The Secretary of State for Defence (Mr Philip Hammond)
A core element of the transformation process under way in the Ministry of Defence (MOD) is reforming its acquisition system to drive better value from the defence budget. This includes changes to the Defence Equipment & Support (DE&S) organisation to ensure it has the structures, management and skills it needs to provide the right equipment to our armed forces at the right time, and at the right cost. This is essential to tackle the legacy problems in defence acquisition that led to cost and schedule overruns, and which have resisted previous reform. The people at DE&S work hard to provide battle-winning equipment, support and logistics, but the current system does not work for them, does not always support them, and is not delivering value for money for the taxpayer.
Over the last year, Bernard Gray, the Chief of Defence Materiel, has analysed the root causes of the current situation and identified three interlinked issues. These are: a historically overheated equipment programme, where far more projects were planned than could be paid for; a weak interface between DE&S and the wider Ministry of Defence with poor discipline and change control between those setting requirements for equipment and those delivering the programmes; and insufficient levels of business capability at DE&S for the scale and complexity of the portfolio it is asked to deliver. The result has been significant additional costs in the defence budget of the order of hundreds of millions of pounds each year, with money spent managing the consequences of delay rather than delivering maximum capability for the armed forces.
I was able to announce to the House on 14 May, Official Report, column 261, that we had finally balanced the defence budget. The MOD is now engaged in a process of transformation to deliver the behaviour-changing incentives and structures that will maintain the budget in balance in the fixture. The restructuring of DE&S is key to this process.
For decades the Ministry of Defence has wrestled with this issue without success, and it is clear that addressing it within current structures will be extremely challenging. Earlier this year, I therefore asked my officials to focus their efforts on considering the comparative benefits which could be derived from changing DE&S into either an executive non-departmental public body with a strategic partner from the private sector (ENDPB/SP), or a Government-owned, contractor-operated (GOCO) entity. The work done to date, suggests that the strategic case for the GOCO option is stronger than the ENDPB option. Further value-for-money work is under way to confirm this assessment. In the meantime, as resources and commercial appetite constrain our ability to pursue these two options simultaneously to the next stage, I have decided that MOD should focus its effort on developing and testing the GOCO option further.
The work to determine value for money between the options will take place over the next few months, and in parallel we will begin development of a commercial strategy, engaging industry to hone our requirement. This work will support decisions later in the year on whether to proceed with the GOCO option and whether to launch a competition for the private sector management company to run the organisation. Provided that the further work demonstrates that the value-for-money case for GOCO over ENDPB/SP is conclusive, this will be followed by an investment appraisal that will test the GOCO against a public sector comparator, following which a decision on whether or not to proceed will be taken.