By Mark Smulian
16 September 2010
Ministry of Defence officials did not understand the costs involved when they launched their largest Private Finance Initiative project, a damning report by the Public Accounts Committee has found.
They also used a defective comparison with public funding for the £10.5bn future strategic tanker aircraft (FSTA) project – which provides in-air refuelling for military aircraft. The deal took nine years to negotiate and failed to provide value for money.
The 27-year contract was signed in 2008 with the Air Tanker consortium, which owns the refuelling aircraft and makes them available as needed.
The committee said the PFI worked best where demand was predictable and ‘this was clearly not the case’ with military refuelling.
It said: ‘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.’
The MPs found the MoD lacked the skills to manage the procurement, which took nine years rather than the expected four to settle. They said they did not believe it was value for money.
Defence officials assumed that the PFI would be the best option despite having no sound basis for this, and used ‘a public sector comparator which was not a realistic or affordable alternative to the PFI – and the outcome was highly dependent on which discount rate was used’.
The PFI was chosen in ignorance of the costs of air-to-air refuelling, as officials ‘did not understand the cost of the deal [they were] negotiating’.
The MPs said: ‘The prevailing support for the PFI at the time is not a justification for the department’s decision in 1997 to commit to a £10.5bn project to deliver a vital military capability without knowing whether it was the best value option’.
Peter Luff, minister for defence support and technology, said it was ‘clear that mistakes in defence procurement have been made in the past’ but the current government would ensure future contracts were better managed and provided better value for money.
