MoD to bring private sector partner in to run defence estates rather than set up separate legal entity

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The Ministry of Defence’s estate arm is leaning towards an “insourcing” business model for its £400m strategic business partner contract, rather than setting up a separate legal entity to run its operations, it is understood.

Last month the Defence Infrastructure Organisation (DIO) announced a shortlist of three consortiums to compete for its £400m strategic business partner role. Telereal Trillium, KPMG and Mace make up one consortium, Serco, DTZ and Bechtel another, and Capita, URS and PA Consulting form the final bidder.

As Building exclusively revealed in July, the job was initially tendered for £100m, but then rose to £400m. The DIO stated at the time that payment could rise higher because of an incentive-based contract to encourage the strategic partner to drive efficiencies across the defence estate.

The DIO has said it is considering two business models for the private sector partner: an insourced model, where the successful bidder would send an executive team into the DIO to runs its operations, or an incorporated model, that would involve setting up a separate legal entity. This would be a wholly-owned subsidiary of the Ministry of Defence (MoD) but managed by the strategic business partner.

However, with the MoD opting for the latter model for its massive Defence Equipment & Support outsourcing contract, it is understood that it is now likely to favour the insourced model for the DIO job.

The shortlisted bidders are expecting an invitation to negotiate by the end of this month setting out further detail.

“Until then we won’t know for sure but the view is that it will be the insourced model - at least in the first instance, as it may transition to the outsourced model over time,” a source close to the process said.

The strategic business partner will be responsible for managing around £9bn worth of defence estate repairs and maintenance contracts, which have been delayed for two years while the DIO puts in place its transformation programme and are now set to be awarded in 2014.

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