House of Commons Defence Committee Defence Acquisition Seventh Report of Session 2012–13 Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/defcom Ordered by the House of Commons to be printed 29 January 2013 HC 9 Published on 5 February 2013 by authority of the House of Commons London: The Stationery Office Limited £17.50 Defence Committee The Defence Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Ministry of Defence and its associated public bodies. Current membership Rt Hon James Arbuthnot MP (Conservative, North East Hampshire) (Chair) Mr Julian Brazier MP (Conservative, Canterbury) Thomas Docherty MP (Labour, Dunfermline and West Fife) Rt Hon Jeffrey M. Donaldson MP (Democratic Unionist, Lagan Valley) Mr Dai Havard MP (Labour, Merthyr Tydfil and Rhymney) Adam Holloway MP (Conservative, Gravesham) Mrs Madeleine Moon MP (Labour, Bridgend) Penny Mordaunt MP (Conservative, Portsmouth North) Sandra Osborne MP (Labour, Ayr, Carrick and Cumnock) Sir Bob Russell MP (Liberal Democrat, Colchester) Bob Stewart MP (Conservative, Beckenham) Ms Gisela Stuart MP (Labour, Birmingham, Edgbaston) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/defcom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Alda Barry (Clerk), Dougie Wands (Second Clerk), Karen Jackson (Audit Adviser), Ian Thomson (Inquiry Manager), Christine Randall (Senior Committee Assistant), Rowena Macdonald and Carolyn Bowes (Committee Assistants), and Sumati Sowamber (Committee Support Assistant). Contacts All correspondence should be addressed to the Clerk of the Defence Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 5745; the Committee’s email address is [email protected]. Media inquiries should be addressed to Alex Paterson on 020 7219 1589. 1 Contents Report Page Conclusions and recommendations 3 1 Introduction 8 2 The problem 10 3 Acquisition Principles: The White Paper 15 Value for money 17 A defence industrial strategy? 18 Open procurement 20 Commercial off-the-shelf acquisition 21 Open systems and the modular approach 22 Exports and economic benefits 24 Working in alliances 27 Relations between Government and Industry 29 Small and Medium-Sized Enterprises 34 Science and technology spending 37 Wider government involvement 39 4 Solving the problem: the emerging solutions 41 Structural 41 DE&S Reform 41 5 The Acquisition Process 49 Identifying the requirements 49 Approval 50 Monitoring 52 6 Beyond the White Paper 53 Urgent operational requirements 53 Single-source contracts 55 7 Measuring success 56 8 Risks and Unknowns 58 Personnel and structure 58 Policy and processes 61 Flexibility 61 Security of Supply 62 Degradation of the national skills base 62 Conclusion 64 Formal Minutes 65 2 Witnesses 66 List of printed written evidence 66 List of additional written evidence 66 List of Reports from the Committee during the current Parliament 67 3 Conclusions and recommendations Based on our analysis, we have identified a number of areas of risk in the MoD’s acquisition policy. Further, the length of time taken by some acquisition projects means that it may be many years before success or failure is visible, and by that time irreparable damage may have been done. In an attempt to mitigate these risks we have made the following recommendations: 1. The decision in 2010 to change to the carrier variant of the Joint Strike Fighter was the largest single procurement decision in the SDSR. It is clear that the decision was rushed and based upon incomplete and inaccurate policy development. It was taken without the MoD understanding how the change could be implemented. Perhaps the primary example of how little the MoD understood about this decision is the fact that it was supposed to improve interoperability. This turned out to be incorrect. This decision ultimately led to increased costs to the carrier strike programme and a delay in the in-service date of the carrier. It could also be argued that it provided a rationale for the early decommissioning of the Harrier. We urge the MoD to learn the lessons of this closed, rushed and flawed decision of 2010. (Paragraph 15) 2. We note that the problems leading to the overheating of the defence budget have been identified and the expressed willingness of the parties to address them. We shall be monitoring progress on this. (Paragraph 21) 3. We sympathise with the impatience of the defence industries in the face of the slow timescale for producing promised information and urge the MoD to accelerate the publication of further material to flesh out the bones of the White Paper. The Equipment Plan should be published as a matter of urgency without awaiting any NAO input or commentary. (Paragraph 28) 4. We believe that the absence of a defence industrial strategy which supports appropriate national sovereignty puts the UK at a disadvantage against competitor countries. Furthermore, we do not understand how we can have confidence in a national security strategy which does not show a clear grasp of what is needed for the defence of the United Kingdom, and how this can be ensured. We recommend that the Government reconsider the wisdom of not having a defence industrial strategy. (Paragraph 41) 5. The White Paper accepts that there are some capabilities possessed by defence suppliers that are critical to our national sovereignty and must be protected on- shore. We expect the MoD to be clear about the capabilities that fall into this category and to have a clear sustainability plan developed with UK industry. (Paragraph 45) 6. We recommend that the MoD work with industry and other Government Departments to ensure that where it is appropriate to use open standards these should be consistent, widely publicised and promoted as a matter of course. (Paragraph 53) 4 7. We recommend that the Department reviews and benchmarks itself against the US “Fast, Inexpensive, Simple and Tiny” initiative. (Paragraph 58) 8. While we commend the Government’s commitment to encouraging defence exports it is clear that the playing field is not level. We recommend that the Government keep under review the reciprocation by other countries of the UK’s commitment to open procurement. If it transpires that others are not prepared to give to UK industry the opportunities the UK gives to theirs, it might become necessary for the Government to reduce its open procurement. (Paragraph 68) 9. The overriding reason for the purchase of any item of defence equipment must be its quality and the requirements of the Armed Forces. We consider nonetheless that the Government should take into account in buying equipment the enhanced opportunities for export of equipment in use by UK armed forces. Defence equipment sales carried out within all the constraints of national and international law bring with them significant benefits to the UK in terms of employment opportunities, economies of scale and enhancement of influence. (Paragraph 69) 10. Defence Equipment and Support should be directed to take account of tax revenues when conducting investment appraisals and this should form part of a rounded government decision-making process. (Paragraph 70) 11. We believe that the UK strategy for defence acquisition should be based on a coherent level of commitment to a requirement for an ability to act nationally, to an understanding of where a level of mutual interdependence or partnership is acceptable, and where the risks of dependence on the US are acceptable to our national interest. A government with the ambition for the UK to retain its status as a major international power enjoying considerable operational sovereignty should address these issues in that order. (Paragraph 77) 12. We recommend that when entering into contracts, the MoD pays due regard to the need to effectively understand and manage risks originating with private sector partners and in the supply chain, especially the practicality of the placement of civilians, and in particular civilians who are non-UK nationals, into harm’s way. (Paragraph 85) 13. We recommend, therefore, that the MoD, industry and the Treasury develop collaborative behaviours and methodologies for delineating the competitive and collaborative phases of defence acquisition. This should overtly identify and manage risks where they arise and as they are identified so that less emphasis is placed on the, sometimes flawed, concept of risk transfer. We also note that the movement of personnel, especially at the senior level, can be effective for defence, but recommend the promotion of a culture of overt openness, visibility and transparency so that public confidence in defence leaders does not wane. (Paragraph 94) 14. We recommend that the MoD include in its annual report and Accounts information about the number and value of contracts awarded to SMEs, by both the DE&S and prime contractors. (Paragraph 97) 5 15. We were told that the requirement to bear unlimited liability is a disincentive to SMEs to bid for Government contracts. We expect to be told in the response to this Report what action has been taken to ease this burden on business. (Paragraph 103) 16. We expect to learn in the response to this Report what the MoD is doing to encourage prime contractors to speed up the process of engaging with SMEs as potential suppliers.