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UK Pursues Another Big Privatization Plan for MoD

Jun. 1, 2013 - 11:40AM   |  
By ANDREW CHUTER   |   Comments
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LONDON — The final stage in transforming how Britain’s Defence Ministry manages everything from its naval bases to accommodations and catering is set to kick off this month, as industry submits final bids to become the Defence Infrastructure Organisation’s (DIO) strategic business partner.

Three MoD-shortlisted consortiums led by Capita, Serco and Telereal Trillium have until June 24 to submit proposals for a 10-year deal to become the organization’s business partner, a DIO spokesman said.

The plan, which is aimed at injecting a range of high-level commercial and project management skills into the DIO, could be worth up to £400 million (US $602 million) to the winning consortium in fees if the government approves the plan.

The intention is that after the contract expires, the DIO will have sufficient leadership and managerial skills to stand on its own.

A decision on a winning consortium is expected in the third quarter of this year, with implementation getting underway in the first half of 2014.

The DIO spokesman said the MoD “remains broadly on track to make our initial assessment of whether to proceed with appointing a strategic business partner and, if we do so, to select a preferred bidder to take [us] forward into the next stage of the process.”

Executives said they expected the process to remain on track.

“The DIO laid down a timetable, and so far they have hit their milestones. It’s reassuring, if you compare the MoD to where they were three years ago, they are a quite different strategic organization,” said one executive who asked not to be named.

None of the three consortiums shortlisted were willing to comment on their bids.

The competition is the latest in a number of moves by Britain’s Conservative-led coalition government to improve its non-frontline operations, bringing greater efficiency to the way the MoD goes about its business in the face of significant budget cuts.

Defence Secretary Philip Hammond is in a fight with the Treasury to stave off further significant budget cuts in the 2015-’16 fiscal years as part of governmentwide austerity measures. That could result in additional demands for non-frontline cost efficiencies, analysts said.

The British have successfully involved industry in managing defense activities in the past, most notably the government-owned, contractor-operated (GOCO) arrangement at the Atomics Weapons Establishment led by Lockheed Martin UK. The coalition’s cost-cutting efficiency drive has resulted in a new rush of outsourcing opportunities for industry to provide management skills.

Last year, leading British service supplier Serco, along with partner Accenture, landed the first of this kind of contract when it secured a four-year deal to take over the leadership of the MoD’s defense business services (DBS) activities.

DBS provides corporate services such as civilian human resources, finance, information technology and security vetting.

In a speech in November, Hammond said the MoD was on course to save about £2 billion in non-frontline costs by 2014 compared to 2010.

“Over a 10-year period, we expect to save around £15 billion,” he said.

Hammond said the MoD has lacked the right business skills and capabilities to manage some of Britain’s largest capital and infrastructure projects, and on occasion has been a “soft touch” for industry.

Attention so far has been focused on the controversial plan to privatize the £14 billion annual Defence Equipment and Support (DE&S) procurement arm in a likely GOCO arrangement. But that is just one of a number of significant non-frontline activities the government is hoping to turn over to industry management in the next year or so.

Next in line is the DIO — although the MoD cautions it will proceed with the program only if the bidders prove they can provide value for money.

Often described as Britain’s biggest landowner, DIO, formed in 2011 from various infrastructure bodies, has a budget of just more than £3.3 billion, controls 2,400 square kilometers of land and manages the training estate, military bases, troops’ accommodations, building programs, cleaning, catering and various other activities.

The biggest challenge for the DIO is to ensure the MoD estate fits the reduced military and civilian personnel footprint being brought about by heavy budget cuts, industry sources said.

The Army and the civil service are taking the brunt of the reductions, and the decision to speed up the withdrawal of troops from Germany is creating its own pressures.

Industry insiders estimate DIO manages about 200 major contracts with industry, including large private finance initiatives involving housing and other accommodations.

Following the DIO effort, but equally complex, is the logistics commodities and services transformation project, which could see industry take over everything from storage and warehousing services to railway, air transport, water transport, commodity procurement and other services.

The competition is in its assessment phase, but depending on exactly what is included in the deal if it goes ahead, the MoD estimates the project could be worth £6.2 billion to £13.2 billion over 13 years.

The primary role of the logistics, commodities and services operation, which is run as part of the DE&S organization, is to support operations and force generation by undertaking procurement and inventory management of all non-explosive commodity items, including food, clothing, fuel and medical supplies. This also involves the storage and distribution of these commodity items, together with all other non-explosive stock across defense

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