Select committee inquiry
Non-competitive procurement of defence equipment inquiry
Closed
What the inquiry looked at
“Much of what the Ministry of Defence buys for the armed forces is very specific, technical equipment that can only be acquired from one place. Normally it is better to conduct a competitive procurement to make sure the best possible value-for-money is received, but this is much harder to assure when you can only procure from a single source. The Ministry of Defence currently tenders about 50% of its contracts under this single-source model, and has introduced Single Source Contract Regulations to ensure non-competitive procurements deliver value for the taxpayer. The Single Source Regulations Office is responsible for monitoring these but some suppliers are resisting how the Office interprets the regulations. A particular challenge has been agreeing to move existing contracts into the new regulations regime. The Department estimates that the regulations have saved £313 million as of July 2017. However, the National Audit Office found that the Department lacked good data on its portfolio of non-competitive contracts, and that the proportion of total contracts tendered in this way had roughly stabilised. The NAO also found that the Department does not have the commercial staff it needs to make sure regulation of procurement continues to save money. We will ask the Ministry of Defence how they are working to better understand their procurement portfolio, how much more money we can expect the regulations to save, and whether the Single Source Regulations Office is carrying out its duties in the most effective way possible.”
The committee's words, from the inquiry page on parliament.uk ↗.
What it found
In the committee's words, from the summary of 28th Report - Ministry of Defence: Acquisition and support of defence equipment ↗
Our review of three aspects of the Ministry of Defence’s acquisition and support arrangements highlights the need for the Department to get to grips with three key areas of its business with better oversight and scrutiny. First, we cover what more can be done to reduce levels of non-competitive defence procurement. Second, we consider the increase in ‘cannibalisation’ in the Royal Navy, where parts are being taken from one vessel to keep another going. And third we report on weaknesses in the Department identifying contingent liabilities in its contracts, denying Parliament and the Treasury the opportunity for appropriate scrutiny.
Non-competitive procurement
Around 50% of the Department’s procurement of equipment is not subject to competition.
We recognise that there are sometimes valid reasons why procurement cannot be done competitively and the Department must use a single supplier. Nevertheless, while the Department should not introduce competition for the sake of it, there is scope to do more to reduce levels of non-competitive procurement in line with stated government policy. The Single Source Contract Regulations, introduced in 2014, have led to some improvements in transparency around contract costs. However, there are still too many contracts which the Department has not brought within the scope of the regulations, with some suppliers still refusing to be subject to the regulations or provide all the required information. So far, the financial savings arising from application of the Regulations are very limited, and the Department will need to ramp up progress and have a clear strategy on increasing competition if it is to achieve its 10–year savings target of £1.7 billion. We would also like to see stronger powers for the Single Source Regulations Office.
Cannibalisation
The Department invests heavily in supporting its vessels, but experienced problems when bringing into service the Type 45 destroyers and Astute-class submarines. In the Navy, the levels of ‘cannibalisation’ (taking parts from one vessel to keep another going) have increased 49% in five years overall, and there has been a particular issue with the Type 45s and the Astutes. The Department does not have the data, controls and processes to routinely monitor cannibalisation and its costs across the Navy. The reasons behind the increase need to be better understood and managed so as not to adversely affect operations and increase costs.
Contingent liabilities
The Department has repeatedly failed to comply with long-established procedures when identifying a contingent liability in a contract, denying both Parliament and the Treasury the means to scrutinise the extent to which the taxpayer might be exposed to potentially huge liabilities in the future. Four cases were identified in 2016 and 2017 before a review was undertaken, which identified 12 more cases within Defence Equipment and Support.
What the government said
The government responded.
Summary written by Accountability Index from the government's response.
The government agrees with the Committee's recommendations on competition and on the Single Source Contract Regulations, and reports them as implemented.
- On increasing competition, the government says the department's "default procurement policy is to compete its requirements", while noting there will still be valid reasons why single source procurement "may sometimes be appropriate".
- It says that from April 2020 all Investment Decision Approvals (Cat A-D) "must follow the 3-stage model as standard".
- On the target for contracts within the Single Source Contract Regulations, it states that "the department has therefore met this target" and is "committed to keeping the number low" of exemptions.
- On oversight, the government says it has changed the legislation through three Statutory Instruments and has brought forward the next review, which "will provide further opportunities to extend the regime".
Read the government's response ↗ Read the report ↗ Report an error
How the inquiry ran
Each dot is a dated item listed on this page, from the inquiry's opening on 3 January 2018 to 23 March 2018.
- Oral evidence 10 Jan 2018
- Report 23 Mar 2018
- Correspondence 30 Jan 2018
What it recommended 0 recommendations · 30 conclusions
1The Department lacks a coherent approach to increasing competition in its equipment procurement and, as...
Concluded (the committee's words)
The Department lacks a coherent approach to increasing competition in its equipment procurement and, as a consequence, is struggling to make progress in reducing the level of single source procurement. The proportion of contracts let competitively has remained unchanged for five years at around 50%, despite the Department’s commitment to competition as the default option. We accept that 100% competitive tendering is unlikely; circumstances can arise where only one supplier has the ability to meet demands for particular equipment, or security considerations mean the Department has to contract with a trusted national supplier. But there is little evidence yet of a coherent strategy to increase competition, despite the Department’s claims that it is changing practices and the mind-set amongst staff. We are concerned that Commands may still be specifying requirements to dictate single source procurements with a preferred supplier. They may also change the requirements for an existing procurement fundamentally, but place the additional work with the existing supplier instead of re-competing it. Recommendation: The Department needs to have a clear strategy for increasing competition which will see real savings materialise. We are not pushing for competitive procurement on every occasion as we recognise that there can be valid reasons sometimes for why single source procurement may be appropriate. Nevertheless, we look to the Department, frontline Commands and project teams to take a competitive approach where it is best, and to seek strategic opportunities to stimulate the market in order to reduce the number of occasions when it uses single source procurement.
2There are still too many contracts outside the Single Source Contract Regulations and some suppliers...
Concluded (the committee's words)
There are still too many contracts outside the Single Source Contract Regulations and some suppliers are still failing to cooperate. The Regulations are leading to increased transparency and improved information for contract managers, and are strengthening the hand of commercial staff in contract negotiations. However, not all contracts are being brought into the regulations. The Department has particular difficulties with contracts that pre-date the Regulations that may be brought into the regime ‘on amendment’, although this requires contractors to agree. Only eight such contracts have been included since the Regulations were introduced in 2014. There is also uncertainty about whether particular sub-contracts qualify for the Regulations. With the Regulations giving the Department the power to disallow whole categories of cost, some suppliers are still refusing to be subject to the Regulations or provide all the required information. Ministry of Defence: Acquisition and support of defence equipment 5 Recommendation: We expect to see the Department meet its target of 100% of all eligible contracts brought within the regulations by 2019–20. Where suppliers refuse to comply with the regime, the Department should develop and apply appropriate sanctions. In defence procurement, where public scrutiny is often limited because of security concerns, it is particularly important that the Single Source Regulations Office has effective oversight.
3The Department has made promises of significant savings arising from application of the Single Source...
Concluded (the committee's words)
The Department has made promises of significant savings arising from application of the Single Source Contract Regulations, but actual savings achieved so far are very limited. The Department has a target of securing £1.7 billion in savings from the application of the regulations over 10 years, which is an important contribution to managing its wider affordability challenges. It claims to have made £313 million 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. Money has already been taken out of the budgets and the Department believes it is on track to meet the overall target. However, it has made a slow start. Actual savings achieved to date are only £3 million, and realisation of further savings will depend on effective management of the contracts over their lifetimes. This in turn will depend on the success of efforts to transform DE&S, and the successful recruitment of staff with commercial skills. When we next examine the Department’s Equipment Plan, we will check on progress with savings arising from the Regulations. We are sceptical about the robustness of the £1.7 billion savings target. Recommendation: The Department must improve its information and performance monitoring systems so it can effectively track progress against its savings targets and intervene in a timely way to increase momentum. The Department should demonstrate to the Committee at the earliest opportunity that actual savings are being achieved.
4The Secretary of State’s review of the regulatory regime provides an opportunity to strengthen the...
Concluded (the committee's words)
The Secretary of State’s review of the regulatory regime provides an opportunity to strengthen the Regulations and the powers of the Single Source Regulations Office (SSRO). SSRO does not have many of the powers of a typical regulator. We are concerned, for example, that it does not have timely access to all the contractual information it needs to carry out its role and that suppliers’ data submissions can be made without senior executive confirmation that data are accurate. We are also concerned to hear of the Department’s inability to require the inclusion of eligible amended contracts within the Regulations without the supplier’s agreement. The Secretary of State has now completed his review of the Regulations and is due to announce the results in due course. Recommendation: The SSRO needs appropriate powers and access to information to do a rigorous and independent job. We expect the Department to set out: how the SSRO’s powers will be strengthened; and whether, and if so, how contracts will include a requirement on contractors to provide the SSRO with appropriate, reliable data and contractual information.
5It will be particularly important that the Department does all it can to ensure that...
Concluded (the committee's words)
It will be particularly important that the Department does all it can to ensure that UK suppliers, including smaller companies, are not disadvantaged as a result of Brexit. The Department realises that it needs to be vigilant as the country leaves the 6 Ministry of Defence: Acquisition and support of defence equipment European Union that UK defence contractors are not disadvantaged in selling their products or entering into international alliances, with part of the Department’s role being to encourage and help British industry to be successful. There is the risk that exit from the European Union may further limit choice if it affects UK industry’s ability to participate in collaborations. The Department accepts that “we [the UK] do not have the ability indigenously to supply all of the equipment that our armed forces need”. The Department also says it wants to avoid falling into the traps it has in the past of bigger companies in the UK supply chain absorbing smaller companies, with the result that its ability to procure competitively is reduced. Recommendation: The Department needs to do more to maintain diversity amongst smaller suppliers, and to safeguard the interests of British industry after we have left the European Union. Support arrangements and cannibalisation of navy equipment The Royal Navy operates ships, submarines and helicopters to meet the United Kingdom’s defence requirements. They are complex systems with many parts, requiring the Navy to have spares to be used either during scheduled maintenance or if the original parts break unexpectedly. DE&S puts in place support arrangements for equipment, but when parts are unavailable, the Department can authorise that parts are taken from other vessels, a longstanding process known as ‘cannibalisation’.
6The Department’s arrangements to support in-service Type 45 destroyers and Astute-class submarines have not been...
Concluded (the committee's words)
The Department’s arrangements to support in-service Type 45 destroyers and Astute-class submarines have not been adequate. The Department admits that there have been issues with the support of both these vessel types since they were brought into service. To address the recognised shortcomings, the Department said it had recently spent £8 million on Astute-class parts and, in 2016–17, further invested in the Type 45 support arrangements. The lack of operational experience and performance data for these new vessels has made it harder to predict their support requirements. Ineffective support contributed to increased ‘cannibalisation’, where parts are taken from one vessel to keep another one in service. Over the last five years, there has been a 217% increase in cannibalisation of Type 45s and a 107% increase for the Astute-class submarines. Each instance can increase costs, divert resources and create additional risks, particularly if parts are taken from the production line. Despite the need to make future efficiencies across defence, the Department tells us that the Navy will be adequately resourced to provide its future objectives. Recommendation: The Department must make sure it adequately funds the provision of spares for its future new ships–the aircraft carriers and the Type 26 and Type 31 frigates—in order not to repeat the same mistakes made with the Type 45 destroyers and Astute class submarines. It should provide an assessment of what it sees as an acceptable cost envelope for spares that balances competing risks, including the costs of oversupply, risks to effective deployment, and delays in receipt of spare parts.
7The Navy and DE&S have not always ensured that spare parts are available when required...
Concluded (the committee's words)
The Navy and DE&S have not always ensured that spare parts are available when required for ship and submarine maintenance. The Department acknowledged it could improve its planning of maintenance by considering its requirements further Ministry of Defence: Acquisition and support of defence equipment 7 in advance and ordering parts from contractors earlier. In September 2017, only 67% of parts ordered by the Ships team in DE&S, and 58% by the Submarine team, were delivered on time (against targets of 95%). The maritime supply chain improvement programme aims to improve planning, alongside addressing the 21% shortfall in staff who are qualified in commercial and inventory management. Inadequate maintenance planning increases cannibalisation risks; in the last five years 60% of ships and submarines requiring cannibalised parts were in maintenance, an increase from 27% to 89% over the period. Recommendation: The Navy and DE&S should work with contractors to better plan for scheduled maintenance and ensure that parts are available when required so that the now smaller Royal Navy can fulfil its operational commitments.
8The Navy has become more reliant on equipment cannibalisation, with some pieces of equipment being...
Concluded (the committee's words)
The Navy has become more reliant on equipment cannibalisation, with some pieces of equipment being repeatedly cannibalised. The Department has previously agreed with this Committee’s findings that, although cannibalisation may be necessary in some circumstances, it should not be used routinely. However, over the last five years ship and submarine cannibalisation has increased 49% across the Navy. 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. During 2016–17, the Department also relied on cannibalised parts to resolve 28% of Astute-class defects. The Permanent Secretary told us he is not uncomfortable with the overall level of cannibalisation across the Navy, although he is concerned that it is happening with great frequency with certain items. He has asked the Department to address this as a matter of urgency. Recommendation: The Department must deliver on its undertaking that cannibalisation should not be routine, particularly in relation to repeatedly cyclical cannibalisation of parts. To this end, the Department should, by the end of September, write to the Committee identifying revised targets for acceptable, safe levels of cannibalisation, and what additional actions could be undertaken to reduce it.
9The Department expects vessel cannibalisation to decline but cannot say to what extent, or by...
Concluded (the committee's words)
The Department expects vessel cannibalisation to decline but cannot say to what extent, or by when, and has no upper limit on what level it would tolerate. The Department expects the cannibalisation of Type 45 Destroyers and Astute-class submarines to fall. It does not have a threshold for an acceptable level of cannibalisation, although it does have an equivalent threshold for Merlin helicopters. It does not have the data, controls and processes to routinely monitor cannibalisation and its costs across the Navy. The Department acknowledges that the National Audit Office report has provided it with valuable new insights, and says that applying new data analysis techniques should improve its ability to predict and manage the demand for spare parts. The Department acknowledges that cannibalisation also takes place across the Army and Royal Air Force, but cannot quantify to what extent. Recommendation: The Department needs to ensure it has adequate data to better understand and respond to cannibalisation trends so as to implement our recommendations across both the Navy and the other Front Line Commands. 8 Ministry of Defence: Acquisition and support of defence equipment Contingent liabilities In negotiating contracts, the Department needs to identify any potential contingent liabilities. These are potential uncertain obligations that may arise if certain events happen. They are frequently indemnities built into contracts during negotiations that limit the liability of private sector firms, and require HM Government to cover the remaining costs. Because of the possible cost implications for the taxpayer, contingent liabilities require scrutiny by HM Treasury and Parliament. Departments must comply with long established procedures for notifying the Treasury and Parliament before entering into contracts containing contingent liabilities.
10The Department has repeatedly failed to comply with long established procedures, denying both Parliament and...
Concluded (the committee's words)
The Department has repeatedly failed to comply with long established procedures, denying both Parliament and the Treasury the opportunity to scrutinise the extent to which the taxpayer might be exposed to huge liabilities. The Department is required to seek approval from Treasury and notify Parliament of the existence of contingent liabilities when agreeing a contract. The Department has now drawn our attention to 16 cases going back to 2007 where it had failed to comply with requirements. As a result, in most cases, Parliament has not had the opportunity to scrutinise and raise any objections, even though the taxpayer could be exposed to huge costs. These failures are signs of an organisation with weak internal controls and senior management oversight. We are also surprised that, before we challenged them on the point, the Department had been unaware if there were consequences for the legal status of contracts where it has not complied with due process before entering into them, and that it is unable to quantify the possible exposure in many cases. Recommendation: The Department must ensure all contingent liabilities are notified properly to the Committee and the Treasury. We expect it to take disciplinary action if this does not happen. We expect the Department to set out clearly the rationale for contingent liabilities in all cases, and to rigorously place a value on the liability involved, wherever possible, working with others as necessary. Ministry of Defence: Acquisition and support of defence equipment 9 1 Non-competitive procurement of defence equipment
11We asked the Department whether it thought that the UK had the onshore ability to...
Concluded (the committee's words)
We asked the Department whether it thought that the UK had the onshore ability to deliver the needs of the Ministry of Defence and our armed forces in the future, particularly in light of Brexit. The Permanent Secretary said that “Strictly, the answer to that question must be: no, we do not have the ability indigenously to supply all of the equipment that our armed forces need.” He added that it was important to be vigilant as the country left the European Union that UK defence contractors were not disadvantaged in selling their products or entering into international alliances and stressed this was something the Department was intensely aware of and working hard on alongside colleagues across government.31 He said that he did not want to be complacent about relationships that may emerge that disadvantage UK companies in an international environment, with part of the Department’s role being to encourage and help British industry to be successful in this area.32 28 Q 107 29 Qq 39–41 30 Q 94 31 Q 112 32 Q 113 Ministry of Defence: Acquisition and support of defence equipment 13 2 Support arrangements and cannibalisation of naval equipment
12On the basis of a report and memorandum from the Comptroller and Auditor General, we...
Concluded (the committee's words)
On the basis of a report and memorandum from the Comptroller and Auditor General, we also took evidence from the Ministry of Defence (the Department) and the Royal Navy on support arrangements and cannibalisation of naval equipment.33
13In 2016–17, the Royal Navy spent £9 billion on the equipment, people and support needed...
Concluded (the committee's words)
In 2016–17, the Royal Navy spent £9 billion on the equipment, people and support needed to meet its commitments. This includes procuring new vessels such as the HMS Queen Elizabeth aircraft carrier, and the Astute-class nuclear submarines. To keep its fleet operational, the Navy also spent £1.8 billion supporting its ships and boats, including on spare parts, fuel, and maintenance.34 Since 2000, the Navy’s fleet size has reduced by almost a third from 123 to 84 vessels, including a reduction in the number of destroyers and frigates from 32 to 19.35 This reduction has affected the Navy’s flexibility, with it having to quickly fix problems to keep vessels operational, rather than being able to replace a defective ship with another one while it is being fixed. In 2017, the Government announced its commitment to halt the decline in ship and submarine numbers, and increase the size of the Royal Navy Fleet by the 2030s.36
14The Navy’s ships and submarines are highly complex engineering systems.
Concluded (the committee's words)
The Navy’s ships and submarines are highly complex engineering systems. For each type of vessel, the Department needs to identify and put in place appropriate maintenance and support for vessels to remain operational. This involves predicting the required type and quantities of spare parts, as well as the frequency and scope of maintenance periods. Where the Department does not have the spare part required for either maintenance or where an unexpected defect has arisen, it may choose to take the required part from other ships and submarines. Each instance—termed ‘cannibalisation’ or ‘store robbing’—can increase costs and technical risks and divert resources.37 Over the last five years, there have been 3,230 instances of ship and submarine cannibalisation involving 6,378 parts.38 Support arrangements for Type 45 Destroyers and Astute-class submarines
15The Department acknowledged that when the Type 45 Destroyer and Astute-class submarines were brought into...
Concluded (the committee's words)
The Department acknowledged that when the Type 45 Destroyer and Astute-class submarines were brought into service, the support arrangements had not been as good as expected.39 For example, the National Audit Office (NAO) found the increased Astute- class equipment cannibalisation (107% increase in the last five years) resulted, in part, from a critical shortage of spares given ‘poor inventory management and an incorrectly defined, managed and resourced’ support approach. The NAO also reported that the Navy had decided to make savings by not cataloguing or labelling some parts of the Type 45 Destroyers. This had then made it harder to identify the parts needed or where they might be available.40 33 Report by the Comptroller and Auditor General, Investigation into equipment cannibalisation in the Royal Navy, Session 2017–19, HC 525, 1 November 2017; National Audit Office RUC0001 34 Q 56, NAO (RUC0001), para 4, figure 2, p 5 35 Ibid, para 7, figure 4 36 Ibid, para 16 37 C&AG’s Report, paras 3, 7 38 C&AG’s Report, para 2.3 39 Qq 24–25, 32 40 C&AG’s Report, para 3.14, figure 3 14 Ministry of Defence: Acquisition and support of defence equipment
16It can be more difficult to predict support requirements for new ships and submarines given...
Concluded (the committee's words)
It can be more difficult to predict support requirements for new ships and submarines given the uncertainty of how this equipment will perform and the limited information available on which to make decisions. In 2016–17, in an effort to improve support, the Navy invested an additional £8 million on Astute submarine spare parts and spent £1.5 million improving technical documentation for the Type 45s.41 The Department told us it had learnt lessons about introducing new equipment, which it had put into practice with the new Queen Elizabeth aircraft carrier, where it expects to have 95% of the spares available.42 Availability of spare parts
17Alongside improving the support for new equipment being brought into service, the Department also recognised...
Concluded (the committee's words)
Alongside improving the support for new equipment being brought into service, the Department also recognised the need to improve its planning of scheduled maintenance to ensure spare parts always available when required.43 The NAO reported that in the last five years, 60% of the recipient ships and submarines that needed parts were in maintenance or low readiness.44 In September 2017, only 67% of parts ordered by the Ships team in Defence Equipment and Support (DE&S), and 58% by the Submarine team, were delivered on time (against targets of 95%). In 2014, the Department introduced a programme designed to improve the availability of spare parts for ships and submarines. This involved building inventory management skills, better planning of maintenance, and ensuring the supply chain delivered parts on time.45 The Department told us it now required all teams to look two years ahead to examine each planned maintenance period and the associated spare part requirements.46
18We questioned the Department on its ability to ensure adequate funds would be available to...
Concluded (the committee's words)
We questioned the Department on its ability to ensure adequate funds would be available to support its in-service ships and submarines given the well-recognised budgetary challenges it faced. The Department acknowledged these financial challenges, but explained that, as the Navy had received funding reprioritised from across the Department, it felt the service had sufficient resources to deliver its commitments.47 However, we note that despite this, in 2016–17, the Navy reduced its maritime support budget by 6% (£271 million), and the Department expected the Navy to make savings of £1.6 billion from its support budget over the next 10 years.48 The Department told us that it expected to be able to make the necessary savings without a disproportionate impact on vessels’ ability to operate.49 Reliance on cannibalisation
19Previous Committees have recognised equipment cannibalisation can be acceptable and necessary in some cases.
Concluded (the committee's words)
Previous Committees have recognised equipment cannibalisation can be acceptable and necessary in some cases. However, they have also warned that the Department needs to ensure cannibalisation is the most effective solution and that there is a clear threshold 41 Q 33; C&AG’s Report, para 3.14 42 Q 25 43 Qq 35–36 44 C&AG’s Report, para 2.8 45 NAO (RUC0001), para 14, figure 7 46 Q 36; C&AG’s Report, para 3.8 47 Q 11 48 C&AG’s Report, para. 3.13; NAO (RUC0001), para 5 49 Q 15 Ministry of Defence: Acquisition and support of defence equipment 15 for when it becomes unacceptable.50 This is line with the Department’s own guidance that cannibalisation will only be “used if no other solution is available due to the risk of damage to equipment components”.51 The Department reiterated that there was no policy to increase the use of cannibalisation, which would only be conducted to ensure high- priority ships and submarines remained operational.52
20Despite this, the NAO reported that cannibalisation has become a routine part of equipment support,...
Concluded (the committee's words)
Despite this, the NAO reported that cannibalisation has become a routine part of equipment support, with a 49% increase in the instances of cannibalisation between April 2012 and March 2017. In 2016–17, there were 795 instances of cannibalisation, equating to 66 instances per month, compared to 30 instances per month in 2005, at a time when the Navy was larger. In particular, the Department had relied on cannibalised parts to resolve 28% of Astute-class submarine defects during 2016–17. This contributed to 110 parts being taken from the Astute-class production line in 2016–17, a 43% increase from 2012–13. The NAO also reported that cannibalisations have resulted in a 42-day delay to, and £4.9 million cost impact to, Boat 3, and a further estimated £40 million cost increase for those submarines in production.53 The Department acknowledged that in some areas the use of cannibalisation had become systemic rather than one-off, and it would need to take some action. This was particularly the case with the Type 45 Destroyers and the Astute-class submarines, where it was ‘more problematic’.54
21The Permanent Secretary told us he was “not uncomfortable” with the routine levels of cannibalisation...
Concluded (the committee's words)
The Permanent Secretary told us he was “not uncomfortable” with the routine levels of cannibalisation being conducted at present. The witnesses expressed concern that some parts were being repeatedly cannibalised, and the Permanent Secretary told us this was an area on which the Department would now focus as a matter of urgency.55 The NAO found that 26% of the instances of cannibalisation, where data were available, involved parts which had been cannibalised on three or more occasions. Parts most often cannibalised included non-safety critical valves (costing an average of £2,541 each) and control and surveillance machinery (average cost £8,115).56 The Department stated that of the repeated parts identified by the NAO, 64% were now either on the shelf or had been ordered.57 Plans to reduce cannibalisation
22The Department does not routinely monitor the use, causes and impact of cannibalisation across the...
Concluded (the committee's words)
The Department does not routinely monitor the use, causes and impact of cannibalisation across the Navy. The NAO found that without information, and a strategic oversight of cannibalisation, the Department had not determined a threshold beyond which cannibalisation was unacceptable. The Navy does, however, use a metric to assess cannibalisation across the Merlin helicopter fleet: the average number of cannibalisations per 100 flying hours.58 When we challenged the Department, it could not say what an appropriate level of cannibalisation for ships and submarines would be. It also told us that 50 House of Commons Committee of Public Accounts: Management of the Typhoon project, Thirtieth Report of Session 2010–12, HC 860, 20 April 2011; Assessing and reporting military readiness, Twenty–sixth Report of Session 2005–06, HC 667, 28 February 2006 51 C&AG’s Report, para. 1.5 52 Q 31 53 C&AG’s Report, paras 2.3, 2.17, figure 10 54 Qq 45, 48 55 Qq 24, 34, 36 56 C&AG’s Report, paras 2.4, 2.11 57 Q 26 58 C&AG’s Report, paras 2.6, 3.2–3.4 16 Ministry of Defence: Acquisition and support of defence equipment it expected cannibalisation rates to fall as the Navy gained experience operating the ships and submarines more recently brought into service, but could not say by how much or by when.59
23The NAO also found that the Department did not routinely assess the costs, either engineering...
Concluded (the committee's words)
The NAO also found that the Department did not routinely assess the costs, either engineering or administrative, of cannibalisation. The Department told us that it is refreshing its cannibalisation policy so teams must assess and provide the wider cost implications of cannibalisations and refer cannibalisation decisions to a more senior officer if they may have significant wider cost implications.60
24The Department acknowledged that cannibalisation occurred across all the Armed Forces.61 It described cannibalisation as...
Concluded (the committee's words)
The Department acknowledged that cannibalisation occurred across all the Armed Forces.61 It described cannibalisation as a recognised practice for both the Army and the Royal Air Force when all other supply options had been exhausted. However, the Department was unable to provide the Committee with authoritative information for the other Commands to the same level of detail as the NAO report on the Navy. It committed to looking at the data available to make sure the lessons learnt from the report on the Navy were applied to the same level of rigour across the other Commands.62 59 Qq 24, 33–34 60 Q 17 61 Q 48; C&AG’s Report, para 5 62 Qq 48–50; Correspondence with Ministry of Defence, 22 January 2018, paras 9–14 Ministry of Defence: Acquisition and support of defence equipment 17 3 Contingent Liabilities
25On the basis of correspondence from the Ministry of Defence (the Department), we took evidence...
Concluded (the committee's words)
On the basis of correspondence from the Ministry of Defence (the Department), we took evidence regarding the Department’s repeated failure to secure Treasury approval for contingent liabilities and to notify Parliament in line with requirements.
26A contingent liability is a potential obligation that is uncertain, but may arise if specific...
Concluded (the committee's words)
A contingent liability is a potential obligation that is uncertain, but may arise if specific conditions are met or particular events happen. They are frequently indemnities built into contracts that limit the liability of private sector firms should, for example, an event such as an accident, leak or explosion occur, and require HM Government to cover the remaining costs. In some cases these costs could be unlimited. Consequently, where departments wish to enter into a contract which gives rise to a contingent liability in excess of £300,000, it must obtain Treasury consent, and Parliament should be notified through a departmental minute, accompanied by a ministerial written statement. The Department should not incur the liability until 14 parliamentary sitting days after issuing the Minute, thereby allowing time for appropriate scrutiny.63
27In January 2017, we examined the Permanent Secretary about the failure of the Department to...
Concluded (the committee's words)
In January 2017, we examined the Permanent Secretary about the failure of the Department to notify Parliament of the contingent liability relating to the Phalanx Close in Weapons System Availability contract. He apologised and said that changes to guidance would prevent it happening again.64 Subsequently, the Department identified three further cases relating to the Astute-class submarine Boats 5 and 6, and the Type 26 Frigate Manufacture Phase Contract. In each case, Parliament had not been informed and given the opportunity to scrutinise the contingent liability. In July, the Department initiated a review of all 3,200 open contracts within its Defence Equipment and Support (DE&S) organisation to identify any further cases.65 This was completed in December 2017 and identified a further 12 contracts, going back to 2007. A review of contracts within the Defence Instructure Organisation and the Information Systems and Service organisation was still under way at the time of our evidence session in January 2018.66
28Of the 12 further cases identified, none had received Treasury approval and 10 had not...
Concluded (the committee's words)
Of the 12 further cases identified, none had received Treasury approval and 10 had not been notified to Parliament as required. They had arisen in three particular operating centres within Defence Equipment and Support (DE&S): submarines, helicopters and land equipment.67 The Permanent Secretary told us that this position was unacceptable and it was clear that some project teams had not appreciated the existence of a contingent liability. As a result, the Department had taken a number of steps to avoid a repetition. These are mandated training across the organisation to make sure relevant staff understood the rules; clearer policy and procedures; staff briefings to the senior management group within DE&S; and extra controls in the approval process to make sure that staff cannot forget to check whether there is a contingent liability.68 63 National Audit Office (RUC0001) 64 House of Commons Committee of Public Accounts, Delivering the defence estate, Forty–seventh Report 2016–17, HC 888, 22 March 2017, Minutes of Evidence Q 1 65 Correspondence with Ministry of Defence, 13 July 2017, para 6; Q 4 66 Correspondence with Ministry of Defence, 4 January 2018, para 1; Correspondence with Ministry of Defence, 22 January 2018, para 5 67 Correspondence with Ministry of Defence, 4 January 2018, para 3; Q 7 68 Qq 3–4, 7 18 Ministry of Defence: Acquisition and support of defence equipment
29The Department accepted that failing to secure Treasury approval and notify Parliament were serious matters...
Concluded (the committee's words)
The Department accepted that failing to secure Treasury approval and notify Parliament were serious matters and, given that procedures had been improved and training now provided, failure by staff to follow the procedures may lead to disciplinary action in the future if appropriate. It had submitted details of all the cases to the Treasury in December 2017, and was working with it to regularise the position.69 There remains a possibility that the Treasury will not approve the cases. Given the significance of these contracts, we were surprised to discover at our evidence session that the Department had not thought to check whether they were legally valid and enforceable as a result of the failure to follow required procedures. The Department has since written and stated that “Legal advice has confirmed that there is no circumstance where a court would regard such arrangements as being legally unenforceable because the Department had not followed an internal government administrative process, in failing to declare contingent liabilities arising from those contractual arrangements. The contracts therefore remain fully enforceable.”70
30The Department reported to us that the liabilities were “unquantifiable” in eight of the cases...
Concluded (the committee's words)
The Department reported to us that the liabilities were “unquantifiable” in eight of the cases identified. Here the nature of the contingent liability means that it is unable to predict a series of scenarios with which to accurately cost the liability. For example, the costs associated with dismantling and decommissioning facilities for strategic weapons cannot be anticipated to a degree of certainty.71 The Department added that it always tried to assess and quantify the liability where it could, and tried to disclose where it was not possible to know the size of the potential liability.72 The Department has since written to explain that only where it is not possible to obtain a reliable estimate, due to the nature, scope, range and scale of possible scenarios that might occur, are contingent liabilities treated as unquantifiable. In the future, it proposes to set out the rationale for the contingent liability more clearly during the approvals process, and is working with HM Treasury to better articulate the maximum exposure and potential examples of the scenarios that could lead to unquantifiable contingent liabilities.73 69 Correspondence with Ministry of Defence, 4 January 2018, para 2 70 Qq 16–19, Correspondence with Ministry of Defence, 22 January 2018, para 3 71 Correspondence with Ministry of Defence, 4 January 2018, para 3 and Annex A 72 Q 32 73 Correspondence with Ministry of Defence, 19 February 2018, paras 4–5 Ministry of Defence: Acquisition and support of defence equipment 19
Evidence
Oral evidence sessions 1
- 10 Jan 2018No witnesses recordedparliament.uk ↗