'Profit put before financial health in air traffic sell-off'

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The Government is heavily criticised today by MPs for being more concerned about raising the maximum amount of cash from the sale of Britain's air traffic control service than with the financial robustness of the business.

The influential Commons Public Accounts Committee also takes ministers to task for dismissing the option of privatising National Air Traffic Services as a not-for-profit company along the lines of Network Rail and burdening it with too much debt.

A 46 per cent stake in Nats was sold to the Airline Group, a consortium of UK carriers led by British Airways, Virgin Atlantic and bmi British Midland, in July 2001. All but £65m of the purchase price came in the form of bank loans, which Nats had to repay.

The 11 September attacks two months later caused a huge downturn in Nats' income, forcing the Government to bail out the business and allow an increase in the fees charged to airlines for air traffic services.

According to the committee, the Department for Transport relied too readily on the "optimistic" business case put forward by Nats and its funding banks and ignored historical evidence of downturns in air traffic. Of the 19 scenarios modelled by the department's advisers and the Airline Group, only one assumed a reduction in Nats' income and then only briefly. "The maximisation of sale proceeds seems to have taken precedence over the financial robustness of Nats," says the committee's report. "No operable contingency plan existed to cope with the risk of a severe and sustained downturn in air traffic."

The report says the department should have paid more attention to the model adopted in Canada where air traffic services were taken over by a not-for-profit organisation. This option was dismissed "too readily" in favour of selling Nats to a profit-seeking but regulated company similar to other privatised utilities.

One of the department's main reasons for preferring a profit-seeking but regulated company to take over Nats was that it would be free to invest outside public sector financial controls. But tough regulatory curbs on Nats coupled with the crippling high level of debts meant that it could not raise external finance at a time when it was embarking on a 10-year £1bn investment programme.

The MPs also say the model chosen for Nats failed to take sufficient account of the different business risks that the company faced compared with other privatised utilities.