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Ministry of Defence: Collaborative Projects

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Ministry of Defence: Collaborative Projects Report by the Comptroller and = Auditor General NATIONAL AUDIT OXICE Ministry of Defence: Collaborative Projects Ordered by the House of Commons to be printed 26 February 1991 .London: HMSO E8.95 net 247 This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act. John Bourn Comptroller and Auditor General National Audit Office 22 February 1991 The Comptroller and Auditor Generalis the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies: and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their rasourcas. MINISTRY OF ,,EFENCE: COLLABORATIVE PRO~CT.5 Contents Pages Summary and conclusions 1 Part 1: Background and scope of the National Audit Office study 6 Part 2: The Department’s consideration of collaboration 7 Part 3: Advantages and disadvantages of collaboration 13 Part 4: Central management of collaborative projects 19 Part 5: External audit arrangements 23 Glossary 26 Appendices 1. Collaborative projects involving the United Kingdom as at 1 March 1989 28 2. Background information on the projects examined by the National Audit Office 31 3. Structure and organisation of the Conference of National Armaments Directors and the Independent European Programme Group 52 4. SPY0 Howitzer 54 5. European Defence Industry Study - Independent European Programme Group Action Plan 56 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS Summary and conclusions Background 1. The Ministry of Defence spend some g8.5 billion a year on defence equipment. In 1989-90 El.4 billion of this total was spent on equipment procured in collaboration with other NATO countries. The Department were then involved in some 41 collaborative projects (Appendix 1). The Department expect international collaboration to remain a major feature of their procurement strategy in the years to come. 2. In view of the significance of collaborative projects in the Department’s equipment procurement programme, the National Audit Office have examined the Department’s general approach to collaboration and the results they have obtained. This investigation builds upon an earlier National Audit Office examination of the subject, dealt with in my predecessor’s Report “Ministry of Defence: International Collaborative Projects for Defence Equipments” (HC 626/1983-84). 3. In consultation with the Department the National Audit Office selected for detailed examination ten collaborative projects with aggregate estimated total United Kingdom procurement costs of more than !Z20 billion (Appendix 2). Findings 4. The issues examined and the National Audit Office’s main findings are summarised below. On the consideration given to collaboration and to widening opportunities for purchasing from overseas (Part 2) (a] Subject to an overall policy of obtaining maximum value for money, the Department now expect most significant new equipment developments to be collaborative (paragraph 2.2). @) Factors which can create difficulties for collaboration include the long term influence of previous procurement decisions, and the lack of common equipment requirements and timescales (paragraphs 2.12-2.14). (c) Within the Conference of National Armaments Directors and the Independent European Programme Group, the Department have played a leading role in efforts to increase the opportunities for collaboration (paragraph 2.17). (d) Efforts in the major multilateral fora have achieved only limited success in establishing joint Staff Requirements and collaborative projects based on them. It is too early to judge whether recent 1 changes in procedures intended to improve performance will result in an increase in the number of collaborative projects (paragraphs X2-2.27). (e) If a programme has been too small for collaboration to be economic the Department have not until recent years fully considered the alternative of purchasing equipment abroad. However, in common with most other European NATO nations, they now publish details of contract opportunities to potential foreign and domestic suppliers. They have also concluded a bilateral arrangement with the French Defence Ministry which has met with some success (paragraphs 2.3, 2.4, 2.28-2.32). On success in securing the advantages and minimising the disadvantages of collaborative projects (Part 3) (f) The Department’s working assumption, which is tested case by case, is that in collaborative projects any higher production costs are more than offset by development cost savings. However, analysis by the National Audit Office suggested that development cost growth on collaborative projects has on average been higher than for non- collaborative projects. This draws into question whether collaborative projects have delivered cost savings overall compared with national projects. If confirmed, the finding could have significant implications for decisions to adopt collaborative procurement routes, and the National Audit Office recommend that the Department conduct a broad-based review of their experience of project cost growth and make its results available to those responsible for investment appraisals comparing the likely merits of collaborative and non- collaborative procurement options [paragraphs 3.6-3.9). (g) The Department stress the importance of interoperability but have no systems for monitoring the degree of interoperability achieved in practice. The Department have not fully addressed interoperability in many of the projects submitted to the Equipment Policy Committee (paragraphs 3.10-3.13). (h) The Department’s experience on the In-Service Support of equipments procured collaboratively has been mixed (paragraphs 3.14-3.19). (i) Collaborative projects are prone to delays due to the time taken for international resolution of issues such as contract terms and workshare arrangements, as well as other specifically collaborative factors. The Department aim to make appropriate allowances for these factors in project planning (paragraphs 3.20-3.22). (j) The Department have generally negotiated arrangements which relate cost and work shares to production offtake. Where they have had to balance their objectives of minimising costs and maximising the amount of work allocated to United Kingdom industry, the cost minimisation objective has usually prevailed. However, cost share on Long Range TRIGAT was greater than that implied by production offtake, and on MLRS the Department invested funds in facilities in order to acquire a share of a particular work package (paragraphs 3.24-3.31). 2 MINISTRY OF DEFENCE: COLLABORATIVE PRO,ECTS (k) The Department have found it advantageous to exercise their right to withdraw from certain projects. But in others they have agreed to restrict their ability to withdraw without cost penalty in order to reduce the ability of other nations to withdraw (paragraphs 3.32-3.34). On the management of collaborative projects and the Department’s success in securing their preferred approach to procurement (Part41 (1) Despite informing the Committee of Public Accounts in 1986 that they intended to update their 1980 guidance on collaboration, the Department did not update their main guidance document until 1990 (paragraph 4.6). (m) The Department accepted the Committee of Public Accounts’ recommendation in 1984-85 that they should give more urgency to reviews of experience on collaborative projects. However, the “lessons learned” mechanism set up to achieve this has been used in only one of four relevant cases (paragraphs 4.84.10). (n) Competition at prime contractor level was obtained for only two of the projects examined (COBRA and MLRS III). In some recent projects there has been significant competition at sub-contractor level; and provision for development contractors to compete for production contracts (paragraphs 4.144.17). (0) The Department have argued vigorously, and with success, for the incorporation of taut contracting terms into recent collaborative contracts. But the earlier EHlOl contract did not originally have a maximum price: and the EFA contract terms do not place an absolute limit on the customer’s liability although they do provide contractors with strong incentives to minimise costs (paragraphs 4.184.21). (p) In two of the four full development projects examined (COBRA and TRIGAT), the outstanding level of technical risk on entering full development was greater than would have been accepted for a national project. These development contracts were fixed price which, given the high level of outstanding risk, may have resulted in the agreed prices including a large contingency element, although competitive pressures militated against this possibility in the case of COBRA (paragraph 4.23). (q) In April 1989 the Conference of National Armaments Directors published its own views on procurement policies for collaborative projects. These are broadly in line with those put forward by the Department. This represents a large measure of agreement by the NATO nations to the United Kingdom’s preferred approach to maximising value for money from defence equipment procurement (paragraph 4.31). On the adequacy of external audit arrangements (Part 5) (r) The National Audit Office do not have statutory rights of access to collaborative project offices. In general, their examinations are therefore
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