Turning around the UK's inefficient military procurement practices could be best achieved by transforming its Defence Equipment & Support (DE&S) organisation into a government-owned, contractor-operated (GOCO) entity, defence secretary Philip Hammond has announced.
A recent review conducted by Chief of Defence Materiel Bernard Gray concluded that persistent failings in the acquisition of and support for equipment used by the UK armed forces are caused by three factors, Hammond said. These are "a historically overheated equipment programme, where far more projects were planned than could be paid for; a weak interface between DE&S and the wider Ministry of Defence; and insufficient levels of business capability at DE&S for the scale and complexity of the portfolio it is asked to deliver".
Outlining his proposal for the reform of DE&S on 17 July, Hammond said: "I have decided that MoD should focus its effort on developing and testing the GOCO option further." To conclude later this year, the activity will consider "whether to launch a competition for the private sector management company to run the organisation". The strategy is being investigated in preference to an alternative model of changing the procurement and support organisation into an executive non-departmental public body.
"The MoD is now engaged in a process of transformation to deliver the behaviour-changing incentives and structures that will maintain the budget in balance in the future," Hammond said. The official earlier this year detailed a 10-year allocation fixed at £152 billion ($239 billion), plus a contingency fund of £8 billion. "The restructuring of DE&S is key to this process," he added.
Work to assess the value for money of establishing a GOCO arrangement will be performed over the next few months, before the proposal is tested against a "public sector comparator". A decision on whether to proceed would be taken in early 2014, but a full privatisation has already been ruled out as being inappropriate.
"Despite the good work of good people working for DE&S, they do not have available to them the full range of skill sets that they need to negotiate on equal terms with some of the more complex [equipment] providers," said armed forces minister Nick Harvey. "The new body will contain a greater degree of private sector expertise, so it might be able to drive a harder bargain."
One example of a recent failing was a deal to supply the Royal Navy with two Queen Elizabeth-class aircraft carriers. Originally budgeted at £3.5 billion, the deal is now expected to cost more than £5.1 billion. The coalition government had looked into the possibility of cancelling one of the ships as part of a budget balancing process, but found that the MoD's contract with the Aircraft Carrier Alliance made this financially unviable. The UK's deals linked to the Eurofighter Typhoon were also running at around £2.5 billion over budget by March 2011, according to the UK's National Audit Office (NAO).
The opposition Labour party quickly questioned the decision. "We fear that privatisation could weaken the public accountability and transparency of multibillion pound defence decision-making," said MP Alison Seabeck. "We have seen recently with G4S that outsourcing does not guarantee efficiency or effectiveness, and can increase risk," she added, referring to the high-profile failure of a decision to contract out some Olympic security commitments to a private company.
Further opposition was voiced by Steve Jary, national secretary of the Prospect union.
"Although some commercial risk would be transferred to the GOCO, operational and safety risks would remain with MoD. If the secretary of state has to carry the can for equipment failures, does he really want to contract-out the assurance that everything has been done to avoid those risks?" he asked.
Jary also questioned how the UK's allies would react to the proposed construct. "The introduction of a commercially driven DE&S creates potential conflicts of interest which will limit the extent to which secret technologies are shared," he said. "Industry is not convinced by the approach and does not understand why MoD cannot reform the procurement process from within."
Calling for wide-ranging consultation in advance of any change, former chief of the defence staff Lord Stirrup said: "I have lost count of the number of major reorganisations to which the mechanisms for defence acquisition and logistic support have been subjected over the past decade and a half. It seems unreasonable to expect superior performance from any organisation that spends almost its entire time studying its own navel."
The NAO provides a snapshot of the UK's defence procurement activities in its annual Major Projects report. In its most recent publication, covering the 2010-2011 financial year, it said the forecast cost of completing the MoD's 15 largest projects had grown by £466 million within the 12-month period, and that the total spend was likely to be a combined £6.1 billion, or 11.4% over the approved budget.