Tag Archive for: MOD

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Huge Ship, Tiny Error, Major Problem

Picture: LPhot Alex Ceolin, UK MOD© Crown copyright 2019

You may know the expression “don’t spoil the ship for a ha’pworth of tar*”, but we have a case now where the ship most certainly has been spoiled – or at least put out of service for some considerable time – because of a tiny error in manufacturing. The impact of this has also led to a tricky contract management situation.

In August 2022, the British aircraft carrier Prince of Wales broke down just one day after departing its Portsmouth base for training exercises off the US coast. That was hugely embarrassing for the Navy given the ship had cost some £3.1 billion and this wasn’t the first problem since initial launch in 2019. This time, the issue was traced to a starboard propeller shaft fault and an installation error. Responding to a recent parliamentary question, Ben Wallace, the UK Defence Minister, said that based on “initial reports” the shaft was misaligned by 0.8 – 1 millimetre. That is a tiny mistake, but apparently caused a huge problem.

As well as the operational issues this caused, the question of who should pay for the error is also complex. Construction and delivery of the warship was carried out by a consortium of three firms under the banner of the now defunct Aircraft Carrier Alliance. BAE Systems, Babcock and Thales were all involved, which makes it complex to assess liability. Will the Ministry of Defence (MOD) end up paying or will they be able to pin the responsibility onto one or more of the firms?

A report on the “Breaking Defence” website said that the MOD “declined to comment on why the repair bill liability decision has not been made yet, nor when a decision is likely to be made”.  But MOD did say that repairs were likely to cost some £25 million, and that an investigation was looking at how to ensure the failure was not repeated. Well yes, one would hope that the same won’t happen again!

John Healey, the Labour Party’s shadow defence secretary pointed out that since the ship entered service in December 2019, it had spent 411 days in dock for repairs, compared to just 267 days at sea. A previous deployment also ended in embarrassment and a quick return to base in Portsmouth after an internal flood left the engine room and electrical cabinets submerged for 24 hours. The current repairs were supposed to be completed at the Rosyth dockyard in Scotland by February, but at time of writing (May 2023) still seem to be going on.

We could draw analogies here between our (literal) flagship and the wider state of the UK. Still pretending to be a significant global power, but incapable of actually doing anything to live up to that fantasy and all that sort of thing. But keeping to the facts, in a more mundane fashion it does highlight the importance of absolute clarity in the contract whenever you are buying from a consortium of any kind – and that doesn’t just apply in the military world of course.

Don’t assume a consortium will act as one entity if something goes wrong. It’s just as likely that each party will fight to protect their own position, which can leave the buyer in a difficult position, as we may be seeing here. So a strong and clearly written contract, including a definition of what will happen if there are issues after the formal consortium is dissolved, is essential.

And you can see why the UK Treasury (finance ministry) is not too keen on increasing the MOD’s budget for spending on more equipment, even given the present Russian threat. Cases like this (as well as high-profile failures such as the Ajax armoured vehicles) all add to a lack of confidence that such money would be spent well.

* A bit of research suggests that the expression was originally about sheep rather than ships! I didn’t know that…

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What’s In Store for Bad Buying in 2023?

As we enter 2023, what do the prospects for Bad Buying look like? No doubt, we will continue to see regular procurement and contract related fraud and corruption. It will be greeted on discovery by the CFO explaining that “it was a very sophisticated fraud”. Usually, that is simply not true.  What the CFO (or CPO) means is “our processes were rubbish and wide open to criminal exploitation, but I can’t say that because you might question why I’m paid a six or seven figure salary to manage this shambolic process”.

Talking of fraud, the long-running controversy over PPE procurement in the UK will continue in 2023, with an announcement this week that the government is going to court over the supply of gowns from supplier PPE Medpro. One paragraph in the Guardian report on this leapt out at me.

“The legal claim states that the DHSC had paid PPE Medpro the full £122m for the 25m gowns by 28 August 2020. This was before any of the gowns had been inspected in the UK, and before all the gowns had arrived. Health officials rejected the gowns after a first inspection at the NHS depot in Daventry on 11 September 2020”.

I know the situation was desperate back in 2020, but to pay the full contracted amount before inspecting the product at all – it just seems incredible that any procurement professional would agree to that. Anyway, more to come on PPE this year, no doubt with more discussion of links to politicians, dodgy suppliers and billions of wasted money.

Moving on from PPE, the public sector (in every country) will continue to struggle with complex and technologically complex procurement in areas such as Defence and major IT programmes. We can hope that the UK Ministry of Defence sorts out the long-running Ajax armoured vehicle fiasco, another programme with potentially billions of pounds on the line.  The latest comments in December during a House of Lords debate seemed a little more positive but let’s wait and see. It’s not just the UK of course. Just before Christmas, we saw reports in the German press and on the Jane’s website about some of their army’s vehicles following a major training exercise.

“Germany suspended procurement of the Puma infantry fighting vehicle (IFV) on 19 December after 18 of the vehicles broke down in an exercise preparing for their first assignment to the NATO Response Force Very High Readiness Joint Task Force (VJTF) in January, when Germany takes over command of the force”.

But the UK MOD seems to have issues with low tech procurement too. Recent reports suggest that the organisation still hasn’t got to grips with maintenance of military housing, a long-running example of Bad Buying on several counts. It started with a dreadful PFI programme that cost the taxpayer billions, and now the relatively new contract for looking after the homes is not delivering satisfactory outcomes for those who live there.  A contract management failure maybe?

Of course, it isn’t just the public sector that demonstrates Bad Buying, although the private sector is better at keeping failures hidden. I would argue that the professional services market (audit, consultancy, legal services) demonstrates a long-term failure of markets, procurement and buyers generally. Last month, the 100 Group, which represents the Finance Directors of some of the UK’s biggest firms, wrote to the “big four” audit firms to complain about rising fees. To which we might respond – well, you are the clients, why don’t you do something about it?

In truth, there is an oligopoly in the audit market. So the firms can get away with saying they are “investing in audit quality,” whilst in practice the extra revenue is channelled into paying their partners more and more each year – £1 million plus now in large firms. EY also increased the salaries of its junior accountants by 13% recently – nice for those people no doubt, but we all know that it is the clients who will pay for that generosity.

To some extent, legal service and strategy consulting has gone the same way – higher and higher salaries for firm’s partners in particular, whilst clients get exploited. Yet too many buyers are unwilling to use approaches that might mitigate cost increases, such as applying real competitive pressure, negotiating hard and skilfully, managing individual assignments more carefully, or looking at alternative suppliers to the top (and most expensive) firms.

Anyway, I’ll leave you with four thoughts for the New Year – maybe they could form the basis of some procurement new year resolutions for your organisation!

  • Check that you have everything in place to minimise the risk of fraud and corruption in your procurement activities. You can’t make it 100% criminal-proof, but you can make wrongdoing much more difficult by applying reasonably basic processes, systems and policies.
  • Competition is still the best mechanism invented to drive positive outcomes and outputs from suppliers and contracts. Use it well and widely.
  • Be a little cynical – well, maybe more than a little – about what suppliers promise you and the claims they make about their products and services, particularly in areas such as technology.
  • Organisations that are “good at procurement” don’t just focus on the skills and knowledge of their procurement teams – they understand that a wide range of people in the organisation need to understand their own role in the end-to-end process. They must also have the right commercial skills to play their part in procurement success.
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UK Politicians Not Impressed with Army Ajax Programme

We wrote about the UK Ministry of Defence (MOD) Ajax armoured vehicle fiasco almost a year ago.  Now, the Public Accounts Committee (PAC), made up of politicians from all parties, has urged MOD to either fix or scrap the scheme by the end of 2022.

The programme has been running for 10 years and has failed to deliver a single usable vehicle. By December 2021, the Department had paid the supplier, General Dynamics, £3.2 billion, although Ministers now say there will be no more payment until problems are resolved. Noise and vibration problems proved to be a health hazard for soldiers during testing, and there were other performance issues too. The initial design had some 1,200 “capability requirements” and both buyer and supplier under-estimated the complexity of what they were trying to build. In their report published recently, the PAC said this.

“The Department’s management of the programme was flawed from the outset as the programme was over-specified and the Department (MOD) and General Dynamics did not understand the scale of the technical challenge. We have seen similar failings again and again in the Department’s management of its equipment programmes. The Ajax programme also raises serious concerns about the Department’s processes and culture for testing whether new equipment is safe to use”.

The MOD still appears to have no idea when, if ever, the vehicles will go into service and will not commit to a target date. And assuming this does not end well in term of delivering adequate vehicles, we can expect a serious legal battle – unless the MOD just caves in and pays up, of course. As the PAC report says, “because of programme delays and missed milestones, the Department estimates that it owes General Dynamics £750 million for completed work, but has not paid anything since December 2020, and the parties remain in dispute”.

The PAC comments follow a report from the National Audit Office in March 2022 which went into more detail, and there were several points in that report that I found particularly shocking. For example:

“The Army’s policy of regularly rotating posts means that the programme has had a high turnover of senior personnel, with five senior responsible owners (SROs) since November 2011, and four   programme directors and six project managers since September 2013. Defence Equipment & Support (DE&S) replaced the programme manager who had negotiated the reset immediately after the contract was updated in May 2019, affecting the programme’s corporate knowledge. It also replaced other senior programme personnel after the new director general was appointed in December 2019”.

That issue is largely within the control of the MOD, and the “revolving doors” staffing policy has been identified before as an issue; yet it still happens. And some senior roles were not even full-time before 2021! Then we have the Ajax Programme Office, responsible for running programme.

“The programme management office, which supports the SRO, has remained small for a programme of this scale and complexity. In 2016, six of the eight posts were vacant …  By April 2019, it had filled these vacancies to manage the contract renegotiation in 2018, but then reduced resources – at a time when the programme was missing milestones. In July 2020, the programme management office had dropped to four posts…”

What madness is this? A huge, critical and failing programme, and you reduce the programme management resources? Why? Would nobody take the jobs because they knew it was a doomed programme? Or did senior people want it to fail? Or did they think that a lack of resources might be a good excuse when the proverbial hit the fan?  Anyway, it is a shame the PAC didn’t pick up on this issue.

The NAO report identifies many other issues, from poor programme governance to specification issues, and really it is a textbook example of how not to run a major equipment procurement programme. It will certainly deserve its own chapter if and when “Bad Buying Part 2” emerges …

We are looking at increasing defence spending in the UK for obvious reasons following Russia’s invasion of Ukraine. That is fine; but as a taxpayer, I don’t want to see a penny more of my money going to MOD until I see a detailed and convincing plan laying out how the organisation will ensure it doesn’t waste more billions on equipment.  Ajax isn’t the first disaster of this nature; it just happens too often.

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MOD Versus Guy Hands – Seconds Out for the Big Fight!

After our last article featuring criticism of the UK Ministry of Defence (MOD), there has been more positive news in recent days, even if it relates to past failure. The development relates to the organisation gearing up for a legal battle with a private equity firm headed by billionaire businessman Guy Hands.

Twenty-five 25 years ago, MOD sold off houses that were used for military families. The deal was controversial at the time and has continued that way, as it became more and more obvious that it was a lousy deal for the taxpayer and indeed for many occupants of these properties. As The Guardian described it,

“In 1996, the Conservative government sold 57,400 properties in the so-called “married quarters estate” to Annington Homes, which was then bought for £1.7bn by Nomura, a Japanese investment bank that employed (Guy) Hands. He later left Nomura to found the Terra Firma private equity firm, and bought Annington for £3.2bn in 2012”.

An odd aspect of the deal was that the MOD retained responsibility for maintenance and refurbishment of the properties, whilst paying what was supposedly a discounted rent on a 200-year lease. In other government PFI-type deals of the period (including a vary large one that I was personally involved with), the buyer of the property took on full responsibility for maintenance, so at least the taxpayer was transferring a significant element of risk.  In the MOD case, the aim was to use the money raised from the sale to renovate the properties – but of course that would benefit the new owners too.  But in any case, the MOD has not done a great job of maintaining the estate in the intervening years.

The commercial naivety shown by MOD has enabled the buyers of the property to make huge profits on the back of house price inflation, with an annual return averaging over 13%, according to the National Audit Office.  That gain included Annington issuing debt last year (against the property income stream) that enabled it to pay a dividend of £794m to its parent company. Here is what I said about the deal in the Bad Buying book.

“A National Audit Office (NAO) report in January 2018 laid out failings in terms of the buying and contract management process. The Department’s own calculations suggested retaining ownership would be cheaper – but for fairly nebulous “policy benefits”, the sale went ahead anyway. It then made very cautious estimates about future house price inflation and failed to build any mechanisms into the contract to claim a share of windfall gains. Of course, house prices rose faster than MOD’s cautious model, and the rate of return for Annington and its investors has been far higher than expected.

The NAO identified other problems – for some reason, MOD retained responsibility for maintaining the property, which it hasn’t done well, and there has been little collaboration between MOD and Annington to seek further benefits. Overall, it’s an example of failure that could comfortably sit in several different chapters here, but a lack of commercial understanding and negotiation skills in MOD were certainly amongst the issues; the NAO report estimated that the Ministry of Defence would have been between £2.2 and £4.2 BILLION better off if it had retained the estate”.

But the government is now taking an interesting stance. Defence Procurement Minister Jeremy Quin is trying to take back ownership of the properties through exercising “statutory leasehold enfranchisement rights”, a somewhat obscure legal manoeuvre. The MoD has sought to take two houses initially to test whether Annington can be forced out, whilst as you might expect, Annington claims the government has no right to do so and is behaving badly.  This may end up in court; but the firm has now offered a one-off payment of £105 to contribute to refurbishment if the MOD backs off from the legal route.

So that suggests Annington knows there is some chance it might lose in court; and arguably that is already a potential £105 million “procurement benefit” for MOD. Not bad on Andrew Forzani’s end of year savings report… But maybe there is more if the Minister has the appetite for a fight.

And just to complete the story, the chair of Annington is Baroness Liddell, an ex-Labour Party MP and now a Labour peer. It’s quite amusing hearing her now justifying the unfettered capitalism that Hands has always propounded, whilst it is the Conservative Party that tries to claw money back from the billionaire’s firm …

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