Select Committee on Public Accounts Appendices to the Minutes of Evidence




  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.


  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.


  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.


  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.


  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.


  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).


  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.


  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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