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NAO 

Report by the Comptroller and Auditor General

mod

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nocompro = non competitive procurement

Improving value for money in non-competitive procurement of defence equipment

 2017

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nao: Our vision is to help the nation spend wisely….Our public audit perspective helps Parliament hold government to account and improve public services….Our studies evaluate the value for money of public spending, nationally and locally….Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £734 million in 2016.

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This report looks at how the Ministry of Defence has responded to the need to deliver better value for money for the taxpayer for non-competitive procurement and whether it is on the path to success.

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Key facts

£8.8bn

expenditure through non-competitive contracts in 2015-16

51% level of non-competitive procurement of defence equipment by number of contracts in 2016-17

£1.7bn

savings expected from applying the Single Source Contract Regulations (the Regulations) over 10 years

<> cocoo will challenge this figure…becos via public competitive procurement, much more savings would be achieve…therefore, the figure 1.7bn are really part of the loss

1,891 live non-competitive ‘equipment’ contracts that the Ministry of Defence (the Department) managed as at 21 August 2017 (66% of total non-competitive contracts by value)

110 contracts and sub-contracts operating under the Regulations as at 31 August 2017

£23.9 billion the value of contracts operating under the Regulations as at 31 August 2017

£313 million Department’s estimate of savings and cost avoidance potentially achieved in the first two and a quarter years of the Regulations

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mod can procure from UK suppliers or from abroad….except that mod colludes with baes(uk nc), to procure mostly from baes, using either of these excuses:

A/only one supplier (baes) can meet demand for certain types of expensive and sophisticated equipment

cocoo: is the baes equip really more sofisticated than the offshore firms?

is it true that only one supplier can meet the demand? offshore firms really do not manufactore those types, and even or supperior quality? 

B/security considerations require the mod to contract with a trusted national supplier (baes), to maintain sovereign capability, for example, nuclear-powered submarines or complex warships.

cocoo:

-mod gets no vfm from nocompro….iow, is paying too much to baes

-is baes really a trusted firm?? <> cocoo will dig out baes shit. 

-is it true that to maintain sovereign capability, must mandate that mod contract from a uk firm (mostly baes)?

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government introduced the statutory Single Source Contract Regulations (the Regulations) via the Defence Reform Act 2014, and established the Single Source Regulations Office (SSRO).

The SSRO is responsible for recommending the profit rate to be applied to relevant contracts, producing guidance on allowable costs under the Regulations, and issuing opinions or determinations on issues raised with it by contracting parties. The Regulations include measures to increase transparency of supplier costs. In 2012, the Department stated that its policy was to pursue open competition 

wherever possible, to fulfil the UK’s defence and security requirements

The Department expects to generate £1.7 billion of savings over the 10-year Equipment Plan from the application of the Regulations. Achieving these savings is important to the Department’s objective of maintaining the affordability of its Equipment Plan.

the regulations allow nocompros only to areas essential for national security, and costing no more than a fair return for suppliers [nocompros must be best value for money]

<> cocoo argues : that mod’s nocompros [long-term relationship with a single supplier: baes] are not really bvfm for taxpayers [noncompros breach the taxpayers wpi], nor essential for national security wrt the uk’s defence and security requirements [compros do not breach the national security wpi]…thus, cocoo argues that the wpi requires compros, on the basis that:

–This report looks at how the Department has responded to the need to deliver better value for money for the taxpayer for non-competitive procurement and whether it is on the path to success. Part One provides background information. We then examine whether the Department:

• • has a strategic view of non-competitive procurement (Part Two);

• • has strengthened its oversight of non-competitive procurement (Part Three);

• • is using the Regulations to secure savings through improved transparency and compliance (Part Four); and

• • is developing skills and capacity to improve outcomes through negotiations (Part Five)

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The Single Source Contract REGULATIONS:

• ability to require full transparency of costs within suppliers’ prices provides greater assurance on value for money.

• The regime provides statutory backing for efforts to negotiate down prices.

• Transparency of costs incurred during the contract allows identification of ‘excess profits’.

• Building a knowledge base on costs informs future budgeting and contracting processes 
  

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Short-term challenges

• Most suppliers now accept the need to work within the Regulations,  but some are resisting them and their interpretation by the Department and SSRO.    Some suppliers are either resisting being subject to the Regulations or have failed to provide information about costs and prices required by the Regulations. The Regulations give the project teams and other commercial staff responsible for negotiating and managing contracts greater access to supplier information than ever before. This puts them in a stronger position to drive down costs. It is therefore not surprising that industry had initial problems or complaints about the single source regulatory regime. However, the Regulations will fail if contractors can evade them by not cooperating.

The MOD faces a particular challenge in gaining agreement from contractors [ SPECIALLY BAES] to bring existing contracts brought within the regime ‘on amendment’, although these can be the highest-value ones 

• The SSRO’s interpretation of its remit has created additional friction, in part because it is seeking changes to its powers. The legislation does not confer on the SSRO many of the characteristics of an independent economic regulator …This, and its confrontational public tone, has limited the willingness of others to cooperate with it. 

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Longer-term challenges

• Realisation of potential savings identified from application of the Regulations will depend on good contract management. The Department calculates that by July 2017 the Regulations had achieved reductions in contract prices of £313 million. This represents some 3.9% of total contract values. Part of this is cost avoidance, and part contributes towards the Department’s 10-year target to save £1.7 billion from existing projects in the Equipment Plan through application of the Regulations

• SSRO makes annual recommendations to the Secretary of State on the baseline profit rate to be applied to contracts within the Regulations. So far, this has resulted in significant potential savings from these reductions in the baseline profit rate, but suppliers have criticised the way it is calculated

• The effectiveness of the Regulations could be undermined by gaps among key commercial and cost assurance staff. It is essential that the Department has sufficient appropriately skilled staff in key areas to achieve value for money, given the large amounts of money at stake, and the lack of competition. We have identified shortages of commercial skills as a common problem across government.

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Conclusion on value for money

The most effective route to securing VFM for money in defence procurement is normally through competition. However, because such competition is frequently absent on the largest defence contracts, the Department introduced the Single Source Contract Regulations to balance a fair return for industry with the need for better value for money for the taxpayer. The Department has identified significant potential cost reductions on contracts within the new regime, 

<> cocoo disagrees:

• mod is failing its duty to increase its ability to negotiate contracts and scrutinise costs to secure better vfm
• mod should require formal justification for nocompros, and be able to demonstrate it is applying credible pressure for competition. mod  should be able to demonstrate why a nocompro offers better value for money…. mod should be identifying where competition can be increased
• SSRO and the mod should work together to monitor the impact of decisions on the defence industry. The SSRO’s statutory aims make clear it  should balance value for money for the taxpayer with a fair return for industry

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Non-competitive equipment procurement in defence

when only one supplier is able to meet demands for certain types of expensive and complex equipment, or where security considerations require a trusted national supplier, mod takes nocompros. 

mod’s nocompros excuses :

• maintaining a sovereign capability to manufacture and support equipment;

• meeting urgent requirements, such as replenishing stocks of weapons used on operations;

• securing long-term partnerships with industry, where the benefits of not opening contracts to competition outweigh the costs; and

• using the supplier that owns the ip 

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naos reasons v Nocompros :

-nocompros cause continued consolidation, which means there are ever and ever fewer suppliers able to manufacture major equipment….

-Although a long-term relationship with a single contractor can in theory offer advantages through economies of scale, simplified supply chains and reduced procurement times, in practice it may lead to:

• lack of leverage to address poor performance because of dependence on one supplier;
• lack of transparency concerning the supplier’s costs, making it difficult to establish a fair price;

• refusal by suppliers to share risk; and

• lack of incentive for suppliers to make their operations more efficient.

• nocompros are highly complex and involve a number of different participants, responsible for defining the requirement, selecting the best procurement route and negotiating a deal

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Attempts to achieve value for money from nocompros :

In 1968, in an attempt to exert control over nocompros’ excess profits and costs, gov introduced the ‘Yellow Book’ regime: It provided for ‘equality of information’ between Department and supplier at the point of contracting; ‘post-costing’ to identify whether actual costs conformed to estimates; and, through negotiation, the recovery of ‘unconscionable profits’….. but the yellow book failed to prevent inappropriate behaviours and did not address the imperfections in the market arising from the lack of effective competition. Deficiencies included:

• limited access to contractors and inconsistent information from them, so that the Department could not assure itself it was achieving value for money;

• excessive focus on profit, rather than seeking reductions in the bulk of contract costs, and, in particular, insufficient challenge of overhead costs;

• restricted ability to adjust profits for contracts with above or below average risk;

• weak governance, with no assurance about the extent to which contracts were covered by the regime, and the need for industry agreement to make changes to arrangements; and

• a lack of standard reporting requirements, and guidance that was vague and open to interpretation.

Subsequently, the government introduced the Defence Reform Act 2014, called the Single Source Contract Regulations (the Regulations) to enable the mod to identify non-allowable costs not appropriate to the contract, and apply a regulated and benchmarked profit rate.

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Given the stated policy of the Mod to use competition as much as possible, we would expect to see it reducing the level of nocompros….however, MOD has not increased the level of competition since its 2012 statement.

It is important to prevent a compro from becoming nocompro due to ip

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Defence Reform Act 2014 and the Regulations

the Regulations in 2014 replaced (the voluntary ‘Yellow Book’). now, rules on contract pricing and requires contractors to submit regular reports to demonstrate to mod that costs are appropriate, attributable to the contract, and reasonable. mod may impose civil penalties if contractors do not comply

Not all noncompros fall under the regulations. excluded : government-to-government agreements, contracts relating to the purchase of existing land and buildings, international collaborative contracts, and contracts relating solely to intelligence

19 contracts excluded:  for example, for the operation of the government pipeline and storage system, together with intra-governmental agreements with the Defence Science and Technology Laboratory. 19 exclusions is only an underestimate of the true number, as project teams are not required to inform the SSAT of excluded contracts

Regulations will eventually cover 100% of eligible new nocompros with a value greater than £5 million, unless circumstances are exceptional

Contractors have statutory obligations to provide a full breakdown of costs and demonstrate they are allowable, and these are scrutinised and discussed by project team negotiators.

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SSRO

Within the mod, the SSAT oversees the application of the Regulations and acts as liaison point for the SSRO…BUT…The mod is not required to share with the SSRO the extent of contracts excluded and exempted from the Regulations, or the underlying reasoning

<> cocoo: why not? which types of contracts the mod is not required to share?

The SSRO is a pb ,not part of mod, but approved by the Sosde…SSROis a ‘regulations office’, not a regulator…ssro can request the information they need….ssro Can ask the mod to penalise suppliers that do not provide information, but ssro has no access rights…the SSRO must ensure that suppliers are paid a fair and reasonable price….BUT…The SSRO has sought to audit industry rather than regulate it. Does not consider whether industry is receiving a fair rate of return. Staff lack relevant experience, and its methodology has been flawed.

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REGULATION Exemptions

Contracts can be exempted from the Regulations only with the approval of SOS, So far, this has happened only on seven occasions

mod’s target that all nocompros over £5 million and not covered by the exclusions, must be covered by the Regulations. There is disagreement between the Department and certain suppliers, who are either refusing to be subject to the Regulations or will not provide the required information about costs and prices. The Department is considering what action to take in these situations.

The SSRO found breaches of the Regulations that occurred during negotiations, but were not reported as deviations. five contracts had breached the Regulations because they had not observed the principle of ‘not taking profit on profit’  : the policy is that Profit can only be charged on profit, if a sub-contractor is part of the same group as the prime contractor….BUT mod did not take action to correct the error in these cases <> why not?.nobody asked.

Disagreements between mod and suppliers have centred on the ‘reasonableness’ of costs, the more subjective category…One such disagreement relates to ‘re-work’. Suppliers are expected to bear the cost of re-work caused by their poor workmanship…the supplier is now setting up a system to record the causes of re-work

<> cocoo will validate these claims, or ask mod to validate them

Some contractors have resisted complying with the UK’s Regulations, partly because they already comply with the United States’ Federal Acquisition Regulations. The UK’s ‘principles-based’ approach contrasts with the ‘rules-based’ approach in the US, which is more specific about which categories of costs are not permitted. US regulations are also more permissive than the UK’s in areas such as sales and marketing, and research and development

The SSRO issues guidance on what costs are allowable, which then mod considers. the general policy is that costs are only allowed when they generate benefits directly attributable to the contract. BUT, while suppliers disagree, arguing that this ignores the government’s broader ‘prosperity agenda’ for UK industry.

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Cost savings expected from the Regulations

mod has set a 10-year target to save £1.7 billion by applying. in just 2 years saved 313m.:

Category of saving	Amount (£m)
Baseline profit rate	58
Other profit adjustments	78
Disallowed costs	154
SSRO opinions and determinations	2
Other	22
Total [contract cost savings]	313
Notes Savings from 79 contracts.
Source: Ministry of Defence

 

mod can carry out reviews of costs after the contract award and, if appropriate, recover excess profits.

<> cocoo will help mod recover excess profits

Between December 2014 and March 2016, the mod reviewed 17 completed contracts which pre-dated the Regulations (known as ‘post-costing’), worth £447 million. This work resulted in the recovery of £5.2 million of excess profits. It will be conducting similar exercises in future on contracts within the Regulations.

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BASELINE PROFIT RATES [BPRs]

One of the elements contributing to the savings came from ssros annual review of the bprs to be applied to contracts within the Regulations. This rate has fallen from 10.6% in 2014-15 to 7.46% in 2017-18

–ssro has changed the range of companies used as comparators. Previously, the range of comparator companies was drawn from across British industry, but the SSRO now focuses on companies from the UK, Western Europe and North America (including defence companies) engaging in comparable types of activity

In addition, ssro has used a three-year rolling average profit to smooth out fluctuations. The methodology that the SSRO has used has been criticised by industry, but is supported by the Department as being more robust. Debate has centred on the selection of comparator companies, and the use of the median rather than mean value of the comparator population.

In March 2017, the SSRO published extensive information about how it had selected the comparator companies, their characteristics and identities.

There are five other categories of adjustment that can be made to the bpr, for example, for levels of risk

More detail on the application of these adjustments can be found at:

www.gov.uk/government/uploads/system/ uploads/attachment_data/file/618406/Annual_stats_bulletin_June_2017_-_WEB.pdf

Single Source Regulations Office, Developing the SSRO’s approach to calibrating profit rates in single source contracts, June 2017.

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The SSCR (the Regulations) will have little value if mod does not have the skills to capitalise on them in negotiations…mod needs to develope skills and capacity to improve contract negotiations

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The DE&S evaluates suppliers’ overheads, which represent £2 billion of spending annually. In the past, suppliers have not always provided these costs promptly, and indirect costs have not been agreed in a timely manner

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APPENDIX

(NAO) criteria on how regulation helps nocompro’s vfm :

• are all appropriate contracts brought within the Regulations, and comply?
• are nocompro outcomes improving?
• are all parts of the system operating effectively? is mod working effectively with the (SSRO) (are all appropriate referrals made?. is SSRO is monitoring supplier compliance with the Regulations and making recommendations for mod?
• are profit rates set in such way, to balance the interests of the tax payer [WPI <> cocoo], with achieving a fair and reasonable return for industry that encourages contractors to continue operating in the defence sector?
• what challenges mod faces securing nocompro VFM, and how it is managing them?
• How is independent regulation seeking to secure nocompro VFM?
• How does mod seek to secure nocompro VFM?
• In what circumstances does mod use nocompro?

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conclusions

Increasing concompro vfm depends on improving the efficiency of contractors and driving better deals through upskilling, and changing behaviours. Efforts are under way to achieve this but are ‘work in progress’

In what circumstances does mod use nocompro?:

external reviews of mod’s procurement practices, for example by Lord Currie. We examined information published by mod and other bodies. We also examined published documents from the US Department of Defense and Government Accountability Office (GAO). We reviewed mods internal commercial and acquisition guidance provided to its staff, and policy  documents.  These  included  documents outlining when procurements should be competitive and when they should not, how to price them and when to involve other bodies like the Single Source Regulations Office (SSRO). We analysed contract data provided by the Department’s strategic supplier management cell, the SSRO and Single Source Advisory Team (SSAT)….This helped us identify the types of contract and commercial models used across the Department….We examined project and approvals documents. These included business cases, commercial strategies, reviews prepared by the Cost Assurance and Analysis Service (CAAS) and Investment Approval Committee papers….We collected data and information  on  nine  randomly  chosen  contracts, within the Regulations and outside.

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How is independent regulation securing nocompro vfm?

• We examined data on how the new regime is operating. This included reviewing SSRO data on profit rates and suppliers’ compliance with reporting requirements to assess trends. We also examined actual and predicted savings from implementing the Regulations and the assumptions underpinning them.

• We spoke to other regulatory bodies, the Office of Rail Regulation, the Water Services Regulation Authority (Ofwat) and the UK Regulators Network. This helped us understand how other regulatory regimes work.

• We examined publicly available material, such as GAO reports, to examine what processes are in place in other countries.

• We held a workshop on regulatory practices. We  held  an  internal  workshop with experts on regulation from across the NAO to seek their advice on the SSRO’s role compared with that of regulators. We looked at how regulators are structured, and how they measure compliance, maintain independence and engage with the regulated market
  

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PARLIAMENT REPORT ON MOD

https://committees.parliament.uk/committee/127/public-accounts-committee/news/98286/mod-needs-coherent-approach-to-increasing-competition-in-procurement

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-what more can be done to reduce nocompros?

-why the increase in ‘cannibalisation’ in the Royal Navy, where parts are being taken from one vessel to keep another going?

-Around 50% of mods procurement is nocompro. sometimes may be valid reasons for nocompros…

<> COCOO:  BUT…. there is scope to reduce nocompros, AS PER GOV policy!!!

The SSCR 2014 led to some transparency around contract costs. However, there are still too many contracts which MOD KEEPS REFUSING to bring within the scope of the regulations, STILL ALLOW some suppliers to keep refusing the regulations or provide all the required information.

So far, the financial savings arising from the Regulations are very limited, and the Department will need to ramp up 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 Ssro

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Contingent liabilities

mod has repeatedly failed to comply with contracts’ contingent liability procedures, in order to deny both Parliament and the Treasury the means to scrutinise the extent to which the taxpayer is exposed to potentially huge liabilities in the future….

it is also concerning that mod keeps failing their duty to design and implement a clear strategy to drive compros, thus mod is likely to failed their duty to achieve the planned savings of £1.7 billion.

mod keep allowing some suppliers to keep refusing the regulations. Thus, mod is in a duty to arm Sssro with the teeth to do its job

following Brexit…mod is failing to properly support UK defence suppliers, and failing to promote competitive procurement

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Reducing single source procurement [sspro = nocompro]

government’s (mod) policy is to use competition wherever possible in order secure the best vfm…. Nevertheless, to retain sovereign capability, as well as consolidation within the defence industry, in some cases there are a limited number of suppliers able to provide the sophisticated equipment needed

<> cocoo challenges this

mod considered that gvfm can be secured not only via compro, but also via nocompro….but mod did recognise that improving how it specified requirements, could greatly increase the number of compros

to secure bvfm from nocompros, mod introduced in 2014 the sscr : Single Source Contract Regulations (the Regulations). These apply to Qualifying Defence Contracts = [non-competitive contracts over £5 million and qualifying sub-contracts over £25 million]

mod said it was trying to place high-value contracts under the Regulations as quickly as possible, and still aimed to have 100% of all eligible contracts under the Regulations by 2020.

One of the main aims of the Regulations is to reduce the cost of procuring equipment. The Department has a target of £1.7 billion in savings from the application of the Regulations over 10 years…mod said it had so far made reductions of £330 million to initial contact prices

However, actual savings achieved so far are only £3 million…further savings will depend on effective management of the contracts over their lifetimes

sscr 2014 + The Defence Reform Act 2014 [set up the Single Source Regulations Office (SSRO)] which, every year, recommeds to the Sos, the BPR (baseline profit rate) for nocompros, etc

mod said it did not want to fall into the past traps whereby large uk companies acquired (t.o.) some of the smaller ones, with the result that the ability to procure competitively is reduced

<> cocoo:  did cma not investigate?

mod admitted that, after brexit, the UK lacks the onshore ability to deliver its needs….thus mod was trying to prevent uk defence contractors  from being disadvantaged in selling their products or entering into international alliances

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While the primary limitation period for a claim in tort [COCOO CLAIMS TORT ON WPI]or for breach of contract is six years, the limitation periods for procurement challenges are much shorter [1 to 3 MONTHS] and complex

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WPI = ESG = environmental, social, and (corporate) governance…. the ESG evaluation can be done internally, or externally by investors or other stakeholders

<> cocoo must become an stakeholder(sol)/investor, to evaluate firms’ esg/wpi

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CL and public procurement intersects at two points:

1) tackling anticompetitive practices (or bid rigging) in public tenders

2) dealing with distortions of competition created by public institution actions or regulation

In the EU, the public procurement market is 14% of the GDP (around €2 trillion per year). Thus, competition in public procurement is necessary to ensure achievement of ‘value for money’.  national cmas have quite a fruitful and easy harvest investigating competition law infringements in public procurement markets

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BAE T.O. BID FOR BALL AEROSPACE

https://www.baesystems.com/en-us/article/bae-systems-signs-agreement-to-acquire-ball-aerospace

BAE Systems today , 17.08.23, announced a definitive agreement for the proposed acquisition of Ball Aerospace for approximately $5.55 billion….The acquisition will deepen BAE’s relationship with NASA, a key Ball Aerospace customer, and boost the UK weapons giant’s environmental monitoring and surveillance as it responds to climate change

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…. bae faced fierce competition from blackstone, textron and general dynamics….but finally, uk bae successful t.o. bid for usa ball aerospace, is £ 4.4 billion…but still pending clearing from usacma[fca] (protectionist)

parent Ball Corporation [beer can maker] is letting off subsidiary Ball Aerospace [enriched by ukraine war], works on weather forecast and on SENSITIVE (eg. sensors to track enemy troops]MILITARY TECH.eg satellites, to nasa, pentagon, hubble and webber telecopes]…. new satellites will orbit earth TO PROTECT FREEDOMS AROUND THE WORLD + CLIMATE CHANGE HUMAN IMPACT ON EARTH <> WPIS]

BAE’S 44% revenues come from usa. they build submarines, fighter jets, weapons…etc…and have record orders/profits since russia invaded ukraine [baes shares have rocketed over 74 pc and have further to fly….baes orders, since ukraine war, has hit 66 billion, prompting it to upgrade its earnings guidance for 2023…The biggest portion of the new orders came in air, driven by new orders from Saudi Arabia and for MBDA, the European missiles systems business in which BAE is a partner….Maritime, driven by orders for the type 26 frigate and the UK’s dreadnought submarine programme, also contributed a big chunk of new business….

said it was not widely enough appreciated that BAE’s ability to export from the US, UK, Australia and Sweden meant it was “uniquely well equipped” to compete in multiple markets

BAE, which has two major Swedish subsidiaries in Hagglunds and Bofors, is also seen as a potential beneficiary if Sweden and Finland’s applications to join NATO are approved and the two countries raise defence spending accordingly

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CMA REVIEW OF UNDERTAKINGS BY BAE – 2016

https://www.gov.uk/government/news/cma-to-review-bae-systems-undertakings

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CMA UNDERTAKING REVIEW: BAE 2016

On 1999, British Aerospace plc, now BAE Systems plc (BAES), acquired the Marconi Electronic Systems business (MES) 

BAES is the largest defence supplier in the UK, with global turnover of
£17.9 billion in 2015. It was paid £3.7 billion by the MOD in the financial year
2015/16, representing 15% of all MOD procurement expenditure in that year
(more than twice as much as the next largest defence supplier). MOD
payments represented around 22% of BAES’ global revenues.

BAES was imposed 2 undertakings (CONDITIONS TO CLEAR THE MERGER). In early 2016, we(cma) checked with the MOD that it would be an appropriate time for our review …The CMA has a statutory duty to keep undertakings under review. From time
to time,by any change of circumstances, undertakings may  no longer be appropriate and either:

(a) one or more of the parties to the undertakings can be released from them,
or
(b) they need to be varied or to be superseded by new undertakings.

IF SO, the CMA has a duty to provide such advice to the (sosBEIS)….the final decision remains with the sosbeis

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CMA UNDERTAKING S REVIEW REPORT

The 2 baes undertakings are most relevant in:  maritime (warships and submarines), combat aircraft and munitions.

Changes of circumstances [since the last review of the Undertakings]:

(a) structural changes to BAES: BAES has sold, closed or otherwise reduced the significance of its business

(b) changes to mod defence procurement practices:  The MOD has entered into a number of long term procurement frameworks with BAES

(c) changes in defence suppliers’ capabilities:  The MOD now seeks to procure more goods and services from suppliers on a European or worldwide basis rather than solely from the UK….because there has been an increase in the capabilities of UK shipbuilders other than BAES and overseas defence contractors have established on-shore bases in the UK. Both of these changes mean that there is a greater number of credible suppliers

cma:

the Undertakings have not improved competition, becos most access requests (no entry barriers) recorded by BAES have been for small mod contracts. larger contracts have not played a role in enabling other prime contractors to compete for MOD contracts…Also, as a result of the Undertakings, the MOD has not awarded any contract to an
alternative prime contractor which used BAES as a subcontractor (of EF essential facilities)

but the MOD said the Undertakings ‘should be retained to protect competition potential since BAE Systems still holds a dominant position.The MOD said that the mere existence of the Undertakings, creates the potential for competition….We (CMA) sought evidence of this in the form of reports, policy papers or Board/Committee minutes that refer to the use of the Undertakings in discussions, decisions or negotiations but no such evidence was received that pre-dated our review.

cma: the mod decision to procure through non-competitive contracts, has reduced competition for contracts, and therefore the need for the undertakings, [ as there are no rivals to may seek access to BAES’ resources]…..

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<> cocoo: mod says the baes undertakings are needed….but, on the other hand, they have killed 22% of the purpose for the undertakings, by deciding to procure via noncomp contracts [=mods’ single source procurement approach]….but only 22% of baes revenues comes from mod contracts…thus:

1/-cma/sosbeis were wrong to release baes undertakings, becos mod cannot totally kill the purpose for the baes undertakings [as 78% of baes revenues comes from other contracts]…thus, the undertakings should have stayed. thus the cma 2016 report was flawed, and the sosbeis decision to release baes from the undertakings was flawed.

2/-mod, and/or relevant (self) regulations:

[that allows mod to be able to choose a single source procurement approach + mod granting exclusive contracts to baes + mod reluctance to seek other contractors + even when an mod contract allows for competitive allocation, there is no evidence that mod will offer it to anyone other than bae]……..or to any firm who will not subcontract a large proportion of the contract to baes [see combat air]……these reasons add up over time, so that , of course, [as cma found] , there are
no other credible prime contractors in the UK that could replace BAES, in the
unlikely event that the MOD chose to alter the current procurement
arrangements. 

are distorting competition , in breach of cpcl…eg: has killed 22% of the purpose for the undertakings, which wrongly resulted in baes being fully released.

3/-the current t.o. of baes, should be made subject to , at least, the 2 undertakings being reinstated.

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 (cma) disagree with mod. our conclusions for each sector:

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Warships

There are alternative options for the MOD to procure noncomplex warships and other naval vessels . thus, the Undertakings are only appropriate for complex warships. There are currently two major programmes where the Undertakings may potentially be relevant, the Type 26 frigate and the Type 31 general purpose frigate.

we consider it unlikely that the MOD will seek to involve other contractors in relation to the Type 26 frigate programme. BAES currently has an exclusive contract (pursuant to the TOBA) to produce Type 26 frigates. We have not seen any evidence to indicate that the MOD is likely to seek to change this arrangement. Although the Parker Report envisages the possibility of competitive procurement for the Type 31 frigate, we have seen no evidence that procurement will be through a competitive process….Moreover, we have seen no evidence that BAES has essential resources to which an alternative contractor would require access to build this frigate

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Submarines

BAES, together with Babcock International and Rolls-Royce, is party to an
agreement with the MOD called SEPP to build nuclear submarines. There are
no other credible prime contractors in the UK that could replace BAES in the
unlikely event that the MOD chose to alter the current procurement
arrangements. 

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Combat Air

The MOD is currently purchasing F-35 combat aircraft from a US company
which has subcontracted a proportion of the manufacturing to BAES in the
UK. Hence there is no prospect of the Undertakings being used, until the uncertain start and nature of a successor programme

 BAES is also part of a multi-party contract to design the Future Combat Air
System (FCAS). we have seen no evidence that this procurement policy is likely to
change in respect of the next generation of combat aircraft (manned or
unmanned).

if future MOD policy were to require new combat aircraft to be designed and manufactured in the UK, there are no alternative uk contrtactors. Hence it is
unlikely that the Undertakings will be used to facilitate entry by uk prime
contractors.

BAES does not appear to have essential resources in this sector that could not be procured from international competitors.

Support services contracts for combat aircraft are generally awarded to the
original manufacturer of the aircraft, thus there is little prospect that MOD policy will shift towards uk procurement of combat air in the foreseeable future. BAES is unlikely, therefore, to have the ability to foreclose (deny entry to rivals]

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Munitions

Around half of munitions acquired by MOD are procured under the MASS
partnering agreement which is a long-term single source arrangement. This
lasts until 2022.

<> cocoo: THERE WAS NO TENER. . THE CONTRACT WAS GIVEN TO baes….THE CONTRACT IS NOT IN THE GOV TENDERS WEBSITE….the contract is now called ngms.:

gov.uk: nov. 2020 : <> brexit date [jan 2020]

A new £2.4-billion [ from mod [taxpayers] to baes] contract to equip UK Armed Forces with essential fire power will sustain 4,000 jobs around the UK over 15 years, Defence Minister Jeremy Quin today announced…Replacing the current MASS (Munitions Acquisition, the Supply Solution) single-source contract from January 2023, the Next Generation Munitions Solution’ (NGMS) deliver about 50 per cent, by value, of the MOD’s total general munitions (GM) portfolio and will maximise military capability and reduce cost.

After the expiry of the MASS partnering agreement, the MOD may [but did not] choose a competitive process. BAES has the only UK facilities able to produce the products required by the MOD. The absence of competitors is due (at least in part) to the single source approach MOD has taken to the procurement of munitions.

<> interesting!!!

there are offshore suppliers which could supply the
munitions [much cheaper and better] than currently supplied by BAES, the MOD has not decided whether it would wish to procure from non-UK suppliers (offshore)

<> cocoo: mod’s faillure in duty to act in best interest of uk, uk taxpayers and consumrs and wpi

We consider it unlikely that the prime contractor/subcontractor model would
be applied for munitions currently covered by the MASS partnering agreement

<> cocoo will ask for the mass parn.agreement to be amended so that the contract/subcontractor model can be applied to such type of munitions

The MOD said that BAES should not be released from the Undertakings

why??….. MOD IS PRETENDING THAT IS ON THE SIDE OF CL

The MOD repeated its view that the Undertakings were beneficial as a
negotiation lever…..but…We have not received any evidence showing that the Undertakings
have previously led to more effective negotiations.

The MOD also said that if BAES were to be released from the Undertakings,
this would be premature and that such action should be delayed.

CMA:  due to the changes of circumstances, we advised sos that BAES should be released from the Undertakings.

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BAES can decline a request and not provide its resources [deny access] for three reasons:

(a) insufficient capacity;
(b) no capability; or
(c) if it is already a member of a competing team: Teaming occurs when a contractor joins with other contractors to supply a product/service.

teaming arrangements undertakings, were retained in 2006, to prevent a BAES only supplier, from choosing only to work with a BAES sub-contractor, thus foreclosing the market.

Where BAES proposes a teaming agreement involving two or more BAES
entities in an MOD contract, the Undertakings require BAES to seek approval from CMA. BAES has sought permission from the cma to pursue teaming arrangements five times and permission was granted on each occasion…..

<> cocoo will challenge those cma decisions

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MOD allows only UK firms in their procurement, on basis of national
security (wpi), for complex warships, submarines and some types of munitions. This
does not mean the entire supply chain is manufactured in the UK

< > cocoo: mod should tender to other uk firms….not just to baes

But MOD accepted that open competition offers the ideal catalyst for
UK-based industry in the defence and security sectors to improve
efficiency, remain competitive and generate innovative solutions for
domestic and international customers.

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The CMA has a statutory duty,

by virtue of section 75J of the FTA and paragraph 13 of Schedule 24 of the Enterprise Act 2002 as amended by the
Enterprise and Regulatory Reform Act 2013,

to keep under review the carrying out of undertakings….so,  from time to time, the CMA must consider whether, by coc, an undertaking is no longer appropriate, and either:

(i) the parties can be released from the undertaking, or
(ii) undertakings needs to be varied or to be superseded

if so, mod must give such advice to the Sos

we(cma) found:

(a) the British Aerospace/MES merger ‘operated against the pi, by a lessening of competition; [tebbit doctrine used]

(b) should we advise the Sos, that the Undertakings should be varied, superseded or that BAES should be released from them?

(c) was the coc sufficient to lead to the adoption of the Undertakings?….…..There is wide discretion as to what kinds of coc may be taken into account. CMA11 gives three examples of types of cocs that have led to variations [of undertakings] in the past:

• undertakings that have time-expired or clearly become obsolete;
• undertakings that are affected by new legislation; and
• undertakings that are affected by changes in market conditions

THE COC must be such that the undertaking [to remedy the merger] is no longer appropriate in dealing with the anticomp arising from the merger

cma: our statutory duty is to focus on the competition issues raised in the Undertakings. We have therefore not applied a wpi test [eg. national security] which is at Sos discretion.

1/ BAES had divested or closed businesses in areas relevant to the Undertakings. BAES, since 2006, it has sold, closed or otherwise reduced the significance of its business in a number of areas:

cocoo <> did bae [against the wpi), sold/closed/reduced these areas becos they were limiting their nm (near monopoly)? 

Avionics:

BAES has sold most of its capabilities in avionics and electronics systems in
the UK since the Undertakings were accepted. Specifically, in 2007 BAES
sold its remaining 25% share of Selex Sensors and Airborne Sensors (Selex)
and its Inertial Products business. BAES’ only remaining avionics business is
the UK-based business of BAES Inc Electronic Systems. BAES’ market position is now much reduced in avionics and air electronics in the UK, and that Leonardo (formerly Finmeccanica) is now considered the principal supplier of air avionics and electronics products

Shipbuilding:

BAES has ceased manufacturing ships in Portsmouth and rationalised its facilities on the Clyde.

Combat vehicles:

BAES no longer has a manufacturing footprint in combat vehicles in the UK.
As part of its rationalisation, it has closed five manufacturing and engineering
support sites, the last in 2014. 

Munitions:

BAES has closed a number of munitions facilities since 2000.

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Changes to MOD procurement

the MOD has moved away from the competitive prime contractor model, and has instead put in place long-term procurement frameworks which ‘it (falsely) considers’ have enabled it to secure gvfm, freedom of action and operational advantage :

-15-year framework for complex warships: TOBA
The BAES Naval Ships Business entered into a 15-year Terms of Business
Agreement (TOBA) with the MOD in July 2009 to sustain a minimum level of
work to keep UK facilities operating and to maintain sovereign capability in the
shipbuilding sector. The TOBA grants BAES the exclusive right to contract
with the MOD for the design and manufacture of complex warships.

-Long-term framework for submarines: SEPP
In relation to submarines, the three key (or ‘Tier 1’ 33) companies in the UK
operating in this sector – BAES Submarines, Rolls-Royce and Babcock
Marine – entered into the Submarine Enterprise Performance Programme
(SEPP) Memorandum of Understanding with the MOD in October 2011. The
SEPP sets out their respective roles and responsibilities in relation to
submarine construction on a non-competitive basis.

-15-year framework for munitions: MASS partnering agreement
In August 2008, the MOD and BAES entered into the MASS partnering
agreement, on a single source basis. The purpose of the MASS partnering agreement was to
facilitate the preservation and modernisation of the UK’s sovereign capabilities
in respect of munitions deemed important for national security.

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The Single Source Regulations Office (SSRO) :

2014. Its duty is to ensure that gvfm is obtained for the UK taxpayer in expenditure on QDC = qualifying defence contracts [=nocompros over £5m] , and that single source suppliers are paid a fair and reasonable price under those contracts. 

<> SSRO is therefore COCOO’s main target

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Alliance model

The MOD uses alliance models in the maritime sector, for the aircraft carrier and
submarine programmes. The alliance members are nocompros

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Offshore procurement

(a) The MOD is now more open to overseas procurement, although in some areas an on-shore capability is still required.

(b) Many overseas defence contractors have acquired and/or expanded
uk facilities. Hence they do not require access to BAES resources to bid for or fulfil contracts.

Combat aircraft

next generation manned military aircraft requirements have already been met by offshore prime contractors, pointing to the current procurement of the F-35 Lightning II aircraft, for which BAES is a subcontractor to the US-based prime contractor, Lockheed Martin.

following the termination of the Nimrod MRA4 programme in 2010, the MOD now procures its maritime patrol capability (the P-8 Poseidon) from Boeing in the US, and the A400M (military transport aircraft) from Airbus.

Unmanned aircraft

MOD procures the Watchkeeper unmanned surveillance aircraft from the French defence contractor, Thales, and the Reaper unmanned combat aircraft from the US Company, General Atomics.

Non-complex ships:

MOD has awarded a contract for MARS fleet tankers to Daewoo Shipbuilding and Marine Engineering (DSME), which is based in South Korea.

Land vehicles: 

MOD has procured combat vehicles from several overseas suppliers,
including the FRES Specialist Vehicle Programme supplied by General
Dynamics, and the Warrior Capability Sustainment Programme supplied by
Lockheed Martin.  BAES has closed its combat vehicle manufacturing sites in the UK.

Supply-side changes:

there has been an increase in the capabilities of UK shipbuilders…eg: Babcock International winning a contract to build four OPVs for the Irish Navy and Cammell Laird winning the contract to build the research ship ‘Sir David Attenborough’.

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Conclusion on cocs since 2006:

(a) BAES has sold businesses and closed other facilities including in combat
air and general munitions.

(b) MOD now seeks to procure more goods and services from suppliers on a European or worldwide basis rather than solely from the UK;

(c) the MOD has significantly increased nocompros (whereas the Undertakings were designed to increase compros ) 

(d) there are an ever increasing number of credible uk and foreign suppliers

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 Use of the Undertakings

Number of access requests [made ot baes, by rivals]:

BAES has provided us with its compliance databases for the period since the
last review of the Undertakings in 2006. 

We noted that the number of requests is relatively high, averaging 164 per
year from 2007 to 2016. We asked BAES why….they replied:  The Undertakings require BAES to provide access, ONLY if it has the resources and the capacity to assist (unless Undertaking 2.3 applies).

cma: in all cases, the absence of the Undertakings would not have led to a different outcome in the tendering process

< >  cocoo:    but the reason is becos baes is infringing the undertakings !!….thus, cma should not advise [sos] that the undertakings should be released….but that they should be complied with by baes, and fined for infringing them !!!

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Value of access requests

in bids relating to contracts for which BAES was likely to be the only credible supplier,  the access requests did not facilitate an alternative prime contractor to bid for or perform contracts for an MOD programme, but, for example, to requests to support or
upgrade legacy equipment or ships built by BAES and in use by the MOD. These also include a contract where the prime contractor had already been selected and was a joint venture of several companies including BAES. In these cases, the absence of the Undertakings would not
have led to a different outcome.

tHERE was no example of the Undertakings having resulted in the award of a contract by the MOD to an alternative prime contractor which had needed access to BAES’ resources. The MOD said that it was not able to identify any such examples

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Evidence of use of Undertakings in contract negotiations

BAES told us that no reference has been made to the Undertakings when BAES has discussed procurement strategies with the MOD….MOD said that the mere existence of the Undertakings, mean that the potential for competition is created

<> cocoo: not, if alll know the undertakings are a joke!

we (cma) have seen no evidence that the Undertakings have enabled other actual/potential prime contractors, to bid for or win contracts relating to MOD programmes….thus, the undertakings can be withdrawn.

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the effect of the BAES/MES merger was to create
vertical and horizontal links at both the prime contracting and sub-contracting
level. The aim of the Undertakings is to protect competition

The merger led to a reduction in the number of onshore suppliers. This might
have changed BAES’ incentives to subcontract with alternative prime
contractors. For potential prime contractors, the reduced range of onshore
subcontractors and high barriers to entry in establishing their own onshore
capabilities in the relevant areas might have made it difficult or impossible for
them to compete with BAES for MOD prime contracts.

The Undertakings were designed to ensure that other potential prime
contractors would be able to compete for MOD contracts in a prime
contracting procurement model when BAES had essential resources.

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For the Undertakings to remain appropriate, two conditions must hold:

(a) There must be a likelihood that procurement will, in the future, be on a
competitive basis (which, in turn, means that there must be alternative
credible prime contractors) such that the Undertakings would be relevant.
If there is no reasonable prospect of MOD competitively tendering
contracts in a given area of defence spending, the Undertakings have no
role in that area

<> cocoo:   the undertakings need be amended, to apply even where no likelihood of future compros.

(b) BAES must have the ability and incentive to foreclose other potential
prime contractors

<> cocoo:   baes cannot foreclose, because to foreclose, first you need compros [to be foreclosed]…thus, the undertakings need be amended, so that foreclosure is not a requirement

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to determine whether there is a realistic prospect of the Undertakings being used in the foreseeable future in a compro:

– is competition among prime contractors likely?

cma: no

are the Undertakings needed to prevent baes foreclosure of other prime contractors?

cma: no

-is BAES likely to have the ability and incentive to foreclose in the event (which we consider unlikely) that a major warship programme is put out to competitive tender?

cma: no