Lessons Learned from the United Kingdom: Public-Private Partnerships
The U.S. Department of Defense (DoD) and the U.K. Ministry of Defence (MoD) face a common challenge: to modernize their forces to meet changing military threats under reduced budgets. To meet this challenge, both organizations are increasingly interested in leveraging private sector capital and expertise to provide defense activities and support services. While both countries have reduced their force structures and defense spending substantially since the end of the Cold War, the United Kingdom has been more aggressive in pursuing such private sector involvement.
RAND recently published the proceedings of a three-day conference that brought together senior military leaders, government civilians, and industry representatives from the United States and the United Kingdom to discuss the British experience with privatization and explore its applicability to the U.S. Army. The conference, held at Ditchley Park in Oxfordshire, England, on April 14-16, 2000, was organized by the Honorable Mahlon Apgar IV, Assistant Secretary of the U.S. Army for Installations and Environment at that time.
What Is Privatization?
As Secretary Apgar explained in the conference's opening address, privatization has two components: attracting private capital to help fund programs, and enlisting private enterprise in designing and executing programs. Unlike outsourcing, which involves contracting with outside organizations to provide support services and which has been standard practice in the Army for years, privatization shifts some or all of the responsibility and risk for planning, organizing, financing, and managing a program or activity from the Army to private contractors or partners.
The U.K. MoD began increasing private sector involvement in defense activities in 1980s by privatizing several government-owned defense firms and conducting public-private competitions for support activities such as aircraft maintenance, vehicle repair, and food and janitorial services. Over the last decade, the MoD has used the Private Finance Initiative, under which contractors invest in assets used to provide defense support services, to reduce costs and improve performance.
As the U.S. Army seeks to achieve the same goals, improved use of private sector capabilities and resources is an essential strategic objective.
Both the United States and the United Kingdom have downsized while simultaneously attempting to restructure and modernize their military forces. In an era of shrinking budgets, the quality of support services must be maintained or improved while costs are reduced. If support costs cannot be reduced from current levels, the U.S. military may either have to reduce its force structure or slow down the pace of modernization. The private sector has been able both to improve the performance and reduce the cost of support services through quality management programs and outsourcing non-core functions.
It is difficult in the current budget environment for the Army to make the investments required to renovate housing and other base facilities and improve the reliability of military equipment. However, such investment today is needed to lower support costs and improve living and working environments tomorrow. Privatization can help solve this problem. A private-sector provider with a well-designed, long-term contract:
has the financial incentive and ability to borrow against a future income stream and invest today to reduce costs tomorrow,
can absorb some risks,
can contribute expertise in better business processes and practices, and
can provide organizational incentives to improve performance.
Conference Working Groups
The Assistant Secretary of the Army for Installations and Environment commissioned and distributed background reports compiled by RAND and PricewaterhouseCoopers that were designed to focus conference discussion on private sector involvement in three major areas of U.S. and U.K. interest:
Housing and other base facilities,
Base operations and services, and
Conference participants broke up into three small working groups, each dedicated to discussing one of the three areas of interest and comparing U.S.-U.K. experiences with privatization. Each working group attempted to determine which areas are appropriate for privatization and focused on strategic approaches to public-private partnerships. The groups also pondered obstacles and ways to overcome them.
The three working groups presented their findings to the entire assembly in closing plenary sessions.
In the concluding sessions of the conference, participants raised common issues and themes across the three areas of interest.
Appropriate Activities for Privatization: Although it proved difficult to draw a dividing line between military, civilian, and contractor functions, each working group agreed that a strategic approach was needed to integrate contractor, civilian, and military operations, particularly in deployed environments.
How Public-Private Partnerships Can Be Established: To make effective use of private sector providers, adversarial contracting relationships must be replaced by long-term partnerships based on common goals. Conference participants recommended changes in the current contract design process. They also recommended that contract requirements be defined in terms of outcomes or outputs rather than inputs and placed emphasis on establishing performance metrics, including measures of customer satisfaction, and linking them to contract incentives. Participants also thought that the government should share gains associated with cost reductions and performance improvements with contractors. They disagreed, however, about whether such changes would require regulatory reform or if cultural changes would be sufficient.
Creating Incentives for Privatization. Conference participants explored some of the reasons why the United Kingdom has made more use than the United States of privatizing military support functions. Many felt that DoD leadership had not yet secured the full support of senior military leaders, government civilian employees, and political leaders in Congress to proceed with innovative privatization deals. Participations made suggestions for increasing support from these quarters and creating internal organizational incentives.
Some of the incentives they recommended included:
introducing improved accounting systems,
using working capital funds to create financial incentives for privatization,
allowing commanders to keep some of the savings from privatization,
designing pilot projects to test new methods and demonstrate success,
sharing best practices and lessons learned, and
educating commanders and contracting officers about how to design and manage innovative contracts.
Participants agreed that the conference provided a valuable forum for exchanging ideas, learning from each other's experience, and discussing common problems. As a result of the conference, U.S. Army participants resolved to, among other things, establish a permanent, ongoing forum, develop new forms of contracting for privatization, and pursue a strategic vision for privatization that includes garnering support from key military commanders and political leaders.