MoD in new retreat over bid to enrol big business


Attempts by the Defence Secretary Philip Hammond to reform the Ministry of Defence by enlisting big businesses for their commercial skills have again been struck by a lack of private sector interest.

The Independent can reveal that the Ministry of Defence only attracted two teams to bid for a crucial 13-year deal called Logistics Commodities Services Transformation (LCST).

The contract would see the private sector make sure that the MoD gets value for money on a £1bn-a-year spending programme for everyday non-military essentials, from food and medical supplies to nuts and bolts.

Typically, three or more bidders would fight it out for such an important contract to ensure that there was suitable competition to bring down their fees and force them to find savings.

But only the US defence group Leidos and a combination of FTSE 100 government contractor Babcock International and the logistics group DHL have been asked to put forward formal tenders after a third party pulled out. An industry source said that this was the latest example of "bungled MoD outsourcing", while a senior Conservative MP declared Mr Hammond's much-trumpeted reforms to be a "mess".

Although two bidders is a sufficient number to press ahead with the tender process, this does leave the MoD in a precarious position. If one of the parties felt it cannot make enough money on the contract and pulled out of the race, the programme would almost certainly be scrapped.

Before Christmas, Mr Hammond's totemic reform – the semi-privatisation of the Defence Equipment & Support (DE&S) agency that buys guns, tanks, helicopters and submarines – collapsed after only one bid team, led by the US engineer Bechtel, decided it wanted the contract.

Mr Hammond desperately tried to continue negotiations with just that one consortium, which also included the Big Four accountant PricewaterhouseCoopers, after a rival bidder pulled out. But he was forced into an embarrassing surrender when it became inevitable there was insufficient competitive tension to justify the reform, though he has vowed to revive what is known as the GoCo – government-owned, company-operated – model in the future.

This process and analysis of a more limited overhaul of DE&S, which is now going ahead instead, cost the MoD nearly £18m. Bidders are estimated to have wasted £40m.

Sources said a major problem for the LCST deal is that many companies that might have been interested had instead been focusing on the DE&S contract through most of 2012 and 2013. When that failed, they did not have enough time to look at the less meaty logistics work, which also includes revamping storage facilities and inventory management techniques that date back to the 1940s.

The lack of competition is excellent news for Babcock, which was never interested in the DE&S bidding since it is also a MoD supplier.