House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Fourth Report

AIR TRAFFIC CONTROL

The New Scottish Centre

51. The CAA's preferred bidder for the New Scottish Centre is SkySolutions, a consortium of Bovis and Lockheed Martin, who had competed with AyrTec, a consortium of Hughes and Laing. The contract with them has not been placed yet. 85% of the systems at Swanwick and Prestwick will be common to both.[87] Despite the problems at Swanwick, NATS believed that the system being developed for the NERC was a good one and would do what was wanted of it.[88] It had stayed with the same system for the NSC because there was no alternative that would meet NATS' requirements.[89]

52. NATS planned to sign a letter of intent with SkySolutions very soon after it gave evidence to us on 11 February and would pay the company an initial small sum of not more than £5m. It then intended to sign a binding memorandum in April 1998 and the final contract in August once SkySolutions had organised its financing. NATS assured us that it would not sign any binding agreement with SkySolutions until it was sure that the software at NERC could be made to work.[90] This would be known by April.[91]

53. NATS recognised that there were possible disadvantages to having only one supplier of software systems and told us that this was one of the reasons why the contract negotiations had taken so long. It was anxious to ensure that it would be able to pay a competitive rate for the several upgrades of the systems at NERC and the NSC that would be required over the lives of those facilities.[92] NATS was also trying to ensure that the contract gave it some right to obtain a share of the commercial benefits of the system if it were sold to other countries.[93]

54. Sir Ronald Mason, former Chief Scientific Advisor at the Ministry of Defence, was concerned that using the same contractor for both centres increased the chance of common fault failure, and that use of different contractors with dissimilar software, as was done in the case of some commercial aircraft, could reduce this risk.[94] He told us that the selection of the same software supplier for the New Scottish Centre as for the New En Route Centre

essential

Sir Ronald explained that NERC and the NSC needed to be interoperable, but they did not need to be identical.[96] He recommended that an independent assessment be undertaken, perhaps by the National Audit Office, with the remit to determine whether NERC met the original specifications and was working reliably and safely enough to be accepted.[97] This assessment could be run in parallel with NATS' acceptance tests.[98] He accepted that this might delay the placing of a contract for the New Scottish Centre for about three months.[99]

55. We received evidence from the co-ordinator of the joint Department of Trade and Industry/Engineering and Physical Science Research Council Safety Critical Systems Research Programme, S R Price, that although in an ideal world dissimilar systems might be an answer, the UK's resources were limited and it would be more risky to develop parallel dissimilar systems than to do one system well. He did not think that the strategic situation of two ATC centres providing back-up for each other was comparable to that of aircraft on-board systems.[100] An IPMS witness did not believe that every system in NATS could realistically have dual software systems.[101] Professor Ladkin did not agree with the categorical statement that single sourcing was inconsistent with the basic principles of safety-critical software development, since safety issues were more subtle than that. However he did not offer a view as to whether single- or dual-sourcing was more appropriate for NERC and NSC.[102]

56. NATS' response to Sir Ronald's point was that it was prudent and safe to have similar, unconnected systems in the two centres. The chance of both, operating independently, failing at the same time from the same fault was "so small as to be acceptable".[103] NATS believed that an independent assessment of the NERC project was not justified and would not take two or three months but rather would delay the project by at least a year by tying up management resources.[104]

The future structure of NATS

57. NATS believed that it would need to invest more than £100m per year over the next decade in order to maintain and improve service quality. It is constrained by its External Financing Limit (EFL) and believes that by 1999/2000 it will have exceeded its available cash and will be unable to finance its investment programme other than through the PFI. NATS did not believe that the PFI was a desirable way to finance its investment because of the delays caused by its complexity and the risks of placing a safety-critical service, which relied on an integrated network of systems, in the hands of a diverse group of contractors.[105] It also told us that there was little doubt that the use of the PFI for the NSC would mean that its cost would be "significantly higher" than if it had been funded through a more conventional route. This was because of the extra cost of private capital, the equity element, the premium for the risk borne by the private sector, the bidding costs (about £10m alone) and the lack of competition for any upgrading contracts in future.[106]

58. NATS therefore believed that a way of financing its investment programme needed to be found. It did not think that increases in its EFL or changes in the definition of the PSBR were likely and therefore recommended structural change to the company. It set out three options which would allow adequate investment funding to be secured:

A regulated utility: NATS would be established as a plc and floated, with at least 50% of the shares being sold to avoid problems with the company's classification by the Treasury. Systems for safety and economic regulation would be established.

Trust status: a precedent was NAV CANADA, now responsible for Canadian ATC. It was sold by the Government for $1.5 billion CDN, financed by a $3 billion CDN loan from a consortium of banks. It was required to recover its costs rather than make a profit.

'Corporatisation': precedents were found in New Zealand, Germany and the Netherlands. The air traffic service provider would be incorporated as a government company which could borrow privately and would be expected to behave as if it were in the private sector and to return a dividend to its shareholder. NATS believed that this could only work in the UK if the present PSBR rules were altered.[107]

The CAA and NATS recommended that NATS be privatised as a regulated utility. In 1995 the then Transport Committee recommended consideration of the option of corporatisation.[108] The Government is presently reviewing the future of NATS and will consult on its conclusions; we were told that the Secretary of State was "concerned to ensure that NATS has adequate funding for future investment".[109]

59. Privatisation of NATS was proposed by the previous government but was opposed by a number of interested parties including airlines, who objected to the fact that they would have to pay for NATS' profits within their ATC charges. Although NATS was not in the end privatised it was separated more clearly from the CAA by its establishment as a wholly-owned subsidiary of the CAA on 1 April 1996. The IPMS suspected that the debate about the privatisation of NATS in recent years had in fact harmed the Swanwick project: "the previous chief executive [Mr Derek McLauchlan] was going to war with the previous Government over privatisation investment and he took his eye off the ball in developing the NERC project".[110] GATCO, however, thought that concern about privatisation was not likely to have been the cause of the problems with Swanwick.[111]

60. We took evidence from witnesses about the different methods of restructuring in other countries which have allowed corporations to borrow money privately for capital investment without being privatised. These witnesses included the Director of Air Navigation Services and Aerospace Safety Regulation in Canada, and a former New Zealand Treasury official.

61. The Canadian Air Navigation System was sold to NAV CANADA in 1996 for $1.5 billion CDN. It is a not-for-profit corporation with a Board comprising representatives of users, government, unions and others. It has borrowed $3 billion CDN privately (which was 3 times oversubscribed) and the corporation is allowed to collect user charges on the basis of cost recovery rather than profit.[112] Any profits made must be used to pay debt or be spent on the air traffic service. The restructuring was driven by the need for an efficient and responsive service and by the realisation that because of budgetary constraints the former air traffic control service was likely to be underfunded and unable to afford the latest technologies.[113] It was "widely considered to have been a success for all concerned": for the taxpayer, through $1.5 billion CND in receipts, for the industry, in allowing the system to modernise, for users, who benefited from more efficient operations, and for employees, NAV CANADA itself and the government of Canada.[114]

62. New Zealand Air Traffic Control was established as a State-owned Enterprise (SOE), known as the Airways Corporation, in 1987. The New Zealand government developed an SOE policy in the mid-1980s in order to address the problems of a number of state-owned businesses that were loss-making and providing poor services. Legislation required the SOE to be operated as if it were privately-owned, and its borrowing was no longer counted as public sector borrowing. Many of the original SOEs in New Zealand have in fact been privatised, although the Airways Corporation remains entirely government-owned.[115] This is probably because of concerns on the part of airlines about it being a natural monopoly.[116] One special feature of the new structure is the official recognition of the policy tension involved in trying to implement the objective of commercial autonomy and accountability when the government is the owner of the company. The requirement to prepare a 'Statement of Corporate Intent' was included in the SOE legislation in order to enable a compromise to be reached between conflicting demands in the event that a minister wished to pressurise an SOE into pursuing uncommercial objectives.[117]

63. Until 1993, Dutch air traffic control was managed by and responsible to the Dutch Ministry of Transport. It is now a free-standing corporation which reports to government. Its budget is still approved by the relevant minister, but any expenditure by the air traffic control organisation is not now considered to be part of government expenditure. This is very close to privatisation but because the organisation does not have shareholders or make a profit, its incorporation is different. The minister appoints the board of management and the advisors. They include representatives from the Ministry of Transport, Schiphol Airport, the Dutch military, and the airlines KLM and Transavia. Foreign airlines are not represented.[118]

64. Airline representatives were concerned that reliance on the PFI might lead to higher costs in the longer run and the risk of monopoly capture of an important piece of infrastructure. They stressed that the most important requirement as far as the structure of NATS was concerned was to free it from the PSBR and allow it to borrow privately to fund investment.[119]

65. The Minister for Transport told us that the Government was looking at alternative models for the structure of NATS, although he did not see any urgency about this. The focus of the Government's examination would be on investment and whether there was a different model that would "enable them to achieve the highest levels of investment in a more sustained and reliable way in the long term".[120]

Safety regulation

66. NATS is part of the CAA whose Safety Regulation Group (SRG) is responsible for the safety regulatory oversight of all UK air traffic service providers, including NATS. The SRG achieves this by considering individual air traffic control units, their staffing, equipment, maintenance and any other necessary arrangements. When satisfied that a provider has demonstrated that the service to aircraft will be safe, the SRG grants a formal approval under the Air Navigation Order.[121] Personnel sometimes move between these two parts of the CAA.

67. Some witnesses supported a clearer separation between the SRG and NATS. These included the IPMS, who thought that such a separation would be required by European developments in the near future anyway,[122] and the Aviation Study Group, which considered that a number of safety-related incidents which occurred between 1995 and 1997 illustrated "the less than satisfactory safety regulation" of NATS by the SRG and recommended "the transfer of safety regulation to the Health and Safety Executive in order to create greater transparency and to prevent potential conflict between economic regulation, air traffic services provision and air traffic services safety regulation".[123]

68. The Minister for Transport said that he was "in favour of separating regulation from service provision", but did not see any benefit from moving the SRG to the Health and Safety Executive.[124] When giving evidence on railways the Deputy Prime Minister confirmed that he believed it was generally a sound principle to separate operational and safety responsibilities.[125]

69. The CAA agreed that moving the SRG to the HSE would not be helpful and indeed, since it would distance the SRG from the other civil aviation functions with whom a close working relationship was vital to effective safety regulation, would have a detrimental effect.[126] Witnesses from the SRG also did not think that it would be a very good idea to take safety regulation out of the CAA because the HSE operated under different laws and aviation was governed by a large number of international aviation agreements.[127] On the other hand, the SRG was not comfortable with the combination of service provision and safety regulation in one body, because non-NATS air traffic service providers believed, wrongly in its view, that the SRG gave NATS preferential treatment. It recommended that the CAA be separated from NATS.[128]

70. Other countries have separated ATC operations from safety regulation. In Canada, the restructuring of air navigation services allowed the government "to end its operational role while continuing to serve the public interest as the safety regulator. No longer is there a conflict between an organisation that on the one hand provides the services and at the same time regulates the provision of those services".[129] In New Zealand a new Civil Aviation Authority has been formed, which regulates only aviation safety, that is separate from the Airways Corporation.[130]

71. There are two European aviation safety bodies. The Joint Aviation Authorities, a grouping of European aviation safety authorities, looks after aviation technical standards. The other is the very recently formed Air Traffic Management Safety Regulation Commission. The SRG envisaged that safety regulation policy would eventually be transferred to those bodies. In the longer term, it was planned that both bodies would amalgamate into a European Aviation Safety Authority covering aircraft, air traffic and airport operations. The UK Government supported this plan because the proposed body would have the power to make rules which would be applied in a uniform manner. The present system required consensus. The SRG expected that the new system would raise general safety standards in Europe and the UK would make an effort in the preparatory phase to ensure that that was the case.[131]

87 Q420. Back

88 Q419. Back

89 Q35. Back

90 QQ426-31. Back

91 Q439. Back

92 Q492. Back

93 Q494. Back

94 Q260. Back

95 ATC 16. Back

96 Q273. Back

97 Q260. Back

98 Q263. Back