09 Dec 13. While I admit to having serious reservations I have never talked down the notion of having a Government Owned, Contractor Operated (GOCO) structure involved as a solution for the future of defence procurement in the UK and a successor to the existing and much maligned Defence Equipment and Support (DE&S) operation based at Abbey Wood. However, although at the time of writing the Secretary of State for Defence, Philip Hammond has made no formal announcement, it is expected that he will either today or tomorrow confirm that the MOD’s preferred GOCO solution option for the future of defence procurement is to be removed from the table until at least after the next General Election.
Informed sources have over the past week been telling us that bold plans from the main GOCO protagonist have failed primarily because there was too little interest shown on the part of the private sector. That may well be true and if so then not without very good reason. After all, coming off the back of hard lessons the private sector has been forced to learn failure of the GOCO idea for defence procurement will hardly have surprised that many outside of the MOD. Complicated and challenging as it was the bottom line is that whatever the GOCO solution was full of potential risk for both sides. But while GOCO will be ruled out in favour of a DE&S+ solution for now, I see this merely as the end of the beginning for GOCO rather than beginning of the end. At some future point defence procurement along with many other aspects of defence, health, education and maybe other government services too will, in the years ahead, end up being part privatised.
Back to the GOCO in question. At first there had been three potential bidders, then there were two and then, just three weeks ago, it came down to there being just one consortium that chose to remain. That was to be no criticism on the remaining bidder in this strange and somewhat protracted competition to run Britain’s future defence procurement operation. But having only one bidder would quickly prove to be an insurmountable problem to overcome. For the Secretary of State for Defence, Philip Hammond to have remained with a single bidder solution would not only open himself up to further direct criticism but critically it would leave a huge shadow cast over the future of defence procurement operation.
Keen observers of the DE&S change process will not have been surprised by the various leaks over the past few days suggesting that, for the time being, the end was in sight for a GOCO solution. But having trawled through the single 1,200 page submission from the remaining bidder, Material Acquisition Partners, a consortium led by Bechtel, with PA Consulting and PriceWaterhouseCoopers, one may now conclude that the MOD does now have a ‘template’ which they can, if desired, use to resurrect a GOCO solution.
For the immediate future the procurement plan will be based on DE&S+ a process which is in effect a rigorous and well thought out plan to modernise and change the whole process of planning and execution of defence procurement but one that will remain wholly owned within the public sector. To work properly DE&S+ will be costly and require the new organisation to import skills that it currently does not have. Those additional skills will need to be ‘stolen’ from the private sector which means that, to succeed and work sufficiently well, DE&S+ will need to pay competitive salaries. The golden rule that ‘if you want quality you have to pay for it’ springs to mind as does something that I was taught a great many years ago ‘quality is never built as a result of an accident; it will always be as a result of intelligent effort’.
With uncertainty soon to be removed and with hoped for clarity anticipated to emerge through statements expected from Philip Hammond in Parliament this week and the fact that both he and Chief of Defence Materiel, Bernard Gray are I understand up in front of the Defence Select Committee on Thursday it seems to me that this week will be marked out as the week that the process of rebuilding defence procurement within the public sector was finally agreed. We should welcome that but I would again stress that future longer term part privatisation of defence procurement should never be ruled out and that while GOCO was proved to be controversial, and just a little too far ahead of its time, it does not mean that by 2020 it might not be in place.
For Chief of Defence Materiel, Bernard Gray, a man not exactly known for tolerance or patience come to that, the final death knell for a GOCO solution will have come as a blow. But it is by no means the end for his role and while speculation is bound to exist as to his future as head of DE&S I believe that in the process of change from the current organisation to DE&S+ that the consistency of retaining the same man at the top will be hugely important.
For its part, and whilst there had been many reservations expressed since SDSR 2010 on the potential of a GOCO solution, it is right to say that industry had made it very plain that it would work with whatever solution the Government concluded. And so it will in the future. While industry may not like the notion that for the new DE&S+ solution to do its work properly also requires that it could find itself raided by the new procurement organisation for some of its best staff I suspect that it will live with it. For DE&S+ to do its job well may well require that the new structure will need to pay the best of its staff 25% higher than it currently does and to bring in some of the skills that it lacks; salaries maybe up to 50% higher than it has paid in the past.
With an annual budget of £14bn and with responsibility for in the region of 16,000 military and civil service posts making the right decision on the future structure of the defence procurement organisation is of paramount importance to government, military and industry. Currently 92% of the total DE&S budget is spent on the equipment and support programme. Within an overall defence budget of £38.6bn the bill for defence has dropped to around about fifth in the league table of government expenditure, this being behind DWP – Department of Work and Pensions (£174bn) DH – Department of Health (£112bn), DoE – Department of Environment and Rural Affairs (£57bn) and HMRC (£47.bn). The actual capital budget within the overall defence budget amounts to £9.9bn and in terms of the departmental budget capital and resources this accounts for 25% of the defence departmental budget. For interest purposes it may be useful to observe that assets on the MoD books currently exceed £130bn whilst liabilities account for in the region of £21bn. Had the Government been successful in the part spinning out DE&S to the private sector in the form of a GOCO this would have meant that a sizable proportion of MoD’s resources would have moved from direct contracting and commissioning to being managed via a sponsorship GoCo arrangement.
The possibility of backtracking on the idea of a GOCO solution has been very evident in messages emanating from both Government and Chief of Defence Materiel in recent weeks. Even though the public sector alternative has been a growing potential solution being talked about for the best part of two years DE&S+ has in recent months appeared to be the new kid on the bloc. When CH2M Hill, which had been leading the Portfield consortium that included Serco and WS Atkins, decided to pull out of the bid competition three weeks ago a near term private sector solution for defence procurement in this Parliament ended. Note here that the URS/KBR team had pulled out some considerable time ago presumably also on the basis of there being too much risk and not enough potential to make profits. The complexity of what was being required by private sector consortia that entered into the original competition for a GoCo process is best demonstrated by there being no less than 1,200 pages in the bid document submitted by the Material Acquisition Partners.
It is a pity to me that the choice of whether to go for a partially privatised GOCO sector solution or stay with a modernised and much upgraded DE&S+ public sector solution has dragged on for so long. One notes also that during October Bernard Gray chose to appoint Pete Worrall, Chief of Materiel [Joint Enablers] to become the board level champion for the alternative public sector solution which we now know as DE&S+. Worrall was charged with providing independent governance and challenge to the whole DE&S+ option as it was further developed. Shortly after this Paul Blakiston who until recently was Head of the Maritime Change Programme was promoted to become Director DE&S+. A two-star post Blakiston is charged with overseeing the development of a robust public sector alternative solution to GoCo.
What will set a new public sector comparative option DE&S+ apart from the existing procurement organisational structure at Abbey Wood will be the degree of independence given to staff. Defence procurement was never an easy or straightforward process and neither will it be in the future. But with the right level of experience employed and if they are given the tools, techniques and freedom to do what is best for both the military as the user (and taxpayer as the funder) then the process can and will be far more effective than the one that it replaces. DE&S+ people need to have freedom to operate and to use the skills that they possess. None of this is to suggest that great improvements have not already been made in the defence procurement process under Gray but it does suggest that potentially the scope to improve the process of defence procurement is enormous. And if that proves to be right and if the DE&S+ model is well designed and proved to have performed within a couple of years that will be the time to privatise it rather than now. Now, go and get on with it Bernard!
By Howard Wheeldon, FRAeS,
Wheeldon Strategic Advisory Ltd.