1. The Transport Department and the Treasury, saw a PPP as the best way to develop NATS' business and to meet the Government's main objectives:
• To at least maintain standards of safety and national security;
• To obtain an injection of private sector money and skills;
• To develop NATS' business with greater freedom to invest outside normal public sector spending constraints; and
• To safeguard the interests of the taxpayer.3
2. The Government rejected the option of a not-for-profit corporation, as pioneered since 1996 by NavCanada, NATS' Canadian equivalent. This model was widely cited as an alternative to the PPP during the passage of enabling legislation through Parliament in 2000. The Department believed at the time that the particular structure of NavCanada would not result in NATS' expenditure being classified to the private sector and would not therefore provide the freedom to invest that was required. The Department was also concerned that without the profit motive the model lacked the usual spurs to efficiency.4
3. The Department and the Treasury considered that the PPP was the best way of improving the efficiency of NATS, which has the highest charges in Europe. More of the Company's resources need to be put into frontline operations. At the moment, just fewer than 2,000 of its 5,800 staff are air traffic controllers, and only 1,400 of those are active, the others being in training. The Department also considered that new investors would look at whether NATS brought projects in on time and budget and got benefits from them, areas where the Company had not been successful in the past. NATS is now accountable for its performance in new ways: to the capital markets for the money it seeks, to its shareholders, to the Economic Regulator and to a stakeholder council. Under this scrutiny it has spent a lot of time improving its procurement arrangements, and has brought human resources and facilities management into single organisations rather than having them scattered through the business.5
4. NavCanada too has demonstrated its ability to improve upon the levels of efficiency it achieved under public ownership. The Department conceded that the difference between the PPP and the not for profit model is not as great as had been thought. Its mind was not closed on these matters. But much time, trouble, Parliamentary time and money has been taken to construct the PPP and it would be a serious matter to abandon it now in favour of another model.6
5. The Department still saw very significant benefits in the PPP structure. For example, every other air traffic control body in Europe and North America has responded to the downturn since September 11th by raising prices, sometimes by very significant amounts. The average increase in Europe last January was 12%. These bodies are not subject to economic regulation of the type that is part of the NATS PPP.7
6. The PPP operates within the standard UK model of utility regulation, the RPI-X price regime. Under this method, regulators set price or revenue limits every four or five years, which they judge will enable the companies to deliver the services expected of them. This approach ensures that prices change in a predictable way and usually less than retail price inflation. Most experience in using RPI-X has been in domestic utilities, though the Civil Aviation Authority also uses it in regulating charges to airlines at UK airports.8
7. There are also other difficulties with the NATS price regime. It reduces NATS' income when airlines move to smaller aircraft, even though the cost of providing control is not influenced by size. To increase its charges above the limits set by the price cap, NATS must apply formally to the Civil Aviation Authority, await the outcome of a process of consultation which will take several months, and then await the next annual "window" of opportunity in which prices are changed across Europe. The Regulator has now proposed a major modification to the price cap, so that NATS will only bear up to half of the loss of income from unexpected reductions in the volume of business.9
_____________________________________________________________________________________________________
3 C&AG's Report, summary para 2
4 ibid, para 1.7
6 C&AG's Report, para 1.8 and Appendix 3; Qq 2-3, 61-64, 71
9 ibid, paras 3.31- 3.32; Civil Aviation Authority: Decision under Section 11 of the Transport Act 2000, NATS en route charges control, 20 December 2002