5 The Department has long wrestled with problems in defence acquisition. By 2010 poor performance led to an 'overheated' equipment programme, where a gap of £38 billion emerged in the defence budget. Building on an independent report commissioned by the Department, DE&S estimated £1.5 billion was lost annually because of three systemic issues:
• to offset cost overruns in the equipment programme, major projects were routinely delayed or reduced in scope as well as impacts across other areas of defence spending;
• the Department struggled to make strategic investment decisions because of blurred roles and accountabilities between head office, the commands and DE&S; and
• poor skills and management freedoms within DE&S to maximise the value of funds allocated to buying equipment and manage projects through their life.
6 The need for change was widely acknowledged and made in a number of Department commissioned reviews, as well as in reports by the House of Commons' Committee of Public Accounts and Defence Committee. There are three strands to the Department's strategy for reforming defence acquisition. The Department has sought to:
• develop an affordable equipment programme, in the form of the Department's ten-year Equipment Plan;
• strengthen the roles and responsibilities of head office, DE&S and the commands, through a new operating model in line with Lord Levene's 2011 review; and
• improve DE&S's skills and capabilities through the Department's Materiel Strategy.
7 To improve acquisition within DE&S, the Department initiated the Materiel Strategy, designed to:
• give DE&S greater management freedoms to introduce private sector practices, skills and tools;
• formalise and introduce rigour in dealings between DE&S, the commands and head office; and
• improve DE&S's efficiency and deliver the Equipment Plan for less.
8 The Department evaluated three organisational structures to meet these objectives:
• Trading fund
A public corporation, government-owned and operated, financed from its trading activity.
• Executive non-departmental public body with a strategic partner (ENDPB/SP)
A special-purpose body that manages part of the government's work, contracting with the private sector for business support.
• Government-owned, contractor-operated model (GoCo)
A company where the government owns the strategic direction and assets, but the GoCo would be operated on a for-profit basis by a private company, accountable to its shareholders.
9 The Department opted for the structural reform that offered the highest evaluated benefits, but carried greater assessed implementation risks, the GoCo. This was actively pursued between 2012 and 2013, and has now been discontinued in favour of establishing DE&S as a bespoke trading entity. The Department chose the bespoke trading entity when terminating the GoCo competition in December 2013. The Department evaluated the bespoke trading entity as a lower-risk option, but with the potential to bring the functional improvements necessary without requiring complex risk transfer to the private sector.