Examination of Witnesses (Questions 120-139)
SIR ROY MCNULTY AND MR DOUG ANDREW
WEDNESDAY 1 MAY 2002
120. You did set out in your second letter not only objections—or perhaps that is putting it too highly—minor reservations about the suggestions that the government had made and you said, "Failure in this would be damaging to future attempts by government to undertake other PPP deals". Then you set out how the currently proposed capital structure jeopardises the PPP objectives. You set out NATS's views on a more appropriate capital structure. You said, in effect, that no company should bear—I paraphrase now because it took you two pages to say this—a level of debt; that the proposed opening debt is 129 per cent of the opening RAB. You said that was not in the interests. You say, "Under current proposals, NATS's debt would be 350 million higher and it would be very thinly capitalised." Did you receive adequate, sufficient answers to the questions that you raised, given that you after all have a very specific responsibility for ensuring that this service not only works adequately but works very efficiently?
(Sir Roy McNulty) The response was, firstly, that they did adjust the structure. The figures you have quoted in the end were amended by the fact that the debt was £100 million or so lower than previously envisaged.
121. Which would bring the percentages down to what?
(Sir Roy McNulty) It brought the percentage down to just over 100 per cent, but it was still high by any standards. Secondly, the government and their advisers had concluded that that structure was satisfactory from their point of view.
Chris Grayling
122. The obvious concern which results from all this, given that over the few months since you had that exchange of letters, is that NATS's financial position has been given a severe kicking by the events of 11 September. It is having to look to refinance the business in order to keep itself on the financial straight and narrow. It leaves two huge questions. One is the possibility of a repeat event, a second shock of some sort and the ability of the current financial structure to withstand that. The second is the administration structure for NATS in the worst case is very similar to that set up for Railtrack. The concern would be, if this does not work out financially, given the importance of air traffic control services to the country, what is the fallback position? Would the fallback position operate effectively? Would we see in the skies the kind of events we have had over the past few months with the railways?
(Sir Roy McNulty) That all remains to be seen. We do not have an absolute answer today. The problem is there. We all understand the problem fairly well. We are looking at what, if anything, we can do as regulators. The NATS management and board are looking at the question of capital raising and a much more sustainable financial structure has got to be arrived at.
123. Are you confident that what is there at the moment, what is being discussed, is now able to withstand a major shock? Last summer you said that the business plan could not withstand a major shock.
(Sir Roy McNulty) What is there today does not satisfy the criterion you are describing. I remain hopeful that over this summer into autumn a set of conclusions will be arrived at which gives NATS the sustainable financial structure for the future that it needs and arguably did not have as of last summer.
Chairman
124. You would make plain your view of the new equity bid when you are talking about the financing in the structure of the company?
(Sir Roy McNulty) I would expect so. I am encouraged by your remarks. I will endeavour to retain the clarity which you have found in that letter.
125. You will also tell us, will you not, Sir Roy?
(Sir Roy McNulty) Absolutely.
Mr Donohoe
126. You are the safety regulator of the whole of the NATS package. In these circumstances, are you satisfied that the reduction in the staffing levels that we are talking about will maintain the safety standards?
(Sir Roy McNulty) We are satisfied so far. NATS, like a lot of the aviation industry, is going through restructuring, not least in the light of the events of last September. We are particularly conscious of the need to keep a very close surveillance on changes that companies make, both in manpower numbers, ways of working and so on. So far, we are satisfied with NATS. I have been particularly asked by the Minister that during this year we submit a report to the Minister giving our conclusions on this and giving an assessment of how the NATS safety operation has worked in the first 12 months. That we will be doing, but so far so good on that front. We would not tolerate it any other way.
127. You are not concerned at all about the 21 per cent reduction in staff?
(Sir Roy McNulty) In support staff?
128. In staff overall.
(Sir Roy McNulty) I am not aware of that figure of 21 per cent overall. That is not the case to date. There was announced a reduction of just over 20 per cent in support and management staff and the changes that we have seen so far are acceptable to us.
129. You would accept that, before this change of structure, NATS was being run inefficiently?
(Sir Roy McNulty) It was my view, and I think I said as much to this Committee at a previous hearing, that NATS was very administrative heavy. It had a lot of administrative back-up and we began to understand that better by bench marking against other similar service providers.
Chairman
130. It does not seem to be the administrative, back-up staff that are going, does it? The ones that we have just heard about from the previous witnesses do not come in that category, do they?
(Sir Roy McNulty) The people who have been going in recent months are primarily in that category. Richard Everitt did mention a reduction in engineering staff over a period as the centres are rationalised and that obviously we would look at particularly carefully, but we have not in any way reduced the standards that we apply to NATS. We are applying, if anything, more attention to it than before and to date we are satisfied.
Mr Donohoe
131. How do you examine and police that?
(Sir Roy McNulty) We have people located in each of the centres. We have standards established and we review the operation in practice of how the whole NATS safety management system is being operated.
132. Part of the process that you have is to set the charges and they have made application to you to increase these charges. One of the premises that they use is that airspace in the UK for some reason is more complex than in any other part of the world. Do you take that into account when you are considering like for like in terms of cost to the airlines of the charges that you will eventually set?
(Mr Andrew) To the extent to which we are relying on bench marking with comparable air traffic control service providers, we try to allow for differences in complexity. A number of the European comparators have equally quite complex airspace. For example, in the Ruhr Valley in Germany. Some of the Paris airspace is very complex also. Complexity is explicitly allowed for but also we tend to look at NATS's own costs in terms of longer term setting price caps.
Chairman
133. NATS is very dependent on one route group area is it not, the north Atlantic?
(Mr Andrew) Yes, it does get a high proportion of its revenue, perhaps out of line with its costs, from the north Atlantic over flights.
134. Do you propose any regulatory intervention to change that?
(Mr Andrew) We have always been encouraging NATS to look at a more efficient and cost reflective pricing structure. This is a European Treaty issue, the Eurocontrol Treaty, so it is not entirely within the UK or NATS's domain.
135. Would that increase the costs to other short haul carriers?
(Mr Andrew) That would be one potential reconfiguration of the charges, reducing the charges to the over flights and giving more to the more intensive users of the complex terminal airspace, but that is just one option.
136. Mr Andrew, does anybody understand the way that you do your pricing charges?
(Mr Andrew) I hope they do.
Andrew Bennett: You could not explain to me simply how they were done, could you?
Chairman
137. When this unkind person said there were only two people who understood it—they were both economists and one they implied was dead—that was unfair, was it?
(Mr Andrew) The charging condition itself and the formula are very complex but there are only two people who probably understand them. There probably only need to be two people. In terms of the policy used to set the price cap itself, there are standard UK regulatory policies. We publish the documents in draft and in final form. We have extensive interaction with the key participants.
138. You talk to them but it is not true then that they are so complicated and so obscure they bear very little relationship to reality? That is an unfair charge?
(Sir Roy McNulty) On a good day, I understand it.
Mr Donohoe
139. Is this a good day?
(Sir Roy McNulty) This is one of the better days.
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