Memorandum by National Air Traffic Services
Ltd (PPP 05)
PUBLIC PRIVATE PARTNERSHIP
1. INTRODUCTION
1.1 The Committee is conducting an inquiry
into the proposed Public-Private Partnership (PPP) for National
Air Traffic Services Ltd (NATS), and has sought written evidence
from interested parties. This Memorandum sets out NATS' views
on the PPP, and responds to the specific issues raised by the
Committee. The Civil Aviation Authority (CAA) plans to submit
a separate note on regulatory aspects.
2. BACKGROUND
Traffic levels are rising
2.1 The 1990s have been characterised by
strong and sustained growth in traffic levels, typically around5
per cent annually. The rate of growth has increased in the last
two years, running at nearer to 7 per cent annually. Traffic levels
have nearly doubled since the late 1980s and the expectation is
for this growth to continue. NATS controllers will handle 1.9
million aircraft movements this year and current forecasts indicate
that movements will rise to around 2.7 million by 2010.
NATS safety record
2.2 Safety is of paramount importance to
NATS. Despite the increase in traffic, the number of risk bearing
aircraft proximity incidents reported by pilots and controllers,
where NATS contributed to the cause, remain low.
|
| 1992 | 1993
| 1994 | 1995
| 1996 | 1997
| 1998 | 1999
|
|
| 7 | 8
| 13 | 12
| 16 | 11
| 6 | 8*
|
|
| *Figures for 1999 are complete to 27 September 1999. Reports for 1999 have yet to be assessed by the UK Airprox Board.
|
|
2.3 The first Report of the UK Airprox Board was published
recently and provides an analysis of Airprox incidents reported
in 1998. The Report notes that the number of risk bearing incidents
in UK airspace per 100,000 flying hours, involving commercial
air transport, remained stable throughout the 1990s'. tapering
in 1998 to the lowest rate recorded. In 1990, the rate of risk
bearing incidents per 100,000 flying hours for commercial air
transport was 2.69; in 1998 the rate was 1.20. The great majority
of risk bearing Airprox incidents continue to involve general
aviation and other aircraft flying outside controlled airspace.
2.4 Though not a measure of safety, NATS monitors the
number of "overloads" reported by NATS controllers.
These reports are designed to provide operational managers with
an early indication that airspace arrangements in particular sectors
may need to be reviewed. As such, the process represents an important
risk avoidance measure. The number of reported overloads increased
in 1998 following management encouragement to staff to report
such events. The number has remained static this year.
|
| 1998 |
1999 |
| Jan-Mar | Apr-Jun
| Jul-Sep | Oct-Dec
| Jan-Mar | Apr-Jun
| Jul-Sep* |
|
| 16 | 13
| 24 | 12
| 11 | 16
| 20 |
|
| *Period to 26 September. |
|
2.5 NATS is constantly looking for ways to improve the
safety of the ATC system. There are a number of safety improvement
actions currently underway, which are directed at reducing the
probability of safety incidents, including:
(i) Continued re-sectorisation—designing procedures
which not only add more airspace capacity, but reduce the complexity
of the controller task and the peak workload on individual controller
positions;
(ii) Level busts—working with aircraft operators
to raise awareness amongst pilots about the importance of following
controller instructions;
(iii) Safety nets—commissioning research and development
into options for further improving the effectiveness of the Short
Term Conflict Alert, which provides warning of separation loss
to controllers;
(iv) Lessson learning—ensuring that where lessons
can be learned, information on safety incidents is shared across
the whole organisation.
Delays caused by NATS are down nearly 20 per cent this year
2.6 Despite traffic growth of nearly 7 per cent this
year, delays in UK airspace have been reduced by19 per cent in
1999. The average delay to all flights, attributable to NATS,
has been reduced from 1.63 minutes in the period from January
to September 1998 to 1.31 minutes in the same period in 1999.
This contrasts with the situation this year in Europe where a
7 per cent increase in traffic has led to a 73 per cent increase
in delays attributable to European air traffic control. In Europe,
the average delay to all flights increased in the January to September
period from 3.41 minutes in 1998 to 5.90 minutes in 1999. This
increase is only partly accounted for by the Kosovo crisis.
NATS charges to customers are falling
2.7 NATS has been steadily reducing the charges made
to its customers. The NATS' element of the Eurocontrol en route
charge was £60.46 per service unit in 1994 (in 1994 prices).
The charge in 1999 is £50 per service unit. Charges for North
Atlantic services and at Airports have fallen more sharply still.
NATS major investment projects are moving ahead
2.8 NATS' Two Centre Strategy has been endorsed by Government
as the best means of meeting future capacity requirements, whilst
providing an appropriate level of operational contingency cover
between centres. This Strategy involves completion of the New
En Route Centre at Swanwick and construction of the New Scottish
Centre at Prestwick.
2.9 NATS has continued to make good progress on the Swanwick
Centre. Since the revised plan was established in October 1998,
all milestones have been met, and planned activities remain on
schedule. Following "Technical Transfer" in March, and
the successful completion in May of the first phase of the large-scale
simulation programme, the second phase of the simulation programme
will begin in November. Recognising that this is a major and complex
system development, NATS will continue to manage very closely
the remaining milestones and risks through to the planned operational
service date of Winter 2001-02.
2.10 The New Scottish Centre project has also made progress,
with the start of initial enabling works and the appointment of
Bechtel to support the project team in a project definition phase.
The aviation industry is becoming ever more liberalised and
commercial
2.11 The debate about the future of NATS needs to be
set in the context of developments in the aviation industry as
a whole. Twenty years ago, the airline industry was dominated
by state-owned national flag-carriers. Now the airlines are almost
entirely in the private sector, in an industry dominated by alliances,
takeovers and new start-ups. Airports were traditionally state-owned,
but the process of privatising airports is now well advanced around
the world. Aircraft manufacturing and the ATC equipment market
have seen a process of takeover and consolidation.
2.12 Under pressure from airlines and governments to
improve efficiency and reduce delays, it seems clear that the
same process is now starting in the provision of air traffic services.
Currently, around twenty of the world's air traffic service providers
have been given the freedom to operate commercially, either in
the public sector or with private sector participation. The span
of countries is very wide and includes for example Germany, Ireland,
Canada, Switzerland, Australia, Spain, New Zealand, South Africa,
the Netherlands, Portugal, Thailand, the Czech Republic, Romania,
and the Ukraine.
2.13 The issue has been brought into sharp focus this
year because of the delay situation in Europe, and the growing
recognition that the status quo is not an option for the future
development of the industry. ATC in Europe is currently provided
from 49 ATC centres, by 31 national ATC providers, operating 18
hardware systems and 30 different software languages. This situation
is not sustainable, and the airlines seem certain to increase
pressure on governments for rationalisation, with a more integrated
system and a smaller number of more commercial providers. The
point is well illustrated by the "Five Point Action Plan",
launched this month by the Director General of the International
Air Transport Association in response to this year's problems
in Europe. Included amongst these five points is the proposal
to Transport Ministers in European states: "To liberalise
the provision of air traffic services in Europe through commercialisation,
privatisation or corporatisation in each of the European states".
2.14 This reflects thinking not only within the international
airline community but also amongst leading figures responsible
for air traffic services in Europe. In a recent article in Flight
International, Wolfgang Phillip, Eurocontrol's Senior Director
expressed the view that: "Air traffic control is very difficult
in Government systems . . . they are always limited by government
rules and a lot of limitations. Separation from government control
is the only way, in the longer run, to give air navigation service
providers the financial and managerial freedom to run their businesses.
Nationalist thinking disappears and business thinking arrives."
2.15 NATS today is a very different sort of organisation
from when it was first attached to the CAA in 1973. Over that
period, NATS has changed from an organisation that was an offshoot
of the Ministry of Defence and the Board of Trade to become a
free-standing company focused on financial and operational targets.
NATS sees PPP as another step in its evolution—a step which,
like all other previous changes in NATS, will be accompanied by
a continuing commitment to give top priority to safety.
3. NATS OBJECTIVES FOR
THE PPP ARE
CLEAR
3.1 The NATS' Board and management have welcomed the
Government's proposals for the PPP. NATS wants a PPP process that
gives adequate scope for consideration of its views, ensures that
staff are well informed and involved, retains customer confidence
and ends by delivering a partnership structure which helps the
Company to achieve its objectives.
3.2 NATS has defined its objectives for the PPP, following
wide-ranging discussions with customers and staff as well as Government.
These objectives are summarised below:
(i) Maintain NATS total commitment to safety.
(ii) Create the basis for a secure future for NATS business
by:
— maintaining NATS as a unified business with a clear
focus on safety, and with an air traffic management capability
able to provide full gate-to-gate service;
— securing access to funds for investment in existing
activities, and in new opportunities on a commercial basis;
— accessing a broader range of management skills;
— creating a stable structure of ownership, which can
help NATS achieve its objectives;
— securing the independence to build a global, ATM-related,
growth business in partnership with others as necessary.
(iii) Create a future for NATS staff in which they can
have good conditions, fair treatment, and new opportunities in
an expanding company.
(iv) Establish a fair and stable regulatory environment
which encourages NATS to become more efficient and to develop
new business.
(v) Establish a transparent, commercial relationship with
Government in all its activities with NATS, whilst recognising
Government's sovereign responsibilities.
(vi) Enable NATS to deliver benefits for all stakeholders:
— for Customers—safety, reduced delays, improved
cost-effectiveness,
— for Suppliers—additional business for those
who can help NATS meets its objectives, and
— for Shareholders—a fair return on their Investment.
4. ARRANGEMENTS FOR
MANAGEMENT FINANCE
AND ACCOUNTABILITY
Management
4.1 The Government wishes to see NATS enhance and broaden
its management expertise and skills base to enable it to be at
the forefront of industry developments. NATS agrees that bringing
in a private sector partner would enable the Company to broaden
its management skills. Although the management of NATS' air traffic
control operations and safety is recognised as being outstandingly
effective, the history of the Swanwick project highlighted a need
for more effective management of such projects. In addition, the
Company has not had the requirement in the public sector to develop
its capability in areas such as marketing. The expertise that
a private sector partner could bring, together with the freedom
to act commercially, and on a global basis, will help NATS broaden
its management across the board to address existing tasks and
new opportunities.
4.2 Within the overall first priority of safety, the
new regime of economic regulation will provide a framework for
incentivising the Company to achieve greater efficiency, leading
to a greater focus on customer interests, transparency in costs
and charges, and further reductions in charges.
Managerial and Commercial Freedom
4.3 The proposals will give the Company managerial and
commercial freedom to take advantage of the air traffic service
opportunities that are opening up throughout the world, and to
manage the business in the best interests of stakeholders. The
potential market for air traffic services is growing rapidly and
there is a pressing need for increases in capacity in Europe and
further afield. NATS has a range of capabilities that can help
meet that demand. NATS recognises that it can benefit from access
to commercial expertise in opening up these new markets and in
the management of large, complex IT projects.
Finance
4.4 Capital funding for new air traffic control systems
has been reduced in recent years, from a peak of £130 million
in 1993-94 to £36 million in 1998-99. The only mechanisms
currently available for financing major investments remain funding
approved by DETR and HM Treasury, or the Private Finance Initiative
(PFI). NATS continues to regard PFI as an inappropriate mechanism
for financing large, complex software systems and supports the
conclusions reached by the Transport Committee in its 1995 Report
on NATS privatisation (paragraph 96):
"In common with the Department of Transport and the CAA,
we do not believe the Private Finance Initiative offers a long
term solution to the problem of obtaining investment finance for
NATS, since its extensive use—even if it were possible to
identify relevant and practicable opportunities—would fragment
NATS to an unacceptable extent."
4.5 Freeing NATS from public sector financial constraints
will allow the Company to plan ahead with certainty rather than
on a stop-go basis. The Company already needs to borrow for investment,
but the investment programme will make NATS significantly cash
negative, requiring additional future funding. Access to private
investment will enable the Company to invest in world leading
ATC provision and expand into new markets.
4.6 NATS has a secure and stable income, though at present
it is required to pay back to its customers all profits above
the target rate of return generated from its en-route business.
This cost-plus approach provides no structural incentives to ensure
the effective control of the Company's cost base, and no mechanism
for leveraging this potential profit stream to build the Company
into a world class business for the benefit of current and future
potential customers and stakeholders.
Accountability
4.7 NATS has long argued, as has the Transport Committee,
that separating the provision of air traffic services from the
CAA would in itself improve accountability by introducing a more
transparent relationship between the regulator and regulated.
4.8 Accountability will also be strengthened by the proposals
in the PPP for:
(i) involvement of a private sector partner;
(ii) the appointment of Government directors to the Board;
(iii) the proposed requirement for Board unanimity in
strategic areas, including approval of the annual business plan,
the raising of new equity and capital, and policy on dividends
and re-investment;
(iv) strengthened arrangements for consultation on NATS'
plans through the Stakeholders Council, with representatives from
Government, airspace users, the strategic partner, and NATS staff
and management;
4.9 More generally, NATS believes that the PPP will perserve
accountability by keeping NATS as a unified business, thereby
reducing the scope for buck-passing or confusion as to where accountability
lies. It is essential that the company should be maintained as
a single entity that is able to provide the full range of air
traffic management services both within the UK and internationally.
4.10 The shareholding structure needs to avoid conflicts
of interest, ensure stability and safeguard the coherence of NATS
as a single entity. The choice of partner is critical to the successful
implementation of the PPP, and NATS would hope to contribute to
the selection criteria.
5. IMPLICATIONS FOR
SAFETY, INVESTMENT
AND STAFF
Safety
5.1 In recent months, many people have expressed concerns
that the PPP will put air safety at risk. Yet it is clear that
the Government, the CAA and everyone in NATS is committed to safety
as the over-riding priority, and that existing systems of safety
regulation and safety assurance with continue. As the Deputy Prime
Minister made clear at the Labour Party Conference, the Government
would "never, repeat never, play games with people's safety".
NATS strongly shares that view.
5.2 Safety is the top priority component of NATS' core
business. Safety cannot therefore be a public/private issue because,
without safety, there is no business. With access to investment,
the PPP means that NATS will be able to maintain its excellent
safety record at a time when the volume of air traffic is growing
rapidly. NATS welcomes the Government's clear statement that there
will be no diminution either of safety standards or of the safety
regulator's powers to enforce these standards.
5.3 The Company has a strong safety culture and it is
NATS' intent that this safety culture will be maintained and fostered.
NATS view is that:
(i) the separation of service provision and safety regulation
can only serve to enhance public perceptions of safety, as there
will be greater transparency between NATS and the CAA, and it
will be clear that safety regulation remains under government
control;
(ii) with the exception of NATS, the service provision
aspects of the UK aviation industry are now largely a private
sector activity. Although questions about safety were raised when
BA and BAA were privatised, there is no evidence at all that safety
standards in the UK aviation industry have suffered because companies
are now in the private sector. BA and BAA now have over 20 years
combined experience of private sector operation in competitive
markets with no diminution of safety standards. NATS believes
that PPP will lead to safety standards in air traffic being maintained
and even improved as the Company seeks to become a leading player
in the developing international market;
(iii) from a business point of view, it is inconceivable
that a company whose sole business is safety would put that at
risk by cutting corners. Decisions on such matters as controllers
working hours will continue to be subject to safety regulation.
Decisions on capital investment and running costs will continue
to be a matter for the Boarad in determining the annual business
plan. This is an area where it is proposed that the Government
directors will have a power of veto;
(vi) the Company structure should not create artificial
barriers between different parts of the organisation which provide
operational ATC services; and
(v) all these cultural, organisational and business pressures
will serve to underpin NATS commitment to safety under the PPP.
As an extra backstop the Government would have directors on the
Board who will be able to keep a watching brief on safety.
Investment
5.4 The PPP is the best option for enabling NATS to have
access to investment funds. The business needs £1 billion
over the next ten years in a steady and sustained way. This investment
is required 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. As
noted in paragraph 2.8, the core of the programme is the Two Centre
Strategy. Investment in advanced air traffic management systems
and computer assistance tools are needed to meet capacity requirements
in the longer term. The new centres at Swanwick and Prestwick
will provide the necessary expansion capability and the technology
platform for future development.
Staff
5.5 NATS welcomes the fact that the Government has addressed
the main concerns expressed by staff in respect of pensions and
terms and conditions of service. The Government has made clear
that staff in employment at the time PPP is established will be
entitled to remain members of the CAA Pension Scheme.
5.6 The Company strongly believes that the PPP is in
the best long term interests of staff. In the public sector, cutting
costs has been NATS' principal means of improving financial performance.
PPP will open up new opportunities to grow the business both in
the UK and overseas, thus improving employment opportunities.
As new investment delivers modern, more reliable equipment systems
and increased levels of automation, it is very much in the interests
of staff that opportunities should be provided to replace tasks
that are no longer necessary.
5.7 The Government has made clear that it will stand
by its undertaking that 5 per cent of the shares will be allocated
to all employees, thereby giving them a stake in the future success
of the business. Staff will also have greater involvement in the
business through representation on the Stakeholder Council.
6. THE ALTERNATIVES
6.1 The Government considered a number of different options
for the future status of the Company. Given that safety standards
can be maintained in the private sector, it concluded that the
best way to ensure NATS stayed at the forefront of industry developments
was to introduce a broader base of management skills and expertise
and access to private finance. NATS' observations on these alternative
options are as follows:
(i) Trust status: The closest example is NavCanada. The
model requires a complex structure, to separate ownership of the
assets from operational management and to manage the different
interests of the various stakeholders. The structure does not
provide strong incentives to improve efficiency, nor does it provide
access to private sector management expertise and skills which
the PPP will afford.
(ii) Corporatisation: This model already operates in a
number of countries. The Chartered IPOC, which is advocated by
the NATS trades unions, is a form of corporatisation. We understand
that it was rejected by the Government not on public finance grounds,
but because it too did not achieve the objective of providing
structual incentives to improve efficiency. The proposals for
the Post Office are also a form of corporatisation. The main difference
between NATS and the Post Office is the scale and complexity of
the investment required as well as the very different nature of
the market in which the two companies operate.
6.2 In NATS' view, the alternative options would not
deliver the benefits of the PPP. They do not:
— free NATS from the Government borrowing rules
or Treasury controls;
— give employees a direct stake in the business;
— provide structural incentives to improve efficiency
and performance; or
— allow NATS to have access to the investment it needs
in a steady and sustained way to tackle the threat of growing
delays.
6.3 The status quo is not an option. Investment is essential
and the present Government recognises that PFI is not the right
solution to NATS' investment requirements.
7. CONCLUSION
7.1 The future status of NATS has been under review since
the early 1990s. As a result there has been a great deal of uncertainty
for both staff and management and the decade has been characterised
for the Company by political indecision and lack of commitment
to future investment funding. NATS has continued to provide a
safe and efficient service to its customers, but the uncertainty
needs to be ended to enable planning to proceed on future investment
and growth. NATS will oppose any plan to revert to the status
quo, with insufficient funding for its projects and no clear way
forward on the funding of the New Scottish Centre.
7.2 The PPP, if properly implemented, has the potential
to be an imaginative and successful solution. It provides extensive
safeguards to ensure that safety and the public interest are secured.
It is the quickest route to ensure that vital investment is made
in the ATC system. It will enable management decisions to be taken
on a business basis, in accordance with best private sector disciplines.
It will provide a genuine partnership between the public and private
sectors, and will deliver a safe, modern and efficient air traffic
control system. PPP will enable NATS to develop the business for
the long term, and thus secure the company's future in a growing
and increasingly competitive market.
8 October 1999
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