Reforming MoD Procurement: Here We Go Again

This week has seen reports that the new government regards the MoD’s procurement system as “disastrous” and intends radical revision. Major MoD procurement reviews come around every 10 years or so.  The last one, 299 pages, was by Bernard Gray and his team in 2009. In January 2019, Louisa Brooke-Holland, of the House of Commons Library, provided an excellent update. She begins with National Audit Office concerns that the MoD’s planned 2018-28 expenditure (£186bn) is “unaffordable” and that is before factoring in the 30% over-runs, both in time and money, that we have come to expect. The MoD’s habit of delaying contracts, in order to meet Treasury short term cash limits, compounds the problem: the military do not get the kit they need and the price goes up.

“A third of the MOD’s total procurement spend in 2017/18 was on non-competitive contracts (£8.6bn out of £24.3bn)[1]. A few big suppliers dominate the defence industry – over 42% of total MOD procurement expenditure was with 10 suppliers[2].” It could be described as a hand in pocket relationship.

The 10 yearly strategic reviews lead to much hyped solutions. For example, “Smart Acquisition” was launched in 2000 following the 1998 Strategic Defence Review. Apparently this was new as its purpose was “To enhance defence capability by acquiring and supporting equipment more effectively in terms of time, cost and performance.”  A sizeable chunk of the consultancy fee must have gone into that.

Lord Levene’s review (June 2011) prescribed “a delegated model”, giving the three heads of the armed forces responsibility for managing their own budgets, including equipment.  A small step but at least in the right direction. The MoD mandarins did not think much of that and have since conducted their own reviews which boiled down to plans and yet more plans.

Commercial procurement experts were hired and fired. Ministers came and went with equal rapidity.  The MoD is impervious to change and only likes ministers who are good at extracting cash from the Treasury. The House of Commons Select Committee Report of December 2017 noted that procurement was a mess and the MoD was hugely over-spending but then just tinkered with the problem. Rearranging the deckchairs did not help the Titanic avoid the collision.  The iceberg had a better solution: it got rid of the Titanic. Therein lies the answer to equipping our armed forces. When I told Nicholas Soames, then shadow Defence Secretary, that the Tories should take procurement out of the MoD, he fell off his chair.  Being an open minded man, he agreed to discuss it with recently retired flag officers (current ones having too much skin in the game). He reported back, with some surprise, that they fully agreed. The armed forces are the customers and the manufacturers are the suppliers.  The former know what they want and the latter know what they can make when and the prices they can offer.

We have only had the MoD since 1947.  The idea that the armed forces should work more closely together was a good one.  No one thought it would lead to a huge bureaucracy preventing the armed forces from carrying out their mission. MoD civilian personnel numbered 57,760 (FTE) at 1 April 2019, a small increase (1.6%) compared with the year before. Within that, the Defence Equipment and Support (DE&S), i.e. procurement, entity employs about 12,000 staff, 25% or so being military personnel.  Arie de Geus, head of planning for Shell, showed that the primary goal of any organisation is to look after itself[3]; DE&S is no exception.

The two main roles of most government departments are to formulate policy (including managing legislation) and to distribute the funds provided by the Treasury as equitably as possible across the front line.  In the case of defence, there are also two “sovereign” interlocking constraints: ensuring that the UK is independent, e.g. not being dependent on others for key weaponry or ammunition, and providing jobs for British workers. One can question which ministry should be responsible for godfathering British exports of military materiel: there are two or three other candidates.

If the armed forces were doing their own procurement, these constraints would need to be superimposed on their spending budgets.

Over the past 40 years or so, governments of all colours have declared fresh initiatives to cut extravagance, waste and incompetence from MoD procurement.  None have succeeded because, over those years, the MoD has inoculated itself against interference. No senior executive, military or civilian, can ever be held accountable for the cost and financial overruns because they are no longer there when things come to a head.  It is time to recognise that the MoD’s layer of fat between the armed forces and defence suppliers is simply unnecessary. It should be cut out.

 

[1] Ministry of Defence ‘Finance and economics annual statistical bulletin: trade industry and contracts 2018’, 6 September 2018, figure 2a

[2] Ministry of Defence ‘Finance and economics annual statistical bulletin: trade industry and contracts 2018’, 6 September 2018, figure 5

[3] "The Living Company" Nicholas Brealey, London (1997)

Planning doesn't work using the 30,000 foot view

The World Economic Forum tells us all that the gender pay gap in Britain is appalling, we really should be doing better. The problem with the claim being that they’re using the wrong figures. Which is something that Hayek rather warned us about, those well removed from the actual action of the economy never will have accurate information about said economy.

That the WEF is a private sector group sitting on a Swiss mountain doesn’t change this basic fact about the pretence of knowledge:

The UK has fallen six places down the global rankings for gender equality. Despite successive prime ministers pledging to take decisive action to tackle the gender imbalances in politics and wider British society, the UK has dropped from the 15th most equal nation in world to 21st.

That we’re 21 out of 149 doesn’t bother us it has to be said. But there’s always that little detail that this level of abstraction manages to miss:

The Global Gender Gap report 2020 said the gender wage gap in the UK was 16%, compared with 7% in Sweden and Norway. In the UK, more than three times the number of women are in part-time roles compared with men.

Well, yes, that is missing something important. The UK gender pay gap for those in full time employment is some 9% or so at present. It’s also true that the UK economy has much more part time working than most others.

Which is why we are all abjured to use not the blended - part and full time - gender pay gap but one or the other. Because it is simply a truth that part timers get lower pay per hour than full and thus if there’s a structural difference in the labour markets the blended number will not be comparing like with like.

We have actually had the UK’s Statistics Ombudsman, Sir Michael Scholar, snarling at Harriet Harman for making this mistake.

And if the WEF is incapable of getting the important details like this right then why should we listen to them at all?

Mining the Moon: How Private Property Rights in Space Bring Limitless Opportunities

Introducing private property rights in space would incentivise private companies to mine it. This could protect the earth’s environment and provide limitless growth and prosperity. The sky is not the limit: there are no limits.

Earth has never run out of any raw material. Yet in today’s Climate Emergency hyperbole the assertion that we are plundering the earth and need to limit our consumption is deafening. 

The scarcity of raw materials argument was first stated in 1972 in the book ‘Limits of Growth’. It had been commissioned by the Club of Rome, a group of scientists, politicians and bureaucrats who calculated the speed at which the earth’s resources would run out at specific levels of consumption and population growth. Specific years were predicted at which specific raw materials would disappear. Not one did in the indicated years or since. 

Notwithstanding all the empirical evidence to the contrary, environmentalists the world over stick to the theory of the earth’s depletion and demand rationing by government.

The free market economy is the main reason why we have not run out of anything. In a market economy, when supply outstrips demand, the prices rise - thereby incentivising users to become more efficient, to find replacements, or to look for additional supplies.  Cars and white goods have become more efficient through inventions; finding additional fossil fuels; mining new deposits and so on.  

But we can do even better. It is undeniable that excessive mining destroys part of our environment. It is also not inconceivable (contrary to all current evidence) that at some point we may run out of one or the other raw material. Fortunately, there is an easy market solution: space mining.

Every known raw material is available in space . We simply need to go and get it. The added advantage is that few care about the environment on, say, the moon.Nobody lives there and, apart from ensuring that it continues to exists, who would care? In addition, when we mine on the moon we can mine less on the earth and thereby preserve our own habitat better.

How to achieve mining in space? As always the market provides the most efficient solution. Yet we need to make it profitable for private companies to do so. The problem is that there are currently no property rights in space. So any private enterprise there remains fraught with both insecurity and uncertainty. It is thus no surprise that nobody is willing to take the very high financial risk. 

Activity in space is governed by the 1967 Outer Space Treaty (formally named the Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and Other Celestial Bodies). 109 countries are signatories. It was mainly aimed at keeping space nuclear free and limits the use of space to peaceful purposes. Unfortunately it is woefully inadequate in providing property rights for potential entrepreneurs. The wording about lunar or asteroid mining is ambiguous at best. 

Under the Moon Treaty, no state is allowed to appropriate the moon or other celestial bodies by way of claim of sovereignty, by means of use or occupation, or by any other means. It is contested whether under this wording extraction of resources is prohibited, or not. The US has unilaterally introduced the US Commercial Space Launch Competitiveness Act of 2015 to give guidelines to private companies. Other countries have replicated this. The controversy on legal claims for mining for profit remains. 

As long as there is legal uncertainty, private companies will not invest the billions needed to go mine the moon.

It is pretty straightforward what needs to be done: a new treaty establishing private property rights should  be negotiated. This could take the form of a multinational treaty; or could involve the United Nations.. There are precedents for both: The Moon Treaty is a multinational Treaty; whereas the customs, treaties, and agreements relating to the sea were united in the United Convention on the Law of the Sea. Antarctica is governed by a multinational treaty. 

The main aim for any country wanting to promote free market prosperity should be to establish property rights, probably beginning with the Moon. To reach United Nations consensus one could, for example, give every country in the world a part of the Moon (perhaps proportionally to its population/economy/land surface, or a combination of factors). Countries could then mine themselves,  sell the rights to private companies, or sell their plot to other countries. It could also give unexpected capital to undeveloped countries.

The main danger, especially if we go down the United Nations route, is the excessive length of negotiations, and the potential collectivist approach which many may promote. If it transpires that a market hostile outcome is likely, free market economies should go it alone and conclude a multinational treaty instead. There is also a danger that the environmental lobby will hi-jack the negotiations, as they successfully did with regards to Antarctica (a vast territory for the exclusive use of a handful of scientists and four million penguins). 

Private property rights in space could bring unheard of scientific advances and prosperity. The sky is not the limit: there are no limits.

The Wright stuff

It was on December 17th, 1903 that Wilbur and Orville Wright took to the skies in a heavier than air machine at Kitty Hawk, North Carolina. They were originally into bicycle manufacture and repairs, but were very gifted engineers. They had to design new propellers from scratch, since previous ones had only been used in water. They had to devise a method of steering, and invented a way of warping the wing to alter its presentation to the air. Their flight was for a smaller distance than the wing span of a Boeing 747. But it did the job, and they went in to improve and refine their craft until it pioneered the modern aviation industry.

It seems astonishing in retrospect that it was only 65 and a half years later that humans put their footprints on the moon. Such is the accelerating pace of modern progress.

It was also on December 17th, this time in 1935, 32 years after that first hesitant flight, that the Douglas DC3 Dakota first took to the skies. It was one of the most successful and widely produced planes, the first to be valid as a passenger-only plane, and one that saw extensive military service as the C47. I was surprised on one of my early rips to the Florida Keys in the late 1980s to find myself in a DC3 passenger plane that was probably older than I was, yet still in commercial use.

Exactly one hundred years after the Wright brothers first flew, Burt Rutan’s privately built and financed SpaceShipOne went supersonic for the first time. The following year it went on to win the X-Prize for taking passengers into space. To appreciate the pace of change, reflect that the smart phone, the indispensable and ubiquitous gadget of today, was not launched until four years later. And those who claim that we cannot go on “using up” the planet’s resources, should reflect that the iPhone in today’s pocket uses a tiny fraction of the resources that went into the room-full of junk needed a couple of decades earlier to fulfil the functions that it achieves.

The point to appreciate is that the Industrial Revolution has taken us out of the world of Parmenides, in which everything is constant, and plunged us into the world of Heraclitus. We step and do not step into the same river, for new waters flow ever about us. The technology present at our birth seems like ancient history as we mature, and older people find it hard to keep pace with it.

There are those who want us to stop, who yearn for constancy, and who want to live in a predictable world that we can shape. It is not going to happen. The pace of change is accelerating. Lab-grown meats, autonomous cars, people-carrying drones, and genetically engineered organisms are just a handful of the technologies that will make the future unrecognizable from the past.

We can cope with this by staying flexible and adaptable, using our creative skills to solve the problems that developments bring with them, and using the new technologies to solve the problems that have eluded us thus far. It is possible to look to the future in terms of the hazards it might present, or to look to it in terms of the opportunities it will offer. In virtually every measure of the human condition, the present is better than the past, and the future will be better still.

Actually, this would work

Larry Elliott tells us that Boris must now do something for the North. Perhaps so, one nation conservatism does mean that all in the nation should benefit. The thing is though, why wouldn’t this work?

Boris Johnson now has to deliver for voters in his newly won seats in Wales, the Midlands and the north. He is unlikely to do so with an agenda of labour market deregulation and spending cuts.

In the medium to long term, as Paul Krugman has pointed out, it’s pretty much all about productivity. And labour market deregulation aids in boosting productivity simply because it makes the adoption and deployment of new technologies easier. Thus more of it is done.

We can look back into our own past history of rigid and union defined labour markets to see the truth of this, British industry did not cover itself in glory in the manner it adopted new ways of doing things now, did it?

There is also the more theoretical point that we know what boosts productivity - market competition. Wages do indeed follow productivity therefore we need the competition to drive them up over time. This being true of labour markets too.

Oliver Cromwell, who protected Britain from freedom

Oliver Cromwell was declared Lord Protector of the Commonwealth of England, Scotland, and Ireland "and of the dominions thereto belonging" on December 16th, 1653. He had been one of the Parliamentarians opposed to the rule of Charles I, and had distinguished himself as a commander in the civil war that ensued. He had signed, with others, the order to execute King Charles in 1649, and served in the so-called Rump Parliament until he forcefully dissolved it, sending soldiers to overwhelm its independence.

Britain had given up its monarchy to be ruled under a military dictatorship. Cromwell thought he was guided by God to implement his will on Earth, and was ready to do so without pity. He was fervently anti-Catholic. Indeed, the Long Parliament he dominated passed an ordinance in 1647 confirming the abolition of the feast of Christmas, which Cromwell believed was an abhorrent and sinful vestige of 'popery.' His troops slaughtered Catholic civilians in Ireland in their thousands.

After Cromwell became Lord Protector, he took to signing himself "Cromwell P." with the 'P' standing for Protector, mimicking kings who put an 'R' for Rex after their name. He set up local groups of 'triers' to vet potential ministers for their purity of thought, and 'ejectors' who could dismiss 'impure' clerics and teachers.

Just like a monarch, he was succeeded when he died by his son, Richard. Cromwell, but the latter was soon forced from office, and the monarchy restored under Charles II. Cromwell had been given an elaborate state funeral and a burial in Westminster Abbey, but after the Restoration his corpse was dug up, displayed, and then beheaded.

Cromwell was regarded by some historians as a liberator who saved Parliament, but subsequent judgements have been harsher. It is now regarded as absurd that Parliament has a statue outside it of the only man who abolished it. An influential children's novel, "The Children of the New Forest," published in 1847 by Frederick Marryat, helped turn the tide, portraying Roundheads as dour killjoys, and Cavaliers as dashing and romantic.

Many people today see in Cromwell a prototype of the 20th Century dictators, so convinced of the rightness of their cause that they would slaughter people in their millions to advance it. And even today, some see a reflection of Cromwell in people gripped by an ideology that tells them that it alone embodies justice, and that the rightness of their cause allows them to engage in any behaviour that supports it, even if this involves renouncing basic human decency.

Cromwell was a fanatic, and those who today think that their self-convinced virtue justifies any behaviour share that fanaticism.

Equalising wealth is more difficult than it looks

A report claiming that the great diminution of wealth inequality in the 20th century didn’t happen. Or rather, didn’t happen quite as much as people think it did. The reason being that people lie, especially about taxes:

The answer? Lots of it goes awol, not being declared when members of the dynasty die. For individual families this could be the result of incompetence, but overall that can’t explain the scale of what is going on. The richest 1,500 dynasties of 1892-1920 had at least 20%-32% of their wealth hidden by their descendants in the second half of the 20th century, with richer families hiding more of their wealth.

The research is here. We’re not entirely sure we believe the argument itself. Because there’s a certain fact about how great fortunes used to be held - agricultural land was the thing. And the great stylised fact about wealth is the plunge in the relative value of agricultural land over the past 150 years. The steamship opened the American prairies as food sources, the refrigerated ship the pampas, the railways the Ukraine. As each change worked through the system British land prices fell - relatively that is, not necessarily in nominal, money, terms. As we’ve noted before time was that 3,000 acres would finance the building of a baronial manse, today the same estate wouldn’t cover the maintenance bill for the roof.

But such quibbles aside the paper is of great interest.. Firstly, if true, then the seeming rise in wealth inequality in recent years isn’t true. Further, if the decline in it didn’t happen then all those good things ascribed to the reduction also can’t be so allocated. Something else must explain those claimed glories of the mid-last century and so too must it be true that the taxation of wealth won’t bring them back.

The largest lesson though is about the power of the state. If the panopticon can’t actually tax such things effectively then perhaps we should be seeking solutions to our varied problems that don’t involve the state being that panopticon?

Eiffel – symbolic engineer

Gustav Eiffel, one of the 19th Century's significant engineers, was born on December 15th, 1832. He became one of the leading figures in France's Industrial Revolution which, for economic, cultural and political reasons, developed much later than its English counterpart. France was building infrastructure such as railways, and needed creative engineers to build the bridges and viaducts it needed.

Eiffel pioneered many innovative design features, including prefabricated bridges that could be transported in sections to remote areas and then assembled with nuts and bolts rather than welding, and thus needing less skilled labour. He built bridges across Europe, showing a talent for combining the aesthetic with what the function required and what the materials allowed.

He is most famous for two projects that became cultural icons. He designed and oversaw the construction of the Eiffel Tower, erected for the Great Paris Exposition of 1889. He also designed the internal structure of the Statue of Liberty, and had the entire statue erected at the Eiffel works in Paris before it was disassembled and shipped to the United States. Both of these works became symbols of the nations in which they were located.

One project he was involved in that went wrong was the early attempt to build a canal across Panama. After he'd been involved for a year, the company building it went into liquidation and there were court cases that followed. Charged with raiding money under false pretences, he received a fine of 20,000 francs and two years in prison, although both sentences were quashed on appeal.

His nearest counterpart in the UK was probably Isambard Kingdom Brunel, also French by origin. It was an age when engineers could conceive and build massive prestige projects, taking on challenges hitherto thought impossible, and astounding the world with virtuoso achievements. The successful ones tended to combine a creative imagination with secure knowledge of the forces and stresses at work on the materials, and an attention to the details of every part of the project.

It was also an age in which people of talent could raise money from backers to fund such ambitious projects as these, projects that left their mark on the world and still inspire admiration for the beauty and practicality with which they combine form and function. Few of today's engineers are household names, and few stamp their individual personality on projects that are more likely in modern times to be constructed by teams without public presence, and often funded, at least in part, by public money.

Gustav Eiffel was one of the larger-than-life figures who strode across the 19th Century, role models who inspired others to aim at greatness. The world is poorer by the relative lack of such figures in modern times.

If you're worried about economic rents why not reduce economic rents?

The latest attempt to justify eyewatering tax rates is to insist that high incomes are largely gained from economic rents. Thus we should tax high incomes because economic rents.

For most of the last four decades, the gains from economic growth have flowed overwhelmingly to the rich. Much of those gains to the rich weren’t “earned” in any traditional sense, but rather extracted, excess profits squeezed out of a system designed to favor those who already have power, position and wealth.

The justificatory paper is here and looks at, as it should, the manner in which American doctors, lawyers, financiers and the like make high incomes.

Well, call us Mr. Picky if you must but we do tend to think that if you’re worried about the unfairness of economic rents then the solution is to reduce the ability to claim income from economic rents. That does seem to, rather neatly, deal with the problem.

We thus find ourselves agreeing with Milton Friedman in arguing that the American Medical Association should be abolished, or stripped of licensure powers, because its existence, or perhaps licensure powers, protects those economic rents earned by doctors.

We might even go on to agree with the Cato Institute and observe the manner in which the American labour market is infested with such requirements for licensure. Some one third of all jobs require a highly restrictive licence - membership of a guild in effect - for it to be legal to perform that labour. Strip those requirements away and we reduce that ability to collect economic rents on labour income.

We’d also add our own solution. Such licences are near always state based - moving across the state line requires the acquisition of a new one with the new restrictions placed upon who may have one. Thus there is an obvious solution, use the Commerce Clause to impose Federal recognition of each state licence in every state. Given that there are 50 states then at least one of them can be relied upon to issue a licence to do whatever for $25 or the like. Licensure then becomes a boring collection of cheap documents, not an actual barrier leading to the creation and appropriation of those economic rents.

Perhaps that solution doesn’t appeal. But back to us being Mr. Picky. If you wish to complain about economic rents then you should be proffering solutions to economic rents. Not using their existence as an excuse to tax the bejabbers out of everyone. For without your offering a solution to the thing you’re actually complaining about we might think it is just an excuse to doing that taxing of the bejabbers.

And that would never do, would it?

Andrei Sakharov

We said goodbye to Andrei Sakharov on December 14th, 1989, 30 years ago. He lived just long enough to witness the total collapse of the evil regime he had spent much of his life in opposition to.

As a PhD physicist, his primary interest was initially in cosmic rays, but he was assigned to the postwar team that developed the first Soviet atomic bomb. They were able to produce one rapidly because Soviet spies had stolen the technology from the US Manhattan Project. Sakharov researched a possible way of making thermonuclear weapons in a way that was totally original, however, and produced a device radically different from the US Teller-Ulam design. Although the US exploded the first H-bomb, Sakharov's design for the Soviet Union was in many ways more practical, and gave them a brief lead in thermonuclear technology.

His work made Sakharov a leading figure, a position he used to campaign for civil liberties and human rights, to the increasing concern of the authorities. He was also concerned by the implications of his scientific work, and opposed both nuclear proliferation and atmospheric testing. He was involved in the 1963 Partial Test Ban Treaty.

Sakharov broke with tradition by publicly opposing the election of Nikolai Nuzhdin to the Soviet Academy of Sciences, citing his responsibility for "the defamation, firing, arrest, even death, of many genuine scientists." When he succeeded in preventing the election, the KGB began to compile a dossier on Sakharov.

From 1968, he emerged as the leading dissident figure, publishing calls for civil liberties and staging vigils outside closed courtrooms. He made public appeals on behalf of over 200 prisoners he thought were unjustly detained. He was in 1970 a founder member of the USSR's Committee on Human Rights. With others he wrote petitions and established contacts with international groups campaigning for human rights.

He came under increasing pressure and, when awarded the 1975 Nobel Peace Prize, was not allowed to leave the country to collect it. His wife did, though, on his behalf. Sakharov wrote publicly that the state he had once thought of as a breakthrough to a better future for mankind, was now corrupted.

"Yet our state is similar to a cancer cell – with its messianism and expansionism, its totalitarian suppression of dissent, the authoritarian structure of power, with a total absence of public control in the most important decisions in domestic and foreign policy, a closed society that does not inform its citizens of anything substantial, closed to the outside world, without freedom of travel or the exchange of information."

After he opposed the Soviet war in Afghanistan, he was exiled to Gorky, off-limits to foreigners, in 1980, and was held in internal exile until 1986. When his wife was arrested, he went in hunger strike to demand her release, and to allow her to travel abroad for heart surgery. He was detained in hospital and force-fed. The Politburo, under international pressure now, allowed her to go for surgery in the US, but sentenced her to Gorky on her return. Finally, in 1986, Gorbachev told them they could return to Moscow.

There are many Sakharov prizes now to recognize those who campaign for human rights, including the European Sakharov Prize for Freedom of Thought. There are also streets named after him and statues to honour his contribution. He was a brave man, enduring innumerable seizures, searches and detentions, but ultimately he won. He shamed his country, and in doing so, helped bring about the demise of one of the most corrupt and poisonous ideologies that ever held sway.