How expensive has defence procurement become in the US?

'A lot' appears to be the answer:

According to the Government Accountability Office, cost overruns have ballooned to more than $450 billion over the past two decades. The Navy needs to take authority back from the bureaucracy, end the culture of constant design changes and gold-plating, and bring back fixed-price competition.

Recall the development of the Polaris nuclear-missile system in the late 1950s. The whole package—a nuclear submarine, a solid-fuel missile, an underwater launch system, a nuclear warhead and a guidance system—went from the drawing board to deployment in four years (and using slide rules).

Today, according to the Defense Business Board, the average development timeline for much less complex weapons is 22.5 years. A case in point is the Ford-class aircraft carrier. The program is two years delayed and $2.4 billion over budget.

and more:

Yet the defense firms involved still profit under cost-plus contracts. The three stealthy Zumwalt-class destroyers—they are really heavy cruisers—are another example.

The defense bureaucracy produced a seagoing camel costing three times its original estimate and delivered with questionable seaworthiness and without functional radar or a reliable propulsion system.

Both quotes come from John Lehman, US secretary of the Navy under President Reagan.

Note the push-back against cost-plus contracts and how they provide economic operators with the incentive to keep the costs ticking even if they are not necessarily making a profit (helps soak up capacity, cashflow management etc).

Episode #28 of the PPP with Baudouin Heuninckx is available

The next instalment of the Public Procurement Podcast is up, this time a relaxed conversation with my good friend Baudouin Heuninckx, Chief Counsel of the Belgian Armed Forces Procurement Division and a part-time academic at the University of Nottingham and also the Belgian Royal Military Academy. He has just published a book on defence procurement as of November 2016 entitled The Law of Collaborative Defence Procurement in the European Union.  

Defence procurement issues in a galaxy far, far way

 

It seems that even the New Republic is subject to corruption in defence procurement.

This reminds me of my first presentation as a PhD student where I half-jokingly claimed the Death Star would not have been destroyed if only the Empire had followed a competitive dialogue.

Links I Liked [Public Procurement]

1. What to do with old city buses? Not directly connected with public procurement but to take into account when one calculates life cycle costs today regarding the end of life of a product that is still 20 years away.

2. Varoufakis mentions corruption and procurement in his speech to the Eurogroup. Only briefly. Very good read overall. I was told as well that Greece simply decided to apply the Directive 2014/24/EU to all contracts irrespective of value. Bold move and one I want to follow closely.

3. Ecuador spends 11.5% of GDP in public procurement. I am not sure how reliable the figure is, but it looks quite significant.

4. Obama is bringing digital love to how government operates, including procurement. As I said on my talk in Tuesday, we're just getting started to see technology changing procurement and reducing transaction costs. I particularly loved the comparison between the projected costs of the original HealthCare.gov website ($800 million) with the total amount of funding Twitter raised ($60 million) to serve a similar number of users.

5. When defence procurement goes wrong, it really goes wrong. Would love to know Baud and Aris' views on this (old) story).

Have a nice weekend.

Links I Liked [Public Procurement]

1. Blockchain can be used for supply chain tracking. It seems my idea last week of using some sort of blockchain technology to solve the reputation issue in public procurement and a decentralised contract repository/database is not as crazy as I originally thought.

2. Canada wakes up to open contracting. 

3. We need more challenges in public procurement (or at least avenues to solve disputes). I do not disagree with overall view. I am huge fan of the Canadian Procurement Ombudsman system.

4. Public procurement award data can be used to catch corrupt officials. Incredible story from Costa Rica, beautifully reported. A textbook example of the benefits of making contract data available in some way or form. My view is that the easier it is, the better. Bonus points for sending 2 (two!) former Presidents to jail for the snaffu.

5. The poor state of defence procurement in the UK. Self-explanatory. Sometimes I think the security exception for defence procurement is none other than a red herring to allow scope for poor procurement practices. But I'm a cynic.

Public Contracts Regulations 2015 - Regulation 17

Regulation 17 - Public contracts and design contests involving defence or security aspects which are awarded or organised pursuant to international rules

Albert drew first blood today. Is entry is here.

Regulation 17 establishes what sets of rules are applicable to a public contract or design contest which involve defence or security and have an international component of sorts. As with yesterday's Regulation 16 which contained rules similar to Regulation 4 but for the defence sector, today's regulation creates a specific regime for the defence and security sector that derogates the general rules contained in Regulation 9.

Regulation 17 excludes the application of Part 2 rules in four scenarios and the need for the parties to achieve an agreement regarding procurement rules in another one. Regulation 17 does not mention expressly its scope of application other than saying that  it applies on "defence and security matters". As a number of contracts in those field are already excluded from Part 2 rules by force of Regulations 15 and 3(2), then one must conclude that for Regulation 17 to have any useful meaning it needs to apply to contracts that were not already excluded, so the "defence and security matters" threshold will certainly be lower.

It should be said as well that these exclusions presuppose the existence of an alternative procurement regime that can be relied upon instead of the Public Contracts Regulations. In consequence, if there is no fallback procurement regime at the end of exception, for example if an international funding organisation (Regulation 17(2))  does not have procurement rules, my interpretation is that Part 2 would still be applicable.

Exclusion of Part 2 rules

Paragraphs 1 - 2 of Regulation 17 establish the four different scenarios that lead to the non-application of Part 2 rules, as long as other procurement procedures are established. The first exception is a legal international agreement that creates obligations for a Member State and third countries related with defence and security matters. Interestingly enough, this Regulations refers to not only third countries but also "subdivisions of such countries". I am no international law expert but wonder what is the international standing of such internal "subdivisions". By definition, if "subdivisions" they are not a country in their own accord and have not been recognised as such. Having said that, this is not an international law blog, so let's keep focused on the procurement side of things.

International agreements or "arrangements" related to the "stationing of troops and concerning the undertakings of a Member State or third country" provide a second exception to Part 2 rules. I am not entirely sure what is meant by "arrangements" as it seems a much lower threshold to aim for than a proper international agreement. Furthermore, the way I read this specific exception is that it is only applicable to troop deployments to protect undertakings. For example, if the Government decided to deploy troops to protect oil wells explored by a British company say in Africa (was about to say the Falklands, but that would be an incredible faux pas...). Please let me know in the comments if I got it completely wrong.

The third exception is related to international organisations, presumably in the field of defence and security. My suspicion here is that this exception is NATO shaped.

The final exclusion to Part 2 rules applies to contracts/design contests in the field of defence and security which are wholly financed by an international organisation or international financing institution. I am not sure why there was a need to refer to international financing institutions specifically as I would argue all international financing institutions constitute (or are part of) international organisations.

Agreement needed

Paragraph 3 of Regulation 17 states that in case a contract or design contest is only funded in the most part by an international organisation or international financing institution, then their procurement rules do not apply automatically and the parties will still have to reach an agreement. Naturally the agreement can be for those other procurement rules to apply instead of Part 2.

It is interesting to note that in case the contract or design contest is not funded in the most part (ie, only 50% or less) by the international organisation or international financing institution, then Part 2 is still applicable and will have to be complied with. This may lead to some rough edges as said international organisations may have internal rules stating they can only disburse funds in case their own public procurement rules are followed. As we are talking about defence and security contracts and design contests, I suspect this will be a minor issue.

Public Contracts Regulations 2015 - Regulation 16

Regulation 16 - Mixed procurement involving defence or security aspects

Back in week 1 we talked about the issue of mixed procurements and how Directive 2014/24/EU and the Public Contracts Regulations solve this issue. Regulation 4 includes the general rules for mixed contracts and Regulation 16 rules specific for contracts mixed with defence and security aspects, ie contracts whereby part of what is being procured is covered either by Article 346 TFEU or the Directive 2009/81/EC. This Regulation transposes Article 16 of Directive 2004/14/EU. As before, essentially all of the content was copied from the Directive, albeit with a different drafting style.

Objectively separable contracts

Regulation 16 is simpler and less prescriptive than Regulation 4. In a situation of a mixed procurement covered, if the contract is "objectively separable" the contracting authority may decide to separate the contract into different procurements (applying the appropriate rules to each part) or alternatively award a single contract instead. However, the decision to award a single contract needs to be "justifiable" and the procurement will follow the (negative) rules of Article 346 TFEU or the Directive 2009/81/EC as appropriate. It is interesting to note that while Regulation 15 referred to the scope of application of the Defence and Security Regulations, Regulation 16 on the other hand refers to the Directive 2009/81/EC. I think this is yet another example of inconsistencies due to lack of time to polish the Regulations.

What about contracts that are not objectively separable?

When I read paragraph 8 of Regulation 16 I was confused as it seemed redundant in face of paragraph 5. This is due to the drafting style adopted by the law maker, as paragraphs 3-7 in terms of content and context are really sub-paragraphs of paragraph 2 as all of them contain rules applicable to objectively separable contracts. Paragraph 8 however, deals with those contracts that are not objectively separable. For these contracts, they may be awarded in accordance with the rules of Article 346 TFEU or the Directive 2009/81/EC, just like paragraph 5. As the lawmaker uses may instead of shall, this should be taken as an optional approach, thus allowing contracting authorities to apply Part 2 of the Regulations if they so wish to do so.

Update: Albert's excellent, excellent entry is here.

Public Contracts Regulations 2015 - Regulation 15

Regulation 15 - Defence and security

Regulation 15 transposes Article 15 of Directive 2014/24/EU into England, Wales and Northern Ireland. This Regulation ensures that Part 2 applies to certain contracts within the field of defence and security.

As mentioned before, defence and security benefit from exceptions to general procurement rules under certain situations. One of the exceptions is granted by Article 346 TFEU, but most of the legal regime applicable to defence and security contracts is contained on Directive 2009/81/EC. As such, Regulation 15 ensures that if contracts do not fall within the exceptions of Directive 2009/81/EC, then they are subject to general procurement rules and in this consequence to Part 2 of the Public Contracts Regulation 2015.

This is an almost verbatim transposition of the original with the only noteworthy difference being that the cross references on Article 15(1)(a) and (b) to Directive 2009/81/EC are made instead to a "Defence and Security Regulations". I am not sure why the lawmakers would use this terminology and not refer to the official name of the law which is Defence and Security Public Contracts Regulations 2011. Maybe another example of the rush to get the Regulations out the door?

Albert's short entry is here.

Public Contracts Regulations 2015 - Regulation 3

Regulation 3 - Subject Matter and Scope of Part 2

Regulation 3 brings us to Part 2 of the Public Contracts Regulations 2015. As the Regulation itself is short, today's commentary will focus first on a general view of this Part 2 and then a couple of quick comments about Regulation 3 itself. Albert's views are mostly coincidental to mine (although more detailed) and can be found here.

General comments on Part 2

Part 2 of the Regulations spans most of the law itself (from Regulation 3 to Regulation 85) and covers what we can consider to be the substantial business of public procurement: scope, general and special rules on procedures for contract award, records and reports. Remedies, rules on contracts not covered by the Directives and others odds and ends can be found on subsequent parts.

As mentioned in previous entries, most of the Regulations follow the Directive 2014/24/EU very closely and none more so than Part 2. In effect, when we think about procurement rules, most of them will be found on this part and more often than not they are quite similar in content (though not in structure or presentation) to the Directive.

So what about Regulation 3 then?

Regulation 3 is mercifully short after yesterday's laundry list of definitions. It contains only two paragraphs, the first on the general subject matter and scope of application and the second on the derogation from Article 346 of the Treaty on the Functioning of the European Union (TFEU in the lingo).

According to Regulation 3(1), Part 2 applies to the contracts (and design contests) with a value identical or higher than the thresholds mentioned on Regulation 5 and if no exception is applicable. Fairly standard scope of application. Regarding the thresholds themselves, however, stay tuned for a Friday rant...

The most interesting bit of Regulation 3 is probably the second paragraph, containing the reference to Article 346 TFEU. This is a Treaty Article providing an exception to the Treaty, whereby Member States are entitled to withhold information that is contrary to its national security interests (Art 346(1)) and - the bit relevant to procurement - allowing Member States to take measures to protect their defence industries. Naturally this includes the procurement of defence material, and an express reference is made to a list drawn up by the Commission in...1958!

In other words, defence benefits from a derogation of the Treaty rules. By definition, that would affect the Directive 2014/24/EU as well, but still the lawmakers involved decided to spell it out, including a provision in Article 1 reinforcing the derogation. True to its copy+paste approach, so did the Regulations law makers. I am not sure the reference to Art 346 was needed as all secondary EU legislation needs to comply with primary legislation like the TFEU and will blame some excessive zeal for its inclusion.

Defence procurement is not really my area, so I defer to the experts on this and have reached out Dr. Aris Georgopoulos (University of Nottingham) and Dr. Baudouin Heuninckx (Belgian Armed Forces) for comment. Will ping a couple others (Prof Martin Trybus from Birmingham and Dr. Luke Butler from Bristol) for added measure.

If you have access to the Public Procurement Law Review, there is an article by Nicolas Pourbaix from Hogan Lovells precisely on Art 346 - PPLR 2011, 20, Issue 1, 1-8. Or, in alternative Chapter 3 of Martin Trybus' Buying Defence and Security in Europe, covers this derogation quite extensively.