Britain to clamp down on costs of non-competitive defence contracts

LONDON, Feb 26 (Reuters) - Companies which do not face an open competition for British defence contracts will be subject to greater scrutiny over costs under new plans to boost efficiency, Defence Secretary Michael Fallon will say on Thursday.

The government, up for re-election on May 7, has cut defence spending by around 8 percent in real terms over the last four years to help reduce its record budget deficit, including shrinking the size of the armed forces by around one sixth.

Britain spends more than 6 billion pounds ($9.3 billion) a year on defence contracts where either specialist requirements of national security prevent a competitive bidding process.

Rolls-Royce, BAE Systems (LSE: BA.L - news) , Finmeccanica and QinetiQ are the biggest recipients of these, according to government figures, making up around 90 percent or more of their revenue from sales to the Ministry of Defence in 2013-14.

A new independent regulator has now been set up to keep track of costs on such contracts, and will be able to fine companies that break the rules as much as 1 million pounds.

"If they find costs coming in are in stark contrast to the estimates going out, they will clamp down hard on companies and reduce their prices," Fallon will say in a speech to business leaders on Thursday, according to extracts released in advance.

The crackdown is not about attacking companies' profits, he will say, but ensuring a "fair deal" for the taxpayer.

Companies have in the past "exploited a lack of competitive pressure and transparency" Fallon will say, citing examples where firms have tried to claim back overhead costs including horse racing trips, motoring fines and magicians.

"It will now be up to suppliers to justify, rather than for us to disqualify, every pound of their contracts," he will say.

($1 = 0.6455 pounds) (Reporting by Kylie MacLellan; Editing by Mark Potter)