International Civil Aviation Organization

World-wide CNS/ATM Systems

Implementation Conference

Rio de Janeiro, 11 – 15 May 1998

WW/IMP-WP/26

2/4/1998

Item 3

Agenda Item 3:	Financial matters

A EUROPEAN VIEW ON KEY ECONOMIC AND FINANCIAL ISSUES

(Presented by 36 Contracting States1, Members of the European Civil Aviation Conference)

Action Paper

Summary

This paper will outline the issues that need to be considered before a major project is undertaken and describes established mechanisms currently in place. The paper outlines the steps taken in Europe to meet the requirements of a multi-State environment and addresses the key economic and financial issues to be considered in order to ensure cost-effective implementation of CNS/ATM systems. Recommendations for action by the Conference are at paragraph 8.

1.	Introduction

1.1	The aim of this paper is to highlight the key economic and financial issues involved in implementing CNS/ATM systems from a European perspective. It is based on the sub-headings set out in the draft agenda proposed for the Conference.

2.	Impact Of Civil Aviation On States' Economies

2.1	It is universally accepted that the establishment of a transport infrastructure is a vital part of States' economies. Increasingly, civil aviation plays an essential role in the development of these economies becoming the premium choice transport for both passengers and cargo. In Europe, we see the development of the civil aviation infrastructure as essential to the economic growth and prosperity of the region. As part of this we believe it is essential that air navigation services are provided as safely and as cost effectively as possible. Increasingly, this is likely to involve States on a multilateral basis.

2.2	The ICAO Manual on Air Navigation Services Economics (ICAO Doc. 9161/3) notes that the contributions by air navigation services to the economy can be assessed on the basis of five key indicators of direct, indirect and induced economic activity, namely, employment, personal incomes, business revenues, tax revenues and capital investment. Clearly the impact on the economy of jobs created and equipment manufactured and maintained in the economy could be significant. However, beyond this there is the impact of activities such as tourism which are highly dependent on the provision of efficient air navigation services.

2.3	The impact from the provision of air navigation services on a nation's gross domestic product (GDP) could affect decisions regarding investment in additional capacity including the implementation of CNS/ATM. In this respect it needs to be recognised that in the first instance there may be disadvantages for some States if equipment and expertise has to be purchased outside the State which may cause balance of payment problems. Additionally, major air navigation services projects may put demands on resources causing States to prioritise at the expense of other services.

2.4	Given this, it can be useful to carry out an economic impact analysis to quantify the benefits and thus help to obtain financing for air navigation services projects which would include CNS/ATM.

2.5	In Europe, we have increasingly recognised the importance of an efficient ATM infrastructure. Over the past decade major steps have been taken to improve efficiency by developing projects and programmes on a multinational basis. During this period, resulting from initiatives by the European Civil Aviation Conference (ECAC), the Eurocontrol organisation has increased its membership to 27 States and has taken on the task of project managing programmes with the aim of improving service provision in Europe, which led to the establishment of the European Air Traffic Control Harmonisation and Integration Programme (EATCHIP). This involves not only member States' civil aviation organisations but also their military counterparts. Multinational initiatives can also provide more cost effective solutions by eliminating duplication. One example in Europe is Reduced Vertical Separation Minima which is being managed by Eurocontrol as a common European project. In addition, user representatives participate in this process thereby ensuring that all interested parties have an input.

3.	Costs And Benefits For ATM Service Providers And Users

3.1	It is recommended that a full business case is prepared before a decision is taken to proceed with a project. The business case would normally set out the strategic issues, the resources needed and the reasons for proposing the project. An analysis of the various options, including "do nothing", would be presented. An essential part of the business case where major projects are involved is the cost benefit analysis (CBA) and the related financial analysis. The CBA shows qualitative and net quantitative benefits to the provider and other interested parties of undertaking the project. A financial analysis would follow on from the CBA. This would show the net present value (NPV) of the project including high, low, and base-case projections and the payback. An analysis showing the effect on user charges should also be presented.

3.2	It is likely that, given the costs involved in financing CNS/ATM, a CBA, together with the relevant financial analysis, would be required by the provider of funds in order to have reassurance regarding the economic viability of the proposal. A CBA would be especially relevant since it helps to identify the investment plan that best conforms to the economic goal of maximising net benefits. As part of this process it would be necessary to identify the incremental costs and benefits over a period of time. In the case of CNS/ATM, this would be the net cost associated with the implementation of CNS/ATM compared with the cost of continuing with the existing system.

3.3	Care will need to be taken when assessing the CBAs of ATM service providers and other interested parties. It is important that the CBAs and the associated NPVs for the ATM service providers are kept separate from those of the users although it is recognised that in assessing the overall viability of CNS/ATM to a State the overall NPV would need to be calculated and reviewed. In most cases equipment costs and associated operational costs would be allocated directly to ATM service providers and users according to ownership and usage. If there are common or joint costs these would need to be allocated according to generally accepted accounting principles; ICAO Doc. 9161/3 contains guidance on this issue. Care would need to be taken since an incorrect analysis might distort the CBA and produce misleading results.

3.4	Following on from the CBA the NPV would be calculated by taking the benefit (if applicable) for each year and discounting it back to the base year. This recognises the fact that a net surplus at the base year is worth more than the equivalent in the future. The NPV is calculated from the cash expenditures and benefits in future years. Accounting allocations based on the accruals principle of matching income against expenditure to reflect the liabilities incurred are not considered nor are the costs representing capital expenditure i.e. depreciation and interest. NPVs are based solely on the discounted values of future cash flows. In carrying out an investment appraisal other indicators may be used. These may include speed of pay-back and the size of the benefit to cost ratio.

3.5	Our experience in Europe leads us to the view that the involvement of airspace users at the earliest possible moment is invaluable in assisting the decision-making process. This applies equally to investment options as well as technical and operational issues. In addition, having user support helps to progress projects and to ensure that the decisions are fully supported. This will be particularly important in the context of CNS/ATM. The revised Eurocontrol Convention signed in June 1997 is a particularly good example of enhanced user consultation procedures.

4.	Sources Of Finance

4.1	Financing for CNS/ATM is likely to follow processes established for traditional air navigation systems. Chapter 6 of ICAO Doc. 9161/3 discusses various sources of financing in the context of air navigation services. However, in respect of CNS/ATM and, in particular, the Global Navigation Satellite System (GNSS) the Air Navigation Services Economics Panel (ANSEP) in its Report on Financial and Related Organizational and Managerial Aspects of Global Navigation Satellite System (GNSS) Provision and Operation (ICAO Doc 9660) concentrated on five sources: direct contributions from government, debt financing, internally generated resources, equity financing and leasing.

4.2	The form of finance will depend on a number of factors including the organisational form under which the services will be provided, the level of traffic within the airspace concerned and whether it would generate enough revenue to service debt. This could be particularly relevant where a local satellite data augmentation unit is involved serving only a few airports with very limited traffic.

4.3	Debt financing is becoming the most common form of financing, especially with the growth of autonomous agencies providing air navigation services. Many of these agencies now operate as quasi-independent entities with direct access to the capital markets and this is one of the reasons for the growth in corporatised bodies. Having this ready access to funds can greatly assist in the development of their ATM infrastructure. However, other bodies, because of their public financing rules, have to borrow through their governments. This means they have to compete with other public projects for scarce funds. ICAO policy also supports generating funds internally through depreciation and retained profits. Equity financing is associated with the privatisation of service providers. However, leasing may become an increasingly important financial option, particularly where GNSS component provision is concerned.

4.4	In addition to financing options described above there are further variations. For example, in the United Kingdom, to alleviate pressure on public funds, certain projects are being financed through the "Private Finance Initiative" (PFI). The objective of the PFI is to encourage investment by the private sector in public infrastructure and services. Two specific requirements for a PFI are a transfer of risk to the private sector and value for money. Some ATM providers could find this approach suited to their needs; however, it may not be suitable for all projects.

4.5	Finally, States and ATM service providers may have access to funding through aid programmes or through special export promoting agencies. Further sources of finance may be available through international financial institutions established for the purpose of financing projects promoting economic development. ICAO Doc. 9161/3 contains other examples. It should be noted however that a project for the provision of air navigation services could find itself competing for finance against a wide range of economic activities.

5.	ICAO's Cost-Recovery Policy

5.1	ICAO's basic cost-recovery policy is expressed in Article 15 of the Chicago Convention. ICAO Documents 9082/5 (Statements by the Council to Contracting States on Charges for Airports and Air Navigation Services) and ICAO Doc. 9161/3 gives further explanations on this policy. ICAO Doc. 9161/3 emphasises that no particular cost-recovery principles apply specifically to CNS/ATM (para. 1.19). Nonetheless in its report (ICAO Doc. 9660) the ANSEP Panel considered that because of its international character, in particular such components as integrity monitoring and wide area augmentation, ICAO should actively promote the concept of international cooperation.

5.2	ICAO accepts that a multilateral system can provide economies of scale for those States participating in the system and, because of the wider area covered, such a system facilitates recovery of charges. (ICAO Doc. 9161/3). A very good example of this is the Eurocontrol Route Charges System which currently serves 27 Member States in Europe. All Member States agree to adhere to a common set of principles for establishing their cost bases and these principles are based on ICAO policy and Council Statements. The Eurocontrol Route Charges System is further described below.

6.	Cost-Recovery Mechanisms

6.1	ICAO recognises that more States are likely to increase their efforts to recover full air navigation services costs from users in order to meet the increasing financial obligations of providing air navigation services (ICAO Doc. 9082/5 paragraph 29). This is especially relevant with the implementation of CNS/ATM where considerable additional resources may be required and which if financed out of general taxation could put unacceptable strains on public finances. In Europe the member States of Eurocontrol have achieved full cost recovery for the provision of en route air navigation services since 1982.

6.2	Cost recovery mechanisms are described in detail in ICAO Doc. 9161/3. In addition, in the context of CNS/ATM further guidance is contained in the report by the ANSEP Panel on Financial and Related Organisational and Managerial Aspects GNSS Provision and Operation (ICAO Doc. 9660). This report divides cost recovery/charging methods into two principal categories, namely, users charged directly by the satellite service provider or users charged through the air traffic service provider/State. The latter was the preferred option since charging users direct created institutional, enforcement and possible constitutional (i.e. authority to charge) problems.

6.3	Applying the second category, it would be up to the entity charged with deciding how these costs should be recovered. The report identified four methods. These were air navigation services charges levied directly on users, royalty payments, licence fees and levies on passengers, freight and fuel. However, air navigation charges were seen as having an overriding advantage over the other methods because they could be more closely related to those users who create the demand and who use the service. In addition many States already have established charges schemes for recovering the cost of providing air navigation services for which CNS/ATM could clearly be a part; the Eurocontrol Route Charges System is considered to be an ideal vehicle for this.

6.4	One other factor also needs to be considered. By the nature of the service CNS/ATM lends itself to recovery over a wide geographical area, for example on a regional basis; and there are a number of established regional air navigation services charging systems. The Eurocontrol Route Charges System is one of the most successful.

6.5	The Eurocontrol Route Charges System was established in 1971 and now has 27 participating States all of whom are members of Eurocontrol. These States cover the majority of States who are members of ECAC and it is the intention that all ECAC member States will join Eurocontrol and participate in the route charges system. Under the Eurocontrol Route Charges System, States calculate their cost bases according to common principles. A single charge is levied for each flight operating within the region. This follows ICAO policy and guidance as set out in the Council Statements, including the charging parameters used which are based on distance flown and aircraft weight. By generating a reliable revenue stream for participating States the system has proved to be a major enabler for several European ATS providers to secure investment funds from the markets, especially as the assuredness with which this operation is undertaken and its efficiency in collecting the moneys due, helps significantly to limit their exposure to financial risk. It is foreseen that the Eurocontrol Route Charges System would be the vehicle used to recover the costs associated with CNS/ATM Systems.

6.6	Similar arrangements are in place in other parts of the world, for example ASECNA and COSECNA. Some are operated by multi-national organisations representing the service providers and others provided nationally or by non-service provider agencies such as IATA. One common requirement of all these arrangements is that they must follow accepted ICAO policies and principles and be based on an open and transparent approach with the users made fully aware of the necessary detail through agreed consultation procedures.

6.7	The position of ICAO itself should not be overlooked. ICAO has considerable experience in administering multi-State cost recovery schemes such as the Danish and Icelandic Joint Financing Agreements, and more latterly with the North Atlantic Height Monitoring System Arrangement. In addition, ICAO could facilitate implementation of CNS/ATM by providing various assistance to States and assisting regional co- operative efforts.

6.8	In establishing a cost recovery system consideration would need to be given to identifying costs more properly allocable to non-aviation users. According to ICAO policy, these costs would need to be separately identified and excluded from the costs to be recovered from civil aviation. This issue is particularly highlighted in ICAO Doc. 9660 and reinforces the point that only costs of those services contained in the ICAO Regional Air Navigation Plans should be recovered from civil aviation users. However, this creates a further set of problems concerning: an acceptable means of allocating these costs; the availability of suitable and acceptable cost recovery mechanisms; and the preparedness of non-aviation users to contribute towards the costs of GNSS.

6.9	Recognising the need for urgent action in this area, work is being initiated in Europe, in coordination with the user organisations.

7.	Conclusion

7.1	Europe has recognised that an efficient ATM infrastructure is vital to the regions' economies. Major transport developments have to be carried out in a multi-State environment and in full consultation with airspace users at all stages. Processes and mechanisms have been established to meet this need. The nature of CNS/ATM particularly lends itself to this approach.

7.2	It is essential that a full business case is prepared for all projects. In the current economic environment and, with the cost of air navigation services increasingly being recovered directly from airspace users, they must be able to satisfy themselves that projects are financially justified. Involvement of the users at the earliest possible opportunity in the project appraisal is highly recommended and, through the revised Eurocontrol Convention, Europe has taken specific steps to enhance this process.

7.3	When considering CNS/ATM projects, appropriate cost recovery mechanisms must be in place. These will help to ensure that regular revenue streams are generated which in turn will facilitate the future funding of projects.

7.4	The issue of obtaining financial contributions from non-aviation users who will benefit from GNSS will need to be urgently resolved; consequently, Europe is initiating work in this area.

8.	Recommendations

8.1	The Conference is invited to:

a)	recognise that a full and detailed business case is required for all CNS/ATM projects; and

b)	endorse the need to address, as a matter of urgency, the issue of cost-allocation amongst all users of GNSS.

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