The report that I am bringing to the committee today looks at the Scottish Government’s purchase of Glasgow Prestwick airport in November 2013. The Government bought the airport through its executive agency, Transport Scotland, to protect jobs and safeguard what it considered to be a strategic infrastructure asset.
The Government established a company, TS Prestwick Holdco Ltd, to oversee the airport on its behalf, and it is now providing the airport with loan funding, on which it is charging what is known as known as a European Union reference rate of interest, which is broadly equivalent to the interest rate that a commercial lender would charge. The airport will start repaying the loan funding once it can demonstrate positive operating cash flows.
My report assesses whether the Scottish Government’s approach to the purchase of the airport was reasonable, including the quality of business and financial planning that informed its decision to buy. The report also considers the future plans for the airport’s development, and the governance arrangements that have been put in place since the purchase. It is important to note that the Scottish Government is still assessing a number of potential future developments for the airport. They will take time to put into effect, and we will continue to monitor developments and will follow up that work at a later date.
I will briefly summarise my findings under three headings, the first of which is the Scottish Government’s purchase process. Overall, we found the purchase process to be reasonable, given the tight timescale of just six weeks to undertake the required due diligence and negotiate the purchase. However, there are two areas worth noting. The Government identified the risks associated with the airport’s commercial viability but, because of the time constraints that it was working under, it neither modelled the impact or likelihood of those risks nor included their potential impact in the financial forecasts. The positive financial return on the investment, as set out in the purchase business plan, is based on optimistic assumptions for future passenger growth. Our own financial modelling has shown that, with less optimistic future passenger growth assumptions, the Government could still have reasonably expected to receive a return on its loan funding at the time when it was considering the purchase. Nevertheless, it is worth emphasising that the eventual return will depend on future developments that will affect the airport’s sale price, passenger numbers and other assumptions.
Secondly, in relation to the Government’s arrangements for monitoring the airport’s performance, we found that the Government has established good governance arrangements to monitor the airport’s on-going financial and business performance. They include clear risk management processes, effective reporting on the airport’s business and arrangements for scrutinising the airport’s operations.
Thirdly, on current plans for the airport’s future development, the latest available plan for the airport, dated May 2014, estimates a total loan funding requirement of £39.6 million up to the financial year 2021-22. Some £11.6 million of that funding is expected to cover losses from core trading activities, with the rest needed to clear an essential maintenance backlog and to cover capital investment. As at January this year, the Scottish Government has provided the airport with a total of £9 million of loan funding, and it has committed to providing a further £16.2 million to the end of March 2016 if that is required. The total amount of loan funding that will be needed is still uncertain, because of a number of possible development opportunities for the airport that the Scottish Government and the holding company are currently exploring, but it might be some years before the Government can achieve its aim of selling the airport back to the private sector.
The report makes a number of recommendations for the Scottish Government. In particular, we think that it should now develop robust business and financial plans, including clear assumptions and forecasts for the loan funding that will be required, together with a well-defined and regularly reviewed exit strategy. We have also developed and included in the report a checklist that public bodies can use in future investment decisions.
As always, convener, my colleagues and I are happy to answer any questions that the committee might have.