Reform / MOD conference raises more doubts about acquisition “GoCo”

It's not often you get to hear a current Minister, the Shadow Minister and the Permanent Secretary of the Department all speaking at the same event over one morning. So well done to Reform, the non-political think-tank, for getting a pretty stellar group of speakers together for yesterday's conference on Ministry of Defence (MOD) issues - "Delivering Value for money and innovation in defence".

We may come back to some of the discussion in more detail at a later date, but the potential GoCo (Government-owned, Contractor-operated) proposed as the model for MOD's Defence Equipment and Support (DE&S) organisation, and the somewhat similar strategic partnership for the Defence Infrastructure Organisation (DIO), were high on the agenda.

But one immediate thing was clear yesterday. The MOD is in the hands of the accountants now, in a way it never has been before. And that is probably, on balance, not a bad thing.  Now, past management (and Ministers) weren't around to defend themselves, but Philip Hammond, the current Minister and an accountant by training, painted a pretty damning picture of poor historical planning and financial management. At one point, he said "we are ending a long established conspiracy between MOD and  industry to lock in unaffordable projects". Strong stuff.

The new Permanent Secretary, Jon Thompson, is also an accountant and has recently been promoted from the CFO role at MOD. He's worked in the private sector previously, as well as other public bodies, and he's about as far from the polished Sir Humphrey archetype as you can get, but I'd trust him with my money. A gunslinger moustache, dry sense of humour, and an East Anglian accent - but very sharp and not a man to be messed with.

Two main points for me to take from the event.

Firstly, there was a genuine acceptance of the benefits of engaging with the private sector to help MOD move forwards - true even of Jim Murphy, the Labour Shadow Minister ( a more engaging character than I'd expected from what I've seen of him via the media).

But the second point was how this enthusiasm was allied with real caution about the business models that may be most appropriate, and a desire for the benefits of new contracts to be really clear.

The recent deal with Serco and Accenture for service transformation across the MOD’s Defence Business Services (DBS) was held up as a great example of an innovative reward structure, although it seems too early to be claiming this as a success to my mind. But both Hammond and Thompson talked about the sharing of real measurable gains with the suppliers as being at the heart of that deal's success - so the private sector get a return where the benefits of their involvement was very clear.

On that note, the key remark came from Thompson, who explained his two key questions to be answered about the GoCo.

1. How do you evaluate its value for money?

2. How do you make it work in a way such that all parties benefit and get a fair return?

Now that first point in particular is a real stumbling block, to my mind. There isn't a clear gain in the way that a partnership to sell off land or develop commercial activities can show. So hand over the procurement / project management of a major new project to GoCo, and there is no obvious counter-factual or baseline. How will we know if the private sector has "saved" money for the public purse? If they deliver on time and to budget, that's fine, but perhaps the public sector would have done the same?

And you can imagine the pushback if the baseline was an assumption that the public sector would have "failed" and the private was rewarded for merely "on plan" performance. We've also commented here previously on the CLM / ODA Olympic partnership - that while it was a major operational success, it didn't come cheap. That was affordable for a one-off like the Olympics, but would it be acceptable on a business as usual basis?

Hammond was also vague about the timing for the next GoCo decision - "early next  year". And we heard (unofficially) that issuing the tender to the three consortia shortlisted as DIO partners seems to have slipped, perhaps because of the ongoing GoCo debate.

So given yesterday's discussion, and thinking about that innate accountants' cautiousness, my view is the odds for the GoCo getting approved have slipped from around 70% to 50%.

Finally, I wondered about the event being sponsored by HP, Telereal Trillium and KPMG given that the latter two are in one of the shortlisted consortia for the DIO contract. (KPMG are clearly close to the MOD - they also got a mention for supporting Thompson on some of the key MOD planning and budgeting work).

But it was noticeable that there was no-one from the MOD's Commercial function at the event, or, as far as I could see, from DIO or DE&S. There were however quite a few delegates from Serco, who are leading one of the other bidding groups for DIO, so I assume other firms got invited to ensure there could be no future claims of unfair treatment.

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