Sole suppliers of military equipment could be overcharging the UK government by up to £26m, according to the recently installed watchdog tasked with overseeing defence contracts. After reviewing 18 non-competitive contracts from the previous year, the watchdog's chairman concluded that certain processes, such as allowing contractors to charge for redoing previously faulty work, were no longer acceptable under the new regime.
Profit caps on these types of defence contracts, which the report claims accounted for about 49 per cent of the Ministry of Defence's equipment budget over the past nine years, are expected to be introduced in March. Given that the £31bn renewal of the Trident nuclear deterrent and £4bn construction of Type 26 global combat ships both fall under this category, the implications could be massive.
BAE Systems (BA.) and QinetiQ (QQ.) are likely to be most at risk. While the former has single source contracts on various projects such as naval ships, the Eurofighter Typhoon, Trident and RAF maintenance work, the latter generates over 80 per cent of revenue from the UK government.
Should QinetiQ's 14 per cent operating margin be benchmarked against the profits earned by relevant international peers, Haitong analyst Ed Stacey warns that it could be halved. But despite rampant fears these new rules will weigh on the company's bottom line, he's confident the impact will be nowhere near as damaging.
Meanwhile, independent defence analyst Howard Wheeldon reckons costs should come second to national interest. Despite public scrutiny over how the government uses the public kitty, he says limited competition means it's either a case of farming single source contracts out to British companies or inviting foreign bidders in.
"We've seen similar exercises in the past," he said. "It's good for watchdogs to look into these things, but at the end of the day its job isn't to decide what's best for the national interest."
