Chairman
51. Do you want to take a minute to take advice?
(Ms Lomax) Can we write to you?1 We think it is flights that the data are showing here. If we failed to pursue the point sufficiently vigorously with the NAO at the time when we should have done, I apologise to the Committee. We need to beg the Committee's indulgence to follow this up afterwards. The general point I think I can make is that downside scenarios were tested. There was extensive testing by the bidders, by our advisers and for the benefit not just of the Department and the Treasury but also credit committees of four banks. This was a very thorough exercise. The issue that is worth thinking about is that, in the circumstances of May 2001, the world looked a safer place. The expectations for traffic growth were different. Even if you had said then there could be an absolutely catastrophic development of the sort that September 11 precipitated, how much weight would you have put on that in deciding what was an acceptable price and an acceptable financial structure for NATS?
Mr Rendel: Chairman, I understand what the witness is saying but this is a serious matter. We have come up, apparently, with a disagreement between the NAO and the witness as to whether this report is accurate or not. It does make a difference to my further questioning because clearly if this report is accurate and what the witness was saying earlier in answer to you was not accurate, if she is now correcting what she is saying about this and the NAO have made a mistake, obviously that makes a difference to any further lines of questioning. We may wish to discuss afterwards as to whether we need to recall this witness at a later stage to answer these points once she has been able to hammer out with the NAO what is the truth of this matter.
Mr Williams: Or recall the Permanent Secretary who was there at the time.
Mr Rendel
52. I am a little unhappy that this should be answered by a note.
(Mr Burr) Whatever the basis of these figures, the point still remains that the scenarios in blue did not exhibit the patterns of the scenarios in grey.
53. I entirely take the point there but it seems to me that what the witness is saying is that the blue scenarios were calculated on a different basis from the grey scenarios. Perhaps we can go on with some other questions. To what extent do you feel that the privatisation transferred any risk of further problems from the public to the private sector or was it never intended to do that at all?
(Ms Lomax) The risk has clearly been transferred in the sense that, had NATS remained in the public sector, there would have been a choice of two possibilities to respond to the events of September 11. One, the Government could have picked up the whole tab. Two, the costs could have been passed straight on to users. The whole business about the composite solution is an attempt to find a way of spreading the adjustment across a wider collection of people.
54. May I ask you to turn to page 26, figure 14, because it indicates that the difference between the Airline Group and the Nimbus Group came out better in terms of Nimbus on three of the different criteria and better in terms of the Airline Group on two, of which one was the net sales proceeds. To what extent was it net sales proceeds that made the difference to the choice? Was that really your main criterion?
(Ms Lomax) No. The choice was made in the round. There was a small difference between the Airline Group and Nimbus at the end but it was only a few million. The Nimbus deal was different because Serco wanted to put their existing-
55. What was the difference of a few million?
(Ms Lomax) By the time the Airline Group's bid had been adjusted down, the difference in terms of the net sales proceeds between the Airline Group and Nimbus was quite small. The Nimbus Group also involved a great deal of debt for NATS, by the way, but it was different in some other respects.
56. Better in some respects?
(Ms Lomax) Yes, and also worse in some respects.
57. Including financial credibility and capacity, which sounds like exactly why the NATS bid has gone wrong.
(Ms Lomax) There were differences across all the criteria. For example, on certainty, clarity and conditionality, Nimbus was rated acceptable to poor.
58. Am I right in saying that effectively what happened was that the Airline Group, having been made the prime bidder, was able to gazump the government downwards at the last minute, when it was rather late to change your mind, and yet you suddenly discovered that they were offering a lower price for your goods than they had previously offered you?
(Ms Lomax) Nimbus did volunteer that they did not want to change their bid. This was against the background of foot and mouth and the impact that that was having on traffic forecasts.
59. You were gazumped?
(Ms Lomax) We prudently took account of what was happening in the outside world and I think we would have been criticised if we had not. Traffic forecasts were coming down. The questioning so far has suggested that we were so greedy for proceeds that we did not look hard to see whether it was a safe deal. We did take account of the fact that the world was changing and that the world economy was slowing, that foot and mouth was hitting the North Atlantic trade quite severely and that those were good reasons for allowing the Airline Group to revise its forecast down. Even so, it remained higher than the Nimbus Group and the Nimbus Group voluntarily decided they did not want to adjust their bid.
Chairman
60. That was rather a frustrating session because you signed off this report. When Permanent Secretaries sign off a report, we assume the departments have agreed the report. Either the Department signed up to this report and every fact, including the figures, or it has not. Otherwise, we get into a ridiculous situation. Are we basing our questions on inaccurate reports? Colleagues are frustrated. Personally, I am in the dark now. I asked you a simple question at the beginning of this meeting: did you take account of possible downturns? You said, "We could not possibly have foreseen there being a downturn after September 11." That is a fair enough answer. As I understood it, you said to me, "Yes, we did take account of what happened in the Gulf War and the oil shocks of 1973 and 1972." There now seems some doubt about this. I do not know about colleagues but I, for one, am confused.
(Ms Lomax) Could I have a shot at explaining? First of all, I apologise for appearing to criticise anything in the report at this stage. I should not have done it. It is out of order. The truth of the matter is that the amount of technical testing for a bid like this is enormous. The NAO report may not be inaccurate so much as over-simplified. I stick completely to what I said to you at the beginning, which was that the impact of September 11 on the measure of airline traffic that matters to NATS' income was quite unprecedented. For the purposes of considering the present situation, that is a very important point. With the ink scarcely dry on the contract, with the PPP only seven weeks old, NATS was hit by a quite unprecedented shock.
Chairman: I am not sure that answers my question. I have made my point. You have promised us a note.2
do not really like dealing with notes because it is much better to resolve these things. Maybe, before the end of the meeting, we will get to the bottom of it. If we have not, I will ask you some more questions.
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1 Ev 26-28.
2 Ev 26-28.