VIEWPOINT

2023

S U C C E S S F U L P R I VAT E
S E C T O R PA R T I C I PAT I O N
IN NONCORE DEFENSEAC TIVITIES
Unlocking hidden value & enabling
greater focus in a complex world

AUTHORS
Carlo Stella
Adnan Merhaba

Defense entities are facing increasing complexity.

Tobias Aebi

While defense budgets are decreasing in real terms,

Selim Mankai

the range of threats is widening. Managing theAlexander Snovskiy

integration of technology and capabilities acrossland, sea, air, and space is ever more crucial. These
challenges require an emphasis on core defense
activities. Expanding private sector participation(PSP) in noncore defense services and assets is
an option that improves focus, meets challenges,
and frees up budgets for frontline activities. This
Viewpoint explains how to identify the benefits
and successfully initiate noncore PSP.

ARTHUR D. LITTLE

VIEWPOINT

THE TIME IS RIGHT
Today, countries and their defense organizations
need to be ready and able to respond effectively

PSP benefits
Defense PSP creates three important benefits:
1. Financial. Embracing more efficientto growing geopolitical instability and ever-private operations delivers significant costchanging security threats. The nature ofsavings, while shifting the burden of capital

warfare has changed dramatically as well, withinvestment to the private sector and enabling

digitization and complexity impacting operations

increased utilization of assets to generate

and forcing defense entities to adapt rapidly.

new revenues. In the 1990s, the UK generated

From cyber warfare and asymmetric tactics tosavings of approximately US $700 million by

emerging technologies like artificial intelligence

involving the private sector in almost 200

and unmanned systems, defense entities mustnoncombat defense activities (see sidebar

master an elaborate set of new, interconnected“The UK’s long defense PSP journey”). During

challenges. These tasks are amplified by thethe same decade, the US Military Housing

general requirement of modern militaries toPrivatization Initiative secured around $30

integrate forces across their different branches tobillion of private investment to renovate

ensure seamless operations and maximize overall

housing units in poor condition and resolve

effectiveness.

accommodation shortages.

Many countries in Europe and Asia experienced

2. Qualitative. PSP and transferring activities

defense budget growth in both 2021 and 2022,

to specialist providers improve the quality,

but defense budgets are under pressure in realavailability, and timely delivery of assets andterms in other regions. For example, the 2022

services, while supporting innovation and

US defense budget shows a cut of approximately

modernization. This enhances satisfaction

6% in real terms, compared to its 2021 budget,with services, reduces complaints, andaccording to IISS.

boosts the morale of personnel and theirBecause of greater complexity and budgetarypressure, defense entities need to channel theirresources, senior staff time, and investments
to where they deliver maximum impact. Thesechanges are increasing the pressure on defense
organizations to offload noncore services andassets to fully focus on core functions. Embracing
PSP removes the need to manage such functions
as noncritical utilities, hospitality, nonmilitarytransport, retail, and supplies. The UK, forfamilies. The US Department of Defense (DoD)
demonstrated the benefits by choosing to
privatize a large hotel estate (76 facilities with
11,600 total rooms) through open tendering.
As a result, the new private operators
dramatically improved quality of services
provided without jeopardizing affordability
for military personnel, veterans, and theirfamilies.
3. Administrative. PSP reduces theinstance, introduced PSP to progressively remove

administrative burden on defense entities,

assets and services that carry a significant costallowing staff to concentrate on their coreburden but are not considered core capabilities

mandate. In the UK, the privatization of(e.g., healthcare, training and education, andnonmilitary training facilities during thenonmilitary IT).

2000s removed significant management,
operational, and maintenance activities
from the UK Ministry of Defence (MoD).
Beyond cost savings, this considerably
reduced administrative requirements in
multiple departments, including equipment
and support, HR, and logistics.

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES2ARTHUR D. LITTLE

VIEWPOINTThe UK’s long defense PSP journey
The UK began to increasingly involve defense
private sector businesses following thedissolution of the Soviet Union, with a vision to- $425 million saved by privatizing thedevelopment of MoD’s integrated, crossbranch internet and communication system- $2.1 billion saved on a long-term contract

maintain the country’s competitive, innovative,

for the development and renovation of

and world-class defense and security industries.

accommodations

The PSP process began in the early 1990s andran in three waves. It focused on removing major
nonmilitary assets and services from MoD control
to establish a leaner organization, enhance
efficiency and service quality, and redirect
resources to modernize core military assets. By
1998, the private sector was involved in roughly
200 noncombat activities.

- $1 billion saved on a 25-year contract for

operating and maintaining water and waste
management assets

In addition to these cost savings, MoD’s overallcapabilities have been improved through theinjection of state-of-the-art private services,while developing robust framework processes
for managing PSP and commercial partnerships.

Structures have evolved over time. During the

The UK’s experience serves as a testament to theinitial wave, project teams were created on apotential of defense PSP and provides valuable

decentralized basis, leading to inconsistentlessons for future efforts. First, future PSP leaders

contracts and uneven relationships withshould be prepared for a lengthy journey thatprivate partners. A central unit was created,

may span several decades. Next, authorities need

the Parliamentary Commercial Directorate,

to ensure flexibility in governing mechanisms

which was responsible for consolidating

to allow for continuous evolution based on

the functions of contract and performance

progress and external factors. Finally, senior-level

management, the functions of PSP efforts, andrepresentative steering committees are crucial

efficiency improvements. A senior-level steering

to support the evolution of PSP efforts, ensuringcommittee for central planning, procurement,

consistent progress toward overarching goals.

and outsourcing was added in the 2010s to further
refine practices. The UK’s defense PSP initiative
has resulted in significant benefits, primarily inthe form of substantial cost savings, including:

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES

3ARTHUR D. LITTLE

VIEWPOINT

ENSURING SUCCES SFUL
DEFENSE P SP

2. Strategy & plan
After establishing clear objectives, defense
entities should create a robust PSP strategy that

PSP efforts in defense organizations typicallyconverts into a comprehensive strategic plan. This

begin either as a centralized initiative aligned

plan should provide clear instructions on how towith national programs or on an ad hoc basis

privatize assets and services and include guidelines

due to budgetary constraints or impending

for prioritization and measurable KPIs for eachhigh capital investment activities (e.g., housing

objective to monitor progress and outcomes.

renovations). Regardless of what drives PSP,
success requires a structured journey that

Experience shows that large-scale PSP

includes three elements: (1) vision and objective,

programs tend to unfold in distinct waves,(2) strategy and plan, and (3) operating model.

each corresponding to a different phase of
the country’s strategic plan (see Figure 1):- Wave 1 — quick wins and big-ticket items.

1. Vision & objectives

In the UK, for example, the first wave of

The vision and objectives for a noncore defense
PSP program should be based on the defense

PSP centered on heavy assets like facility

entity’s overall vision and strategy, local andmanagement and operations, includinginternational benchmarks, relevant laws, andhospitality, housing, catering, and retail.

- Wave 2 — emphasis on specifics. Here, thestakeholder interviews. Setting a vision andobjectives at the beginning of this journeyfocus shifts to assets and services that require

and then amending them over the course ofa more detailed approach to transferring

the program can guide PSP over the long term.

operations and developing contracts with a

In India, for example, the government’s defense

private party. These remain relatively easy

PSP vision of self-reliance and empowering local

to privatize, as there are extensive global

businesses resonates with its wider objectives

experiences and best practices to follow.

of increasing PSP and boosting the use of locallyIn the US, the move toward hospitality

produced goods and services.

privatization is an example of one activity
that may occur during this wave.

Figure 1. How different countries coordinate privatization
efforts
Figure 1. How different countries coordinate privatization efforts

01

WAVE 1

WAVE 2

02

03

WAVE 3

UK: First major efforts, focusing on heavy
assets (e.g., facility management & operations,
hospitality, housing, catering, retail)Privatization of fleet management (e.g., buses,
transporters) and other medium-cost noncore
activities

Focus on nonmilitary training (e.g., technical,
engineers, IT, health & safety, aircraft training)

US: First major privatization initiative in
DoD (housing)

Second major initiative (hospitality)

Various smaller decentralized initiatives

India: Country-wide initiative focused on
support services across several public sectors(telecom, IT, housing) to bundle governmental
services & assets

Privatization of farm service & other clusters(postal services, MRO [core and noncore]& vehicles)n/aCanada: Infrastructure divestment to write
noncore assets off balance sheet

Footprint reduction from personnel capacity
reduction (repurpose & sell land/infrastructure)

Efficiency achievements across militarybranches & services

Australia: 28 activities identified (e.g., catering
contracts, base support tenders, aircraft
maintenance contracts, motor transport fleet)

40+ noncore activities shortlisted (e.g., basesupport, logistics support, fleet management,
equipment cataloging, domestic transport)

Additional activities identified (change ofapproach, bottom-up & driven by operational
staff)

Focus on large assets& infrastructure

Focus on assets & services
easier to privatize

Focus on more
specialized services

MRO = Maintenance, repair, and overhaul
Source: Arthur D. Little

MRO = Maintenance, repair, and overhaul
Source:Arthur D.
Little SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIESSUCCESSFULPRIVATE

4

ARTHUR D. LITTLE

VIEWPOINT- Wave 3 — final steps. If implemented, theproviding financial and risk analyses, leading

third wave typically targets specialized

discussions with the private sector, andservices with complicated operations and acollecting bids. In addition, they may provide aclose affinity to core military services (e.g.,

policy framework and gather lessons learned

training or IT). In the UK, the attention during

for future efforts. In some cases, there is thethis phase was on nonmilitary training,establishment of an overseeing committee, as

covering the technical, engineering, IT,

seen in the UK, Australia, and India. These define

health and safety, and aircraft segments.

the assets and services for privatization, suggest
implementation strategies, and evaluate the3. Operating model

progress and success of PSP implementations.

A successful PSP operating model needs toDefining the mandate, positioning, organizational

clearly outline overall organization for the work instructure, and primary roles of the specific unit

addition to the mandate and model of the specificdriving PSP is crucial. Successful countries,

unit (see Figure 2). The optimal choice relies

including the UK, France, and Australia, haveheavily on the scale of PSP and the degree of need

opted for an “orchestrator” model, where the unit

for cross-functional coordination and efficiency.

leads projects and acts as the main facilitator

Cross-functional project teams provide a goodstarting point in the early stages of PSP. These
integrated teams bring together stakeholders
from various functions, such as procurement,
legal, finance, and planning, to drive respectiveof public-private partnership efforts within theorganization. Consisting of a mix of functional
experts and project teams, it has high-level
responsibility for projects and possesses
significant decision-making power.

PSP efforts. However, while this approach is

The unit’s positioning within the defense hierarchy

initially suitable for the program, it mightis decisive. It should be high enough to exert the

become overly complex as PSP scales up.

political influence needed to trigger and drive

Instead, dedicated PSP units are a proven choice
for larger-scale programs, as witnessed in
the US, UK, France, and Australia. These units
identify opportunities and drive the successful
implementation of initiatives, collaborating

significant changes and be able to collaborate withkey stakeholders, such as asset owners, planning,finance, and other relevant support departments,
including HR, procurement, and legal. In both the
UK and France, PSP units are two to three levels
below the relevant minister to ensure adequate

closely with asset and service owners. They
Figure 2. Organizing
successful privatization governancepower and are on the same level as procurement
assist PSP projects to get them off the ground,Figure 2. Organizing successful privatization governance
Dedicatedprivatization
unit

Cross-functional
project teams

and finance departments, enabling effective
collaboration.

Private sector
representative
SMEs

Oversight
committee•

Integrated teams include all
stakeholders (e.g., force, procurement,
legal) to drive respective privatization
efforts•

Identify opportunities & drive
successful implementation of
initiatives in close collaboration
with forces•

One single officer in charge•

Support projects during initial stages
by making financial & risk analysis,
leading discussions with private sector
and collecting bids•

Provide suitable methodology (policy
framework) & collection of lessons
learned•Defines assets & services
to be privatized & suggests
implementation strategies•

Evaluate privatization-implementation
progress & success•

Discuss potential scope & issues
of upcoming privatization

SIMPLIFIED PROCESS FOR DEVELOPING PRIVATIZATION PROJECTSOpportunity
screening &definition

Businesscase & option
analysis

Management
review & decision
for proceeding

Tendering(development& evaluation)

Management
review & decision
for proceeding

Implementation& organizationaltransfer

Monitoring &control, contract
management

Source: Arthur D. Little
SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES5

VIEWPOINT

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIESARTHUR D. LITTLE

6

ARTHUR D. LITTLE

VIEWPOINTIMPAC T & RE ADINES S:
PRIORITIZING P SP

The sheer scope of these assets and services

The range of services and assets provided by

maximize PSP benefits. While every country’s

defense entities is potentially vast and needs

needs will differ, the following framework, based

effective prioritization setting when creatingon the PSP journeys of defense entities arounda convincing PSP strategy. Organizational

the world, lays out an approach that can befunctions must combine with everything involved

adapted to individual requirements:

means that choosing what to privatize and whenrequires careful evaluation and prioritization toin supplying, housing, feeding, and meeting theliving requirements of their personnel and their

1. Create an asset & service repository. First,
understand and map all noncore assets

families. A large number of these activities areand services owned by the defense entity

noncore and fall under eight main categories:

and create a database that can be used to

1. Healthcare

plan future PSP opportunities. These assets
and services can be clustered based on

2. Housing

category (e.g., healthcare, housing) or by the

3. Utilities and waste

organization responsible. Figure 3 shows asample database.

4. Hospitality and clubs

2. Identify critical assets and services. Certain

5. Nonmilitary transport

assets and services are strategically important

6. Retail, food, and beverage supplies

and cannot be considered for offloading. They

7. Communication, training, and education

may represent critical infrastructure (e.g., water

8. Information technology (IT)desalination plants in hot countries or vital
power-generation facilities close to militarybases), contain confidential information(e.g., clothing and food supplies near militarybases may reveal information about troop
levels), or have other special characteristics(e.g., nonmilitary planes used by high-ranking

individuals and state leaders).
Figure 3. Sample repository of categories/subcategories
Figure 3. Sample repository of categories/subcategories
Healthcare

On-basehospitals

Nonmilitary transport

Off-base
hospitals

Specialized clinics(e.g., oncology,
dialysis, childcare)

Researchlaboratories

Medicalevacuation

Housing

Military
barracks

Housing complexes
for military families

Retirement
homes

UtilityvehiclesBase commissaries& exchanges

Diningfacilities

Uniform &equipment shops

Communication, training & education

Waste management
facilities

Renewable energy
installations

Hospitality & clubs

Military hotels & lodges

General aviation
aircrafts

Retail, food & beverage supplies

Utilities & waste

Military baseutilities

On-/off-basetransport services

Military
academies

Noncore training& professional
development courses

Libraries& research
centers

Schools forchildrenBroadcasting& mediaunits

IT

Officers’ clubs

Data centers

Noncore network infrastructure

Source: Arthur D. Little

Source: Arthur D. Little

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES

37

ARTHUR D. LITTLE

VIEWPOINT

3. Define aspiration levels for each cluster.

5. Evaluate the impact and readiness of

The level of PSP ambition will vary between

opportunities. Set success criteria forcountries and clusters of assets and services.

PSP projects. For example, impact criteria

Experience shows that countries are generally

might include quantitative, qualitative,

more ambitious about privatizing complex,

and administrative benefits. Readinesshigh-CAPEX areas not connected to theircriteria would focus on the availability andcore processes, such as off-base healthcare

experience of private partners, internationaland housing. However, governments tend toand local success stories, and any regulatory

be more cautious about assets and services

barriers. Evaluate project simplicity (e.g.,that they rely on operationally like IT. Figure

number of stakeholders involved, degree of

4 shows the aspiration levels of different

asset centralization, and estimated project

countries across clusters.

duration) and internal readiness, including
data availability, human capabilities, and4. Identify all PSP opportunities. Knowledge

previous experience.

gained during the previous steps will allow
defense entities to create a long list of areas

6. Select focus opportunities. At the final

for privatization. Common low-hanging fruit

stage of planning, build a short list ofincludes the construction or renovation ofopportunities to ensure PSP efforts are wellhousing; large, uncritical infrastructure (e.g.,defined and effective. These are likely to

district cooling); or wastewater facilities andinclude quick wins as well as other large,

nonmilitary vehicles (e.g., buses, car fleets).

centralized but noncore assets, such as
hotels, uncritical power generation, and large
retail facilities, since operation of these andpotentially their ownership will be transferred
to a PSP depending on the chosen model.

Figure 4. Visualizing aspiration levels by country, assets, andservices
Figure 4. Visualizing aspiration levels by country, assets, and services

01

Healthcare

02

Housing

03

Utilities & waste04

Hospitality & clubs

05

Nonmilitary transport

06

Retail, food & beverage
supplies

07

Communication,
training & education

08

IT

FranceIndia
CanadaUK

FranceIndia

Germany

US
India

UK

India

UK
Germany

TurkeyTurkeyFranceUS

US

CanadaCanada France India

Low

India

US

Aspiration level

USFranceCanada

UK

UK
UK
High

Source: Arthur D. Little

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES

Source: Arthur D. Little

48

ARTHUR D. LITTLE

VIEWPOINT

Examples of success stories in specificclusters include:- Healthcare in Australia. The majority of

medical and dental services were transferred
to private entities. This approach led to ASPEN
Medical being contracted for field operations
and most on- and off-base health services.

THE OVER ALL
PRIORITIES SET TLE
ON OPPORTUNITIEST H AT Y I E L D H I G H
CAPEX OR OPEXS AV I N G S

Pathology, imaging, and radiology services
were transferred to Medibank.

- Utilities in the US. The DoD successfully- Retail in Canada. Retail and food/beverage

installations, including electricity, water,

Finance-Operate (DBFO) models under theprivatized a quarter of utility systems on militarynatural gas, and wastewater. Private companies
are now in charge of upgrading, constructing,
maintaining, and operating the infrastructure,with plans to privatize an additional quarter ofsystems in the near future.

outlets were privatized through Design-Buildmanagement of CANEX, the government-owned
military store. A profit-sharing agreement wasestablished between CANEX and the Ministry of
National Defence, yielding significant financial
and operational benefits for both entities.

The overall priorities settle on opportunities
that yield high CAPEX or OPEX savings, support
from key stakeholders across the entity, and thedelivery of substantial improvements in quality
for employees, soldiers, and their families.

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES

9ARTHUR D. LITTLE

VIEWPOINT

CONCLUSIONM A N A G E C O M P L E X I T Y,
C O N N E C T W I T H P R I VAT E
S E C T O R , S E E R E S U LT S

P R I VAT I Z I N G N O N C O R E A S S E T S A N D
SERVICES HAS PROVED TO DELIVERF I N A N C I A L B E N E F I T S , FA C I L I TAT E M A J O R
INVES TMENT S , AND ENHANCE QUALIT Y

In a time of escalating pressures on defense entities,
privatizing noncore assets and services has proved todeliver financial benefits, facilitate major investments,and enhance quality. As defense management
becomes more complex, organizations should increase
PSP efforts by initiating the following steps:
1

Set a proper PSP vision and objectives alignedwith overall defense and/or national strategy,
which establishes and covers benefits andambition levels.

2

Create a robust PSP strategy to translate into acomprehensive strategic plan. Clear prioritizationof the noncore assets and services intended for
PSP is the desired outcome.

3

Design a PSP operating model that involves key
internal and external stakeholders and effectively
puts the right structure, authority, and capabilities
in place to govern and steer programs.

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIES10VIEWPOINT

SUCCESSFUL PRIVATE SECTOR PARTICIPATION IN NONCORE DEFENSE ACTIVITIESARTHUR D. LITTLE

11

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