Industrial Policy and Competition Policy
Industrial Policy
A review of defence industrial policy as conducted by the Government.
Paper No 5 - Defence Industrial Policy can be downloaded as a pdf. (172Kb)
Competition Policy
Competition remains the best procurement strategy to deliver value for money for the defence budget. It has undoubtedly brought benefits: it has enabled the provision of world-class equipment for the Armed Forces at an affordable cost and has assisted UK industry in winning competitions overseas. Competition, at both prime and sub-contract levels, encourages innovation, flexibility, efficient use of resources, and the development of skills and knowledge. It is only a truly efficient and globally competitive industry that can deliver strong performance.
Competition will therefore remain the bedrock of our procurement policy. However, competition does not mean simply accepting the lowest price tender. Deciding best value for money also involves looking at: the performance of the equipment and timeliness of its delivery; the risk involved in achieving the required performance; the sustainability and support costs of the equipment; and the wider factors listed above. The UK will also follow EU procurement law, which requires open competition within the EU for all non-warlike equipment.
Value for money is also a long-term concept, and is not simply assessed discretely for each individual acquisition decision. We need to be aware of the aggregate impact of these decisions on project performance and on the industrial and technological base. This impact will be assessed more systematically and deliberately both in our choice of procurement strategies on individual projects and across projects in the longer term. As part of a procurement strategy, we have the opportunity to manage the competitive tendering environment flexibly to achieve the best long-term value for money.
This may influence, for example, the timing of down-selection to a single Prime Contractor, or the degree to which we invest in technology readiness and de-risking before the main project decision point: with limited resources, it is important not to carry on the competitive process beyond the point at which long-term advantage can be gained. For example, design, construction and assembly of the Type 45 Destroyer is being shared between BAE Systems Marine and VT Group, in order to retain a competitive UK shipbuilding industry for the future while ensuring continuity of design and production throughout the Class, which should lead to cost savings and fewer delays.
We also need to manage technological risk effectively. Burdening Prime Contractors with unmanageable levels of risk will not lead to efficient project performance. Neither of course does close government control or the protection of industry from the costs associated with normal commercial risk. Whatever degree of risk is borne and managed by the contractor, the Armed Forces will always bear the operational risk of equipment or services that are not delivered on time or to the performance standard required. Investment in de-risking technology, as a key tenet of Smart Acquisition, is critical to ensuring effective military capability and a healthy defence industry.
For example, we are investing around 15% of the Ground Based Air Defence programme funds in advance of the project’s demonstration phase in order to reduce risk.
Companies investing their own resources in bidding for any contracts are taking a calculated risk upon the outcome of the competition, and this is no different in the defence business. If companies are to be able to judge these risks then it is vital that they have confidence that competitions are fair and transparent. It also benefits the MOD to receive competitive bids which are acceptable against all their criteria.
Therefore, where wider national interests are relevant to the outcome of a competition, then these will be declared and explained to potential bidders as far as foreseeable. This allows industry to frame their bids accordingly, and take account of any factors outside their control at the outset. An example might be a warship building contract, where it is Government policy that for strategic reasons the fabrication and assembly of new Royal Navy warship hulls should be undertaken in UK yards. This policy ensures that the UK retains a national capability to manufacture warships; and, by specifying this condition in advance, the Government is able to select the Prime Contractor for its future aircraft carrier requirement competitively, while ensuring that bids are based on ship construction work being undertaken in the UK.
The MOD/industry Code of Practice encourages this positive, equitable and co-operative approach between the MOD and its suppliers, and sets out the behaviours and processes that both sides should be entitled to expect before, during, and on completion of the tendering process.
Partnering
Smart Acquisition has engendered a profound change in the relationship between the MOD and industry throughout the supply chain. With industry increasingly involved in providing long-term services to the MOD, we have recognised that a partnership approach, building reliable links with our suppliers, is often the best means of realising our goals.
The Government is committed to Public Private Partnerships, including the Private Finance Initiative, which are delivering real benefits in the provision of defence services. Partnering does not mean creating privileged or monopoly suppliers, which could stifle innovation and result in inflated prices for inferior equipment. Selection of a long-term partner is often undertaken by means of competition, and is always a painstaking and disciplined process; partnerships must be underpinned by hard commercial reality. But partnership is about basing relationships with suppliers on an open, co-operative means of doing business, identifying and sharing risks and rewards and improving communication.
Transparency of information in particular gives suppliers a clearer understanding of the MOD’s requirements and a more stable basis for long-term company investment. Open dialogue with industry, not least through industry’s involvement in the Department’s Capability Working Groups, provides the MOD with many benefits: access to industry’s expertise and innovative ideas; earlier identification of problem areas; flexibility to develop the relationship and change requirements over time; and the potential for increased long-term value for money. More detail on the processes involved in partnering is available in the Ministry of Defence Policy Paper No 4 – Defence Acquisition.
Non-competitive procurement
Although competition remains the MOD’s principal method of acquisition, there are occasions when it may not be able to deliver the best long-term value for money or sustain key UK defence industrial capabilities. Currently about 16% by number of all contracts are placed non-competitively, most commonly where spares or upgrades are required, but also as a consequence of the increasing complexities of systems integration work and the reduction in the number of Prime Contractors who are capable of managing the largest system and platform programmes. Our ability to run competitions, particularly for support services, can be restricted if the scale of long-term investment required in facilities is too high for any single company to undertake without the confidence of a return, or if there is only one supplier with access to key intellectual property.
Industry must also play its part in the single-source contracting process, recognising the MOD’s essential requirement to negotiate acceptable performance, cost and time criteria, at an affordable price and incorporating fair terms and conditions. Having decided in favour of a single-source procurement strategy, we will often require Prime Contractors to utilise competition in selecting their sub-contractors to achieve value for money, while recognising the need to retain key industrial capabilities where present in lower-tier suppliers. Much of the defence industry is characterised by long product development cycles and high levels of non-recurring cost, set against a pattern of relatively infrequent demand from a small number of customers.
The long time between concept and sales makes it difficult to attract private investment, requiring governments to fund most product development work. But a single government rarely has the buying power or the military demand to sustain economic production of the highest-value defence equipment as a monopsony. Nor can governments aspire to generate within their national industry the range of technological capability needed to meet their military requirements.
It is therefore in the interests of both defence companies and governments to obtain access to wider markets. Governments can assist in this by creating appropriate regulatory environments and by harmonising their military requirements, leading potentially to collaborative projects.
Industry plays its part by actively seeking investment opportunities in foreign markets: for example, UK companies have had notable success in penetrating the US market over a number of years, particularly at the sub-system level.
Both these approaches have significant obstacles. There is resistance in some countries to allowing foreign companies to participate in their acquisition processes, especially as Prime Contractors. European collaborative efforts have in the past been dogged by poorly aligned national requirements being shoehorned into a single project, and efficient project performance has often been hampered by an expensive overemphasis on government intervention to secure domestic political and industrial benefits.
One reaction to such obstacles would be to retreat into protectionism, restricting access to the UK market in retaliation for the difficulties faced by British companies seeking markets abroad. This approach would inevitably destroy the viability of a high-technology UK defence industry and severely damage our Armed Forces’ capabilities. Wider market access is crucial to the efficiency of an industry with insufficient domestic customer demand. The UK defence industry, whose exports greatly exceed defence imports, and with its foothold in the US market, would suffer more than most.
Despite the existing imperfections of the global market, UK industry has exploited its opportunities to make significant inroads abroad: it has established profitable relationships with foreign partners and its products benefit from the international transfer of defence technology. In addition, relatively low expenditure in research and technology in comparison with the US means that the ability to attract US technology is highly desirable both for pulling technology through into UK defence products, and for maintaining the Armed Forces’ level of performance, and their ability to conduct joint operations using interoperable equipment. A protectionist approach to defence acquisition would jeopardise industry’s success and the military effectiveness of the Armed Forces.
Only a policy of accessible markets supported by open competition will maintain the required level of military capability and give industry the freedom and opportunity to grow. We are committed to looking outwards and overcoming the obstacles to freer access to overseas markets. The goal is a fair and accessible competitive defence market, at both Prime Contractor and sub-systems levels, where this can genuinely be achieved, allowing the UK defence industry to compete on merit for leadership of and involvement in foreign programmes. We will nevertheless need to ensure that national security interests are not prejudiced in those few sensitive areas. But governments need to accept the inevitability of greater mutual interdependence and manage it advantageously. This is a significant challenge for both government and industry; notwithstanding the significant progress already made, there is much protectionist resistance to overcome.
