By Colin Marrs

23 Jul 2014

Like Robert the Bruce’s persistent spider, the people trying to reform the way the Ministry of Defence buys and manages equipment keep returning to the fray. Colin Marrs reports

Shortly before his army routed the English at the Battle of Bannockburn, King Robert the Bruce of Scotland took inspiration from a persistent spider which overcame repeated failures before successfully spinning its web. Modern-day weaponry bears little resemblance to the axes, arrows and swords wielded during that clash. However, the current Ministry of Defence’s efforts to reshape its Defence Equipment and Support (DE&S) organisation appear to take inspiration from Bruce’s maxim: “If at first you don’t succeed, try, try again.”

The current reform of the organisation responsible for buying and maintaining the armed forces’ equipment and weaponry originally sprang from a report commissioned by former Labour defence secretary John Hutton. The review was commissioned in 2009 from former FT defence correspondent and media businessman Bernard Gray, who ten years previously had advised on Britain’s Strategic Defence Review. Among a number of recommendations, he suggested turning DE&S into a Government-Owned Contractor Operated entity (GoCo), enabling it to recruit expensive and highly-skilled managers.

The report argued that DE&S was hamstrung by rules surrounding civil service remuneration – rules subsequently tightened even further when the coalition came to power. Gray argued that pay restrictions were a “false economy” when applied to roles dealing with massive public spending. He later told CSW: “If we save £20,000 on somebody’s salary, and it costs us £200m in a failed project, is that really good value for money?” A GoCo employing private sector staff, he argued, would enable DE&S to overcome the pay problem.

In January 2011, three months after Philip Hammond was installed as defence secretary, Gray was appointed as chief of defence materiel at the MoD, with a mandate to implement his own plan. By July 2012, Gray was winning the argument: Hammond told Parliament that the GoCo looked better value than the more cautious ‘DE&S+’ option of giving the agency greater freedoms from Treasury spending controls.

In April 2012, the defence secretary fired the starting gun on a competition to find a partner to operate the GoCo. The competition attracted three consortia – all dominated by large US contractors. The first was led by CH2M Hill, which oversaw the construction of the London 2012 Olympics, partnering with Atkins and Serco. The second was led by US-based engineering firm Bechtel, with consultancy firms PricewaterhouseCoopers and PA Consulting. The third comprised URS Corporation and KBR.

Other firms decided not to compete due to worries over conflicts of interest, with one reported to have concluded they would not be able to win defence contracts if they were running the GoCo. The process was complicated even further when a Pentagon spokeswoman told the Wall Street Journal that the US government had “some concerns over an option that would put contractors in roles normally filled by government employees, and the effects this would have on ongoing and future co-operation” with the USA. By the time the shortlist was announced in August 2013, the URS/KBR consortium had withdrawn from the process.

When, shortly afterwards, only the Bechtel consortium out of the remaining two bidders decided to enter a detailed bid, the government admitted defeat, saying there was not “sufficient competitive tension” to proceed. Dr John Louth director of the Defence, Industries and Society Programme at the Royal United Services Institute for Defence and Security Studies (RUSI), puts much of the blame for the failure on the quality of the management information being offered by the department. He says: “The depth and quality of the data it produced was contestable. My sense was that the companies that withdrew couldn’t come to a decision whether it was risky or not.”

Hammond announced that DE&S would instead be turned into a central government trading entity, adding that exemptions from public sector pay restrictions had been agreed with the Treasury and Cabinet Office. The new body, which came into being in April without the need for legislation, has a separate governance and oversight structure from the rest of the department – with an independent chairman and a chief executive who will be an accounting officer, responsible to Parliament for the organisation’s budget.

Speaking to CSW, Philip Dunne, minister for defence equipment, support and technology, is keen to focus on the process’s positive outcomes. He says “the lesson was that there is interest in helping government with its substantial defence procurements”, and as a consequence, much of the work of the new DE&S+ will be provided by private contractors. Two contract notices have already been issued, for project delivery and human resources. The former is valued at up to £400m over three and a half years, while the latter has a value of up to £100m for the same term. A prior information note for a management information contract contains an indicative value of up to £200m.

Questions remain about how the MoD will ensure greater pay freedom for DE&S+ while keeping its overall costs down. Louth says: “It is hard to square that circle, but until we see the contracts it is difficult to know if the contractors will be expected to provide the efficiencies required.” He adds that the DE&S+ arrangements run the risk of fuelling demand from other departments to be given similar flexibilities. After all, “it would be rather foolish of other departments not to look at what has been agreed to see if it could apply to them.”

Plans for the future of DE&S+ will be aided by the stabilisation of equipment costs – an achievement confirmed by the National Audit Office in February. After a number of years of spiralling prices for ongoing projects, the NAO concluded that in 2012-13 11 major projects saw a net cost increase of £708m, representing a rise of just 1.4%. The main driver for this was the £754m increase in the aircraft carriers contract, said the report: “Without the carriers, there was a net cost decrease of £46m across the 10 remaining projects.”

However, problems still remain, with the NAO concluding that legacy projects – including the carrier contracts – still have a significant impact on costs across the department’s portfolio. It also raised concerns over a £1.2bn underspend in the department’s equipment plan. A subsequent report by the Public Accounts Committee (PAC) found that although the department had done some work to analyse the causes of this underspend, the information was not good enough to provide a clear view of whether it’s due to slow progress by suppliers, cost savings or non-materialisation of predicted risks – meaning that it couldn’t assess how many of the costs will eventually materialise. Calling the lack of knowledge a strategic weakness, PAC chair Margaret Hodge said: “If the department does not address this underspending it will be tempting for the Treasury, in seeking further public expenditure reductions, to take these underspends as savings”.

Dunne tells CSW that the situation is now under control. “We have worked with the Treasury to identify where the black hole came from.” The causes, he says, vary from project to project. “In some cases it is down to deferral; in some cases to do with bits of the project not coming in; and in others it is down to invoices arriving later than expected. You can’t always get the bills to land within a month of a year-end.” 

Dunne is adamant that the lack of clarity over the figures did not play a part in the withdrawal of bidders from the GoCo process. He calls both the Equipment Plan and the work done subsequently a “major step forward” and points to cost reductions and the 88% fall in overall delays as positive developments, saying that PAC “talked up the problems”.

Dunne also reveals that, although the government is keen to make the new DE&S+ arrangements work, the GoCo concept is far from dead. Legal powers to create the body were retained within the Defence Reform Act, which received Royal Assent in May. Dunne remains enthusiastic about the concept, saying: “We are keen to continue with those provisions. However, it won’t happen this side of the general election, and we can’t bind any future government.”

The failure of the GoCo plan is a major blow to the government’s outsourcing programme, but it need not make it harder to achieve the aims of DE&S reform. Gray’s initial plan required greater independence for the agency for two reasons: so it could pay higher salaries; and so it could more effectively challenge the military’s tendency to over-specify equipment, request variations, and alter ongoing programmes. If the flexibilities granted to DE&S+ are strong and durable enough for it to realise those aims, then the MoD won’t need the GoCo and can avoid the risks of this major reform.

That, however, may not be enough to persuade ministers that a GoCo isn’t required: like Robert the Bruce, Philip Dunne sounds keen to try, try again. So DE&S+’s fate will not depend only on whether it improves defence procurement; it may also rest on the outcome of the forthcoming election. 

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