A British Ajax tank. Photo: Richard Watt, MOD

What do you do when someone saves you money? Most of us would pocket the cash and say ‘thank you very much’. Yet when a military spending watchdog, set up in 2014, tried to ensure the Ministry of Defence (MOD) got value for money in the military equipment and services it buys, it saw the MOD being accused of interfering and obstructing its work, rather than being thanked on taxpayers’ behalf.

The Single Source Regulations Office (SSRO) was established to monitor the £8bn which the MOD hands out every year to arms companies in contracts awarded without any competition. One of the main justifications given for awarding a contract in this way is that there is a limited number of companies that can supply the right equipment, so it’s in the UK’s interest to have a stable military supply chain. However, without competition, its becoming increasingly clear that taxpayers are paying far more than we should.

This is no small matter. Even in the context of a bloated £35bn military budget, £8bn is a significant amount of money. There are lots of industries and services that would be very grateful recipients of that kind of funding. To put it in context – it’s more than three times the amount government spends on unemployment benefits, nearly five times the cost of resettling 20,000 Syrian refugees and enough to pay for 1.6 million hip operations. 

After a cautious start, the SSRO began making waves in September 2015 when it proposed what it claimed would be the most far-reaching reform of the system since 1968. Among other things, it suggested a change to the way that profit rates awarded to arms companies are calculated. This included offering different profit rates for different types of work, which could save millions of pounds a year.

While it doesn’t seem that radical, the proposal was certainly enough to get the attention of major arms companies. At the Defence Suppliers Forum (DSF), one of several forums for arms dealers, politicians and civil servants, the SSRO’s proposals were on the agenda. The Aerospace Defence, Security and Space Group (ADS), a trade body for arms companies, said it would hold a workshop to gather response from its arms dealer members and feed those into a consultation.

Arms company interests fight back against moderate reforms

A few months later, the SSRO announced that it had been overruled, Defence Minister Michael Fallon had ordered it to set one baseline profit rate for all types of work. In a statement, SSRO’s chair Jeremy Newman said: “We were keen to introduce this change now, but the statutory guidance issued to us by the Secretary of State instructed us to recommend a single rate for a further year.”

Two weeks after the announcement, Newman resigned. An SSRO press release claimed he wanted to “focus on his other roles”. However, unnamed insiders cited by the Daily Telegraph, said that he was frustrated by interference from the MOD, which was preventing the SSRO from doing its job.

If the MOD and arms industry hoped his successor Clive Tucker would be more compliant they were wrong. One month later, the baseline profit rate had been cut from 10.6% to 8.95% as the SSRO tried to put it more in line with practice around the world.

At that month’s DSF month, the rate change was on the agenda and the minutes state: “The MOD recognised that this methodology could usefully be developed further, and has asked the SSRO to review it over the coming months. Industry welcomed the opportunity to revisit the methodology.” To the SSRO’s credit the rate remained unchanged.

In May, Tucker’s SSRO took on the arms companies again by taking over £1m off the roughly £70m figure Rolls Royce had charged the government for fighter jet aircraft engines. Tucker was forthright. “The law is very clear that the onus is on the contractor to justify the costs it wants to pass on to the taxpayer,” he said, “if the contractors won’t adhere to the guidance we have the ability and the will to impose a change when necessary.”

The following month, Tucker continued the tough-talking, telling a Defence Acquisition conference packed with arms dealers: “You may not always like what we do, but we want you to understand what we are doing.”

His speech was followed by another press release slamming arms companies for charging the taxpayer for ‘costs’ like Christmas parties, charitable donations and commemorative mugs. Tucker said: “For too long single source procurement went without effective scrutiny, and this is precisely the sort of inappropriate expenditure that the [2014] Defence Reform Act [which created the SSRO] was enacted to kill off.”

All of this is unlikely to have pleased the arms companies. The SSRO held a series of discussions with industry over the summer and, in October, Clive Tucker resigned – the second chair to do so in just eight months. According to the Telegraph’s Alan Tovey, “sources close to the situation say he was frustrated by interference from the MOD, which was preventing the SSRO from doing its job.” A few days later, the arms companies and MOD met at the next DSF.

We can only guess what was actually said in the meeting, but the minutes state: “MOD is aware that industry has concerns about the Baseline Profit Rate centred around the methodology for calculating the rate rather than the rate itself….The process to find a new chairman for the SSRO is on-going.

Will parliament act in the interests of the public or the arms companies?

In November, the battle between arms dealers and the SSRO turned to Parliament, with the House of Commons Defence Select Committee holding an inquiry into military acquisition and procurement. Paul Everitt, the chief executive of the ADS told politicians of his opposition to the SSRO’s methodology and multiple profit rates. In a later session of the committee, SSRO chief executive Marcine Waterman hit back, telling the same committee that the MOD and arms industry were not responding to most of its requests for information.

Perhaps frustrated by MOD interference forcing her colleagues to quit, Waterman told Parliament that the SSRO would be asking Defence Secretary Michael Fallon to grant it the enforcement powers which the MOD currently holds. When it was put to her, by Tory MP James Gray, that: “If you are going to be an independent regulator, you really do need significantly more muscle; otherwise, you will be having the wool pulled over your eyes all the time.” Waterman agreed.

Whether she gets these powers or not is ultimately the decision of the government and Michael Fallon’s recommendation will carry great weight. One thing for sure is that it will be fought every step of the way by arms companies. As long as they are intimately involved in shaping military policy then it will be one that is committed to militarism and promoting their interests. If they will lobby this strongly against a moderate reform, what will they do when their interests are truly threatened?

Public money should be spent on the public good. But at a time of cuts and austerity, and when public services are being cut, this is only one of the many ways that arms companies are maximising their income at the expense of the rest of us. The fact that has been allowed to go on for so long is more reflective of the level of influence arms companies enjoy, and of a foreign policy that puts military interests ahead of real peace and security.

The first of the regular reviews into the whole SSRO framework is scheduled for this summer, it will be interesting to see who the government sides with. Will it be the arms companies and their desire for ever-greater profits – or will it be the interests of taxpayers and wider public services? We will soon find out.