Memorandum by the Department of the Environment,
Transport and the Regions (PPP 06)
INQUIRY INTO THE PROPOSED PPP FOR NATS
INTRODUCTION
1. The Committee is to conduct an Inquiry
into the proposed public private partnership (PPP) for National
Air Traffic Services Ltd (NATS). This memorandum describes the
background to the PPP and the arrangements which are currently
proposed.
BACKGROUND
2. The Government announced on 11 June 1998
that its preferred option for NATS was a public private partnership
comprising the sale of 46 per cent of NATS shares to private investors.
Up to five per cent would be available to employees, and 49 per
cent of shares would remain in public ownership. The Government
consulted on its proposal between late October 1998 and 31 January
1999, and announced its intention to proceed with PPP on 27 July
1999. The response to the views expressed in the public consultation
was published on the same date.
3. Establishing NATS as a PPP will itself
effect a complete separation between aviation regulation and service
provision, thereby meeting concerns expressed over a number of
years (by the Select Committee, the former Monopolies and Mergers
Commission, and air users) that there was an inherent conflict
of interest in the CAA's position as both regulator and air traffic
services provider. The Government proposals, however, will achieve
much more than that: NATS is presently facing challenges in a
number of areas. It needs to carry out a substantial investment
programme of around £1 billion over 10 years to maintain
and improve service. This includes commissioning the New En Route
Centre at Swanwick and delivering the New Scottish Centre. It
needs to strengthen its project management skills if this investment
programme is to be delivered effectively. There are also opportunities
to expand into the international market for ATC provision and
advice, where NATS has the operational and safety expertise to
become a major player.
4. To meet these challenges, the Government
intends to set up a New Partnership Company through the introduction
of a strategic partner into NATS so as to secure a genuine partnership
between the public and private sectors which will deliver a safe,
modern and efficient air traffic control system for the future.
The partnership will:
— meet NATS' business needs by giving
NATS access to private sector capital for investment and overseas
expansion, improving NATS' project management capability for major
capital projects; and providing NATS' with commercial freedom
to develop its business domestically and abroad;
— safeguard the interests of users
by providing the right structure of incentives and disciplines
to maximise NATS' performance and efficiency, including economic
regulation, and maximising competition and transparency of NATS
operations;
— safeguard the public interest, ensuring
best value for the taxpayer in the sale process, and yielding
proceeds for reinvestment in key programmes;
— protect the interests of employees
by ensuring that employees get a fair deal on their employment
terms and pension arrangements, and giving employees the opportunity
to acquire an interest in NATS.
5. The strategic partner will have operational
control, through the voting arrangements, but the Government will
retain sufficient rights to ensure that it can protect the taxpayer's
financial interests as a minority investor in NATS, and that the
public interest is safeguarded.
Questions posed by the Committee:
a. What arrangements are currently proposed
under the PPP for NATS, with particular reference to management,
finance and accountability?
(a) Management
6. The Government intends to retain its
financial investment in NATS and therefore wishes, as an investor,
to put in place commercial safeguards to protect the value of
its—and the taxpayer's—equity stake in NATS. These
safeguards will be enshrined in a Shareholders' Agreement and
will include mechanisms for Government to appoint a minority of
tenured, non-executive "Partnership Directors" to the
Board of NATS.
7. The NATS Board will be responsible for
ensuring that the company operates within accepted corporate governance
practice. Some decisions, such as raising the new equity capital
and the approval of the annual business plan, will require unanimous
Board approval. This will effectively give the Government-appointed
Partnership Directors veto rights over those items.
8. There will be a new Stakeholder Council
which will draw together the stakeholders in the partnership and
provide a forum for full and open consultation on the policy and
strategies of the company in addressing the issues and challenges
it faces. The Government envisages that its members will be DETR,
the strategic partner, NATS management, air users, airport operators,
MoD; staff and passenger representatives.
9. It is expected that NATS will remain
a single entity but there will be some internal restructuring
to ensure that monopoly activities are effectively ringfenced
to that there is no unfair cross subsidy between the constituent
parts of the "NATS group". A separate subsidiary will
carry out the monopoly activities, and will be prevented from
undertaking any other significant business which would be capable
of being provided on a competitive basis.
(b) Finance
10. The PPP will free NATS' investment and
management decisions from public sector spending control and will
enable the substantial investment programme to proceed smoothly.
It will also provide the right structure of incentives and disciplines
to maximise efficiency. The introduction of the strategic partner
will enable NATS to make best use of private capital and private
sector expertise in financial as well as managerial matters, and
the Government will take into account the financial credibility
and records of bidders in selecting the strategic partner.
11. The Partnership Directors on the Board
of NATS will have explicit guidance as to their role in protecting
the Government's interests as an investor but will otherwise be
free to exercise their own commercial judgement. There will also
be a requirement for Board unanimity on the specific areas necessary
for protecting the taxpayer's financial interests, such as the
approval of the annual business plan and the policy for dividends
or reinvestment.
12. The Shareholders' Agreement will protect
the Government's rights in certain key areas such as the issue
of new shares and the company's dividend policy. Initially dividends
are likely to be low because of the need for high levels of investment.
The Government will also hold a golden share, which will contain
measures to safeguard the public interest.
13. NATS' investment will be financed through
a combination of operating profits, borrowing and the capital
injected by the strategic partner. Charges for monopoly services
will be regulated under an RPI-X regime which will set the maximum
price levels and which will be periodically reviewed by the CAA
in consulation with NATS and its customers. This mechanism will
encourage NATS to exert downward pressure on its costs, while
the safety and economic regulatory regime ensure that safety and
service standards are maintained.
(c) Accountability
14. The strategic partner will be subject
to a rigorous and competitive selection process to ensure that
it brings the required management capability, commitment and strategic
rationale to the partnership. The Government will also ensure
that there are no significant conflicts of interest, and that
the strategic partner fully shares the Government's and NAT's
commitment to maintaining and building upon the UK's high standard
of aviation safety. Similar restrictions would apply to any subsequent
owner, and there will be provisions in the Shareholders' Agreement
enabling the Government to veto the transfer or selling on of
substantial shareholdings to anyone who does not meet these requirements.
This will help protect the public interest in the New Partnership
Company beyond the point of sale.
15. The Government will agree a mission
statement with the partnership company which will set out the
ambit within which the company will operate and its business plan.
The statement will be incorporated into the Shareholder's Agreement
so as to guarantee that the company retains commercial, operational
and management control while ensuring that the Government's interest
as an investor and that the public interest are protected. The
Government will also remain accountable to Parliament for its
stake in the company.
16. The NATS New Partnership Company will
be regulated by the CAA, which is itself accountable to Parliament
through the Department of the Environment, Transport and the Regions.
A new economic regulatory regime will ensure that there is no
abuse of NATS' monopoly position, and that the interests of air
users—for example, the quality, cost, continuity and availability
of services—are protected. NATS will be required to hold
an operating licence, enforced by the CAA, which will incude:
— the licensee's general obligations;
— requirements aimed at assuring the
regulator of the adequacy of the licensee's financial and operational
resources;
— an obligation to collaborate with
the Secretary of State for Defence so as to maintain joint and
integrated civil/military provision of air traffic services;
— measures to prevent distortions of
competition such as cross subsidy and discrimination; and
— obligations relating to the establishment
of a transparent process, including user consultation, for business
and investment planning and for establishing future service levels.
17. The CASA will be given concurrent powers
with the Director General of Fair Trading to take action against
monopoly situations, anti-competitive behaviour, and the abuse
of a dominant position under the general competition law.
b. What implications will the PPP as currently
proposed have for safety standards, investment and staff?
(a) Safety Standards
18. The Government's overriding priority
is to maintain, and improve if necessary, the UK's aviation safety
standards. In order, therefore, to ensure regulatory stability
at a time of major change to air traffic services provision, the
Government has decided not to alter the safety regulatory regime
at present. NATS will remain subject to regulation by the CAA's
Safety Regulation Group, which already regulates it, and the rest
of UK aviation, to a very high standard. The CAA's safety regulatory
powers are wide-ranging, underpinned by the Civil Aviation Act
1982, the Air Navigation (No 2) Order 1995, and the Rules of the
Air, and the Safety Regulation Group is rightly highly-regarded
world-wide—including by international aviation organisations—as
an effective and professional regulator.
19. As discussed above, the PPP will ensure
clear and proper separation between the service provider and regulator,
thereby improving the transparency and autonomy of the safety
regulatory regime, and the Government is determined that there
will be no diminution either of safety standards or of the safety
regulator's powers to enforce them. While concern was expressed
in the consultation over the safety implications of private sector
status for NATS, the Government does not agree that this, in itself,
is detrimental to safety.
20. Depending on the outcome of the Transport
Safety Review, the institutional arrangements for aviation safety
may need to be revised later. Continuing international developments
in safety regulation will also need to be taken into consideration
in due course.
(b) Investment
21. The investment programme over the next
10 years is substantial at an estimated £1 billion and is
dominated by the completion of the New En Route Centre at Swanwick
and its supporting projects; developing the New Scottish Centre
and replacing the Oceanic Flight Data Processing System at Prestwick;
further development of software systems to provide increased computer
assistance to controllers; and the continuing programme to update
radar, radio stations and other parts of the infrastructure.
(c) Staff
22. The Government has recognised the important
concerns expressed by both existing and retired members of staff
about their pensions, and these concerns have been borne in mind
in the development of its proposals. NATS staff are currently
members of the Civil Aviation Authority Pension Scheme (CAAPS).
The CAA itself is the principal employer, with NATS participating
in the scheme as an associated employer, and Highlands and Islands
Airports Ltd (HIAL) as a non-associated employer.
23. The Government has proposed to the CAAPS
Trustees that all NATS staff who are in employment with the company
at the time the PPP is established should be entitled to remain
in CAAPS. To comply with Inland Revenue requirements, the company
will participate in the scheme as a non-associated employer, as
HIAL does already. CAAPS will remain in the public sector but
will be restructured internally to clearly separate that part
of the fund attributable to NATS from the rest of the fund. In
accordance with the undertaking given in the consultation document,
the position of existing pensioners will remain unchanged. They
will continue to belong to CAAPS, and to be entitled to receive
the benefits that the scheme offers. Existing arrangements for
negotiation between management and the Trade Unions on terms and
conditions of service, including pensions, will continue.
24. These arrangements will not necessarily
apply to employees taken on by the New Partnership Company after
it is established. Their pension arrangements will be determined
on the basis of the usual negotiations between management, employees
and their representatives.
25. The Government intends to make up to
a 5 per cent shareholding in the PPP available to employees and
proposes that there will be an equal amount of shares gifted to
all employees, with an opportunity to purchase further shares
in the company. Any such share offers would be open to all existing
NATS staff at the date of the strategic partner's investment,
regardless of rank or status within the organisation. The Government
is currently considering the most appropriate share scheme structure
for delivering these objectives; this matter will also be the
subject of detailed discussion with potential strategic partners
during the PPP process before a final decision is made.
c. What alternative future arrangements might
be made to facilitate investment, and to make NATS independent
of the CAA, with particular reference to the changes proposed
to the ownership of the Post Office?
26. The Government considered the Independent
Publicly Owned Company (IPOC) model, and a range of other options,
both in deciding on its preferred option in the first place and
in analysing the responses to the public consultation. There are
many similarities between the IPOC model and the New Partnership
Company, and the Government believes that the New Partnership
Company approach offers all the benefits claimed for the (untried)
IPOC model, plus some additional benefits.
27. The New Partnership Company secures
access to private capital; separates regulation from operations,
introduces economic regulation; involves all stakeholders in the
company's future; provides for Government to appoint Partnership
Directors; gives Government—and the taxpayer—annual
dividends; and provides on-going assurance that the company is
operating properly in the national interest. The IPOC model also
claims to deliver these ends, but the New Partnership Company
also:
— removes any future risk of investment
counting in the public accounts and therefore becoming subject
to Government controls;
— enables private sector investment,
project and commercial management expertise to be introduced;
— establishes genuine private sector
efficiency drivers at the outset;
— gives the company commercial freedom
to extend its operations world-wide, while minimising the risk
to the taxpayer of possible financial failure; and
— provides proceeds for use in other
transport projects.
28. The Government does 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. NATS' investment involves
large, complex, state of the art systems, and its successful delivery
requires project management skills and expertise which are not
easily found in the public sector. The scale of these projects,
in relation to the size of NATS business, is quite different from
the situation in the Post Office. NATS does not have a good track
record in delivering these large investment projects within budget
and within a timetable. On the other hand, the Post Office's investment
has been generally less complex, and it has had a good track record
in delivering it.
29. The Post Office is exposed to competitive
pressures from the market, since a significant part of its business
operates in an increasingly competitive environment. This is not
the case with NATS—a large part of its business (en route
ATC) is a natural monopoly and it is not exposed to the competitive
disciplines of the private sector. By bringing the private sector
into a partnership, together with effective regulation, the PPP
can bring greater efficiency to NATS monopoly operations.
October 1999
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