Financial merry-go-round

There’s a phrase which crops up regularly in any assessment of the financial arrangements between Luton Airport and Luton Borough Council: CONFLICT OF INTEREST (forgive the shouting!). In this page we’ll explain why, what the concerns are, and what is or is not being done about it.

Ownership and funding of public/private Airports
Luton Airport is owned by Luton Borough Council, and its early history of being run by the Council proved to be financially unsuccessful. The Airports Act 1986 enabled relevant airport companies to inject private capital, and part II of the Act covers the 15 municipal airports including Luton. These airports had to be set up as arm’s-length companies. Any subsidies from authority to airport, whether financial or human, had to be entirely transparent.

In Luton Airport’s case a public/private partnership in 1998 transferred responsibility for management and development of the Airport to a private consortium, completely separate from the Council.

Luton Council signed such a public/private partnership in 1998, where the Airport would be operated and developed by a private consortium, London Luton Airport Operations Ltd , for a period of 30 years, while the airport remained publicly owned by the Borough Council. A supplemental agreement signed in 2012 extended the concession to 2031.

A 2016 House of Commons briefing paper makes clear the need for an arm’s length relationship between local authorities and airports. A report by Lord Evans in 2019 into standards in public life expected under the Localism Act 2011 also emphasises the need for complete transparency and an arm’s length approach in public/private arrangements. Yet in reality, the way the relationship operates at Luton could hardly be further from the requirement for arm’s length governance.

Governance arrangements at Luton Airport
The Council and the Holding Company LLAL are both led by the same person – Robin Porter – and the Holding Company has no staff of its own but pays the Council for the professional services of Members and Officers of the Council to act as its Board (see the Holding Company accounts). The Council and the Holding Company therefore share the same controlling minds.

The Holding Company has been and continues to be proactive in driving growth of the Airport. In 2012 it issued a vision for growth and threatened to terminate the operating concession if the Operator did not apply to the Council to invest in capacity expansion. Bowing to this pressure, the Operator issued its own Masterplan to achieve 15-16m passengers by 2028, subsequently revising this upwards to 18 million over a 15-year project.

The Holding Company has recently invested some £40m in preparing a Development Consent Order for further capacity expansion at the Airport, as referenced in the Accounts, even though the current expansion project is only half-way through its 15-year term and noise mitigations to keep an 18 million passenger capacity within noise planning conditions have not been delivered.

Robin Porter expressly acknowledges that the Council is driving Airport expansion, most recently in the Local Government Chronicle coverage of the bail-out request from Hazel Simmons, leader of Luton Council, to the Prime Minister: ‘In 2012, the council went from being a “passive landlord” of its airport to becoming “very active in driving the agenda”. It has worked hard with its concessionaire, airlines and other destination airports to open up routes and Mr Porter claims their product has “improved dramatically” in the eight years since changing its approach.’

Further evidence for the conflict of interested created by this “hands on” approach is provided by passenger growth incentivisation scheme put in place in 2014 between the Council, the Holding Company and the Operator to drive faster capacity expansion in return for concession fee rebates. The rate of incentivised growth was such that the Operator knowingly breached a noise planning condition put in place by the Council, and has reached the 18 million passenger limit 8 years too early which now threatens breach of another planning condition.

The incentivisation scheme, to which the Council, Holding Company and Operator are party, directly undermines the democratic function of the Council as the Local Planning Authority for the Airport, constitutes a direct subsidy of the Airport by the Council, and starkly exemplifies the clear conflict of interest. All of this is completely at odds with the clear exposition in chapter 7 of Lord Evans’ report.

External Audit concerns
That the Council’s commercially-driven strategic support for Airport expansion is clearly not at arm’s length is also set out by the external auditors Ernst and Young in their Audit Results Report 2017-18, where they state:

“• Since the decision to extend the concessionaire agreement in 2012, the Council has benefited from increased dividend and the wider economic regeneration in Luton from a growth in passenger numbers.
• The Council’s strategic documents and corporate plan demonstrate a long term strategic commitment to support Airport expansion plans. In particular, the Council sees itself providing a place shaping role to enable these schemes to happen as this will support objectives to promote economic growth, regeneration and job creation in Luton.
• The funding and associated borrowing committed by the Council in the 2017-2018 financial year (£275million) towards the DART scheme and DCO is a strategic decision made by the Council as shareholder to enable Airport expansion and modal shift now that Luton Airport is reaching maximum capacity.
• The Council have sought advice during the business case for investment in DART and DCO on how these schemes could maximise the value and benefit they obtain from ownership in the Airport. The Council and LLAL’s advisors estimate that the valuation of the Airport could be significantly higher by 2031 with Airport expansion schemes in place, including a significant upfront payment from an incoming concessionaire. Both of which if they materialise, would provide a significant future financial benefit to the Council.”
Again, this overtly commercial position is in clear conflict with the Council’s responsibility to protect the residential amenity of residents affected by the noise and other environmental impacts of the Airport, and in our view fails to satisfy the test of probity under Localism set out in Lord Evans’ report.

Public accountability in commercial arrangements
Luton Airport is publicly owned by the Council on behalf of the people of Luton. Yet money from the operating concession does not flow directly to the Council, but to a private Holding Company which passes on less than half of it to the Council. The remainder is used for strategic purposes decided in confidence by the Holding Company Directors, and also to fund a network of local charities selected by the Holding Company as being aligned to its strategic goals.

These Directors are Members and Officers of the Council who provide professional services to the Holding Company, but invoke the confidentiality of a private Board when making decisions about public money. And at least one of the funded strategic charities is overseen by a Councillor who also votes on the Development Control Committee on matters to do with the Airport development.

Luton Airport revenue is clearly public money which should only be dispensed with all the safeguards of public accountability and scrutiny in place – safeguards which apply to the Council, but not to the Holding Company. Without transparency and accountability, taxpayers are doubly disenfranchised: loss of Corporation Tax revenue on money channelled into charities chosen by the Holding Company, and loss of democratic oversight, accountability and influence over how the Airport revenue is used.

Value for Money risks
The External Auditor has expressed concerns over lack of transparency in Value for Money risks. In their 2018-19 audit report, they considered whether Council Members would have been able to scrutinise decision-making in matters regarding the Airport, in particular relating to borrowing and investment. They said:
“In considering our findings and recommendations, we have traced back all of the Council’s decision making papers since 2012. We were concerned that there is no documented evidence that would have enabled the Councillors and members of the public to have understood and been able to scrutinise the overall decision made by the Council on Airport ownership, future borrowing and investment.
For example, the paper considered by Council’s Executive in 2012 around the decision making to extend the concessionaire agreement did not refer to the evaluation of options undertaken in 2010 when there was the opportunity to break the agreement. In addition, we believe that none of the decision making papers, borrowing and treasury management documents since refer to the commitments the Council has in its concessionaire agreement and the significant termination payment should it chose to do something different. This is a significant and material reason that impacts on the timing of any evaluation of options.”

Essentially, the Auditor is pointing out that the small team of Council Members and Officers which leads the Holding Company is taking advice and making investment decisions which put hundreds of millions of pounds of public money at risk, without an adequate opportunity for oversight within the proper democratic processes expected of the Council.

With a downturn in Airport revenue due to Covid-19 leading to bail-out pleas from Luton Borough Council, the magnitude of this financial risk is now plain for all to see.

Funding gap
The Holding Company received some £313 million of total concession revenue between 2011-2019, yet only paid dividends to Luton Borough Council of some £95 million in that period. What did it spend the remaining £218 million on, and was there adequate and transparent public accountability and scrutiny over the the decisions relating to the use of that public money – particularly value-for-money and commercial risk?

Given this significant disparity, we believe it would be appropriate for the Holding Company, rather than the taxpayer, to make good the current funding deficit at the Council by liquidating some of its strategic investment reserves.

We also believe that further expansion of capacity at Luton Airport should only be considered at the end of the current expansion project due to last until 2028, and only after all the noise mitigations have been delivered to ensure that an 18 million passenger capacity is achieved within the planning conditions laid down by democratic agreement at the 2013 Planning Meeting.

The planning conditions relating to aircraft noise were put in place by Luton Borough Council to “protect residential amenity”. It’s a great pity – indeed a travesty – that the Council did not choose immediately to enforce the noise footprint condition when Luton Airport knowingly breached it in 2017, 2018 and 2019. The financial benefits the Council achieves may explain this. Our next page explains the way in which aircraft noise nuisance can be measured, and its detrimental effects on people.