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Defence Procurement

It goes without saying that if that is the case, the best deal will be procured from that source. I think it fair to identify four phases in the history of defence procurement in recent times. The standard cost-plus model was universal in the world until the 1980s, but economically it was clearly an extremely wasteful and damaging process. The defence industry had no incentive to keep its costs down, unlike any industry operating in normal market conditions. Ultimately that is very bad for an industry, because it prevents it from becoming as efficient and innovative as it should be. We took the first steps in moving away from that model under Peter Levene, now Lord Levene, when he became chief of defence procurement. We moved to a competition-oriented model, with which we encountered great difficulties, because when major projects involve major technology risks, people are not prepared to quote a fixed price. That makes it necessary to return to a system of contractual arrangements under which much of the risk is taken by the procurer, who must do a deal at a very early stage with the supplier, and as a result it is not possible for competition to operate effectively. We then moved to the smart procurement system, which we used until fairly recently. Its main aims were was to prevent a confrontational relationship between the supplier and the purchaser, to ensure that one did not try to cheat the other, and to give an incentive for everyone with expertise and answers to bring them to the table. The insight was relevant, and there is no doubt that smart procurement has produced some great successes—along with some very difficult problems, some of which have been mentioned today. However, we have all found that it is not the whole answer, because it, too, does not allow us to benefit fully from competition. There is always a tendency to oppose the forming of an initial partnership solely with the prime contractor and favour letting in parts of the supply chain to gain the real benefit and the real ideas, and that means a diminishing of competition throughout the system. Now we are moving to a system that was called DPA Forward, until the two agencies were merged. I think we will all be very interested to see how it works and what it consists of, but my view is that where smart procurement needs to be tweaked, modulated or reviewed, the main purpose should be to ensure that we can benefit more from competition. There are a number of problems, one of which is that there is a limited amount of competition within the frontiers of the United Kingdom. As some of my colleagues have pointed out, there is competition in shipbuilding, between companies such as Vosper Thornycroft and BAE Systems, and that is fine; but in some areas it is impossible to benefit from competition without going outside the United Kingdom. In the United States it will almost always be possible to meet defence requirements by buying something off the shelf, but that would probably be the last contract that the buyer would ever let, because we would no longer have any capability of our own. Next time around we would be entirely dependent on an American supplier. Not only would we have no leverage in terms of price and normal commercial negotiations, but we might well find ourselves in precisely the difficulty that we have experienced with the joint strike fighter. We might not get the necessary technology, or the Americans might try to sell us something slightly sub-standard that did not involve the latest technology. We cannot put ourselves into such a position. Unless someone has thought of a fifth route that has not occurred to me, there is only one alternative to that range of possibilities, with the difficulties that are attached to them. That is more competition within the European Union. It has been established for a long time that that would be desirable if it could be achieved, and there have been various attempts to achieve it. It is also generally recognised that the old system of joint procurement that was used for the Tornado was hopeless because it was based on the principle of juste retour, which means that every country that is part of the consortium involved must receive a proportion of procurement equivalent to the proportion of the funds that it contributed to the initial development and research costs. That was a very inefficient and anti-competitive system. We then established OCCAR—the Organisation for Joint Armament Co-operation—a joint procurement agency based in Paris, which is another bureaucracy. I do not wish to run the agency down, for it has done some good work, but it has also experienced some problems. I do not think that the A400M, for instance, has been a brilliant success so far. That system does not strike me as ideal. It is very bureaucratic; it is not competition, or the use of markets. We have a market—the single market—which has been outstandingly successful in every other area of economic activity that anyone cares to mention. Let me make a suggestion. I am not advocating this, because I do not know enough about it—I have not done enough of the homework to be sure that I want to advocate it—but I am sure that we ought to consider systematically an option that will no doubt shock a number of Opposition Members. I believe that we should consider simply getting rid of the special protection for the defence industry that exists in the single market legislation—I cannot remember which clause in the treaty contains it—and extend the single market, in the form of the public procurement directive, to defence procurement. We should make it the rule, not the exception, that when we have a defence procurement opportunity we entertain bids from countries throughout the European Union, on a reciprocal basis. Because of the legal and enforcement structures in the EU, everyone else would have to observe the same rules. Of course there would be certain cases in which individual British companies thought they had lost out, but I am tempted to believe, at least on a preliminary basis—I stress that I am speaking on a preliminary basis—that we would be the net gainers. We have an enormous number of very successful businesses. Some of them are niche businesses—avionics businesses, for example—and some are producing larger platforms, but we benefit from considerable expertise. I also believe that, in practice, we are always slightly more inclined than most of our continental partners to be open-minded, liberal and in favour of open markets. In practice, we have opened our defence markets where other countries have not. A good example in the non-war-fighting area is roll-on/roll-off ferries. Two orders for those were placed with German yards and two were placed somewhere else in the European Union, possibly in the Netherlands—I cannot remember. There was probably some agitation among Scottish colleagues of mine when that happened, but so far it has been a one-way street. As far as I know, no equivalent of the Defence Procurement Agency—or Defence Equipment and Support, as it is now called—or of the Ministry of Defence in any of our EU or NATO partners has placed orders for equipment for military purposes, let alone war-fighting equipment, in this country, except when no company in that country could provide the equipment. Thus there has been no competition at all in that direction, although we have engaged in some competition in procuring from the EU. That is a foolish situation in which to be—or, at least, it would be foolish of us to resist the idea of opening up the market completely, given the assurances provided by the treaty, the legislation, the European Court of Justice and the European Commission that such a change would be enforceable and that there would be a genuinely free market in defence equipment. Let me make my final point, in the space of one minute—