Britain’s Ministry of Defence could run a competition to outsource its 14 billion pound ($22 billion) annual procurement and support organization as early as 2013, according to the country’s minister for armed forces.
The possible 2013 competition to partially privatize the Defence Equipment and Support (DE&S) organization is expected to attract some of the world’s largest program management companies.
Bechtel, KBR, Fluor, Jacobs Engineering, Deloitte Touche Tohmatsu and Serco were among 15 companies selected by the MoD this year for market-testing talks. The talks will determine whether a government-owned, contractor-operated (GOCO) or an executive non-departmental public body (ENDPB) is the more effective way forward.
The less-favored ENDPB scheme would see DE&S and its employees remain in the public sector, but at arm’s length from the government. Industry would be involved as a strategic partner.
The government is driving the transformation of DE&S because it holds the organization partly responsible for a string of delays and overspending on key equipment programs, such as the A400M transport plane, the Nimrod MRA4 reconnaissance aircraft and the Type 45 destroyer.
The MoD cites a lack of business capability at DE&S as one of the major problems in running an effective procurement operation.
Speaking in the wake of a July 17 announcement by Defence Secretary Philip Hammond that the MoD would decide this year whether to proceed further with the favored GOCO option, Armed Forces Minister Nick Harvey said a “commercial partner would be sought in a competition during the course of next year, and a decision on whether to go ahead would be taken in early 2014.”
Harvey warned the process will likely be time consuming and has “a long way to go.”
A decision on a way forward is already later than expected. And some industry executives here reckon Harvey’s 2014 timescale is optimistic. They see the decision to go for more testing as further delaying the changes.
“This announcement is a holding operation. The chances of anything emerging before the next election [by 2015] now look very slender,” said Howard Wheeldon, policy director at trade lobby organization ADS.
As the process moves forward, DE&S is creating an interim management structure aimed at bridging the gap between now and when the new organization is put in place.
In a letter to staff, DE&S boss Bernard Gray wrote that significant work has taken place to “move DE&S toward an interim structure to ensure we deliver our outputs whilst achieving our share of the reductions set out in the strategic defence and security review.”
The restructuring comes as thousands of jobs are being axed at DE&S, where some 29,000 people worked when it was formed in 2007. That figure will have fallen to 14,500 by 2014-15.
Appointment of a suitable contractor will be key to pushing through a GOCO arrangement.
Gray recognized the number of hurdles involved in a highly critical 2009 report on defense acquisition for the then-Labour Party government. Gray was an outside adviser at the time, and became chief of defense materiel when the Conservative-led coalition came to power in mid-2010.
The report recommended a GOCO arrangement but said there were significant issues to be overcome, including the “impartiality of any contracting partner.”
Gray said that although a number of large-scale program management and project delivery companies are capable of doing the job, some are not U.K.-based and therefore pose security considerations that must be “thought through carefully.”
Labour rejected his GOCO recommendation.
Opinions are divided on whether a GOCO would require primary legislation in Parliament — a process that would slow any changes to the organization.
The MoD reckons a GOCO would have major benefits over the DE&S structure, including the introduction of significant private-sector management expertise and processes.
Many in industry believe such a radical shake-up of DE&S is risky and probably unnecessary. In a recent interview, BAE Systems CEO Ian King said he didn’t think DE&S is in as bad a shape as some have said.
“Is it as broke as some people think it is? I don’t think it is. Can it be optimized? Sure. But is it completely bust? I’m not sure it is,” he said. “I always look at other procurement models in the world and try and see which ones are more efficient than the U.K. methodology. The U.K. punches massively above its weight.”
EADS also voiced concerns about the possible changes, warning the parliamentary defense committee in April that the transformation would be complex to implement and could cause a disconnect between industry and the MoD.
The proposed changes are part of a wider reform effort with implications across the British defense sector as capabilities, personnel, processes and management structures are shaken up in response to declining defense spending.
The MoD has for months been looking at proposals from Gray to radically change the way it buys and supports equipment as part of a new defense materiel strategy.
The MoD already operates GOCOs for managing naval dockyards, the Atomic Weapons Establishment and others, but those organizations would likely be dwarfed by a change on the scale being considered for DE&S.
Alex Ashbourne-Walmsley of Ashbourne Strategic Consulting said Hammond’s statement pointed up the government’s preference but illustrated the ongoing concerns about a GOCO approach.
“It has marked out the direction of travel but shows they are unwilling to go any further while risks, responsibilities and other issues remain,” she said.
Alison Seabeck, Labour shadow defense minister, voiced similar concerns during a debate in Parliament: “We fear that privatization could weaken the public accountability and transparency of multibillion-pound defense decision making. How could a GOCO be held publicly accountable? Who would be responsible for ensuring that contracts were delivered to time and cost?”
In a statement, the MoD said it would work closely with the Treasury and the Cabinet Office over the summer to develop a conclusive value-for-money case for a GOCO.
“We will be developing a commercial strategy, engaging with industry to hone our requirement,” the statement said. “This work will support decisions later in the year on whether to proceed with the GOCO option and whether to launch a competition for the private-sector management company to run the organization.”