Botched defence outsource cost £33m

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Published: Thursday 26th February 2015 by The News Editor

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A botched project to outsource defence procurement cost taxpayers £33 million – and questions remain about the value for money of its replacement, a spending watchdog has said.

The Ministry of Defence dropped attempts to set up a government-owned, contractor-operated (GoCo) model for buying military equipment in 2013 after all but one private bidder withdrew.

It settled instead for turning Defence Equipment and Support (DE&S) into an arm’s-length body responsible for securing £14 billion of kit and support each year on commercial lines.

A review by the National Audit Office found that the abandoned GoCo project “has cost time and money” including £25 million on contractors and advisers.

The NAO said that despite the setbacks the process “has yielded some learning” in making clearer responsibilities and accountabilities between the forces and procurement bodies.

It has also “given DE&S a better understanding of its business needs”, the NAO suggested, concluding that “many” of the benefits sought from the GoCo could be realised under the new set-up.

But it warned that the MoD “has not yet demonstrated the value‑for-money case”.

“The department has set initial key performance targets for DE&S, but is yet to set out fully how it will measure whether the bespoke trading entity is improving defence acquisition,” its report said.

“We would expect the department to set out the value-for-money case once detailed plans are available in summer 2015.”

The report drew particular attention to the need to show the benefit from £250 million due to be spent on private sector expertise to boost skills and other areas.

“DE&S is placing great reliance on managed service providers to define and make improvements in projects and programmes, human resources and management information systems,” it said.

“In return, DE&S expects to pay around a quarter of a billion pounds over three and a half years for this business support.

“DE&S has agreed contracts with the managed service providers whereby part of their fees are, in principle, linked to milestones and a set of metrics.

“It is essential, therefore, that DE&S establish these metrics and a baseline to track progress in implementing these reforms and transferring skills and capabilities to DE&S staff.”

It went on: “Risks remain, and affordability relies on DE&S having the skills and capacity to make more than £6 billion of savings, a significant proportion of which it has yet to identify.”

The chairwoman of the Commons public accounts committee, Labour MP Margaret Hodge, said: “It is deeply concerning that the Ministry of Defence has got it so badly wrong, throwing away £33 million of taxpayers’ money on botched reforms.

“Poor governance and unclear messages on how risk would be shared between the Government and private sector meant that its competition to run the GoCo failed disastrously with just one contractor putting in a bid, forcing the ministry to keep its defence acquisition company in-house.”

Mrs Hodge also raised concerns that savings made through deep cuts to permanent DE&S staff may have been cancelled out by cash spent on outside contractors to fill gaps.

The NAO said permanent staff numbers were nearly halved between 2007 and 2014 but “potential savings, however, have been offset by employing contractors who, on average, cost between three and four times more”.

Contractors’ costs last year accounted for 37% – £481 million – of overall operating costs, it found.

Yet the MoD “lacks robust information on how project teams are using contractors, and the cost of doing so”.

Mrs Hodge said: “If it is to be successful in reforming defence acquisition, the ministry needs to sharpen up and address criticism that it is inefficient in how it uses the skills of its staff.”

Defence Minister Philip Dunne said : “Of the £33 million which the NAO identifies, £25.4 million was money well spent on informing the establishment of DE&S as a Bespoke Trading Entity.

“The £7.4 million spent on the GoCo option represents 0.6% of the annual cost of running defence procurement.

“We are investing around £163 billion in cutting-edge equipment over the next 10 years, with our major projects coming in last year nearly £400 million under budget in stark contrast to the £4.5 billion cost overrun in 2009.

“This report acknowledges the real progress that has already been made in reforming defence acquisition, including stabilising and improving the affordability of the Equipment Plan.

“We are not only improving performance through project delivery, but also transforming the way we undertake defence acquisition.

Published: Thursday 26th February 2015 by The News Editor

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