The UK wants to privatize management of its defense procurement operations. Here, Chief of Defence Staff General Nick Houghton, left, and Britains Defence Secretary Philip Hammond arrive at 10 Downing Street in London. (LEON NEAL / AFP)
LONDON — The UK government is pressing ahead with legislation to realize a controversial plan to privatize management of its defense procurement operations even as the Ministry of Defence increases resources for an alternative plan to improve in-house acquisition capabilities.
The Defence Reform Bill enters the committee stage Oct. 8 en route to what the Conservative-led coalition government hopes will be a legal framework by next May that enables a government-owned, contractor-operated (GoCo) scheme to take over management of Britain’s Defence Equipment & Support (DE&S) procurement arm.
British officials have argued that privatizing defense procurement and acquisition would allow government to access superior commerical legal, contracting and program management skills to cut the cost of buying military goods and services. US officials, however, have expressed concern at its closest ally outsourcing to industry what the Pentagon considers a governmental responsibility, eroding London’s ability to manage complex defense transactions.
There also remains considerable opposition to the GoCo move in the Treasury, Cabinet Office and even MoD itself, while in Parliament the opposition Labour Party is expected to push for significant amendments to a bill that includes sections on single-source contracting and reserve forces.
While UK officials have advocated the GoCo arrangement, they are competing the approach against an improved in-house operation, dubbed DE&S+, with a winner to be selected in the first half of next year.
And last week, UK Defence Secretary Philip Hammond put more horsepower into the DE&S+ option by adding senior MoD official Paul Blakiston to the team that argues for retaining management of the procurement operation in house.
“It reflects a concern that perhaps we hadn’t put enough resource into the DE&S+ option inside DE&S,” Hammond said in a Bloomberg business wire service article Sept 30.
Details of what a DE&S+ operation might look like remain under tight wraps.
Senior industry executives here, however, said they expect a “strategic industry partner” to be appointed to help the government close a gap in commercial, financial and legal skills compared with defense contractors. That’s similar to the goal of the GoCo approach, but in a less radical package.
Insiders said the move to raise the emphasis on the in-house work reflected Hammond’s wish to be able to demonstrate a level playing field in investigating the two options more than a change in his stated preference for the GoCo.
The government is eager to improve the performance of its procurement arm in the face of continuing significant cost overruns and delays in the delivery of the £14 billion (US $22.7 billion) annual equipment and support budget.
Bernard Gray, the head of DE&S and architect of the GoCo effort, reckons the current system wastes 25 percent of the £6 billion spent on equipment procurement each year.
Appointing an industry consortium to manage the procurement effort would save the MoD around £940 million a year over a 10-year period, Gray told lawmakers recently in evidence ahead of the committee hearings starting this week.
Paul Everitt, the chief executive at the defense and security trade group ADS, said the move to beef up the DE&S+ team reflects MoD efforts to ensure greater competition between the rival options.
“The change in emphasis is based on ministers and officials making it very clear there is an active competition running between the GoCo and DE&S+,” Everitt said. “Tonally they haven’t said anything different, but we can see from the little more resource going into the DE&S+ team suggests that at the very least they want to make it clear that when a winner emerges, it’s because it’s the best approach rather than it being a consequence of the resources available in the respective teams.
“Government is also giving themselves the reassurance there is a genuine and deliverable option to the GoCo because, since the number of bidders dropped below three, another problem on the bidder front could make it very difficult for them,” he added.
An unusual feature of the reform effort is that the government continues to seek a consortium to manage the GoCo scheme even as it competes the GoCo approach against improving its existing operation.
Two consortia are vying for the GoCo award after Fluor decided against bidding for the contract and a URS/KBR team recently withdrew from the contest.
One consortium includes CH2M Hill, WS Atkins and Serco. The other is composed of Bechtel, PricewaterhouseCoopers and PA Consulting.
The CH2M Hill bid, however, has been tainted by a government review of all its contracts with Serco in the wake of allegations that it has been defrauding the Ministry of Justice on two contracts.
Alex Ashbourne Walmsley, a director at consulting firm ASC, said the number of bidders is only part of the problem.
“Ostensibly, the feeling behind the change of tone is the discomfort caused by the withdrawal of several of the potential bidders to run GoCo, like Fluor and URS. A competition with just two remaining teams is fragile and therefore cannot guarantee best value for money,” she said.
“More probably, though, I think there is a growing realization in the MoD and across Whitehall that GoCo will be an enormous distraction in the short term and will fail to deliver significant benefits in the longer term — either for performance or cost savings. There does not seem to be anyone apart from the chief of defence materiel [Bernard Gray] willing to die in a ditch for GoCo,” Walmsley said.
Hammond said it was up to the GoCo bidders to demonstrate the benefits of the scheme to taxpayers.
Analysts here said that even if the GoCo scheme were able to demonstrate performance benefits over its rival, the politics of such a radical change might play against a decision in favor of the contractor-led procurement effort 12 months ahead of a general election. Although the government is seeking to push through reforms across the civil service, the radical approach of outsourcing operations to highly paid private-sector executives on this scale could be a step too far, said the analysts said.