During my final few months at Kingston University, just like everyone else wanting to graduate, a 15,000 word dissertation on a project of choice was required. Mine was the design of a Fire-fighting Aircraft, in which I proposed that the modification of an existing aircraft will be the ideal way of going about this.
RAF Voyager, the Aircraft to replace the VC-10 just like my theoretical Fire-fighting aircraft is a modified Aircraft – an Airbus A330-200. With such a proven track record, it is no surprise that similar decisions have been made by the Governments of India, USA, Australia, UAE, Saudi Arabia, Brazil, France.
However, the peculiar aspect of the Voyager is the means by which the project is being funded – PFI (Public Finance Initiative).
Under this arrangement, the private sector takes on the risk of designing, building, maintaining and operating the 14 MRTT Aircrafts (Multi Role Transport Tanker), to the output specifications set by the MOD which includes Aerial Refuelling Capabilities. As a result the Airtanker Consortium (Shareholder breakdown below) was formed and awarded the Future Strategic Tanker Aircraft (FSTA) contract in 2008.
At a RAeS lecture on the 23rd of February 2011, James Scott – Director of Flight Operations at Airtanker, said this route allows for healthy collaboration between the public and private sector that gets the best of both worlds.
Several Individuals though, disagree that PFI is the best available finance option, including the National Audit Office who published a report detailing the deficiencies of the PFI deal, some of which are costs that are likely to spiral beyond the published estimated values.
The following is a quote from the NAO report published 30 march 2010.
The contract for FSTA is likely to cost arround £10.5 billion over its duration, although this is a forecast based on expected usage rates and the actual cost could vary. The department [MOD] has estimated the full project cost at £12.3 billion, once its own ongoing costs are included. FSTA will cost the department [MOD[ an average annual payment of around £390 million to Airtanker, but the department [MOD] will not start paying for the contract until FSTA is introduced to service. In addition, the department [MOD] will pay £60 million per annum on personnel, fuel and other related costs. Between the start of the formal assessment phase and contract signature, the department spent £48 million managing the project, including £27 million on advisers, £10 million on supporting the bidders and £11 million on internal costs.
A series of reports have also been published by the House of Commons‘ Treasury commitee, that concluded that PFI deals are too costly, inflexible and opaque.
In a BBC radio 4 programme broadcast in June last year, one of the issues raised with PFI deals is that Equity holders (See Chart above for Airtanker shareholders) are known to sell on their shares for as much as 30% profit. Even If equities are not sold, it is difficult to determine whether excessive profits are not being made on the deals due to a lack of access to cost breakdown of projects. Some of the more technical flaws of the project, are discussed in a very long blog post here.
Personally, I conclude that although these public-private partnerships are an excellent idea, the execution so far have been very dissapointing.