Hoon may abandon PFI on £13bn Airbus deal

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The £13bn contract to replace the RAF's refuelling aircraft may not be awarded under the Government's Private Finance Initiative, the Defence Secretary Geoff Hoon said.

Mr Hoon confirmed that a consortium led by EADS, the main shareholder in Airbus Industrie, had been selected for the contract in preference to a group led by Boeing and BAE Systems. It will supply the RAF with a fleet of new and used Airbus A330s.

But the Ministry of Defence said that a final decision on whether to go down the PFI route or opt for a conventional procurement would not be taken for several months.

The Defence Secretary said that the MoD's lengthy evaluation of the competing bids had established that the Air Tanker consortium offered better value for money than the rival Tanker Team consortium led by Boeing and BAE. "This is, however, a highly complex PFI deal and a number of important issues remain to be resolved before we will be in a position to confirm the PFI route," he added.

The MoD's hesitancy is thought to have stemmed from last-minute concerns in the Treasury about whether the PFI was the most appropriate structure for the deal - the largest ever awarded by the MoD. Under a PFI contract Air Tanker would own, maintain and crew the aircraft over the 27-year life of the programme and charge the RAF a monthly fee. The consortium would also be able to use the aircraft to earn commercial revenues when they were not in service with the RAF.

An alternative option would be to keep the RAF's existing fleet of TrisStar and VC10 refuelling aircraft flying longer and phase the replacement aircraft in over a more gradual period to ease the strain on the MoD's equipment budget.

Ironically, BAE could end up being better off if the contract is turned into a conventional procurement because it owns a 20 per cent stake in Airbus whereas the rival Tanker Team's bid was based on using a fleet of second hand British Airways 767s.

Last year the MoD decided very late in the day to turn an £800m contract for Hawk trainer aircraft from a PFI programme into a conventional procurement. A ministry spokesman said that the same could yet happen to the refuelling order.

"It is too early to be certain if a PFI contract will provide the best solution for our requirements. It is by no means in the bag. We are committed to going ahead with Air Tanker but not necessarily as a PFI."

The spokesman also refused to confirm the in-service date of 2008 for the new aircraft, saying that they were due to enter service "around the end of the decade".

Industry sources said they would be surprised if the contract was turned into a conventional procurement since it had been nominated as a potential PFI project as far back as 1997.

Trade unions welcomed the selection of Air Tanker which has pledged to safeguard 7,500 UK jobs and perhaps more if it wins lucrative export orders. The other members of the consortium are Rolls-Royce, Cobham and the French defence contractor Thales. VT, the Portsmouth-based shipbuilding and support services group, is expected to join as a 10 per cent shareholder.