Nats board opposed PFI

Court case casts doubt over PFI for major government IT projects as Revenue plans £4bn 18-year PFI deal

Court case casts doubt over PFI for major government IT projects as Revenue plans £4bn 18-year PFI deal

The board of National Air Traffic Services (Nats) was opposed to the whole principle of Labour's Private Finance Initiative (PFI) for its IT contracts.

One concern was being tied into a long relationship with a single supplier that faced no competition.

The disclosure of the private views of the Nats board during a High Court hearing, will encourage critics of PFI who say that it rarely works when used as the basis for major IT contracts.

The Treasury continues to favour PFI to fund IT projects including the Lord Chancellor's Department's Libra project with ICL, and Inland Revenue's forthcoming competition that is expected to lead to an IT services contract lasting up to 18 years, worth £4bn.

Under PFI, the supplier funds the costs of development, takes on the risks of any delays or increased costs, and the customer does not have to pay until the system goes live.

But when cross-examined in the High Court last week, Mark Webb, a senior Nats executive, agreed that PFI was "very unpopular" and had disadvantages for customer and supplier. The customer was "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". Nats' head of contracts Brian Hayes thought PFI guaranteed the supplier a long-term contract without it facing regular competition, Webb confirmed. Also the customer had to pass control of assets, hardware and software to the supplier.

Webb added that "PFI changed people's objectives." It encouraged the supplier to deliver the system as quickly as possible so it could recover revenue rather than build "the right system if it was going to take longer".

If a contract was delayed, the supplier suffered a "triple whammy" and was "disproportionately penalised", Webb said.

Suppliers not only lost income but the revenue period was cut down by the delay, he said. This was because payment was not made until the system went live. Suppliers "also had the cost of the team for the additional period of time to develop the system, and they had the interest charges on the money they had borrowed".

Papers from the Nats board and other high-level documents have been produced in the court as part of a case over the failure of a 14-year PFI contract for a replacement flight data processing system, known as FDPS2, to control flights over the Atlantic.

Signed in 1997, the contract for the FDPS2 at the Oceanic Area Control Centre at Prestwick in Scotland was heralded as the first PFI contract under the new Labour Government.

But a Nats board document, dated 5 August 1999, said there was a "need to consider options for escaping the Private Finance Initiative contract with EDS".

Asked in court last week to explain aspects of Nats' views on PFI, Webb, the head of the FDPS2 project, said that the board was "against the whole principle of PFI" and not specifically because of the contract with EDS.

One document presented to the court said, "In summary the response from the Treasury/[Department of Transport] was a 'no' to breaking PFI"

The High Court is hearing evidence for EDS' writ claiming more than £42m after Nats terminated the contract 11 years early. Nats says it cancelled the contract in July 2000 because of EDS' failure to meet a critical milestone a month earlier in May. EDS claims that Nats did not have sufficient reason to end the contract about 18 months before the system was due to go live.

Since the ending of the project, Nats has sought to find a new FDPS system using commercial off-the-shelf software, not funded by PFI.

The hearing is due to finish in May. Webb continues to give evidence.

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