Battle lines drawn on private sector role in defence

The Government has rattled the unions by pushing forward with plans to effectively privatise the body that supplies guns to the Army and battleships to the Royal Navy.

In a White Paper on Monday the Defence Secretary, Philip Hammond, outlined his preferred option of bringing in a private-sector partner to help slash the cost of buying everything from missiles to radio systems.

Defence Equipment & Support (DE&S) has a budget of £14bn and Mr Hammond wants a big business to oversee the organisation and bring with it the commercial nous to help get the most bullets and combat gear for the MoD's buck.

"For decades, the MoD has been at a disadvantage in commercial negotiations, and reforming single source procurement will radically change how the MoD conducts a high proportion of its business," Mr Hammond said.

Matthew Fell, CBI director for competitive markets, said the Government needed to "strike the right balance" between competition and investment.

The move has infuriated unions, which are concerned that DE&S's 16,500 staff will lose many of their hard-earned rights. They also question whether the private sector should be at the heart of decision-making at the department that is most responsible for national security.

Bob Rollings, secretary for the defence sector at the Public and Commercial Services Union, told The Independent: "We're not impressed with this, our members are not impressed that this [defence procurement] should be left to the private sector. This poses a big risk: we've got a workforce committed to maintaining standards for the front line and we can't be certain that will still be the case with the private sector."

Mr Rollings accused Bernard Gray, the chief of defence materiel who has spearheaded the plan within government, of "refusing to engage properly" with unions.

In a study that the former journalist conducted under the previous government, Mr Gray was shocked to discover just how expensive and long it took to buy and build vital defence equipment. He believed this situation could help Britain's enemies during times of war.

His favoured reform is known as "GoCo", which is short for a government-owned, contractor-operated model. Although the Government retains ownership, most critics and even proponents view this as at least semi-privatisation.

Mr Hammond is running a parallel process to analyse the GoCo and a second, unfavoured but less controversial option of modifying the current level of private-sector involvement in procurement.

Another plan is for an independent watchdog to be established to ensure that costs are kept down on those defence contracts that can only be bid for by one party due to their sensitivity.

The GoCo has excited potential private-sector partners, such as the FTSE 100 support services group Serco and the US engineer Bechtel, and they are pouring resources into winning what would be a hugely lucrative contract.

An industry source said: "This dual process is such typical Yes, Minister. The MoD is saying 'yes, we want this huge reform' but is leaving an option open to cancel in case it turns out to be too controversial."

The overall defence budget is some £34bn, but the Treasury is squeezing departments and Mr Hammond believes that cutting procurement costs will avert a cut in troop numbers.