UK to start talks on outsourcing weapons buying - sources

LONDON Thu Jul 11, 2013 7:32pm BST

Defence Secretary Philip Hammond leaves after attending a Cabinet meeting at Number 10 Downing Street in London March 12, 2013. REUTERS/Andrew Winning

Defence Secretary Philip Hammond leaves after attending a Cabinet meeting at Number 10 Downing Street in London March 12, 2013.

Credit: Reuters/Andrew Winning

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LONDON (Reuters) - Britain will kick off controversial talks to put its 159 billion pound military equipment buying programme in the hands of a private company as soon as Friday, as it battles to clamp down on cost overruns and delays, industry sources said.

About 20 firms have expressed an interest in a contract to run the Defence Equipment and Support (DE&S) unit, which accounted for almost half of the Ministry of Defence's (MoD) 34.4 billion pound budget last year.

The government will now choose firms for formal discussions.

Should it go ahead, Britain will be the first country to outsource its negotiations with weapons supplies such as BAE Systems and Finmeccanica, according to defence consultancy IHS Jane's. Britain expects to spend 159 billion pounds on military equipment between 2012 and 2022.

Firms in the running for the contract include defence and engineering companies Bechtel, CH2M Hill and Balfour Beatty, as well as business consultants PricewaterhouseCoopers and Deloitte, three sources told Reuters. U.S.-listed Fluor, URS, KBR, and SAIC are also vying for the deal, two of the sources said.

Some of the British companies in the running include WS Atkins, Capita, PA Consulting, QinetiQ and Serco, the three sources added.

The firms will now decide whether to form alliances, with some of the U.S. groups expected to team up with British ones.

In June, Defence Secretary Philip Hammond laid out the so-called government-owned, contractor-operated (GOCO) plan.

"It's a huge step for MoD outsourcing and has the potential to significantly change the procurement market for defence materiel in the UK," one source close to the bid process said.

The MoD declined to comment on the process.

CONCERNS

The government intends to cut the list of bids down later this year, one source said, and in 2014 will compare the best proposal with an alternative option known as 'DE&S plus', which it has not provided details on but has described as an "improvement of the status quo."

Britain is aiming to complete a reform within the next 18 months, Bernard Gray, the chief of defence materiel who spearheaded the GOCO idea, told political magazine Civil Service World this month.

While the defence industry has voiced support for the government's move to reform the way it buys equipment, there are concerns over potential conflicts of interest as some bidders already hold contracts with both the DE&S and its top suppliers.

There is also uncertainty over how the government and eventual winner will ensure commercial confidentiality.

"There could be circumstances where, certainly with the UK entities and occasionally some of the American ones, we might find that elsewhere in the world we're competing against, or they're in our supply chain, or they're alliancing with us," said one senior defence industry source.

"Now if we're going to share information with a commercial entity, we want to make sure that's absolutely firewalled and any unauthorized disclosure is remediated at law."

QinetiQ, for instance, provides services to the MoD as well as technology and equipment to other defence contractors such as Lockheed Martin.

Atkins, whose overall work with DE&S is worth less than 1 percent of DE&S' total annual spend, holds numerous defence equipment contracts with the MoD including for software testing for the Lynx Wildcat helicopter.

MPs will debate the issues at the second reading of the Defence Reform Bill in the Commons on Tuesday.

Alison Seabeck, who looks after defence equipment and procurement policy for the main opposition Labour Party, told Reuters she was "very open minded" about the proposals, but echoed industry concerns around intellectual property.

(Editing by Mark Potter)

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