Was PFI the reason why the EDS Oceanic project failed?

The High Court case between EDS and National Air Traffic Services may have been settled, but evidence emerged that the...

The High Court case between EDS and National Air Traffic Services may have been settled, but evidence emerged that the Government's private finance initiative was actually on trial. Tony Collins reports

After hearing evidence for more than 40 days in the case EDS v National Air Traffic Services (Nats), Judge Toulmin was still capable of showing surprise.

He had just heard Bill Semple, the former chief executive of the air traffic service, say in the witness chair that there was hope that the Government would drop its private finance initiative (PFI) as a requirement for funding a £50m ongoing contract with EDS.

"Was that a realistic hope?" asked the judge. "The Government had by that stage nailed their colours to the PFI mast, had they not? Mr Prescott [the deputy prime minister] was making many speeches at that stage expressing the virtues of PFI."

Semple replied, "I think the only light that we had, my Lord, was that they had previously dropped the PFI requirement for the New Scottish Centre [a different project in which an EDS competitor Lockheed Martin was to build a new air traffic control system]. So I guess having had one minor success, we thought we might just get another, but it was a pretty forlorn hope."

Then came a particularly incisive comment from EDS' QC Murray Rosen. "What a shame you did not, Mr Semple," he said.

Rosen appeared to be suggesting that the contract with EDS might never have ended up in court, indeed the Oceanic flight data processing system project might never have failed, had the Government and especially the Treasury allowed the contract to switch from PFI to conventional funding.

Not that Semple was being blamed. It was said during the case that the Treasury and the Department of Transport had turned down requests from Nats to drop PFI.

No single cause of the failure of the EDS contract to build a system to track aircraft flying over the North Atlantic emerged during the High Court hearing which lasted 44 days. But PFI-related problems ran through internal project reports, memos between executives, board minutes and e-mails like a diseased main artery.

Minutes of a Nats board meeting in August 1999, nearly a year before the contract was terminated, were revealed in court. One minute of the meeting said, "There was a need to consider options for escaping the private finance initiative contract with EDS."

Phil Oxton, client executive at EDS, told the court, "Nats wanted out of the PFI contract. It was one of their objectives, and it seemed to be one of the solutions to the problem that we had between us."

The judge then asked, "The problem was how to get there?"

"That is correct," replied Oxton.

The two parties were in court because Nats had ended a 14-year contract 11 years early, in July 2000, claiming that EDS had failed to meet a vital milestone two months before. The supplier denied this and sued in December 2000, claiming that Nats was not justified in cancelling the contract.

The hearing began in January and ended suddenly two weeks ago. Although the terms of the settlement are confidential, Computer Weekly understands that Nats agreed to pay its own legal costs and many millions of pounds to EDS.

During cross-examination Alan Milne, EDS' Oceanic project manager, said that by February 2000, five months before the contract was cancelled, Nats had an intention to terminate. This was for several reasons, including its "displeasure with the PFI arrangement".

Termination of the contract would be the "cheapest way out", he said.

Days before the trial was cut short, Semple was asked by Rosen if Nats had wanted to escape from PFI and do a deal which would deliver an EDS Oceanic system. "I was hoping that that was what would happen," Semple replied. "That is what I was instructing my people to try to deliver."

One key unresolved question during the case was whether the Government, by insisting that the Oceanic system be funded under PFI, had doomed the contract from the start. Was the Nats view of the contract, and by extension the supplier, so hardened by signing an uninvited PFI contract that when the usual disputes that beset major projects arose, the tensions were not easily dissipated?

At the highest level, directors at Nats and their counterparts at EDS disagreed over the extent to which each side was co-operating. And at a lower level, down to every-day meeting arrangements, there were disagreements over the hospitality for Nats executives when visiting the EDS offices.

Milne told the Nats QC Jeremy Storey, "No, I am sorry, I must be clear there. As I recall, we did not remove hospitality. Nats were free to use whatever facilities we had at our offices, such as the coffee machines and the like, and at particular meetings Nats would be supplied with lunch."

Storey then asked, "Mr Milne, you say they could wander off to the coffee machine. In fact their security passes were withdrawn so they needed to be escorted everywhere, including to the lavatory, did they not?"

No, that was not entirely true, replied Milne.

Mark Webb, manager of the Oceanic project at Nats, agreed in court that PFI was "very unpopular" within his organisation. "It was the principle", he said.

One concern of Nats was that it would not own the asset of the air traffic control system being built by EDS. So Nats could end up being "tied into a relationship with a single supplier for such a length of time, and that relationship may not work for that length of time".

Under PFI the supplier owned not only the hardware but copyright in the software. So if Nats wanted at any stage to replace EDS, it could be faced with building a new system from scratch. Under a conventional contract, the supplier would be paid when it delivered to agreed milestones but ultimately the customer would own the system.

"I know they [the board of Nats] were against the whole principle of PFI," said Webb.

It is unlikely that the issues raised in the trial will dissuade the Government from continuing to favour PFI for major IT contracts, despite other PFI computer disasters including those at the Lord Chancellor's Department, Passport Service and Immigration Service.

Indeed a government statement after the contract was cancelled said that the EDS Oceanic contract failed for "reasons that have nothing to do with PFI".

Experts find PFI a risky business for all concerned
Stephen Castell, an expert witness in IT litigation and mediation, said, "It is clearly a fallacy to think that PFI [private finance initiative] ensures 'risk transfer' from the customer to the supplier, as many in government believe: far from it.

"Fragmentation and lack of essential project control is going to be almost inevitable. The PFI or outsourcing partner, because of obvious commercial pressures, has diminishing incentive to give the customer good visibility of the progress of software development and software quality assurance, particularly when things go wrong," he added.

"Once trust is gone, it is difficult to rebuild. This would be worrying for any customer, but it is positively alarming where the procurement of public safety-critical systems is involved. Public sector PFI and outsourcing contracts need some radical new, professional re-engineering if they are to continue," Castell concluded.

Geoff Reiss, chairman of the British Computer Society's special interest group in programme management, said suppliers and customers need to have "aligned motivations" for a project to succeed but PFI can distort the priorities of each side. For example, as the supplier is not paid until the system is operational, he said, it might want to build the system as quickly and cheaply as possible.

As the customer does not pay until the system is working, the customer may want the greatest care and time taken, Reiss said.

Simon Martin-Redman, of public sector specialist DBI which is involved in PFI contracts, said PFI can be successful if both sides are intent on co-operation throughout the lifetime of the contract.

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