The Ministry of Defence is not making enough progress on boosting competition within its supply chain and is at risk of failing to meet a £1.7bn savings target from driving down costs from single-source procurement, MPs have said.
A wide-ranging report from parliament’s Public Accounts Committee said the department lacked a “coherent approach” to reducing the proportion of contracts that did not result from competitive procurement, which was said to have remained unchanged at around 50% for the past five years.
MPs also said the MoD needed to do more to support the UK defence industry through Brexit as well as expressing concern over “repeated” failures to disclose contingent liabilities within contracts to HM Treasury and parliament, and highlighted the level of parts “cannibalisation” practiced within the Royal Navy.
On procurement, the PAC report said that despite having a commitment to make competition the “default option” for contracts where this was possible, there was concern that MoD buyers “may still be specifying requirements to dictate single-source procurements with a preferred supplier”. They added that there was also suspicion that buyers may seek to rely on an existing supplier for additional work, even when requirements differed fundamentally from an existing contract.
Regulations made under the Defence Reform Act 2014 give the Single Source Regulations Office the power to monitor contracts that were not put out to competitive tender, and allow it to request information from suppliers that the MoD can use to negotiate savings.
However the PAC said there were still too many MoD contracts outside the regulations – sometimes because the agreement predated them – and some suppliers were failing to cooperate. It said that the department had promised “significant savings” from the application of the Single Source Contract Regulations but had made a slow start.
“It is concerning that the ministry still lacks a clear strategy to drive competition in its procurement of equipment – something that will be vital if it is to make planned savings of £1.7bn” – Meg Hillier
“The department has a target of securing £1.7bn in savings from the application of the regulations over 10 years,” the report said.
“It claims to have made £313m in potential savings so far, shared between cost avoidance and cashable savings, although it is unable to be precise about the balance between the two.
“Actual savings achieved to date are only £3m, and realisation of further savings will depend on effective management of the contracts over their lifetimes.”
MPs said they were “sceptical” about the robustness of the £1.7bn target, which they said would depend on the active management of contracts, reform of the MoD’s Defence Equipment & Support trading entity and the successful recruitment of staff with commercial skills.
The report said the PAC expected to see the department meet its target for 100% of all “eligible” contracts brought within the single-source regulations by 2019–20, and to “develop and apply appropriate sanctions” for firms that refused to comply. It called for the SSRO to be given bolstered powers to demand contractors to provide it with “appropriate, reliable data and contractual information”.
PAC chair Meg Hillier said her committee was clear that the MoD needed to toughen up its oversight and scrutiny of the way it conducted business.
“In particular, it is concerning that the ministry still lacks a clear strategy to drive competition in its procurement of equipment – something that will be vital if it is to make planned savings of £1.7bn,” she said.
“Some suppliers are refusing to fall into line with contracting regulations that have been in place since 2014. This is unacceptable and government must ensure the SSRO has the teeth to do its job properly.”
Hillier added that the committee’s work had also raised concerns about the potential impact of Brexit on British defence contractors – particularly small and medium-sized firms who could be disadvantaged by reduced partnering or export opportunities.
“The ministry must give serious thought to what it can do to support UK suppliers while ensuring there is sufficient diversity in the market to promote competitive procurement,” she said.
Repeated failures to report exposure to financial risk
Elsewhere, MPs were angry that the department had “repeatedly failed” to comply with long established procedures relating to parliamentary and Treasury scrutiny of contingent liabilities within contracts that exposed UK taxpayers to potentially huge expense.
“The department has now drawn our attention to 16 cases going back to 2007 where it had failed to comply with requirements,” the PAC report said.
“As a result, in most cases, parliament has not had the opportunity to scrutinise and raise any objections. These failures are signs of an organisation with weak internal controls and senior management oversight.”
Concern over Royal Navy's parts-cannibalisation issues
The report also said that the rising incidence of equipment “cannibalisation” was problematic within the Royal Navy, particularly in relation to ship and submarine parts. The practice involves a required item being taken from one vessel and put into another, rather than being sourced in new or refurbished form. MPs said equipment cannibalisation had increased by 49% over the past five years – although it had gone up by 217% in the case of Type 45 destroyers – and came against the backdrop of a shortage of qualified inventory managers.
“It has become routine for some pieces of equipment, with 26% of all cannibalisations involving the same specific type of equipment on three or more occasions,” the report said.
“The department must deliver on its undertaking that cannibalisation should not be routine, particularly in relation to repeatedly cyclical cannibalisation of parts.”
MPs told the MoD to report back by the end of September with revised targets for acceptable, safe levels of cannibalisation, and additional action that could be taken to reduce it.
Responding to the report, an MoD spokesman insisted that getting value for money when buying the best equipment for the armed forces was the department’s priority.
“Sometimes single source is the only credible option and in those cases we work closely with the SSRO, who have already helped reduce contract costs by over £300m and strengthened our hand in negotiations,” he said.
On the PAC’s cannibalisation observations, the spokesman said that “less than half a percent” of parts used were swapped components.
“We only do this when it’s absolutely necessary to get ships out of port and back onto operations more quickly,” he said. “We continue to make improvements to how we manage this long-established practice."