The Defence Industrial Triptych

Government as a Customer, Sponsor and Regulator of Defence Industry

Henrik Heidenkamp, John Louth, Trevor Taylor

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9781138148505
• eBook ISBN: 9781317686880
• Topic: Politics & International Relations
• Subtopic: Military & Maritime History
• Index: Politics & International Relations

The relationship between government and the businesses that contribute towards the defence and security of the state is a critical one; it often underscores a modern state's foreign policy and sense of place in the world. Yet, despite its clear importance, this subject is underexplored and rarely analysed in a rigorous manner. As a consequence, government defence industrial policies, if they exist at all, often seem somewhat contrived, ill-considered and contradictory.

The Defence Industrial Triptych systematically analyses the components and drivers of the relationships that bind a government to its defence industrial base by examining three major case studies: the UK, US and Germany, who between them account for over three quarters of NATO defence spending. The features of their defence industrial relationships –whether common or unique – provide vital lessons for policy-makers, industrialists and the taxpayer. As defence cuts bite across NATO and as the UK approaches the 2015 Strategic Defence and Security Review, the relationships this Whitehall Paper considers are more important than ever.

II. Governments as Customers of Defence Industries

This chapter addresses some of the key dimensions of government’s role as the customer. It identifies the functions that government has entrusted to industry in defence, outlines government’s perceptions of vital defence industrial sectors, assesses contract-awarding procedures, examines the transparency of government’s acquisition plans and intentions, discusses government’s approaches to measuring success and looks at the partial-dependence on industry during operations.

A prominent theme of the past thirty years has been the increasing readiness of successive governments in the UK, the US and Germany to rely on the private sector for the supply of defence goods and services – to act as a customer, rather than a producer, for much of what is associated with defence capabilities. This trend has fundamentally affected the government–industry relationship in the defence sector. The functions fulfilled by the private sector go far beyond the mere provision of military equipment and materiel. In the equipment domain, it includes the full spectrum of through-life services, including the maintenance, repair and upgrade of kit. In addition, the private sector provides various kinds of people-support functions to the armed forces, including construction, laundry and catering services. In some countries, industry is also entrusted with protection and guarding tasks.

All of these services are provided by industry not only at home, but increasingly on deployed operations in the form of contractor support to operations (CSO). Moreover, industry plays a crucial role as a consultant to the government in its efforts to mature its capabilities as an ‘intelligent customer’. Driven by financial imperatives resulting from increasing budgetary pressures, new operational requirements posed by the strategic environment and the changing nature of the private sector’s involvement in defence, the British, US and German governments have substantially developed their roles as customers of the defence industry over the last decade.

Functions Passed from Government to Industry

The United Kingdom

In the UK, one manifestation of the trend towards relying on the private sector for the production of much of its defence capability was the privatisation of state-owned entities, either by the creation of joint stock companies or by inducing existing private firms to take over government assets. Under former Prime Minister Thatcher, British Aerospace and Rolls-Royce becamejoint stock companies, while British Shipbuilders was broken up into a number of privately owned firms. The state arsenals (Royal Ordnance and the Royal Dockyards) were treated slightly differently, with the former being auctioned to British Aerospace in 1987 and the latter initially turned into government-owned, company-operated facilities, as were the nuclear-weapons sites at Aldermaston and Burghfield. Only after 1997,under the Labour government, were the surviving dockyards at Devonport, Portsmouth and Rosyth fully privatised. Today, the only remaining state-owned defence industrial organisation is the Defence Support Group (DSG), which has the capacity to repair and even build armoured vehicles. In what might seem to some a strange arrangement, the DSG is often contracted to do work by the design authority for vehicles, which is often BAE Systems. In 2013, it was expected that the General Dynamics Scout fighting vehicle would be built in the UK by the DSG, with the coalition government simultaneously exploring possibilities for the DSG’s privatisation since the 2010 Strategic Defence and Security Review (SDSR).¹

UK governments have also been prominent in their readiness to act as a buyer of services, rather than as a purchaser of finished goods. They have regularly sought to outsource to the private sector many tasks that do not involve significant capital investment by the firms involved. These arrangements are often called public–private partnerships (PPPs), while private finance initiatives (PFIs) involve investment by firms in significant capital assets of the sort that in previous years would have been bought by the Ministry of Defence (MoD) itself.

By 2010, the MoD was buying a wide range of services from the private sector, rather than doing the work itself. On almost all of its sites, the grass was cut, the buildings maintained and the meals prepared by companies hired under facilities-management contracts. In addition, some training exercises were being designed and organised by private firms, and some training grounds were privately managed. Companies and universities were also being hired to deliver training and education, including equipment instruction.

The MoD had become a major user of PFIs especially, but not exclusively, for infrastructure projects. Companies were paid on a monthly basis to build and operate a large number of buildings and other infrastructure elements. More sensitively, in terms of operational needs, the MoD’s satellite-communications requirements were being met (largely) by the Skynet V network of satellites and ground stations built and supported by Astrium (an element of EADS). The heavy-equipment transporter fleet, roll-on roll-offferry fleet, and Voyager fleet of tanker and transport aircraft were also provided under PFI arrangements. PFIs could be viewed as contracting for almost all elements of capability, with the MoD putting in minimum internal elements. By 2010, the MoD was paying more than £1 billion a year in PFI service charges.² Of course, the move to PFIs was part of a general global trend away from contracting mainly for equipment and parts supply towards contracting for whole-life services.

For equipment, the traditional model, still in place in the late 1990s, saw a contract placed with industry for the delivery of completed systems, normally along with a set of spare parts expected to last about two years. Once a piece of equipment moved to the in-service date, either the prime contractor or a mixture of prime and sub-system contractors were placed under contract for a specific time to deliver spares according to demand.

There were at least three drawbacks to such arrangements. One was that, especially for novel systems, it was difficult to predict the requirement for spare parts, which meant that the initial package rarely matched the replacements needed. Secondly, there was no incentive for contractors to provide more reliable equipment, since they could profit by providing spare parts alone. Finally, equipment which did prove reliable could leave procurement teams with money left over towards the end of the financial year, creating the temptation to use it on (unnecessary) spares, rather than lose it back to the centre of the MoD or the Treasury.

In light of these considerations, the MoD turned to ‘contracting for availability’, where the contractor was required to generate a specified number of systems available for use at a given time. Such contracts were meant to incentivise the firm to invest in engineering changes that would make equipment more reliable, giving businesses a reduced risk of contract-compliance failure and less work to do. Given they could involve costly design and engineering work – that is, company investments that would take time to recoup – contracts for availability tended to be multiyear (eight or more years) in duration. The emphasis on contractor involvement in equipment support continued to grow after 2010 under the coalition government.³

The protracted UK military operations in the Balkans, Iraq and Afghanistan also stimulated the MoD’s readiness to be a customer for, rather than an in-house generator of, services in military theatres, mainly, but not exclusively, for the support of troops. Such services included, for example, cooking, cleaning, and the provision of private communications, accommodation and maintenance. In the Balkans in the 1990s, the British armed forces became increasingly reliant on private contractors, which led to the Permanent Joint Headquarters (PJHQ) concluding a contractor logistics (CONLOG) contract with Kellogg, Brown and Root (KBR), under which planning for contractors’ roles would be built into UK military preparations.

With this increasing reliance on contractors, small groups of equipment manufacturers’ staff were deployed to theatre to provide advice and support. Whilst the UK military avoided using private security guards for the protection of UK military personnel, private contractors were used extensively for the often risky tasks of logistics transport and its protection.

Andrew Higginson estimates that UK CSO expenditure for 2010 was around £2.6 billion.⁴ The net additional costs of UK operations in Afghanistan (£3.8 billion) and Iraq (£95 million) in the fiscal year 2010– 11 – which ended on 31 March 2011 – came to around £3.9 billion, suggesting, by best estimate, that CSO expenditure accounted for at least 60 per cent of the UK’s overseas operational defence sustainment effort in 2010.⁵ On Operation Herrick, the number of companies supporting the UK in theatre rose from twenty-two (with 2,030 employees) in July 2008 to sixty-seven (with 4,867 employees) in July 2010.⁶ In Afghanistan, UK contractors comprise around 40 per cent of the MoD’s total workforce, according to figures from the Office of the US Deputy Assistant Secretary of Defense (Program Support).⁷

The 2012 commitment to restructure the British Army down to 82,000 personnel will likely mean that the UK military will remain a significant user of private-sector services on any extended deployed operations. However, as with the US, there is the unresolved issue of the demarcation of activities which must remain in governmental military hands. The cumulative effect of the readiness to rely on the private sector was that, by 2012, the MoD was spending around 60 per cent of its money with the private sector, which arguably should therefore be providing at least that percentage of the elements of required capability.

Clearly, this could not take place within a strictly contract-defined, transactional framework, reflecting the rather adversarial government– industry relations that appeared to inspire much of the emphasis on competitive contracting. While competitive tendering continues to be used often for the selection of a contractor, once the contract is in place the MoD is normally ready to talk in terms of ‘partnering’ with its suppliers, in the mutual interest of both. The precise meaning of ‘partnering with suppliers’ continues to be debated and to evolve, but it certainly means that MoD–industry relations were not seen as zero-sum – recognising, that is, that some events and behaviours could be in the interest of both parties.

Much of the underpinning thought justifying the MoD move towards becoming a decider and a customer rather than a provider lay in the tenets of New Public Management, which held that the private sector, when properly incentivised and controlled, would normally be more efficient and effective than the public sector. The Conservative– Liberal Democrat coalition government seemingly has held to these expectations even more firmly than its Labour predecessor. Within defence, it has set about contracting with a private company to manage the MoD’s estate in the Defence Infrastructure Organisation, and to find a firm to provide human-resources and other back-office functions within a Defence Business Services organisation. Most controversially, it has also explored contracting out the contracting process itself by turning much of the Defence Equipment and Support (DE&S) organisation into a government-owned, contractor-operated (GOCO) organisation.⁸

In the UK, there is no legal or formal policy stipulation preventing the outsourcing of ‘inherently governmental’ tasks, although the Ministry of Defence has recognised that such a category exists.⁹ The British government has been ready to entrust almost anything except front-line operations to the private sector.

The United States

In the United States, the defence industry represents a major part of the overall US economy, but it is not a normal market. There is one single buyer, in the form of the Department of Defense (DoD) and a small group of major corporate suppliers – the prime contractors – that essentially form oligopolies in each sub-sector of defence. Moreover, it is a uniquely structured market, in that the government – as the sole buyer and regulator – plans and controls the conditions that should lead to an efficient, effective and responsive industrial structure.¹⁰ The purpose of this is to satisfy the operational needs of defence, meet the expectations of taxpayers in terms of affordability and efficiency, and ensure successful operation within the laws of the United States.

Free-market economists in the US would prefer a set of conditions whereby there are multiple suppliers and buyers within a market; freedom of trade and movement of scarce resources; and no long-term barriers to market entry, all choreographed by the hidden hand of the pricing mechanism. The US defence and national-security market is, of course, not like this. Instead, the US government creates the conditions of economic and operational performance through the careful management of a regulated economic souk of a s...

Table of contents

• Cover
• Title
• Copyright
• Contents
• About the Authors
• Acronyms and Abbreviations
• Foreword The Right Honourable James Arbuthnot MP
• I. Introduction
• II. Governments as Customers of Defence Industries
• III. The State–Defence Industrial Relationship: Government as Sponsor
• IV. The Regulation and Control of Defence Businesses
• V. Implications of the Government–Defence Industry Relationship