LONDON - The regulatory organization responsible for policing single-source defense contracts in the UK reckons it could cut up to £3 billion off the cost of deals during the next decade, in part by adopting a baseline profit scheme with different levels of return depending on the complexity of the work being undertaken.

"The potential for a downward trend in the baseline profit rate, including the introduction of multiple rates, …. signals the potential for up to £3 billion of savings for the taxpayer (measured at present value over 10 years)," (SSRO) said in written evidence made public by the Parliamentary defence select committee in the last few days.

The Ministry of Defence intend to include any Single Source Regulations Office savings in a £9.2 billion efficiency drive aimed at helping fund a £178 million, 10 year, equipment procurement program.

The introduction of multiple rates is opposed by many in the MoD and industry and it's by no means certain the scheme will be approved by Defence Secretary Michael Fallon when he receives new recommendations from the SSRO mid-2017 on extending it's regulatory powers.

Fallon has already rejected the move to multiple baseline profits once before telling the SSRO the methodology behind the scheme requires review. Minor changes have already altered how the base profit rate is calculated but the proposal for multiple rates rather than the current one size fits all approach would be a significant change.

The baseline profit rate for 2015/16 was 10.60 percent and the SSRO recommended an 8.95 percent rate for 2016/17. It is only the baseline though and actual profit levels agreed by the contractor and the MoD are usually higher.

"The decrease in the profit rates over the last two years has resulted in a saving of £14.36 million for the taxpayer to date," said the regulator in its evidence.

The base profit rate for the next financial year is scheduled to be released early next year, and if SSRO's remarks to the select committee are anything to go by a further reduction appears possible for 2017/18. The SSRO said it believed "a single baseline profit rate does not reflect the diversity and the type of work undertaken….Having a number of baseline profit rates, for different types of activities better reflects the risk and reward balance related to different contracts."

The SSRO said in its submission that it has already helped the MoD to achieve £50 million of savings, in part from base rate cuts. The £3 billion figure though far exceeds any previous forecasts on potential spending reductions the SSRO could achieve.

The SSRO wouldn't elaborate on exactly how it arrived at the £3 billion figure.

Reading between the lines though, the regulators evidence to the defense committee appears to forecast likely downward pressure on the baseline profit, introduction of multiple profit rates and a significant upturn in the number of non-competitive contracts being referred to the regulator by the MoD. These are all moves that could generate significant savings.

Only about 20 percent of contracts are being passed to the SSRO for scrutiny of allowable costs and other issues – it's one of a number of concerns which are causing tension between the regulator on one side and the MoD and industry on the other .

Paul Everitt, CEO of UK defense trade body ADS Group said multiple profit rates were not supported by his organization.

"Multiple profit rates are not considered appropriate. There are concerns that the underlying methodology is not robust enough, and given the baseline is a starting point for negotiations which involve risk, performance and investment it adds an unnecessary complexity," he said.

One industry executive who asked not to be named described the SSRO as being "out of control."

All direct single source industry deals fall under SSRO regulations but government-to-government contracts, principally US Foreign Military Sales, do not. The SSRO wants to change that and says in its evidence that some of the cost in a FMS deal would not be allowable under the single source rules.

The SSRO was set-up in 2014 by an act of Parliament to regulate contracts awarded without competition by the MoD.

Single source contracts accounted for £8.8 billion of MoD work last year. That figure is likely to grow as massive contracts are added to the list, including new Dreadnought-class nuclear missile submarines, Type 26 frigates, Apache helicopters and P-8 maritime patrol aircraft.

Among it's duties the SSRO annually recommends the base profit rates contractors can earn on single source deals as well as adjudicating on the terms and conditions of contracts referred by MoD. The SSRO evidence to the select committee is part of a wider investigation by lawmakers into defense procurement and acquisition in Britain.

The evidence submitted by the SSRO may provide a preview of the recommendations due to be handed over to Fallon mid-2017 as part of the review being conducted by the SSRO into it's future operations.

Industry sources said recently they had heard rumors of a fierce argument between the MoD and the SSRO over several issues including the level of independence of the regulatory body. The SSRO said in it's evidence it's powers should be toughened up.

"At present, the SSRO does not have, for example, enforcement powers or the ability to require the provision of information, including the contracts themselves. Its independence should also be reinforced within the regime," it told the select committee.

The SSRO has already lost two chairman this year, both of them resigning unexpectedly.

Clive Tucker, the interim chairman, resigned in October just weeks before he was due to stand down ahead of a new non-executive chairman being appointed. His decision to depart followed what was reported by sources to have been a bruising encounter with a senior MoD official over the future position of the SSRO.

Andrew Chuter is the United Kingdom correspondent for Defense News.

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