ANNEX
SHORT TERM STRATEGIC AIRLIFT
INTRODUCTION
1. The Short-Term Strategic Airlift (STSA)
procurement process ran from January 1998 to May 2000. The specified
requirement was to deploy the Joint Rapid Reaction Force (JRRF)
over a distance of 3,200 miles within seven days. The competition
was "terminated" by the Government on the advice of
the Chief of Defence Procurement (CDP), Sir Robert Walmsley, in
July 1999. The competition was halted because no one bidder had,
in the view of the DPA project team, met the needs of the Ministry
of Defence. Of the three relevant bids, that of IBP, based on
the standard Antonov An-124 100, was judged to have too many political
risks because it was dependent on co-operation from agencies of
the former Soviet Union. The Air Foyle/Antonov bid, based on the
proposed Antonov An-124 210, was judged to be delayed by potential
technical risk because the aircraft was to have been modified
with Rolls-Royce engines and Western avionics. The MOD project
team evaluation that four years would be needed to successfully
modify and certificate the aircraft was made without any reference
to the aircraft Design Authority, Antonov, who had declared that
two years was required to complete the task. The customer's preferred
choice, the C-17 bid from Boeing/British Aerospace, was judged
to be unaffordable as it exceeded in price the budget allocated
for the procurement and operation. The price could not be negotiated
down, despite a special meeting between CDP and Harry Stonecipher,
the Chief Operations Officer of Boeing, at the Paris Air Show
in July 1999. At this time Boeing planned to sell four C-17s to
the MOD for use by the RAF, and the budget set for the STSA programme
was £500 million. The competition was not part of the Smart
Procurement Initiative (SPI); no Integrated Project Team was formed;
discussions were adversarial rather than co-operative. The competition
was halted on 5 August 1999 and the Defence Procurement Agency
(DPA) initiated a new process to provide the capability the MOD
sought.
PHASE 2 STSA
2. Phase 2 of the STSA procurement started
in August 1999. It was a twin-track process with the same target
completion date of January 2000. Track One was to negotiate with
Boeing and the US Government to try to obtain four C-17 aircraft
at an acceptable price. Track Two was to provide a back up in
case the negotiations with Boeing failed and was to provide two
An-124 100 aircraft along the model of the existing enabling contract
with the MOD, but with a more assured level of service. The aircraft
were to be unmodified in order to avoid any risk of technical
delay, and the performance of the aircraft was confirmed as being
known to the MOD. It was put to the three potential An-124 100
suppliers that they had an equal chance with the C-17. DPA confirmed
that a Ministerial decision would be made ". . . based on
a balanced and impartial Business Case and VFM considerations",
and that "The Business Case presented to Ministers will include
cost/capability information for all potential solutions . . .
and the Charter option will therefore be compared to C-17 options".
Air Foyle/Antonov proceeded into the second phase on the basis
of this statement.
3. In reality, however, it appears that
the Antonov was a fallback option if negotiations with Boeing
failed completely. In the final decision, the programme budget
has been exceeded, value for money has been ignored and the decision
has been made on performance characteristics that the MOD knew
could never be met by the An-124. The cynical ones among us might
describe the An-124 as a "stalking horse" to provide
a competitive edge for the bidding process. During the negotiations,
Boeing and the USAF were incorporated into the Track One Integrated
Project Team to best develop the bid. David Spong, the Boeing
Vice-President responsible for the C-17 bid, waxed lyrical in
the Boeing company newspaper about the Integrated Project Team
with DPA which enabled a successful bid to be accepted, a level
of effort on the part of the MOD which was not extended to the
An-124 100 proposal.
THE AN
-124 PROPOSAL
4. Since 1993 Air Foyle has had an Enabling
Agreement with the MOD, which provides a fixed block-hour price
for the An-124 100 but, at the wish of the MOD, neither guarantees
aircraft availability nor a minimum level of business. Clearly,
relying on this Enabling Contract approach could not provide the
assured service, free of political risk that the MOD was seeking.
Air Foyle concluded that to meet the requirement for more assurance
a drastic approach would be required.
5. Hence, Air Foyle put together a consortium
comprising themselves, Antonov and Marshall Aerospace. The consortium
would own, support, maintain, crew and operate the aircraft from
British resources. Marshall Aerospace would be the Delegated Design
Authority (DDA), and DPA confirmed that the aircraft could be
operated on the UK Military Aircraft Register, thereby permitting
operation by RAF crews as well as civil contractor crews on the
RAF Reserve. The MOD would provide only use of loading and launch
bases, and ground handling and movements services. The Air Foyle
bid was an all-inclusive package with no loose ends, and with
a cost of £210 million over the seven year contract, ie 42
per cent of the allocated budget. The An-124 proposal had the
potential to reduce the programme cost to the MOD by undertaking
civil charter work. In particular, the level of assurance achieved
enabled the An-124 100 to be considered as an organic capability
to be judged alongside the C-17. The Minister for Defence Procurement
has since confirmed verbally to Air Foyle that political issues
relating to the origin of the aircraft were not a factor in the
decision but that a "more capable solution" was selected.
EVALUATION
6. The evaluation process was very short.
Bidders put forward their proposals by 29 October 1999. The DPA
project team, after a few telephone conversations and one face-to-face
meeting, put forward their evaluation to the Equipment Acquisition
Committee (EAC) in the first week of December 1999. The EAC desired
more information on the Air Foyle bid, the main objectives of
which appeared to be to verify the ability of the proposal to
meet normal certification and duty of care requirements of the
acquisition process. In mid-January 2000 25 officials from the
MOD, DPA, and DERA visited Antonov Design Bureau in Kiev as elements
of an integrated team. The team including DPA, DERA and the Air
Foyle bid team produced a joint report covering certification,
flight and ground testing, cockpit Anglicisation and overall airworthiness.
During drafting of the report DPA confirmed that there were no
"show stoppers", and a final report was forwarded to
the DPA on 27 January 2000. Subsequently, the DPA project team,
with no reference to the other members of the "integrated"
team added a rider to the report judging that the Anglicisation
and certification process would take six months longer than the
bid stated. This still allowed completion before the "must
have" date of December 2001.
7. We understand that the DPA paper to the
EAC which met in February 2000 made no recommendation, and merely
explained the "pros and cons" of the C-17 and Air Foyle
An-124 100 proposal. It then took from February to May 2000 for
the Government to announce that they were going to proceed with
the Boeing bid. This delay was occasioned principally by Treasury
resistance to the C-17 proposal desired by MOD, as Treasury evaluation
did not demonstrate value for money in the C-17 solution. There
was also linkage to the much more politically sensitive decisions
that had to be made on the Future Transport Aircraft (FTA), and
the Beyond Visual Range Air to Air Missile (BVRAAM). In the event,
the C-17 was the only acquisition from the US.
DPA DEBRIEF
8. DPA has accepted that the An-124 bid
met the need. It was judged to have a small technical risk but
this could be mitigated. The An-124 bid programme cost was some
half to one-third the programme cost of the C-17's and the C-17
bid breached the budgetary limit by about 10 per cent. There were
no "show stoppers" with the An-124 bid that could not
be resolved during the negotiation or implementation process.
DPA was unable to identify any methodical evaluation process that
had been applied to the selection and referred to the decision
being made by Ministers principally on the ability of the C-17
to land in 4,000ft. There was no performance requirement in the
An-124 Request for Proposals and DPA had been advised in September
1998 that such performance by the An-124 was not possible. DPA
was unable to justify the decision on a Value for Money basis.
BOEING BID
9. The information gleaned on the Boeing
bid is naturally subject to conjecture, assumptions and the analysis
of intelligence. However, because of the US Freedom of Information
process, many of the official figures, particularly for the Foreign
Military Sales (FMS) logistics support cost, are available in
the public domain.
10. The winning Boeing bid is a lease contract
over seven years. It is for four aircraft (3 + 1 "in use
reserve") to be operated by RAF aircrews. The aircraft will
be based at RAF Brize Norton and will be serviced at First Line
by RAF ground crews. Each aircraft will be supported by RAF Crew
Chiefs and, when the aircraft are on detachment, additional RAF
ground crews will be in support. The USAF will be responsible
for the maintenance of the aircraft, which will involve USAF personnel
providing maintenance support at RAF Brize Norton, as well as
deeper level maintenance from their base in Charleston. The USAF
will provide all the training support for the RAF air and ground
crew. The C-17s will be an integral part of the RAFs Transport
Force, augmenting the C130Js and Ks already in service. They will
remain in service until replaced by the Future Transport Aircraft
(FTA), which, on current plans, should be the Airbus A400M in
2007-08.
11. However, under the terms of the lease
the full capabilities of the C-17 will not be available and the
aircraft can only be used as a strategic long-range transport,
albeit with the ability to land on short runways. The C-17s will
be restricted in operational use and their capability for para-drop,
airdrop, rough field, low-level operations and air to air refuelling
will not be used. It can reasonably be assumed that this is a
restriction imposed by the lease conditions, or because the airworthiness
of the aircraft in these roles cannot be evaluated by the DPA
in the time available. On the basis of the experience with the
C130J it is likely that two to three years would be necessary
for this process. This may be compared with the An-124 100 for
which DERA confirmed in the integrated report that the documented
airworthiness path available would make Military Aircraft Release
for the same strategic transport role possible in nine to 12 months.
It is possible that even the airworthiness evaluation necessary
for this level of operations by the C-17 will not be carried out
by the MOD thereby leading to a lower level of care than with
the An-124 bid. Without the special role capabilities from the
C-17, no savings are possible by reductions in these activities
by other RAF transport aircraft.
12. The DPA "struggled" to identify
500 hours of annual utilisation for the proposed Track Two An-124
100 service contract. With the C-17 carrying half the cargo of
the An-124 100, then 500 An-124 100 hours translates into 1,000
C-17 hours for the carriage of Outsize Loads. However, for the
RAF to crew three aircraft (one "in use reserve") means
that they will have to fly approximately 3,600 hours per year
to remain current. Hence, 2,600 flying hours per year must be
flown surplus to requirements. Unlike the An-124, no reduction
in programme cost is possible by civil charter work as the C-17
is not civil certificated.
13. Assumptions have to be made about the
leasing arrangements. Currently Boeing is using their own finance
company to provide the lease and the arrangements will most probably
be conducted under US law. Leasing to a government has never been
easy in the US, and the Boeing 757s for the Presidential Fleet
were eventually bought rather than leased. However, it is quite
likely that the Boeing Finance Company will accept a higher residual
value of the aircraft at the end of the lease than a non-aligned
finance house would be able to accept. Given the purchase price
of a C-17 of $234 million, a residual value after seven years
of 30 per cent and an exchange rate of US$1.5 to £1 the finance
package for the aircraft runs at between £600 million to
£670 million for the assets alone. To this must be added
the two Foreign Military Sales (FMS) packages, for training and
maintenance, which come to $230 million (£153 million) over
the lease period.
14. For years the DPA sought to avoid FMS
contracts because of their expense (the US Government charges
a 15 per cent agency fee) and their poor service (eg the supply
of Chinook spares). In addition, there are hidden costs: the costs
of the RAF air and ground crews have not been included in the
procurement price, and the project costs and the training flying
costs have also been excluded. Many of the C-17 training flights
will be non-productive, because no loads will be available for
the aircraft. Hence the published costs for the C-17 contract
over seven years are likely to be around £800 million, much
in excess of the £500 million budget, with the real costs
probably exceeding £1,000 million.
15. The Strategic Defence Review made a
case for a short-term outsize airlifter to rapidly move the JRRF
and meet the UK's defence commitments until the long-term airlift
solution became available in 2007. Four C-17s or their equivalent
were identified as being required. The only aircraft able to meet
the performance requirement for landing is the C-17. Therefore,
this is a NAPNOC contract and no competition is required involving
wasted time, cost and effort by industry. But the MOD came to
industry with the STSA requirement seeking innovative bids. When
questioned by industry on the performance requirement the MOD
acknowledged the differences between the aircraft being considered
but professed a level playing field and gave specific written
assurances that the decision would be taken by Ministers based
on value for money. During the second phase, DPA continued with
the twin track approach specifically stating to industry that:
— value for money was paramount; and
— the performance of the An-124 100
was known to MOD.
Demonstrable airlift needs evidenced during
this year have been for East Timor, Mozambique, Sierre Leone and
the transport of the LR5 submarine, all truly strategic tasks
both best achieved and actually completed by the An1-24 100 (C-17
is too small for LR5).
DRAWBACKS OF
THE C-17
16. As a tactical outsize airlifter, the
C-17 has no equivalent, but it is not a strategic airlifter. It
is range limited and requires air to air refuelling (AAR) to carry
significant loads in excess of 2,750 miles. There are no AAR tankers
in the UK inventory compatible with the C-17 and no intentions
to provide any. The C-17 carries about half the cargo of the An-124
100. Whether purchased or leased, the C-17 is a very expensive
aircraft, particularly under the new system of Output-Based Accounting
now being used. But the high price of the C-17 reflects its extensive
capabilities. To acquire the aircraft without the full capabilities
being available represents extraordinarily poor value for money
as well as exceeding the declared budget limit and requiring cross
subsidy from other budgets.
17. DPA has confirmed the C-17 programme
cost to be approximately 10 per cent more than the £500 million
budget. But simple mathematics shows that the C-17 programme cost
must be substantially more. This leads to questions on how this
decision is being presented both to the taxpayer and to Parliament
and from which budgets are the true costs being paid. DPA have
confirmed that the decision was based principally on the ability
of the C-17 to land in 4,000 ft. If this performance requirement
had been identified as being paramount then neither the first
nor second phase of the STSA competition would have been undertaken
by any An-124 bidder. But DPA confirmed that this was not the
case.
18. The Antonov An-124 100 carries twice
the load of a C-17 over the same routes or will go twice as far
carrying the same load. It has proved itself recently during the
Kursk tragedy, the Sierra Leone operation and the Mozambique disaster.
In addition, issues that should have gained value for money credits
were ignored, including the real opportunity to develop trade
and political linkages with Ukraine and Russia. The Air Foyle
An-124 package offered complete financial visibility; there were
no hidden costs and there was even the potential for programme
cost reduction. DPA themselves have admitted that there were no
"show stoppers" with the Air Foyle Antonov An-124 100
bid. They have agreed that it offered the capability needed at
a half to a third of the cost. The Air Foyle An-124 packages represented
the very best value for money, but were harshly reviewed by the
DPA.
SUMMARY
19. The An-124 bids proposed by Air Foyle
offered outstanding value for money and substantially more effective
strategic airlift. They were available within the required time
frame and contained innovative elements which delivered a range
of other advantages.
20. The decision for the C-17 exceeds the
declared budget limit and may be four to five times more than
the An-124 100 proposal. The C-17 decision was made on performance
characteristics contained in the SR(Air) that industry laughed
out of court at the very first STSA bidders conference. If these
characteristics were critical then no competition should have
taken place. If they were not critical than there is no justification
for the decision and the C-17 offers appalling value for money.
21. Before the contract is let, it would
be wise to have the National Audit Office (NAO) review this STSA
procurement and judge:
— On the value for money likely to
be obtained.
— The validity of the programme costs
presented to Parliament.
— Why An-124 bidders were led to expend
two years of cost and effort when the final decision was taken
on performance characteristic that the An-124 bidders told MOD
they could never deliver at the bidders conference in September
1998.
— The confusing and contradictory process
by which DPA drew industry into a nugatory effort.
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