MoD aircraft deal worth £10.5bn failed to deliver

The Ministry of Defence's biggest ever private finance initiative (PFI) is "inappropriate" and not proving value for taxpayers' money, according MPs on the Public Accounts Committee (PAC).

The £10.5bn, 27-year Future Strategic Tanker Aircraft (FSTA) programme – which is to supply air-to-air refuelling and passenger transport planes – is just the latest of a string of PFI deals to attract criticism.

The most serious charge levelled by the PAC, chaired by Labour's Margaret Hodge, is that the MoD should have grasped that a PFI may be suitable for projects with a clear specification – such as building a school or a hospital – but it does not work well with less predictable plans likely to be changed along the way. "Using PFI to procure the FTSA project was inappropriate and has not secured value for money," Ms Hodge said.

Under the deal for 14 modified Airbus A330s, AirTanker Ltd, a consortium of Babcock, Cobham, Rolls-Royce, Thales and EADS, continues to own the aircraft but is contracted to provide to the military when required. The group is also contracted to service and maintain them.

There were signs of trouble with the PFI structure from the beginning. Although the MoD started the procurement in 1999, the deal negotiations took twice as long as anticipated and the contract was not signed until March 2008. Delivery is also running behind schedule – when the first of the planes is delivered next year it will be five and a half years late. Even then they may not be equipped to fly into danger zones such as Afghanistan.

Even before the final FSTA deal was agreed, the contract was proving too inflexible. It is "simply astonishing" that the MoD did not decide until 2006 that the new aircraft should be able to fly into high-threat environments such as Afghanistan, says the PAC. Four years later the decision to fit the necessary protective equipment to the aircraft has still not be taken, because of the cost implication for the MoD of changing the original contract specification. If the decision to armour the 14 planes is taken, it could add hundreds of millions of pounds to the bill, and delay the scheme still further. In the meantime, the military is relying on old Tristars and VC10s, some of them dating back to the 1960s.

In 2004, the MoD project team itself recommended the PFI be scrapped in favour of a more traditional procurement structure, because of the need for greater flexibility in defence equipment programmes. But the department ploughed on regardless, and the final deal is the biggest defence PFI deal ever.

Both the MoD and the Treasury come in for scathing criticism, with Ms Hodge saying the Treasury should have challenged the MoD's failure "to conduct a robust evaluation of alternatives" to PFI. The PAC also sets out "significant shortcomings" in the procurement process, including the MoD's inability to compare the costs put forward by AirTanker with those likely to be incurred under a standard purchase contract. The department is also criticised for the expense of the over-running procurement and a lack of leadership skills.

AirTanker rebutted the criticisms, claiming the programme is running on time and that the scheme will not only provide double the aircraft of the fleet it is replacing but will also cost around 30 per cent less. "AirTanker believes that the FSTA programme offers value for money to the UK MoD and the taxpayer," a spokeswoman for the company said.

Private finance initiatives that have failed the taxpayer

Metronet

The most spectacular private finance initiative failure was the collapse of Metronet in 2007. The deal between Metronet, Tube Lines and Transport for London (TfL) was put together in 2003 to upgrade London's creaking Underground network. Within five years, the Metronet consortium collapsed, costing taxpayers £2bn as its functions were taken over by TfL. Earlier this year Tube Lines was also bought out by TfL.

HM Revenue & Customs estate

The PAC concluded in April that the PFI deal covering ownership and management of 60 per cent of the HMRC's estate is also failing to deliver value for money. The 20-year deal signed by Mapeley Steps Contractor in 2001 has cost the taxpayer 20 per cent more than expected so far, the PAC said.

NHS

Latest estimates suggest that the NHS faces a £65bn bill for 103 new PFI hospitals with an estimated value of £11.3bn at the time they were built. The Government says the schemes provide value for money. But some trusts are now handing over more than 10 per cent of their annual turnover.

Housing

More than four-fifths of local authorities' 25 PFI housing projects are over budget, the National Audit Office said in June. Nearly half are running at more than twice the anticipated cost. And the average delay is two-and-a-half years.