Written evidence submitted by Jag Patel

The saying, “If you always do what you always did, you will always get what you always got” is apt in relation to defence procurement and failure.

This submission shows how the Government and its recent predecessor has singularly failed to reform the defence procurement process to address the scourge of persistent delays and cost over-runs that have plagued military equipment programmes over the last several decades.

TOPICS EXAMINED IN THIS SUBMISSION

1. This submission tells it exactly how it is – no lies, no spin.  Specifically, this submission offers an insight into the following topics which no one wants to talk about in public, namely:
1. Government Strongly favours Buying off-the-shelf Equipment
2. The P-8A Poseidon – A Case Study in off-the-shelf Procurement
3. Defence Procurement is no longer exclusively Funded from General Taxation
4. Price-fixing on a Grand Scale
5. SMEs bring long-term Commitment
6. Applying the Principles of Natural Justice
7. Lower-level Civil Servants also Rushing for the ‘Revolving Door’
8. A new Defence Industry Strategy with a Noble Purpose
9. Industry Days used by Defence Contractors to Fix Prices
10. Written Evidence on Failings in Defence Procurement

Government Strongly favours Buying off-the-shelf Equipment

2. The Government has recently revised its defence procurement policy to consider buying, as its first and foremost priority, new military equipment for the Armed Forces which automatically falls in the off-the-shelf category – specifically because an off-the-shelf equipment is a fully engineered and supported technical solution which satisfies the key user requirements at no additional cost or risk to the Exchequer, that is to say, it does not require any development work laden with risk, to be performed upon it.
3. The reason why the Government has moved away from its long-standing procurement policy of buying equipment designed to a tailored technical specification requirement set by the military customer is because, it is no longer confident in the ability of its own people to identify, manage and control technical risks inherent in a starting-point for the technical solution that requires development work to be performed upon it – which has been the cause of persistent delays and cost overruns on equipment acquisition programmes over the last several decades.
4. This is because it does not possess the capability in the form of intelligent and experienced procurement officials who have an adequate understanding of what it takes (in terms of skill types, funding, tools, processes, materials, scheduled work plan etc.) to advance an immature technical solution from its existing condition, to a point where it will satisfy the technical specification requirement, within a private sector setting driven by the profit motive.
5. Nor is the existing defence procurement process (which has evolved over the years) conducive towards delivering equipment for the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life, because it has been interfered with by Defence Contractors (most notably the Select Few) who have skewed it decisively in their favour, at every turn.
6. The Government’s considered assessment is that it is unlikely to accumulate an in-house capability of the desired quality and numbers anytime soon, certainly not in the foreseeable future.  It has also been realistic and concluded that it is nigh on impossible to reconstitute the existing, flawed procurement process alongside the tough 2015 Spending Review commitments to be fulfilled in this Parliament, now further complicated by the Brexit vote – hence its preference for the off-the-shelf option.
7. If anyone has any doubt about the determination of this Government to press ahead with considering the off-the-shelf solution as its first option, then they should look no further than its decision to buy the standard Boeing P-8A Poseidon maritime patrol aircraft to plug the capability gap created by the cancellation of Nimrod MRA4.  Settling on the choice of the P-8A Poseidon means that these aircraft cannot be refuelled in-flight by the RAF’s Voyager tanker planes to extend their range and endurance on-station, because the former are fitted with the flying-boom receptacle whereas the latter are equipped with the probe-and-drogue system – making them entirely incompatible.  The Government has taken a lot of flak from informed commentators and endured negative publicity in the press and media for this serious operational deficiency – nevertheless, it has decided to go ahead with the purchase.
8. So what impact does this policy shift have on Defence Contractors’ business prospects?
9. UK-based military equipment manufacturers who do not possess off-the-shelf equipment and are in the business of developing & building weapons platforms are most likely to be adversely affected by this adjustment in defence procurement policy.  To counter haemorrhaging their domestic market share to similarly positioned players from the US and elsewhere, UK-based Defence Contractors have little choice but to increase their competitiveness significantly, by first selling their products in the international marketplace – on price, superior technical performance & timely delivery – and then re-entering the domestic market with fully developed products rebranded as off-the-shelf offerings, to satisfy UK Government needs, just as the Americans have done.
10. It is believed that some 20 percent of the equipment procurement budget is currently being spent on buying off-the-shelf equipment.  This slice is only set to increase as more and more projects, which involve significant development work are side-lined in favour of off-the-shelf purchases.

The P-8A Poseidon – A Case Study in off-the-shelf Procurement

11. Whereas the Ministry of Defence will not come out and say so publicly, it is clear that MoD’s preference for looking at the off-the-shelf solution as its first option, when deciding on which military equipment to buy, has been the determining factor in its choice of the Boeing P-8A Poseidon.
12. After being misled by UK-based defence equipment manufacturers with false promises and lies for several decades, this generation of elite politicians, senior civil servants, military top brass and front-line procurement officials have been so badly scarred that, there remains little appetite to consider any alternatives that may be put forward.
13. Of course, MoD prefers an off-the-shelf equipment because it corresponds to a fully engineered and supported technical solution which satisfies the totality of the technical specification requirement, at no additional cost or risk to MoD, that is to say, it does not require any UK-specific modifications or related development work laden with risk, to be performed upon it.
14. Accordingly, it is entirely understandable that MoD has opted to spend £3bn on this US-designed and manufactured product.  It has done so for the following reasons:
1. MoD will have had the benefit of evaluating the hardware configuration of the technical solution to assure itself that the P-8A Poseidon satisfies the technical specification requirement set by the military customer, in particular the key user requirements, before placing an order.
2. Acknowledging the fact that the cost of acquiring and re-provisioning Support Assets associated with military equipment over the whole life cycle can be in the order of four to five times the prime equipment costs, MoD will have sought and obtained firm selling prices, not only for the P-8A Poseidon weapons platform itself, but also its Support Assets needed to sustain it for the full period of its service life – enabling it to maintain a fixed, through-life budget without any risk of it being breached.
3. MoD will have been able to verify that there exists a fully functioning production line for the P-8A Poseidon, before taking the main investment decision.
4. Commonality and interoperability with US armed forces, on any likely future operations brings with it the certainty that replacement spare parts for this platform will be made available, via a common logistics supply chain – thereby reducing in-service support costs considerably.
15. The decision to go for the off-the-shelf solution is entirely justified because the P-8A Poseidon is a mature and stable design standard devoid of any hidden financial, technical or schedule risks which have dogged the so-called, minimal development solutions proposed by UK-based defence equipment manufacturers.

Defence Procurement is no longer exclusively Funded from General Taxation

16. In a historic first for defence procurement, the cost of buying new military equipment for the Armed Forces is to be paid for not from general taxation under the terms of delegated powers from the Treasury, but from the proceeds of the sale of surplus land and property owned by the Ministry of Defence, together with efficiency savings MoD has committed itself to achieving in this Parliament, in its 2015 Spending Review settlement – such as, headcount reductions in its civilian workforce and restraining pay across Defence.
17. This dramatic change in procurement policy means that for some equipment purchases, MoD will be engaged in commercial transactions with two different Private Sector players, not the usual one – thereby doubling the risk that defence procurement officials at MoD Abbey Wood, Bristol will be duped into signing contractual agreements which will deliver extremely poor value for money for the taxpayer, because they don’t have the necessary financial and commercial skills to deal with for-profit organisations.
18. In addition, for new equipment purchases like this to deliver the outcomes the political elite have set for defence procurement, they will need to be scoped in such a way that programme milestone deliverables are aligned perfectly with income streams from land sales and planned efficiency savings – an untested procedure which is completely new to MoD and with it, introducing further unforeseen risks added to the already serious project management deficiencies identified some years ago.
19. The acquisition of the Boeing P-8A Poseidon maritime patrol aircraft and Apache AH-64E attack helicopters falls under this category of new equipment purchases.  However, it is only fair to say that because these two programmes correspond to off-the-shelf buys, the likely project management risks associated with the usual delays and cost overruns are mitigated to some extent.
20. What is not clear is how the whole-life sustainment costs of these two acquisition programmes are to be paid for – either, from the sale of additional land (which is entirely conceivable given that MoD is the single largest owner of public land in the UK) or reverting back to general taxation.
21. In any event, funding the purchase of new military equipment in this imaginative way marks a significant departure from long-established practice – yet another indication of the dire state of defence procurement in today’s challenging post-Brexit era.

Price-fixing on a Grand Scale

22. The clear message behind the Government’s defence procurement policy is that military equipment for the Armed Forces is to be purchased through fair and open competition – the only exception being off-the-shelf purchases and single-source contracts.
23. This is to be achieved by selecting the preferred Prime Contractor from a choice of industry teams by running a multiple-phase, winner-takes-all competition on the basis of a level playing field, genuinely open to all-comers including non-domiciled suppliers – to ensure it gets the very best value for money for the taxpayer.
24. However, the ‘sudden death’ competition (which reduces the field of Bidders from six to one following a one-off release of the invitation to tender) currently used by MoD has been rendered ineffective by Defence Contractors, who are quoting identical bottom-line Selling Prices against the same Requirement – which amounts to price-fixing on a grand scale, with the active connivance of the Secretary of State for Defence.  Worse still, MoD’s Project Team Leader at Abbey Wood is being denied the opportunity to choose the single Prime Contractor on the basis of price competitiveness, and therefore value for money.
25. This has come about because MoD’s long-standing policy of disclosing the total budgeted expenditure figure or associated year-on-year financial funding profile in the ITT has resulted in Defence Contractors quoting identical bottom-line Selling Prices in their ITT responses – an entirely predictable result!
26. It is not for MoD to tell the Private Sector what the price of a new equipment programme should be.  Instead, it is very much the business of Defence Contractors to tell MoD how much each new equipment programme will cost, based upon the prevailing value of goods, services, labour and finance in the free market shaped, not by the interfering hand of people in the pay of the State who always get it wrong, but by competitive market forces.

SMEs bring long-term Commitment

27. In a clean break with the previous administration, this newly constituted Government has made it clear that it will look upon Small and Medium-sized Enterprises much more favourably, when deciding how to spend public funds.
28. It is now widely accepted that in addition to offering flexibility and adaptability, SMEs bring long-term commitment, original thinking and niche expertise in a way others do not on both, equipment supply & sustainment contracts and service provision contracts for MoD.  Indeed, they are the lifeblood of the UK economy and should rightly be given equal access to publicly-funded contracts which have hitherto, been monopolised by the Select Few.
29. In any discussion on Prime Contractors and SMEs, it is important to understand the reasons why the former has a need for the latter.  The first thing that happens after MoD has released the invitation to tender is that, the ITT recipient dissects his proposed Technical Solution into its component workshare parts and outsources some of them to other Profit Centres, whilst retaining the rest.
30. This happens because the ITT recipient does not possess the full range of capabilities in-house to build the entire Technical Solution on his own – hence his requirement for Supply Chain partners, which may include SMEs.  It certainly is not due to benevolence on the part of ITT recipients, as people in MoD have been led to believe (by the Select Few).  The result is the founding of a commercial relationship between for-profit organisations, large and small, operating in the free market solely for the benefit of Shareholders.  It is not for people in the pay of the State to interfere in this business relationship, other than to ensure that:
1. Both the ITT recipient and his Supply Chain partners conduct business within the law and prevailing regulatory framework.
2.    Pay their fair share of business and employee taxes to the Exchequer.
31. The other important issue to bear in mind is that irrespective of the size of for-profit organisations (the distinction between the Prime Contractors and SMEs), MoD is obliged to apply the principle of equitable treatment and maintaining impartiality at all times.
32. Additionally, there must be a clear separation of roles between MoD as Buyer and Defence Contractors as Sellers, to avoid the possibility of them getting mixed-up and creating confusion.

Applying the Principles of Natural Justice

33. Public Servants have a greater duty to apply the Principles of Natural Justice than the rest of us. In no area of public policy are these fundamental principles being violated as in defence procurement.
34. The current practice of digging out old ITTs from the archives, searching & replacing the project name and promptly despatching them off to Defence Contractors has resulted in the Principles of Natural Justice being routinely violated, because selection criteria essential to inform the decision on down-selection, phase-by-phase is omitted – leaving Bidders in the dark as to how their performance will be judged.
35. Under the Principles of Natural Justice, defence procurement officials are duty bound to inform Bidders what evaluation criteria they will be measured against, as they progress from one phase to another and what level of achievement constitutes satisfactory or not – given that taxpayers’ money is to be spent on procuring assets for public benefit, through the instrument of open competition. Not decide upon selection criteria on the spur of the moment, at the time of assessing the ITT response, as is currently the case!
36. Later, Bidders removed from the contest will be denied the opportunity to complain that they had not been informed about the rules of the competition, at the outset – including a chance to challenge the final decision at Judicial Review.
37. Accordingly, it falls upon procurement officials to clearly state the rules by which they intend to prosecute the competition for each phase of the equipment acquisition programme, what penalties Bidders are likely to face for not abiding by these rules, and for failing to comply with the requirements expressed in the ITT.
38. This means that procurement officials should have the talent to be able to express the whole of the requirement, in plain and clearly written English – in such a way, that it cannot be interpreted any other way than intended.
39. In addition, they should be single-mindedly impartial in their dealings with industry, that is, not take sides with one Defence Contractor or another. Procurement officials whose impartiality has been compromised cannot usefully contribute towards the achievement of team, departmental or organisational goals, nor is it in taxpayers’ best interests to have them remain on the public payroll.
40. The governing elite make great play of this country’s sense of fairness, respect for the rule of law and doing the right thing – yet, it seems that people in the pay of the State are exempt from having to abide by these same values!

Lower-level Civil Servants also Rushing for the ‘Revolving Door’

41. The ‘revolving door’ is one reason why public trust in Government and Public Sector institutions has fallen to a new low.  This is because lobbying and corruption rear their ugly heads every time public money crosses the boundary between the Public Sector and the Private Sector.
42. Whereas media focus is on the high-profile political elite who shamelessly exploit their previous relationships and know-how they have accumulated whilst in the pay of the State to line their own pockets and unwittingly skew the market in favour of their new paymasters in the Private Sector, the journey made by thousands of ordinary civil servants underneath them, who are also looking to follow the example set by their political masters and cash-in on this bonanza, has escaped scrutiny.
43. Of course, everyone has a right to sell their labour in the free market to whomsoever they wish, for whatever price they can command.  However, the brazen way the political elite have gone about exercising this freedom without any checks and controls on the way they go about disseminating privileged information about inner workings of Government is scandalous, and always to the detriment of the best interests of taxpayers – which is what they said they would protect whilst in the pay of the State!
44. The military-political-industrial complex has been the original model for lobbying and corruption from the earliest of times – indeed, the career prospects of people in the pay of the State are inextricably linked to those with the means to produce weapons systems, facilitated by the ‘revolving door’ and intense lobbying behind the scenes where it matters most, in the corridors of power inhabited by the same, self-serving political elite.
45. At a time when the headcount at MoD’s defence equipment acquisition organisation at Abbey Wood, Bristol is being forcibly slashed as part of a deal with the Treasury, there exists an extremely high risk that departing procurement officials, including those who have not previously taken part in the assessment of invitation to tender responses will be persuaded to pocket corresponding memory sticks (or CDs) and offer them in return for employment, to competitors of owners of these same CDs – thereby transferring innovative design solutions and Intellectual Property Rights which can then be used by unscrupulous recipients, to grab a larger share of the defence market.
46. Such behaviour only reinforces the view that lower-level defence procurement officials have nothing to offer potential employers in the Private Sector (unlike the political elite), except someone else’s property!  And when these people arrive on Contractors’ premises, they promptly become a burden on fellow co-workers and the payroll because they do not have the necessary skills (due to being selected for reasons other than merit) as task performers to add value to the business, only costs.
47. What’s more, because many Defence Contractors do not have a ‘Code on Ethical Behaviour in Business’ in place, they will not only happily accept such proprietary information without any qualms, but also encourage its unauthorised removal from MoD Abbey Wood – yet they would not want their own CDs to fall into the hands of their Competitors.
48. Such is their twisted sense of morality!

A new Defence Industry Strategy with a Noble Purpose

49. This author has proposed a new Defence Industry Strategy which has at its heart, a built-in mechanism which elicits Private Sector investment capital into each defence equipment acquisition programme, as an alternative to public funds.
50. It has been published by the Business, Innovation and Skills Committee, in the form of written evidence as part of its Industrial Strategy inquiry.[1]

Industry Days used by Defence Contractors to Fix Prices

51. Far from serving as a forum for conveying procurement officials’ requirements to military equipment manufacturers and offering them an alluring prospect of networking with like-minded people with common interests, Industry Days (instigated and hosted by MoD) have become nothing but a gathering of the great-and-the-good (on overheads) from competing firms where talk, in huddled groups, immediately turns to how to carve-up the product market, subvert the competition process, contrive to nullify its use altogether or fix prices!
52. A much more effective way of transmitting MoD’s requirements to all-comers in the defence manufacturing industry is through the vehicle of a carefully constructed and worded invitation to tender whose formal release marks the start of the multiple-phase, winner-takes-all competition and concludes with down-selection of the single Defence Contractor for the final Manufacture, In-Service Support & Disposal phase.
53. If ITT recipients need to take on first-tier Supply Chain partners for dissected workshare parts of their Technical Solutions, then they should be chosen through open competition, on the basis of best value for money – not at a gathering where price-fixing is on the agenda.
54. MoD would do well to heed the words of Adam Smith who wrote in The Wealth of Nations (1776), that “…… people of the same trade seldom meet together even for merriment and diversion, but when they do, the conversation always ends in a conspiracy against the public, or in some contrivance to raise prices”.
55. Adam Smith goes on to say “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.  But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary”.

WRITTEN EVIDENCE ON FAILINGS IN DEFENCE PROCUREMENT

56. The Public Administration & Constitutional Affairs Committee has recently published two written submissions by this author, as part of its inquiry into the Work of the Civil Service.[2] & [3]
57. They examine the Government’s record of performance on defence procurement and the role civil servants have played in overseeing equipment acquisition programmes which have been plagued by persistent delays and cost over-runs.

conclusion

58. Whereas the reforms implemented by the coalition Government in the last Parliament have shown an observable impact, there remains much to be done to achieve the lofty goals set by the governing elite for defence procurement.

ABOUT THE AUTHOR

59. Jag Patel is an independent Defence Procurement Adviser with over 30 years experience of researching, analysing and solving a wide range of entrenched procurement problems – where it matters most, at the sharp end for both, the procurement organisation at Abbey Wood and for the Private Sector.  Those who want to learn more about what else has gone wrong with defence procurement can email JagPatel3@gmail.com or follow @JagPatel3

on Twitter for regular updates.

16 October 2016