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Defence partner contract could rise above £400m

Exclusive: A contract to find a new private sector partner for the Ministry of Defence could exceed its estimated £400 million price under an incentive-based contract with staff from the winning consortia set to be seconded to the DIO.

CN has learned that the Defence Infrastructure Organisation will present the three shortlisted consortia for the scheme, valued at around £400m, with a full briefing document next month on the extent of its landbank, assets and costs.

Each of the three consortia will then be expected to set the fee it would charge for a core management team to be seconded into the DIO if it was eventually chosen as the winning private sector partner.

After that point, further expenses will be paid through an incentives-based approach whereby the winning team will be paid a percentage of savings achieved.

The DIO announced it had shortlisted three consortia to become its private sector business partner:

  • Telereal Trillium / KPMG / Mace;
  • Serco / DTZ / Bechtel;
  • Capita / URS / PA Consulting

One source told CN: “Winning this bid will be a very real challenge. You will have to prove you can do it better than someone else who might say I can save [the MoD] 50 per cent of its costs. There will also be a really interesting discussion to be had around what could really be achieved without a private sector partner.

“It’s about taking cost out so no-one should be worried about paying a fee because it’s about finding savings that wouldn’t have otherwise been there. If they are paying a proportion of savings they will be delighted to pay [for example] £1 billion if they have managed to save £5bn.”

“They have to be vague about the price of the contract at the moment because no-one knows what the base costs are.”

A spokesperson for the Ministry of Defence said: “The £400m figure is an estimate of the upper range of contract payment that may come to pass over the life of the contract. The MoD can only provide an estimate as the contract will be largely incentive-based.”

Bidders for the contract were asked whether they could manage DIO’s operations and staff; develop and implement a strategic asset management plan for its estate; manage existing and new suppliers; and develop contract strategies to drive further efficiencies across the Ministry of Defence estate.

The DIO believes long-term partnering with industry may enable it to “harness the expertise available in the private sector to create a world-class sustainable, efficient and professional organisation at the best cost to the taxpayer”.

Mace chief operating officer Mark Holmes said Mace “is looking forward to the next phase of competition in this UK consortium”.

“We will be working with Telereal Trillium and KPMG to offer the right support to DIO in its transformation programme,” he added.

“Mace has a strong track record of bringing innovation and practical support to clients, both public and private, though sustained programmes to transform their estate as business needs change.”

DIO plans to issue the three selected consortia an Invitation to Negotiate in the next few weeks.

The consortia will be asked to further prove that they can provide the MoD with the right skills and expertise, before the DIO makes a final decision regarding their preferred strategic business partner next summer.

However, a contract will only be awarded if it can be found to provide value for money to the MoD and the taxpayer.

Ian Downie, MD of Serco’s strategic partnership business, said: “We are delighted to be one of the three selected teams along with our partners DTZ and Bechtel, and we look forward to the MoD issuing the ITN in the next few weeks. 

“This is an excellent example of the changes and acceleration that the MoD has been making to their procurement processes, with the competition for a strategic business partner having only started in May and expected to complete by next summer.”

Defence secretary Philip Hammond said: “Our search for a strategic business partner is expected to extend the capability of the DIO further by allowing it access to private sector skills and innovation.

“This is an example of where the private sector can add significant value in working with the public sector through a long-term strategic partnering arrangement to deliver benefits for both parties.”

He added: “If this type of partnering arrangement proves successful, it offers the potential for further use in other parts of defence in future.”

DIO chief executive Andrew Manley said: “We were delighted with both the quality and quantity of responses from industry, which allowed us to carry out full and thorough evaluation, before arriving at our choice of candidates to take through to the next stage of the process.”

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