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Friday, March 27, 2015

Of croquet and magicians

A couple of years ago or so, I posted a note on the efforts of the UK Ministry of Defense to outsource its procurement selection process. Yes, privitise procurement of the UK's defense apparatus: UK considers outsourcing defense procurement

So, what has become of that?

Fraudulent arms companies charged taxpayers for magicians, croquet and speeding fines
Plans to privatise the arms procurement sector collapsed in 2013 after bidders withdrew from the process. The Labour party described it as a “complete shambles". Defence Minister Michael Fallon will lift the lid on the abuses and tell the audience at an Institute of Directors dinner in Durham that “vital” work is required to overhaul the procurement process used by the Ministry of Defence, the FT reports.

This will include a new Whitehall defence watchdog, which will have the power to fine arms companies up to £1m for breaching contract rules.
As noted in that short article (not as short as this excerpt, so you should always read the full source-linked citations in this blawg), the FT has a story on the matter:

Arms companies charged taxpayers for croquet and magicians
“It will now be up to suppliers to justify, rather than for us to disqualify, every pound of their contracts,” the defence secretary will tell the audience, adding that the MoD will demand “100 per cent transparency”.
A bit more is available here:

Exclusive: UK single-source procurement reportedly led to claims for 'croquet and magicians'
Fallon claimed that a "lack of commercial leverage" and "information" led defence contractors to claim for costs including croquet, horse racing trips, motoring fines, and "close-up magicians". He stated that there were expenses that the "taxpayer had no business paying".

Fallon - in his current role since July 2014 - expanded on reforms to single-source procurement that were enshrined in the Defence Reform Act of May 2014.

On the reforms, Fallon said that "the bottom line is that we [UK MoD] spend around GBP6 billion [USD8.9 billion] a year on single-source contracts - nearly 50% of our procurement budget".

The measures outlined in the Defence Reform Act include a single-source pricing framework for non-competitive procurements valued at GBP5 million or more; the establishment of a Single Source Regulations Office to ensure value for money and the payment of what was described as a "fair and reasonable" price to contractors; and the requirement for contractors to disclose costs through a standard reports. The latter measure gives the MoD "full open-book rights" according to Fallon.
Not all commentators seem to understand the new direction (or maybe they do and are trying to lead it off track):

BEN GRIFFITHS: Prosperity firmly linked to safety and security - and that's why defence MUST be an issue for this election
Michael Fallon was looking to the past when he unveiled reforms of the procurement process for military equipment.

He flagged up a shocking and unacceptable culture where arms-makers claimed back costs including croquet, horse racing trips, motoring fines and even two magicians. Fallon was right to castigate the previous regime of suppliers exploiting a lack of competitive pressure and transparency. Today’s defence sector is changing for the better, however.

As Ian King noted this week, partnership between government and industry is essential so that the armed forces get the equipment they need at a price the taxpayer can afford to bear over the long term.
Getting "equipment they need at a price the taxpayer can afford to bear" is an invitation to "soak 'em". A pricing model that is intent on getting whatever the market can bear will always be more expensive for the government and other consumers than it could be.

A pricing model that focuses on the cost and fair and reasonable value of that item shifts attention away from what the market can bear to "do we really need it at that price?" It often turns out that our perception of need is quite faulty, especially when close attention is not paid to fighting the next war but fixated on fighting the last one or supporting the military industrial complex that supplied the last war.  See, Recycling the procurement cycle

We don't need a model that justifies expense of an item because, on someone's assessment, the taxpayer can bear the burden. We should balance the cost against the perceived need and evaluate both need and cost with scrutiny.

I think the Defense Minister is on the right track when he says the government will require suppliers to justify costs. The federal procurement regime in the US, as well as the state and local regimes based on the ABA Model Procurement Code, like Guam's, have that focus. But, of course, it does little good to have that power in a regime if it is ignored or implemented poorly.

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