Government shelves plans to privatise defence procurement

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Government plans to privatise the procurement of military equipment are to be abandoned after only one contractor proved willing to run the scheme following the withdrawal of other bidders from a tendering process.  

The government had intended to privatise the Defence Equipment and Support agency (DE&S) through a government owned, contractor operated (GOCO) arrangement intended to improve  the effectiveness of Britain's £14 billion annual military procurement programme.

Two commercial consortia were invited by the Ministry of Defence (MoD) to enter into commercial negotiations to take over the management of DE&S: a group led by CH2M Hill together with WS Atkins and Serco Group, and a group headed by Bechtel supported by PricewaterhouseCoopers and PA Consulting.

However, in late November the CH2M Hill consortium announced that it had decided to pull out of the process after concluding that the commercial terms on offer were not good enough to justify continuing with the bid.  The consortium was concerned that there was a high risk that financial assumptions made by MoD were incorrect, and that if contract standards set by MoD were enforced, it would not be possible to make a profit from the venture.

The bid was also hindered by a government investigation into Serco after the company was found to have been fraudulently overcharging the Ministry of Justice on a contract for tagging offenders.

Despite remaining in the running for the contract, the Bechtel consortium submitted a 1,200-page first-stage proposal for the scheme that highlighted the complexities and difficulties a GOCO arrangement would have faced.

The ambitious privatisation scheme has been championed within the MoD by Bernard Gray, the ministry’s chief of defence materiel, with the aim of reducing the mismanagement and overspend that left the MoD with a £38bn budget 'black hole' before the Coalition government cut military procurement programmes to bring spending into line.  However, as the first such scheme of its kind in the world, there were criticisms that it would be fraught with difficulties and take privatisation into areas of government previously considered too complex and sensitive to hand over to commercial contractors.  The influential Royal United Services Institute has warned that procurement should remain part of the government’s core duties

The privatisation process was further complicated by risks posed by potential conflicts of interest involving bidders who were involved in other contracts with the Ministry of Defence.

Defence secretary Philip Hammond is now examining other options for improving the Ministry of Defence's performance in equipment procurement, which might still involve the private sector despite the failure of the GOCO tendering process.  One option includes appointing a private-sector partner with the role of helping the Ministry of Defence avoid the delays and cost-overruns which have plagued its procurement programme, with plans for a GOCO-style full privatisation remaining on the table for review after the 2015 general election.

Another option which the MoD may take forward is known as DE&S Plus – a less radical alternative which would keep control of procurement in-house but involve streamlining procurement teams and greatly increasing the pay and bonuses available to civil servants managing defence projects to match private sector rates.

A Ministry of Defence spokesperson said: “Given the history of defence procurement, it is clear that the status quo is not acceptable and reform is needed to bring in private-sector skills and experience”.

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