International Civil Aviation Organization

World-wide CNS/ATM Systems

Implementation Conference

Rio de Janeiro, 11 – 15 May 1998

WW/IMP–WP/24

27/2/98

Item 3

Agenda Item 3:	Financial matters

3.4	Sources of financing and modalities of payment

3.6	Cost-recovery mechanisms

BASIC ASPECTS OF FINANCIAL CONTROL AND MANAGEMENT

(Presented by the Secretariat)

Information Paper

SUMMARY

This paper, in support of action paper WW/IMP-WP/8, addresses certain basic aspects of financial control and management that are essential to the successful cost recovery and financing not only of CNS/ATM systems but of air navigation services in general. The text is based on Chapters 4 and 6 of the ICAO Manual on Air Navigation Services Economics (Doc 9161/3).

1.	Introduction

1.1	Cost recovery and financial planning for CNS/ATM systems in particular and air navigation services in general depend on sound and accurate accounting systems. It is essential that all costs be determined in accordance with generally accepted accounting and costing principles (i.e. they must be based on recognized rules, standards or conventions) to permit the costs of service operations to be recorded and analyzed in accordance with their nature and origin. It is recognized, of course, that practices and procedures will differ from State to State.

2.	Cost determination

2.1	Identification of facilities and services

2.1.1	The first step in determining the costs of air navigation services is to draw up an inventory of all the facilities and services that directly provide services for aircraft en route as well as during the approach and aerodrome phases, whether exclusively, or in addition, to any service provided for non-aeronautical purposes. Some facilities may serve more than one function, that is aerodrome and/or approach and/or en route control. If possible, a methodology should also be developed to classify or group sections of the inventory identifying them with the civil aviation units providing the services (e.g. area control centre, communications station etc.).

2.1.2	Where any of the facilities and services being listed are provided for and implemented under the ICAO Regional Air Navigation Plans, these should be so identified as should any other facilities and services provided at the request of aircraft operators.

2.1.3	The administrative and common services associated with the provision of air navigation services although not suited for inclusion in the inventory, itself, are also to be taken into account in the costing process.

2.1.4	Air navigation services have traditionally been classified into the following five categories: air traffic services (ATS), telecommunications service (COM), meteorological services for air navigation (MET), search and rescue services (SAR) and aeronautical information services (AIS). With the implementation of CNS/ATM, ATS and COM will gradually be replaced by ATM and CNS respectively, which are broader in scope.

3.	Scope of cost basis

3.1	The cost basis for charges should include all costs incurred. In addition to costs for facilities and services that the civil aviation administration or the entity levying air navigation services charges provide themselves, all the costs of services provided by any other department or agency of the government or any other entity should be considered. Trials and major research and development work may be included as part of the capital investment, the annual depreciation at which could then be included in the cost-basis for charges.

3.2	The costs of any air navigation services provided for military or other State functions should be excluded from the cost/basis. If a facility serves both civil and military functions the cost share allocable to civil aviation should be determined to ensure that no costs which are allocable to military functions are included in the cost/basis for charges on civil aviation.

3.3	As CNS/ATM system components are implemented States could add the associated costs to their cost basis for air navigation services charges. The implementation of CNS/ATM systems components will in many cases lead to the retirement of existing facilities before the end of their economic life. In such instances the balance of the undepreciated portion of the facilities concerned could be included in the cost basis for charges. The same procedure could apply to costs of premature retirement or training of personnel made redundant by the implementation of the new systems. Such costs, however, should be limited to termination settlements, costs with regard to early retirement and costs of retraining and/or relocation.

3.4	The accounts of an entity providing air navigation services constitute the basic reference for determining the cost basis for air navigation services charges. Where the accounts are very complete and where they cover all relevant categories of facilities and services, they can serve that purpose well. However, it may not be advisable to rely only on the accounts when determining the basis for charges. This is because while the costs of operation and maintenance, and administrative overheads, would probably remain unchanged, the situation may be different with regard to depreciation and cost of capital. In the accounts, for example, assets may be depreciated according to government accounting standards which may not reflect the true operating life of the assets concerned, or they may not be depreciated at all. When the cost bases for charges are determined, it is necessary to ensure that a depreciation element reflecting the reduction in the value of the assets during the period concerned (usually the financial year) is included. This may result in the application of depreciation rates for charging purposes which differ from those reflected in the accounts. Also, cost of capital imputed on the net capital value of the assets of an entity providing air navigation services would normally not be reflected in its accounts but should be included in the cost basis for charges. The same practice should apply in those few instances when equity capital is involved.

4.	Allocation of costs

4.1	Allocation of costs to other than civil aviation users

4.1.1	Certain facilities and services such as ATS, AIS and aeronautical fixed service essentially exist only to serve aeronautical requirements, while others, like MET, SAR and sometimes radio navigation aids, also serve non-aeronautical functions. Aeronautical mobile facilities and services (i.e. transmitting and receiving stations) frequently serve aeronautical as well as non-aeronautical functions, including maritime and general commercial and private message traffic. Considering the many factors involved, the cost share for civil aviation will have to be established by approximation. One method would be to base the allocation on the number of messages handled.

4.1.2	It should be noted that civil aviation will constitute a minor share of navigation satellite users. Other users of GNSS include military aviation, the maritime industry, the trucking industry, surveyors, customs and police services, forestry, the agricultural industry, those undertaking positioning for environmental purposes, etc. It is important to establish the principle that civil aviation should not pay for more than its fair share of the costs of GNSS provision. Allocation of costs for augmentation systems, or other costs of GNSS service provision, to users other than civil aviation as well as civil aviation should therefore precede any cost recovery from civil aviation.

4.2	Allocation between airport and en-route operations

4.2.1	Once the costs for civil aviation have been determined consideration will need to be given to the allocation between en-route and approach and aerodrome control utilization. This will determine how route charges as opposed to approach and aerodrome control charges will be affected. To ignore this issue when users are to be charged directly would distort the principle of equity in charging since overflying traffic could be subsidizing traffic landing at the airports concerned, or vice versa, depending on the accuracy of the cost allocation. Different allocation parameters can be applied, the choice in each instance depending primarily on such factors as the type of facility category concerned and the functions it serves.

4.3	Allocation of costs among categories of users

4.3.1	ICAO policy specifically calls on States to ensure that no users are burdened with air navigation services costs not properly allocable to them according to sound accounting principles. A general principle, though, is that where cost allocation needs to take place the total costs should be allocated equitably among the different categories of users served by the route facilities and services concerned. This is of particular relevance in the case of State, including military, traffic which is often exempt from charges.

4.3.2	It is important to recognize that the major part of the air navigation facilities and services infrastructure has been established to serve the requirements of commercial air traffic, and that some users receiving extensive service could not, by reason of the nature of their activity, have called for the provision of service on such a scale on an economic basis. The prime beneficiaries among users should therefore be carefully identified to ensure that realistic allocations of costs to the various user categories are made.

4.3.3	The first step in allocating costs among categories of users is to define the categories of users as a function of the services provided and/or the traffic concerned. In this context it is recognized that users may be categorized differently according to the type of airspace and air traffic services involved, and that the approaches adopted by States will vary according to circumstances. Certain categories of users may either be exempted, for example VFR flights, or handled in a different way, for example military flights which are exempted from route facility charges but may pay for their services through other means. In the interest of transparency the costs for the services to these categories of users may need to be identified.

4.3.4	The second step in allocating costs among categories of users is to apply appropriate parameters to those costs which are found to be attributable to two or more categories of users. A parameter selected for route facility cost allocation purposes should, ideally, be common to all user categories, reflect the extent to which en- route services are provided to each category, and be readily and objectively measurable. A combination of number of flights and distance flown is recommended in most cases. Distance flown is not as relevant to the allocation of approach and aerodrome control costs as it is to the allocation of route costs because the distances flown are much more homogeneous during the approach and aerodrome phase of operations than during the en-route phase.

5.	The financing plan

5.1	Purpose and contents of the financing plan

5.1.1	Prior to embarking on a CNS/ATM systems component or any other air navigation services investment project and securing the financing required, various data need to be compiled. Thus, estimates of the costs of the project involved need to be prepared and, annual traffic estimates need to be made for the period extending over the life of the air navigation services infrastructure created by the project. Also basic financial and economic analysis (including cost/benefit analysis) will need to be carried out. Possible sources for financing the project need to be identified, as will potential revenue sources subsequently required to meet debt servicing obligations.

5.1.2	Once it is decided to proceed further with the CNS/ATM system or air navigation services project, it becomes necessary to develop a much more detailed plan - the financing plan - which provides such basic information as:

a)	estimates of the component costs (labour, materials, equipment, etc.) of each distinct part of the over-all project;

b)	the funds required to make disbursements at various stages in the project's progress;

c)	the currencies in which payments are to be made; and

d)	the sources from which the funds are to be forthcoming whether from:

1)	sources generated by the entity providing the air navigation services from its operations (which would primarily include user charges, and possibly retained earnings, but could in some circumstances also include contractual payments);

2)	other sources including information on the applicable conditions (i.e. interest rate, repayment period, etc.).

5.1.3	Also to be emphasized is the importance of the availability of data showing the trend in the financial situation of the air navigation services provider concerned over recent years, as well as anticipated developments over the period of debt repayment. Of particular relevance is the recording of revenues and expenses by major item. Estimates regarding future financial developments would emanate from budgets and longer-term financial plans.

5.1.4	Apart from regular reviews prior to the decision to proceed with the air navigation services project, once that decision has been made, the original cost and revenue estimates will need to be reviewed and updated. This process should continue throughout the project construction and implementation phase.

5.2	Currency requirements - general

5.2.1	An important - and in some instances a determining - factor as to whether or not an air navigation services investment project can proceed is the demand it places on foreign currency, and the extent to which costs can be defrayed in domestic currency. Where, as will often be the case, project costs call for payment in foreign funds and the national currency is not freely convertible, it is essential to establish at an early stage the practicability of obtaining the foreign exchange required. The provision of such exchange will need to be examined with the appropriate fiscal authorities of the government, and for this purpose a statement should be prepared detailing as fully as possible both the foreign currency payments involved and the extent to which prospective sources of financing for the project can be expected to accommodate foreign exchange requirements. While arrangements securing the loan of foreign funds or even the provision of foreign goods and services on extended credit terms, serve initially to reduce exchange problems, all such arrangements remain a legitimate concern of the fiscal authorities of the government, since repayment of the debt involved ultimately constitutes a demand on foreign exchange reserves. However, air navigation services charges may be made in convertible currency and an air navigation services investment project may therefore not necessarily impose a (significant) burden on national foreign exchange reserves.

5.2.2	The extent to which payment of project costs can be made in the domestic currency or will involve foreign exchange depends on the many and varied factors present in each situation, and it is therefore only possible to give the following general guide as to the kinds of costs that might typically be expected to fall into each category.

5.2.3	Costs typically payable in domestic currency may include:

a)	construction work and other services performed by domestic contractors and firms;

b)	land acquisition including associated costs of any easements (e.g. rights of way over another's property), etc.;

c)	salaries, wages and other related costs of national employees;

d)	domestic materials, supplies and equipment of which the country is not a net importer;

e)	interest on domestic credit; and

f)	taxes

5.2.4	Costs typically payable (wholly or partially) in foreign currency may include:

a)	construction work and other services performed by foreign contractors and firms;

b)	imported equipment, materials and supplies;

c)	wages, salaries, allowances and other related costs of expatriate personnel; and

d)	interest on foreign credit.

Policy directives and contractual arrangements seeking maximum use of domestic labour and materials can be effective restraints on foreign currency requirements.

5.3	Repayment of loans

5.3.1	Early in the planning stages, an assessment needs to be made of the future ability of the provider of the air navigation services as such to service loan obligations. That ability depends to a large extent on the provider's revenue-generating capacity, which may increase significantly as a result of the availability of the new or improved air navigation services facilities financed by the loan concerned. Many providers still do not recover their total costs and those serving low traffic volumes have little or no immediate prospects of doing so. Where this is the case, the burden of securing funds to service the loan will normally fall on the government concerned. Nevertheless, where circumstances permit, growing emphasis is being placed on providers assuming responsibility for providing the funds required for meeting a part of the interest and instalment payments on a loan taken to finance air navigation services infrastructure developments.

5.3.2	In a growing number of circumstances where governments have delegated the provision of air navigation services to an autonomous authority or body, they have also delegated to such a body the authority to negotiate and secure its funding and financing requirements, and the obligation of servicing loans taken, including their repayment. Where such responsibility is assigned, a schedule should be drawn up showing for every loan or part of a loan involved when each instalment and interest payment is to take place and the amounts involved, as well as what revenue or other income the provider intends or is expected to pledge against these commitments. Funds required to service the debt obligations would need to be channelled from the over-all revenue flow, principally revenues from charges.

5.3.3	Repayment of foreign loans usually requires outlays in convertible currency. To the extent the entity that provides the air navigation services is responsible for any servicing of this type of loan, it may be advisable for it to be given access to such convertible currency as it might have generated from its operations. This could involve the establishment of a convertible currency account (or accounts) being held for that purpose by the entity, subject, if required, to monitoring by the foreign exchange authorities in the State concerned to ensure it is being used as intended.

5.3.4	More recently growing attention has been given to offering a further guarantee to the lender by stipulating in the contract or agreement covering the loan, that a certain portion of the air navigation services charges collected will be set aside, (possibly in a separate account) specifically to service interest and capital repayment obligations. In some cases, it may be necessary for the State to guarantee the loan. Where a foreign loan in convertible currency is involved the contract could stipulate, if this would facilitate obtaining the loan, that such an account would be held in a bank and State mutually acceptable to both parties.

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