Memorandum by IPMS and PCS (PPP 08)
PROPOSED PUBLIC-PRIVATE PARTNERSHIP FOR NATS
INTRODUCTION
The Institution of Professionals, Managers and
Specialists (IPMS) and the Public and Commercial Services Union
(PCS) represents 95 per cent of staff in National Air Traffic
Services (NATS). IPMS represents air traffic controllers and engineers,
PCS represents air traffic assistants and administrative staff.
Both unions represent staff in the Economic Regulation Group (ERG)
and the Safety Regulation Group (SRG) both part of the CAA.
When the Government announced its intention
to proceed with the privatisation of NATS on Tuesday, 27 July
it came as no surprise that not one Labour backbencher spoke in
favour. There has been little support for the proposed privatisation
in any quarter and the government announcement came against a
background of opposition from over 160 MPs, unions in NATS, the
Transport Select Committee and the British Airline Pilots Association
(BALPA).
Up to 27 July no minister or DETR official had
attempted to discuss the detailed submission made by IPMS and
PCS in January 1999 as a response to the DETR paper "A Public
Private Partnership for National Air Traffic Services". A
copy is enclosed for ease of reference.
Both unions continue to fundamentally oppose
the current Government proposals. We believe that introducing
considerations of profit and shareholder interests into a safety
organisation, will in time, undermine safety considerations.
NATS is a success story. With an increase year
on year of air traffic of some eight per cent, NATS has coped
with fewer staff. Any organisation would be proud of this and
the cost to airlines has fallen in actual terms over the last
few years.
The unions have supported the increased commercial
focus of NATS for over 10 years. They have agreed to break the
Civil Service link, agreed new working practices for controllers,
assistants and engineers and undertaken various reviews of NATS
to improve the efficiency of the NATS service.
The end result is a service which has fewer
delays than its European counterparts and is regarded as a world
leader in the provision of efficient, dynamic and above all, safe
air traffic control system.
We have drafted this submission in the same
order as outlined in the Press Release.
MANAGEMENT
The current management have delivered, as described
above, an outstanding improvement in traffic levels combined with
a reduction in costs. This is due, in no small part, to the dedication
of the staff within the organisation. They have shifted more traffic,
coped with ever higher stress levels and generally coped with
the job.
Criticism has been made of the Project Management
abilities of senior NATS staff. This is mainly directed at the
project management of Swanwick. While not wishing to try and defend
this shortcoming, it must be pointed out that the private sector
project management has also been woefully inadequate. There is
also a need to look at other IT projects in the public sector
which have also had long delays and malfunctions. Surely it cannot
all be laid at the door of the public sector.
We agree that there may be a need for further
areas of expertise in the senior management structure but privatisation
seems a drastic step to produce such a small return.
FINANCE
We outlined in our submission to DETR the method
by which we believe NATS financing could be provided outside the
Public Sector Borrowing Requirement (PSBR) (Section 4). This involves
an Independent Publicly Owned Company (IPOC) along with lines
of the current status of the Post Office. This would allow commercial
freedom where this is warranted without the constraints of direct
Treasury control.
We also proposed an alternative, the Trust Model
(Section 6). This model is being pioneered in Canada, NAVCAN,
which seems to be successful and non-profit making. The initial
financing was a debt of $3 billion which was raised from a syndicate
of banks. The Trust allows a balance of interests to influence
the company with no single stakeholder dominating the company.
What is not apparent in the Government proposals
is the responsibility for parts of the financial package. Who
takes the financial decisions? It appears it will be the private
company with two government appointed directors on the board.
In other words all financial decisions will be taken by the private
company.
ACCOUNTABILITY
In the Government proposals there is no obvious
line of accountability. The private company seems to have little
or no accountability to Government or other shareholders. The
Government will initially own 49 per cent of NATS with up to five
per cent owned by staff. The Government has already said it will
not vote its shares. Is this in order that they can sell them
at a later date? How is the staff five per cent voted? Where are
the lines of accountability? The only criteria published so far
says that the board must be unanimous in the budget forecasts
and in accepting the accounts. There is no talk of accountability
to, for example, the Audit Commission.
SAFETY STANDARDS
The unions have consistently argued that safety
standards could be compromised under private ownership. We have
always maintained that the financial demands of a private company
would have a detrimental effect on the existing safety culture
and ethos in NATS.
Supporters of privatisation often point to BAA
and British Airways as successful case studies where safety has
not been compromised. But airports and airlines often have access
to other revenue, they can generate profits from other means (much
of BAA's income comes from retail shopping outlets). NATS does
not have direct control over its revenue and will therefore have
to cut costs to increase profitability.
At a recent meeting with Chris Mullin and the
CAA Safety Regulator, Richie Profit, the latter said that the
union concerns over safety were genuine. If the "new"
NATS were to change the current safety case approach then SRG
would find it very difficult to cope.
The Government response to our fears over safety
is to point to the proposed separation of SRG and NATS. We have
supported this separation in order that there is a more transparent
relationship between the two parts. In reality this separation
has been in effect some time.
The Regulator has admitted that they would have
little or no power to intervene until standards declined to a
defined minima or less. It has to be noted that NATS standards
are generally higher than the minima. There are also many areas
affecting safety where minima are difficult to define (eg training
standards, services outside control lanes, etc).
But it must be made clear that the regulator
does not make safety in any company. The company needs to have
a safety culture and ethos and this cannot be imposed. NATS is
there for one thing—safety. It exists to keep planes apart—to
expedite their routing and maximise airspace and runway capacity.
Those providing that service are not distracted by any other consideration.
NATS safety "culture" is a product
of managers with operational experience and a sole focus on safety.
We believe that will suffer when profit becomes the primary focus
and accountants replace senior managers. The demand for a short
term, commercial rate of return will bias judgement.
At the moment NATS has no vested or commercial
interest in being anything less than frank about its operation.
Staff also feel confident that they can be open and frank about
the whole operation. At the present time this ethos is prevalent
within NATS and can be confirmed by SRG. The current NATS internal
safety systems together with its safety culture means that SRG
has to make little or no direct intervention.
Contrast this with the incidents recorded in
the aviation industry's Confidential Human Incident Reporting
Programme (CHIRP) reports. Commercial pressure is reported time
and time again as reasoning being incidents. A privatised air
traffic service will bring in considerations of profit, shareholder
interests and commercial pressures. At best this would reduce
the primacy of safety. At worst it will produce a conflict. Our
reasoning was summed up in a NATS internal document leaked to
the unions which stated:
"Our primary objective during the PPP is
to influence and protect the commercial and financial position
of NATS, and to maximise opportunity for management to deliver
value to its new shareholders (and, of course, to its customers)."
"There may also be identifiable relationships
and trade-offs between the outputs (ie safety and productivity)."
"In presenting this information externally
we must also be aware of the fact that we should know more about
what is actually achievable than the regulator, users, HMG and
its advisers, so there may be divergence between what we say and
what we think we will do."
This is a rather damning indictment of private
sector thinking even though it has been publicly disowned by NATS.
The full memo is available.
The reasoning is echoed in a letter to the Financial
Times (8 October 1999) in the aftermath of the Paddington
train tragedy. The author concludes:
"the management of the railways has shifted
perceptibility towards explicit bonus linked goals of train performance
and away from an absolute safety requirement."
This precisely sums up our fears, expressed
long before the Paddington tragedy.
Even those groups said to support the Government's
approach appear to have some reservations. Recently a consortium
of airlines, including BA and Virgin, was formed with the express
aim of making a bid for NATS. They did this on the grounds of
"safety and costs". If even supporters have these doubts
where does that leave the Government's statements on safety?
Our stance on the safety issue remains unequivocal.
Why take a risk with safety when there are several "no-risk"
options.
INVESTMENT
Much has been written and said about the need
for investment in NATS. We agree that much needed investment has
been delayed and deferred because of Treasury indecision. However
the new owners would pay some £500 million to buy the company
and require a further £500 million in the next few years.
Where then is the return for the private investor in a short time
scale? Lessons from Railtrack show that although a company CAN
invest it is by no means certain it WILL invest.
It is clear that the return will come from substantially
higher charges to users, the airlines, and ultimately the passenger.
The total investment required by NATS is £1
billion over 10 years (Government figures). The unions have suggested
that this investment can come through on IPOC or Trust or indeed
through the issue of bonds.
Privatisation is, in the long term, the most
expensive option to ensure investment. Other options would have
the benefit of not requiring a profit.
STAFF
In the response to the consultation document
para 2 it stated:
"With very few exceptions, NATS staff were
opposed to a private sector solution."
Consultation meetings with members have only
served to reinforce that view. Members are aware of the shares
to be made available to them but their major concern is safety.
These are professionals whose expertise keeps air traffic moving
safely and any government would be foolish to ignore their reaction.
The likely impact on staff is cutbacks in order
to cut costs and maximise profit. Of course that causes us concern
but the major pressure on unions at this point is simply the safety
issue.
ALTERNATIVE ARRANGEMENTS
The Committee has asked for alternative arrangements
to facilitate investment. We have already given three options:
(a) IPOC
An IPOC would allow access to sufficient capital
through both the public and private sectors—a genuine public,
private partnership. It would give a commercial structure of incentives
and disciplines, co-operating with Eurocontrol and European ATC
providers rather than competing with them. An IPOC would have
commercial freedom to develop the business through a hands-off
relationship with Government and access to capital.
The Government, as owner of an IPOC, would not
only have the "last resort" mechanisms to maintain its
interests and obligations, but on-going strategic control over
the business, to ensure its obligations are met and safety is
paramount.
Our reasoning for the choice is contained in
our submission to the government (Section 2).
(b) Trust
Again the Trust model would allow access to
capital through the private sector. The Trust would initially
be financed by loans from the private sector which would be serviced
from current revenue. This is not unlike the current system for
NATS which provides for an eight per cent return on nominal capital
to the Treasury.
The Government would realise the full value
of the company if this option is accepted. Under current estimates
this would be £1 billion.
Further investment would be financed by further
loans from the private sector and again serviced from revenue.
Yet again the absence of the profit motive makes this a cheaper
option. Our reasoning is contained in Section 6 of our submission
to Government.
(c) Bonds
If the Government wishes to raise further finance
this can be done through a bond issue. The bonds can be medium
or long term returns or a mixture. The bond market in Britain
is currently underused and should prove a ready source of finance
with the servicing from current receipts.
OTHER ISSUES
A number of previous privatisations have started
as partial sell offs (eg British Telecom).
One of the main goals of the EU and Eurocontrol
is "One Sky for Europe". Co-operation and harmonisation
in Europe will be expensive and will need Government-led initiatives.
How will it be ensured that a private company will have both commitment
and the will to invest.
The Government has relied heavily on the fact
that they will hold a "Golden Share". Given the fact
that this "Golden Share" has never been used in previous
privatisations and appears to be inconsistent with EC Rules, then
it can be discounted as having any controlling interest in the
new NATS.
The Government would have a 49 per cent stake
and intends to "retain its financial investment for the foreseeable
future" (Response to Consultation Paper para 15(I)). However
this shareholding will be diluted further by ensuring "a
sufficient part of its own shareholding is non-voting". In
other words the control of the company will be in private hands.
The Government has persuaded Eurocontrol to
change its charging regime and allow ATC providers to move away
from "cost plus" changing to profit based charging.
This has been done to "provide the framework for a profit
making private sector company" to take over NATS (Response
to Consultation para 16).
Military relationship—the highly successful,
co-operative joint formula (between military and civil air traffic
control) is already being divided because of the requirement to
define and change. This area needs to be explored further (see
Section 7 of our submission).
Regulators will find it more difficult to recruit
suitably qualified staff from NATS with the separation of the
companies. We shall need to examine some positive measures to
ensure that staff of the right calibre will join SRG.
CONCLUSION
NATS Trades Unions fundamentally oppose the
current privatisation proposals. We have sound reasons as outlined
above.
There is "no-risk" alternatives available
to the Government which could unite all concerned in a genuine
partnership. We have outlined some options above and deal with
them in more detail in our submission.
Any of these options would deliver investment
without recourse to the PSBR for NATS. They would not have the
safety risks inherent in the Government's privatisation proposal.
Using any of the options would bring together NATS staff, senior
management, unions, pilots and the aviation industry more generally.
It would do so in a positive way.
The Government proposals do not do this—which
should, in itself, be a cause for concern.
October 1999
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