Welsh Government undertook appropriate due diligence for Cardiff Airport purchase

27 Jan 2016 - 12:00pm

Although progress is slower than forecast at the time of acquisition

The Auditor General has today published his report on the Welsh Government’s acquisition and ownership of Cardiff Airport.

The report notes that, in the years before acquisition, the Welsh Government had become increasingly concerned about the Airport’s decline, despite efforts to provide support and latterly to improve its working relationship with the Airport’s owners. The Welsh Government considered that public sector ownership would give the Airport the stability and commitment that it needed to develop in the long term.

The report acknowledges time constraints, but points to some weaknesses in the preparation of the Welsh Government’s business case for the acquisition. The Welsh Government did not set out clearly enough its investment objectives or its consideration of alternative options, risks and benefits. The Welsh Government gave some consideration to other options, including the prospect of a joint venture with another commercial partner, but acquisition was the preferred option from the outset because of the constraints of other options.

Huw Vaughan Thomas, Auditor General for Wales, said today: Turning the Airport around is proving more challenging than the Welsh Government expected at the time of the acquisition, despite some positive developments. The Airport is operating in a highly competitive environment and is coming from an inherited low base. The Welsh Government needs to use the results of the independent review it has recently commissioned to establish a clear understanding of the overall financial health of the Airport and likely future finance requirements.

Drawing on professional advice, the Welsh Government negotiated a purchase price that was informed by the estimated value of the Airport as a public asset and a range of commercial valuations. The public asset valuation applied different assumptions to the commercial valuations in line with Treasury guidance and factored in the value of transport user and environmental benefits. Commercial valuations can vary greatly depending on the assumptions applied, as was the case for the Welsh Government’s acquisition of the Airport. The Welsh Government ultimately accepted a commercial valuation based on specific assumptions about the overall commercial performance of the Airport – centred on a positive assessment of business growth – and the cost of capital (the required rate of return for the investor).

The Welsh Government undertook a rigorous due diligence process. While the due diligence work identified some significant risks, the Welsh Government took appropriate measures to mitigate risks where possible through the sale and purchase agreement.

The report concludes that the Welsh Government has established sound governance arrangements to manage its investment on an arm’s length basis, having followed legal advice in establishing a holding company. The Airport has a growth-oriented business plan, although the need for external finance is greater than forecast at the time of the acquisition and progress against the overall business plan has been slower than previously forecast. The Welsh Government has approved commercial loan facilities to the value of £23 million and has commissioned a review of the Airport’s financial health and likely future finance requirements.

The report notes that there is no formal plan to realise wider benefits from the acquisition of the Airport, but the Airport is working more closely with relevant public sector stakeholders, including the Welsh Government. There have been various developments on a range of issues including transport access, tourism and marketing initiatives. The Airport has also taken action to improve its environmental performance and to address a number of equality-related issues.

The report makes seven recommendations on issues including the relationship between the Welsh Government’s holding company and the Airport operating company, the horizon for business planning, and the development of a long-term strategy for developing the Airport.