John Vine, chief inspector of borders and immigration, said the e-borders scheme had failed to meet its promises.
He said airports were not meeting those with terrorist alerts against them on arrival, and “not one person” had been stopped boarding a plane to the UK.
Mr Vine noted successes including arrests due to e-borders information.
The Home Office said UK border technology was the most advanced in Europe but agreed there was more to do.
The total cost of the e-border programme is expected to be £536m from 2007-15, and Mr Vine said a “fundamental re-think” was needed.
The scheme, devised by the Home Office in 2003, was meant to improve immigration controls by collecting advanced passenger information (API) on every scheduled inbound and outbound journey to and from the UK.
‘Export the border’
A target was set to collect data on at least 95% of passenger movements by December 2010 but, at the time of the inspection last year, only 65% were being recorded.
The report blamed legal difficulties in collecting API on European flights and a failure to test the e-borders concept on train and sea routes.
The data was meant to enable staff to “export the border” – preventing passengers from boarding planes to the UK where this was considered a threat.
This included people who had previously been deported from the UK, but Mr Vine said “not one person” had been stopped under that system.
Speaking Today on a programme, he said people with an alert against their name for “terrorist sympathy or activity” should be met at airport arrivals gates by border staff, but that was only being done at Heathrow.
The report, which contains 14 recommendations, also criticised the “poor quality” of data on watch lists used by the e-borders system to alert border staff of criminals, terrorists and other suspects.
It said this created inefficiencies and a greater volume of work which officials were unable to manage.
“This, coupled with a policy of prioritising immigration work over customs work, resulted in the deletion… of over 649,000 records concerning potential drug and tobacco smuggling, over a ten-month period,” the report said.
It said the deletions had a “significant impact on the ability of staff at the border to seize prohibited and restricted goods and deal with those responsible”.
Inspectors also found the data set was not extensive enough for the e-borders programme to “count in and out” all foreign national passengers – and that this would not be possible until 2018 at the earliest.
Shadow home secretary Yvette Cooper asked Home Secretary Theresa May to “urgently explain why hundreds of thousands of possible drug smuggling records were deleted in 2012 without having ever been read”.
“It is an outrage that drug smugglers have been able to get away with it because basic information was never acted on,” she added.
And she said it was “unacceptable that the Home Office will not provide any information about the sections of the report that have been redacted”, saying two of the three top three recommendations have been edited.
‘Best in Europe’
The Home Office said it now carried out advance checks on 78% of those flying to Britain and required API from everyone coming from outside the EU.
Immigration Minister Mark Harper said everyone who arrives at UK borders is checked, and the e-borders scheme is an extra level of security.
“We have the best coverage of any country in Europe but we are working to improve our coverage further,” he said.
The Home Office played down the importance of the information that had been deleted, saying anyone who had committed a serious offence would already be on a separate “warnings index” and intercepted on arrival.
Officials said the details that had been removed were potential matches between two databases, less than 1% of which would have prompted an alert.
Among a series of positive findings, inspectors said information gathered as a result of the e-borders scheme had resulted in the arrest of thousands of people for offences including murder and rape.
Mr Vine said he was pleased the e-borders “high-profile alerts” system was being used to intercept high-risk individuals at the arrivals gate at Heathrow – but pointed out that this was not happening at any other port or airport.
He said: “The Home Office should now define clearly what the aims of the e-borders programme are ahead of the new procurement exercise, and be transparent about what e-borders will deliver and by when.”