Memorandum by the Civil Aviation Authority
(PPP 03)
THE PROPOSED PUBLIC PRIVATE PARTNERSHIP FOR
NATS
1. INTRODUCTION
1.1 The Sub-committee is to conduct an inquiry
relating to the propsoed Public Private Partnership (PPP) for
National Air Traffic Services Ltd (NATS), covering:
(a) what arrangements are currently proposed
under the PPP for NATS, with particular reference to management,
finance and accountability;
(b) what implications the PPP as currently
proposed will have for safety standards, investment and staff;
and
(c) what alternative future arrangements
might be made to make NATS independent of the CAA, with particular
reference to the changes proposed to the ownership of the Post
Office.
1.2 This Memorandum explains the regulatory
CAA's views on these matters. NATS will be submitting a separate
note. Section 2 deals with part (a) above. Part (b) is then mainly
dealt with in the next two sections. Section 3 deals with safety
standards and Section 4 with investment. Staff matters are covered
in Section 5, and the final section presents some conclusions.
2. COMMENTS ON
THE NATS PPP ARRANGEMENTS
2.1 If the PPP is set in the context of
the changes made in the management and culture of NATS over the
last decade or so, it can in fact be seen as a natural step in
the evolution of NATS to become a modern organisation, rather
than as a change in direction.
Modernisation of NATS to date
2.2 A decade or so ago, NATS, as an integral
part of the CAA, was not in direct control of its finances, personnel,
or research and development work. Senior appointments were made
almost entirely from internal staff; accountability was diffuse;
and there were few contacts with the actual paying customers.
More important, whilst safety was deemed the top priority, there
was not a clear distinction between safety management and safety
regulation; and there was, for instance, very variable documentation
of safety procedures and quality systems.
2.3 At that time, it was decided that it
was vital to bring NATS' safety arrangements up to best current
practice and to turn it into a free-standing modern company. This
developmental process has continued since, and has relied on considerable
inputs from external safety specialists and the commercial world.
2.4 Examples of some important changes serve
to demonstrate the progress made:
(a) Safety regulation functions were removed
from NATS and transferred to the Safety Regulation Group of CAA.
Safety experts were brought in to review NATS safety processes.
Their recommendations led, inter alia, to formal management systems
and the appointment of a NATS Director of Safety reporting to
the Chief Executive.
(b) The finance and management functions
were progressively transferred into NATS. Three years ago the
limited company was established as a subsidiary of the CAA—this
takes separation as far as is currently practicable.
(c) External management consultants were
brought in to help in the restructuring of the company and its
business processes so as to make it more customer-focused and
effective.
(d) Recruitment was opened up to bring managers
with commercial experience into NATS.
(e) The CAA Board instituted a "shadow"
economic regulatory regime for NATS charges. This has contributed
to the reductions in NATS charges; indeed these reductions have
been far more substantial, in terms of cost effectiveness improvements,
than NATS senior managers themselves might have expected.
There have therefore been significant changes
and improvements in NATS' structure and performance over the last
ten years, but we believe that the current arrangements for NATS
have reached the limit of what is possible within the existing
legislative framework.
Benefits of PPP
2.5 In our view, the PPP would be the next
logical step in NATS' development. It would provide an injection
of business energy, which should produce a clearer commercial
and financial focus. In particular, it would offer opportunities
to broaden the managerial skill base, which will be increasingly
necessary with the likely longer term restructuring of air traffic
control (ATC) services on a European, and perhaps wider, basis.
The recent DETR audits of the New En Route Centre (NERC) project
(DERA focusing on software development and Arthur D Little on
project management) showed the professionalism and commitment
of NATS air traffic controllers and engineers. They also showed
that there are areas of project management that need to be further
strengthened.
2.6 There is also the issue of access to
funding—which is vital for NATS and, of course, its customers.
There has been general agreement that NATS urgently needs access
to additional sources of funding for investment purposes, and
that freeing NATS from the Government budgeting and financial
processes is the best way of achieving this. The investment programme
is essential to maintain and enhance NATS' safety systems, to
provide sufficient capacity to meet growing traffic demand, and
to improve the productivity and cost effectiveness of the organisation.
For example, an important ingredient is the development of the
next generation of computer tools to assist the work of controllers,
building upon the success of the R&D work that produced Short
Term Conflict Alert. It should be stressed that, were these investments
not to be made or to be seriously delayed, UK ATC would still
be safe, but it would not be possible to increase capacity—producing
deteriorating services and reducing cost effectiveness, with increased
delays for customers.
2.7 Many respondents to the Government's
Consultation Document considered that private sector money and
expertise through the PPP would provide both investment and greater
efficiency. The CAA endorses this view. The PPP would combine
disciplined, transparent and accountable safety regulation with
formal economic regulation and an injection of top level managerial
talent from the commercial world.
2.8 The Government has stated that it intends
to establish "the most stringent safety regulatory regime
in the world" for NATS. The CAA, as the single UK aviation
regulator, would ensure that NATS' present high standards of safety
are maintained, and where necessary improved. NATS has come to
lead the world in the development of ATC safety management systems,
and the UK now has a safety record on a par with the best in the
world. This paramount concern for safety best practice, demonstrated
over the last decade, would continue to be fostered by the CAA
under the PPP.
2.9 The PPP would ensure that efficiency
in delivering the necessary safety and ATC capacity to customers
can be promoted through commercialisation, competition and economic
regulation, leading to a greater focus on customers' interests,
transparency in costs and charges, and reductions in charges to
customers. This again is a natural series of steps building on
the work over the last decade in reducing NATS' charges.
2.10 The CAA notes an important added protection:
the Government has stated that it intends to retain its financial
investment in NATS for the foreseeable future. It would therefore
develop specific commercial safeguards to protect the value of
its—the taxpayer's—minority equity stake in NATS.
2.11 The CAA also notes that the Government
has decided that the company would be maintained as a single entity,
one that is able to provide the full range of air traffic managment
services within the UK. NATS should thus be able to participate
effectively in an increasingly competitive market throughout the
world. The CAA views this as a very real gain, because it would
add an outward-looking dimension to the company and, by making
it possible to export UK expertise, would deliver a real contribution
to improved global aviation safety.
3 THE SAFETY
REGULATION OF
NATS POST
PPP
3.1 The CAA welcomes the continuing support
from the Government to the maintenance, and where possible the
enhancement, of the UK's excellent aviation safety record. The
Government has made a firm commitment that there would "be
no diminution either of safety standards or of the safety regulator's
powers to enforce them under a public private partnership".
This section sets out a number of key points about the future
safety regulation of NATS, which serve to demonstrate how the
CAA would deliver on this commitment. At the very outset, it should
be said that the CAA's Safety Regulation Group (SRG) believes
that the integrity and effectiveness of its safety oversight of
NATS would be unaffected by a successful PPP arrangement.
3.2 First, some background about the industry
is worth setting out. There are 75 individual civil air traffic
control units in the UK. ATC services are provided by 35 separate
organisations, the bulk of which are private sector companies.
SRG also regulates many large commercial aviation companies, including
British Airways, BAA and British Aerospace. These companies have
shareholder interests as a prime driver: but SRG's experience
reinforces the view that aviation safety is not automatically
prejudiced by the commercial nature of such organisations.
3.3 In practice, the safety regulation of
NATS as a PPP would be conducted in substantially the same manner
in which it is done at present. In regulating NATS, SRG has traditionally
treated it as a separate entity. NATS' formal legal separation
from CAA would reincorce this distinction in the public eye and
ensure greater transparency. CAA's SRG will, in any case, pay
particular attention to its regulatory responsibilities in respect
of NATS in the coming years, because it is a safety critical organisation
in a period of major change.
3.4 Each of the ATC units and infrastructure
services that NATS operates will continue to be required to provide
comprehensive evidence to convince SRG that its en-route and airport
air traffic control services remain safe. Indeed, given the projected
increases in air traffic generally, these requirements are likely
to become more onerous for NATS and the other ATC service providers
as the industry strives to ensure safety targets are achieved.
Safety Regulation of the New En Route Centre
3.5 The NERC Project has been the subject
of extensive SRG safety oversight since its early days. This oversight
has become progressively more intense as the project has moved
forward. The regulatory regime concentrates on monitoring the
processes used by the NATS project team to deliver safety assurance
throughout the entire control centre—this includes human
resources aspects. The purpose of this approach is to ensure that
SRG has a comprehensive understanding of these processes. With
this background, the SRG audit team will be able to assess the
final version of the NERC Safety Case effectively. Before the
Centre will be allowed to operate, SRG has to be convinced that
the achievement of safety performance targets is fully supported
by the evidence presented by NATS. SRG essentially operates a
challenge process on the NERC Safety Case.
3.6 Recent work on NERC safety has included
initial assessments of the processes used to ensure the validity
of the proposed "ATC Method of Operation", with particular
reference to the Human Machine Interface and the ATC operational
procedures and tasks. Within the evolving NERC Safety Case, SRG
has found that the safety assurance processes created thus far
are satisfactory.
Safety Regulation of NERC Software
3.7 Some years ago, SRG recognised that
the software used in NERC and other safety significant ATC systems
presented some new safety regulatory issues. These issues arose
because of the size and functionality of the individual systems
and their complex interactions.
3.8 SRG has developed safety regulatory
requirements to address these issues. Following extensive consultation
and advice, software safety requirements have been produced in
conjunction with the appropriate UK and European expert bodies,
and they reflect current best practice. The requirements, which
continue to be refined as more knowledge and research results
become available, now form part of UK civil aviation regulatory
documentation. These requirements will form the basis through
which NERC and other ATC software is regulated.
3.9 Additional resources have been procured
by SRG to enable a continuing, thorough and appropriate assessment
of this software. A comprehensive audit plan has been prepared:
its timescales and completion match the progress of the NERC project
towards its projected O-date.
Safety Regulation of Air Navigation Services
3.10 Air Navigation Services consist of
all those air navigation facilities and standard systems required
for international air navigation as set out in the Chicago Convention.
As well as ATC services, they include the Aviation Meteorological
Service and the Aeronautical Information Service, both of which
deal with safety significant information, and which are currently
provided by NATS as services to aviation throughout the UK and
the international airspace assigned to it under the Convention.
In particular, NATS is currently delegated the UK Meteorological
Authority role by the CAA.
3.11 Final responsibility for the continuing
provision of each of these services would, of course, be subject
to review as part of the detailed work of DETR and CAA on PPP.
The completed arrangements for the supply and delivery of these
services would necessarily include the appropriate SRG regulatory
oversight.
Co-ordinated Aviation Regulation
3.12 One of the major reasons for keeping
the regulatory CAA together—a view supported by most of
the PPP Consultation respondents—is to enable wider views
of aviation policy to be taken. In particular, the Directorate
of Airspace Policy (DAP) being in the CAA would preserve a successful
civil/military partnership for resolving airspace policy issues
and strengthening the national focus, whilst properly safeguarding
the UK's defence and security needs. DAP has natural regulatory
links with both ERG and SRG. In its work on the safety regulation
of NATS' activities, CAA's SRG would work closely with DAP to
ensure that airspace planning considerations would be fully taken
into account.
4. INVESTMENT
ISSUES
4.1 The task for the licensing and economic
regulatory structures would be to reinforce and channel the desirable
commercial disciplines and pressures introduced by the PPP. The
Licence would probably influence NATS investment in two main ways.
First, there would be a formal obligation placed on NATS to invest,
in order to maintain and develop the assets needed to meet all
reasonable demands for the services that it is licensed to provide.
Second, there would be a condition in the Licence to consult regularly
with users concerning, inter alia, NATS capital investment
plans.
4.2 The investment incentives for a commercially
orientated PPP would be different from those that NATS currently
faces. As a public sector organisation operating in a cost recovery
environment, NATS faces political pressures to invest to meet
demand, but these are of a different nature to the commercial
and regulatory pressures that a PPP-ed NATS would face.
4.3 The main lever available under the current
system is largely moral pressure. If NATS does not match capacity
with demand then the result is delays. The level of delays attributed
to each European ATS provider are compared with each other, and
political pressure is applied to the worst ATS providers to encourage
improvement. There are no financial incentives under the current
Eurocontrol charging arrangements because, with the cost recovery
principle, all of NATS' costs—incuding capital spending—are
covered over the long run: this is irrespective of the number
of flights handled or operational performance.
4.4 Under a PPP structure, the commercial
environment and economic regulation would change NATS' incentives
to invest. Changes are to be introduced by Eurocontrol to the
charging arrangements to accommodate this. NATS would face both
rewards and penalties; with the trade-off between them being the
determinant of the resulting investment choices. In setting the
regulatory environment for NATS, desired capacity and associated
quality of service would be major issues: it is essential to ensure
that NATS has the appropriate incentives to provide increased
capacity in ways which would deliver the desired service quality,
eg delay targets.
4.5 The PPP should also have more flexibility
in responding to perceived investment shortfalls than NATS currently
has. As a public sector organisation, NATS is bound by public
sector budgeting and borrowing requirements, which restrict its
access to funds for investment. Thus, funding for its investment
programme must compete against other pressing demands such as
health and education.
4.6 European ATC is characterised by a lag
between the identification of a problem and the resources then
being made available to fix it—a point made strongly in
the Eurocontrol Performance Review Commission's first Performance
Review Report (published 9 June 1999—Figure 2). With private
sector involvement, the PPP-ed NATS should be able to get access
to funds for investment in projects with robust business cases.
This would have the added benefit of focusing NATS' mangement
on the costs and benefits of their proposed investment programme,
to ensure that it provides—at least cost—the
services that users are willing to pay for. Thus, the PPP-ed NATS
would have a much greater incentive to consult with users and
to include their inputs in its investment planning process.
5. STAFF ISSUES
5.1 The CAA was encouraged that the concerns
expressed by staff in the course of the detailed consultation
process, in respect of pensions and terms and conditions, were
addressed by the Government in coming to its conclusions on the
future of NATS.
6. CONCLUSIONS
6.1 The CAA's current role is to provide
through NATS the safest and best system of ATC, and the toughest
and most accountable regulation in the world. The CAA is confident
that the PPP for NATS would best achieve these objectives by formally
separating ATC provision and regulation. The PPP would build on
the organisational modernisation and improvements in performance
instituted in NATS over the last decade.
6.2 The CAA believes that the PPP presents
a major opportunity for the UK aviation industry to strengthen
its position as a world leader.
6.3 The PPP means that NATS would be able
to raise the finance for investment without having to compete
for money against other Government spending priorities. NATS would
thus be able to maintain and improve safety standards when increasing
capacity in line with demand, and raise the quality and value
for money of the services that it offers its customers.
6.4 PPP would offer a clearly defined separation
between the CAA as regulator and NATS as the provider of air traffic
management services—and that would deliver greater transparency
and accountability.
6.5 By enabling the CAA to focus solely
on its regulatory role, the PPP would strengthen the regulatory
framework for UK aviation. It would also provide an opportunity
for the CAA itself to become more outward-looking in style, re-casting
itself not just as a technically excellent regulator, but more
as a champion of the flying public and all airspace users, regulating
without fear or favour in defence of the public interest.
8 October 1999
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