Hammond Tests Greater Government Role in U.K. Defense Agency

Photographer: Oli Scarff/Getty Images

U.K. Defence Secretary Philip Hammond has said he favors the go-co option, a government-owned, contractor-operated organization, to cut costs. Close

U.K. Defence Secretary Philip Hammond has said he favors the go-co option, a... Read More

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Photographer: Oli Scarff/Getty Images

U.K. Defence Secretary Philip Hammond has said he favors the go-co option, a government-owned, contractor-operated organization, to cut costs.

Defence Secretary Philip Hammond said he has put extra resources into examining whether the U.K. should keep its military-procurement office in public hands as the government works toward a decision on part-privatization.

The Ministry of Defence has been seeking to transform the Defence Equipment & Support agency, with an annual budget of 14 billion pounds ($23 billion), into a government-owned, contractor-operated organization, known as a go-co, to cut costs. The U.K. would be the first country anywhere to privatize defense-procurement decisions.

To date, Hammond has said he favors the go-co option. He has now appointed a two-star general to examine an alternative, known as DE&S-Plus, which would effectively change the terms and conditions of employees in the organization to make it more flexible, while keeping it in government hands.

“It reflects a concern that perhaps we hadn’t put enough resource into the DE&S-Plus option inside DE&S,” Hammond said in an interview yesterday in Manchester, northern England, where his Conservative Party is holding its annual conference. “It’s for the go-co bidders to show us how a go-co solution would show us transfer of risk, and real value to the taxpayer.”

Two groups are in the final running for the project -- one comprising CH2M Hill Inc., WS Atkins Plc (ATK) and Serco Group Plc (SRP), with the other including Bechtel Group Inc., PricewaterhouseCoopers LLP and PA Consulting.

Bristol-Based

The U.K. government plans to spend 159 billion pounds by 2022 on buying and servicing defense equipment through DE&S, which is based in Bristol in the west of England and employs 16,500 people. Ill-managed procurement decisions have cost the U.K. billions of pounds in recent years.

Hammond also said the government is “still moving forward” in discussions with BAE Systems Plc (BA/), Europe’s largest defense company, over the future of its U.K. shipbuilding programs.

BAE, which consolidated the U.K.’s warship-building capacity in 2009, lacks work to sustain its three surface shipyards located in Portsmouth on England’s south coast, and Scotstoun and Govan in Scotland. After completion of two Queen Elizabeth-class aircraft carriers, due to start coming into service in 2018, activity will dip before building of Type 26 global-combat ships starts. The company and the Defence Ministry are in talks on whether to shut one site.

“We are in a program of maturing the Type 26 design; the more mature the design is at the point of contract the easier it is to properly allocate the contract,” Hammond said. “The allocation of risk is an important issue. The decision that BAES has to make about how it’s going to organize its business around the much smaller volume of work once the aircraft carrier is finished are decisions for BAES. It’s not for me to set the timetable for that.”

Hammond also said there’s an “ongoing discussion” about the aircraft-carrier program, which has again run over budget, about “how we complete this project in a way which best aligns the interest of Ministry of Defence and the industrial partners and gets the project done.”

To contact the reporter on this story: Kitty Donaldson in Manchester, England, at kdonaldson1@bloomberg.net

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

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