House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Second Report

THE PROPOSED PUBLIC-PRIVATE PARTNERSHIP FOR NATIONAL AIR TRAFFIC SERVICES LIMITED

THE POST OFFICE AND REGIONAL AIRPORTS

56. On 8 July 1999, the Government published its White Paper on the future of the Post Office.[185] It proposed that the postal market be opened more fully to competition, and that the Post Office should be established as a public limited company, but with all of the shares owned by the Government. The Post Office would, under certain circumstances, be permitted to borrow up to £75 million each year to fund "larger growth investments including acquisitions, joint ventures, alliances and partnerships".[186] Part of the objective of the White Paper was to permit the company to take advantage of opportunities overseas: even before publication of the White Paper it had already acquired German Parcel, as well as a minority stake in City Mail Sweden.[187]

57. If NATS were to become subject to the same rules as the Post Office it would also be entitled to borrow on the private market, addressing one of the most pressing reasons to alter its ownership. Moreover, ownership of the Post Office will be through a public limited company wholly-owned by the Government: if the same structure were applied to NATS it would clarify its relationship with its regulator, the CAA, by further separating the two organisations. Finally, if NATS followed the example of the Post Office it would be free to invest overseas, as the Post Office has done already. Therefore several, although not all, of the objectives of the public-private partnership would be achieved.

58. Furthermore, if NATS was established as a publicly-owned corporation, like the Post Office, some of the worries expressed by our witnesses about the public-private partnership would be addressed. The Government, as sole owner of the company, would not need to require NATS to maximise its profits in the same way as a private investor would, addressing the concerns of the airlines about increased charges, and other witnesses about safety. Moreover, there would be no question that national security might be jeopardised, nor that the non-commercial safety services might be undermined. Finally, since the Government would retain overall control of NATS, the company's future involvement in Eurocontrol would be better assured.

59. Nevertheless, the Government identified a number of reasons why NATS should not be treated in the same way as the Post Office. It told us that it did not agree "that it is valid to compare NATS with the Post Office. The scale and complexity of their investment needs are quite different, as is the nature of the markets in which they operate".[188] The Government argued that NATS investment was usually in large, technologically-advanced infrastructure projects for which specific expertise, and project management skills were required, and that NATS had a poor record in delivering such projects on budget and on time. By contrast, it said, investment by the Post Office was usually in more straightforward projects, and it had been much more successful in delivering them. The Government also pointed out that the Post Office operated in an increasingly competitive market, whereas a large part of NATS business, en route air traffic management, was a natural monopoly which was "not exposed to the competitive disciplines of the private sector".[189] Lord Macdonald, the Minister for Transport, repeated exactly the same arguments when he gave oral evidence to us.[190]

60. Another group of publicly-owned companies which have been freed to an extent from the Treasury rules relating to borrowing are a number of regional airports. On 17 November 1998, the Secretary of State for Trade and Industry announced that "public sector borrowing controls on financially sound local authority airports would be relaxed from 1 April 1999 ... [to] allow qualifying local authority airports to raise development capital on the money markets to cater for growing demand".[191] Five airports have been freed from borrowing controls: Humberside, Leeds Bradford, Manchester, Newcastle and Norwich.[192]

61. We do not suggest that the model of the regional airports should be followed by NATS, since it would not address the problem that the relationship between NATS, as an operator, and the CAA, as a regulator, is currently too close. Nevertheless, we sought to investigate why the supposedly inviolable Treasury rules could be set aside in the case of the regional airports and not in the case of NATS. The Government claimed that"we are dealing with different businesses here",[193] for two reasons. First, it argued that the airports concerned had a large asset base, and, unlike NATS, had little restriction on their revenue and profit. Such comments of course overlook the fact that NATS, as a monopoly supplier in a growing market, can almost guarantee that its revenue will continue to grow. Second, the Parliamentary Under-Secretary of State at the Department of the Environment, Transport and the Regions told us that he "would be very surprised ... if the total sums which those airports ... are allowed to borrow come to anything like what is required in the case of NATS".[194] In fact, their total borrowing over the next five years is expected to average £92 million per annum,[195] a figure not dissimilar to that required for NATS.

THE INDEPENDENT PUBLICLY-OWNED CORPORATION

62. The reforms proposed for the Post Office in the United Kingdom are intended to create an independent publicly-owned corporation. A number of countries have established similar 'corporatised' companies to provide their air traffic control services. In the European Union they include Germany, the Netherlands, Ireland, Portugal and Spain.[196] However, perhaps the most prominent example, and the one that dominated the evidence we were given on the subject, is New Zealand.

63. The Airways Corporation of New Zealand was established as a state-owned enterprise in 1987. It operates as a fully commercial business, accountable to the government for its performance. Its shareholders on behalf of the government are the Minister for State-Owned Enterprises and the Minister of Finance.[197] Just as in the United Kingdom, the Corporation's revenue comes from charges made on aircraft operators and pilots flying into or over New Zealand,[198] and from advice and services provided to domestic and foreign organisations. Airways is regulated by New Zealand's Civil Aviation Authority and by the International Civil Aviation Organisation (ICAO).

64. Establishment of NATS along the same lines as the Airways Corporation would offer many benefits, and would appear to meet the principal objectives of the proposed public-private partnership. In particular, because it is a state-owned enterprise, the ownership and management of Airways is clearly separated from that of its regulator, New Zealand's Civil Aviation Authority. Moreover, its borrowing does not count against the government's borrowing: NATS told us that "the organisation is not bound by government borrowing constraints, and is free to borrow money on the open market. Airways is a stand-alone business and the government is prevented by law from guaranteeing or underwriting Airways' obligations in any form".[199] The Corporation told us that in every borrowing document it issues a provision is inserted stating that the government does not guarantee or in any way support debt borrowed by the company.[200]

65. The Airways Corporation is also able to exploit opportunities overseas. Its consulting division has provided advice and expertise to aviation organisations throughout Asia and the Pacific, including India, Oman, Malaysia and Canada, as well as Bermuda. Moreover, Airways announced in September 1999 that it intended to join a consortium with Lockheed Martin Air Traffic Management and Adacel Technologies Limited to tender for the major upgrade of the United States's oceanic air traffic management system.[201] These overseas activities have proved to be a significant source of profits for the Corporation.

66. Although the Airways Corporation is not under the same commercial pressures as a privately-owned company in a competitive industry, it is obliged by law to act commercially. The State-Owned Enterprises Act 1986 provides that "the principal objective of the Corporation is to operate as a successful business and to be as profitable and efficient as comparable businesses that are not owned by the New Zealand Government".[202] It attempts to meet this objective by setting itself strict financial targets. Profits, which have generally been modest, have been passed either to the Government as a dividend, or to the Corporation's customers as discounts to the Corporation's charges. The Corporation argues that "shareholders [the Government] and customers have a strong and legitimate interest in ensuring that the Corporation's services are not only safe, but are also efficient and cost effective".[203] It also says that its "shareholders require us to protect and grow the value of their investment in a competitive market, to increase revenue, achieve cost efficiencies and seek new business opportunities; our customers want an appropriate level of service, price certainty and value for money".[204]

67. Several of our witnesses argued that instead of becoming subject to a public-private partnership NATS should become an independent publicly-owned corporation. BALPA said that such a model would enable NATS to borrow on the private markets, and would free the company from day-to-day interference in its operation, but would allow the Government to maintain control of strategic matters relating to national security and safety.[205] The IPMS and PCS unions took a similar view, emphasising that the establishment of NATS as an independent publicly-owned corporation would allow it to borrow, would give the company commercial incentives to improve its performance, and would allow NATS to co-operate with other Eurocontrol air traffic control providers, not compete with them.[206] The unions claimed that this model "addresses all but one of the objectives set by the Government in its public-private partnership proposals. Above all, it would put safety unequivocally before profit".[207] The only objective the corporate model would not fulfil is the delivery of a receipt to the Government for the sale of a large stake in NATS.

68. The Government also pointed out that the establishment of NATS as an independent publicly-owned corporation would not generate any revenue for the Treasury. It told us that it was not persuaded on several other grounds that NATS should follow the example of the Airways Corporation. The Government argued that notwithstanding the legal requirements placed on the Airways Corporation it is not under strong pressure to be efficient,[208] presumably because it does not seek to maximise its profits, although it is worth repeating that our witnesses disagreed about whether NATS could improve its efficiency, and if so, how it would do so without undermining safety. The Government also claimed that the fact that all of the shares of a publicly-owned corporation are owned by the Government would mean that "under United Kingdom rules such a company would normally be classified to the public sector":[209] its borrowings, therefore, would remain subject to Treasury constraints. However, as we have seen in the case of the Post Office, the Government is able to waive Treasury rules for independent publicly-owned corporations when it wishes to do so.

THE TRUST MODEL

69. The most significant example of a country which has followed what is widely known as the trust model[210] for ownership of its air navigation services is Canada. Until 1996, air navigation services were the direct responsibility of the government.[211] On 26 May 1995, a non-share-capital corporation called NavCanada was established by airlines, representatives of General Aviation, unions representing staff engaged in air navigation services, and the Canadian government. The corporation is governed by a fifteen-member board of directors. Five directors are nominated by aviation interests, two by the unions and three by the government. A further four are then nominated by the board, and the fifteenth place is taken by the Chief Executive Officer.[212] In addition other aviation interests, such as the General Aviation community, are represented on an Advisory Committee.[213] The corporation's initial funding was generated by the issue of bonds worth CN$3 billion: the bond offer was three times over-subscribed.[214]

70. Under the Civil Air Navigation Services Commercialisation Act 1996[215] responsibility for air navigation services within Canadian airspace, at the vast majority of Canadian airports, and in that part of oceanic airspace for which Canada is responsible,[216] passed to NavCanada, on payment by the corporation to the Government of CN$1.5 billion. Its objectives since then have reflected the interests of those that control the corporation: in its most recent business plan it set out its aim to become "the world's most respected air navigation service (a) in the eyes of the flying public for our safety record, (b) in the eyes of our fee-paying customers for our fee levels, customer service, efficiency and modern technology, and (c) in the eyes of our employees for establishing a motivating and satisfying workplace with competitive compensation and challenging career opportunities".[217]

71. If NATS were to follow the example of NavCanada, a number of the objectives of the public-private partnership would be achieved, mainly because it would entirely remove the company from the public sector. As a result, the relationship between the provider of air navigation services and the organisation which oversees it would be made far clearer. NATS would also be free of Treasury rules over its borrowing, and so could attain the funds that it needs. It would also be allowed to invest overseas: NavCanada has already sought, like the Airways Corporation of New Zealand, to become involved in the development of the United States oceanic air traffic control systems.[218]

72. Moreover, the model presented by NavCanada addresses a number of the concerns expressed about the proposed public-private partnership. Above all, because NavCanada has no shareholders it does not need to make a commercial return on its activities in order to pay a dividend. In fact a number of conditions are placed on the corporation by the Civil Air Navigation Services Commercialisation Act 1996, including a requirement that the corporation must set its charges at a level which would not generate revenues in excess of its current and future financial requirements.[219] Thus although NavCanada makes a small profit,[220] it is not under the same pressure to maximise its profit as NATS might be after a public-private partnership. The Canadian government has a degree of control over NavCanada through its seats on the board of directors: the Act also protects the government's right to direct the company to provide air services to meet international agreements, and in the interests of national security.[221]

73. In one particularly striking way, the NavCanada model meets and exceeds another of the Government's objectives for the public-private partnership, because the Government would accrue revenue from the sale of 100 per cent of NATS. The IPMS and PCS suggested that the sale of NATS to a non-share-capital corporation might generate £1 billion:[222] if the company's debts are to be written off, and the fees payable to advisers are similar to those under the public-private partnership, the Government would receive £670 million,[223] considerably more than the £20 million it seems likely to receive under the public-private partnership.

74. Nevertheless the Government rejected the NavCanada model as an option for the future of NATS. It argued that the charging regime set out under the Civil Air Navigation Services Commercialisation Act 1996, which is "designed simply to recover costs, and the ownership structure apparently create little incentive to maximise efficiency, [or] improve management practice".[224] NATS told us that the trust structure "does not provide strong incentives to improve efficiency, nor does it provide access to private sector management expertise and skills which the public-private partnership will afford".[225] NATS also said that without any incentive to maximise profits there was little reason for the company to seek to expand overseas.[226] However, the Government appears to have overlooked a key driver for efficiency in NavCanada, which is that those who pay charges to the corporation, the airlines and other air users, are involved in its management: they presumably want to pay as little as possible, and so want NavCanada to be as efficient as possible. Hence the corporation committed itself in 1997 to challenging targets to reduce annual operating expenses by $135 million over three years, or by 18 per cent of its total costs.[227]

Conclusions

75. We have recorded in this report the concerns raised both by our witnesses and by others about the proposed public-private partnership for NATS, and we have noted the Government's failure satisfactorily to address those concerns. We have also examined alternative structures of ownership, already tried around the world, which would deliver many of the benefits of the public-private partnership - particularly the two key objectives, further to separate NATS from its regulator, the CAA, and to free NATS to borrow money privately without being constrained by the Treasury rules - without raising the same concerns. Again we have noted the Government's paltry, and at times disingenuous, reasons for dismissing the alternative models. The Government has failed, in its evidence to us, and more generally, to make a positive case for the public-private partnership for NATS. It has also failed to give adequate reasons for rejecting the options of establishing the company as an independent publicly-owned corporation, or as a trust or non-share-capital corporation, similar to NavCanada.

76. We are also disappointed by the quality of the arguments used to support the case for the public-private partnership, which have often obscured rather than clarified matters. We offer three examples. First, a principal reason given for the Government's proposal is that it would free NATS from the strictures of the Treasury, allowing it to borrow money more freely, and to operate overseas. However, the examples of the Post Office and the regional, local authority-owned, airports illustrate the fact that the Government is capable of relaxing those rules whenever it wishes to do so. Thus the constant repetition of the mantra about unalterable Treasury rules is, at best, a distraction. Second, those that claim that the introduction of private sector disciplines to NATS will encourage the company to become increasingly efficient are unable to suggest how costs might be cut without endangering safety: indeed it is generally accepted that, in the short- and medium-term, costs at NATS will in fact rise to meet increasing demand.

77. Third, the supporters of the public-private partnership have occasionally pointed out that NATS is only one of several companies which provide air traffic services in the United Kingdom, and so implied that it is comparable to the others. The Deputy Prime Minister has told the House of Commons that NATS "will not be unique. It will be designated to the private sector, like the air traffic control at many of our major airports ... There are 35 air traffic service providers in the United Kingdom, most of which are privately owned".[228] Others have pointed out that NATS provides air traffic control to a minority of airports in the country.[229] Such comments are disingenuous. Air traffic control services are provided by private companies generally at smaller airports and aerodromes, whereas NATS provides such services at airports such as Heathrow, Gatwick, Manchester, Stansted, Birmingham, Edinburgh and Glasgow.[230] The larger airports which do not employ NATS as air traffic control operators, such as Newcastle, Luton, East Midlands, Leeds/Bradford, Bristol and Belfast City, deal with a fraction of the number of flights and passengers as NATS does at Heathrow and Gatwick.[231] Crucially, NATS is the monopoly provider of en route air traffic services in the United Kingdom.

78. We noted with particular interest the evidence we received from the CAA. As a safety regulator it had reacted to developments at NATS, including the proposed public-private partnership, by deciding that it would require three more staff to oversee the company.[232] It had not, however, apparently thought through the full implications of the establishment of a public-private partnership for NATS for it as an economic regulator,[233] although we are encouraged to note that the Transport Bill clarifies the CAA's role as an economic regulator.[234] Of more concern is the CAA's enthusiastic backing for the public-private partnership proposal,[235] and its readiness to dismiss the alternatives such as those seen in Canada and New Zealand.[236] We do not believe that it is appropriate for the CAA, as an economic and safety regulator, to give the impression that it is an advocate of the public-private partnership. It would be more sensible for it to take a disinterested view.

79. The evidence we received made abundantly clear that the proposed public-private partnership is flawed. At the very least the Government must seriously address the questions and concerns about the proposal raised by our witnesses, which we have set out in this report. We would in fact go further: the current proposal for a public-private partnership for NATS is, in our view, the worst of all the possible options for the future structure of the company. It would lead to operational control of NATS, other than in extreme situations, being ceded to a private investor which is very likely to seek either to cut costs, jeopardising safety, or to increase revenues, by raising charges to its customers, putting airlines and airports in the United Kingdom at a competitive disadvantage. It would also give rise to other concerns about NATS continued commitment to Eurocontrol, about matters of national security, and about the future provision of non-commercial services which are vital to safety. There are questions about the validity of the special share the Government intends to hold in the company. Moreover, the Government's revenue from the sale of control of NATS would be extremely small. Even a full privatisation would at least generate a reasonable revenue for the sale of the company.

80. We are, however, encouraged by some recent developments. Lord Macdonald, the Minister for Transport, told us that NATS would not be sold to the highest bidder, but instead to "the most appropriate strategic partner".[237] During the debate on the Second Reading of the Transport Bill, the Parliamentary Under-Secretary of State said that "there is nothing to stop NATS management or a not-for-profit group submitting a bid" for NATS.[238] Although we do not support the public-private partnership, we recommend that, if it is to be established, the Government should only sell the remaining stake to a bidder committed to making no commercial return on NATS operations.

81. Such a bidder may exist: the Airline Group has already said that it would operate NATS on the basis of not expecting a commercial return. Indeed, if the Airline Group or a management team, or even another bidder, were to succeed in acquiring the 46 per cent stake in NATS, and to operate the company on a not-for-profit basis, it would be possible, subject to a number of conditions, to structure the company in a way similar to a trust model such as NavCanada. The conditions would include guaranteeing the staff, as owners of 5 per cent of the company, at least one place on its board. Another condition would be that the 'stakeholder' council would require greater power to put forward its advice. Conditions would have to be placed on the company, to ensure that it did not unduly favour members of the Airline Group: similar conditions already bind NavCanada. If these conditions were met, the proposed public-private partnership might be at least partially redeemed. Nevertheless, the Government would not have maximised the revenue it might be able to generate in exchange for ceding operational control of the company.

82. The trust model, as adopted by NavCanada, would meet the main objectives of the public-private partnership, freeing NATS to borrow on the private market, and separating the company more clearly from its regulator, the CAA. Despite the Government's contrary view, we believe that NATS would face strong demands to become more efficient, because its customers, the airlines, would be involved in its management. However, there would be no over-riding commercial pressure to maximise profits, thus jeopardising safety standards. Moreover the Government would receive significant revenue from the sale of the whole of the company. In short, since customers, staff, and the Government would all be involved in the provision of air traffic services, the trust model answers concerns about rising charges, lower safety standards, national security considerations, and the future international development of air navigation services. We therefore strongly recommend that the Government should establish a trust, or non-share-capital corporation, as the

owner of National Air Traffic Services Limited.

185 Post Office Reform: A world class service for the 21st century, which can be viewed at www.dti.gov.uk/poreform. Back

186 Post Office Reform: A world class service for the 21st century, para.25. Back

187 See the Twelfth Report from the Trade and Industry Committee, The 1999 Post Office White Paper, HC (1998-99) 94, paras.12 and 31. Back

188 PPP06, para.28. Back

189 PPP06, para.29. Back

190 See Q.311. Back

191 HC Deb, 17 November 1998, col.552w. Back

192 See HC Deb, 21 December 1999, col.539w. Back

193 Q.345. Back

194 Q.348. Back

195 See HC Deb, 21 December 1999, col.539w. Back