Opinion: Dr John Louth, RUSI research fellow

The MoD’s procurement reform offensive has suffered a heavy defeat. John Louth considers the prospects of a successful counter-attack

29 Nov 2013

It was announced this month that plans are being hastily redrawn for the potential privatisation of the Ministry of Defence’s defence acquisition organisation, after one of the two remaining consortia competing to run Defence Equipment and Support (DE&S) withdrew. This is a very significant moment for DE&S reform. The plan is not necessarily dead in the water, but I certainly don’t see a healthy swimmer powering to the bank with a good and sturdy stroke. To extend the metaphor, November 2013 looks rather like the moment when our swimmer, tired and entering choppy waters, has been asked to carry an anvil on his back.

In June, the government published a white paper suggesting that the private sector could effectively run DE&S under a ‘Government Owned, Contractor Operated’ (GoCo) model. The best approach was to be assessed in a commercial competition, with the winner tested against a ‘DE&S+’ internal reform option. The government and officials from MoD emphasised continually that the commercial competition was at the heart of this reform strategy as, they seemed to argue, only the private sector possessed the portfolio management and commercial skills to deliver effective military acquisition. Moreover, chief of defence materiel Bernard Gray has consistently argued that as well as private sector competencies, the department needs private sector reward practices – including the ability to pay large bonuses.

This was always a hard sell, politically and organisationally, but not without its merits; industry and advisory businesses within various bid consortia sought desperately to deliver proposals that would match the department’s vision whilst meeting the demands of their shareholders and management boards. When the Invitation to Negotiate was released in July, there were three prospective bidding consortia comprising large, credible international businesses. Almost immediately this became two, as one team – seemingly unable to make the numbers commercially viable – withdrew.

Two consortia remained: Materiel Acquisition Partners (MAP), led by Bechtel with PA and PwC; and Portfield, comprising CH2MHill, Serco and Atkins. Bids were required from these respective bid teams in three phases, with the second of these due on 15 November. Unfortunately, Portfield then decided to withdraw from the competition for reasons that are not, as yet, in the public domain.

This is hugely problematic for the MoD, particularly given the results of the recent joint review commissioned by defence secretary Philip Hammond from the Cabinet Office and MoD. Asked to consider the reform process with the number of bidders reduced from three to two, it concluded that a viable competition was still possible – albeit with substantially increased risks – but that a further withdrawal should initiate a formal reconsideration of whether the GoCo was still viable. This is the situation the department now faces.

The MoD could consider MAP’s bid against the DE&S+ option, but the lack of competitive tension within the private sector hints at this being a risky strategy. The intellectual argument for defence acquisition reform was made on the twin premises that the private sector could do the job substantially better than the MoD, and that given the chance it would queue around the block to do so. But the private sector’s appetite for running DE&S has now substantially weakened.

All eyes are now turning to the in-house option. Much of DE&S+, perfectly properly and understandably, has not been subject to public scrutiny. Changing reward practices within the civil service and military would seem one probable work strand, as would the development of competencies around commercial negotiation, finance and risk management. Indeed, there is a role for private sector expertise to play, perhaps under contract to DE&S, in bolstering these necessary governmental skills. But it is not a great vision for change; just a rehash of practices that are pretty common already.

This is the nub of the argument. The case was made that defence acquisition in the UK was broken, and could only be put right by the private sector taking over. Credible private sector businesses lifted the lid, took a good look, and decided – with one significant exception – that it really wasn’t for them. Consequently, we could be reverting back to the model of the civil service delivering defence acquisition, supported by military and private sector skills as necessary. If so, it’s been a long journey to arrive back where we started.

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Dr John Louth is a senior research fellow at RUSI and the director of its Defence, Industries and Society Programme.

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