INTOSAI Working Group on the Audit of Privatisation
Thirteenth Meeting London, 27 and 28 September 2006
Auditing regulatory frameworks for economic assets post-privatisation
Brian Boyd, Executive Director
Performance Audit Services Group
Introduction
Sydney Airport is a vital part of Australia’s economic infrastructure. It has been transitioned from a publicly owned and operated asset through commercialisation to privatisation. It is subject to a complex regulatory framework governing all aspects of its operation, encompassing matters as varied as air movement safety to land development to environmental impact to the pricing of services.
The regulatory tools implemented by government are equally varied. They include traditional legislated regulatory frameworks, with monitoring and compliance undertaken by designated statutory authorities and government departments. They include contractual obligations placed on the leaseholder through the privatisation process and overseen by government. They include pricing controls and prohibition on anticompetitive behaviour as well as the administrative regulation of air traffic volumes and timing.
The implementation of the Sydney Airport Demand Management (SADM) Act 1997 saw the introduction of the private sector as a key player in administering and enforcing the regulatory framework. This is unusual in the Australian context and a recent audit of air traffic regulation at Sydney Airport has identified a number of issues concerning the effective audit oversight of such a regulatory framework.
This paper is divided into three parts. The first part of the paper provides context for the latter discussion and elaborates on Sydney Airport’s key economic role, the tensions surrounding its development and regulation and its transfer to the private sector. The second part of the paper outlines the evolution and structure of the regulatory environment that governs the operations of Sydney Airport. The third part of the paper explores the some of the key accountability issues that have emerged through our recent audit activity and attempts to distil some lessons that may be of value to both auditing and legislating bodies more broadly.
The important public interest issues surrounding the sale and management of Australia’s airports generally and Sydney Airport in particular, have been reflected in the ANAO’s audit program in recent years:
· In 1997/1998, the ANAO examined the administration of the Sydney Airport Noise Amelioration Program (Audit Report No. 17 of 1997/1998) and the sale of Brisbane, Melbourne and Perth Airports (Audit Report No. 38 of 1997/1998);
· In 1998/1999, the ANAO examined the administration of Phase 2 of the sales of the Federal Airports (Audit Report No. 48 of 1998/1999);
· In 2002/2003, the ANAO audited the sale of Sydney (Kingsford Smith) Airport (Audit Report No. 43 of 2002–03);
· In 2003/2004, the ANAO audited the management of Federal Airport Leases (Audit Report No. 50 of 2003–04); and
· The ANAO is presently auditing the development and administration of the Sydney Airport Demand Management Act.
Sydney Airport
This section of the paper highlights the significance of Sydney Airport as an economic asset and the key public interest factors that influence the regulatory framework.
Sydney Airport is a major international gateway and cargo airport. It is Australia's busiest passenger airport, handling over 28 million passengers a year, including 9.6 million international passengers. It also handles over 14 million tonnes of freight annually. Sydney Airport is one of the world's oldest continuously operating commercial airports. It is located in the suburb of Mascot, only 8 kilometres from the city centre. To the west, north and east are densely populated inner-city suburbs and to the south, Botany Bay.
On 29 March 2001 the Government announced it had decided to sell Sydney Airport by a 100 per cent trade sale with the following sale objectives:
· optimise sale proceeds within the context of the broader Government sales and policy objectives;
· minimise the Commonwealth’s exposure to residual risks and liabilities;
· ensure that the airport lessee has the necessary financial and managerial capabilities to operate and provide timely investment in environmentally appropriate aviation infrastructure at Sydney (Kingsford Smith) Airport;
· ensure the sale outcome is consistent with relevant airport legislative, regulatory and policy requirements, including environmental, foreign investment, competition, access and pricing policies;
· ensure fair and equitable treatment of employees of Sydney Airports Corporation including the preservation of accrued entitlements; and
· ensure the airport lessee demonstrates a commitment to the effective development of airport services, consistent with Australia’s international obligations.
The sale was undertaken as part of a program to privatise 22 Federal airports that was completed in December 2003. In aggregate, the airports privatisation program raised sale proceeds of $8.5 billion. The airports privatisation program involved leasehold, rather than freehold, sales. Accordingly, the Commonwealth retains a continuing risk of liability as landlord and owner. It has also accepted a level of ongoing involvement in airport operations because of the need to administer the Airport Leases and related sale documentation. All leases are for a term of 50 years plus an option for the lessee to extend for a further 49 years. The airport sites revert to the Commonwealth at the end of the respective leases.
The existing and planned facilities at Sydney Airport are considered by Government to be adequate to meet its current planned capacity of about 353,000 aircraft movements and 30 million passenger movements per year. Sydney Airport’s capacity has been steadily increased since the early 1970s. Notable improvements have included extending runways during the 1970s and 1980s and the 1994 opening of a third runway on land reclaimed from Botany Bay. Since 1999, the progressive introduction of Precision Radar Monitoring (PRM) has sought to mitigate the decrease in capacity caused by adverse weather conditions.
Source: http://www.btre.gov.au/statistics/xls/atd_2004_05.xls 14 August 2006
Planned capacity depends primarily upon an airport’s physical infrastructure, on its pattern of use and on its rate of use. The relevant physical infrastructure includes runways, taxiways, staging and apron areas; terminal and baggage or cargo handling facilities; and links to ground transport.
In the case of Sydney Airport, physical infrastructure remains the single most important constraint on its capacity, in that any significant increase would mean expanding the airport site and/or its buildings and movement areas. However, expansion at Sydney Airport is constrained by the level of residential and commercial development around the site. Government policy is that:
We will not allow the lessee of Sydney Airport to undertake major infrastructure developments that would increase the runway capacity of the airport.[1]
Any significant increase in air movement capacity in the Sydney region is to be achieved by building an additional airport in the Sydney basin and the Commonwealth has purchased land to that end. However, in December 2000, the Government announced that, on the basis of Sydney Airport’s current capacity, it would be premature to build a second major airport in the city. The current timetable for the construction of a second Sydney Airport is uncertain.
The size and location of Sydney Airport have also given rise to community objections to the environmental impact of its operations, especially noise from aircraft movements. Community concern escalated after the November 1994 opening of the third runway, which significantly increased aircraft movements over one of the most densely populated urban areas in Australia.
To ameliorate the impact of aircraft movements on local residents, successive governments have purchased the properties of those worst affected, embarked on extensive sound-proofing of buildings at considerable expense[2], legislated curfew arrangements (which had been the operational practice of aircraft operators since the early 1960s)[3], and, most recently, actively sought to maximise the use of flight paths over Botany Bay in conjunction with the adoption of a long term operating plan in 1997.
Ongoing concern over the environmental footprint of operations at Sydney Airport along with considerable community concern saw, in 1997, the Parliament pass the SADM Act. This Act limits aircraft movements at Sydney Airport to 80 movements an hour during non-curfew hours.[4] However, the Act provides neither direct means of enforcing the limit nor any sanctions for those who may breach it. Instead, the Act provides for a Slot Management Scheme, to provide a workable and effective means of administering the movement limit.
The Regulatory Framework
This part of the paper provides a broad overview of the regulatory framework governing civil aviation operations in Australia with a focus on matters governing the timing and volume of air traffic – namely, the Sydney Airport Demand Management Act and the Sydney Airport Curfew Act.
In Australia, as in most countries, civil aviation is subject to extensive regulatory controls to promote a broad range of public policy goals.
The regulatory framework has three primary axes.
The first relates to civil aviation activity and infrastructure in the broader economic context. The goals of regulation are to promote economic efficiency and to discourage anticompetitive behaviour. It includes monitoring of prices, costs and profits relating to aeronautical services and aeronautical-related services, quality of service monitoring, and provision for access regulation. Such regulation is authorised by legislation such as the Trade Practices Act 1974 and the Airports Act 1996, and by appropriate instruments made under this legislation.
The Australian Competition and Consumer Commission is the principle agent in respect of this area of regulation, which has been characterised by a transition from direct intervention, through tools such as price controls and caps and arbitration in relation to access, to an oversight of prices and profits with regular reporting to Government and the parliament: In particular:
· In May 2002 the government indicated that airport-specific access regulation would not continue to apply. Accordingly, s. 192 of the Airports Act was repealed on 6 September 2003 by the Civil Aviation Legislation Amendment Act 2003 (Airports remain potentially subject to the general access provisions of Part IIIA of the Trade Practices Act).
· Following the report in 2002 by the Productivity Commission on price regulation of airport services, the government has largely deregulated airports, replacing price caps with price monitoring. Aeronautical services for regional airline services at Sydney airport are the only airport services still subject to a price cap, under Declaration no. 90, which has effect under Part VIIA of the Trade Practices Act 1974.
The second axis of the regulatory framework relates to the ongoing public policy interest in civil aviation safety.
The principle regulatory body in this field is the Civil Aviation Safety Authority (CASA) which was established on 6 July 1995 as an independent statutory authority. Under section 8 of the Civil Aviation Act 1988, CASA is a body corporate separate from the Commonwealth.
CASA's primary function is to conduct the safety regulation of civil air operations in Australia and the operation of Australian aircraft overseas. It is also required to provide comprehensive safety education and training programmes, cooperate with the Australian Transport Safety Bureau, and administer certain features of Part IVA of the Civil Aviation (Carriers' Liability) Act 1959.
The Civil Aviation Regulations (CAR) 1988 and the Civil Aviation Safety Regulations (CASR) 1998, made under authority of the Civil Aviation Act, provide for general regulatory controls for the safety of air navigation. The CARs empower CASA to issue Civil Aviation Orders on detailed matters of regulation. The CASRs 1998 empower CASA to issue Manuals of Standards which support CASR by providing detailed technical material.
The Chief Executive Officer manages CASA, and is responsible to the Minister for Transport and Regional Services.
Airservices Australia, another Commonwealth statutory authority, was established in 1995 to provide air traffic control management and related airside services within Australian airspace.
The third axis of the regulatory framework relates to the operation of aviation infrastructure. Its policy objectives include both the efficient and effective use of aviation infrastructure along with the management of the environmental impact of airport operations and development. This includes:
· The application of relevant state laws, taxes and charges to the airport lessee companies and businesses on the airport sites.
· Provisions in the Airports Act and in airport leases and sale agreements, overseen by DoTRS, covering matters such as maintenance and development of the infrastructure.
· Specific legislation dealing with matters at designated airports, covering matters such as curfew arrangements, noise mitigation and traffic flow regulation.
The federal Department of Transport and Regional Services (DoTRS) has responsibility for aviation and airports policy and regulation in Australia (that is, the second and third axes of the regulatory framework outlined briefly above, while the Department of Treasury is the lead agency in respect of policy relating to the regulation of airports from a purely economic perspective (the first axis of the regulatory framework).
It is in the context of the third axis of the regulatory framework that the Australian National Audit Office has recently examined the implementation and administration of the SADM Act. As noted above, this legislation was brought to the Australian parliament in 1997 with the goal of:
“giv(ing) effect to the government's commitment to cap aircraft movements at (Sydney Airport) at 80 movements per hour through the implementation of a slot system”[5]
The proposed legislation operates in conjunction with the Sydney Airport Curfew Act 1995 and the Long Term Operating Plan (LTOP) for Sydney Airport.
The Curfew Act regulates movements between 11:00 pm and 6:00 am. Key features of the curfew include restrictions on take-offs and landings to specific types of aircraft and operations as follows:
· small (less than 34,000kg) noise certificated propeller driven aircraft and low noise jets (mostly business and small freight jets);
· limited numbers of medium size freight jets meeting the most restrictive current noise emission standards; and
· international passenger jet arrivals (meeting the strictest noise standards) in the curfew shoulder period between 5:00 am and 6:00 am of no more than 24 movements per week (no more than five on any one day).
The LTOP (which is authorised by the Minister for Transport and Regional Development under the Air Services Act 1995) applies outside of curfew hours and requires that, generally, aircraft movements be conducted in such a manner as to minimise the noise impact on the surrounding population. The new legislation would limit the hourly number of movements in non-curfew hours at 80, and provide an administrative mechanism and associated compliance framework to allow that limit to be observed.