The Ministry of Defence have announced a 15-year contract worth £230 million a year with the ship builder BVT Surface Fleet Ltd. The contract is designed to provide the company with a reliable income after the current contract to build two new aircraft carriers is completed.
Most procurement processes look something like the following:
1) Buyer works out what they need.
2) Different suppliers bid for the contract. Each supplier offers a certain product at a certain price.
3) Buyer decides which company is offering the best balance between a low price and a quality product. The best bid gets the contract.
There are complications in this process. You need to be careful that suppliers don't overbid in stage two and wind up promising more than they can deliver - leading to problems down the line like the recent collapse of the National Express rail franchise. Stage one can be challenging for some contracts, for example in research and development where a clear specification can be impossible.
These challenges mean that procurement is a complex process and firms have to build up a set of skilled staff and robust procedures in order to get good value. Some operations are impossible to contract out effectively and that can mean that the process has to be internalised within the company, which leads to vertical integration.
What BVT are being offered though, bears no relationship to the basic structure of an effective procurement process. BVT are being guaranteed an income in return for agreeing to the government's judgement about the price they could deliver if they were efficient. This is quite similar to the arrangement between the Government and the BBC. Every few years the Government decides what income the BBC can get by on and then sets the licence fee needed to deliver that income.
That replaces a bidding process, where each supplier does all they can to prove they are the most efficient, with a series of negotiations where a single supplier does all they can to convince the government that efficiency is impossible. The Government can rarely get good value out of these negotiations for a number of reasons:
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It doesn't have the same knowledge of how the company operates and could operate that its managers do.
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Ministers rarely have any specialist knowledge before they start in a new department and are rarely in their positions for more than two years. They are deeply inexpert compared to the corporate executives they are negotiating with. Civil Servants should fill that gap but have little incentive to really fight the taxpayers' corner.
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If a supplier has little fear of losing their income, the Government has little leverage.
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This new arrangement with BVT makes little sense in terms of delivering the right kit for the military at the right price for taxpayers. Yet, similar deals have been struck with other companies such as BAE systems, which has a fifteen year "partnering arrangement" for supplies of ammunition (see page 20 in their annual report, PDF).
We are all going to pay a heavy price for guaranteeing a relatively small number of jobs. The taxes required to pay the bill for this new deal with BVT could easily put more people out of work than the contract keeps in employment. Unfortunately, the highest price might be paid by soldiers and sailors at the front line.
The motivation for these deals can be seen in the press release. It is all about employment policy and building a corporatist "partnership" between the Ministry of Defence and their chosen firms, how many ex-MOD officials and ministers are now in high paid jobs at the same firms that they award these lucrative contracts to?
After all, the last Permanent Secretary at the Ministry of Defence appears to have moved on to become chairman of Finmeccanica UK, who are responsible for the Future Lynx project. Defence of the Realm has chronicled how attached the defence establishment are to this project, which is responsible for shortages of helicopters in Afghanistan.
Ministers should be standing up for the real interests of the British military, but for that to happen we'll need serious changes in how British politics works.