MoD overspending ignored guidelines: Audit report attacks 'fundamental flaw'

OFFICIALS at the Ministry of Defence spent pounds 95m too much on a helicopter order and ignored a suggestion from the supplier that the price should be lower, it is claimed today.

A report from the National Audit Office, the public spending watchdog, concludes that the MoD could have saved that sum when it bought 44 EH101 anti-submarine helicopters from IBM ASIC, an American contractor, in September 1991. Ministry officials overruled their own guidelines covering the way prices are set.

The internal guidance states that a minimum of 10 per cent of the price should be fixed, or not subject to inflation. But on the EH101 order, the officials made just 1 per cent non-variable. They also based their calculation on an index which took account of IBM's labour costs, rather than market prices, and did not build in a deduction for productivity improvements at IBM.

When IBM suggested using a formula that would lead to a lower price, the MoD did not think it was appropriate. The NAO estimates that the IBM formula could have saved pounds 95m on the pounds 1.5bn contract.

The helicopter deal is one of several major defence contracts examined by the MoD to see what savings could have been made if different pricing formulas were used and MoD guidelines complied with.

The NAO finds that pounds 14m could have been saved on the Alarm missile order; the MoD spent pounds 8m too much on the first production contract for Stingray torpedoes; and pounds 6.4m too much will be paid to British Aerospace for the Rapier missile system.

In none of the cases examined did the ministry try to quantify how much more it was paying by departing from the guidelines. The NAO describes this as 'a fundamental flaw' in its approach.

However, the NAO also goes on to find that the internal rules are themselves wrong. They pay too much attention to inflation and add pounds 50m a year to the annual contracts bill. If that figure is added to the other pounds 25m to pounds 30m, Alan Williams, MP for Swansea West and a Commons Public Accounts Committee member, said the excess over the eight years covered by the report comes to more than pounds 600m. He added that the PAC would be examining the matter: 'Rarely has there been such a case of a department being ripped off and lying back and saying rip me off.'