At the recent Public Private Partnerships (PPP) for Defence and Security conference, the Chief of the South African National Defence Force (SANDF), General Rudzani Maphwanya, indicated that the SANDF may be looking to examine options to test the PPP concept.
The initial test solutions should be below the National Treasury threshold for reduced PPP process. Defence PPP can be slightly different from commercial PPP models (Build-Operate-Transfer; Build-Own-Operate; and Design-Build-Finance-Operate). The ideal would be to cover all six SANDF identified functional areas, while also providing solutions covering each of the arms of service.
This is a large challenge. The initial test set of contracts would allow the SANDF to understand the PPP model and the implications of executing contracts in a SANDF PPP project office. The initial contracts need to establish processes and procedures for adjudicating the value brought to the table, value unlocked by the PPP and performance against contract.
Adjudicating value could be a derivative of the well-established Systems Operating Performance requirements. This brings in the elements of effectiveness and efficiency to derive a PPP with total system effectiveness.
The value of the PPP is determined by selecting solutions that maximize systems operating performance at lowest possible Total Cost of Ownership (acquisition & support cost combined), without compromising the operational effectiveness of SANDF operational capabilities.
The biggest challenge is understanding what is contract performance. Performance based contracting is not currently exercised in the SANDF. In order to obtain the maximum benefit from Capability Contracting, a contract needs to stipulate the roles, responsibilities, and duties of the parties involved. This is fixed in a Performance Work Statement (PWS). The PWS outlines the tasks that a contractor is to perform. It is comparable to a unit’s tasking orders (TO) capability issued through OSIS (Operational Support Information System). However, just as units often cannot perform some missions because of TO shortages, the contractor may not be able to perform a function because the Government never “turned on,” or paid for, that part of the contract.
PPP Contracts are “performance based”. The SANDF cannot tell a contractor how to perform the task but merely what the end state of the task needs to be and, more importantly, to what standard. That is how the contractor will be evaluated and held accountable. Once the PWS is finalized and agreed on by both the Government Institution and the contractor, and the funding is approved, the contractor can begin the new work. This implies that the initial PWS needs to include the level of detail to ensure that the capability is fully functional.
Note to SANDF: Make sure that what you expected was a funded part of the PWS. This negative impact can be minimised by generating PWS templates for different contracting models. Below is a suggestion of different defence applicable models, tailored from the commercial standard models, that can be evaluated during the initial set of PPP contracts:
Model 1. Support existing SANDF Asset. This is a contract for agreed performance on SANDF Prime Mission Equipment (PME). The functions can be divided into a Two-Level Maintenance process that separates maintenance into two categories: Field-level maintenance is an on-system or near-system repair process that returns equipment to the user. Sustainment-level maintenance is an off-system repair process that can be employed at any point in the integrated logistics chain and returns equipment to the supply system. The PPP contract covers the sustainment-level maintenance on Contract for Availability. The support contracts are for multiple years (5, 10, 15, 20 or 30 years).
Model 2. New SANDF Asset with Support. This contract model covers the acquisition of new PME. The new build PME can be supplied in line with the standard SANDF project process. The SANDF can then still influence the product solution. The asset support is then also included as per Model 1. This model is in line with the standard PPP Build-Operate-Transfer (BOT) model. The benefits are distributed acquisition cost, but with a reduced SANDF logistics footprint to reduce the total system life cycle cost. Small batch procurement can then be targeted as suppliers are fully engaged over the total life cycle. This increases the total system effectiveness versus standard procurement and support procedures.
Model 3. Used Asset with Support. The process is like Model 2. The difference is that the PME has been operated by a previous entity. PPP generally deals with new design and build projects. A lower cost, and short lead time option of used PME is an option to consider. This option provides limited opportunity for the SANDF to change the PME. The asset has been used but is available almost immediately. The downside is that the asset’s life is reduced. The support contract would generally be to a maximum of 20 years. The benefit is reduced acquisition cost that can also be distributed over an increased period. The total system life cycle cost is reduced. The downside is that systems are then replaced on a shorter timeline, which could offer the benefit of a shorter total life cycle. This aligns with continuously more modern technology philosophy.
Model 4. Asset Supply with Operational Support. This is the contract for capability option and is also known as the Build-Own-Operate (BOO) model. The SANDF supplies limited support. The user operates the PME and can schedule use, but field-level maintenance is carried out by the contractor for the duration of the contract. The asset can be either new or used. The scope for change to meet SANDF needs can be accommodated. Full system obsolescence is continually monitored by the contractor to ensure user defined performance requirements are achieved for the duration. The benefit is a reduced acquisition cost as there is a significant reduction in support infrastructure. The contractor economy of scale provides reduced support in the long run versus Model 2 (new) and Model 3 (used) PME. Asset management is the responsibility of the contractor for duration of the contract. This is an elegant option for the SANDF to transfer guaranteed operational availability risk on deployments.
Model 5. Modified SANDF Asset with Support. The first four models are straight forward and have international track records and data. This model brings in the complexity of the asset management of controlled items. The modified asset acquisition element is similar to the existing mid-life upgrade project mechanism and can be compared with the Design-Build-Finance-Operate (DBFO) model. The asset is transferred to the contractor. The SANDF has potential to influence the PME product solution, like model 2. The support contract would be shorter duration like model 3. The risk is related to the handling of controlled assets. The acquisition cost is further reduced versus models 2 and 3. This provides an increase in the total system effectiveness versus model 2 without upgrade. The process efficiency benefits need to be evaluated versus model 3, similar to a make / buy decision in terms of total system effectiveness.
Model 6. Contractor Use SANDF Asset and provides Support. The SANDF has indicated that is examining options to sweat assets. The mechanism for sweating assets is currently not mature. The contract roles, responsibilities, and duties of the parties involved need to be developed. In this model, certain excess capability capacity is transferred to a contractor for use. The PME remains a SANDF asset. The contractor then operates the PME as the user. The Contractor is responsible for maintaining the assets to OEM and SANDF baseline standards. The SANDF PME is then used for revenue generation. The financial model needs to be formulated per different PME application. The benefit to the SANDF is that the excess fleet can be used to guarantee the operational availability of a portion of the fleet that remains with the user. This can improve the Total System Effectiveness for the expanded capability.
There is scope for the SANDF to prove the PPP concept in a short term with a relatively small, fixed budget allocation. It is possible to select a high impact set of six to ten PPP contracts covering the capability of all six functional areas distributed between the arms of service and the six contracting models identified. This should enable smart acquisition through partnership options into the future if the defence budget is increased to 1.5 – 2.0% of GDP in the medium term.
Written by James Kerr, Orion Consulting CC, which provides Market Entry Strategy and Bid & Proposal services to the Aerospace & Defence related industry and assists international SME mission system product suppliers to gain traction in South Africa.
