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U.K. Defense Agency Sale Said to Clear Treasury

The U.K. Treasury has approved the Ministry of Defence’s plan to explore allowing a company to manage military-equipment procurement, said a person familiar with the matter.

Defence Secretary Philip Hammond will today announce the final stage of plans to turn the Defence Equipment and Support agency into a government-owned and contractor-operated body, known as a “go-co,” the person said on condition of anonymity. The agency has an annual budget of 14 billion pounds ($21.4 billion) for buying and servicing military equipment.

Hammond sees private-sector management of military equipment procurement as a way of avoiding cost overruns that have led to the waste of billions of pounds in taxpayer funds. A Jan. 10 report by the National Audit Office said there are “critical shortfalls” in air transport and refueling capabilities because of delays in delivering new aircraft, the latest criticism of procurement-cost overruns.

After the approval, granted by Chief Secretary to the Treasury Danny Alexander, the Ministry of Defence will spend the next 12 months identifying potential private-sector partners for any such newly created entity, the person said, declining to be named because Parliament has yet to be told.

The Cabinet Office, which oversees government bodies, the Treasury and the ministry will also explore the degree of change achievable if DE&S remains state-run.

Possible Bidders

Potential bidders include U.S. contractors Jacobs Engineering Group Inc. (JEC), Bechtel Group Inc., Fluor Corp. (FLR), CH2M Hill Inc. and KBR Inc. (KBR) British company Serco Group Plc (SRP) may also be among the interested parties.

The drive to part-privatize comes at a time when Hammond is negotiating his department’s budget for 2015-16. Chancellor of the Exchequer George Osborne has said equipment spending will rise by 1 percent a year more than the inflation rate, leaving open the possibility of further reductions to troop numbers. Osborne announces the departmental spending plans in June.

DE&S is based in Bristol in the west of England and employs 16,500 people. If Hammond’s plans receive the final sign-off 12 months from now, the U.K. will be the first country to attempt such a move. He will publish a consultation paper before Parliament breaks for the summer vacation in July, the person said.

In July 2012, the “go-co” option was criticized in a report by the Royal United Services Institute research group, which said it would be a costly mistake. The ownership model suffers from “an inherent weakness,” said a panel of experts convened by London-based RUSI.

“We cannot easily see how the DE&S as a go-co would even work in practice, let alone why it would be a less expensive and better alternative to what is in place today,” the group said. The proposal “appears to rest on an argument that, because the government is not very good at negotiating and managing contracts with the private sector, it is going to negotiate an even bigger contract with a private-sector entity to undertake the entire task on its behalf.”

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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