June 10 (Bloomberg) -- The U.K. government plans to set up an independent agency to negotiate contracts with its biggest defense suppliers, including BAE Systems Plc and Rolls-Royce Group Plc, to save hundreds of millions of pounds a year.
Defense Secretary Philip Hammond intends to seek value in equipment procurement while also ensuring the industry makes a reasonable profit, said defense ministry officials who cannot be identified under government rules. He will set out plans for new legislation in Parliament today, the officials said.
For reasons of national security, often only one company can provide the specialist capability required by the armed forces on a specific project, the officials said. That has allowed companies to set terms with the ministry without risk of being outbid. Hammond aims to change those rules governing state and industry relationships, which date from 1968.
Hammond has backed private-sector management of military equipment procurement as a way of avoiding cost overruns that have wasted of billions of pounds in taxpayer funds. The National Audit Office said a Jan. 10 report addressing procurement-cost overruns that there are “critical shortfalls” in air transport and refueling capabilities because of delays in delivering new aircraft.
In addition to proposing an independent agency, Hammond today will set out the legislative changes required to transform his ministry’s current procurement arm, Defense Equipment and Support, into a government-owned, contractor-operated organization, known as a Go-Co. This is so that if the project is approved by Chancellor of the Exchequer George Osborne’s Treasury in April, the ministry can quickly implement the change from DE&S to Go-Co status.
While Hammond favors the Go-Co model, it has yet to be approved by the Treasury or the Cabinet Office, which is considering keeping DE&S in government hands.
The drive to partly privatize defense procurement comes as Hammond is negotiating his department’s budget for 2015-16. Osborne is scheduled to announce the departmental spending plans on June 26.
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