Examination of Witnesses (Questions 167-179)
MR DAVID JAMIESON, MR ROY GRIFFINS AND MR IAN MCBRAYNE
WEDNESDAY 1 MAY 2002
167. Good afternoon, Minister. We are delighted to see you. May I ask you firstly to identify yourself, well known as you are?
(Mr Jamieson) I am David Jamieson, Parliamentary Under-Secretary of State for Transport.
(Mr Griffins) Roy Griffins, director general of civil aviation at the DTLR.
(Mr McBrayne) Ian McBrayne, head of the civil aviation division.
168. Did you have some opening remarks you wished to make?
(Mr Jamieson) If I may. I am very pleased that we have been called before your Committee and we very much welcome the inquiry that you are undertaking. I know the Members of the Committee, like us, were very shocked by the attacks on the World Trade Centre on 11 September last year. These events had very wide ranging, severe repercussions across the aviation world and NATS unfortunately did not escape the harmful effects of these. With NATS's income dependent on traffic volumes and in particular on transatlantic traffic, the resultant exceptionally sharp downturn in the number of flights had a serious impact on the company's revenues and these events did occur just a few weeks after the public/private partnership was created for NATS on 26 July last year. Once the financial consequences of 11 September became clear, all the parties involved realised there was a need to cooperate with a view to devising a strategy that would secure NATS's long term future. NATS management, the government, the Airline Group as shareholders, the Civil Aviation Authority as economic regulator and the four lending banks have all played a part in working towards that solution. On a short term basis, a loan facility has been agreed for a maximum of £60 million up to 30 September 2002. £30 million is being provided by the government and the other £30 million by the four lending banks. Each party is lending on the same commercial terms. The loan facility was announced to the House on 20 March. As yet, NATS have not called upon that loan. A number of measures are envisaged for the longer term. The company is taking steps to reduce its internal costs which will result in savings of £200 million up to 2005. It has also applied to the Civil Aviation Authority for review of the charge cap which has been set for the years 2003 to 2005, to take account of the unprecedented events of 11 September. NATS is not at liberty to increase its charges to offset lost revenues as its European counterparts have indeed done by an average of 12 per cent for 2002. The CAA as an independent regulator is currently in the process of considering NATS's application for review. NATS and its shareholders are also looking at other ways of strengthening the balance sheet. I am sure the Committee will have no doubt noted, notwithstanding the difficulties following 11 September, the new, en route centre at Swanwick. It commenced operation successfully on 27 January this year and this is the first element of the two centre strategy for air traffic control in the United Kingdom. The other is the proposed new Scottish centre at Prestwick and although NATS has found it necessary to defer the operational date of the Scottish centre by some 18 months to two years from the original target date of 2007, existing facilities have been upgraded to ensure that the capacity will be sufficient to meet needs in the meantime. The government believes that the measures that have been taken, together with further measures which are still under discussion, will provide NATS with a sound financial basis for the future and I hope I can provide the Committee, with my officials, with some further assistance in your inquiry.
169. I am sure you will be able to. Could you start off by telling me why the government seems to be prepared to pay 300 million for the new railway infrastructure? It has issued government guarantees in the form of letters of comfort for the London Underground PPP, but it is only prepared to loan NATS 30 million at commercial rates, despite the fact that the government is a major shareholder in the company.
(Mr Jamieson) The government has had to react in the most appropriate circumstances to this particular company and the circumstances this company found itself in. This company is a partnership between ourselves and the Airline Group and the employees. We had to find the most appropriate way of reacting to the circumstances. It would have been, in any other circumstance, that the loans from the banks would have been available to the company, but the circumstances changed very rapidly in September and we have reacted accordingly, as a responsible shareholder. The money has been matched by the other major shareholder, the Airline Group, through the banks.
170. Have you had any indication from the banks that they are not particularly happy about their part in the deal and they want to renege on it?
(Mr Jamieson) I have no indication of that. I do not know if NATS themselves have given that indication.
171. Did your Department check when this general theory became prevalent in the press?
(Mr Jamieson) My Department at the time entered into very long, careful and detailed negotiations on these matters and we were mindful of the position of the banks at the time. These matters would have been considered when we made our £30 million offer.
172. Before I ask you to identify some of the benefits that NATS derive from this partnership, could I ask Mr Griffins about the two letters he received from Sir Roy McNulty, one dated 11 June and one dated 15 June, both about the PPP and the capital structure? In the letter of 11 June, addressed, "Dear Roy", Sir Roy said, "It seems clear the financial structure as currently envisaged will not work and that significant changes are required." He then reminded you of the things that he thought were important: "Structure must permit long term investment and be capable of delivering capacity." He also said that financial circumstances should not require cuts in staff numbers. He went on in the second letter to talk about the government's public/private objectives and said, "The success of the PPP will be judged against whether these things happened in practice, not against the specific level of proceeds achieved in the short run." He then set out some very grave reservations from NATS about the capital structure and pointed out that the gearing was such that it would normally be unacceptable. He finished by saying that it was important to develop the right solution. Could you tell us what answer you gave Sir Roy in those circumstances?
(Mr Griffins) I cannot recall the exact terms of my written replies to Sir Roy.
173. Could you paraphrase?
(Mr Griffins) In general, they were letters which, in the circumstances, would have come from a prudent chairman of an organisation as advised by his lawyers.
174. And one who would not be too happy about a rate of indebtedness that puts it way into a class not normally found in other, comparable companies.
(Mr Griffins) I think I would have explained, though I cannot recall the letter precisely, to Sir Roy, that we were in a competitive context; that the government took seriously everything he said and reacted. There were similar letters at the time which have also been reported from Sir Roy's predecessor as chairman of the Civil Aviation Authority.
175. Consistency? Interesting.
(Mr Griffins) And indeed from Mr Andrew to me, making the same points. The government reacted. There were some adjustments made.
176. The gearing was reduced?
(Mr Griffins) The gearing was reduced.
177. By how much?
(Mr Griffins) By £100 million.
178. Sir Roy still says that he felt the situation was not satisfactory, even after those changes.
(Mr Griffins) We can check the transcript but I do not think he said that it was not satisfactory. With hindsight, nobody would say it was ideal. Nobody expected the unprecedented events of 11 September.
179. Except that when he is talking about the gearing of a company in terms of debt he is talking about the situation that existed before 11 September, not the shock that afterwards had a very worrying effect.
(Mr Griffins) The structure was workingand we will never know whether it would have worked perfectlyup until the unforeseen and unprecedented events of 11 September.
Chris Grayling: Was that not the whole point, if the Civil Aviation Authority's warning was that the business plan could not withstand a major shock? They did not identify what the major shock was but the example of the Gulf War was being used; we had the experience of 11 September. There was a whole variety of different scenarios that could have had a dramatic impact on the business, but surely the core point was that the Civil Aviation Authority said to you, "This business plan will not withstand a major shock". Lo and behold, three months later there was a major shock and it does not withstand it. It does suggest they were right and you were wrong, does it not?