Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence

Memorandum by National Air Traffic Services Ltd (NATS 02A)


  Thank you for your letter of 9 November in which you confirmed the additional information promised in the course of the hearing on 8 November and the additional questions on which you now require responses.

A list of the "bugs" which remain in the system at Swanwick

  The attached annex provides a list of outstanding Programme Trouble Reports (PTRs) as at 15 November. The number of PTRs required to be resolved prior to Technical Handover next month has continued to fall, from the 120 reported by Colin Chisholm at the hearing on 8 November to 99 now. The project remains on track to reduce this to a manageable number of around 30, all of which will be in a "known state" at Technical Handover.

Details of the shortage of engineers in NATs, particularly at LATCC

  The budget for engineers at LATCC for October 2000 was 215 against 210 staff actually in post. LATCC is currently recruiting to fill 11 posts which cover these vacancies and forthcoming retirements. Watchkeeping staff numbers are at full strength. As far as the situation in NATS Software Services is concerned, the position is that for the same period there were 204 staff in post against a budget of 207. In overall terms, there is no shortage of engineers in NATS.

  The computer failures at LATCC this year have, however, resulted in some diversion of resources in the NATS Software Services area in order to resolve NAS software engineering issues. These staff, with their in-depth knowledge of the NAS system, represent a scarce, expert resource. Their diversion has created scheduling issues for some other planned tasks, but the team has just delivered the latest version of NAS software into operational service only one week behind schedule.

The manpower situation at LATCC, particularly during the conversion period as controllers train at Swanwick

  For Area Control operations at LATCC, NATS currently has 360 air traffic controllers available to meet a budgeted requirement for 300 controllers to run the operation at full strength. The overbearing of 60 controllers has been in place for some time in order to meet NERC development requirements leading to the different concept of operations at Swanwick. Next year the overbearing will be used to provide cover for operational conversion training. By June 2001, the actual number of controllers is anticipated to increase to 374 against the same complement of 300 posts required for Area Control operations at LATCC.

  For Terminal Control operations, NATS has a full complement of 255 controllers to meet current operational requirements, although there will be a slight shortage (10 to 14 people) after the introduction of two new sectors in the Spring. NATS managers are confident that this is manageable through the Summer of 2001.

  During this Winter, there will be a number of staff working off-site on training activities and on the evaluation of these planned re-sectorisations. In addition, the Swanwick operational conversion training will start in January. Throughout this period, the Area Control and Terminal Control operations will be manned to meet seasonal requirements. As explained in NATS' memorandum to the Committee, there is a very detailed programme in place to meet conversion training requirements. A roster for all LATCC Area Control staff has been published, including over 21,000 individual allocations of staff to activities.

How many near-misses or loss of separation incidents have occurred during periods of computer failure this year? How many commercial aircraft have opted to fly in uncontrolled airspace during computer failures at LATCC to avoid delays?

  No Aircraft Proximity (Airprox) incidents have occurred as a result of NATS computer failures this year. The failure of the NAS system on 9 June has, however, been cited as a contributory factor in an incident on that day involving the loss of standard separation between two aircraft in the Dover sector.

  We have no data on the number of commercial air transport aircraft opting to fly in uncontrolled airspace during periods of computer failure. However, the number could be expected to be small, given the fact that nearly all major UK airports lie within controlled airspace.

The internal costs to date of the Swanwick Project

  There is no disparity between the NATS and DETR memoranda in respect of the costs of the NERC project. The Arthur D Little (ADL) report explained that the approved budget for NERC was £474.9 million—made up of £350.7 million capital and £124.2 million revenue.

  As noted in both memoranda, ADL found that the expected costs to completion of the project would amount to around £625 million, ie £150 million more than the original budget. The ADL estimate of £625 million included approximately £60 million of site revenue costs, which NATS considered should not have been included in the total. These costs relate to expenditure with third parties on the management of the Swanwick site over the period from the original 1996 "O" date until the Winter of 2001-02 and hence are unrelated to computer system development costs. The figure of £625 million has, however, come to be generally regarded as the revised target figure for the project.

  ADL also identified an additional £76 to £86 million of internal NATS staff costs associated with the management of the project and the operation of the Swanwick site. ADL did not include these internal staff costs within the project costs identified above on the grounds they had always been accounted for separately from the project. It is these costs that are referred to as "NATS internal costs" in DETR's memorandum.

The Tender Evaluation Board which dealt with the New Scottish Centre contract

  This question is assumed to relate to the tender evaluation process which took place to determine a preferred bidder for the New Scottish Centre (NSC) Private Finance Initiative (PFI) contract in late 1996/early 1997. The PFI contract has subsequently been abandoned and work is now proceeding on the basis of revised funding and procurement arrangements.

  The original procurement and evaluation processes for the NSC were carried out in accordance with an invitation to Participate (ITP) using the Negotiated Procedure under the Public Works Contract Regulations 1991. In addition, the NSC tender evaluation process was structured to conform to the Government's PFI guidelines. Ministers of both the Department of Transport and HM Treasury endorsed NATS, procurement process both before an advertisement was placed in the European Union Official Journal and before the ITP was issued. The ITP stated that the Civil Aviation Authority intended to award the contract to "the most economically advantageous offer" received from tenderers taking into account the evaluation criteria listed in the ITP.

  The first stage of tender evaluation, based purely on technical and commercial considerations, led the Tender Evaluation Board to conclude in late 1996 that:

  "The prices declared by the tenders for the construction and lifetime support of the New Scottish Centre make this programme financially the largest that NATS has ever undertaken. Before entering into such a commitment, NATS must be confident that the chosen Project Company will be able to fulfil the technical and commercial requirements. On the basis of the evaluation, and paying particular attention to the performance of the systems companies on previous ATC contracts, the Tender Evaluation Board does not believe that the necessary level of confidence has yet been established to permit the selection of the preferred tenderer."

  Thus the advice of the Tender Evaluation Board was that a decision on the preferred bidder should be deferred sine die pending confirmation on the ability of the competing bidders to deliver air traffic systems projects then in progress.

  Strategies for handling this situation were considered by management, with one option being to delay the letting of the NSC contract for up to a year to assess the rate of progress on the bidders' other projects. However, in parallel with the tender evaluation process, a review of the NATS Two Centre Strategy had concluded that the NSC should remain a core component of the company's Centre Development Plan and that the project needed to proceed without delay in order to meet operational requirements.

  In the light of these conflicting considerations, NATS management concluded that the project should go ahead if mitigation of the Tender Evaluation Board's concerns could be achieved. While evaluation of the technical, commercial and total lifecycle costs issues between the bids were considered to be broadly neutral, the key discriminators between the two tenderers were thus credibility and risk. The selection of the Preferred Bidder, Sky Solutions, was made in accordance with these criteria. This selection was endorsed by the CAA Board and subsequently, in March 1997, by the then Secretary of State for Transport. The Centre Development Plan was endorsed by the new Government in May 1997.

  The Chairman of the Tender Evaluation Board at the time has no recollection that he threatened to resign over this decision and he continues to be employed by the Company in a senior position.

Why did the PFI for the New Scottish Centre eventually fail?

  The PFI contract for the New Scottish Centre failed for three reasons:

    —  the costs of the proposals were higher than NATS' airline customers were prepared to pay. In particular, the PFI structure would have led to a sharp increase in charges at the time the Centre entered operational service;

    —  it proved impossible to reach agreement on some elements of the PFI contract that met NATS' operational and commercial objectives at the same time as meeting the Government's PFI criteria, especially in relation to the transfer of commercial risk to the contractor. Despite many meetings with the Treasury Task Force, DETR officials and senior accounting advisers, the balance sheet treatment was never finally resolved; and

    —  following the announcement of the PPP proposals it was accepted by Government that to have a private sector NATS with one of its main centres in another company's ownership was not logical.

  The main issues however, were affordability and the appropriateness of using the PFI model for major IT projects. The structural rigidities of the PFI concept are perhaps well suited to the provision of fixed infrastructure but not to the development and maintenance of complex IT systems that require to be changed and modified many times over their system lifecycle. The NSC PFI was intended to run for a period of 25 years (development and operation), resulting in NATS' customers paying for unnecessary contractor overheads, and with no opportunity for NATS to share in any cost reduction opportunities later found to be available. The PFI programme relied on the continued co-operation of a single contractor whilst providing little leverage to NATS to control the activities of that contractor. In particular, the PFI structure allowed no opportunity to compete future maintenance and development work.

  The importance of competition has been well illustrated by the re-tendering of the NSC building design and construction activity. The building costs now seem likely to be reduced significantly as compared to the PFI project plan. In addition, system design and development has been broken down into discrete Contract Line Items (CLINs) subject to competition and incentivisation arrangements. Under the Master Agreement negotiated with Lockheed Martin (LM), the entire scope of services that make up the Systems Programme, is the sum of individual CLINs. Each of these may be awarded and managed separately. It is possible to have a mixture of contract forms, ie. cost reimbursable, fixed price, cost plus incentive fee or any other appropriate contract type for that element of work.

  Overall it is confidently expected that it will be possible to achieve savings in excess of £100 million on the overall project costs as a result of changing the procurement arrangements.

Details of the savings that have resulted from Lockheed Martin providing the software both for the New En Route Centre and the New Scottish Centre

  The best independent analysis of the position on this issue was provided in the Arthur D Little Report. ADL concluded that "the benefits of having a single system supplier for NERC and NSC far outweigh the drawbacks. Future upgrades can be implemented on both systems, realising substantial savings, and support and maintenance costs can be minimised, again with substantial savings. Also the development risks when using the same supplier will be much reduced".

  The ADL Report makes the following further points:

  "There are many benefits to be had by choosing the same supplier as for NERC, and since the tender evaluation stage for NSC it has become very apparent that these benefits are significant. The primary benefits are as follows:

    —  future upgrades can be implemented on both systems, realising substantial savings for NATS, estimated by NATS to be more than 30 per cent.;

    —  substantial savings can be made in maintenance and support costs since only a single engineering support cell is required. Over the lifetime of NSC (18 years) this is estimated by NATS to be worth £200 million; and

    —  there will be much higher confidence that the NSC system will work. The system architecture will be as for NERC (the CXSS software, application software and hardware platform will all be common) and therefore the risks will be much smaller than if a different supplier were chosen."

  The ADL Report also noted some drawbacks, relating in particular to the risk of "lock-in" to a single supplier. The ADL report noted that "Management of the business risk is key to ensuring that the drawbacks of having a single system supplier are minimised and NATS financial exposure is limited. One important aspect of this is to ensure that the right commercial arrangements are in place for NSC. Although it is not within the scope of this study to investigate the merits or otherwise of the PFI, the mechanism by which it is understood NSC is to be financed, choosing this way forward for NSC will inevitably impact on the business risks for NERC.....On the face of it, the potential for "lock-in" is increased by PFI."

  Subsequently, as noted above, the Government decided that the PFI should be abandoned. The revised procurement arrangements described above will significantly reduce the potential for "lock-in" to a single supplier as well as resulting in further savings beyond those envisaged at the time ADL completed their Report.

What costs have been incurred by NATS, the CAA or any other public body as a result of the decision to opt for the PFI for the New Scottish Centre, and then to cancel the contract?

  In May 2000 NATS settled a claim with Sky Solutions for work undertaken in respect of the NSC PFI contract. The settlement, totalling £7 million, was approved by the DETR. No payment was made to the bidders for work undertaken prior to March 1997 when the preferred bidder was announced.

  Prior to the announcement in November 1993 that the NSC would be funded under the PFI, the project had been proceeding on the basis that it would be conventionally funded and procured. Following the announcement, the specification had to be re-written as an output specification, service level specifications and mechanisms had to be developed, the arrangements had to be tendered, and the resulting bids had to be evaluated and negotiated. This activity added several years of delay to the project and hence significantly increased the level of project support costs. In addition, the costs of specialist advisers would need to be added to the cost. The costs of sustaining projects to support the current operation are set out below. It is not possible to calculate precisely what the difference would be between the project cost had it been funded and procured conventionally, on the basis of the timetable originally envisaged, and the additional cost arising specifically as a result of the PFI.

What pressures will be put on the air traffic control system due to the delay in opening the New Scottish Centre? What additional costs—in terms of replacing and updating systems in the existing Centre—will be incurred?

  As a result of the delays in completing the New Scottish Centre project it has been necessary to implement a programme of work at the Scottish Area Control Centre (ScACC) at Prestwick to sustain operations until the New Scottish Centre is brought into operation.

  This programme of work is aimed at addressing three areas, namely, ATC capacity, systems capacity and systems ageing. The key milestones in the programme are:

    —  new bank of workstations constructed for military occupation, year ending 2000;

    —  new discrete Military Voice Communication System ready for operational service, March 2001;

    —  Radar Data Processing and Display System ready for operational service, March 2001;

    —  new sectors to be ready for operational service winter 2002 and 2003; and

    —  new Domestic Operations Room layout to be completed end 2003.

  The total capital cost of this Sustainability Programme is £6.4 million plus internal NATS Engineering costs of £2.3 million. The programme ensures that ScACC will continue to operate a safe and effective service to NATS' customers in the period to the transfer of operations to NSC.

What benefits will the New Scottish Centre bring, in terms of increased capacity in the airspace it covers, or in terms of reduced delays?

  The New Scottish Centre is one of the key elements of NATS' Two Centre Strategy endorsed by Ministers in May 1997. The centre will provide the platform for increasing airspace capacity throughout the life of the building, over the next 30 to 40 years. The capacity benefits arise from the ability physically to increase the number of sectors in Scottish airspace throughout this period, and the ability of modern technology to support the task of controllers through the development of productivity tools. The current centre can accommodate a limited number of additional sectors, but there will then be no further space in the operations room for subsequent expansion. There are three other major benefits:

    —  existing ageing equipment systems will be replaced, thus enhancing the overall reliability and resilience of the system.

    —  commonality with Swanwick will enable contingency cover to be provided in the event of the catastrophic failure of either centre; and

    —  common systems and software will reduce maintenance and upgrade costs, which are expected to become an increasing factor in NATS' overall cost base.

Why did EDS default on the Oceanic Flight Data Processing System contract?

  EDS failed, in NATS' view, to meet the requirements for Critical Design Review 2 by 31 May 2000 as mandated in the contract between NATS and the Company. This assessment is not, at this time, accepted by EDS.

What cost has been incurred by NATS, the CAA or any other public body as a result of the decision to opt for the PFI for the New Oceanic FDPS, and then to cancel the contract?

  Costs have been incurred with specialist advisers and on internal project support costs. NATS has also had to incur costs on sustaining the current system and has let a number of support contracts which are currently under review. NATS is currently in discussion with EDS about the value of any elements of work completed to date that might be of benefit in developing a new system, and about contractual issues arising from the Critical Design Review 2.

What "off the shelf" flight data processing system do you intend to purchase for the Oceanic centre? What consideration have you given to purchasing other systems, such as those to be developed for the New Scottish Centre, and those at the New En Route Centre, "off the shelf" rather than having "bespoke" systems designed?

  The NATS Board has agreed a strategy of procuring a modified Commercial Off The Shelf (COTS) product to meet NATS' core requirements for the Oceanic Flight Data Processing System with a progressive upgrade of the system to meet future requirements, as necessary.

  It is expected that a competitive detailed project definition activity will be undertaken with a view to defining the project in terms of "core" requirements. The objectives of this Project Definition activity include:

    —  reaching an agreed and validated set of Requirements for the project which meet NATS' business needs and are both practicable and affordable;

    —  confirming that one or more COTS products can, when modified, meet NATS' requirements and be capable of further modification to meet NATS' requirements; and

    —  gaining assurance that products proposed by one or more suppliers can meet NATS' requirements for the project and that subsequent modifications can be delivered, as planned.

  The NERC and NSC systems are not suitable for the Oceanic task in the medium term. The Oceanic task is wholly procedural requiring advanced conflict prediction and resolution which is possible in this highly predictable environment. In the longer term (10 years plus), it may be possible to use a common system for both Oceanic and domestic operations but this is beyond the concept of operation and the current generation of systems being put into operation.

What has caused the "marked improvement in the reliability of the current system" at the Oceanic centre? Do you anticipate further improvements in future?

  The current system entered operational service in 1987 but was beset by serious hardware and software reliability problems. A hardware upgrade programme in the early 1990s improved matters and subsequent software upgrades have continued to improve the reliability of the system. We do not anticipate any further significant improvements in the functionality of the system as future developments to cater for CNS/ATM (Communication Navigation Surveillance/Air Traffic Management) in the North Atlantic region depend on the technological platform afforded by FDPS 2. The current system operated with 99.93 per cent availability in 1999.

Can you explain more fully the nature of the "consolidation plus tools" investments plan that you have made your preferred option? Why is the plan described as "high risk"?

  This investment plan option, referred to in Section 1.3 of the NATS Service and Investment Plan, seeks to achieve the necessary ATC capacity to meet forecast demand through the earliest possible introduction of computer assistance tools to increase ATC sector productivity in both London and Scottish Area Control. It also aims to achieve the consolidation of all of NATS' facilities, including London Terminal Control and Manchester, in the two Area Control Centres at Swanwick and Prestwick by 2010. This plan therefore delivers the capacity goals whilst addressing overall operating costs.

  The reference to high risk does not refer to any safety issues. The simultaneous programme to deliver both the capacity and unit consolidation elements is very challenging in terms of technical requirements and timescales and is consequently rated as high risk to maintain the proposed timetable.

Andrew Picton

Company Secretary

24 November 2000

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