A Public Private Partnership for National Air Traffic Services Ltd

1. During the final stages of the Transport Bill in November 2000, amendments were made to defer the implementation of the planned public private partnership (PPP) for National Air Traffic Services Ltd (NATS) until three months after Royal Assent. The Minister for Transport said that the Government remained firmly committed to the setting up of the PPP, but undertook to use the time to consult interested parties further on the details of its operation and report back to Parliament at the end of the three months. A list of organisations contributing to discussions during the three month period is attached.

2. The Transport Act 2000 received Royal Assent on 30 November 2000, and the period of deferral therefore ended on 28 February 2001. The Government accordingly lays before Parliament a report on its use of the three month period.

Overview

3.During the three months from 30 November 2000 to 28 February 2001, Ministers had a range of meetings with unions, NATS staff, the management of NATS and the CAA, air users, and the Trustees of the Civil Aviation Authority Pension Scheme (CAAPS). There were also meetings between the unions and bidders, and between the Department of the Environment, Transport and the Regions (DETR) and unions, bidders, air users and representatives of the Pension Trustees.

4.The Government has laid before Parliament a range of secondary legislation to implement some of the details of the PPP.

5.The Government has announced the charge controls which will apply to the UK and Oceanic en route services for the next five years, the Government's Partnership Directors are being selected by open competition and NATS is being restructured for separation from the CAA.

Protections in relation to safety

6.Safety is the primary consideration for everyone concerned with the PPP, and has featured in many of the discussions during the three month period.

7.Much was made in earlier debates of the argument - which the Government does not accept - that private sector status is incompatible with safety and that an organisation whose prime output is safety should not be subject to the profit motive, nor even to incentive based regulation. The Government believes that profits and safety are perfectly compatible as long as regulation and service provision are separate, and safety regulation continues to be carried out robustly from within the public sector.

8.The PPP will make a positive contribution to safety because it will:

• separate regulation from service provision;
• ensure that NATS has access to essential investment capital to maintain - and improve, where necessary - its existing high standards of safety as traffic continues to grow; and
• introduce the financial and project management skills to complement NATS' operational excellence.

9.There are potent protections for safety in the Transport Act itself:

• sections 1 and 2 enshrine the paramountcy of safety by placing it ahead of all other regulatory considerations for both the Government and the CAA;
• section 8 lays a duty on holders of air traffic services licences to provide a safe system - no ifs or buts;
• section 26 and the air traffic services licence ensure that, in the event of a serious or sustained failure to meet statutory or licence requirements, the licensee can be subject to an Air Traffic Administration regime and the business transferred to another licensee;
• section 70 requires the CAA to discharge its airspace regulatory duties so as to secure the most efficient use of airspace consistent with the safe operation of aircraft and the expeditious flow of air traffic.

10.Safety regulation will remain in the public sector, in the hands of the CAA's Safety Regulation Group (SRG), whose expertise and effectiveness are internationally acknowledged. The aviation industry has a very strong ethos of powerful safety regulation, for example:

• no UK air traffic control services provider (including NATS) can operate until the CAA is satisfied that they can do so safely;
• the CAA conducts regular inspections and audits of all air traffic control units to ensure that safety standards are being maintained and will be resourced as necessary in order to continue to discharge this role effectively under the new regime;
• air traffic controllers are licensed only when they have satisfied stringent CAA criteria and they cannot operate without supervision until they have passed CAA-conducted examinations;
• the competence and medical fitness of air traffic controllers is tested and confirmed annually by CAA inspectors;
• procedures and equipment used by controllers to provide an air traffic service and which can affect the safety of aircraft must be approved by the CAA;
• the maximum hours air traffic controllers can work on a particular day and over a number of days is specified by the CAA in the Scheme for the Regulation of Air Traffic Controllers Hours (SRATCOH); and
• controllers and pilots are required by law to report all safety related incidents to the CAA. All reports are investigated.

11.NATS' internal safety standards, through its Safety Management System, are higher than the statutory minima set by the CAA and, despite all the safeguards, it has been suggested that these higher standards will inevitably be eroded. The Government can give a categorical assurance that this will not be the case. SRG's approval will be required for any proposed operational changes which could affect safety standards. There can be no question of those standards being watered down.

12.Furthermore, the Government has made amendments to the Air Navigation Order which ensure that the CAA retains the same safety regulatory controls over the independent NATS as it can currently exercise over NATS as its own subsidiary company. There are three main elements to the amendments:

• the provision of air traffic services will be subject to an approval granted by the CAA;
• the CAA will be able to direct the holder of an approval, in the interests of safety, to provide such services as it considers appropriate; and
• equipment used in the provision of air traffic services will also be subject to approval by the CAA. Maintenance records will need to be kept in relation to that equipment. The CAA will have a right of access to both the equipment and the records.

13.The Government has also addressed concerns which have been expressed about the impact of charge controls on the safety of NATS' operations. The charge cap recommended by the CAA for NATS' en route operations was endorsed by SRG as fully consistent with NATS maintaining its safety standards. The Government accepts that assurance but has nonetheless set a less rigorous cap in order to make doubly sure of a smooth transition to the PPP. The legitimate search for increased efficiency will not be at the expense of safety.

14.From the outset, the Government said that safety was paramount and, in its initial consultation paper on the PPP in October 1998, undertook to consider any and all suggestions as to whether and how the safety regulatory framework might be further strengthened. The Government has fulfilled its commitment to ensure that safety remains at the top of the agenda for NATS, the CAA and UK aviation.

Concerns of staff representatives, the employee share scheme and pensions

15.Ministers and DETR have held a series of meetings with representatives of the IPMS and PCS. The Minister for Transport also met representatives of the British Airline Pilots Association. The meetings have covered a wide range of issues relating to the bidding process and have sought in particular to address the unions' concerns about the general and detailed approach of the bidders to staffing issues. The Government regrets that NATS' trade unions remain opposed to the principle of private sector involvement in the provision of air traffic services.

16.Ministers also visited NATS' main operational sites at Swanwick, Heathrow, West Drayton, Prestwick and Manchester and took the opportunity to discuss the PPP with staff. In the course of the visit to Swanwick, the Minister for Transport was able to tell staff about the charge control for UK en route operations. At the same time, NATS announced plans to increase the number of controllers being recruited to its training college each year by 50%.

17.The Government has also facilitated meetings between a team of IPMS/PCS representatives and the three consortia who subsequently submitted final bids. Those meetings gave the unions the opportunity to discuss a range of issues in some detail with potential strategic partners.

Employee share scheme

18.NATS employees will be entitled to 5% of the equity in the NATS PPP. The shares will be held in an employee trust and all employees who are in employment on the date that the PPP comes into effect will be entitled to benefit from the shares. There will be an initial allocation of free shares to all such employees and this will be the same allocation regardless of rank or seniority in the company. We expect the share scheme to be an Inland Revenue approved All Employee Share Plan so that employees can take advantage of the available tax breaks. This will involve a lock-in period - for five years - before employees can cash in any shares, except in the case of retirement, death or resignation. The Trust will be the buyer of last resort. The Employee Trust arrangements are still under discussion but we expect them to be finalised shortly.

Pensions

19.The then Minister for Aviation had a meeting with the Trustees of CAAPS in January to discuss the timetable and processes for making an order under section 96 of the Act. There has been a series of further meetings between the Trustees' Legal Advisers and DETR on the details of the order, which will give the Trustees statutory protection for their restructuring of the Scheme, and discharge the Government's obligation to ensure that no individual member of the Scheme is materially worse off as a result of the restructuring. The Government understands that the Trustees and their advisers consulted staff representatives as they were developing their proposals for the restructuring of the Scheme.

20.The Transport Act 2000 (Civil Aviation Authority Pension Scheme) Order 2001 was laid before Parliament on 9 March 2001 to implement the restructuring of CAAPS on 31 March 2001.

21.The Government has further developed its proposals for a trust of a promise, to ensure that existing NATS staff are entitled to remain in the NATS Section of the CAAPS or a Scheme equally as good. A detailed proposal was put to the Trustees, CAA, NATS and the unions on 2 February 2001, and the DETR is engaged in discussions with them and with the Law Debenture Trust Corporation to finalise and implement the arrangements. The Government expects those arrangements to be in place before the introduction of the PPP.

22.Ministers have done a very great deal to meet the legitimate concerns of NATS' staff in relation to safety, economic regulation, protection of pension rights and their continuing involvement in the PPP through the employee share scheme and the Stakeholder Council. The Government is determined to secure a satisfactory outcome for the PPP and work with a strategic partner who will enhance and complement NATS' operational excellence with new skills in the fields of project management, customer relations and financing.

Discussions with air users

23.The then Minister for Aviation had a meeting with representatives of air users (commercial airlines, business aviation, leisure flyers, passengers, and airport operators) in January, at which he invited views on:

• the future organisation of NATS;
• the detailed working of the PPP and its relationship with its customers;
• the safety regime;
• the reorganisation of the CAA to carry out its functions;
• national interest protections; and
• membership of the Stakeholder Council.

24.Air users are generally supportive of the PPP, although they will be looking to NATS to improve its consultation process and to involve them more fully in its strategic planning. The safety regime and range of protections for the national interest were regarded as comprehensive, and the integration of the Directorate of Airspace Policy fully into the CAA was welcomed. General aviation users sought assurance that the PPP would not lead to greater restrictions in access to airspace or to significant expansion of controlled airspace. All users stressed that there should be no discrimination in the provision of services, and that NATS should not represent the UK in international fora to the extent it had done hitherto. The Government is meeting those concerns through statutory protection in Chapter III of Part I of the Act, NATS' air traffic services licence, and the administrative arrangements for international representation.

25.DETR also wrote to a wider field of aviation interests setting out the arrangements for the PPP and inviting views on the issues listed above. While there remains some resistance to the PPP, great emphasis was placed on safety, and on the role and make-up of the Stakeholder Council. There was a general consensus that safety needed to be embedded within the management structure with a control mechanism separate from - and taking precedence over - operational management of the service. And it was strongly argued that the Stakeholder Council should draw its representation from the aviation community in its widest sense - users, environmental interests, aviation professionals, passengers and those affected by civil aviation. The Government will be considering the composition of the Stakeholder Council further, and will consult the strategic partner, when selected.

26.The general message - with which the Government agrees - was that the PPP's first priority should be the safe, efficient and economic provision of services and management of the airspace, supported by proper consultation on strategic and detailed operational matters affecting UK aviation.

The future structure of NATS and the CAA

27.Transfer schemes will be used to separate NATS from the CAA in readiness for the PPP, and will transfer NATS to the ownership of the Secretary of State.

28.Although day to day management of the PPP will rest with the strategic partner, the Government is appointing up to 3 non-executive directors. They will contribute to the organisation's commercial success, exercising independent commercial judgement on issues of strategy, performance, resources and standards of conduct, and ensure that the Board functions effectively and transparently. But they will also protect the Crown's financial interests in the Company and ensure that the company retains an independent identity. The Partnership Directors will meet periodically with representatives of the Crown Shareholder to review developments within the Company.

29.The posts have been advertised in the national press and applicants are being considered. The partnership directors will be able to report direct to the Government, and Ministers are looking for people with experience in safety, employee share issues, pensions, finance and trades union matters.

30.The strategic partner will appoint an executive director who will have specific responsibility for all safety related matters. This appointment - as with all executive director appointments - will require the unanimous approval of the Government appointed Partnership Directors. The Director of Safety will sit on a Board-level Safety Review Committee which will be chaired by a Partnership Director and will oversee all safety matters.

31.In the CAA, an internal committee has been established to exercise oversight of the air traffic services licence, which the Government will issue shortly. The CAA has consulted interested parties on how this committee proposes to conduct itself and has posted a consultation paper on its website. The committee comprises representatives of all three main regulatory arms: the Safety Regulation Group, Economic Regulation Group, and the Directorate of Airspace Policy. The Government can give a categorical assurance that the CAA's watchword will be "joined-up regulation" within the terms of Section 2 of the Transport Act 2000 and that safety will be placed ahead of all other regulatory considerations.

32.The CAA is being further strengthened by two appointments to its Board: the Director of Airspace Policy (DAP) and the Assistant Chief of the Air Staff both joined the Board on 1 March.

33.The appointment of the DAP is also germane to empowering the CAA in relation to airspace policy. This is a vital function as it is the process by which airspace is shared among users of all classes so as to ensure, as far as possible, that the needs of all users can be met.

34.The Transport Act 2000 places the CAA's duties in respect of airspace policy into primary legislation for the first time. It brings airspace policy wholly within the CAA by providing for the nomination of a member of the Board to discharge that function. The DAP will take on that role. Since the airspace policy function requires the DAP to "hold the ring" between the needs of commercial, leisure and military users, the present DAP is standing down as a serving RAF Officer.

35.The Government has been consulting on, and will shortly issue air navigation policy directions to the CAA under Section 66 (1) of the Act. These directions set out the CAA's air navigation functions, such as the determination and procurement of a Lower Airspace Radar Service (LARS) and the responsibility for ensuring that an Aeronautical Information Service (AIS) is provided in accordance with the UK's international obligations. They also lay down:

• how the Directorate of Airspace Policy is to be organised;
• the consultation and liaison arrangements to be followed;
• the circumstances under which the Secretary of State for Defence must be consulted and his approval sought;
• how the environmental impact of air operations is to be considered, and
• the role of the CAA in international relations.

36.The Government will also issue directions to NATS setting out how they are to ensure that they take full account of the environmental implications of their operations.

37.The Government has also strengthened the CAA's ability to enforce its airspace policy decisions through an amendment to the Air Navigation Order 2000 which empowers the CAA to direct any person in charge of the provision of air traffic services to provide such services as the CAA considers appropriate. This will ensure the efficient use of airspace in requiring that the air traffic services provided are appropriate for the airspace classification.

National security and special share

38.In the course of the passage of the Transport Act through Parliament, the Government was pressed on a number of occasions to enumerate how national security would be protected once the national air traffic services provider was no longer wholly publicly owned. The range of measures put in place in the Act itself is as follows:

• section 38 gives the Government powers to direct the licence holder to do - or not to do - the things which are specified in the direction where this is in the interests of national security. Directions of a general nature may be also be given;
• section 67 ensures that there is a nominated member of the Board of the CAA with responsibility for national security, and that the Authority engages in a dialogue with the Government if, in the view of this person, there is any conflict - actual or potential - between the CAA's discharge of its air navigation functions and national security. The Assistant Chief of the Air Staff will fulfil this role; and
• by virtue of sections 93-94, the Government can direct or take control of any and every component of UK civil aviation in times of crisis, war or great national emergency.

39.Furthermore, the operating licence requires the licensee to inform the Secretary of State if control of or the ability to exercise material influence over, its operations changes hands. The licence may be revoked under its own terms if such a change goes ahead despite being deemed by the Secretary of State to be detrimental to the national security.

40.These are very powerful protections, and they are what Parliament and the country have every right to expect. The MOD has worked with DETR throughout the process, both to put these protections into place and to secure the continuation of joint and integrated civil/military operations.

41.Parliament has taken a particular interest in the special share arrangements. An order under section 51(2) will designate the company that is to be the vehicle for the PPP, and will require the Secretary of State to ensure that the Crown continues to hold a special share in this company. The order was approved by the House of Commons on 12 February and by the House of Lords on 27 February.

42.The special share rights are enshrined in the Articles of Association for NATS and, if NATS were floated - for which the Government has no current plans, they would ensure that the checks and balances within the corporate structure of NATS which are being set up as part of the PPP could be preserved into the future. The Government is confident that the special share provisions in the Act and in the Articles of Association are consistent with the provisions of the Treaty of Rome. The special share should not, however, be regarded as the sole provision to protect the Government and public interest in NATS. A range of protections in the Act and the air traffic services licence will ensure that from day one of the PPP, the Government or the CAA as regulator will be able to intervene in the event of any significant concern as to the public interest.

Summary

43.The past three months have given the Government an opportunity to develop further its proposals for NATS. The Government remains convinced that the PPP is the best solution for NATS, the aviation industry, and the UK. The PPP is a genuine partnership between the public and private sectors which will:

• enhance safety by separating regulation from service provision;
• free NATS' investment and management decisions from public sector financing constraints;
• allow long term investment planning focussed on real benefits;
• introduce new skills in the fields of investment planning and project management;
• offer NATS the opportunity to develop its business, including overseas;
• provide the right structure of incentives and disciplines to maximise efficiency within a strong economic and safety regulatory framework;
• safeguard the public interest through statutory protections, licence obligations and the golden share; and
• involve all aviation interests - staff, air users, Government - through the Stakeholder Council.

44.The discussions which have taken place during the past three months, and the constructive views expressed by all who have been involved, will help to ensure that the PPP is introduced and operated in a fully effective manner with due regard to the paramount issue of safety and all other relevant considerations. The Government is grateful to all who have been involved.

Organisations contributing to discussions during the period

Air 2000
Air Transport Users Council
Aircraft Owners and Pilots Association
Airport Operators Association
Association of British Travel Agents Ltd
Aviation Environment Federation

BAA plcBirmingham International Airport Ltd
Board of Airline Representatives in the UK
British Air Transport Association
British Airline Pilots Association
British Helicopter Advisory Board

Civil Aviation Authority
Civil Aviation Authority Retired Staff Association

Federation of the Electronics Industry

Gatwick Airport Consultative Committee
General Aviation Manufacturers and Traders Association
Guild of Air Traffic Control Officers

Heathrow Airport Consultative Committee

Independent Pilots Association
International Air Carrier Association
International Air Transport Association
International Civil Aviation Organisation
Institute of Directors
Institute of Logistics and Transport
Institution of Professionals, Managers and Specialists

London Luton Airport Consultative Committee

Manchester Airport plc

National Air Traffic Services

Parliamentary Advisory Council for Transport Safety
Popular Flying Association
Public and Commercial Services Union

Royal Aeronautical Society

Society of British Aerospace Companies Ltd
Strategic Aviation Special Interest Group of the Local Government Association

Trustees of the Civil Aviation Authority Pension Scheme