An introduction to defence procurement

June 2022 update: This has been replaced by a new paper Defence Procurement Reform (CBP9566).

The Ministry of Defence spent over £15bn on defence equipment and support 2017/18. This equates to 42% of its annual budget for the year. The armed forces will take delivery of a range of major platforms over the next decade. However, successive Governments have consistently struggled to deliver key equipment capabilities within agreed costs and timescales. The National Audit Office has assessed the MOD’s latest Equipment Plan (2018 to 2028) as unaffordable. MPs have questioned the Government’s approach to procurement, the level of single-source contracting and sovereign capabilities.

Affordability of the Equipment Plan

The MOD publishes an annual Equipment Plan looking ahead for a period of ten years. It has allocated £186bn for equipment and support for 2018 to 2028. However, the MOD says the forecast costs of the plan exceed the allocated budget by £7bn over the ten years. This could rise to £14.8bn in a worst-case scenario if all the identified risks materialise. These risks include exchange rate fluctuations, failing to achieve required efficiency savings and programme cost increases. Pressure on the whole defence budget means there is little room for manoeuvre.

Shortfalls in the equipment budget can significantly affect the armed forces. The MOD has in the past delayed or reduced the scope of major projects to find short-term savings which can end up adding to the overall cost of the programme and additional costs as the life of in-service equipment is extended to compensate for a delayed replacement.

But it isn’t just the affordability of the Equipment Plan that interest's MPs and defence experts.

Approach to procurement

The MOD’s approach to procurement comes under regular scrutiny. Whilst open competition is the MOD’s stated preferred option, defence procurement is unusual in that a significant proportion of contracts (by both value and number) for defence materiel are awarded non-competitively. A third of the MOD’s total procurement spend in 2017/18 was on non-competitive contracts (£8.6bn out of £24.3bn). A few big suppliers dominate the defence industry – over 42% of total MOD procurement expenditure was with 10 suppliers.

The Government can exempt contracts from the usual procurement requirements of competition for reasons of national security, to maintain sovereign capabilities and to protect the UK’s operational advantage and freedom of action.

MPs have discussed in Parliament what defines a sovereign capability and what, if any, action should be taken to provide that capability. During the 2017-19 Parliamentary session the naval shipbuilding industry debates have demonstrated many of the wider issues about procurement and Government support to domestic industry and the balance between competition and single-source awards.

The Labour party is calling on the Government to undertake a full defence industrial strategy. The Government refreshed its defence industrial policy in 2018 and has published sector specific strategies for shipbuilding and the combat air sector. It says it will produce a new strategy on competition in 2019.

The Defence and Public Accounts Committees have published reports on defence acquisition and non-competitive procurement.

Regulatory framework

In 2014 new regulations were introduced for single source procurement and a new independent body established to oversee these regulations. The Government is required by statute to review this legislation and is expected to publish the review in 2019. It has already begun amending secondary legislation to accommodate changes identified in the review process.

The Government laid draft legislation in December 2018 amending the Defence and Security Public Contracts Regulations 2011.

Multinational collaboration

Major platforms can be very expensive. The Government can offset these costs by developing new capabilities in partnership with one or more countries. The RAF’s recent combat aircraft fleet have all been developed with other nations and the Government is currently exploring options with potential partners for its next combat air system.

Leaving the European Union

The paper concludes by examining defence procurement in the context of the UK’s withdrawal from the EU.