THE PRIVATISATION OF BELFAST INTERNATIONAL
AIRPORT
INTRODUCTION
AND
SUMMARY
OF
CONCLUSIONS
AND
RECOMMENDATIONS
1. Belfast International Airport is the principal
airport in Northern Ireland. In July 1994, following a competitive
bidding process, the Department of the Environment for Northern
Ireland (DOE) sold the airport which operated as Northern Ireland
Airports Limited (NIAL) to a management/employee led (MEBO) consortium
for £32.75 million.[1]
In addition, DOE extracted cash reserves of £15.15 million
from the business at the time of the sale.
2. Two years later, in July 1996, the airport was
purchased by the TBI Group (a property development company which
also owns Cardiff Airport) for almost £107 million. This
represents an increase of over £74 million on the amount
paid to Government by the MEBO consortium.[2]
3. On the basis of a report by the Comptroller and
Auditor General for Northern Ireland[3]
we took evidence from DOE on the sale process, the valuation of
the business, clawback arrangements, control of pre-privatisation
capital expenditure and the costs of the sale. Our conclusions
and recommendations are as follows:
On the Sale Process
(i) We consider that the Department should
have established more thoroughly why the MEBO offer dropped substantially
to within £900,000 of the next highest bid. This was important
to avoid any suspicion that the outcome could have been influenced
by the leakage of price-sensitive information to the MEBO team
during negotiations (paragraph 8).
On Valuing the Business
(ii) It is not sufficient to depend fully
on the market to produce the right price. We repeat our predecessors'
long-standing concern that, without proper valuations, departments
may be at serious risk of missing sources of value in a business
and be ill-prepared to conduct negotiations with bidders (paragraph
14).
(iii) In our view, the valuation exercise
was badly handled. We are concerned that the Department did not
even draw up terms of reference for the valuation assignment (paragraph
15).
(iv) We consider that the £25 million
to £38.5 million valuation range prepared by Touche Ross
was too wide and too heavily caveated and that this undermined
its usefulness (paragraph 16).
(v) We regard it as essential that valuations
are finalised before bids are received. This was not done in this
case. We note that the winning bid of £32.75 million was
very slightly above the upper end of a revised benchmark valuation
range of £27.5 million to £32.5 million which was produced
only after initial bids were received. In our view the credibility
of this benchmark valuation is seriously diminished because it
could have been influenced by knowledge of bids received (paragraph
17).
(vi) We are not convinced that factors such
as terrorist violence, the Gulf War and the Lockerbie bomb provide
a sufficient explanation for the depressed valuation of 1994.
Furthermore we do not accept that the peace process and improved
market conditions adequately explain why the business was resold
for £107 million, two years after the management buyout team
purchased it for £32.75 million (paragraph 18).
(vii) It is clear that neither DOE nor its
advisers had a sufficient appreciation of the value of the business
opportunity in this sale. We note with concern that an independent
efficiency study was abandoned. A fully independent and comprehensive
assessment of the potential for developing the business after
privatisation should have been carried out. This would have helped
to underpin and inform the 1994 valuation and would have reduced
DOE's dependency on conservative cash flow projections supplied
by the airport management (paragraph 19).
On Clawback
(viii) We find it outrageous that
the purchasers of the airport should have been able to acquire
an asset belonging to the taxpayer and sell it at such an immense
profit in just two years without any obligation to return some
of that profit to the taxpayer (paragraph 25).
(ix) We agree with the Northern Ireland
Audit Office report that a clawback liability of 20 per cent on
super profits arising from the onward sale would have yielded
additional proceeds of around £11.6 million (paragraph 26).
(x) We are satisfied that the type of clawback
arrangement on super profits proposed by the Comptroller and Auditor
General for Northern Ireland would not have depressed bids or
deterred potential buyers. We note that the Department assumed
that a clawback mechanism would depress bids without having done
any calculations on the impact of clawback on the returns to the
main MEBO negotiators. Given that, in this case, each of the three
main directors made a reported return of some £6 million
on an investment of £50,000 it seems most unlikely that a
20 per cent clawback on super profits would have deterred them
from proceeding with the purchase (paragraph 27).
(xi) We do not accept the Department's argument
that a clawback provision might not have worked because it would
have been easy for the MEBO to have avoided it by deferring an
onward sale until immediately after the expiry of the clawback
period. The Department's point simply underlines the importance
of constructing clawback provisions in a way which minimises the
risk of avoiding its impact (paragraph 28).
(xii) We agree with the Treasury Officer
of Accounts for Northern Ireland that one of the lessons of this
case is that the Treasury guidance on clawback on gains from an
onward sale needs to be reviewed (paragraph 29).
(xiii) We are not satisfied that the arguments
for and against a clawback clause were adequately weighed up by
the Department and its advisers at the time. Notwithstanding Treasury
guidance, which was cautionary rather than prohibitive, we think
there was a strong argument for including a clawback arrangement
in this particular sale because of the uncertainties surrounding
the value of the business. In sales where there is a lot of uncertainty,
and a consequent risk of getting a valuation badly wrong, a clawback
mechanism allows the risk to be managed in a way which safeguards
taxpayers' interests (paragraph 30).
On Control of Capital Expenditure
(xiv) We note the extremely high level of
capital investment in the airport in the five-year period leading
up to the sale. It is not clear from the evidence presented to
us that this increased the value of the business (paragraph 42).
(xv) We find it unsatisfactory that the
Department waited three years before passing on important Treasury
guidance to NIAL (paragraph 43).
We are concerned at the extent to which Treasury
guidance on pre-privatisation capital expenditure was flouted
and the adverse impact this had on the sale proceeds (paragraph
44).
We note that although DOE quoted Treasury guidance
as one of the main reasons for not having clawback on the onward
sale the Department seems not to have given the same weight to
fully observing Treasury guidance on capital expenditure controls.
It appears to us that the Department complied with Treasury guidance
when it worked against the taxpayer's interest but did not comply
fully with Treasury guidance which was there to protect the taxpayer
(paragraph 45).
(xviii) We are concerned that the Chairman of
NIAL, who was also Chairman of the Northern Ireland Tourist Board,
had a conflict of interests and that unquantifiable tourism benefits
were allowed to influence an investment decision which had a direct
and adverse impact on the primary objective of the privatisation
of the airport which was to maximise proceeds. We expect Departments
to consider carefully what safeguards could be introduced to prevent
this type of conflict of interest occurring in the future (paragraph
46).
(xix) We note the Department's view that
the hotel investment was a case where an Accounting Officer might
have considered whether a Ministerial direction would have been
appropriate. However, in the absence of a ministerial direction,
the Department must bear ultimate responsibility for the investment
and the consequent loss of public funds (paragraph 47).
(xx) We find it astonishing that the threshold
for referring capital projects to DOE for approval was increased
from £0.5 million to £1 million the month before it
was announced that NIAL was a possible candidate for privatisation.
We consider that the rules on the approval of capital projects
should have been tightened at this stage, not relaxed. We do not
accept the Department's defence that these approval thresholds
were immaterial and that adequate control was exercised "administratively"
by a privatisation steering committee. It is clear from all the
evidence presented to us that this committee did not exercise
the sort of thoroughly appraised and carefully documented control
over NIAL's capital expenditure programme which we would have
expected to see (paragraph 48).
On Control of Privatisation
Costs
We note that advisers' costs were 36 per cent higher
than the Department's original estimate. We are concerned that
the main financial, legal and marketing advisers were all appointed
without a ceiling on their fees and that 96 per cent of all advisory
fees were paid for on a time basis at the firms' hourly rate.
In our view, this method of remuneration created a situation where
there was absolutely no incentive for the consultants to minimise
costs. We do not accept that it would have been as difficult as
the Department suggest to break down large blocks of advisory
work into smaller more manageable contractual packages, each with
its own budget and separate terms of reference. (paragraph 52).
1 C&AG (NI)'s Report HC 298 1997-98 paragraphs 1-2 Back
2 C&AG
(NI)'s Report paragraph 3 Back
3 HC
298 1997-98 Back
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