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U.K. Rebuts Conflict-of-Interest Concerns in Defense Sale

Concerns that conflicts of interest may derail the part-privatization of the U.K.’s military-equipment procurement agency are misplaced, the minister overseeing the move said.

“I don’t see philosophically any difficulty in outsourcing procurement activity compared to any other kinds of activity,” Defence Procurement Minister Philip Dunne said in an interview late yesterday in his office in London. “The bidding entities have passed an initial conflict test.”

The Ministry of Defence is seeking to transform the Defense Equipment & Support agency, with an annual budget of 14 billion pounds ($22 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.

Two groups are in the final running for the project -- one comprising CH2M Hill Inc., WS Atkins Plc and Serco Group Plc, with the other including Bechtel Group Inc., PricewaterhouseCoopers LLP and PA Consulting. The Independent newspaper last month cited Babcock International Group Plc Chief Executive Officer Peter Rogers as saying potential conflicts of interest are one reason why his company, which helps build the U.K.’s nuclear submarines, didn’t bid.

The U.K. 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. The government is currently assessing how the new organization would work. Ill-managed procurement decisions have cost the U.K. billions of pounds in recent years.

Government Control

Asked if it’s right for companies such as Serco, which holds government contracts such as for running prisons and electronic tagging of criminals, to control how large sums of taxpayer funds are spent, Dunne said they wouldn’t have a “direct influence” because of being only a minority partner in the bidding group.

“We are setting the requirement, and they are then are negotiating the best deal on our behalf with whoever is interested in supplying it,” he said. “We have control over the contractor and not the other way round.”

During the bidding process, “some of the companies decided actually on reflection, it’s in our financial and commercial interest to remain a contractor to the MoD rather than to potentially help organize the procurement,” he said.

RUSI Criticism

The ministry’s plan was criticized in a July 2012 report by the Royal United Services Institute research group.

“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,” a panel of experts convened by London-based RUSI 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.”

Dunne said the government is taking advice on the plan from five private-sector advisers including lawyers, accountants and Jacobs Engineering Group Inc., at a cost of about 30 million pounds.

The U.K. is holding discussions with its U.S. allies every two weeks about the proposal, after the Department of Defense expressed concerns about the project in April, Dunne said.

U.S. Interest

“They have raised some issues, but none of them have been raised in a red-flag/blackball kind of way,” he said. “I would say they are extremely interested, they are more interested since sequestration has come into place because that is making all aspects of the U.S. government look at how they do things.”

Other allies including Germany, Italy, Spain and Japan have also expressed interest in whether the U.K. can make procurement more efficient, Dunne said.

The MoD intends to phase in operations by the go-co by January 2015, focusing initially on maritime contracts, with the successful bidders receiving a management fee for the work. Maritime contracts will account for 45 percent of DE&S spending over the next decade. Only after an assessment by ministers in 2017 would the government set out permanent financial incentives for the new operators of the agency, Dunne said.

“We are expecting that in the first couple of years, the first phase of the contract, they will generate some quick gain savings,” Dunne said.

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