Changes to the procurement regulations: a decision that will keep Britain secure

Secretary of State for Defence The Rt Hon Philip Hammond MPNew proposals could save the taxpayer hundreds of millions of pounds by changing the rules governing how Ministry of Defence contracts are awarded. Here, MOD DCB outlines the main points contained within the Government’s recent Better Defence Acquisition White Paper.

New proposals have been announced that could save UK taxpayers hundreds of millions of pounds by changing the rules which regulate the award of Ministry of Defence contracts. The motion will see the creation of a new body to replace the existing Defence Equipment and Support (DE&S) organisation and the strengthening of the arrangements governing the procurement of equipment where the MOD is unable to source its requirement through open competition.

Set out by Defence Secretary Philip Hammond, the proposals to revise the single source procurement regulations form part of the Government’s newly published White Paper, Better Defence Acquisition. It is envisioned that the MOD will save up to £200 million a year by reforming its existing arrangements for defence equipment delivery, equipment support and logistics supply.

The White Paper outlines plans to establish a new, independent body to oversee contracts that are required to be awarded without competition, either because of specialist Armed Forces requirements or for national security reasons.

Mr Hammond said: “This White Paper represents another significant step in tackling the problems underlying defence procurement. I remain committed to driving structural and cultural change at DE&S to ensure that projects are delivered on time and on budget.”

Almost half of the money spent on defence equipment every year is awarded through single source procurement under a system that has been largely unchanged since 1968. The current rules have made it difficult for the taxpayer to obtain value for money because of a lack of transparency and competition in single source contracts, leading to unreasonable profits for suppliers. In 2011, the MOD asked Lord Currie to carry out a review into the system, which resulted in a new framework being recommended.

Following extensive consultation with industry, the MOD has decided to take forward Lord Currie’s recommendations and create a Single Source Regulations Office that would independently oversee a system to provide a fair profit for companies alongside incentives to bear down on costs.

The White Paper identifies the three root causes of the problems that have been experienced with the current system: an over-heated Equipment Programme; an unstable interface between those parts of the MOD which request equipment and support services and Defence Equipment & Support, which delivers them; and a lack of business capability in processes, tools and skills, including management freedoms.

Head of Defence Equipment and Support, Chief of Defence Materiel Bernard Gray, said: “Starting the legislative process now means we will be able to implement the chosen model as quickly as possible once a decision has been made about the future of DE&S.”

The MOD has recapitulated that its preferred approach to procurement is through open competition in the domestic and global market, as set out in the National Security Through Technology White Paper published in February 2012. However, defence equipment often requires advanced and specialist technology, which means procurement options can be limited to a single supplier to ensure the correct capability is acquired.

Single source procurement has averaged over £6 billion a year over the last five years, as stated in Better Defence Acquisition,and it is likely that it will remain a significant proportion of MOD procurement in the future.

Trade organisation ADS welcomed the MOD’s decision to opt for change, arguing that a strong focus should remain on sustainability.

Paul Everitt, Chief Executive of ADS, said: “We recognise that the priority for the MOD is to balance value for money while delivering the capability the Armed Forces require and we welcome initiatives to reform and improve processes.

“When it comes to procurement, the focus should be on the long-term sustainability of the UK’s defence capabilities. The Single Source Regulations Office is intended to provide more transparency between the defence industry and the MOD, offering an opportunity for better project management and greater efficiency. It is important that the new framework is developed in collaboration with all stakeholders, including industry, to deliver the confidence suppliers require when tendering for single source contracts and the best advantage to the taxpayer and the Armed Services.”

The MOD also released plans within Better Defence Acquisition to reform the Defence Equipment and Support procurement organisation following the July 2012 announcement by the Secretary of State for Defence that DE&S could potentially become a Government-Owned, Contractor-Operated (GOCO) entity.

Work undertaken to date suggests that the strategic case for DE&S to become a GOCO is stronger than that for other options within the Materiel Strategy programme, following a Value for Money assessment. This has led to a focus on developing and testing the GOCO option further and, in parallel, consideration of a second option which seeks to deliver the identified benefits of the GOCO model while remaining fully within the public sector, known as DE&S+.

The MOD is proposing to let a contract with a contracting entity to operate on behalf of the MOD a limited operating company to which certain services currently being provided by DE&S (the ‘deliverer’ role) would be transferred, together with the employees providing those services; and to provide and improve the MOD’s defence equipment, support and logistics acquisition services, enhancing business capabilities by introducing best-in-class processes, tools and skills, and controlling the management and operation of DE&S.

The contract would be managed by a governor function, which will sit within MOD Head Office.

The contracting entity’s core role (through the operating company) would be to act as the deliverer and to inform and deliver the equipment and logistic components of each of the MOD requester’s plans. The contracting entity and the operating company would also provide delivery performance and financial reporting, including input to Parliamentary reports. They are likely to continue to play a key role in contributing to pan-MOD standards, policies and strategies (eg with respect to equipment safety, commercial operations and supply chain management, including the strategic industrial landscape), but ownership of such standards, policies and strategies would be retained in the MOD.

Defence Secretary Philip Hammond said: “For decades, MOD has been at a disadvantage in commercial negotiations and reforming single source procurement will radically change how MOD conducts a high proportion of its business. The new independent body will deliver a more effective and efficient way of providing the specialist capabilities our Armed Forces need to keep the United Kingdom secure, and at the right price.”

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