4.7 A key feature of the PPP is the role of the three "Partnership Directors" nominated by government. Their prime function is:
■ to exercise their independent commercial judgement on issues of strategy, performance, resources and standards of conduct; and
■ to seek to ensure that the Board, as the principal decision-making forum in the Company, functions effectively and transparently.
In particular, their duty is to protect the taxpayer's financial interest in the company, and to ensure that NATS retains its capability to operate without undue reliance on the Airline Group.
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| An overview of how key risks are addressed through the PPP documentation | |
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| The main safeguards against risks to the public interest are contained within the Strategic Partnership Agreement, the operating licence granted to NATS' regulated business by the Secretary of State, Government's "Special Share" and the Articles of Association of the Company. | |
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| Key Risk | Safeguards for government |
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| That control of NATS may pass to undesirable owners | ■ Changes or increases in share capital require approval of each shareholder. |
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| ■ No shares may be transferred to a third party without the approval of the Crown shareholder, and government would have a pre-emption right. |
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| ■ A "special share" gives government an effective veto on attempts to reorganise the share capital of NATS or to obstruct the Crown shareholder's right to appoint Directors. |
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| ■ NATS' articles of association prevent any individual shareholder except the Crown owning more than 15 per cent of voting shares at a time when the shares are listed. |
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| ■ NATS' licence may be revoked if there is a change of control which the Secretary of State deems detrimental to national security. |
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| Asset stripping in NATS' regulated business | ■ Material sales require the approval of the Partnership Directors. |
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| ■ Under its licence, NATS must give the CAA three months written notice of intentions to dispose of assets, to obtain the Authority's consent. |
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| ■ Under the Transport Act 2000, NATS must have regard in "providing, developing and maintaining the system to the demands which are likely to be placed on it in future." |
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| That NATS may enter into unsuitable business ventures | ■ NATS' licence restricts diversification outside the core en route business, in part through a three per cent ceiling on turnover and a one per cent ceiling on investment in other business. |
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| ■ Material changes in the nature and scope of the business would require Crown shareholder approval. |
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| ■ Any changes in NATS' business plan, and external investments, require Partnership Director approval. |
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| ■ Changes in business plan that require new funding also require shareholder approval. |
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| That NATS may not replace essential facilities that have come to the end of their useful lives, or allow services to erode. | ■ The Transport Act 2000 requires a licence holder to maintain a safe, efficient and coordinated system and to meet reasonable future demand. |
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| ■ NATS' licence includes a general obligation to meet "any reasonable level of overall demand.. ..having regard to the objective of permitting access to airspace on the part of all users." |
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| ■ NATS' licence defines the services it must provide. If they wish to reduce materially the scope of their services they must formally apply for CAA consent to modify the licence. |
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| ■ The Airline Group signed up to get Swanwick and the New Scottish Centre operational in 2002 and 2007 respectively.1 |
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| ■ In the event of a breach the remedies of injunction and / or an order for specific performance would be available to Government, not just damages. |
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| That NATS may become more indebted | ■ NATS' debt is not to exceed greater of £2bn and 15 times the capital and reserves of the company without approval of the Crown Shareholder. |
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| ■ Under its licence, NATS' regulated business must obtain the CAA's consent if it wishes to mortgage its assets. |
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| ■ Partnership Directors must approve any new indebtedness beyond normal trade credit, and any mortgaging of assets. |
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| ■ NATS' regulated business must certify to the CAA each June that it has sufficient financial and operational resources for the next two years to meet its obligations under the Transport Act and its licence to provide services. This certificate is to be supported by an auditor's report. |
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| NOTES 1. There was an obligation on the Secretary of State in the Transport Act 2000 to ensure that plans were in place to complete the centres before he sold shares in NATS. The government, acting as shareholder, has now agreed with the Airline Group that the obligation to complete the New Scottish Centre by 2007 can be extended, probably to 2009. National Audit Office examination of PPP documentation and the Air Traffic Licence of NATS' regulated business.
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4.8 We examined whether the Partnership Directors have appropriate powers and expertise to discharge these responsibilities.
4.9 The backgrounds of the three Partnership Directors nominated by Government are identified in Appendix 5. They have a wide range of relevant experience that should help them discharge their duties, in particular:
■ the lengthy experience of NATS' operations provided by Bill Semple;
■ Stephen Pettit's experience of managing commercial, manufacturing, people and safety issues in the private sector; and
■ the background of Lord Brooke in the field of labour relations.
4.10 We interviewed the three Partnership Directors to establish how their role was being discharged in practice. They saw it as being very similar to that of non-executive directors in industry generally, and considered they were being treated within NATS on a par with the other non-executives on the NATS Board. The Strategic Partnership Agreement between the Government and the Airline Group gives them additional rights. It specifies that one Partnership Director, currently Mr Semple, would chair the Board's safety review committee. Mr Pettit chairs the Stakeholder Council, while Lord Brooke chairs NATS Employee Sharetrust Ltd, which manages the five per cent staff shareholding. The Partnership directors also sit on the audit, remuneration and Chairman's committees. The Board as a whole is not in quorum unless at least one Partnership Director is present. The Agreement confers additional powers, enabling the Partnership Directors to demand papers and information from management, or even to trigger a special investigation of the company. The Partnership Directors told us that though they welcome these powers, they see them very much as remedies of last resort, and there have been no occasions to date when they have had to invoke them.
4.11 In discussion with us, the Partnership Directors illustrated ways in which they had contributed to the governance of NATS during the difficult period since September 11th 2001. Their remuneration had been set on the assumption that they would provide two days of their time per month, but in the new circumstances their input had been greater. They felt that their main contribution had been:
■ to help the Board's consideration of cost cuts, and agree a programme which would balance the books but at the same time not risk NATS' operational capability in the longer term.
■ to assist the Company's efforts to raise additional finance, Mr Pettit has served on a three-man team of directors undertaking discussions with advisers, financial institutions and possible investors.