Selecting a strategic partner for NATS

5  The PPP was established following a highly competitive process. The Department sought to enhance competition by not barring companies in related businesses, but by allowing them to explain how they would deal with potential conflicts of interest. Seven bidders were able to respond to such a specialised requirement, but four of these dropped out before the later stages, one deterred by concerns over regulation of NATS' prices. The Department placed the third place bidder in reserve, but the remaining two bidders, Nimbus, led by the facilities management group Serco, and the Airline Group, competed strongly. Both had clear strategic reasons, based on NATS' fit with their existing businesses, to want control of the Company.

6  Overall there was little to choose between the Nimbus and Airline Group bids, though the Government's view, based on an objective valuation of both bids was that there was sufficient difference to make the Airline Group the right choice. Both met the required criteria for safety and national security. The Airline Group bid gave NATS a financial structure that the Department and their advisers considered acceptable, if not as robust as Nimbus' bid. Conversely, Nimbus accepted fewer of the Department's contractual terms than the Airline Group and sale proceeds would be slightly lower than for the Airline Group. Awarding the contract to the Airline Group also brought greater support for the PPP from other airlines, and from NATS' employees, who thought that their jobs and conditions would be more secure with the Airline Group. The popularity of the deal was not, however, among the evaluation criteria.

7  The Department signed a commercial agreement with the Airline Group in March 2001, subject to the fulfilment of conditions relating to financing and European Community merger approval. At this time the Airline Group bid was worth £95 million more in sale proceeds than Nimbus's. A major factor in this calculation was that the Airline Group had assumed a higher rate of growth in NATS' traffic and income than had Nimbus. This assumption had not changed in response to growing indications, from the end of 2000, that air traffic growth might be declining. In May 2001 the Airline Group told the Department that due to reductions in air traffic growth and to costs they had overlooked within NATS' they could not afford the price they had bid. The deal signed in July 2001 reduced initial proceeds to Government by some £87m to £758m, still £8m more than Nimbus. In addition, the Government was entitled to receive £35m in deferred proceeds at later dates. The Government's advisers estimated that these deferred proceeds would be worth around £21m in 2001 terms.

8  Costs to the bidders were in the region of £30 million. The Department's costs were £44 million, some £17 million more than they had estimated. This was mainly due to the PPP process being more complex and taking longer than the Department had expected, leading to higher fees to advisers. For example, the passage of the Transport Act took longer than expected, and the advisers to NATS and the Department did more work than planned to evaluate and manage risks to NATS' business, such as litigation with suppliers. The Department appointed their lead advisers, investment bankers Credit Suisse First Boston, (CSFB), on the basis of a fixed monthly retainer of £222,000 for 18 months, regardless of how much effort was required to fulfil the work specified in their brief. The Department accepted CSFB's position that it was not their practice to provide records to enable payment on the basis of actual time spent. The project timetable was extended and CSFB received the agreed monthly fee for some 33 months.