Second Report of Session 2010-11
The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
“Using PFI to procure the £10.5 billion Future Strategic Tanker Aircraft (FSTA) project was inappropriate and, in the view of this Committee, has not secured value for money.
“The Department’s decision to use PFI was taken against a background of prevailing support for this procurement route. But that’s no excuse for the Department’s failure to conduct a robust evaluation of alternatives, a failure which should have been challenged by the Treasury.
“PFI may be suited to projects like building schools or hospitals where there is a clear specification. Defence programmes are by their nature different: activities and demands are far less predictable and much more susceptible to change.
It is simply astonishing that it took until 2006 for the Department to recognize that the new aircraft should be able to fly into high threat environments like Afghanistan. Four years later, it has still not decided whether to fit the necessary protective equipment to the aircraft which is essential if they are to be used in Afghanistan. The Ministry of Defence is inhibited from changing the specification because of the implications this would have for the cost of the PFI. Until it does so, the existing Tristar fleet will have to continue flying personnel in and out of Afghanistan.
“It is also of great concern to the Committee that it took the Department over nine years to negotiate a PFI contract and that the delays have led to considerable cost increases against initial estimates.
“Throughout the project the MOD has lacked the robust financial and performance data needed to make sensible decisions. In this respect, FSTA is illustrative of a wider problem for the Department which fundamentally affects its ability to deliver value for money.”
Margaret Hodge was speaking as the Committee published its 2nd Report of this Session which, on the basis of evidence from the Ministry of Defence, examined why PFI was used to procure FSTA, shortcomings in the procurement process, availability of cost data, how the deal was managed and risks in the transition from the current fleets.
In March 2008, the Ministry of Defence (the Department) signed a private finance initiative (PFI) contract with AirTanker Ltd, for the Future Strategic Tanker Aircraft (FSTA) to provide air-to-air refuelling and passenger transport services. FSTA is based around 14 modified Airbus A330s and will replace the 24 Tristars and VC10s that form the RAF’s current fleet.
Under the contract, AirTanker owns the aircraft and will provide them to the Department when required. AirTanker will also provide the associated aircraft support, maintenance and infrastructure, making the scope of the deal broader than any other defence PFI contract to date. The value of the contract, worth £10.5 billion over 27 years, also makes it the largest signed.
PFI works best where activities and demand are predictable. This is clearly not the case for FSTA. For instance, it is simply astonishing that the Department did not decide until 2006 that FSTA should be able to fly into high threat environments such as Afghanistan. Yet the Department is inhibited from changing the specification because of the implications to the cost of the PFI. Just two years after the deal was signed, the forthcoming Strategic Defence and Security Review is likely to change the demand for the services AirTanker has been contracted to deliver. As the Committee’s previous work shows, dealing with changes on PFI deals is expensive and the Review may question whether this PFI deal is sensible or affordable. The fact that no other country has chosen to procure air-to-air refuelling and passenger transport using PFI type arrangements is further indication that PFI is not a suitable procurement route for such important military capabilities.
There are significant shortcomings in the Department’s procurement of FSTA and we do not believe the procurement was value for money. The shortcomings include:
- assuming that PFI would be the right solution from the outset without a sound evaluation of alternative options;
- running only a limited competition;
- never developing a realistic fallback if the PFI solution proved unworkable;
- failing to have a clear understanding of the full costs of running its current aircraft fleets and failing to secure visibility of sub-contractor cost data, meaning the Department was unable either to compare costs with the price being offered by AirTanker or determine whether the PFI option was good value for money;
- not fixing the requirements until late into the process so that the negotiations themselves took over nine years to complete, more than double the expected four years. This delay in turn led to a considerable cost increase against initial estimates.
- not having the right skills and experience in place and failing to provide firm leadership until the later stages of the procurement to effectively manage the procurement, and
- not making timely decisions on fitting the necessary protection equipment to enable the aircraft to fly into high threat environments like Afghanistan, a task that the Tristar may have to continue doing until 2016.
In order to obtain best value going forward, the Department must retain contract expertise and ensure that staff make decisions regarding FSTA in the full knowledge of the financial implications. Without this action, the risk is that extra demands will be placed on AirTanker which result in additional, and unnecessary, payments being made by the Department.
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