U.K. May Use Olympic Model For Defense Acquisitions

May. 19, 2012 By ANDREW CHUTER Defense News

LONDON — The organization that delivered Britain’s Olympic construction effort on time and on budget is being touted as a possible role model in an upcoming radical reorganization of the Ministry of Defence’s procurement and support arm.

The government is restructuring its Defence Equipment & Support organization and has narrowed its options to two, according to Bernard Gray, the MoD’s chief of defense materiel. Both options involve putting contractors at the heart of the 14 billion pound ($22.3 billion) a year operation, either managing or advising DE&S.

The preferred management models are the Olympic Delivery Authority, what is known here as an executive nondepartmental public body, and a government-owned, contractor-operated setup along the lines of the Atomic Weapons Establishment, Gray told the parliamentary defense committee May 15.

The Olympic Delivery Authority is a public body set up by an act of Parliament to develop and build the venues and infrastructure for the games scheduled to start here July 27.

The authority appointed a consortium involving the firms CH2M Hill, Laing O’Rourke and Mace to manage the effort.

Despite early problems, the organization completed the program on time and within the Olympics’ 9.3 billion pound budget.

Gray, who is the boss at DE&S, described the possible arrangement based on the Olympic Delivery Authority template as a public-private joint venture with the contractor essentially acting as adviser.

In contrast, the Atomic Weapons Establishment is directly run for the MoD by a consortium of Serco, Jacobs Engineering and Lockheed Martin under a deal running to 2025.

“The second model we are evaluating is like [the establishment]. It’s a government-owned company which a consortium company would run and manage on our behalf,” Gray said.

“The essential difference is that in the second case, they [the contractor] have management control of the entity, and their fee and profit is driven by what they do with the outcomes,” he said.

Jacobs, Serco, BAE Systems, Bechtel and others in recent weeks have discussed with the MoD how the new schemes might work.

A decision in favor of the Olympics approach could mean its implementation would be a marathon rather than a sprint. A public body must be set up by an act of Parliament, and it could be several years before the primary legislation is in place, a competition is completed and the operation is on track to deliver savings.

The government-owned company doesn’t necessarily require legislation, Gray said, although it might be helpful to clarify the powers of the consortium.

Procurement Minister Peter Luff, appearing alongside Gray at the committee hearings, said the issue of reform couldn’t wait, and an interim management structure to push through changes in behavior would be introduced for those elements of the restructuring not requiring legislation.

The proposed changes come at a time when DE&S faces thousands of job losses as part of a government effort to regain control of defense spending.

Gray favored the government-owned company approach when he wrote a searing report for the MoD in 2009 on the shortcomings of DE&S. He was an independent businessman at the time, but was later invited by the coalition government to sort out the problems that caused a legacy of late deliveries and cost overruns.

Equipment program cost overruns at DE&S have been responsible for a sizeable part of the problem in balancing the defense budget over the past few years. But many of the shortcomings stem as much from political interference and the armed forces’ propensity to change requirements as the abilities of the procurement and support operation.

Restructuring the management and operations of DE&S, along with other acquisition reforms, is a key hurdle in the Conservative-led government’s effort to keep a balanced defense budget on track.

A major restructuring of the MoD is underway with wide-ranging reforms to its structure, size, capabilities and management.

Gray’s testimony to the committee came just 24 hours after Defence Secretary Philip Hammond announced the defense budget had been brought under control after dealing with a 38 billion pound black hole in unfunded liabilities over 10 years left by the previous Labour administration, as well as a nearly 8 percent cut by the cash-strapped coalition itself.

Announcing the outcome of the Planning Round 2012 deliberation, which looks at spending this financial year and for the 10 years ahead, Hammond said it was the first time in a generation that the MoD had balanced its budget.

The announcement was good news for the government after facing mounting criticism over its competence in other policy areas.

Hammond declined to detail how the MoD had achieved the most recent round of cuts required to balance the books.