Conclusions and recommendations
1. The use of PFI to deliver a vital military
capability like FSTA was inappropriate. In 2004, even the project
team recommended abandoning the PFI solution in favour of a conventional
procurement. Military needs are not like hospitals or schools
where activity is predictable and more suited to PFI.
The Department, working with HM Treasury, should set out clearly
when PFI is appropriate for defence and the characteristics of
a successful defence PFI deal.
2. The prevailing support for PFI at the time
is not a justification for the Department's decision in 1997 to
commit to a £10.5 billion project to deliver a vital military
capability without knowing whether it was the best value option.
HM Treasury should also have challenged the Department's selection
of PFI as the preferred option without conducting a robust evaluation
of alternatives. HM Treasury should publish
the basis upon which it reviews the value for money offered by
the contracts the Department proposes to enter into, and the robustness
of the option appraisals underpinning the initial choice of procurement
route.
3. The final decision to commit to FSTA in
2007 was made using 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. Nor did
the Department develop a robust fallback plan which could have
provided a more realistic alternative way of delivering the capability.
At the outset of all future major investments the Department should
identify:
- a realistic alternative against
which to assess the value for money of its preferred solution,
and
- the latest point at which it would be credible
to adopt the fallback option so that a realistic comparison of
the relative value of alternative ways of delivering a capability
can be made.
4. It took over nine years, more than twice
as long as expected, to place the FSTA contract. The Department
incurred extra costs over this period and the last aircraft will
not be delivered until 19 years after the procurement began. FSTA
was undermined by a series of procurement mistakes. We have criticised
the Department before for such failings but FSTA demonstrates
that action is still needed to prevent their repetition.
On future projects, we expect the Department to demonstrate it
has truly learned and successfully applied the lessons from its
repeated procurement failings.
5. The Department did not understand the costs
of the deal it was negotiating as it did not obtain access to
detailed industry cost data. This meant it could not gauge the
whether the deal was value for money. In particular, it could
not determine whether profit margins were appropriate or the premium
it was paying to transfer risk to industry.
We were not persuaded by the Department's generalised assurances
that it had got a grip on this problem on current procurements.
The Department should agree with its commercial partners a framework
against which to assess what constitutes appropriate access to
cost and other data in differing procurement circumstances and
ensure it enforces its access rights rigorously.
6. The Department can only make sensible decisions
with robust financial and performance data. In this case, the
Department did not have data on the performance of its current
aircraft fleets, the cost breakdown of the deal or the potential
costs of alternatives so it could not either compare costs or
know whether the PFI option was value for money. We believe FSTA
is illustrative of a wider problem for the Department which if
it is not addressed will fundamentally affect its ability to deliver
value for money. The Department should
set out clearly its financial and performance data needs, how
it will develop the underpinning management information systems,
how long this will take and how it will change the culture of
the organisation to place a premium on generating and using such
information.
7. The progress of the procurement improved
only when the Department applied enough of its scarce staff with
PFI and commercial skills to FSTA. The
availability of sufficient commercial experts and a more general
awareness of commercial issues in the wider defence community
underpin successful acquisition. The Department should develop
a more comprehensive training and development programme to ensure
there are sufficient skilled individuals to support all of its
complex projects. The Department should also ensure that all staff
involved with FSTA are fully aware of the financial implications
of any decisions they make.
8. For much of its procurement the FSTA project
lacked leadership. In the early years the project averaged a team
leader a year and a Senior Responsible Owner (SRO) was not appointed
until 2007. The Department accepted this
failure but stated that all major projects do now have someone
with an overview of the various elements of the project and influence
over them. This is not the same as strong leadership. The Department
should take action to ensure its managerial and budgetary structures
enable SROs to act as empowered leaders able to drive the delivery
of defence equipment capability.
9. In 2006 the Department recognised the need
for additional protection to enable FSTA to fly into high threat
environments such as Afghanistan but failed to include this in
the contract negotiations. Four years later it has still not decided
whether to fit the necessary equipment. The Department urgently
needs to find a robust long term solution to this issue. Otherwise,
the aircraft will enter service without being able to replace
the Tristar in its current role of flying personnel in and out
of Afghanistan and the Department will incur extra costs finding
alternative ways of providing the capability.
The Department should report back to us within six months of the
completion of the Strategic Defence and Security Review explaining
what solution it has chosen and why, and what the operational
consequences are.
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