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Bidders drop out of UK’s £1.2bn ESN contract as risks prove unacceptable

High levels of risks, an unrealistic timetable and poor rewards for the proposed Emergency Services Network leave just one bidder in for the Lot 4 network extension services contract and only two for the vital Lot 2 user management services contract, as James Atkinson reports

Bidders drop out of UK’s £1.2bn ESN contract as risks prove unacceptable

A number of bidders have pulled out of tendering for the UK Government’s £1.2bn Emergency Services Contract (ESN), which will replace the current TETRA narrowband two-way radio network with a 4G LTE broadband voice and data network.

Bids are now in for all four of the contracts that make up the main procurement part of ESN. Five bidders were shortlisted for each of the four lots, but a number have decided not to submit bids as the risks are seen as too high for too poor a reward.

All five bidders returned tenders for Lot 3: ESN Mobile Services – the main network contract (see below for more). However, Lots 2 and 4 have seen several bidders drop out, while Lot 1 saw four bids returned.

Lot 1 – ESN Delivery Partner
The ESN delivery partner will oversee the transition from TETRA to 4G LTE. Four of the five bidders are understood to have returned bids: Atkins; Kellogg Brown & Root; Lockheed Martin UK; and Mott MacDonald. However, a fifth bidder, KPMG LLP, has dropped out.

Lot 4: ESN Extension Services
Lot 4, which involves providing network coverage in remote locations across the UK beyond the main Lot 3 network coverage areas, has just one bidder left – Arqiva. The other four bidders: Telefonica O2, Vodafone, EE and Airwave have all declined to submit a bid.

Wireless understands that the Home Office and its Emergency Services Mobile Communications Programme (ESMCP) team, which is running the procurement, relaxed the KPIs in an effort to keep more bidders in the game – without success it seems.

The contract is unattractive commercially as it involves providing coverage along all the roads outside of the Lot 3 area and includes coverage provision in difficult and remote areas of the UK such as national parks, sites of special scientific interest and areas of outstanding natural beauty.

It is notoriously difficult to gain planning permission for radio masts in these areas – not to mention providing a very poor return on investment in terms of user numbers and traffic generated. Even Airwave, which unlike the other bidders already provides 100% coverage of the UK road network, seems to have found the contract unappealing.

The ESN contract demands a delivery time of 17 months – industry experts say that on average it takes approximately 24 months to find sites, obtain planning permission, design and install towers and equipment, test and commission a base station.

The Home Office apparently offered a 6 month extension to deliver Lot 4, but bidders appear to think that there is still no chance of guaranteeing delivery of the service even with the extended timeframe and have backed away.

Lot 2: ESN User Services
Lot 2 is the glue that holds the four contracts together as it involves managing the mission critical infrastructure and provides technical service integration and end-to-end systems integration. It also controls all the mission critical applications including push-to-talk (PTT) services, group calling, etc.

Only two bidders remain in the bidding despite the Government extending the bid deadline from 30 October to 14 November 2014. These are: HP Enterprise Services UK (working with Thales); and Motorola Solutions UK. Airwave, Astrium and CGI IT UK have all decided not to bid.

Wireless understands that a major concern for all players in particular is being able to guarantee a viable PTT application – of vital importance to end users, especially the police for whom voice remains a critical lifeline.

There are PTT solutions for LTE, which have been tested in labs and in minor ways on ‘live’ networks, but nowhere in the world has a PTT solution on 4G been rolled out on the scale and with the resilience and availability demanded by ESN. The UK, and its emergency service personnel, will be the world’s first live guinea pigs.

End users get to sign off on the contract only when they are happy with it, so bidders will need to be very sure of their solutions – which will have to be proprietary, as no standard for many mission critical voice (or data) applications exists for LTE yet – a won’t much before 2018-20.

But bidders have also been put off by the sheer complexity of the contract and the responsibility of not just having to co-ordinate the other three contracts within the main ESN project, but also the additional contracts outside of it, including: user devices; air-to-ground service and devices; vehicle installation (for 40,000 vehicles); and control room upgrades.

Lot 3: ESN – Mobile Services
All five shortlisted bidders have submitted a bid for the main area network. The line up here is: Airwave; EE; Telefonica UK (O2); UK Broadband Networks; and Vodafone.

The word is that most people have played the game by submitting compliant bids, but with a lot of caveats when it comes to meeting the Government’s expectations and assumptions written into the schedules. In short, a lot of: ‘yes, but....’, clauses pepper the submitted bids.

One of the reasons for engaging with the private sector for government contracts is to harness innovation. But ESN does not allow for variations, so there is no room for the bidders to bring ideas to the table. The Government has essentially said: do it this way, so the emergency services and the citizens of the UK must hope the Home Office has got it right.

‘Toothless’ Operating Level Agreement
Wireless also understands that bidders are worried about the OLA – the Operating Level Agreement that sets out how the winners of the four lots should work together.

One bidder described the OLA as ‘toothless’, with paltry incentive payments for good behaviour and very serious consequences for non-performance. Another bidder used the term ‘crippling’ to describe the punitive fines involved.

Lot 3 will involve a significant capital investment and bidders are said to be wary that should the Government terminate the contract, or not even switch it on in the first place, they would be left hanging after investing in a major roll out of base stations for which they might not get paid.

This is because the way the contract is set up means the Lot 2, 3 and 4 providers only get paid once the service is up and running and signed off by the end users. As a social principle this may make sense, but it is a big risk for the bidders as it requires major upfront capital expenditure.

For example, if the Lot 2 winner is unable to provide a workable PTT solution, the Lot 3 and 4 providers (assuming they have delivered their parts on time) will not get any revenue payment until the Lot 2 provider sorts the problem out to the end users’ satisfaction.

One consequence of this is that bidders are likely to price accordingly – i.e. increase their prices to cover the potential risk. Milestone payments might have prevented this, but the Government has refused to go down that route.

Other Considerations - Bidder Focus
The UK mobile network operators (MNOs) are obviously crucial to the Government’s ESN plans. However, the last two weeks have seen a flurry of takeover and merger speculation around the MNOs in the UK.

BT has confirmed it is in discussions with both EE and Telefonica O2 about a possible acquisition. Three UK’s parent company, Hutchinson Whampoa then announced it too was interested in buying one of the two MNOs. Vodafone is rumoured to be interested in buying cable operator Liberty Global or Talk Talk.

The question here is: what is going to be the MNOs’ primary focus in the coming weeks and months during a critical period for ESN? Given the importance of the above discussions on their futures, it does not seem likely that ESN will be top of their agendas. At best they are going to be somewhat distracted – surely a worrying concern for the Home Office.

Financial Considerations
One other aspect of ESN should also be exercising the Government’s and the taxpayer’s minds – namely, will it actually save money? The first five years will see Airwave contracts continuing on until 2020 albeit on a diminishing scale. But at the same time, the costs of ESN will be steadily rising.

Some industry experts estimate that the cost to the Government will be almost twice what it is paying now in that period. The gamble the Government has taken is that once the infrastructure is in place and everyone is switched over to LTE, it will go back out to the market and get better prices.

Maybe. The concern for the taxpayer is that the Government has split ESN into many smaller contracts. This might be attractive politically – no powerful single provider to deal with – but it means it loses the advantages that economies of scale bring and potentially the lower prices a single, seamless contract can provide.

For example, who can provide a nationwide air-to-ground network? It doesn’t look like an attractive proposition for the MNOs on top of everything else they are doing. That means a separate network has to be found and then integrated into Lots 3 and 4 to enable seamless roaming. Not a cheap option.

And that’s the problem. The Government has split ESN up to promote more competition – on the face of it a perfectly laudable aim as far as the taxpayer is concerned - but the risk is all that does is push prices up. The risk then is that the Government will blow its £1.2bn budget and end up with something more expensive than the cost of Airwave now.

Next steps
The bids will be evaluated this month (December 2014). January-February 2014 is the ‘negotiation’ phase, but that does not leave much time for serious quality discussion and evaluation.

Bids also need to be ‘normalised in this period: i.e. all the bidders need to be made aware of each others’ assumptions and expectations to ensure everyone is in the same place: this is likely to include commercial, financial, delivery and solution work streams. Best and Final Offers (BAFOs) can be then be submitted and bid against.

The bid documents suggest that the Government is looking to take three bidders through to BAFO stage – clearly not an option any more for Lots 2 and 4. BAFOs are due to be submitted in March 2015, leaving the Government two months to consider the bids and announce the winners.

End game
The fly in the ointment here is that the UK will hold a general election in May 2015. If the winning Government is not the current one, it is under no obligation to sign off ESN.

Everyone Wireless has spoken to in the industry over the last year believes that moving the emergency services communication requirements onto broadband LTE at some point is the right thing to do. The question is: has the Government gone the right way about doing it?

See also:
UK Home Office flags up four contracts on Emergency Services Network

ESN:a challenging contract

Shortlists announced for UK’s new £1.2bn Emergency Services Network

Will the UK’s Emergency Services Network provide any real commercial benefits?

ESN – too much, too fast?

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