MoD supply reform hits problems

Doubts grow over business case for bringing private sector into military procurement

Defence Secretary Philip Hammond's plans for reform of the £14bn division that supplies and equips the armed forces are under threat as advisers struggle to prove they are value for money.

The Ministry of Defence's senior civil servant for procurement, chief of defence materiel Bernard Gray, was supposed to hand over a business case for what critics claim is effectively the privatisation of the 17,400-staffed equipment and support agency this autumn.

However, he has been forced to go back to major outsourcing companies, such as the US giants Bechtel and URS, to ask how a government-owned, contractor-operated ("GoCo") option would work. This sees the private sector run the agency day to day, which supporters, including Mr Hammond, believe would professionalise Defence Equipment & Support and help to cut costs.

This is the second round of market testing the idea, which has led some potential bidders to doubt whether or not the MoD will ultimately pursue this option. One said that it was now only "50-50" that the plan would go ahead.

He added: "We think they're struggling to find the value for money in the GoCo option. The trouble is that this is an austerity environment and there are big upfront costs before you start to make savings after five or 10 years."

A second source added that there was internal opposition to the idea from civil servants and armed forces leaders who wanted to maintain the tried and tested way of working. "The Duke of Wellington said that 'personnel is policy'; modifying that statement to this situation shows that 'culture is policy'."

Opponents of the plans have cited G4S's failure to provide sufficient security at the London Olympics and problems associated with the privatisation of the railways as reasons the Government should not outsource even more critical defence decisions. Profit-making companies could choose their options based on cost rather than what is best for supporting the men and women on the ground, they claim.

Mr Gray is expected to submit the business case to senior defence officials next month, with Mr Hammond expected to make a formal announcement around April.

An MoD spokeswoman said: "In July, we said that a GoCo model was our favoured option but further analysis would be carried out before a final decision is made. A value-for-money assessment has been completed and a business case is being considered."