Weekly Defence Insights by Ollie Welch NDI

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Single source defence contracts – 2017/18 profit rate announced


On Wednesday the MOD announced a 16% reduction to the baseline profit rate for contracts placed under Single Source Contract Regulations - from 8.95% to 7.46%. Under a banner of delivering better value for money for taxpayers, the department claims that the new rate is comparable to returns in European and North American markets. However, the MOD approach to single source procurement is sufficiently unique as to make this contestable and industry reaction was predictably negative.


Though the majority of NDI members do not contract under Single Source Contract Regulations, either directly with MOD or through a Qualifying Sub-Contract, around 50% of MOD spend is single source, thereby ensuring that a large proportion of SMEs active in defence are supplying into programmes ultimately governed through this mechanism. Disappointingly, MOD justified the reduced profit rate by claiming that ‘big business’ must do its part to deliver savings, while failing to acknowledge that the ramifications will run deep into the supply chain, where equivalent savings cannot be managed across a business portfolio in a manner available to a multinational. NDI cannot support changes that fails to account for this reverberative effect, which will deter investment and innovation in a manner that seemingly runs counter to broader Government policy on SME engagement. Instead NDI continues to advocate an approach that incentivises prime contractors to work together with their supply chains to reduce costs, leveraging the agility and innovation inherent to SMEs to the advantage of both the Armed Forces and the taxpayer.


MOD publish data on expenditure with industry


On Thursday MOD released its official statistics detailing expenditure with UK industry and commerce in 2015/16 broken down by UK region, including the number of jobs this is estimated to support. These show that total MOD expenditure with UK industry was £18.7 billion over the period, which supported 121,150 jobs, equivalent to 1 in every 200 in the UK. Expenditure was highest in the South East at £5.1 billion, followed by the South West at £4.4 billion, together accounting for just over half of MOD expenditure with UK industry. Predictably, the spread of jobs reflects where MOD spends its money, supporting 1 in every 70 jobs in the South West and 1 in every 100 in the South East. The statistics clearly demonstrate the importance of region centres of excellence, built around large platform design and production within the UK. These support a vibrant local supply chain and encourage economic growth.


The statistics also reveal a correlation between how MOD chooses to spend its money in an international marketplace and the economic success of UK industry. Despite a growing defence equipment budget, expenditure in the UK in 2015/16 decreased by 2.2% year-on-year; this precipitated a 6.3% year-on-year decline in jobs supported. To combat this NDI supports a holistic approach to MOD contracting that takes account of wider economic factors when determining value for money in order to deliver best overall value for the taxpayer. We hope to see this reflected in the forthcoming Defence Industrial Policy refresh, which would better reflect the MOD’s wider commitment to supporting economic prosperity.


National Audit Office report on ‘Delivering Carrier Strike’


A report by the National Audit Office (NAO) into the delivery of the Royal Navy’s Queen Elizabeth class aircraft carriers has warned that technical issues and personnel shortages could further delay their deployment. According to the NAO, the project is entering a ‘critical phase, with many risks to manage. The next three years will be crucial, the report says, as the carrier brings together the fixed wing aircraft, helicopters, radar and sensors the crew and the ships' support and affordability remains a critical risk. Technical problems means sea trials for the first-of-class will not now take place until the summer, three months later than planned. Further technical issues could mean the carrier will not meet its operational date in 2020. In addition, personnel issues, in particular a shortage of engineers no spare capacity among pilots trained on F-35 remain a concern. MOD insists it is committed to delivering the full operational capability on both QE-class carrier and the F-35 by 2026.


Parliamentary Questions of interest:


Asked what MOD’s main policy priorities are for 2017, the department included among its’ list the delivery of SDSR commitments such as the embedding of innovation across the defence enterprise, the publication of a refreshed industrial policy, and additional support to defence exports and wider prosperity. However, no indication could be given as to what progress has been made against these ambitions since publication of the SDSR in November 2015. We continue to wait in anticipation.


Asked a number of questions relating to the procurement of the P-8 Poseidon maritime patrol aircraft, including on what alternative anti-submarine warfare solutions were explored and what level of flexibility will be built into UK aircraft to allow for the incorporation of non-standard equipment, MOD said that the decision to procure the P-8A Poseidon maritime patrol aircraft was taken following rigorous assessment, factors considered including that it was a proven technology, that it could be brought into service more quickly than the alternatives, and the MOD benefited from economies of scale due to being part of a larger programme. UK aircraft will be delivered in the same configuration as those operated by the US Navy and there are no plans to introduce any UK-specific equipment onto the aircraft.


Asked when it expects award contracts for the Power Improvement Project for the Type 45 destroyer, MOD anticipated this in early 2018.


Other news:


An independent Scotland would have to apply for NATO membership (The Telegraph)


Turkey's troubled NATO status (Bloomberg)



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