Editorial: The plan to float DE&S has sunk

But if the Treasury gives way, civil servants could do the job.

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By Matt.Ross

29 Nov 2013

It is plainly true that the Ministry of Defence’s procurement organisation, Defence Equipment & Support (DE&S), needs greater capabilities. In the opinion of chief of defence materiel Bernard Gray, who’s been studying this field for nearly 20 years, that’s best achieved by giving it two key attributes: the autonomy and strength to test and challenge purchasing decisions; and the money and freedom to equal the defence firms in hiring the best talent in the business. Gray has always argued that these are best provided by outsourcing the whole operation; he told CSW back in June of his doubts that any internal body could maintain the necessary level of independence for an extended period (Interview: Bernard Gray).

However, the loss of one of the two remaining bidding consortia is a heavy blow to Gray’s plans (see Opinion and news). Without a pair of rival contractors, the MoD’s bargaining power is much reduced: as in the energy department’s recent nuclear power station negotiations with sole willing provider EDF, the government can’t walk away without demolishing its own strategy. The danger is that the MoD might decide that it prefers to defend a poor deal than see its main strategy collapse.

Yet any contract with the remaining consortium, Materials Acquisition Partners, is likely to prove expensive. Two would-be contracting groups have now decided that they can’t make the numbers work under the current plan. And though the Portfield consortium’s recent decision to withdraw may owe something to its member Serco’s high-profile problems with the MoJ tagging contract, it’s also likely that the group didn’t like the amount of uncertainty around the risks involved in taking on DE&S. Given the complexity of its work, the variable quality of MoD data and the amount of political interest in defence kit, this uncertainty is considerable. And because contractors tend to protect themselves by assuming in their pricing structures that many of the known risks will come to fruition, outsourcing uncertain risks is very, very costly.

Even a working outsourcing market – as Serco’s MoJ troubles demonstrate – can’t ensure that a contracting programme will produce the right results. So in a continued DE&S outsourcing programme, the government – unable to test the prices it’s being offered in a competitive market – would almost certainly give too much away.

The competition’s failure, however, doesn’t kill all hope of realising Gray’s central aims. For whilst the procurement chief has to date doubted the Treasury’s readiness to give a civil service body the autonomy and freedoms that he thinks necessary, the government now only has three options: get ripped off by a single supplier, abandon the goal of substantive defence procurement reform – or create an in-house organisation that can do the job. If Gray is allowed to establish a public sector body with exemption from some civil service pay controls, the right structures and incentives, and a level of autonomy protected by statutory tools and new lines of accountability, he could achieve 90% of his stated aims. Indeed, if the Treasury and No10 aren’t ready to offer this ‘DE&S+’ model some big freedoms, it will look as if they simply think that a private sector solution is always better. Then the sole remaining consortium’s bid, no matter how eye-wateringly expensive, will appear to be the only way to achieve Gray’s vision of a strong, autonomous MoD procurement operation.

Matt Ross, editor. matt.ross@dods.co.uk

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