Ministry of Defence shake-up in chaos over conflicts of interest

The Government’s heavily criticised plan to “privatise” the £14bn defence agency that buys the armed forces’ tanks and missiles is in crisis, as all of the companies bidding to run the organisation have acute conflicts of interest.

The firms – which range from huge US engineering empires to the electronic-tag-scandal group Serco – are worried they will be compromised by their existing contracts with the MoD if they win the right to run Defence Equipment & Support (DE&S). The conflicts could even prompt legal challenges, while it is understood that Ministry of Defence officials fear that this globally unique overhaul is unworkable.

The chaos is heaping pressure on the coalition to scrap its radical experiment to reform how Britain organises its defences. It is understood that even the Pentagon has, privately, been shocked that the Defence Secretary, Philip Hammond, is so keen on promoting the idea of allowing commercial organisations to run such a sensitive area of national security.

Handing DE&S over to the private sector is one of Mr Hammond’s flagship reforms as he looks to rein in spending. Critics say this is privatisation by stealth, but the plan is designed so that there is the commercial acumen to ensure the taxpayer does not overpay for anything, from submarines to satellite systems.

At least nine companies have formed three consortiums to bid for the right to run the Bristol-based DE&S in what is known as the “government-owned, contractor-operated” model – or GoCo. They are fronted by US engineers Bechtel, CH2M Hill and, believed to be working together, URS Corporation and KBR.

An industry source said: “The whole plan could end up being axed. There is only a very small clique who believe that a GoCo can deliver value for the taxpayer. It is questionable, given the conflicts across the supply chain, that any private-sector partner could deliver value for the MoD.”

A bidder added: “Conflicts will be top of our list; it’s going to be a nightmare. It’s not possible to be part of a conglomerate bid of this size without conflicts of interest.”

One of two serious problems is that several of the companies already work regularly for DE&S, meaning they would be dishing out or overseeing contracts handled by their own employees. For example, the defence technology group Qinetiq won a £1bn contract this year to improve the effectiveness of artillery shells, while Serco provides maintenance on military aircraft.

Peter Rogers, the boss of Serco’s rival Babcock International, recently warned City analysts of this problem when explaining why his company was not bidding for DE&S. In a transcript of the meeting seen by The IoS, Mr Rogers said: “It’s inconceivable that you could be responsible for the GoCo and win contracts. I’m not sure it’s dawned on Serco yet.”

The second major problem is that several firms either work for or are involved with DE&S’s biggest suppliers, notably th defence giant BAE Systems.

Lee McIntire is chief executive at CH2M Hill, but is also a non-executive director at BAE, while accountant PricewaterhouseCoopers checks the books of many defence contractors, such as Cobham. Atkins, KBR and PA Consulting have also worked for BAE.

Mr McIntire said this weekend that “should CH2M Hill be awarded the contract, I would, of course, give up my seat on the BAE board of directors.”

A third controversy is that URS, Bechtel and Serco are also bidding to be the business partner on another MoD agency, the Defence Infrastructure Organisation (DIO). This runs the MoD’s estate, including naval bases and airfields.

DIO has a budget of £3.3bn, which means that a firm involved in running both the DIO and DE&S would control more than half of Britain’s defence budget. This is considered by many sources and – again – by some MoD officials as distinctly unpalatable.

A spokesman for the MoD said: “From the outset, bidders have been required to declare any perceived, potential or actual conflicts of interest, together with proposals for how they would manage them. The MoD has the right to exclude potential bidders if new conflicts of interest arise during the process.”