Public Finance Initiative Problems? The Challenges of Long-Term Defence Acquisition in a Rapidly Changing World

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(The RAND Blog)

A Royal Air Force A330 Voyager taxis past the air traffic control tower as it prepares to take off in Mildenhall, England, May 20, 2021, photo by Karen Abeyasekere/U.S. Air Force

A Royal Air Force A330 Voyager taxis past the air traffic control tower as it prepares to take off in Mildenhall, England, May 20, 2021

Photo by Karen Abeyasekere/U.S. Air Force

by Stuart Dee

February 6, 2024

The Royal Air Force's (RAF's) Air Mobility Force is busy, and it looks set to get busier still. News reports of RAF combat aircraft being scrambled to safeguard UK airspace against attempted Russian incursions or to conduct precision strikes against Houthi targets in Yemen are becoming increasingly commonplace. Less prominent but equally important is the role of air-to-air refuelling (AAR) to enable these missions. The UK's fleet of Airbus A330 Multi-Role Tanker Transport (MRTT) aircraft is an increasingly mission-critical capability. Yet, the composition and utilisation of this fleet speak to two key challenges; the intractable nature of defence capability and acquisition and their critical relationship to the geopolitical environment within which they must operate.

In early 2008, just months prior to the full onset of the financial crisis which engulfed the United Kingdom along with the rest of the global economy, the UK Ministry of Defence (MoD) concluded one of its most complex contracting and acquisition projects in recent memory. The need arose to replace the ageing fleet of TriStar transport aircraft which primarily fulfilled the vital 'airbridge,' transporting troops to and from operations in Iraq and Afghanistan. The outcome was a step-change in thinking around military equipment acquisition; a Public Finance Initiative (PFI) contract with a consortium of key contractors. Under the model, the MoD gained access to a fleet of new aircraft via a 'pay-as-you-go' mechanism, inclusive of all associated services and infrastructure, and the option to call on a secondary fleet of aircraft which could pay its own way in quieter times through leasing to commercial airlines. AirTanker, an airline service company backed by prime contractors—including Thales, Babcock, and Airbus—was born several years earlier, winning out in the race for the Ministry's Future Strategic Transport Aircraft (FSTA) competition by default when the only competing bidder dropped out.

One of the core challenges of the preference for Public Finance Initiative contracting in government procurement during the 2000s lies in its inherent lack of flexibility.

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In commercial terms, the MoD achieved a short-term success; risk was removed from the taxpayer and placed into the hands of the private sector in exchange for a fee. The defence budget benefited from avoiding the need to purchase expensive aircraft upfront, and the RAF was set to benefit from the flexibility that comes with a single aircraft type providing transport and AAR in one. Just 16 years later, however, and with more than a decade still to run on the commitment to the PFI contract, the geostrategic basis for such an acquisition decision appears to have changed, as the onus moves from value for money at all costs to operational surety.

As is only now becoming clear, one of the core challenges of the preference for PFI contracting in government procurement during the 2000s lies in its inherent lack of flexibility. The National Audit Office's 2010 report (PDF) on the FSTA procurement notes that, while the MoD was to be applauded for its swift ability to conclude the AirTanker procurement in 2008 while capital market financing to underpin the deal was still viable, ministers' political preferences for a long-term PFI contract route contributed to an overwhelming focus on this option and its potential benefits, often referred to as an 'optimism bias.' Arguably, then, the decisions that followed were 'locked in' as alternatives were given less scrutiny.

As a result, this mainstay of the RAF's air mobility capability became entrenched for two decades via a notoriously complex contract. Essentially, a combination of political pressure to strike a PFI deal coupled with an impending recession provided the critical ingredient which so often clouds decisionmaking: acute time pressure, as the window for capital financing appeared to grow smaller and the Government's negotiating position diminished.

The policy choices which drove a focus on value for money and risk transfer from public accounts in 2008 appear markedly different from the policy priorities of 2024.

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Although many of the contributing features in this case represent persistent challenges of UK defence acquisition more broadly, their importance becomes all the more significant as the threat landscape changes rapidly. Although the PFI format hypothetically gives the MoD flexibility to call on the 'secondary' fleet of MRTT aircraft, the lived reality of this process is not well tested from either a cost or logistical perspective. Meanwhile, the Voyager fleet is operating ever more intensively to support combat air AAR operations, working to secure shipping routes in the Red Sea in ways that policymakers in 2008 may not have envisaged. Costs continue to rise as the MoD's call on this pay-as-you-go service increases, and the relatively small fleet is therefore likely driving relatively high maintenance costs. The policy choices which drove a focus on value for money and risk transfer from public accounts in 2008 appear markedly different from the policy priorities of 2024, with crises and conflicts in Ukraine and the Middle East propelling a rapidly changing operational cadence for defence.

Future-proofing defence equipment acquisition remains a perplexing and wicked problem for policymakers, but one that merits ever greater attention: not only in terms of what they acquire, but also how. As we look out into a complex future wrought with uncertainties, acquisition decisionmakers would benefit from ever-greater use of robust decisionmaking tools and methods to help them identify options that could increase the United Kingdom's operational (and financial) resilience for multiple different futures. These options are likely to require agility and flexibility, including in contracting; features that are easier to achieve in a more collaborative industry-government relationship that is based on trust.


Stuart Dee is a research leader in Defence and Security at RAND Europe.

Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.