231. Who else could carry the risk?
(Ms Lomax) The risk is being spread between users through higher user charges. In all other air traffic control bodies the risk has been passed straight on to users in the form of higher charges. Most of the other air traffic control bodies put up their charges by amounts ranging from 6%, 10% or even more. NAVCANADA put theirs up by 10%. It is in the annex to this Report. That is one way in which the risk can be carried. Banks are having to participate in a refinancing of the loan and we are finding another equity shareholder, and the Government as a responsible shareholder who has agreed to put in some money to match. It is not just simply coming back to the Government.
Chairman: Obviously, as my colleague says, we will want to be kept informed on how this develops.
Geraint Davies
232. Just one final clarification on these three grey columns. It seems to me that what these three grey columns show is that every 10 years there has been a scenario in which the NATS model does not stand up to this sort of shock. The next 10-year shock happened to be 11 September but history shows us that it was not just one event, it was three events in 30 years. It seems remarkable therefore that those three scenarios which occurred, as opposed to a hypothetical scenario we could never have managed, were not factored into what we were proposing and in fact they would not stand up to financial scrutiny.
(Ms Lomax) Can I make one observation which is that the four separate committees of the banks who were putting in a very large amount of money into this bid, and who want to be repaid, looked independently at downside scenarios and stress tested these bids. It is not just something that was down to our advisers in the Department.
233. So none of them asked the question what would happen if the 1979 or the1983 with the Gulf War oil shocks occurred-
(Ms Lomax) The conclusion that was drawn was that the bids were robust against foreseeable shocks at that stage. As I say, what was-
234. You do not agree that history is the foreseeable future?
(Ms Lomax) If you go back you could say, "Why do you not replay the Second World War?" What is relevant is what people think will happen in the world in which we live at the moment, and people's views on that change.
Mr Williams
235. This was foreseeing for 20 years ahead, not a year or two ahead, so how can you justify not taking into account the fact that we are in one of the most volatile areas in the world where the aircraft industry is very vulnerable, but we completely ignore the experience of the previous 20 years, because when you were doing this the 1979 shock was within the 20- year period.
(Ms Lomax) I do not want to argue that, in the world as it has now developed, enough downside testing was done. The thing that I am trying to throw doubt on is the idea that there was a perfectly obvious piece of downside scenario testing which should have been done which we utterly failed to do. I do not think that is a fair description of what went on. I think there was a very conscientious attempt to test these bids against the very wide range of scenarios, but they did not predict 11 September.
Geraint Davies
236. It is the case that OPEC still exists and Saddam Hussain still exists, so the causes of those three shocks are still there, are they not?
(Mr Everitt) Can I make a point here. There is a very important condition in our licence that if we experience exceptional circumstances as they are defined-and I think by any standards the oil shocks of the 1970s and 1980s (and I was certainly in the industry when that was experienced) would be exceptional-the regulator can step in. This is not an unusual provision. You will find something similar, I am sure, in other regulated environments. The difference compared with NAVCANADA is that NAVCANADA have control over what their price levels will be. You have heard they went up 6% last January and they are going up 3% this January. Here
we have a regulator who arbitrates, in effect, between the company and the users, and I think the design of condition 25, the exceptional circumstances condition, was to try and make some provision for circumstances of the type that could not be envisaged that we might experience and that is, in effect, although we are going under a different provision in the Transport Act, precisely what we are doing now. We are working through with all parties to this composite solution to deal with the totally unexpected and I think unforeseeable event.
Mr Davidson
237. One question for the National Audit Office, if I could, just for clarification. One of the issues that perplexed a lot of us during these debates was the question of NAVCANADA and whether or not its structure would be classified as in the public sector and therefore count against the borrowing requirement. Can you clarify for us whether or not in your understanding the UK Government were using the same criteria to judge what was going to be in the public sector borrowing requirement as a) Canada and b) equivalent European countries? If that is too hard without notice, I wonder if it would be possible to have a note on that, Chairman, because that was one of the main issues at the time as to whether or not a not-for-profit solution was possible and the argument was that the British Government were using different rules. We have now heard it was all the fault of the Office of National Statistics which is akin somewhat to saying "a bad boy did it and ran away" from the Treasury. I am not sure I entirely accept that analysis.
(Mr Colman) I would take the opportunity of putting in a note on that, if I may.21
Mr Rendel
238. I want to go back, I am afraid, to this whole question of the scenarios. I wanted to get one thing straight before I start. Paragraph 3.23 makes it clear that there were nine mandatory scenarios which were tested at the request of the Department. Both Nimbus and the Airline Group had to test those nine mandatory scenarios and only one of those dealt with adverse variations in traffic. So for some reason the Department decided not to ask for the sort of variations in traffic that happened, for example, during the oil crises because the only variation in traffic that was required was that the baseline assumption of 6.7% annual growth be reduced to 3.5%. There was still going to be a big increase in traffic but not as big as happened before so the Department did not require any scenarios with, for example, zero increase in traffic over three or four years?
(Ms Lomax) No, it did not.
239. Secondly, the groups were asked in paragraph 3.24 to show any further scenarios which had been requested, presumably by themselves or by their lender banks, so when you mentioned the lender banks all the testing that was required by the lender banks is included in these blue columns under figure 21, so we can see there everything that the bank has asked for. In paragraph 3.24 the Department requested sight of any further sensitivity testing which had been run on the bidders financial models.
(Ms Lomax) Those were what the airlines asked for.
240. All the banks and the Airline Group.
(Ms Lomax) Those are the ones the banks and Airline Group asked for.
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21 Ev 36-37.