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INSTITUTE
FOR INTERNATIONAL RESEARCH CONFERENCE
London,
Monday 25th September
Robert
Key MP
Smart Procurement
Speech
Introduction
Thus far the Government has had a mixed record in terms of defence. Although the
air campaign in Kosovo was a success, the National Audit Office (NAO) report on
the conflict contains some very worrying comments and forecasts a difficult future
for the effectiveness of the armed forces if lessons are not learned. A series
of leaks and press reports highlighted deficiencies such as problems with getting
supplies to our troops, obsolete communications equipment and continuing concerns
about the reliability of the SA80 rifle. Smart Procurement is supposed to solve
all these problems according to ministers but over two years into the initiative
questions still remain about its effectiveness and the National Audit Office (NAO)
says there is little sign of improvement.
Smart Procurement
The Government's Smart Procurement Initiative has put forward several measures
that they claim will result in 'faster, cheaper, better' equipment for the armed
forces and provide savings of £2 billion over 10 years; almost a third of the
annual savings the government believes will result from its defence restructuring.
The main initiatives are:
- Partnering arrangements
with industry to involve industry more closely in developing operational requirements
and equipment designs;
- Integrated Project Teams
(IPTs) consisting all interested parties in a project: operational requirements;
scientific, procurement, contracts, finance and logistics staffs. Industry would
be involved when competition permitted;
- Personal accountability
to improve cost and time performance;
- A through-life systems
approach, taking a broader view of an equipment's life-cycle cost and making trade-offs
between military requirements, costs and timescales;
- Incremental acquisition
to allow fielding of equipment with a less ambitious initial capability that would
be subsequently upgraded;
- And streamlined procedures
that take account of the differences in cost and risk of different projects.
The main contribution of
Smart Procurement has been to codify the numerous Conservative initiatives, some
of which date back to the early 1980s. The mistake the Government has made was
to simply pencil the £2 billion worth of savings into the defence budget at the
beginning of the ten year period and hope that they will be achieved. Everyone
hopes that Smart Procurement will be successful in delivering them. If they are
not the United Kingdom could find herself with armed forces that are not equipped
to undertake the tasks given to them. The Government will not heed advice. Lieutenant
General Sir Edmund Burton, the former Deputy Chief of the Defence Staff (Systems),
was forced to leave his post following his blunt warning to ministers that the
savings resulting from Smart Procurement would be lower and realised more slowly
than anticipated. This warning was amplified by the NAO Major Projects Report
1999. According to the report "It is too early to tell whether Smart Procurement
will fulfil all of its aims.." The way in which the saving are being counted raises
cause for concern. The Committee of Public Accounts (PAC) criticised the way in
which Ministers have measured the savings from Smart Procurement:
A proportion of the
£2 billion savings (at least some 20 per cent or £400 million) represents deferred
expenditure. It is.misleading for the Department to claim all deferred expenditure
against their £2 billion Smart Procurement savings target.
One major change under
Smart Procurement is the move away from competition towards long term partnerships.
Whilst I agree that the reduction in the size of the defence industrial base since
the 1980s does require a different approach; competition must be retained in some
form to prevent a return to the cost plus and preferred supplier status of the
1970s. The other risk with partnerships sourcing is that it carries a significant
risk of forcing alternative suppliers out of business. This would leave the MoD
with a difficult choice either being stuck with a sole supplier in many cases
with possible cost/efficiency implications or having to place contracts abroad
with dire consequences for the UK defence industry.
Integrated Project Teams
and Personal Accountability are at the very core of Smart Procurement. However,
very little has been said and no money allocated to allow the Defence Procurement
Agency to offer improved terms and conditions, the only way that it will be able
to recruit the best people. There is also the problem of fixed tours of duty for
military team leaders. Arrangements must be put in place to ensure that these
officers do not miss out on promotions simply because they need to stay and see
through an important project.
Incremental acquisition
has created a number of problems to which the MoD has yet to identify solutions.
First it undermines the MoD's Cost and Operational Effectiveness Investment Appraisal
(COEIA) in that only the initial capability can be modelled. The improved capability
of later stages will only become apparent during the development stage of the
initial equipment or even later. Second and more importantly the MoD has an abysmal
record when it comes to modifying defence equipment. In its report, Modifying
Defence Equipment, the National Audit Office fears that cost savings could be
lost through 'embodiment bottlenecks'. According to David Davis, M.P., the Chairman
of the Committee of Public Accounts, "The Smart Procurement Initiative will increase
the number of planned modifications and these will require improved information
systems. Such essential systems are not in place and this must be addressed [by
the MoD] as a matter of urgency." The MoD must ensure that appropriate IT systems
are in place to track modification kits before entire systems are fielded on an
incremental acquisition basis. Third the MoD must not let partnership sourcing
become exclusive sourcing. The DPA must ensure that all capability upgrades are
open to competition so that MoD is not at the mercy of the original equipment
manufacturer.
International collaboration
is one area that the Government still needs to look at. In 1998-99, 13 per cent
of the Ministry of Defence annual equipment budget, £1.3 billion, was spent on
programmes involving other national governments. The SDR talks about the importance
of collaborative projects and the Government's desire to harmonise UK requirements
on a European basis. International collaboration is a useful tool in avoiding
unnecessary research and development costs, however, the SDR is silent on ways
to overcome factors that have hampered collaborative projects in the past and
are outside the control of national project managers. These include political
manoeuvring and changing national priorities, performance compromises that suit
no one and the principle of juste retour work share with less efficient partners;
factors that hinder the drive for quality and efficiency and increase life cycle
costs. The Organisation for Joint Armament Cooperation (Organisation Conjoint
de Cooperation en Matiére d'Armement, OCCAR) is supposed to make European collaboration
more efficient. However, the Convention could institutionalise the problems. In
the preamble to the Convention the four Governments lay the foundations for a
'Fortress Europe' in defence procurement stating that ".a strengthening of their
co-operation in defence equipment will contribute to the establishment of a European
security and defence identity and is a practical step towards the creation of
a European armaments agency". These foundations are built in Article 6, "When
meeting the requirements of its armed forces, each Member State shall give preference
to equipment in whose development it has participated within OCCAR". This requirement
is completely at odds with the whole point of Smart Procurement, the procurement
of the best equipment at the most competitive price.
The Opposition welcomed
the recent announcements on the A400M and Meteor. However, I cannot help but feeling
a little uneasy over the future of the projects. Both projects will provide a
significant boost to the European aerospace and defence industries if they are
managed properly. This means adequate and definite funding on the part of governments
and a move away from the juste retour towards competitive procurement. Securing
adequate funding for both projects could be a real problem for the UK and other
partner governments. For example Harald Kujat, the newly appointed General Inspector
of the Bundeswehr, admitted that he is counting on the A400M ".being financed
from outside the Bundeswehr's budget." It is not for me to comment on German financial
issues but I fear that the General's argument is unlikely to cut any ice with
his colleagues in the finance ministry. I trust Geoff Hoon will stick to his promise
to end UK involvement in these programmes if either the contractor or other partner
nations fail to meet their promises.
Private Finance Initiative
The Private Finance Initiative was a concept developed under the last Conservative
Government that allows government to share the risk of a particular project with
the private sector. Most PFIs set up by the previous government were for the provision
of services to the MoD within the UK or in non-frontline areas. The present Government
very unwisely is pushing the boundaries of PFIs further towards, and in some cases
into the frontline without considering whether or not PFI is appropriate. The
most ridiculous proposed PFI is for the Armoured Battlegroup Support Vehicle.
According to the MoD Contracts Bulletin:
ABSV is to have similar
mobility to Challenger 2 together with similar protection to Warrior, and the
capacity to transport an eight man infantry section with their equipment, under
armour, for a battlefield day of 48 hours.
It must be obvious to
anyone, bar ministers, that ABSV is not a candidate for PFI. The armed forces
are not a commercial organisation. If equipment does not perform in wartime many
soldiers may lose their lives. It is the Government's responsibly to ensure that
private contractors are only used where appropriate. And would shareholders be
prepared to take on battlefield risks?
Defence Evaluation and
Research Agency Public-Private Partnership
Despite continuing opposition to the DERA PPP from the Opposition and the House
of Commons Defence Committee the MoD is pressing ahead with privatisation. The
Defence Committee's first report on the privatisation concluded that the Government's
proposals were ".fatally flawed and should not proceed." The MoD had another look
at its proposals but Geoff Hoon regrettably ignored the Defence Committee's verdict
on these new proposals and decided to proceed anyway. The Committee concluded:
In our judgement the
current risks of proceeding with the public-private partnership -even in its new
and improved format - continue to outweigh the still hypothetical benefits.
The Opposition's position
has remained constant. It was a privatisation too far for the Government of Margaret
Thatcher and John Major and remains so. There are a number of extremely important
questions that remain to be answered and until the MoD provides satisfactory answers
the privatisation should be suspended. DERA is a unique national asset to the
country and should not be sold off at a Treasury whim. This does not mean that
the Conservatives are content to accept the status quo. We recognise that DERA
needs to change to take account of the decline of the UK defence research budget;
the closer links between the MoD and industry envisaged under Smart procurement
and the restructuring of the European defence industry. However, despite revising
its proposals, the MoD has not listened to the views of DERA staff, industry or
our Allies. The second consultation paper remained silent on too many key issues:
who exactly will be allowed to buy shares in the privatised company; what limitations
there will be on the new company's activities; what the relationship between the
privatised and retained parts of DERA will be; and whether enough had been done
to assuage the concerns of the united States and other allies. Until these key
issues are resolved the privatisation must be delayed.
The effects of the imminent
privatisation can already be seen with the announcement of the closure of DERA
Pyestock engine test facilities in the spring of 2002 with the end of the Eurofighter
programme. This decision will leave the MoD with no altitude test cells within
the UK. An announcement that makes the reassuring words of Sir John Chisholm,
Chief Executive of DERA, ring hollow. "There's no way in which 3,000 jobs are
going to be lost as a consequence of PPP. What we aim to do.is to increase our
employment, not reduce it." Sir John is right in one respect, there will be a
large number of vacancies in New DERA. I understand that the 'word in the tea-room'
is all about looking for new employment outside DERA. Many staff are unhappy about
the MoD's plans and fear that the new organisations may not be viable. Closer
to home I have a constituency interest in the future of the aircraft test and
evaluation facility at DERA Boscombe Down. Although the MoD has yet to confirm
it, it is likely that Boscombe Down will be transferred to the private sector
despite the fact that the American military and US aerospace and defence companies,
such as Boeing, have yet to agree to deal with a privatised facility.
Using the MoD's own model
the future of defence research in the United Kingdom could be characterised by
threadbare carpets and crumbling towers. Last September the MoD announced its
intention to compete 5% of the Applied and Corporate research programmes between
April and September 2000 with no limit on further competitions. This will result
in the fragmentation of DERA's unique 'collective memory' and the dispersal of
defence-related expertise all over the country, split between New DERA, industry
and academia. Again the MoD is making the mistake of pressing ahead despite concerted
opposition, for a short term financial advantage that will in the long term adversely
affect the UK's defence industrial base and defence exports and possibility even
national security. Let us be quite clear. DERA privatisation has nothing to do
with military effectiveness and everything to do with the Treasury.
European Defence Consolidation
The defence industry is critical to the prosperity of this country. Directly and
indirectly the industry supports 400,000, mostly highly skilled, jobs. The export
trade is extremely important to the health of the industry. Exports support 130,000
of the 400,000 defence industry jobs and bring in £5 billion worth of business.
The defence industry in the US and the UK is now largely consolidated while Europe
follows slowly behind. This may cause problems with monopoly suppliers. When it
first came to office the Government hoped for the creation of a single European
Aerospace and Defence Company. This hope was ended with the merger of British
Aerospace and GEC-Marconi. The continental response was the creation of the European
Aeronautic Defence and Space Company (EADS). This has raised the spectre of a
NATO divided into 'Fortress America' and 'Fortress Europe' with each half buying
equipment from a domestic supplier at he expense of interoperability and capability.
A 'Fortress Europe' would be of no benefit to UK defence companies. BAE Systems
employs over 18,000 people in the United States and these operations are treated
by the Department of Defence as if they were a US company. With the purchase of
the Apache GKN Westland have strong links with Boeing. The Opposition has a fundamentally
different approach from the Government. It is not the Government's job to run
industry. The Government's job should be limited to procuring the best equipment
at the most competitive prices for the armed forces. It must also ensure security
of supply of essential war materials to the armed forces in time of conflict.
This may involve holding more stocks or preserving the industrial capacity for
surge manufacturing. This has escaped the attention of the Government is respect
of propellants for shells and other munitions, so we are now almost wholly dependant
upon South Africa.
Market lead European consolidation
must proceed if the UK and Europe are to retain a competitive defence industrial
base. The best way to do this is to ensure a genuine two way street between Europe
and the United States. The Government must ensure that European initiatives do
not result in the creation of a 'Fortress Europe' or hinder British defence exports.
Recent discussions in Europe over the sharing of defence information have caused
concern in the US. The then US Deputy Defense Secretary articulated US concerns
that the standard adopted ".would [be] the lowest common denominator approach
on security." The result would be that "We [the US] would have to manage collaborative
programmes with allies on a much more restrictive basis." The Framework Agreement
concerning Measures to Facilitate the Restructuring and Operation of the European
Defence Industry between the UK, France, Germany, Italy, Spain and Sweden signed
at the Farnborough Airshow has worrying implications for British Defence exports.
Although the Agreement contains no veto power Article 13 does allow a signatory
state to suspend a permitted export destination for up to three months, pending
a collective ministerial decision. This could seriously affect British defence
exports by damaging the UK's reputations as a reliable supplier. There is criticism
from Europe over US export regulations. I agree that the defence exporters to
the US have significant problems when competing against US firms. The difference
is that the Administration is looking to relax not increase restrictions on British
and European companies. The Defence and State Departments are committed to a comprehensive
overhaul of the export licensing regime and the two Governments recently signed
a Declaration of Principles that would treat British companies in the same way
as American ones when competing in the US.
Conclusion
Why did NATO take such stick for its weaknesses in the Kosovo conflict? A lot
of it was collateral damage and civilian deaths. It was the bombing of that train
on a bridge and the bombing of the refugee tractors and trailers. Was it an inevitable
consequence of the fifteen thousand feet flying rule?
Air forces argue that the
final decision to press the button must be a human decision - and that only a
human being looking out of the front of the aircraft at the target can be in a
position to make that final judgement. It didn't work in Kosovo. So were the errors
inevitable? No, they were not.
In Northern Ireland earlier
this month I saw once again equipment which has been in use for some years - and
some spanking new equipment - which offers real-time pictures at high definition
(much better than 1 metre) relayed from a platform five kilometres away and one
kilometre high. That platform happened to be a helicopter. But drone technology
could have been far further advanced if someone had thought differently about
procurement priorities fifteen years ago. So what's up?
Last week I visited Thomson-CSF
in Paris. They have noticed that over fifty per cent of defence industrial activity
is now in electronics. I saw their advanced electronic scanning radars that can
give a real-time picture in the platform and on the ground at high definition
(very much better than a metre) from a hundred kilometres distant at thirty thousand
feet plus, through cloud, at night. (Incidentally, with this technology available,
why does Eurofighter still have an old-fashioned mechanical scan radar?)
So have we seen the end
of the bombing of passenger trains and refugee columns? I doubt it - because of
the way we go about our procurement and the way we review it.
The National Audit Office
and the Public Accounts Committee offer historical snapshots. Knuckles are rapped.
The Government defends itself and makes excuses.
The House of Commons Defence
Select Committee offers a critical - a very critical - commentary on procurement.
The Government responds politely but rarely takes a blind bit of notice.
Of course, the Defence
Committee has no teeth. It is not an appropriations committee such as we find
in the United States system.
There will be a Procurement
Debate shortly in the House of Commons. It might run for six hours - the Opposition
will do our best to keep it going. But it will be an Adjournment Debate - so no
votes. It will be held on a one-line whip. Those MPs with no interest in defence
will have gone home for the weekend. Labour whips will discourage dissident Labour
MPs from speaking. The Minister will say that smart procurement is working and
he'll run through the year's announcements. He'll leave out the bad news, slag
off the Opposition for scare-mongering and undermining the forces (which we will
of course refute) and will offer no thoughts at all on the need for radical change
in the procurement process. Maybe ten back benchers will speak - probably in defence
of their constituency interests and quite rightly so.
Absolutely none of this
will be reported by the press and the media.
Today and tomorrow you
are going to delve deep into the undergrowth of defence procurement. Quite right
too. But I invite you to start today by standing right back and thinking the unthinkable.
International Comparisons
Last Thursday, besides visiting Denis Ranque, the Executive Chairman of Thomson-CSF,
I had a session with the Head of French Government Defence Procurement, the Sir
Robert Walmsley of France, General Plane of the Direction Generale d'Armements.
France's DGA is something
else. For a start, General Plane has never served in the forces but the DGA, for
sound historical reasons, has ranks - and uniforms to match. It is not just independent
of Government - it keeps out all political influence until the last possible moment
- much later than in the UK. In spite of that, when I asked the General at what
point Government Ministers first became involved, he simply replied, "Too soon".
And don't forget, this
is France, with a presidential government where foreign affairs and defence belong
to the President, not to the Prime Minister. In defence, cohabitation doesn't
apply. Furthermore, unlike in the UK, French defence policy is not dictated in
support of foreign policy. There are no foreign policy baselines in France. I
asked General Plane if he worked closely with the Quai D'Orsay. He replied, "Non.
Pourquoi?"
Then there is the little
matter of export licences for defence equipment. In France, these are granted
by the Prime Minister. His office chairs a committee of mandarins from the Foreign
Service, Defence, the Interior, the Ministry of Finance and the President's Office.
The Trade and Commerce Ministry is excluded.
So just taking the UK,
the USA and France, we have three starkly contrasting models of supervision and
control of defence procurement and exporting. But who is right? And is it not
a wonder that there is any collaboration or any exporting at all?
There are further differences.
In France, all major defence companies have dual military and civilian capabilities
and they spend between fifteen per cent and twenty-five per cent of their turnover
on defence research. The French Government have no equivalent of DERA - just a
handful of very specialised research teams. They can't understand the fuss about
DERA privatisation, nor the alarm about competing five per cent of the British
defence budget.
On the other hand, the
French are years behind us when it comes to risk-sharing with the private sector,
let alone privatising defence capabilities like their notorious dockyards. I pressed
General Plane on this. It is clear to me now that it is a deeply cultural difference
- all about "la gloire de la Patrie" for the forces and all about trade union
politics for the workforces. But there are cracks - even the Communist Deputes
for dockyard cities know privatisation must come - but always after the next election.
What lessons do I draw
from all of this? I am certain that we must encourage a climate of competition
in defence procurement and resist cosy, cost-plus partnering.
I am certain that procurement
projects, once decided, must be business-led and business-managed.
I am certain that politicians
should keep their noses out of industrial rationalisation and consolidation issues.
And that still leaves the
difficult questions unanswered!
The whole purpose of defence
procurement is to equip our forces with the kit they need at prices the taxpayer
can afford. But who decides what they need?
We spend buckets of money
on electronic warfare and digitisation - but the squaddies' radios don't work;
troops end up in the tropics unprotected from malaria; and designed by a committee
our main assault weapon doesn't work if it is too hot or too cold (and I noticed
that the Paras who rescued the hostages in Sierra Leone were not using SA80s!).
Then there are the Defence
Medical Services which have swung from one extreme to the other and are still
in deep crisis - yet the MOD won't listen to industrialists with practical solutions
- like hospital ships or hospital barges which might be based at Haslar, or Split.
Who decides what's needed?
Should it be the politicians, second-guessed by the Treasury? None of our current
Ministers has ever served in the armed forces and none of them has ever worked
in the private sector. The Procurement Minister is a professional civil servant.
And if politicians are to decide, who decides which options to offer them? The
Equipment Approvals Committee of course! But are they the right people to judge
or to prioritise the options?
Should it be the military?
They certainly know about life at the sharp end. They know when things don't work.
They are good at low-tech problem solving. But I recently had a conversation with
a very senior General about ballistic missile defence - and he candidly told me
that he knew nothing about it.
Should the Ministry of
Defence decide collectively? So, who are the people in what we used to know as
OR (Operational Requirements) and which we now must call the Defence Equipment
Capability Team? Do they know what they need? Do they know what they want? Do
they know what is available? Do they know what they can afford? Perhaps the Defence
Procurement Agency is the answer - or is Abbey Wood really the home of rest? And
I fear DERA will count for much less when it is privatised - its collective memory
will have been destroyed. And is not the Ministry of Defence less independent
of the Treasury than other Departments? The long-term costings of the MOD are
so secret that hardly anybody in the Ministry of Defence let alone in the defence
procurement industry is in any position to assess the impact on MOD expenditure
of cash-guzzling programmes such as CVFs (aircraft carriers) or Typhoon. And don't
forget that we are now into the Ministry of Defence actually asking industry to
delay projects for financial reasons.
Should it be the private
sector who decide? After all, they alone have the key to future defence technologies.
They may not always invent the future, but they are invariably responsible for
the innovation involved in bringing those ideas to production. But private companies
will not share their intellectual property or their expensive secrets with cosy
committees stuffed with commercial competitors - and civil servants who for wholly
understandable reasons are wooed into the private sector - as has happened recently
at both Porton Down CBD and Boscombe Down AT&E.
In the end it is the politicians
who decide - not only on the size of the defence budget but on the procurement
itself. This time last year we were speculating on the bids from Raytheon versus
Meteor, and C17s versus the A400M. The much-delayed decisions could not have been
more political. Bill kept writing to Tony. Tony kept talking to Lionel. Lionel
gossiped to Robin. Robin leant on Gordon. who didn't want to spend any money on
defence anyway.
In the end it was a highly
political decision which led to inexcusable delay and they all said one thing
and did another in Europe - how much they want the A400M, how many they will buy
- if only they have the money - which they won't for the foreseeable future, as
I was bluntly told in Paris last week.
Another highly political
decision will soon be made. The Prime Minister has given his word that there will
be an announcement about the six roll-on-roll-off ferries by the end of November.
Why the delay? Of course these vessels should be built in the UK. Do you think
the French would let them be built outside France? There always comes a point
when the national interest must come first. It is in Britain's strategic and defence
interests that those vessels should be built in the UK. Parallel arguments apply
to continuity of supply for defence products. It is simply unforgivable that we
can no longer manufacture propellant charges for our Challengers and AS90s.
I offer one other certainty.
I am certain that within the constraints of our national interests, Britain should
procure defence equipment in a competitive, global market. It is in our national
interest that we should strengthen our defence relations with the USA. We should
not sacrifice that technological and military superiority for the sake of building
a fortress Europe. Surely French Defence Minister Andre Maginot taught us that
eighty years ago. Fortress Europe is an illusion.
So there is no conclusion.
Defence procurement is a bit like riding a bicycle. Stop and you fall over. The
Government thought the Strategic Defence Review was the conclusion. Defence Ministers
now see their role as presiding over the implementation of the SDR.
There is no ministerial
momentum.
There is no evidence of
any serious ministerial thought-process in procurement.
So don't hold your breath.
Just watch the opinion polls - and please let me have your ideas on how, together,
we will meet the challenges ahead.
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