No country has ever outsourced the way it equips its armed forces. Britain could soon be the first to do so

A FEW months ago Britain’s Ministry of Defence finally managed to balance its books. The National Audit Office, which scrutinises government, validated the ministry’s plan to spend £159 billion ($243 billion) by 2022 on military equipment and support. For a pariah department with a reputation for financial fecklessness, that was a milestone. It now wants to follow up by attempting a reform that has never been tried by any country.

At present the £14 billion a year Britain spends on buying and servicing military kit passes through an outfit called Defence Equipment and Support (DE&S). This arm of the ministry is based in Bristol and employs 16,500 people, mostly recruited from the armed forces and the civil service. Later this month the government will announce that it is to assess whether to continue with a reformed version of DE&S or to outsource its functions to a new organisation that would be owned by the government but operated by a private contractor—known by its acronym, GOCO. To the alarm of many in the defence industry and the armed forces, a GOCO is the government’s preferred option.

The idea sprang from an independent report on acquisition policy carried out in 2009 for the previous government by Bernard Gray, a former journalist and businessman. Mr Gray, who became head of defence materiel in 2011 (and thus boss of DE&S), lambasted a “sclerotic” system which had resulted in a “substantially overheated” equipment programme. Too many types of military kit had been ordered for too large a range of tasks at too high a specification. Mr Gray concluded: “The problems, and the sums of money involved have almost lost their power to shock, so endemic is the issue.” When the coalition government took over in 2010 it found a hole in the equipment budget of £45.6 billion. That swelled to £74 billion following a strategic review of defence, which trimmed spending.

Sub standard

Philip Hammond, the defence secretary since 2011, blames both the acquisition system and the previous government. “The equipment plan became meaningless because projects were committed to it without the funding to pay for them, creating a fantasy programme,” he says. There was a “conspiracy of optimism”: officials, the armed forces and suppliers consistently planned on a best-case scenario, knowing that once a commitment to a project had been made they could revise up its costs with impunity. The conflict between Tony Blair, an activist prime minister, and Gordon Brown, a chancellor with no empathy for the armed forces, made things worse, he charges.

Mr Hammond, who is seen by some as a future chancellor, has succeeded in restoring the trust of the Treasury thanks to a more disciplined approach. But he suspects that until more fundamental reforms have been made to the way procurement is run the problem of equipment programmes that come in late (or never) and wildly over-budget will remain. Hence the enthusiasm for the GOCO.

Opinions differ on the scale of the change needed. Francis Tusa, the editor of Defence Analysis, a newsletter, believes that the current system cannot be made to work. But others are more cautious. Andy Thomis, the chief executive of Cohort, an owner of three medium-sized consulting and engineering companies that works closely with the ministry on a variety of projects, says DE&S does a difficult job quite well. The real challenge, he says, is matching what the armed forces need with the amount of money available.

Many in the defence industry think that a good number of the difficulties associated with acquisition stem from requirement-setting by their military customers, particularly the “gold-plating” that takes place once projects have begun. More commercially minded executives in a GOCO might not be as soft a touch as civil servants, they concede. But the underlying incentives to game the system by getting new kit approved before the real cost emerges will not disappear.

Mr Hammond acknowledges the concern: “If you are building a house and you want to change something halfway through, that change will have a cost,” he says. But he believes a GOCO would be better at controlling the requirement-setters. Together with Mr Gray, he cites the difficulty of retaining people with the commercial, engineering and financial skills to negotiate contracts with industry and to manage complex programmes. Such people are in high demand throughout industry and DE&S, which is bound by civil-service salary scales, cannot pay the market rate. “But competitive pay and conditions are not the only factors,” says Mr Hammond. “Even complete flexibility on pay would not deliver the entirety of the cultural change we need.”

The defence secretary accepts that before he can go ahead, he must show that a GOCO provides value for money. That will be hard. Because no other country has gone down this route, no company has ever run a state’s entire acquisition function. And Mr Hammond must provide answers to many other questions.

How, for example, will the lead company be chosen? (Potential bidders include the American contractors Bechtel, Fluor, Jacobs Engineering, CH2M Hill and KBR; Serco is the only British firm in the frame.) What will be its powers and responsibilities? How will financial risk be distributed when there are factors that only governments can determine—such as homeland security, foreign relations and the preservation of national technical capabilities? How long will a contract with a GOCO have to run given that many programmes take a decade to deliver and a plane or a ship may be in service for 40 years? How will the GOCO be incentivised? Will boosting defence exports—a government priority—be part of its remit? How will ministerial and parliamentary oversight of decisions involving large amounts of money and the future effectiveness of the armed forces be maintained?

Perhaps the trickiest question of all is this: what makes the government think that it is capable of negotiating and supervising a contract of such extraordinary complexity, when the reason it wants to hand negotiation and management of defence contracts to a private firm is that it does not think it is very good at such things? The visionary Mr Gray may well feel he knows how all these and other issues can be resolved. But it will be the canny and ambitious Mr Hammond who will decide by the end of the year whether it is GOCO or no-go. It is a decision that Sir Humphrey, the cunning civil servant known to many Britons through “Yes Minister”, a TV comedy, would undoubtedly have described as “courageous”.