Government plans to privatise MoD agency in doubt as bidder withdraws

Defence Secretary under pressure as US company is now only party interested

The Government is under intense pressure to scrap the semi-privatisation of the agency that buys the UK's military equipment, after one of only two groups looking to run the organisation abandoned its bid.

The Public & Commercial Services Union said that the competition to find a private sector consortium to oversee the £16bn-budget Defence Equipment & Support (DE&S) had "failed" and should remain in the hands of "committed, motivated and well-rewarded civil servants". A team including the beleaguered government contractor Serco, which is under investigation by the Serious Fraud Office for its alleged role in the electronic tagging scandal, decided it could not reach the commercial targets that the Government required.

The withdrawal of this group, which was led by Denver-based CH2M Hill, has left Defence Secretary Philip Hammond's plans to reform DE&S in tatters. He believes that the agency would be better overseen by private sector companies, as they would have the business skills to ensure that the MoD gets more guns and ammunition for the money it spends.

The Materiel Acquisition Partners consortium – led by another US engineer, Bechtel – is now the only party interested in running DE&S, which has 16,500 staff based largely in Bristol. Mr Hammond has vowed to press on with assessing this team's 1,200-page bid for what is known as the "Government-owned contractor-operated", or "GoCo", model of running DE&S. This bid will be judged against the benefits of simply refining the organisation's existing practices, an unheralded option called DE&S-Plus.

While Mr Hammond conceded that a decision must be made on "whether it is in the public interest to proceed with only a single commercial bidder and an internal option", unions were seething that the GoCo process has not been scrapped altogether. They have long feared that handing DE&S to the private sector would lead to thousands of job cuts, devastating the south-west of England economy.

Bechtel's team includes British companies – the accountant PricewaterhouseCoopers and consultant PA. But it is understood Bechtel would be the sole owner of the vehicle that ultimately ran DE&S, unlike the CH2M Hill grouping, where Britain's Serco and WS Atkins would also have been shareholders.

An industry source said it was "shocking" that the Government was looking at handing over such a sensitive area of national security to an entity entirely owned by a firm from another country. The source added that there could be legal action if the MoD was seen to alter "the parameters of the existing competition" to justify handing the contract to Bechtel.

Mr Hammond said: "Bids were required from the two commercial consortia in three phases and the second of those was due to be received on Friday 15 November. MOD has received a bid from one of the consortia but the second has decided to withdraw from the competition. This is regrettable and the reduction in competitive tension will make it more challenging for the Department to conclude an acceptable deal with the remaining bidder, notwithstanding the competition from the DE&S-Plus bid."

The withdrawal will put extra focus on Serco today, when company representatives face MPs on the powerful Public Accounts Committee.