May 6, 2013 4:24 pm

US objects to Ministry of Defence outsourcing

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The US has raised concern over the UK’s plan to outsource procurement of military equipment to the private sector.

Under pressure to make cost savings, the Ministry of Defence is pressing ahead with proposals to recruit a private company to manage its £14bn annual procurement budget.

If successful, it would be the first time any government with a sizeable military operation has outsourced the purchasing of equipment such as tanks, aircraft and communication technology.

But the US defence department is worried the plan could undermine Washington’s relationship with its closest military ally.

“We do have some concerns over an option that would put contractors in roles normally filled by government employees and the effects this would have on ongoing and future co-operation,” said Lieutenant Colonel Melinda Morgan, a spokeswoman for Frank Kendall, the US defence department’s top acquisition official.

Under the plans more than 16,500 government staff in the MoD’s defence, equipment and support unit in Bristol would start to be transferred to a private sector employer by the end of next year. A new organisation would be set up which would be government owned but contractor-operated – known as a Goco.

The US is understood to believe this could put sensitive information that is shared between the two forces at risk. The two nations have agreed to “establish a joint, bilateral, inter-agency team to explore how a Goco . . . would affect our current relationship and what changes may be needed to maintain the current level of co-operation”, Ms Morgan said.

The MoD is consulting potential private sector partners over how to run the Goco. Those include Serco, Bechtel, KBR and Atkins. The US-based contractor Jacobs Engineering has been appointed as the MoD’s delivery partner to help develop the business model for the handover of procurement activities to a contractor.

The MoD said: “We’ve been working closely with the US on the [procurement] strategy for over 12 months and our US colleagues understand our objectives and are sympathetic to them.

“The defence secretary, Philip Hammond, this week met his US counterpart underlining our confidence that the two countries will continue to have a close working relationship in the future.”

Mr Hammond confirmed last month that the government was going ahead with outsourcing. The decision came amid fresh pressure on the MoD to find savings from its £37bn a year budget as the Treasury prepares to impose more spending cuts on Whitehall.

The MoD’s procurement operation has been dogged by cost overruns, delay and accusations of poor project management. Mr Hammond believes outsourcing is the best way to address that.

Costs across key projects have been 40 per cent higher than estimated, while the time taken to get equipment into services has taken on average 80 per cent longer than original estimates.

However, the outsourcing plan is controversial. “Attempting to put procurement in the hands of the private sector in this manner is without precedent in advanced defence markets,” said Guy Anderson, senior principal defence industry analyst at IHS Jane’s. “It would be a brave decision, although the UK has some history in pioneering public-private partnerships in the field of defence.”

The MoD, along with the Ministry of Justice, is widely considered to be at the forefront of government plans to involve the private sector in the delivery of public services. It is in the process of outsourcing billions of pounds of contracts, and some recruitment, facilities management and estate management services have already been outsourced.

Despite its concerns over the UK plan, the Pentagon makes heavy use of private contractors. Private companies have been carrying out security, logistics and reconstruction functions in Iraq and Afghanistan. KBR, the controversial offshoot of Halliburton, which was once run by former Bush administration vice-president Dick Cheney, won contracts worth at least $39.5bn in Iraq alone since the 2003 invasion, according to Financial Times analysis.

Additional reporting by Anna Fifield in Washington

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