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British MoD Looks to Contract Renegotiations To Cut Budget

Jun. 26, 2013 - 12:01PM   |  
By ANDREW CHUTER   |   Comments
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LONDON — Britain’s Ministry of Defence will attempt to renegotiate around £750 million of equipment and support contracts to help meet Treasury demands for budget savings in the 2015-16 financial year.

One of the main targets for renegotiation will be private finance initiative deals (PFIs), said a MoD spokeswoman.

British Chancellor George Osborne described MoD PFIs as “hopeless” in a June 26 speech to Parliament outlining government spending levels for 2015-16.

The British MoD has signed up for around 50 PFIs ranging from accommodation, training and satellite communications to a £10 billion, 27-year inflight refueling and transport service.

PFIs have had a tough time here mainly due to their perceived expense. MoD officials, however, are probably more concerned about their inflexibility in the face of changing military circumstances.

The MoD is being required to cut its budget by £875 million for the year as part of a governmentwide push to reduce spending by £11.5 billion in a new austerity drive aimed at restoring Britain’s public finances.

The MoD spokeswoman said about £350 million of the renegotiation savings will come from existing equipment and support contracts.

The government announced recently it hoped to save £200 million a year by setting up an organization to cut the cost of single sourced noncompetitive contracts signed with industry.

It is not clear at this stage whether those hoped-for cuts are part of the savings Osborne just unveiled.

A further £300 million will come from banding together with other government departments to purchase common services and equipment, such as IT.

Defense got off lightly compared with other parts of government with a 1.9 percent reduction in overall spending, compared with departmental cuts elsewhere averaging between 8 and 10 percent of overall budgets.

The budget settlement for defense came after fierce lobbying by Defence Secretary Philip Hammond and some of his senior military officers, who warned of the dangers of further cuts to military personnel.

The Treasury opted to leave the already-much-reduced military personnel numbers intact and instead shaved a few hundred more civil service jobs to add to the thousands that have already been cut.

The total defense budget for 2015-16 will stand at £32.6 billion, virtually static with the previous year’s figure.

The latest reductions come on top of earlier defense budget cuts imposed by the Conservative-led coalition government of around 8 percent, compared with a 20 percent average for other departments hit by the reductions.

The chancellor said there would be no cuts to military personnel and equipment capabilities.

He committed the government to retaining its pledge of a 1 percent annual increase in real terms of the equipment plan from the 2015 baseline.

The drive to renegotiate contracts is a return to an idea first raised by the previous defence secretary, Liam Fox.

Fox, who was ousted from the role in 2011 to be replaced by Hammond, sought to renegotiate between 600 and 900 contracts.

At the time, the MoD also said it would renegotiate PFI contracts and initiated a pilot phase looking at three deals.

An executive who asked not to be named said the entire exercise at the time had “not been well implemented, ideas from industry over how the MoD could save ten of millions of pounds were ignored, and the renegotiations themselves had met with limited success.”

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