Sir Lynton Crosbie

If ever a reward for public service was deserved it was for the good old Wizard of Oz!  He masterminded a Conservative election victory, saved the nation from Miliband and Sturgeon and presented us with Jeremy Corbyn as the Leader of the Opposition.  A mere Knighthood is insufficient - he should be awarded the vacant plinth in Trafalgar Square!

Conservative Values

Just what does the Conservative Party in general and David Cameron, in particular, stand for?  The news that a Heathrow decision will be postponed, yet again, was entirely predictable.  Equally predictable, that he waited, until the time was right to secure popular endorsement, before taking action to assist a NATO ally who had been violated by the same Islamic terrorism we profess to be fighting a few miles away, was spineless.  On the other hand, we were unprepared for the about turns on welfare reform and balancing the books announced in the budget.  The awful Nicky Morgan has now put the brake on education reform and nobody, it appears, dare face the truth on NHS funding.  The commitment to 2% on defence spending is a shameful accounting trick.  Goodness knows what we are supposed to be "negotiating" over EU membership (but it doesn't seem to be much of substance).  But one thing remains constant, our commitment to 0.7% of GDP on overseas aid!

The Fight Against Islamic Terrorism

I have no insight into the potential military impact of the UK extending its participation on Operation Shader to include targets in Syria but I suspect it will be marginal.  However, we are told that further UK involvement is essential to degrade and destroy "ISIL"  and to keep us safe at home.  Sorry Prime Minister, I just do not buy that as a package.

We could certainly degrade ISIL by targetting them, wherever they are but why stop at Syria - what about Brussels or Birmingham for that matter? As for destroying them and making a peaceful space in Syria thereafter, that is another matter as many professional soldiers and diplomats have written recently.  It is an important consideration but because of the complexity of the circumstances we should not be surprised if no hard and fast answers can be given in advance.  What is certain, however, is that wringing our hands and doing nothing will not improve a deteriorating situation.

So I do believe in extending our bombing mission to Syria for 2 very important reasons.  Firstly, it shows that the UK stands with our allies in the West, particularly France.  Secondly, it is revenge for a series of gross atrocities.  We may not get them all on the first pass but, slowly and surely, if we can hold our nerve, we will indeed destroy the dark forces that threaten our civilisation.  In 1940, Churchill made no short-term promises but he did warn of the danger of falling into the abyss of Hitler's new dark age.  The Prime Minister should be similarly honest - he cannot promise that our streets will be safer as a result of bombing in Syria but he can rally the Nation to join the international fight against pervasive Islamic terrorism.  This could be another "finest hour!"

Tanker Aircraft, PFI and the PMs Private Jet

When it becomes tough for Governments to finance yet more borrowing, the PFI concept has proved particularly attractive since it allows Government to access finance without having to record the underlying obligations.  It is important to note that private finance has always been more expensive than Government finance, particularly in recent times.  So how can a PFI be better value for money than conventional finance?

There is a number of criteria by which PFI can be shown to be more advantageous, overall, to the tax-payer than straight Government finance, procurement, operation and disposal.  In arguing this case, this is where, some would argue, that the fairy tale writing and smoke and mirrors accounting begins.

A major consideration in the public/private comparison is the respective allocation of risk.  If a private concern finances, designs, builds and operates a service and there is some element of demand risk in the service provision then some sort of VFM case for private provision can usually be made.  A particular indicator of demand risk is the potential for 3rd party revenue ie using the spare capacity of the service to Government to generate revenue for mutual benefit.

The starting point for the air refuelling contract was that, historically, tanker aircraft are derivatives of existing commercial or military airframes, transports and bombers.  It followed, at least in the eyes of the MOD and the Treasury, that if a tanker aircraft derived from a transport aircraft, why not build-in the facility to re-convert it according to the demand from time to time?  Whilst this concept appears ludicrously simple, the practicality of switching roles from military to civilian and back again was to prove complex and expensive.

Undeterred at the bidding stage, competitors boldly outlined their plans - some bits, let us call them Part A, would always be on the aircraft whilst military role equipment, Part B, could be installed when required and stored when not. And with one broad brush the technical problems were solved!

Years later, as the bidding process ground on, the full complexity in terms of design, practicability, civil and military certification, export licensing, security and sheer cost, became apparent.  But at this stage, the juggernaut rolled on - the value for money case had been made and even as the price shifted relentlessly North, so the project limped along. Meantime, the MOD and Treasury expected the bidders to make their plans for exploiting the 3rd party revenue to reduce the overall cost of the project.  It is generally understood that the civil aircraft charter market is fairly short-term - carriers rarely commit to charter beyond the next tourist season.  So it was novel, in the extreme, for bidders to crystal gaze and forecast potential revenues for as much as 30 years ahead (the planned duration of the contract).  Needless to say, whilst the ACMI price of a Boeing 767 or Airbus A-330 could be forecast a few months ahead, nobody would commit to the next 30 years.  Worse, the aircraft that would be marketed would not be off-the-shelf civil variants.  They may look pretty much like a civilian model but they would all be encumbered by their Part A modifications providing not only a performance penalty but an insurance dilemma and a nice little earner for lawyers wrestling with the complexities of the Chicago Convention.

Nevertheless, "Per Ardua," the bidders persisted.  The next great hurdle was the bid price and the extent to which that price would be reduced by 3rd Party revenue.  Remember, the holy grail of 3rd Party Revenue demonstrating demand risk, therefore transferring  risk to the contractor (from the MOD) and, therefore, demonstrating better value for money than conventional finance.  Unfortunately, the associated risks could not be quantified and could not, therefore, be priced.  The answer was to write a very rosy and compelling narrative backing up a number that was simply plucked out of the air.  Let us say it was £400m?  It follows that the Contractor's price must reflect the financing risk on that uncertain number and it would have been inflated accordingly.

Whilst £400 may sounds a lot, in terms of the contract numbers over 30 years it is not.  So, £400m was recovered elsewhere in the financial model and all, at least on the surface, appeared above board.

Let us recap on the Contractor's offer:

• You get a civil aircraft converted for military use as a tanker transport
• You can re-engineer it to its civilian origins (think of the headlines in the Sun)
• We guarantee that we will earn £400m in 3rd party revenue and this is reflected in our price

And so, 10 years later, the MOD eventually chose AirTanker with their brand new Airbus A-330 offering over Tanker Transport Service Company with their knackered old second-hand Boeing 767 aircraft (which are still in airline service and have already completed many more landings and flights than they ever would in 30 years of military service).

Meantime, the difficulty of sending the aircraft into harm's way, particularly in Afghanistan, gained widespread hearing.  To be fair to the bidders, defensive equipment to counter missiles and other attacks was not a requirement of the bid.  After all, the aircraft they were replacing had no defensive aids - they were generally operated out of range of enemy action and from secure military bases that could be secured against man-portable missile attack.  Significantly, it could be argued that the fitting of defensive aids suites (DAS) would grossly inflate the contract price and thus impact affordability.  Also, the whole 3rd party revenue concept might had been destroyed - it is one thing to take passengers to Spain in a grey aeroplane which otherwise looks like its civilian counterpart but quite another to expect them to board a grey aeroplane bristling with antenna and carrying laser turrets and chaff an flare dispensers.  The MOD nodded towards the possibility by asking the bidders to submit an "indicative price" but this was a problem which could be left for later, when the significant price could be added without unseemly scrutiny.  It is not true to say that the possibility of operating the PFI aircraft in harm's way was not foreseen it is just that, at the time, it was more convenient to ignore the prospect.

Even without the DAS, the cost and complexity of converting and reconverting aircraft from military to civilian roles meant that for any 3rd party revenue package to be of mutual benefit it would have to be converted long enough for both contractors to make it worthwhile ie to allow costs to be recouped and profits made.  Unfortunately, such long-term deals were rather against the spirit of the contract which gave the MOD rights of recall which might rather spoil an air charter company's summer season.  And then there is the security aspect - despite their markings these aircraft are, potentially, weapons of war.   How do insurers feel about that?  No, the whole concept of flipping roles and registers was all very well in concept but not so attractive in practice.

Fortunately, due to contact ambivalence, AirTanker provided a fleet of 14 aircraft but only 9 of them are currently in use as military tanker transports (and it is difficult to imagine the expansion in RAF airpower that could ever justify bringing the remaining 5 into military use).  There are 5 spare aircraft, capable of being converted into tankers and the MOD is paying for that option in the contract price there is no element of risk transfer here!  To be clear, whilst there is a possibility that some or all of the aircraft could be leased to private charter from time to time, such commercial exploitation is not essential for the Contractor to achieve his required rate of return on the contract.  As far as the shareholders are concerned, these 5 aircraft could sit on the ground for 27 years without ever earning revenue.  This risk was priced into the contract so if any business is ever generated from these aircraft it will all be buns for the contractor (well, nearly all since the MOD gets a token share of the revenue)!  There is no transfer of demand risk to the Contractor so very nice work if you managed to get it!

It is now clear how the Ministerial Jet can be provided so "cheaply," according to the language of PFI anyway.  Firstly, it is already paid for (by the tax-payer), used or not.  Further conversion to VIP fit will be a nice earner for Airbus Defence and Space whilst AirTanker Services will provide all the technical and operational support, for a price.  These additional services will not be trivial.  The aircraft must be specially prepared, sanitised for security purposes, crewed and staffed for VVIP operations and, above all, at the beck and call of the customer (rather like having your cabbie put his meter on waiting). The DAS, with which it will inevitably be equipped, is already been paid for and is probably  in storage right now just waiting for World War III. However, whether the basic system as fitted would be considered good enough for potential passengers is another matter. An installation similar to Air Force One would cost an eye watering amount.

That all being said, I firmly believe that our Royals and VVIPs need and deserve appropriate air transport - it's just that the smoke and mirrors accounting is rather difficult to take.