The Ministry of Defence (MoD) has ditched plans to privatise its procurement organisation, Defence, Equipment and Support (DE&S), after only one private sector consortium was left bidding for the contract.
Last year the government revealed plans to set up a ‘government-owned, contractor-operated (GoCo)’ model for DE&S, which has an annual budget of £14 billion.
However, secretary of state for defence, Phillip Hammond, has now conceded that a “public sector comparator alone would generate sufficient competitive tension to ensure an effective outcome for the armed forces and value for money for the taxpayer”.
The part privatisation model has recently been criticised for taking the opposite approach to the United States, the UK’s closest ally.
There had been two private sector consortiums currently bidding for the DE&S contract. One headed up CH2M Hill, with WS Atkins and Serco involved, the other being led by Bechtel, supported by PwC and PA Consulting.
However, in the end, only Bechtel submitted a proposal, raising questions about whether the contract would be competitive.
Hammond said: “I can confirm that I have decided not to continue the present competition. The heart of our approach was to test the market’s appetite for delivering a GoCo along the lines we had set out, using the competitive process to drive innovation and value.
“We have always recognised that there are risks inherent in the GoCo approach. With only one bidder remaining in the competition at this stage, I have had to make a judgment about whether the public-sector comparator alone would generate sufficient competitive tension to ensure an effective outcome for the armed forces and value for money for the taxpayer.”
Hammond, added, however, that part-privatisation remains a potential future solution to the ‘challenge’ of transforming DE&S, which the MoD believes does not match the capabilities seen in the private sector.
In the meantime the MoD will pursue a ‘DE&S plus’ model, transforming DE&S within the public sector, supported by the “injection” of private sector resource.
To do this the department will set up DE&S as a bespoke central government trading entity from April 2014 and give it a hard boundary from the rest of MoD. It will have a separate governance and oversight structure with a board under an independent chairman and a chief executive who will be an accounting officer.
The new DE&S will also be given “significant freedoms and flexibilities” around how it recruits, rewards, retains and manages staff “along more commercial lines to reflect its role running some of the most complex procurement activity in the world”.
Bernard Gray, the author of a 2009 report criticising the weaknesses in MoD procurement, has been appointed chief executive of the organisation.
Hammond said: “These changes will drive significant incremental improvements in DE&S as well as delivering the mechanisms that will give the organisation a robust performance baseline.”
Public and Commercial Services union general secretary Mark Serwotka welcomed the move to ditch the privatisation plans.
"We have argued from the outset that, as with other areas of our public services, this work should remain in-house so we welcome the long overdue decision to scrap the privatisation,” he said.
"We do not believe the private sector should have any role in defence procurement in the future and will be writing to the defence secretary to ask for an urgent meeting to discuss the proper resources necessary for civil servants to continue to do the job."