Chairman
1. Good afternoon, ladies and gentlemen. Today we have a very important and serious subject. We are discussing the National Air Traffic Services which have been undertaken by a Public Private Partnership and there is considerable interest in this issue. We are delighted to welcome Rachel Lomax who has in the past been before us running a different department, but we congratulate you on taking on Transport earlier this year. Could you introduce your colleagues?
(Ms Lomax) Mr Richard Everitt, the chief executive of NATS, is on my right and on my left is Mr Ian McBrayne from the Department, who is the head of the Civil Aviation Division.
2. You have adopted a not for profit company solution for Network Rail or your Department has. Why did you object to it for NATS
? (Ms Lomax) This was discussed at great length when the Transport Bill was going through the House and I think the Treasury sent a memorandum to the Transport Select Committee. At the time, the Government felt that a PPP would provide a stronger commercial framework and would promote more efficiency than the untried and untested not for profits model which had only very recently been adopted in Canada. With the benefit of hindsight and given the strategic partner we have ended up with, the difference between the PPP and the not for profit model is perhaps not as great as people thought at the time.
3. If you were making this decision now, a not for profit company might have been more of a runner?
(Ms Lomax) The arguments would have looked a bit more finely balanced, yes.
4. The Treasury were raising 500 million from this sale. In the event, you raised 800 million. This was raised mainly by debt which had to be repaid by NATS
itself. Did the desire to take this much money out take priority over the long term viability of the deal? (Ms Lomax) No. On the minor point first, the Department had no benefit at all from the receipts being so far in excess of the 500 million that had been taken into account at the time of the Comprehensive Spending Review. Naturally, the Department was concerned to get value for money for the taxpayer and was mindful of the points which have been made in this Committee about the need to do that. The major objectives of the PPP were to provide a viable way forward for NATS and to ensure that the concerns about safety, security and public accountability that had been expressed in Parliament were adequately addressed.
5. The airlines in the end put in very little money. £60 million?
(Ms Lomax) It was a highly leveraged structure that emerged from the PPP negotiations. It would have been the same if it had been any of the other bidders at that stage. This was pretty much in line with the sort of structure for regulated utilities that other sectors were adopting at that time. The water sector, for example, followed the lead of Glas Cymru. That very highly leveraged structure was something that was popular with other utilities.
6. In the event, we know that the whole thing has turned out very badly because of a sustained downturn in traffic. Why did you not test the robustness of the Airline Group's financial structure against a possible downturn? After all, there had been downturns in the past.
(Ms Lomax) There has been nothing on the scale and the severity of the downturn that followed 11 September. In terms of its impact on NATS' business, which is very dependent on large, long distance aircraft to generate income, in terms of chargeable service units, this downturn has been way in excess of anything that has been seen before. For example, the downturn following the Gulf War on a year on year basis in chargeable service units was 1%. For the last 12 months, it has been 11% .
7. You could have coped with the downturn you had after the Gulf War. That was the scenario you were looking at, was it?
(Ms Lomax) Yes.
8. You did look at these scenarios, did you?
(Ms Lomax) It was very extensively stress tested. Every scenario that people could think of to throw at these bids, was worked up. There were compulsory ones which our advisers suggested. Each of the bidders devised their own and we also did some in-house. That is not to say that every possible scenario that anyone could ever think of was tested because life is not like that. The honest truth is that, in the circumstances of the time, the world looked a less risky place than it does today.
9. Your advisers, CSFB, were giving you this useful advice about a possible downturn? You were paying them a lot of money, were you not?
(Ms Lomax) Yes, and they did a very great deal of work for it. Every year since data on chargeable service units has been collected, since 1983, there has been growth in that measure, which is of particular relevance to NATS, with the exception of the Gulf War when, as I mentioned, there was a relatively small downturn. It had been a very strong, consistent picture in upward growth in that market.
10. Your "partner", the Airline Group, has refused to put any more money in to produce more equity for NATS
. It has been left to you to bail them out with £60 million of temporary finance. You are letting the airlines off very lightly, are you not? If there had not been this downturn, they would have got a profit. Now that there is a massive loss and we are in this appalling mess, they are walking away from it, are they not? (Ms Lomax) September 11 has hit the aviation sector very hard, including the Airline Group. It is a question of what they can afford to do. The taxpayer is not picking up the whole consequence.