Defence Reform Bill

Written evidence from The Public an d Commercial Services Union (DR 05 )

Defence Procurement and Single Source Contracts

1. The Public and Commercial Services Union (PCS) is one of the largest trade unions in the UK, with over 260,000 members. We are organised throughout the civil service and government agencies, making us the UK’s largest civil service trade union. We also organise widely in the private sector, usually in areas that have been privatised.

2. PCS represents around 12,000 members working in the Ministry of Defence and those employed in the wider defence sector. Our submission focuses specifically on the GoCo and Single Source proposals. We would be happy to provide the Bill Committee with further written or oral evidence on request.

Introduction

1. The government is proposing the creation of a new Government Owned Contractor Operated (GoCo) entity to replace Defence Equipment and Support (DE&S).

2. The government believe this will improve the delivery of the equipment programme: "by introducing systems and ways of working that provide staff with the best access to the necessary skills, processes and tools to enable them to do their jobs better, driving value for money in equipment projects." (White Paper Better Defence Acquisition page 5)

3. PCS believes that existing DE&S staff already have the vast majority of skills to deliver world-class procurement and that the risks of moving to a GoCo are too high. This paper demonstrates why the work must remain in the civil service and how to retain, recruit and incentivise DE&S staff.

Background

4. The GoCo concept originally emerged from a review by Bernard Gray. However the then defence secretary, Bob Ainsworth, rejected this, stating: "we are not convinced that such a change would ultimately lead to better outcomes for the armed forces or defence generally."

5. Bernard Gray was then appointed head of DE&S in January 2011, resurrecting his GoCo proposal.

Learning Lessons

6. We will not be the first western country to try using the private sector for defence procurement.

7. In 2009, the US Department of Defense (DoD) announced the cancellation of the US Army’s Future Combat System (FCS) contract and directed the Army to takeover the FCS contract. The FCS programme was initially undertaken by a US Lead System Integrator (LSI’s).

8. These are contractors, or teams of contractors, hired by the US government to: "execute a large, complex, defense-related acquisition program, particularly a so-called ‘system of systems’ (SOS) acquisition program. LSIs can have broad responsibility for executing their programs, and may perform some or all of the following functions: requirements generation; technology development; source selection; construction or modification work; procurement of systems or components from, and management of, supplier firms; testing; validation; and administration." In other words, broadly what the UK government are looking for from a GoCo.

9. The LSI for the FCS program was a partnership between Boeing and Science Applications International Corporation (SAIC). This experienced multiple problems, among them cost and schedule overruns, and were the subject of multiple Congressional oversight hearings before the contract was rescinded in 2009,

10. The US DoD turned to the LSI concept for FCS because at that point they lacked the in-house technical and project-management expertise needed to undertake complex procurement projects. One of the primary reasons for this lack of in-house expertise was the downsizing of the DoD acquisition workforce. (In comparison, UK DASA stats show that DE&S civilian numbers have shrunk from 16,150 on 1 April 2010 to 12,550 on 1 April 2013 – a 22.3% loss of experienced procurement staff in just three years).

11. The US DoD also subsequently believed that they had insufficient visibility into programme and overall system performance. In the US LSI arrangement, the US government had a contractual relationship with the LSI prime contractor, not with any subcontractors that report to the prime contractor. A lack of transparency in this area made it more difficult for the US government to adequately manage and conduct effective oversight of their acquisition programme. It is also believed that this lack of transparency increased the risk of cost overruns, schedule slippage, poor product quality, and inadequate system performance.

12. Mirroring the problems we have with British military tour lengths, the DoD were concerned about the three-year rotation cycle of most US senior military officers when using an LSI mean ing that the ir ability to make independent assessments of programmes being carried out by LSI’s had been reduced.

13. The US government also had major concerns that LSI arrangements would create conflicts of interest for an LSI in areas such as determining system requirements and soliciting, evaluating, and hiring contractors. They were concerned that an LSI might tailor system requirements to fit the LSI’s own products, or that in selecting another contractor, the LSI might favour one of its own subsidiaries (or a favored supplier firm) over other potential suppliers. This would lead to an increase in the government’s costs or reduce technical innovation, particularly if a more innovative solution offered by another firm would compete with a core business line of the LSI.

14. T he US believe s it would be extremely difficult for an outside company to successfully challenge an incumbent LSI that has managed a programme for several years. The incumbent’s greater knowledge of the program and the potential disruptions to the program that might be caused by switching to a new LSI would likely pose a barrier to another contractor’s ability to take over the contract. This could make it difficult for the government to terminate such a contract and as a result, the government of the day will have very little leverage to re-compete the contract.

15. These problems are likely to be magnified in a GoCo. With an initial contract length of nine years ,. the MoD has done no risk analysis on the ability of other contractors to be able to rebid in 2023. Without this risk analysis there is a huge fear the winning contractor will be able to hold the MoD to ransom in years to come.

16. US media reports estimate it cost up to $1.5 billion to close down the ill-fated FCS programme. Probably most important is the fact that the US Congress has banned it from ever happening again. PCS believes the UK government must learn from this.

17. In the House of Commons debate on GoCo on 10 June 2013, defence secretary, Phillip Hammond stated: " The United States , contrary to some media reporting, is relaxed about this process. It recognises that there will be some technical issues that we need to resolve, but I am glad to be able to tell him that the Chief of Defence Materiel received this morning, by coincidence, a letter from his counterpart, the Under-Secretary for defence procurement, in the Pentagon confirming that the United States is confident that it will be possible to make these arrangements work. We have set up a joint working group to work through the issues that will need to be addressed before a decision is made."

18. This however seems to contradict statements made by other senior US defence procurement officials. Melinda Morgan, a spokeswoman for Frank Kendall, the department’s top acquisition official, recently told Defense News magazine: "We do have some concerns over an option that would put contractors in roles normally filled by government employees - and the effects this would have on ongoing and future co-operation."

19. PCS believes we need to learn from the US LSI debacle and stop the GoCo process now. At the very least, the government should ensure that this working group conducts a transparent review of the failed US attempt at privatising defence procurement.

Potential conflicts of interest

20. One of the key recommendations of the Haddon Cave report into the loss of Nimrod aircraft XV230 was that, to avoid a conflict of interest, those responsible for the regulation of safety should be independent of those responsible for delivering output. A GoCo would compromise this position because each of the bidding consortia already have a multitude of defence contracts between them.

21. MoD has stated that: "From the outset, bidders have been required to declare any perceived, potential or actual conflicts of interest, together with proposals for how they would manage them. The MoD has the right to exclude potential bidders if new conflicts of interest arise during the process." To ensure transparency, we would ask that this information be placed in the library of the House.

22. PCS also wishes to understand how any winning GoCo bidder will deal with existing contracts, many of who will be with industry competitors.

23. PCS is also unsure how the GoCo will deal with classified information and intellectual property belonging both to the UK and to our overseas allies.

Risks in defence procurement

24. Defence procurement is a high risk proposition: it is technically risky; the military requirement keeps changing and budgets are constantly being squeezed to meet short term needs. Changes in Governments and defence reviews also bring uncertainty.

25. The MoD has already (in the impact assessment) agreed that the highest risk to the GoCo option is that: "international partners do not accept the proposed changes at all, or that the limitations put upon the scope of the GOCO through negotiation with our international partners mean that the GOCO no longer offers value for money." MoD has said they are talking with our international partners, but we have seen no outcome.

26. UK military forces have been involved in numerous conflicts, many at very short notice such as the Falklands crisis in 1982. We have seen nothing to demonstrate that a GoCo would absorb such additional costs attributed to such short notice requirements and not seek to renegotiate additional remuneration at a time of conflict.

27. At present, DE&S and the government bear all of the defence acquisition risk. However a GoCo will price risk into their bid and will charge the department every time senior military personnel or ministers decide to change requirements.

28. The operational and financial risks of delays and over-runs will remain with the government, compromising any benefit from a private sector partner.

GoCo accountability

29. I t is not clear how and to whom a GoCo will be held accountable . C ivil servants operate within a constitutional framework , enforced through a series of safeguards ranging from the civil service code to various parliamentary audits and inspections.

30. The NAO, P arliamentary committees and P arliament itself have limited authority to call companies to account and the electorate’s democratic control is thereby neutered. Instead there is managerial control and accountability to shareholders and to the wider markets, despite the reality that the ultimate responsibility and risk continues to rest with the G overnment.

31. PCS further understands that , as the GoCo will now be acting as an agent on behalf of the MoD, there will be less transparency as to how and with whom the GoCo contracts.

32. PCS is also yet to understand who will own any value for money savings and any profits generated by the GoCo.

Future DE&S staffing issues

33. PCS’s primary role is to protect and promote the interests of its members, including their job security. We are therefore concerned by references to redundancy, for example in the Impact assessment, signed by Philip Dunne on 2 July 2013, which says: "Recurring costs include the introduction of new IT/MIS, upskilling and redundancy costs and fees." To date PCS has been unable to ascertain the extent of any proposed redundancies.

34. PCS does not believe there is any justification for job losses in DE&S as a result of GoCo or DE&S+. In the Aug 2013 issue of Desider (DE&S in-house magazine), defence secretary, Philip Hammond states; "The gradual erosion of skills and capability in the organisation over recent years cannot be allowed to continue if we are to ensure the MoD’s ability to deliver equipment to the front line." PCS agrees with this statement and seeks assurances that there will be no redundancies and instead investment in the development and training of all staff.

35. Any GoCo bidder needs to restore staff morale and incentivise the workforce, who have seen their pay frozen and increasing attacks on their terms and conditions. The investment appraisal hints at a two-tier workforce, stating that: "The Contracting Entity would be free to provide new recruits to the Operating Company with a different employment contract." With morale already at rock bottom, creating a two-tier workforce will make the chances of a GoCo succeeding even slimmer.

36. The perceived problems of recruitment and retention are symptoms of civil service pay restraint, which can be solved by removing the constraints on pay, terms and conditions.

Questions over the assertions on tax

37. The White paper, quite correctly, states numerous times that one of the aims of the GoCo is to get better value for money for the taxpayer.

38. However, in response to a question where the winning bidder would pay tax from Angus Robertson of the SNP in the House of Commons debate on Defence Reform on 10 June 2013 , the defence Secretary, Phillip Hammond stated: "the entity with which we contract will be UK-registered and domiciled, and will pay its tax in the UK . "

39. It is clear, from the bidding consortia, that any GoCo entity will in reality be American owned. If, as PCS believes, the winning consortium cannot be forced to pay all of the tax liabilities in the UK, this will skew the cost/benefit analysis of the GoCo proposals as the award of a substantial contract to a foreign owned entity could see significant tax losses to the UK exchequer and taxpayer.

GoCo and the military

40. PCS is concerned that very little has been said regarding the relationship between any winning GoCo consortia and the UK armed forces. Contracting for military availability is completely different to contracting for anything else, either in the public or private sector.

41. A major underlying factor in the problems with defence procurement has been identified as the issue of the ‘ revolving door ’ approach of military tours where military personnel come and go at regular intervals. The lack of coherence and consistency that comes from these short tours does, as the MoD has seen during the years, lead to multiple changing of requirements and this subsequently adds time and costs to any given procurement project. Moving to four-year, rather than two-year terms from the rank of colonel upwards, as has been proposed will help, but instead of tinkering round the edges, PCS believes the MoD must come up with much more robust sustainability and succession planning to resolve these issues for future generations.

GoCo and lobbying

42. Unfortunately, in recent years we have seen a very rapid rise in the numbers of ex military personnel and ex MoD civilian staff, usually from the senior ranks of both, who have left the department and in a very short period re-appeared employed either by defence contractors or setting up on their own in a defence related business.

43. Whilst there have been instances of wrongdoing, these are (hopefully) relatively few. PCS is looking for assurances that during the GoCo tender process and evaluation (should the decision be to proceed with GoCo) that no ex military or ex MoD personnel will be involved in these processes on behalf of bidding companies or consortia.

44. These waters have already been muddied by the appointment by Bechtel of Richard Freer, described as one of the prime thinkers behind the previous Strategic Defence and Security review.

Ethical and moral contracting

45. The government should lead the rest of the country by example when they are letting public sector contracts. It is therefore disappointing that two of the bidding consortiums have chequered histories. In the US, CH2M Hill paid an $18.5 million (£12.2m) fine for fraud on government contracts and Bechtel paid a $458m (£301m) fine for shoddy work - leading to a death - on a public contract.

46. When the CH2M Hill fine was announced the US Department of Justice said: "This sort of systemic fraud is an appalling abuse of the trust we place in our contractors." Does the MoD now really wish to deal with such companies and run even more risk if the department is brought into disrepute.

Single source proposals

47. PCS would always wish to ensure the best outcome for the fr ont line and the taxpayer, we welcome the second part of the bill in relation to tightening how we contract using single source procurement. However we do wish to know how this will work if we go down the GoCo route.

48. At present, approximately 45% of the UK’s defence procurement is done through single source. Have the companies who we use for single source contracts been asked if they will find it acceptable that another private company, and in all likelihood, a defence industry competitor will have access to not only details of the goods and services they provide to the MoD, but the prices they charge ?

49. PCS believe s the vast majority, if not all of these companies will be extremely unhappy to see industry competitors having access to this sort of information. We believe there may be downright refusals to share this information. If this happens, what plans have the government and the MoD taken to overcome this and ensure that we are still able to contract with these companies?

Conclusion

50. At present, PCS is opposed to the introduction of a GoCo, as we believe the government will be better served ensuring DE&S is properly resourced and properly staffed. Moving to a GoCo will in our opinion cost the taxpayer more money and adds too much risk in delivering capability to the front line.

51. If the government’s argument is that because government departments such as the MoD are not very good at negotiating and managing contracts with the private sector, it seems perverse that the self same government is going to negotiate a contract with industry to undertake the task on their behalf. PCS believes investment in existing and future civil servants will deliver the world-class procurement support our armed forces need and deserve.

52. We will leave the last word to the pioneer of the DE&S GoCo proposals, Bernard Gray, who we believe in his interview with Civil Service World in July 2013 said, "If we save £20,000 on somebody’s salary, and it costs us £200m in a failed project, is that really good value for money?"

53. The answer is clearly no. PCS believes the correct answer is to properly and fully reward and incentivise public sector workers to do what is clearly now and must remain a public sector function.

September 2013