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National Audit Office report: The Public Private Partnership for National Air Traffic Services Ltd

The Public Private Partnership for National Air Traffic Services Ltd

"The deal has been set up well to provide safety and accountability. But the financial position of the company will need strengthening by the parties involved to enable it to make further investment in air traffic control, one of the Government’s main objectives for the Partnership."

"The deal has been set up well to provide safety and accountability. But the financial position of the company will need strengthening by the parties involved to enable it to make further investment in air traffic control, one of the Government’s main objectives for the Partnership."

Sir John

 

Sir John Bourn, head of the National Audit Office, reported today that the public private partnership for NATS contains many positive elements. But the financial position of the Company will need strengthening to enable it to make further vital investment to expand the capacity of Air Traffic Control.

In its study of the PPP for NATS, the NAO found that the strengths of the PPP include provision for continuing high standards of safety and for national security, and also for accountability to Government and the public interest. There are also safeguards to prevent NATS discriminating in favour of its shareholders. And the taxpayer raised some £800 million from the sale of a 46 per cent stake in NATS to the Airline Group, a consortium of seven UK-based airlines.

But the high proceeds were partly achieved by increasing the level of NATS’ bank debt. NATS’ new financial structure, with increased indebtedness to banks and comparatively little equity from investors, makes the organisation vulnerable to downturns in traffic, such as that which followed September 11th 2001. The Department and their advisers had decided, mainly on the basis of financial projections that assumed constant growth in NATS’ traffic and income, that the financial structure of the PPP would be sufficiently robust to cope with short-term reductions in traffic levels. The down-turn following September 11th, however, has been so severe that there is still a risk that NATS will not be able to fund and deliver its investment plan. Investment is essential to cope with future growth in air traffic, and thereby prevent increasing delays to flights.

It would have been impossible for the Department to have predicted the events of September 11th and the effects on air traffic. Nevertheless, there have been other significant downturns of traffic in the past 30 years, which were not modelled by the Department or its advisers when testing the proposed financial structure of NATS.

In its present form NATS is still vulnerable to further traffic downturns. Its prices are capped by its independent economic regulator, the Civil Aviation Authority. Because of the severe downturn in air traffic, NATS has been inhibited from using its long term loans by the terms of this borrowing, and its ability to invest is therefore severely restricted. NATS is now trying to bring an additional equity partner into the PPP, and if it is successful, it will be much better placed to survive future shocks and to drawdown on its long-term loans for investment. But strengthening the position of the company will require positive and complementary responses from many parties, including investors, banks and the independent economic regulator.

 

Publication details:

ISBN: 0102917450 [Buy a hard copy of this report from TSO]

HC: 1096 2001-2002

Published date: July 24, 2002