Defence Acquisition - Defence Committee Contents

6  Beyond the White Paper

Urgent operational requirements

152.  Parallel to and supplementing the main equipment programme is procurement of "urgent operational requirements" (UORs). Equipment in this category is funded by extra Treasury money to provide the fast equipment solutions that ever-changing operations demand. The UOR system is designed to deliver the speed and flexibility necessary to respond to particular operational environments and emerging threats. A great deal of the equipment currently in use in Afghanistan has been procured through the UOR process. The MoD assured us that there was no possibility of using UOR money for equipment that should come from the core budget[167]. Under the Levene reforms, responsibility for UORs will not be delegated to front-line commands but will remain with central staff.[168]

153.  While UORs do not come out of the MoD equipment budget, if the MoD decides eventually to keep it, it must meet a proportion of the original cost. Otherwise, the equipment must be given away, sold or destroyed.

154.  The UOR system has advantages. It can cut through bureaucracy. EADS pointed out that "its advantage is that those with authority who normally slow down the process, sometimes for cultural reasons, are disinclined in times of war to take the risk resulting from blocking a proposal". [169] UORs allow a swift response to unforeseen circumstances, the sought-after "flexibility" and "agility". Our predecessor Committee has in the past recommended that the MoD should learn from the UOR process.[170] Ideas for Future Defence Procurement, prepared for the official Opposition, comments that "UORs can be acquired much more quickly than business as usual" but that the process does not take the equipment's life-cycle into account. It suggests that "The UOR model should be expanded so that the process can be employed more widely and become the path to a complete solution. A new UOR-plus process is required". Intellect suggested that the UOR process enabled the MoD to be aware of the options the supply base already possessed, enabling it to make significant cost savings.[171] Bernard Gray also wanted to see more of the urgency of the UOR process injected into the normal course of business.[172]

155.  On the other hand, UORs are open to a number of criticisms. Dr Dover (Loughborough University) and Professor Phythian (Leicester University) argue that in themselves they represent a failure adequately to predict/identify future threats, which runs counter to the thrust of the SDSR. Dover and Phythian also thought that an emphasis and reliance upon UORs represents poor value for money, saying that historically, within the defence sector, value only comes from well-planned work programmes.[173]

156.  UORs also have the potential to distort the main equipment programme. Logica suggested that UORs were designed to fill a gap quickly, and only for a short period of time, and then thrown away when they are replaced by the Equipment Programme solution:

The reality is, however, that due to the length of the main acquisition cycle, these solutions can remain in service long term. Such is the concern that coherency projects have now been established to manage the portfolio of UORs. While the UOR has been a useful commercial exercise in cutting through the layers of acquisition process and proving that Defence can procure equipment quickly, until the main equipment programme can be as agile, there will still remain coherency issues with running a UOR portfolio alongside the main equipment programme.[174]

157.  Other criticisms are that (as noted above) "they do not provide proper through life support and like any off-the-shelf requirement, require compromises".[175] Dover and Pythian argued that the system is posited on the assumption that equipment would be available to be bought on a short-time frame, implying equipment surpluses within the global market and also that the UK would possess and retain the skills necessary to maintain and adapt the equipment.[176]

158.  Christopher Donnelly, Director of the Institute for Statecraft and former Senior Fellow at the Defence Academy, and one of our advisers, suggested that UORs were not the only way to acquire essential equipment quickly. He told us that during the Cold War period, two acquisition programmes had been run in parallel. One was the 25-year programme based on maintaining deterrence through a conventional military force. In addition:

Simultaneously, the UK set up and ran for 38 years a highly responsive acquisition system which was able to provide equipment to the troops in Northern Ireland in a matter of days. The "Wheelbarrow" robot for IED destruction took only 5 days from the first requirement being established to a functioning prototype being deployed to theatre. A similarly responsive system was set up to support the 1982 Falklands War deployment. This acquisition process was grounded in "war-time" attitudes and procedures. Better was seen as the enemy of "good enough". Prototypes and lash-ups were provided at very short notice to the troops, enabling them to experiment and identify the modifications they needed, which were made quickly and easily.[177]

He thought that the current UOR process was neither as efficient nor as effective as the system existing up to 1994.

159.  We asked the MoD to comment on the suggestion that during the Cold War period there had been a better way of acquiring equipment speedily. Their response was that this

promotes a positive view of acquisition during the Cold War which contrasts with much of the historical evidence, including the succession of significant studies (Gibb-Zuckerman (1961), Downey (1966), Rayner (1971) and Jordan-Lee-Cawsey/Learning from Experience (1988)) that recurrent problems in acquisition necessitated; the Committee's own Eighth report of Session 1997-98, particularly the section on 'Equipping the Forces', is very clear in this regard.[178]

160.  We accept that not every threat can be predicted, and that therefore some system for urgent procurement will remain necessary. We recommend that further work be done to align the main equipment programme with the UOR system, to establish how the speed and other benefits of the UOR system can be imported into the main equipment programme. One method might be to consider and learn from the 'FIST' (Fast, Inexpensive, Simple and Tiny) process about to be considered by the US Government.

Single-source contracts

161.  At present 40% of defence procurement, amounting to about £9 bn annually, is sole-source, that is awarded without competition, and governed by the "Yellow Book" (the Government Profit Formula and Associated Arrangements (GPFAA). It is expected that this will continue. This means, CDM told us, that "there is a considerable baseline of effectively sole-source suppliers, which are largely UK suppliers".[179] The current arrangement dates back to a 1968 Memorandum of Understanding with the defence sector that determines in advance both profits and the costs suppliers can charge. [180] In January 2011 the MoD announced that Lord Currie of Marylebone would chair a review of this system.

162.  Following consultation, Lord Currie recommended removing current caps on profit margins to give suppliers a real incentive to cut costs and share savings with the MoD. He recommended that 50/50 sharing of savings should be the default, and that there should also be a move towards a common approach to cost transparency, thus enabling MoD to question how money is spent and see how this changes over time. Changes to those effects have now been agreed and are now to be implemented by legislation. Peter Luff explained the MoD's approach:

I am grateful to industry for a very constructive approach to what is quite a big change for them. As Bernard says, this is 40% of our procurement, and getting that right is very important.

This is not about attacking their profits; I want a vibrant, competitive defence industry to make decent profits. It is about attacking their cost base, and making sure that costs are not unreasonably high. A good rate of return—that is great by me. That is what they need to do to stay in business and make the investments they need to be there for the future, but I will not have excessively high costs underpinning a level of profit that is, therefore, unreasonable.[181]

167   Q71 Back

168   MoD Back

169   Ev w11, para 39 Back

170   HC (2008-09) 107, paras 27-37 Back

171   Ev w18, para 16 Back

172   Q175 Back

173  Ev w7 Back

174   Ev w26, para 33 Back

175   Ev w11, para 39 Back

176   Ev w7 Back

177   Ev w54 Back

178   Ev 56 Back

179   Q119 Back

180   MoD website Back

181   Q120 Back

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Prepared 5 February 2013