· The Ministry of Defence (MoD) spent £24.9 billion with outside suppliers in 2009/10.
o The MoD’s biggest supplier, by a significant margin, was BAE Systems.
o Despite Britain’s open defence market, the majority of the MoD’s top suppliers are British companies. The remainder are either American or non-UK EU suppliers.
· The MoD has had a long history of getting bad value for money in defence procurement. This was exacerbated by the relatively protectionist approach of the Defence Industrial Strategy introduced by the previous Labour government in 2005.
· Following the cuts in defence spending resulting from the 2010 Strategic Defence Review the Coalition Government decided on a new more free market defence procurement policy. The ‘National Security through Technology’ White Paper it published in February 2012 strikes a good balance between using competition to deliver better value and making sure the UK retains domestic technology in relevant areas. It focuses on two main principles:
o The principle of ‘Open Procurement’ to buy, where possible, on the open market. What matters is operational capability and value for money. Where a product is made should normally be irrelevant.
o The principle of ‘Technology Advantage’ that British products should be bought in critical areas where the UK needs to support or protect an advanced technology or to secure its freedom of action, particularly during operations, or to minimise its dependence on other countries.
· The UK’s new Open Procurement principle in defence seems certain to lead the UK towards purchasing more off the shelf equipment from America. This makes good sense given the continuing central importance of NATO and the USA to the UK’s defence interests.
· Large European defence projects such as the Eurofighter Typhoon and Airbus have been expensive mistakes suffering from massive cost increases and delays. Their high sunk costs and the political implications of pulling out of them at a late stage mean that the UK is now irrevocably committed to them. Binding the UK to a Europe-wide defence policy and supporting further EU defence integration would not be in the UK’s interests.
· Article 346 of the Treaty on the Functioning of the EU includes a clause exempting defence equipment from EU public procurement laws. However, the European Commission has recently adopted two new defence directives to enhance European defence integration.
o The Directive on Defence and Sensitive Security Procurement, seeks to clarify and limit the scope for national governments to exempt defence equipment from EU procurement laws.
o The Directive on Intra-Community Defence Transfers seeks to enhance the European market for defence products by establishing a common EU regime for intra-EU defence equipment transfers.
· Many of the MoD’s failures to get value for money do not stem from bad procurement policy but from cultural and institutional problems. These are harder to tackle and have persisted at the MoD for decades.
o The MoD should follow the Public Accounts Committee’s advice in order to get better value and clearer risk assessment from its projects.
o The MoD should take steps to stop defence contractors competitively underbidding in order to win contracts and then increasing costs once the contract has been signed.
o The MoD and defence contractors should be made more accountable through Parliamentary hearings in the event of a project running over budget or suffering major delays. They should have to explain to such hearings why they have failed and how they will correct and learn from the mistakes made.
· Leaving the EU would of itself have little impact on the UK’s defence procurement policy. However, it would enable the UK to take a more objective approach to future large pan-European defence projects, free from the pressure of European defence integration. And the UK would become freer to pursue a strong Atlanticist approach, with NATO remaining at the heart of the UK’s defence strategy.