Defence outsourcing could save taxpayer money, says new IEA paper

The greater use of outsourcing in national defence could encourage efficiency, innovation and better services and equipment for military personnel

• The UK government spends over £55 billion annually on defence, yet has little incentive to keep down costs or try new methods

• Outsourcing non-combat functions – like housing, maintenance, training and weapons procurement – reduces costs by between five and 40 per cent

• Defence equipment, such as weapons systems, helicopters and warships, could be purchased through an open and competitive bidding processes to save money

• Competition could even be encouraged between the army, navy and air force

The government should embrace private sector involvement in defence to save taxpayer money and improve national security, according to a new report from the free market think tank, the Institute of Economic Affairs.

The report author, defence economist and consultant to the Ministry of Defence, Professor Keith Hartley, warns that the military is “characterised by inefficiency”. This is because of a lack of incentives to deliver value for taxpayers.

“Military commanders operate on military criteria reflected ultimately in their ability to win wars; they are not entrepreneurs rewarded or penalised through profits and losses,” Hartley writes. “Unlike private sector firms, military units are not subject to capital market incentives and penalties: they cannot be taken over or suffer bankruptcy.”

The paper argues that outsourcing more military functions – such as housing and catering, training, and repairs – through a competitive bidding process could encourage innovation and deliver cost savings. 

The UK has a long and generally successful history of using the private sector in national defence. In 1983, the Ministry of Defence began outsourcing functions like laundry services, vehicle maintenance and air traffic control. By 1989, the Ministry reported cost savings of £50 million annually. The competitive pressure also raised standards for in-house services, which recorded 20 to 30 per cent cost savings during the same period.  

Since the 1990s, the Ministry of Defence has also used private-sector financing for dozens of capital projects, such as accommodation and military satellite communications, and some services, including search and rescue and military flying training. A study by the National Audit Office of over 50 such projects found most to be delivered successfully on time and within budget.

Hartley also highlights the issues with defence weapons procurement, which he says is characterised by “cost overruns, delays and performance failures”. A potential solution would be an “open market,” which would mean the government shopping around the world for defence equipment from friendly nations, rather than repeatedly picking domestic favourites like BAE Systems and Rolls-Royce.

To encourage greater use of outsourcing, the paper discusses the need for the Ministry of Defence to avoid excessive micromanagement, be faster in procurement processes and cancel failing projects. It also suggests a greater use of fixed-price contracts, which Hartley says would give private contractors incentives to innovate compared to cost-plus contracts. 

The paper critically assesses more radical possibilities for private sector involvement in combat missions. The Israel Defence Forces, for example, uses a private company to deliver unmanned military drone missions. Hartley concludes, however, that mercenaries would raise ethical, personnel and contractual difficulties that would make their adoption highly challenging.

Hartley explores other possibilities to create functioning defence markets, such as performance-based pay and competition between the military branches. “Why not allow the army with its land-based guided missiles to compete with the RAF with its manned fighter aircraft for the air defence of the UK?” Hartley writes.

Professor Keith Hartley, paper author and defence economist, says:

“In these increasingly uncertain times, as the UK faces major strategic threats and a land war on our continent, getting the most out of defence spending could not be more critical. Defence is costly and becoming costlier, raising the risk of losing capabilities as they become too expensive. Our national security depends on the Ministry of Defence pushing down costs and getting the best possible value for taxpayers. The greater use of the private sector, along with boosting competitive pressures within the armed forces, could save taxpayer money and deliver more innovative solutions.”

ENDS

About the author

Keith Hartley is Emeritus Professor of Economics at the University of York. He was Director of the University’s Centre for Defence Economics and its Institute for Research in the Social Sciences. He was the founding Editor of the academic journal Defence and Peace Economics and has been a consultant to the United Nations, the European Commission, the European Defence Agency, the UK Ministry of Defence and the House of Commons Defence Committee. He was a NATO Research Fellow and a QinetiQ Visiting Fellow.