Review of Single Source Pricing Regulations
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Review of Single Source Pricing Regulations October 2011 An independent report by Lord Currie of Marylebone Review of Single Source Pricing Regulations An independent report into the single source pricing regulations used by the Ministry of Defence Lord Currie of Marylebone October 2011 Contents Foreword 2 Preface 4 Executive Summary 6 Introduction 16 Background 18 Part 1: Industry Regulations 24 Part 2: MOD Protocols and Procurement Processes 37 Part 3: Independent Assurance 51 Part 4: SMEs and Exports 57 Transition 60 Conclusions 63 Summary of Recommendations 65 Next steps 68 Annex A - Terms of Reference and Review Process 70 Annex B - Current Arrangements 75 Annex C - Cost of Project Delay 96 Annex D - Current Landscape 99 Annex E - Recommended Solution 105 Annex F - Comparative Practices within NATO and Australia 135 Annex G - The Pharmaceutical Price Regulation Scheme 144 Annex H - Small and Medium Enterprises 148 Annex I - Definition of Single Source Contracts 150 Annex J - Overlap with Defence Reform 151 Annex K - Glossary of Acronyms and Abbreviations 153 Review of Single Source Pricing Regulations 1 Foreword Single source procurement has accounted for around 40% of MOD’s total procurement over the last five years. This is too high and this Government intends to reduce the figure. We will set out how we will achieve this in our forthcoming White Paper on technology, equipment, and support for UK defence and security. However, the particular nature of the defence market means we will still have to place some large non-competitive contracts for military equipment, where there are a limited number of suppliers or where we need to protect our operational advantage or freedom of action. This means it is essential that the arrangements for single source procurement ensure value for money for the UK taxpayer in today’s commercial and economic environment. This is clearly not the case with the current arrangements, which have been in place for over 40 years and which lack incentives for industry to reduce its cost base. That is why I am grateful to Lord Currie for agreeing to undertake this urgently needed and demanding review. I agreed with Lord Currie that he should produce an independent report and that is exactly what he has done. Some of what he says about both MOD’s and industry’s ability to deliver value for money is uncomfortable reading, but there is little in his analysis that I do not recognise or that we are not addressing. The key question now is how to take his work forward. MOD wishes to consult widely on Lord Currie’s recommendations, so it would not be appropriate for me to comment on them in detail now. However, I do want to highlight some key issues. In broad terms, Lord Currie’s report focuses on achieving a more open relationship between the MOD and its suppliers, in particular ensuring that standardised high quality cost data is provided by contractors to the MOD. This would help ensure greater transparency of costs and should improve the MOD’s ability to negotiate realistic prices. Industry would be incentivised to deliver efficiency by the opportunity to make greater returns should they deliver cost savings for the MOD. Making industry more efficient should not only achieve value for money to the taxpayer, but also lead to a more competitive role for the UK industry in the export market. Small and Medium Enterprises (SMEs) would have fewer data reporting requirements and a simplified profit rate process. Larger contractors would be expected to provide an annual statement on how they have engaged SMEs in their supply chain. A key recommendation is the proposed new Single Source Regulations Office. We will need to consider this in the light of other MOD changes under Defence Transformation and the Materiel Strategy, as well as wider opinion. We are clear that the new single-sourcing rules will need a tougher framework to support them and I strongly believe that by having an open discussion of Lord Currie’s findings and his proposed solutions, we can develop a clearer understanding of what will work best for industry, Government, and the taxpayer. We had originally envisaged that Lord Currie would conduct the consultation himself. However, after extending the period in which he developed his report, we have concluded that in order to maintain the momentum of the expected reform, the next phase should be undertaken by Government. 2 Review of Single Source Pricing Regulations We will continue to discuss the issues with Lord Currie during the consultation period, which will run from the publication of the report on 10 October until 6 January 2012. Further details on how to take part in this consultation are set out at the back of the report. Following consultation, the Government will produce a public response and a high-level implementation plan for taking forward its conclusions. Tackling industry’s cost-base and improving the MOD’s procurement process are at the heart of this Government’s transformation agenda for Defence. I am grateful to those in industry and elsewhere that have already engaged constructively on this important issue and look forward to continuing this discussion. Peter Luff MP Minister for Defence Equipment, Support and Technology Review of Single Source Pricing Regulations 3 Preface When the Minister for Defence Equipment, Support and Technology, Peter Luff, asked me to undertake a review of the regulations applicable to the procurement of military equipment and services on a single source basis, he gave me the opportunity to understand the challenges and complexities of procurement in this area. The existing regulations, the so-called Yellow Book, were drawn up in 1968, and although they have evolved somewhat in the forty or so years since, they have not changed nearly as much as the industrial and technological landscape. It quickly became apparent that they needed to change, possibly radically. The real challenge has been to find practical solutions to the issues that I and the team uncovered. The Yellow Book arrangements were originally envisaged as applying across Government. In practice these arrangements have become exclusive to the MOD, reflecting the unusual prominence of single source procurement within the Department. While it is desirable to use competitive tendering where possible, there are sound reasons why single source will continue to represent a significant part of total MOD procurement. It is thus essential that the governing regime for this activity is robust and fit for purpose. This is the aim of our recommendations. It is easy to be critical of the failures in procurement, and we have heard much about such issues in the press. Little of this reporting recognises the fast changing world of technology in which the MOD and industry operate, nor the changing nature of the national security threats against which the MOD must protect. Having visited some of the facilities operated by the main defence contractors, we have a much keener appreciation of the demanding nature of the activities in which both industry and the MOD are engaged. Our consultations with those involved in similar procurement in other countries made clear that no one country has the perfect procurement process; but it was also clear that important lessons could be learnt from others. We are encouraged by the changes the senior MOD team are introducing to address the past problems of defence procurement, including the commissioning of this report. Our proposals are designed to complement and strengthen these changes. Susanna Mason, the MOD’s internal sponsor of the review, has been a most effective champion of both the approach to the review and the solution. I am appreciative of her support. In finding a way through these challenges, my load has been greatly eased by the wisdom, guidance, and major input I have received from Charles Bellringer, a consultant independent of the MOD. Jason Petch has done an admirable job leading the MOD team. Without his and the team’s command of the subject matter, this review would have been much the weaker. So I also extend my thanks to members of the team: Sue Ware, Andrew Palmer, John Clark, Phil Gaskill, Graham Saunders, Peter Thompson, Nigel Rix and Oliver Houseman. I am also grateful to the many people from industry and Whitehall who gave their time so generously to brief us and debate the issues with us in so constructive a manner. The original timetable envisaged publication of our report in July. In the event, the refining and testing of our recommendations, together with the need to fit in with the Parliamentary timetable, required a little more time – hence our October publication. The extension has also led to the Minister modifying the next phase of the review, which will now be a consultation with stakeholders conducted by the MOD. 4 Review of Single Source Pricing Regulations The recommendations in this report have been developed with a keen eye to the burden of implementation. We have sought to develop a new approach to single source procurement that meets the objectives of incentivising efficiency and ensuring value for money for the taxpayer, but which avoids becoming a bureaucracy. We believe that the approach is practical. Inevitably there will be one-off costs of migrating to the new approach, but most of the data that will need to be submitted by industry already exists within the constituent companies, so that these one-off costs should be modest. The reward is a more stable environment for the single source defence sector, where industry is more cost competitive in export markets, and the MOD maintains a balanced budget. That balance will avoid the need to cut or delay programmes and greatly reduce the level of waste that results, with benefit to the MOD and industry, including SMEs.