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Defence secretary Fallon opens new fronts in outsourcing campaign

“One of the biggest defence transformations in the Western World” is far from over, defence secretary Michael Fallon told the IfG.

“One of the biggest defence transformations in the Western World” is far from over, defence secretary Michael Fallon told an audience at a recent Institute for Government event.

One of the pillars of this transformation has been the MOD’s evolving relationship with the private sector – both as a purchaser of materiel and services, and through ambitious partnerships with the private sector. And the defence secretary made clear his determination to continue this work, setting out three more partnerships to be completed before May’s general election. Fallon mapped out the savings achieved since the last election. Meeting the £4.3bn of efficiency savings agreed in the 2010 Spending Review was never going to be easy, but Fallon believes that four and a half years of reform have put the MOD firmly on track. Budgetary black holes have been closed; the Defence Board has been overhauled to provide strategic leadership of reform; the chiefs of the Army, the RAF and the Navy have been given spending powers akin to those of a chief executive; and headcount in the MOD’s head office has fallen by 25% since 2010. The accompanying reduction in the size of the armed forces has not been without controversy. A steady stream of former senior military officers has warned that the UK’s ability to respond to military threats abroad is gravely threatened by deep cuts to troop numbers. Just this week the Prime Minister was forced to respond to comments from former armed forces minister Nick Harvey, who claimed that the MOD was considering plans to reduce the size the army to just 60,000 soldiers; Fallon described Harvey’s comments as “nonsense”, stating that there were no plans to reduce the number of soldiers below the already agreed figure of 82,000. The controversy over numbers highlights a core issue for the MOD. Reducing the size of the workforce is an obvious way to save money. But you can only go so far before the reduction in capacity begins to do serious damage to an organisation. In the long term sustainable savings can only come from reforming the way an organisation spends money to do business. In 2009, Bernard Gray, a former journalist and New Labour defence adviser, conducted a review of defence procurement on behalf of John Hutton, then the Secretary of State. Gray’s conclusion was that the UK’s defence procurement programme was “substantially overheated”: he explained that the MoD ordered too much equipment without knowing its true cost and with virtually no way of escaping contracts that overran or became vastly more expensive. Constant overruns meant that new equipment frequently arrived late, forcing the MOD to spend money maintaining equipment that it had already paid to replace. Clearly this was an unacceptable drain on the public purse – procurement accounts for 40% of the MOD’s total spend – and a serious risk to the’ effectiveness of the armed forces in the field. Gray’s solution was a radical one: convert the MOD’s procurement arm, Defence Equipment and Support (DE&S) into a “GOCO” – a ‘Government-Owned, Contractor-Operated’ organisation. To critics this represented the unconscionable transfer of a critical government function into the private sector. To others, it was the best and only way to cool the overheating equipment programme: let a private company slug it out with the defence industry to ensure a better deal for taxpayers and the military. In the end, the private sector decided the GOCO proposition wasn’t for them, and in December 2013 then Secretary of State Philip Hammond announced that GOCO was a no-go. However, this was not the end of the story for DE&S. It has now been converted to a “bespoke central government trading entity” which has negotiated certain freedoms from the Treasury to recruit and retain the right staff to help it thrive in the commercial field. This organisation, Fallon said, “not only has a more businesslike relationship with its military customers, but it is a more effective counterpart to industry as well”. That took care of buying equipment – but what about fixing it? Here the MOD has also turned to the private sector, selling the Defence Support Group, responsible for maintaining the Army’s fleet of vehicles, to Babcock International for an upfront sum of £140m and expected savings of £500m over the 10-year life of the contract. This brings the Army in line with the Navy and Air Force, which already outsource maintenance to the private sector. Fallon also referenced the RAF’s fleet of Voyager personnel transports, which are run in conjunction with a private contractor – an example, he said, of a “truly collaborative effort” between the public and private sectors. Housing a civilian and military workforce that exceeds 250,000 as well as vehicles, planes, aircraft carriers and airfields, the MOD holds an enormous property portfolio. However, the MOD’s estate has become “sprawling”, Fallon said, and ripe for private sector intervention. The Defence Infrastructure Organisation, which manages the defence estate, has recruited Capita as a strategic business partner to help drive through further savings. This, said Fallon, will save £3bn over its ten-year lifetime. Outsourcing public services is a contentious business, and – as the series of contracting mishaps this government has endured shows – it is by no means a sure-fire solution to achieving taxpayer value for money, let alone sustainable savings. But as the projected savings start to stack up, the MOD’s appetite for private sector partners shows no signs of abating. At the Institute for Government, Fallon announced that three more will be finalised before the end of this parliament: the running of Marchwood port will be turned over to a commercial partner; the pipeline and storage system and the logistics and supplies organisation will also be opened up to commercial competition. The public may never be truly convinced of the value of private sector partnerships – especially when it comes to national security – but for now the defence secretary has found an ally he feels he can rely on.

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