Press Notice No. 48 of Session 2002-03, dated 9 December 2003
FORTY-EIGHTH REPORT: THE PUBLIC PRIVATE PARTNERSHIP FOR NATIONAL AIR TRAFFIC SERVICES LTD (HC 80)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, today said that blind optimism by the Department, coupled with its raiding of NATS’ finances, left the Company in a vulnerable financial position with debts double what they were before the PPP, and the taxpayer is unlikely to be the winner.
Mr Leigh was speaking as the Committee published its 48th Report of this Session, which examined the choice of a PPP as the best option for the National Air Traffic Services (NATS) Limited Company; the testing that was done on the Airline Group’s financial proposals; the implications of the financial structure that is now in place; and the prospects for the Company. National Air Traffic Services (NATS) provides air traffic control for aircraft flying over the United Kingdom, and with its Irish counterpart, the North East Atlantic. In July 2001 the Transport Department concluded a Public Private Partnership (PPP) with the Airline Group, a consortium of seven UK-based airlines, giving the Group operational control and a 46 per cent share of NATS. Proceeds were nearly £800 million, of which £65 million came from the Airline Group and the rest from bank loans that are repayable by NATS itself. As a privatised body, NATS’ prices are subject to economic regulation by the Civil Aviation Authority.
The Department preferred the option of establishing NATS as a profit-seeking, but regulated company, rather than a not-for-profit model such as that used for the privatised national air traffic control business in Canada. The Canadian model was dismissed too readily. The regulatory arrangements, copied from the regulated utilities, have been shown to take insufficient account of the very different business risks which NATS faces.
The Department failed adequately to test the robustness of the Airline Group’s proposed financial structure for NATS. The set of scenarios examined was more optimistic than historical experience warranted, and imprudently assumed that the Regulator would always be both willing and able to intervene quickly to protect NATS from any sudden business downturn.
The Department and Treasury took £758 million out of NATS in sale proceeds, leaving the Company burdened with over twice as much debt as it carried before the PPP. The Company’s financial difficulties cannot be wholly attributed to the after-effects of September 11th: the Economic Regulator expressed concern at the indebtedness of NATS before those events.
One of the Department’s main reasons for preferring the profit-seeking but regulated company model for NATS rather than the Canadian not-for-profit model was to give NATS freedom to invest outside public sector financial controls. In the event, the chosen regulatory structure, combined with the high withdrawal of cash from the business, barred NATS from access to external finance for over a year, just when it was embarking on a ten year £1 billion investment plan.
Mr Leigh said today:
“In pursuing the NATS PPP, the Department dismissed the alternative not-for-profit solution operating successfully in Canada and ignored historical downturns in traffic. Blind optimism by the Department, coupled with its raiding of NATS’ finances, left the Company in a vulnerable financial position with debts double what they were before the PPP. This would be all very well but the private sector partner, the Airline Group, did not have to bear financial risk in proportion to the control they had over the Company. In such situations the taxpayer is unlikely to be the winner.”
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