NATS: Financing Air Traffic Control Infrastructure



NATS: Financing Air Traffic Control Infrastructure

Authors

C M Yates, Independent Consultant, UK

Description

Abstract

In July 2001, an innovative Public Private Partnership (PPP) was signed for National Air Traffic Services Ltd (NATS), the monopoly provider of air traffic control for aircraft flying over the UK. The NATS PPP is interesting in policy terms as other national air traffic control organisations are part of government, except NavCan, a Canadian trust with the power to set its own prices, and Airways New Zealand, a state owned company that receives no government support.

The PPP
The UK Government wanted to reform NATS and ensure that it had access to sufficient funds for capital investment. The Government concluded that a PPP would best fulfil its objectives which were:
1. For standards of safety and national security to be at least maintained, in particular by separating service provision from safety regulation
2. An injection of private sector money and improved project management skills
3. NATS to benefit from greater freedom to invest and to improve its services free from public sector constraints
4. That in achieving these primary objectives the interests of the taxpayer should be safeguarded
The second objective arose from the large capital expenditure programme required to maintain and enhance NATS? IT and other infrastructure. At the time of the PPP it was estimated that £1 billion of investment would be needed over the following 10 years and NATS had experienced significant time and cost over-runs on capital projects.1
The third objective was partly a response to the relatively expensive, poor service provided by NATS. In 2001, NATS? charges were the highest among the fourteen members of Eurocontrol and air traffic control delays per flight attributed to NATS were among the longest. After a competitive tender, the winner of a 46% stake in NATS was The Airline Group (TAG) consisting of seven UK airlines (British Airways, Virgin Atlantic, British Midland, Airtours, Monarch, Britannia and EasyJet). Although the Government with its 49% stake was the largest shareholder, TAG was given strategic control of NATS and employees held the remaining shares (5%).

The PPP generated total government proceeds of £758 million. To finance the PPP, TAG raised £733 million of senior acquisition debt which exceeded the regulator?s valuation of NATS? assets (£632 million). In addition to this debt, TAG injected £50 million of equity and British Airways provided £15 million of subordinated debt. In order to win the PPP competition, TAG placed a heavy debt burden upon NATS.

11th September 2001
Following the terrorist attacks of 11th September 2001, air traffic volume fell considerably, particularly across the North Atlantic, which reduced NATS? income and increased uncertainty regarding long-term growth in air traffic. It was difficult for NATS to respond quickly to revenue reductions as the bulk of its costs are fixed and its highly specialised work force is rather inflexible. The banks providing NATS? acquisition facility were concerned that NATS would not be able to meet its debt service obligations in the period 2005 ? 2010. Hence the banks stopped NATS from borrowing from a £630 million capital facility they also provided. As NATS? capital expenditure programme could

1 For example, NATS? biggest capital project, a £650 million control centre at Swanwick, opened in 2002, rather than 1996 as originally planned, and was £160 million over budget.

not be entirely internally financed and TAG was not in a position to provide finance, this gave the banks a strong negotiating position. In these circumstances, NATS had little alternative to applying to its regulator, the CAA, in February 2002 for a real price increase (9% over the period 2003 ? 2005). This was substantially above the 12.5% real price reduction over the same period planned by the government at the time of the PPP. In March 2003, the CAA determined that a 6% real price reduction over the period was most appropriate in the changed circumstances. In this situation, the regulator wished to ensure that NATS? financial position did not compromise the provision of safe, cost-efficient, high-quality air traffic control. However, NATS? customers, airliners, were themselves suffering financially and felt service quality was poor so they were reluctant to pay higher charges.

The Composite Solution
Following detailed consideration of all options to strengthen NATS? financial position, the ?Composite Solution? was agreed in March 2003. The key elements of the Composite Solution were:
* £130 million investment in NATS split equally between BAA and the Government
* A 12% uplift in NATS? Regulatory Asset Base coupled with a mechanism to claw-back some or all of this uplift if future performance exceeds a pre-defined benchmark
* A looser price cap
* Volume risk sharing with NATS being compensated (taxed) for 50% of any drop (increase) in traffic below (above) that expected by the CAA when determining NATS? price cap
* A regulatory policy statement to provide guidance and so reduce uncertainty among providers of long-term finance.

The Composite Solution was broadly consistent with the original aims of the PPP. However since 11th September, management had been distracted from pushing the business forward and it is too early to judge the benefits of the PPP in driving greater efficiency and enhanced service quality into the business. It is notable that RPI-X price regulation can provide effective incentives to improve efficiency and service quality.



Publisher

Association for European Transport