14 January 2014 | Gurjit Degun
Last month the UK government shelved plans to outsource defence procurement, after just one bidder remained to compete for the tender.
Instead of proceeding with the government-owned, contracted-operated (GoCo) option, the Ministry of Defence’s (MoD) Defence Equipment & Support (DE&S) arm is to be turned into a central government trading entity by April 2014.
The government found itself accused by MPs of botching the tender process, wasting two years and squandering millions of pounds. Yet defence secretary Philip Hammond described the exercise as “extremely valuable”.
According to John Louth, senior research fellow and director for defence, industries and society at the Royal United Services Institute, the government had no choice but to abandon GoCo when two out of the three bidders pulled out.
"The select committee last [month] heard the defence secretary say that in his opinion CH2M Hill decided to walk away because they didn’t really have a great deal of confidence in the financial information that was provided by the department,” explains Louth. “My sense is the business just couldn’t get the numbers to stack up in a sensible way.”
Colin Talbot, professor of government at the University of Manchester, believes total outsourcing was not a viable option. “MoD procurement is too big and diverse,” he says. “There’s the sort of current material support that is needed for operations which is everything from socks to stinger missiles, that’s quite a broad area.
“Certainly in that area you might get some private sector expertise where you’re buying lots of different sorts of things. But on the really big equipment, which is where all the money has been lost, there are very few types of those projects in the private sector.”
Louth says the cost of such large projects is regularly underestimated. “Quite often they have an inadequate budget at the start so you can make the case they have been too costly, but if you go and buy a half-a-million-pound house with a £10,000 budget then you’ll spend the next 25 years talking about over-spending.”
Talbot says outsourcing was never going to work: “I think it was clearly just an ideological bee in the bonnet of the Conservatives that the best way to solve any problem is to get private sector managers in.” He also suggests there is too much temptation to keep altering contracts every time there is a change of minister or civil servant.
In the view of Peter Howarth, an independent public sector consultant at SBV, outsourcing is frequently a “knee-jerk reaction”. “It’s quite a good coat of arms as a constant reliance on someone else to move your goods forward with a relaxation of your own efforts,” he says. “I sometimes wonder whether the decision to outsource is really based on a lack of ability or commitment to improve what we’ve already got.”
Independent defence and security consultant Martin Dougherty speculates the government did not spend enough money on the process. “It was almost certainly done on a basis where there was not a lot of money so there were compromises,” he says. “I think GoCo was probably compromised to death by tiny little increments.”
The government now plans to proceed with the new DE&S trading entity. Bernard Gray has been appointed CEO, and a new board will be set up in the coming months. There will be “hard boundaries” between the organisation and MoD, and it will operate “at arm’s length but with the relevant strong departmental oversight”. Private sector partners will also assist with programme delivery.
“It will work within specially agreed rules that are different to those used by the rest of the civil service,” the MoD told SM. “We will be able to recruit, retain, promote and reward staff along more commercial lines to reflect their work carrying out some of the most complex procurement activity in the world.
“This will allow us to compete for the people and skills we need. We also intend to seek an injection of private sector skills through competition to find business partners to support delivery of DE&S in its new form. These changes will reinforce the customer-supplier relationship between the front line commands and DE&S, facilitating a more business-like approach.”
Louth says a completely new model could take between 15 and 25 years to embed. “I think this new organisation will [be in place for] April 2014,” he says. “But how effective it will be in terms of driving out excessive costs and generating effective programmes on time is anybody’s question.
“I think we really need to see what the new organisation will be charged with delivering and what processes it will follow. If it’s a re-hash of everything we’ve already done to date, that doesn’t seem particularly effective or clever to me.”
Paul Everitt, chief executive of defence trade organisation ADS Group, says the industry is pleased with the government’s plans. “Inevitably, people are more familiar with the DE&S operation because that’s what they are dealing with day-to-day and therefore an improvement is something people are comfortable with,” he says.
“We’re assuming that over time the DE&S will begin recruiting. They will contract specialist support to attract the right type of people for the work they want to do. This will include external advice around some of the commercial procurement matters.”
But is this enough? Talbot says there needs to be reform within the MoD and that the whole purchasing procedure needs to be tightened. “One way of doing it would be to try to get some all-party consensus,” he says. “If you don’t do that then the chances are every time we have a change of government, never mind a change of minister, they are going to revisit whatever you’ve decided.”
Howarth says the key to successful defence procurement is to improve procurement skills and look at what other countries, such as the US, are doing. “The government should be looking at good training and development,” he says. “I think one of the answers is to look inside the box. I don’t subscribe to the argument that public sector procurement is bad; there are some very good people in there. What they haven’t got are resources all the way down the chain to deal with complex issues such as defence procurement where each project is a major expenditure.”
Everitt believes the outcome will be “very positive”. “Under the current arrangements there is every incentive to do a good job to make it harder for a private sector competitor at some point in the future,” he says. Dougherty agrees there are some positives to take from the process. “You may find some slight shifts in relationships with firms because one of the things that would have been discussed is what they want for the long term and people in procurement now know,” he says.
“It may be that a sort of mini-GoCo turns up, where you may get some firms entering into localised agreements. Even if the whole thing has not worked there will be some benefits.”
● Oct 2009 – First suggestion of a private sector partnership raised in an independent report by Bernard Gray.
● Dec 2010 – Bernard Gray appointed chief of defence materiel at the MoD
● Nov 2011 – Three proposals – GoCo, a trading fund, and a non-departmental public body – are put forward
● July 2012 – The UK government confirms its preference for GoCo over other proposals
● Apr 2013 – Philip Hammond announces a year-long assessment of GoCo to test against a public sector comparator
● Aug 2013 – KBR-led bid withdraws from the contest
● Nov 2013 – Portfield consortium (CH2M Hill,
Serco and Atkins) pulls
out of competition
● Dec 2013 – Hammond announces decision to
shelve GoCo and set up
DE&S as a central government trading entity.