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Business Comment

Mark Leftly: The tax guns will fall silent when American experts man our defences


Westminster Outlook Kevan Jones was one very unhappy Labour MP last Saturday. The shadow armed forces minister had just read our scoop that the US engineering giants Bechtel and CH2M Hill had won the critically important contracts to manage vast chunks of Defence Equipment & Support (DE&S). This is the Ministry of Defence agency that has a £14bn budget to buy all the military’s kit, from surveillance systems to submarine-hunting helicopters.

The MoD press team has clearly been told to keep quiet about Bechtel and CH2M Hill winning these “managed service provider” roles, issuing nothing bar a banal formal comment saying that any deals won’t be signed and sealed for another month.

Keeping schtum, though, is a rather futile exercise given that the department leaks like a sieve. “The world and his wife knows,” chuckled one industry insider.

Detailed negotiations are now under way that will ultimately see California’s Bechtel oversee project delivery for contracts related to the Navy and RAF. The Denver-based CH2M Hill will look after the Army and joint-command projects, although the exact nature of both companies’ roles is yet to be fully defined.

What had Mr Jones spitting feathers was that we also revealed that these American giants will inevitably fill much of their teams, estimated at up to 200 people in total, with expats as they don’t have enough suitably skilled staff within their British divisions. The companies will have to fly over experts from the US at a potential cost to the taxpayer, industry experts calculated, of an additional £5m. This figure includes expenses such as travel and accommodation. 

Mr Jones immediately took to Twitter, harrumphing that the two companies were involved in last year’s chaotic attempts to outsource the whole of DE&S to the private sector (CH2M Hill pulled out, so the plans collapsed due to lack of competition). He then called on the Public Accounts Committee to look into these contract awards – and it’s not like the chairwoman, Margaret Hodge, needs much encouragement to launch an investigation into government contracts.

Well, Mr Jones if that made your blood boil, look away now: some revised industry estimates put that additional cost as high as £10m. Notably, this larger sum allows for the much-criticised “tax equalisation”, under which expats pay income tax at the US rate, which is far lower than the UK one.

There is form for this: National Audit Office figures last year showed that Nuclear Management Partners (NMP), the US-led consortium that runs the £70bn clean-up of the Sellafield nuclear site in Cumbria, avoided paying £775,000 of income tax over several years.

The local MP, Labour’s Jamie Reed, moaned that this was “completely amoral”.

However, it is also completely legal. From an individual’s point of view, they would be right to question why they should be taxed more heavily when they are crossing the ocean to bring desperately needed expertise to another country.

It is also important to note the caveat that the estimates are just that – clever, expert calculations but not facts – at the moment. Also, expat costs are likely to be reduced over the course of the contracts as more, sufficiently skilled British staff are identified and hired.

What’s more, the MoD had little choice but to pick US companies. All but one of the other bidders were from the US, including the company behind the Sellafield consortium, URS.

Britain’s sole representative was WS Atkins, based in Surrey, and the FTSE 250 constituent was always going to struggle against the financial muscle of its transatlantic rivals. The UK will at least be represented in a separate deal to overhaul DE&S’s human resources, with PwC thought to have edged out its Big Four accountancy peer Deloitte and the management consultant Accenture.

But none of this means that those additional expat costs can be ignored; they will certainly run into the millions per year. Given that the MoD has stated that the combined contracts will be worth between £200m and £400m, those expats are likely to account for 1.25 per cent to 5 per cent of the overall cost in the first year alone, depending on which estimate is closer to the truth.

That’s a poor start when the whole point of this exercise is for the private sector to use its commercial discipline to help drive down costs and get the taxpayer better value for money when buying and looking after the equipment that our forces so greatly require.