Defence Business: Working with Public Private Partnerships | ADM Oct 08
Public Private Partnerships (PPPs) are offering new ways of doing Ministry of Defence (MoD) business more efficiently, making best use of the available skills in the public and private sectors to deliver better defence services in support of the front line, consistent with their principles of Smart Acquisition.
Katherine Ziesing
Smart Acquisition is a long-term MoD initiative to improve the way defence capability is acquired.
The MoD no longer replace military equipment, services, estates or business information systems on a like-for-like basis but instead takes into account how such a capability will integrate with other capabilities to achieve optimum effect by the Armed Forces.
There is now a focus on a through-life approach to acquisition, rather than concentrating resources on the initial procurement. Part of this approach is the use of PPPs where appropriate.
PPP is an umbrella term covering a variety of procurement initiatives, all of which benefit from a close, and normally long-term, relationship with a private sector partner.
The main techniques are the Private Finance Initiative, (PFI), Partnering Arrangements, Outsourcing, the Wider Markets Initiative and the Defence Estates Prime Contracting Programme.
PFI remains the cornerstone of MoD’s PPP programme.
It remains departmental policy to consider PFI for every investment decision and to determine whether or not it makes sense for that investment to come from the private sector rather than from public funds.
Further guidance is available under the PFI Topic. But there are a number of contracting methods available to suit the requirements of the MoD.
A Partnering Arrangement is a term used to describe one form of long-term contract based on the partnering ethos.
It establishes a framework within which the Department’s relationship with a contractor can grow over time.
One type of Partnering Arrangement takes the form of a Partnering Principles document defining the principal agreements between partners and a Framework Agreement within which separate tasking orders define each element of the service to be provided.
MoD has considerable and long standing experience of contracting out, or outsourcing, the provision of services.
Much of this was built on the previous Competing for Quality (CFQ) initiative, which in turn opened the way for other forms of PPP.
Outsourcing contracts are often in the order of 5-7 years in length and other forms of PPP will be more appropriate when a longer-term relationship is envisaged or capital investment is needed.
In many instances, acquisition of new buildings or facilities through PFI is not practicable or economic.
As part of the Government’s Rethinking Construction initiative, a new process has been developed for applying the principles of prime contracting.
This builds on the well-established arrangements for prime contracting now widely used in MoD, as well as its investment in the development of a supply chain management system known as ‘Building Down Barriers’.
Unless there are good reasons for doing otherwise, the prime contracting approach will be adopted where the PFI route cannot be taken.
Under Defence Estate’s prime contracting program, MoD retains ownership and responsibility for the full capital and running costs of new facilities but looks to a single contractor to take responsibility for the integration and management for the entire design and construction supply chain, including the delivery of the completed project on time, within budget and fit for purpose.
Best practice
MoD is committed to the disposal of surplus capacity wherever practicable, but the nature of defence business means that some irreducible spare capacity is always likely to remain.
MoD business areas are encouraged to exploit spare capacity in their assets on a commercial basis in order to make the best use of MoD’s extensive physical (equipment, land, premises) and non-physical (intellectual property, data, skills) asset base.
Business areas can use the income generated by this ‘Wider Markets’ activity, either to support core MoD objectives, or contribute to local ‘quality of life’ improvements for military and civilian personnel.
In 1998, MoD’s in-house research laboratories, the Defence Evaluation and Research Agency (DERA) employing over 12,000 staff, faced an uncertain future due to declining funding and increasing civil sector competition.
To address these issues, the Strategic Defence Review of the same year committed MoD to a PPP approach for the future, announcing its intention to “harness the opportunities offered by a public private partnership to strengthen the Defence Evaluation & Research Agency’s ability to continue to provide world class scientific research well into the next century”.
After numerous studies and reviews, the MoD concluded that DERA would be better equipped to continue to provide the research and development capability that MoD requires as a private entity.
Without the capital and the freedoms offered by the PPP, MoD concluded that DERA would decline as a force in science and technology over the longer term.
In July 2001, QinetiQ plc was formed from the majority of DERA.
Although flotation on the stock market was the preferred option for the PPP, market conditions were not right at the time and QinetiQ lacked a commercial track record.
Consequently, MoD decided to seek a strategic partner to invest in QinetiQ and to support the company’s growth and development.
QinetiQ was successfully floated on the London Stock Exchange on 10 February 2006.
This float - or initial public offering (IPO) – raised approximately £360 million for the taxpayer, £250 million of which was reinvested in defence.
MoD has retained a stake of approximately 19 per cent of QinetiQ (worth around £250 million).
The MoD also retains the special share in QinetiQ in order to protect UK defence and security interests.
However, the UK government has signalled that it plans to sell the remaining stake at some yet unknown stage.
In place
There have been numerous projects announced in recent times for the MoD.
In January 2007, the Metrix consortium was named preferred bidder on Package 2 of the £16 billion Defence Training Review (DTR) program, with a term of 25 years.
The DTR aims to provide the best possible specialist training by creating National Centres of Excellence, through a program of investment, rationalisation and modernisation.
There is a move to make more training in specific areas tri-service.
Those covered in the DTR include:
• Aeronautical Engineering
• Communications and Information Systems
• Electro-Mechanical Engineering Logistics
• Personnel Administration
• MoD Police and Guarding Security
• Languages, Intelligence and Photography
A joint partnership between Interserve and John Laing (Inteq consortium) was named preferred bidder for the MoD’s £90 million scheme to rebuild, refurbish and manage a state of the art communications centre at Corsham in Wiltshire.
The UK Military Flying Training System (UKMFTS) program also runs for 25 years and will see all UK military pilots go through the same training program (see box for more).
Moving forward
The MoD is now pursuing two models for PPPs, according to DLA Pipers European PPP Report 2007.
First is the Strategic Partnership model, which is a joint venture between the public and private sectors.
The long-term partnership has the benefits for the private sector of a skilled public sector partner.
For the public, there are economies of scale in this approach.
Secondly, the Project Delivery Organisation, or Integrator, model which sees a long-term contractual relationship put in place.
The structure is designed to incentivise the private sector to deliver on time and cost and requires that they take a significant share of the integration risk, which affects the operational performance of the project itself.
UKMFTS is structured in this way.
Larger projects under both structures are the way forward for defence projects and this sector will continue to deliver, slowly but surely.
JV in the air
Ascent, a joint venture of Lockheed Martin and UK based VT Group, has signed the contract which will see it provide military flying training to the UK Armed Forces for the next 25 years.
The initial contract is valued at £635 million and is projected to rise to approximately £6 billion over the life of the program.
The contract makes Ascent responsible for running the UK Military Flying Training System (UKMFTS) program, providing comprehensive training to all new UK military aircrew across the Royal Navy, the Royal Air Force and the Army Air Corps.
Minister for Defence Equipment and Support, Baroness Taylor, said: “The partnering contract with Ascent brings together MoD and industry skills to deliver a first class flying training capability.
"It will significantly improve training for Royal Navy, Royal Air Force and Army aircrew by bringing together the current range of fragmented training schemes into one modern and cohesive program.”
Fred Ross of Lockheed Martin has been named managing director of Ascent and Ken Cornfield of VT Support Services will serve as Ascent deputy managing director.
Under UKMFTS, the MoD maintains the training output requirements and standards whilst providing elements such as airfields, fuel and instructors.
Ascent will design the overall system and deliver the training capability including delivering a proven Training Management Information System and the procurement of aircraft platforms and simulators.
“UKMFTS is a model private-public initiative that will enable us to work with the Ministry of Defence for the next two and a half decades, providing tailored solutions that will optimise the capabilities of UK aircrews,” said Dale Bennett, president of Lockheed Martin Simulation, Training & Support.
Ascent will take over the role on an incremental basis to ensure minimal disruption to the current training program.
Additional contracts detailing future services and purchases will be announced as the program progresses.
The training covers the period following Aircrew Selection up to the point the students leave UKMFTS ready to fly in their operational aircraft.
Ascent’s selection as UKMFTS Training System Partner in November 2006 followed a competition to select a partner who would harness the collective skills of the MoD and industry.
Ascent will work with the MoD over the life of the program to design, deliver and manage ground and flying training at multiple locations across the UK.
UK agreement guarantees munitions supply
A new £2 billion 15-year partnering agreement (with anticipated growth to more than £3 billion during the next 15 years) between the UK MoD and BAE Systems Land Systems Munitions guaranteeing the future supply of the Armed Forces’ small arms and medium calibre ammunition has been signed.
The new agreement with BAE Systems LSM covers around 80 per cent of the munitions used by the UK Armed Forces on operations and training and includes small arms and medium-calibre ammunition, mortar bombs, tank artillery and naval gun shells but not complex weapons such as guided missiles.
The arrangement, known as Munitions Acquisition - the Supply Solution (MASS), is initially for a 15-year period.
Some 1,700 jobs will be directly sustained by the deal, including 230 specialist munitions engineer posts.
BAE Systems has pledged to invest more than £120 million over the next five years to accelerate transformation of its munitions sites into modern, safer, highly automated, energy efficient, and flexible facilities.
MASS was signed on 20 August and will be implemented from October this year.
Australian PPP
This model is how the new Headquarters Joint Operations Command (HQJOC) has been built and fitted out near Bungendore, NSW, about 25 km east of Canberra.
The value of the contract comprises both the capital cost of the buildings and infrastructure for the facility and the cost of providing a range of contracted services such as access control, cleaning, administrative and clerical support and waste removal and maintenance services over the 30-year contract term.
Responsibility of these functions will then revert to Defence.
“The project has been a successful outcome and we have delivered on what we promised.
"We are looking froward to continuing to do that for the life of the contract,” said Peter Hicks managing director of Praeco.
Defence will pay Praeco (a consortium comprising Leighton Contractors Pty Limited and ABN AMRO Australia Limited) an Annual Service Payment, commencing when the facility is completed in 2008.
The first full-year payment will be $39.99 million, commencing in 2009-10.
The whole-of-life net present cost to Defence for the provision by Praeco of the buildings, infrastructure and services over the 30-year term is $572.2 million (all dollar amounts are expressed in 2006-07 prices, less GST).
In terms of what Praeco would do differently next time around in a PPP with Defence, Peter Hicks was very positive about the working relationship.
“I think it went well overall but next time we would put more effort and resources into dealing with Defence.
"I think we underestimated the amount of time and effort it would take in dealing with the many aspects of the Defence Department, which is quite a complex organisation.”
“I think the project has been a bench mark in terms of where we are with the Commonwealth government and PPPs.
"This has been the first experience for Defence with a PPP, so it has been a groundbreaker in more ways than one.
"Things can always be done better, but given that it was the first time I think it went very well.
"I would have no problems signing up for another one,” said Hicks.
The HQJOC facility will be equipped with a comprehensive range of command, control, communications, computing and intelligence (C4I) systems.
In December 2005, Defence contracted Codarra Advanced Systems to provide C4I Systems Project Management and Systems Engineering services.
Codarra is providing the majority of the Defence Project Office functions for managing the design and delivery of the C4I Systems for HQJOC.
Following an extensive evaluation process, Defence selected Thales Australia as the contractor to deliver the integrated suite of C4I systems for the new headquarters.
The value of the contract will be up to $58.5 million.
Thales Australia is responsible for the design, build and test of the C4I systems required to support the headquarters. The majority of the C4I systems will be built and tested off-site.
“Thales Australia was able to walk in on July 9 and begin work on fitting out the C4I systems as the handover was exactly on schedule,” said Gary Hines Thales Australia’s general manager of programs and operations for the Security Solutions and Services Division (D3S).
“The installation is going well,” Hines told ADM in late August.
“We’re fitting out our systems at the moment, such as the works stations and other multimedia items.
"These are rolling on schedule out thanks to the ground work already done by us and our team of local SMEs on the logistics support front.
"We have a team of 30-40 people on site to make the project come together.”
The C4I systems will be installed in time for Defence staff to commence moving in and work in November, with a period of testing for a few months, with HQJOC due to be officially opened in March 2009.
Thales Australia will be on hand on for the next three years to support the system they installed at which time the Commonwealth will renew or retender the through life support functions for the various IT systems.