UK Defense Procurement and the Power to Say No
 
(Source: Defense-Aerospace.com; published Sept. 11, 2013)
 
 
PARIS --- UK government officials involved in the plan to outsource the Ministry of Defence’s procurement function to the private sector have so far provided little substance to explain why the British government should take such a revolutionary and unprecedented step.

In fact, the only foundation for the move seems to be the article of Conservative faith that the private sector works better than the civil service. Furthermore, the discussion to date has not confronted the reality that the private sector’s guiding principle is profit, and thus that an acceptable level of profit - and thus of cost to the taxpayer - must necessarily be built into the system.

Also, it does not appear that the lessons learned at great cost through previous outsourcing of government services - National Health Service hospitals, schools, the railway system, etc. - have made an impression on MoD.

Giving evidence to the House of Commons Defence Committee on Sept. 4, UK Chief of Defence Matériel Bernard Gray provided some details to flesh out the outsourcing concept, which the Ministry of Defence has not explained in any great detail, but he was at pains to find a philosophical rationale for the controversial move.

And his rationale is that a private employee is far more likely than a public servant to stop the military from adding, modifying or changing equipment specifications once a program is launched, which Gray sees as the root of all procurement evil.

However, as one MP, Thomas Docherty, noted during the session, “Parliament, as a whole, is sceptical or cautious about” the outsourcing plan, because it “has been asked to take an unprecedented step” on something it knows far too little about. “We haven’t got a clue” about how the new system is supposed to work, he said.

Government Owned, Contractor-Operated agency

The idea of turning over the main defense procurement function to a Government Owned, Contractor-Operated (GoCo) entity is intended to fix a procurement system that was, essentially, broken, Gray said. He noted that, “our current way of doing things effectively costs us somewhere between £1.2 billion and £2 billion a year” in wasted costs.

The government’s theory is that “having a contractual interface… imposes a discipline that makes it, not impossible but harder for the Department” to maneuver itself into a corner in managing a procurement program. “Therefore the GoCo has a disciplining function,” Gray said.

In fact, this disciplining action would be the GoCo’s crucial asset, Gray said, prompting one MP, Madeleine Moon, to say the entire issue boils down to “the power to say no.”

Gray’s long study of the MoD’s procurement function, which now rests in the Defence Equipment and Support (DE&S) organization, led him to conclude that the essential reason why it had broken down is that “people who work in DE&S are either civil servants or military personnel who are, in some sense, beholden to the Ministry of Defence ….[or] the wider civil service for their future…it is quite difficult to disagree with other very senior people in the centre of the Department who want something to be true.”

This is quite an admission for the person in charge of DE&S to make, and Gray explained further: “Our view is that because [the GoCo] will be better able to recruit, retain and incentivise people….[it] will be better able to attract good people. They also have existing methodologies …..[and] tools that they use every day that they can bring in to help them manage the programme.”

Not all observers, nor all MPs, are prepared to accept that private-sector employees would necessarily have more authority than civil servants working at DE&S.

In fact, Sir Bob Russell, MP, expressed puzzlement “as to how their different employment status would affect their day-to-day work,” since under current plans “more than 16,500 Government staff at the MOD’s defence equipment and support unit would be transferred to a private sector employer.” And he wondered “How would that alter their day-to-day working -- the 16,500 people who overnight would go from being public sector workers to private sector workers?”

Gray, who first floated the idea of outsourcing defense procurement to a GoCo, believes that DE&S personnel are “placed in a situation where they have something of -- to put it politely -- a conflict of loyalties. They have a loyalty to DE&S in delivering their programme and they have an overall loyalty to the Department,” which may not always pull them in the same direction.”

In future, when working for the GoCo, “their job will be restricted to delivering the programme and telling the truth to the centre, whether the centre wanted to hear it or not.”

Gray believes that, “when offered suitable incentives, private contractors acting for the Ministry of Defence would be more effective than civil servants in preventing military staffs from over-specifying equipment and adding new requirements during development.”

This does make some sense, but it is difficult to imagine that divided loyalties and a fear for their future careers are the fundamental factors that broke the defense procurement system.

Gray said that “Most other countries have the same problem that we do, which is overrunning in time and cost,” and he quipped that “The Israelis are often touted by people as an example of good procurement; but when I talk to the Israelis and say, "Everybody says that you do a good job", they say, "Well, not really; we just hide it better than you".

How the concept would work

-- The GoCo would be paid in proportion to how well it completes a program relative to what it said it was going to cost to do the job in the first place….Thus it has absolutely no incentive to under-price the job in the beginning.

-- The cost assurance and analysis service [which] currently sits within DE&S would be transferred to the Ministry of Defence in a supervisory role, that, at the moment, we rather inelegantly call the ‘governor organisation.’

-- There will be a contract management oversight and a programme management oversight capability within the Ministry of Defence. It is very important as part of this process that the Ministry of Defence retains an intelligent customer capability.

-- The GoCo managing company will only make money if it saves money for us. That is the way that the deal is set up. Therefore, their fee is dependent upon their saving money against the baseline programme that we have today. We know what we are predicting the programme will cost today, out over the next 20 years, and that is the baseline against which they are going to be judged. If they save us money against the delivery, against that in time and cost, they will save money. If they don’t, they won’t.


The GoCo selection process

-- Two invitations to negotiate were awarded in September; a preferred bidder will be selected in December, and MoD will evaluate that against this unknown concept of DE&S-plus, a virtual benchmark, by March.

-- It costs quite a lot of money to run [the GoCo] competition. It can cost up to £10 million.

-- The GoCo competition that we are running at the moment is composed of two consortia, both of which contain an American and two British companies, as parent bidders, if you like. The company that runs this will be a UK limited company, but the parent shareholders of that would be, in both cases, partly American. So the short answer to that question is yes, I suppose.

-- The company running the GoCo would be a British limited company. Its chief executive or chairman, according to our formulation of the documents, would have to be a British citizen. There would be specific controls put in about what information could be passed from the operating company that does all the evaluation work, through the holding company, which has a financial interest, back to the parent.

-- We are proposing periodic rebidding of the process. In some ways you could make an argument that says this is a bit like auditors of major companies. … We propose an initial period of up to a maximum of nine years and then you would re-compete the contract.

-- The Secretary of State remains responsible for the activities of GoCo. Acting on his behalf, it is effectively his agent…. Secondly, we would propose that an additional accounting officer be created. The permanent secretary would continue to be accountable for the Ministry of Defence expenditure to the PAC, but we would propose that either the chief executive or the chairman of GoCo was also an accounting officer.


(Updated with editing changes Sept. 12, 2013.)

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