British Defence Minister Philip Hammond published the details of his plan to appoint a commercial company to manage the UK’s defense procurement. The controversial proposal has been mooted for more than a year and is Hammond’s response to what is widely perceived to be a long history of under-performance by the 15,000-strong Defence Equipment and Support (DE&S) organization. “Two separate independent studies carried out for the Ministry of Defence [MoD] have suggested that the costs arising from inefficiency in the procurement process are between £1.3 billion and £2.2 billion per annum,” he told Parliament. The UK spends more than £13 billion annually on defense equipment and support.

Hammond envisions replacing the DE&S with a government-owned, contractor-operated entity, a “GoCo.” It would take “strategic direction” from the MoD, which would retain a staff to act as “the intelligent customer...led by the Chief of Defence Matériel and supported by an external private-sector consultant,” Hammond said. Bids are now being invited and next summer they will be compared to the cost of retaining the DE&S. Just over half of its staff would transfer to the GoCo, which would additionally “inject a small number of senior managers, and possibly some key technical staff,” according to Hammond. About 25 percent of the DE&S staff are military; they will no longer take line and project management positions. The appointed contractor would be paid a performance-derived fee; it would not take on the financial risk associated with the government’s defense contracting.

Hammond revealed that 21 companies have already expressed interest in bidding. According to UK national media reports, they include the large British services supplier Serco, which already has many MoD contracts; and U.S. companies such as Bechtel, Fluor and KBR. Hammond said that the winner of any GoCo competition would likely be a consortium that includes U.S. companies, although the contracting entity would be UK-registered.

Hammond also set out reforms to the UK’s procedures for single-source defense procurement, which accounts for 45 percent of the total spending. The fixed-profit formula will be replaced by a formula that provides incentives, and defense contractors will have to be more transparent with the cost data that they provide to the government.

Even before this latest plan took shape, the UK MoD was a world leader in contracting out defense operations and devising public-private partnership and private finance initiatives. However, there has been a steady stream of criticism about these arrangements, on both cost and operational grounds. One typical contract is the one covering basic flying training in the Royal Air Force, currently in the news because the Grob 115E Tutor training aircraft provided by contractor Babcock have been grounded for months following the separation of propellers from two aircraft last year.