APPENDIX 4
PRIVATISATION OF BELFAST INTERNATIONAL
AIRPORT (PAC 97-98/105)
Supplementary Memoranda from the Department
of the Environment (Northern Ireland)
Details of the Capital Expenditure Programme
1. In December 1990, the Department sought and
obtained general guidance from Treasury on how to handle investment
proposals from NIAL during the period leading up to the sale of
the business. Treasury advised that:
"there should be a strong presumption against
initiating capital investment projects in the run-up to privatisation
unless it is absolutely essential to maintain the operations of
the business; and projects of a discretionary nature should only
be undertaken if, in addition to meeting the usual economic appraisal
criteria (in terms of a satisfactory rate of return, etc.), the
Accounting Officer of the sponsor department is able to demonstrate
if challenged by the Committee of Public Accounts, that the investment
had increased disposal proceeds by a sum significantly greater
than the costs of carrying the investment forward".
2. The Treasury guidance also warned of projects
that would span the date of privatisation. "Limited experience
of such projects has suggested that potential purchasers will
use all possible arguments to seek to reduce any beneficial impact
on sales proceeds, or even to achieve a discount." DOE sought
to have any on-going projects completed before the sale took place.
3. Of the £25.5 million of expenditure
highlighted in the NIAO report at para 5.8, £19 million was
spent on schemes which were approved and started before December
1990. £13 million was spent on a cargo centre and an extension
to the passenger terminal. Both projects were subject to investment
appraisal and met the Treasury requirements on rate of return
over 15 years. The cargo centre received DFP approval in principle
in December 1987 and the East Terminal Extension was approved
in principle by DFP in August 1988. These projects received 50%
ERDF funding.
4. The additional £6 million was approved
in the Corporate Plans prior to the announcement that the airport
was a candidate for privatisation and was spent in the three year
period to March 1991. These schemes included:
| Buffet Refurbishment | £325k
|
| International Baggage Reclaim | £547k
|
| Land Purchases (for security reasons) |
£875k |
| Fire vehicles | £778k
|
| Clendennings Car park | £838k
|
| Police Station extension | £170k
|
| BMA Lounge | £420k |
| Computer upgrade | £250k
|
| West Pier Accommodation | £138k
|
5. The NIAO Report states at para 5.19 that,
during 1992, NIAL initiated a block of twelve new capital projects
costing approximately £5.7 million in total. The Department
believes that this reference relates to projects which attracted
ERDF grant after September 1991 and cost approximately £5.2
million in total.
6. On their appointment in July 1992, Touche
Ross were immediately asked to review NIAL's capital expenditure
plans against Treasury guidelines. On 1 July 1992, the Department
wrote to Touche Ross supplying a list of 12 projects which NIAL
wished to add to the ERDF Transportation Programme. This list
did not include the Choke Point Relief, the Landscape Infrastructure
or the Roads and Car Park Rationalisation Schemes which were linked
with the on-going scrutiny of the larger Check-in proposal. The
Department asked whether the projects were supported within existing,
or were likely to be supported within future, corporate plans
and, as such, could be eligible for grant. Touche Ross advised
that the NIAL investment in the ERDF schemes was consistent with
Treasury guidelines.
7. The Touche Ross assessment of the projects
found that they were either in the essential category or were
the completion phases of schemes which had been approved in previous
corporate plans. This assessment was presented to the Privatisation
Committee, which included representatives of DFP and Treasury,
on 5 November 1992. The Committee agreed that these projects would
be acceptable in the context of privatisation, although without
prejudice to the normal process of PE approval within the corporate
plan.
8. It is the Department's view that the schemes
all met the Treasury criterion of being essential to maintain
operations and, because of the availability of 50% ERDF funding,
benefited the sales proceeds.
9. Details of 11 schemes accounting for £5.45
million are set out below; a twelfth scheme, an extension to the
cargo terminal to secure the tenancy of a major cargo handling
business, was initiated in February 1991 at a cost of £627k.
9.1 Additions to East Terminal Extension (£1.2m)
This work involved modifications to the recently
constructed East Terminal Extension to cover finishings which
were to be undertaken as part of the Check-in project, to take
on board new fire safety requirements and the purchase of CCTV
to improve terminal security. The last two items of expenditure
had been approved by DOE in the 1992 Corporate Plan and the additional
expenditure was taken forward as an extension to the East Terminal
ERDF grant scheme.
The East Terminal Extension project had been
approved by DOE in August 1988, following a satisfactory investment
appraisal. The scheme received ERDF grant of 50%. It was virtually
complete by 1991, although there remained some minor works which
were pending decisions on the future of the adjacent Check-in
project (abandoned in 1992).
9.2 Air Traffic Control Equipment (four projects)
Four of the projects, relating to Air Traffic
Control Equipment, were identified as essential replacements or
improvements in the Civil Aviation Authority (CAA) Capital Plan
1991/92-95/96 or as necessary to meet new CAA regulations. In
the 1992 Corporate Plan, NIAL proposed expenditure of £5.4
million over 5 years to purchase the equipment necessary to implement
the CAA plan. The existing equipment was owned by CAA, who operated
ATC at the airport. NIAL proposed to purchase the new equipment
and thereby reduce the annual CAA charge by approximately £1
million. In approving the 1992 Corporate Plan, DOE said that each
element of expenditure would be subject to an investment appraisal
within the terms of the regulatory framework.
On their appointment as privatisation advisers
in July 1992, Touche Ross were asked to assess each of the items
in the ATC equipment programme. They confirmed a number of purchases
as essential before privatisation and agreed that these should
go forward as four separate applications for ERDF grant. These
projects and their total costs were:
- Communications Equipment (£464k);
- Various items of ATC equipment-Comms Recorder,
ADIS and PAPI (£232k);
- Airfield Lighting Control System and Signage
(£234k); and
- Distance Measuring Equipment (£176k).
9.3 Passenger Segregation
Modifications to the terminal, costing £25k,
were required to meet HM Customs requirements as a result of changes
in the status of EC boundaries on 31 December 1992. The scheme
was put forward at a projected cost of £250k in the Corporate
Plan of 1992, which DOE approved in principle. Later that year,
Touche Ross agreed that the project was essential and could be
put forward for ERDF grant. The scheme was re-designed and completed
in 1993 at a much reduced cost of £25k.
9.4 Flight Management System
Expenditure on the Flight Management System
[19]
began in 1990, before the airport was considered suitable for
privatisation. By 1992, £528k had been spent and DOE was
content that it was essential to complete the project to avoid
it spanning the date of privatisation. (Treasury Guidance advises
the avoidance of projects which would span the date of privatisation).
The Flight Management System is a computerised
database which contains all the information necessary to enable
the efficient management of the airport's resources. The project
involved the installation of computer communication lines throughout
the airport complex and the development of software to link databases
of ATC, Airlines, handling agents, NIAL operations etc. FMS also
replaced the Flight Information Display System giving information
to passengers on arrivals and departures. The existing FIDS required
replacement for technical and operational reasons. This involved
the modernisation of supporting hardware and the installation
of display monitors.
This project was first put forward in the 1988
Corporate Plan at an estimated cost of £1 million. Work was
started in 1990, before the airport became a candidate for privatisation,
and proceeded as a number of stand-alone projects. By mid-1992,
NIAL estimated that £528k had been spent and a further £770k
was required to complete the project.
In October 1992, NIAL asked Touche Ross to undertake
an investment appraisal before proceeding any further. Touche
Ross concluded that an investment of £284k was necessary
for implementation and such investment would provide a high internal
rate of return. They recommended that the purchase of replacement
FIDS monitors, estimated at a cost of £90k, should be subject
to separate investment appraisal.
In November 1992, Touche Ross recommended that
the remaining expenditure on the FMS project could be regarded
as essential. NIAL applied for ERDF grant for the project at a
revised total cost of £999,800.
9.5 Car Park Equipment
This project costing £220k was essential
to replace existing machinery which was 15 years old and unreliable
and to introduce a more effective system. The concession agreement
with National Car Parks expired in 1992 and NIAL wished to introduce
a more cost effective "Pay-on-Foot" system.
An investment of £750k was put forward
in the 1992 Corporate Plan. This was approved by DOE subject to
completion of satisfactory investment appraisal under the regulatory
framework. Touche Ross in their review of the 1992 Corporate Plan
found that the new equipment would deliver cost savings from improved
payment methods and categorised the investment as essential.
The equipment purchase received ERDF grant on
a final total cost of £220k. Car Park rationalisation costs
were picked up under another contract.
9.6 Choke Point Relief Scheme
The abandonment of the two-storey Check-in project
left the airport with a number of congestion problems within the
terminal. Touche Ross tested a range of cheaper alternative designs
against investment appraisal criteria and the Treasury privatisation
guidelines and concluded that a modest level of expenditure (£975k)
was necessary to improve the worst of the operational problems.
The Choke Point Relief Project [20]
was put forward and received approval in the 1993 Corporate Plan.
9.7 Landside Infrastructure and Roads and Car Park Rationalisation
NIAL also brought forward in the 1993 Corporate
Plan an item under the general heading of airport development,
to spend £2.18 million on works to relieve congestion problems
at the set-down area and on the approach roads, to improve the
car parks and to carry out upgrading at various points within
the terminal. The works were to be spread over 4 years. After
DOE explained the Treasury Guidelines at an NIAL Committee meeting
in February 1993, the NIAL Board dropped the terminal upgrading
works and brought forward 2 separate projects for discussion with
the Department in June and September 1993.
The Landslide Infrastructure at the set-down/pick-up
area [21]
to include increased lanes, provided a new canopy at the set-down,
security screens at the international exit and fire modifications
to the Primary Search Building at a cost of £828k.
Rationalisation of Road Layout and Car Parks
[22]
(£862k), brought forward in September, included new roadways
to improve traffic flows to and from the set-down area and car
parks, additional parking space, lighting and CCTV in the car
parks and security fencing and landscaping.
If any of these projects had been deferred until
after privatisation, their essential nature would have necessitated
immediate expenditure by the new owner. Such investment may have
been without the assistance of the ERDF grant scheme which ended
in 1993. It is likely that the full cost of the projects would
have been reflected in a compensating reduction in the price bid.
As para 5.31 of the NIAO Report says, DOE believes
that the assumption made by NIAO about the impact of these projects
on the cash reserves failed to recognise their potential to generate
income or reduce outgoings, as in the case of the ATC equipment
which in turn would have had a positive impact on NIAL's sale
price. The NIAL Corporate Plan produced in March 1993 clearly
identifies the car park equipment and most of the ATC equipment
as "Earnings Projects".
Department of the Environment (NI)
5 January 1998
19 Further note not reported (PAC 157B). See also,
Evidence, Appendix 6, page 22 (PAC 246) and Appendix 7, page 23
(PAC 157A). Back
20
Further note not reported (PAC 157B). See also, Evidence, Appendix
6, page 22 (PAC 246) and Appendix 7, page 23 (PAC 157A). Back
21
Further note not reported (PAC 157B). See also, Evidence, Appendix
6, page 22 (PAC 246) and Appendix 7, page 23 (PAC 157A). Back
22
Further note not reported (PAC 157B). See also, Evidence, Appendix
6, page 22 (PAC 246) and Appendix 7, page 23 (PAC 157A). Back
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