National Air Traffic Services - Government response to Select Committee report

This is the Government 's response to the Transport Sub-Committee 's report on Developments at National Air Traffic Services dated 10 January 2001.

The Government agrees fully with the Committee that there is still considerable room for improvement in the operations of the 100%publicly owned NATS 'business -this was one of the main reasons for seeking a Strategic Partnership for NATS with a Public Private Partnership, which will ensure greater investment and safety.

The Government strongly disagrees with the Committee 's recommendation that no fundamental moves towards a Public Private Partnership should be taken until the Swanwick centre is fully operational, in around a year from now. As the Committee points out ,over the past few years NATS has experienced cost overruns or long delays to the completion of all of its major projects, and is now having to increase controller recruitment by 50%so as to cope with projected future shortages. The Government believes that delivering action now through the implementation of the PPP, will provide the necessary resources and expertise required by NATS to manage its business effectively, while at the same time implementing its major investment programme in a timely and cost effective manner. To do nothing now would therefore be damaging to NATS 'business and investment programme, as well as damaging to the morale of NATS staff, who would be subjected to further uncertainty about their future.

The Government has adopted a clear approach to solving NATS 'problems. It has been decisive in finding ways to take forward key projects such as the New Scottish Centre. The PPP is a practical strategy for equipping NATS to meet the needs of the future. It will encourage and enable NATS to bring its investment projects to fruition in the most efficient and timely manner, leading to lower charges to users without compromising the paramount importance of safety. With the assistance of a Strategic Partner, NATS will be equipped to become a major player in the provision of air traffic services around the world, thereby creating opportunities for expansion that would have been unthinkable under the present system.

Reply to the Committee 's comments and recommendations

(a) We commend controllers and other NATS staff for their exemplary response to the computer failures this year, and especially to the major failure on 17 June. However, such computer failures are a disappointment. Although their principal effect is increased delays for airlines, it is self-evident that the resultant increased workload for controllers, coupled with a loss of safety-related computer features, undermines safety levels, even if only by a very small degree. Neither delays nor any compromise of safety as a result of computer failure are satisfactory.

(b) As was rightly pointed out to us, the institution of proper plans to ensure business continuity is required of many major companies, and is of vital importance to NATS given its dependence on so many software systems, and its safety-critical role. We recommend that NATS assess with its customers, staff and others its need for business continuity plans, and report to us the steps it intends to take to improve its ability to respond to events such as major computer failures.

The Government supports the Committee 's commendation of NATS staff for their handling of last year 's computer failures at the West Drayton air traffic centre. Nevertheless the Government shares the Committee's disappointment that the failure on 17 June was not rectified more quickly - this was apparently due to a failure to recognise the nature of the failure. NATS recognises that there are lessons to be learned on improving the effectiveness of business continuity, and has been working with its customers to enhance its arrangements in this field.

(c) Like the airlines, we can see little reason why NATS should not compensate its customers when, through its own failings, it does not deliver the service it has undertaken to provide. We recommend that NATS be required in future to provide at least partial compensation in such circumstances.

The Government has resisted pressure for a statutory compensation scheme, as such a scheme could have the perverse effect of encouraging even such a safety-conscious organisation as NATS to put avoidance of delays before safety. Such a punitive scheme would also lay NATS open to unrestricted liability, and could adversely affect the level of NATS 'investment. The Committee will no doubt be aware that the Government, as part of the PPP, has introduced a performance mechanism that will reduce the maximum charges which NATS can derive from its en route air traffic business, if delays caused to civil aircraft, attributable to NATS, exceed a defined standard. The maximum annual penalty in respect of delays in 2001 and 2002 will be £2m, and this will rise to £5.7m p.a. in respect of delays occurring from 2003.

(d) Given the clearly expressed opposition of NATS and others to the decision to build and maintain the New Scottish Centre under a PFI contract, and the subsequent decision to abandon those arrangements, we are extremely surprised and disappointed that the Government insisted that the project should go ahead on a PFI basis.

The Committee is wrong to suggest that this Government insisted on a PFI. The decision to make the New Scottish Centre a PFI project was taken by the previous Administration, against the wishes of NATS, which then had great difficulty in constructing a viable PFI deal. When this Government reviewed the PFI contract, we found it seriously defective: there was little risk transfer to the supplier; it was expensive; and it entirely fettered NATS 'commercial freedom for the expected useful life of the new centre, some 25 years. This is why the proposed PFI agreement was terminated.

The Government and NATS then hired professional project managers, Bechtel, to assist NATS in negotiating a contract in a more conventional form, and if necessary to manage it through to completion. Bechtel and NATS have since negotiated a master agreement with Lockheed Martin on the provision of systems, and re-tendered the contract for the building design and construction to a different contractor. This approach has already delivered savings estimated at over £100m in comparison to the previous flawed PFI.

(e) Although the advantages of having a single systems supplier for both the New En Route Centre and the New Scottish Centre may outweigh the risks, NATS must remain wary of the dangers posed by being so dependent on a single supplier. Therefore, we reiterate the conclusions of the Arthur D. Little Report, and recommend that NATS continue to follow good commercial practice in the management of its contracts, ensure that it retains managerial and technical competence in order to evaluate its relationship with its suppliers intelligently, and regularly review its financial exposure and business risk.

NATS 'technical competence is already second to none in its field, and will be a major asset in the attempts of the PPP to make itself into a successful and efficient organisation.

One of the main reasons for the introduction of the NATS PPP is the introduction of private sector expertise, to ensure that NATS will follow good commercial practices for all its procurement activities.

(f) More than £15.7 million has been spent unnecessarily because of the Government 's insistence, contrary to the clear and consistent advice of NATS itself, to opt for a PFI contract for the New Scottish Centre, and its subsequent decision to abandon the contract. We unreservedly condemn this waste of NATS' revenue.

The Committee is wrong to criticise this Government over the New Scottish Centre project. As has already been explained in this response, the project was progressed as a PFI by the previous Government against the wishes and advice of NATS. NATS therefore had no alternative but to expend funds in trying to achieve a workable PFI contract, until the present Administration told NATS to abandon the attempt.

(g) We agree with the IPMS. It is extremely disappointing that the [New Scottish Centre ] project has been so much delayed by the decision to opt for a PFI contract. In order to ensure that capacity in the airspace currently controlled by the Scottish Area Control Centre is not constrained we urge NATS to proceed with the construction of the New Scottish Centre without delay.

(h) Although the arguments in favour of the 'two-centre strategy 'seem persuasive, we recommend that NATS clarify for its major customers the benefits that the New Scottish Centre will bring.

Parliament has now enacted legislation which ensures that the NATS PPP cannot go ahead unless the Government is satisfied that the Strategic Partner has in place suitable plans for progressing major capital projects, including the New Scottish Centre. Parliament has now also approved the affirmative resolution which has the effect of triggering this guarantee that the New Scottish Centre will be built. The Committee will be pleased to hear that the New Scottish Centre project is proceeding well, with site preparation work already underway.

Consultation with users will be enhanced through the PPP and its mechanisms as will the commitment to bring the NSC into operation in a timely fashion.

(i) Given the difficulties experienced in the PFI arrangements for the New Scottish Centre, and NATS' opposition to the use of the PFI in that case, we are again surprised and disappointed that NATS was required to proceed with the procurement of a new Oceanic flight data processing system under similar arrangements. We therefore condemn the fact that resources have been wasted in preparing a PFI contract which has subsequently been abandoned.

The Committee's analysis is flawed: the circumstances surrounding the termination of the PFI contract for the Oceanic Flight Data Processing System (OFDPS)are materially different from those surrounding the abandonment of PFI for the New Scottish Centre. In the latter case, the proposed PFI contract was rejected because of insufficient transfer of risk, and excessive cost. In the case of OFDPS, NATS' stated reason for termination was not the PFI nature of the contract, but simply the failure of the contractor to meet a major project milestone. NATS considers that, under the terms of the contract, such a failure entitled it to terminate the contract, whatever its nature: PFI or conventionally funded.

(j) Although we acknowledge that the need to introduce a new Oceanic flight data processing system has become less pressing, we are nevertheless disappointed that it has been so delayed. We urge NATS to take steps to ensure that a suitable new system is put in place as soon as possible.

The responsibility for the introduction of OFDPS will rest with the NATS PPP. As the Committee itself recognises, the need for the new Oceanic flight data processor has become less pressing. However the Government shares the Committee's disappointment that yet another of NATS' major projects has fallen so far behind its original schedule. The Government is confident that the introduction of new project management expertise through the PPP will greatly improve the current state of affairs.

(k) We note that slippage in the timetable for completing the later stages of development of the New En Route Centre is already expected, and we also note the Chairman's unwillingness to guarantee that the Centre will become operational on the target date. We trust that NATS will redouble its efforts to ensure that the Centre is opened on time.

The Government understands the Committee's desire for assurances about the operational date for the Swanwick Centre, given the project's chequered history. But the Government is satisfied that NATS is now making strenuous efforts to ensure that the target operational date of 27 January 2002 for the Swanwick Centre is met. In a complex project of this nature it would be unreasonable to require absolute personal guarantees that this specific target will be achieved.

(l) The evidence we received from staff and from management about possible shortages of air traffic controllers at the New En Route Centre on the date that it is due to open is contradictory. We recommend that NATS re-examine the matter, consulting with staff, and take whatever steps are necessary to ensure that adequate numbers of controllers are available to permit the new Centre to open at full capacity on 27 January 2002.

(n) Although we note the view of NATS management that current staff shortages are either very slight or do not exist at all, there are consistent reports of staff shortages at LATCC, particularly amongst engineers. We are also concerned about the availability of air traffic controllers during the period that the conversion training roster for the New En Route Centre is in place. We recommend that NATS keep a close watch on the situation, and that it ensure that it takes steps, including if necessary increasing rates of pay, to attract sufficient numbers of staff into the company.

The Government agrees that all steps should be taken to deal with any failure to ensure adequate numbers of controllers exist to allow continued operation of the West Drayton centre, while at the same time allowing the continuation of the training programme for controllers on the new systems at Swanwick. Under the terms of the license to be granted under the Transport Act, NATS will be obliged to provide core services such as air traffic control services' so as to be capable of meeting on a continuing basis any reasonable level of overall demand for such services'. NATS have recently stated that the number of controllers at West Drayton is below full complement - nevertheless NATS has repeatedly advised the Government that although controller numbers are tight, they will be able to safely deal with expected traffic levels without a significant increase in delays.

In order to prevent controller shortages in the longer term, NATS announced on 23 January 2001 that it was increasing the annual intake of students at its air traffic controller college at Hurn from 120 to 180, to take effect from June 2001. All the three bidders for the PPP publicly supported this decision.

Rates of pay for controllers will be responsibility of the NATS PPP.

(m) Given the relatively modest increases in capacity made possible by the New En Route Centre, and given its original estimated cost of £462 million, its actual cost of over £700 million is disgracefully high. Moreover, there remains confusion and lack of clarity over the precise costs of the New En Route Centre. These costs, including NATS internal costs relating to the project, must be clearly stated without delay. We recommend that NATS explore with its suppliers means by which it may benefit from any re-sale of the technology to be used at the Centre, in order to recover at least some of the costs it has incurred.

The Government agrees that the level of increase in the cost of the Swanwick project was disappointing - we believe that one of the main advantages of the PPP will be to introduce greater commercial discipline and management expertise, to avoid these problems. At the Committee's request, the Government commissioned Arthur D.Little Ltd to undertake a detailed examination of the costs of the Swanwick centre. The report has been provided to the Committee and sets out the financial position very clearly.

(o) Given all the problems the company has faced, it is obvious that now is not an appropriate time to subject NATS to further upheaval. We therefore strongly recommend that the proposal to implement a public-private partnership affecting the company be postponed, at least until the New En Route Centre has been successfully brought into operation.

The Committee is right to highlight the problems that NATS has, which include delays and cost overruns on its major projects, major computer failures, and a shortage of air traffic controllers at its key air traffic control centres. Therefore it is hard to understand why the Committee's main recommendation is to delay the PPP process by nearly a year. The Government is introducing a PPP for NATS precisely because NATS is in urgent need of additional project management resources, new commercial expertise and sufficient and accessible sources of finance.

If the PPP for NATS were to be delayed, then by the time of its introduction the construction of the New Scottish Centre would be under way, as might the procurement of the new Oceanic flight data processor and the replacement of the NAS computer. The upgrade of the NERC software to a new operating platform will also occur in this period as will the consolidation of LATCC and the Manchester Area Control Centre into NERC. The need for NATS constantly to deliver new capacity whilst maintaining safety, reliability and cost effectiveness has never been more paramount and the challenges NATS faces have never been greater. To delay the PPP, which the Government believes is the best option for getting the required expertise into NATS, is unlikely to improve this situation, especially given NATS 'track record on the implementation of major projects.

There are now only a few weeks to go before the introduction of the NATS PPP, and final bids have already been received. If the PPP was to be delayed, it would have to be re-tendered, and the competition to find the strategic partner would have to start all over again. This process, which would include a repeat of the due diligence exercise by all the bidders, would inevitably cause more disruption to NATS, more expense to all parties and much less certainty about completion. This in turn would have a very damaging effect on the morale of NATS staff.

Finally, the Government is pleased to note that the Committee has not suggested that the NATS PPP will in any way compromise the safety of air travel in the UK. A key objective of the PPP is to strengthen the safe provision of air traffic services by securing investment in the best systems and through the development of NATS' people and skills.