131. Can you tell me, against all of those criteria you have just suggested in relation to efficiency how each person's performance is measured against those?
(Mr Everitt) Yes. We now have a bonus scheme for part of our senior management. They are rated in a number of areas, the overall safety performance of the business is number one, quite clearly. They have personal targets. We have financial targets in at least three of the four criteria that we use. Each year we assess their performance against their individual performance and obviously we assess where we are in relation to the overall group performance and then appropriate bonuses are determined. There will not be a single bonus for everybody or a single percentage for everybody, it will range according to how people perform.
132. Is it possible that the organisation could be performing in financial terms badly but people could still be gaining additional rewards through the bonus scheme?
(Mr Everitt) It would be right to say in the public sector that was a possibility. What we have done is introduced a bonus scheme which has an ability to pay element in it. One of the issues we face this year was that people had contractual entitlements to bonuses which was a carry over as the PPP came in. We changed that this year so that there is now an ability to pay element in the bonus.
133. In other words if the organisation was performing badly it would follow that in some elements of that scheme nobody would qualify for it?
(Mr Everitt) Yes. Part of the decision I had to make this year in relation to the contractual bonuses was how much we would be prepared to pay.
134. Thank you. Can I come back to Ms Lomax, we left Mr Williams' line of questioning slightly unresolved and I ended up quite confused anyway. I think the point he was driving at, if I understood him correctly, was when you were determining the cost involved, whether or not viability was taken into account, the point he was making is-let me explain it, many, many years ago in my youth I was a member of the local authority and I remember that in the tendering procedure if you got an exceptionally low bid for a particular project it would have to be scrutinised very carefully just to make sure they were capable of delivering what they said in the price available. The concern we have about the divergence between what was estimated as likely to be going through the transfer and what was bid was that maybe there was a problem of that kind that had not been taken into account. Have I made myself clear?
(Ms Lomax) The test for financial credibility capacity was not properly executed, is that your point?
135. It was not clear in the answers you gave earlier that was the case, no.
(Ms Lomax) There was extensive testing of all of these bids against a range of financial criteria, yes, it was a long and very technical exercise and that was part of what the advisers were doing. I cannot now remember exactly what point Mr Williams was talking about. What I was trying to say in answer to somebody else was that the decision that was taken about which was the best bid took account of all of the evaluation criteria, it was not just the proceeds, it was not just the financial credibility capacity. it was a decision taken in the round.
Chairman: Thank you, Mr Howarth.
Mr Jenkins
136. You paid some substantial costs to advisers and yet I noticed on page 24 you have the cost of implementing a partnership and the estimate for implementing the partnership and out turn quite at variant, who advises on the estimates?
(Ms Lomax) I think that the original estimates were based on, it says in footnote one, the estimate was set in August 1999 using estimates provided by the advisers, NATS and the CAA.
137. Who were the advisers, just NATS and the CAA?
(Ms Lomax) The advisers estimated how much work they thought would be required. NATS and the CAA based its initial estimates on those views.
138. I thought if the advisers were advising you with the estimate and it turned out in some cases they were substantially different, the legal advice went three times the out turn against the estimate, do you feel you had the right advice in place?
(Ms Lomax) The original cost estimates were clearly optimistic. I think the Department took account of what information and advice was available not just from the advisers themselves but from NATS and the CAA and its own experience too of previous operations. What was clearly the case is this was a much lengthier process and a more complex process than people understood when those original estimates were set.
139. One of the things which Mr Williams started off with, I am still struggling here, I must be honest, if I read it correctly, I obviously do not, because I do not understand these systems, we sold half a company in effect which was worth quite a substantial amount of money and when we sold the company the purchaser put a very small amount of funding into that and then borrowed the rest from the bank. The debt was not on them but the debt becomes that of the company. I own half the
company, so I presume it must be my debt as well then?
(Ms Lomax) I do not think this is a completely unconventional way of making an acquisition. I think this happens quite commonly and you always put debt into the acquired company, you put as much debt on you think it can bear given the amount of income it is likely to generate. The more debt you put into it the less there is going to be available for splitting out between the equity shareholders. The general view for regulated utilities I think is that making large profits for the equity shareholder is not a good thing.
140. I have the debt of the company that I once owned and I got half the money in the bank, so now I have 49% of the company, this cannot be right, nobody would buy this one, so all of the profit in future years, and I use that term advisedly, is going to go to the bank, obviously. I am going to sit back and watch that debt be financed over the next number of years without any income coming to me. Am I right?
(Mr Everitt) That I think is correct. In other words the bank have the first call on the money in the business to service that debt. It was a very clear policy of the Airline Group that we would use the remainder to contribute to the capital expenditure of the business. It would certainly be the case in the initial years.