INTRODUCTION
In
1992, the government of Canada transferred four federally owned airports to
local airport authorities or LAAs. These transfers were part of a general
reform presented in 1987 by the Minister of Transport at the time.[1]
A few years later in 1994, Transport Canada issued the National Airports Policy[2]
or NAP, which would speed up its withdrawal from the direct production of
airport infrastructure services. It would gradually transfer a second round of
airports to Canadian airport authorities, or CAAs. However, Transport Canada
was careful to point out that this delegation to local entities would be different
from the earlier transfers in that it modified certain rules of governance that
had proven to be less effective than expected upon implementation. The new
policy set out the federal government's role in more detail and explained the
responsibilities of all parties involved. Overall, the contractual relationship
between the two parties became clearer and more transparent. It is this
National Airport System, or NAS, made up of 26 airports that the government has
commercialized while maintaining its right of review over the safety standards
and the sustainability of the core network.
The
same document published in 1994 also mentions the commercialization of Canada's
civil air navigation system. This came about in 1996 through the sale of the
entire operation to a private not-for-profit organization, called Navigation
Canada or NAV Canada. The responsibilities of Transport Canada were greatly
reduced and basically involved ensuring strict compliance with the regulations
governing air safety, which was a contrast from the airport transfers where it
retained ownership of the airport property and leased out the infrastructures.
Another
step in commercializing the transport infrastructures was taken in 1995 when
Transport Canada published the National Marine Policy[3]
or NMP. The objective was essentially the same as two preceding cases, i.e., to
make the Canadian marine network more efficient. As with the airport transfers,
Transport Canada established a National Port System, or NPS, which consisted of
ports managed by Canada port authorities or CPAs. In 1999, 17 of the 18 ports
designated to be part of the National Port System received their letters
patent. Finally, the last commercialization of infrastructures was that of the
St. Lawrence Seaway. It came under the philosophy of the National Marine
Policy, which was to reduce its operating costs and thereby increase the volume
of traffic. Transport Canada retained ownership of the current structures in
both instances.
* *
*
This
research on the mechanisms for delegation to new commercially oriented private
entities is divided into six parts. The first part describes the context
surrounding each of the three transfers and the sale made by Transport Canada.
It also includes a description of the different governance and accountability
structures of the new production agencies comprised of the airports and ports,
the new NAV Canada entity and the management firm formed by the users of the
St. Lawrence Seaway. The presentation of the facts discusses the pertinent characteristics
of each of these new commercial infrastructure providers.
The
second part covers the agency theory, with the focus on how responsibilities
can be delegated effectively between a principal and an agent. Effective
delegation is one that minimizes agency costs, or maximizes the profits for a
private firm or the cash flow for a not-for-profit corporation. The analytical
process presents three models whose primary difference lies in the existence of
clearly established ownership rights in the first case, and the lack thereof in
the other two cases. The first model, which is the classic scenario, deals with
the delegation between the shareholders as the principal and the managers as
the agent in a private company whose share capital is scattered. The second
model looks at the delegation between elected politicians as the principal and
public servants as the agent. The third model discusses the delegation that
takes place in a new entity, a not-for-profit institution, while keeping in
mind that it is a substitute for the services that were previously supplied by
a federal department or public agency.
The third part covers the main characteristics of delegation for each of the four newly commercialized entities, and the operational effort to minimize the agency costs. The fourth part discusses the performance of these four organizations as commercial infrastructure providers with respect to their clienteles. Three specific themes are dealt with in turn. The first one covers the mechanism for determining effective price levels for producing their respective services and the volume of investment required to maintain a sustained growth rate. The second theme involves the applicability of the renewed concept of network effects on the various airport and port agencies brought about by the use of high technology. The last theme covers the investment financing and production cost-recovery. In short, how the current trade-offs allow new commercial providers to fulfill their service delivery contracts at the best possible cost and ensure their long-term survival.
The fifth part contains a presentation and an analysis of the experience in other countries where similar or comparable institutions and governance structures were introduced. The comparison helps to put the Canadian experience into perspective. The last part discusses the general performance of the four new commercial transport infrastructure providers. It suggests some corrective measures to improve their performance, since the detailed analysis revealed some shortcomings.
PRESENTATION OF THE FACTS
The
different governance and accountability structures of the new commercial
infrastructure agencies are presented according to the chronological evolution
of the four forms of transfer implemented by Transport Canada. We start with
the two-phase transfer of the airports. Although the two regimes differ in many
regards, we have chosen an inclusive, integral approach that emphasizes the
main facts and shared principles of governance and accountability, and discusses
the most distinctive ones when required. We end this section with a summary of
the problems raised by the two airport transfers.
1.1 The two rounds of airport transfers
The
first round of transfers, like the other transfers, occurred in a particular
economic context. Many studies on privatization have all come to the same
conclusion that governments divest themselves of certain economic activities
when they are experiencing financial difficulty: "The reason most often
cited for privatization is fiscal stress".[4]
For several years now, the federal government has been grappling with a high
deficit that it must absorb by reducing public spending. Transport activities,
in particular the production of infrastructures, are good candidates for such
an operation. In fact, there are several other institutional arrangements that
could be good substitutes for Transport Canada's centralized management of the
airports, as many experiences in other countries have shown. By removing itself
from the production of airport infrastructures, the federal government is
making a wise move because airport infrastructures require many subsidies to
operate. They have a large number of employees, who are in fact public
servants, and they require a high volume of investment. Any form of delegation
naturally results in a drop in public spending in accordance with the desired
goal of a zero deficit.
1.1.1 The National Airports Policy
The
origin of the National Airports Policy can be traced back to a policy statement
entitled "A Future Framework for the Management of Airports in
Canada". The two relevant thrusts are the terms and conditions for
transfer and operation, and the final, definitive transfer of the airports,
meaning their "commercial orientation, potential contribution to economic
development and responsiveness to local interests and concerns."[5]
In
1992, Transport Canada transferred the Vancouver, Calgary, Edmonton and
Montreal airports to local airport authorities, or LAAs. In short, the
operation was a pure and simple transfer of Transport Canada's responsibilities
to these new commercially oriented private entities. The airports had to be
transferred for their fair market value. The new airport infrastructure
providers were subject to the rules of governance and accountability contained
the guiding principles introduced in 1987 and in the supplementary principles
of 1988.[6]
Nevertheless, the lack of a clear and precise policy on Transport Canada's new
role as landlord and its responsibilities with respect to the network's
sustainability resulted in many ad hoc
decisions being made according to the best knowledge at the time.
It
was not really until 1994 that Transport Canada issued its National Airports
Policy and published clear reasons for the second round of transfers to
Canadian airport authorities. Delegation to third parties would, according to
the strategy developers,[7]
cause the operating costs of Canadian airports to shift from the taxpayers to
the stakeholders,[8] impose
market discipline on the development and operation of the airports and
encourage managers to be more attentive to the needs of their respective
clientele and municipality. The Auditor General of Canada has added another
more unofficial reason that Transport Canada was no longer able to raise funding,
which "would have resulted in deferring capital projects and extending the
life of aging facilities and equipment."[9]
In
short, Transport Canada killed two birds with one stone: it decreased its role
as a service supplier and it reduced its future financial commitments. It
created a more competitive environment for the production of airport
infrastructures, which could only please all the stakeholders that had
airport-related activities. It simplified and improved the decision-making of
managers who were now closer to the stakeholders. From that point on, it was
anticipated that the new private regime, whose management would be closer to
the users, would encourage local executives to follow more efficient management
standards, apply service fees that would be closer to marginal production
costs, and adopt investment policies that would support the growth in demand.
One could hypothesize that for the strategy developers of the first round of
transfers, the new environment would emphasize the responsibilities of the new
players coming from the local environment, and would lead to much greater
efficiency than what had existed under the central management of Transport
Canada. In short, some actions and decisions that were considered inefficient
under government management would no longer occur in the new private system. In
the eyes of the strategy developers, there would be a perfect fit between these
newly commercialized private entities and the economic efficiency created by
the forces of a competitive market.
The
second round of transfers really started in 1996 with the transfer of the
Toronto airport to a Canadian airport authority. It has still not been
completed because Transport Canada is still negotiating with the small airports
that are part of the national airport system[10]
and whose financial viability in the long term is a concern. As explained
earlier, the objectives were now clearer and the means to implement the
commercialization were more developed. In addition, Transport Canada had gained
considerable experience over the years with the result that many improvements
could be made to the terms of the transfer contract. In particular, the new
policy of 1994 defined the reference framework for delegating airports to
Canadian airport authorities and determined Transport Canada's new role.[11]
Thus,
Transport Canada would maintain its role as regulator. It would give up its
role as an airport owner and operator for that of an owner and landlord of
airport infrastructures. It would remain responsible for all aspects of
aviation safety. It would introduce measures, mainly financial, so that the
airports that it wanted to transfer would become more profitable and could be
acquired by local authorities. It favoured a wider application of user fees and
charges by the new Canadian airport authorities. It would guarantee the
integrity and long-term viability of the vital NAS system. Nevertheless, these
main guidelines that emphasized profitability, the responsibility of local
authorities and the promotion of regional economic development created a degree
of uncertainty among the managers of the new commercially oriented entities.
Local executives could set priorities that differed from those expected by
Transport Canada. Thus, they had some flexibility or discretionary power that
they could eventually use to their advantage.
The
1994 policy was also accompanied by two documents: one setting out the
fundamental principles governing the creation and operation of Canadian airport
authorities[12] and the
other describing the public accountability principles.[13]
The first document included the main terms of Transport Canada's transfer
contract and certain operating regulations for the new private infrastructure
providers, while the second one focused more on the principles of governance
and accountability that the new tenants had to comply with under the delegation
granted by Transport Canada.
The
summary of the environment in which the two rounds of transfers took place, and
the overview of the approach implemented by Transport Canada to complete its
exercise of delegating the airports to the newly commercialized airport
infrastructure providers are a good background to describe the basic
characteristics of the process.
1.1.2 Description
and analysis of the newly commercialized airport entities
We
present the different aspects of the contracts signed between Transport Canada
and the many local authorities that have acquired management of the airport
infrastructures. The first section covers the main components of the contract
such as the status of a private not-for-profit corporation, the term and
monetary provisions of the lease, its self-sufficiency and its
"off-airport" activities. The second section discusses the main principles
of governance and accountability that accompany and influence the new
commercial entities.
1.1.2.1 The main terms of the
contract
The general framework
The
airport transfers occurred under the framework of the Airport Transfer (Miscellaneous Matters) Act[14]
of 1992 that authorized the Minister of Transport to proceed with the operation
to sell, lease or otherwise transfer an airport. Each of the airports whose
management was delegated to a local or Canadian airport authority would be a not-for-profit
private non-share capital corporation, formed pursuant to Part II of the Canada Corporations Act,[15]
now the Canada Business Corporations Act,
or a provincial act for the Calgary and Edmonton airports.[16]
Subsection 154(1) of the federal act was very clear since a corporation created
in this way was "a body corporate and politic, without share capital, for
the purpose of carrying on, without pecuniary gain to its members, objects, …
of a national, patriotic, religious, philanthropic, charitable, scientific,
artistic, social, professional or sporting character, or the like
objects." Each of the airport authorities would operate in a
self-discipline context. Transport Canada would not impose any regulations
governing certain types of conduct that the new airport authority could adopt
because of its statute as a natural monopoly. The airport authority would also
have to be self-sufficient and elect a board of directors. Moreover, the lease
was more than a contract between the parties because it contained the
obligations of the landowner and tenants of any airport infrastructure.
A local or Canadian airport authority was different from a traditional not-for-profit corporation, whose revenue comes primarily from its donors, because it produced commercial services that were subsequently sold to the stakeholders. It was thus a corporation with non-existent ownership rights, meaning that no person working for the corporation had the ownership rights to appropriate the net cash flow resulting from its activities, which would be the equivalent of the profits in an institution of this type. However, this did not mean that the stakeholders would not try to acquire them in some way. In short, being a private not-for-profit corporation did not imply that it could not have a positive net cash flow, but merely that it could not distribute any profits because nobody had the official rights of ownership to them. The amounts thus collected could increase the volume of investments or go toward paying the current operating expenditures.
Income tax exemption
The
contract for both rounds of transfers expressly stipulated that no income tax
would be payable by local and Canadian airport authorities on revenue that was
derived solely from an airport business.[17]
The exemption was a form of subsidy granted by Transport Canada to increase
their net cash flow and make their
task easier in the financial market should they need financing. It should be
noted that the Canada Customs and Revenue Agency has already granted or will
soon grant this exemption to all the other newly commercialized transport
infrastructure providers. A provision in the incorporating act of
not-for-profit corporations already exempted them from having to pay income tax
because of their non-commercial nature. This formal mention in the Airport Transfer (Miscellaneous Matters) Act
was redundant.
The term of the lease and renegotiation
The
main components of the lease contract between the two parties, the transferor
and the transferee, were as follows. The lease would be for 60 years, with an
option to renew for an additional 20 years. Transport Canada would retain
ownership and lease out the airport infrastructures. The transferor, Transport
Canada, could not cancel the lease unless a local or Canadian airport authority,
the transferee, did not meet the financial commitments or did not comply with
its contractual responsibilities. As many studies and analyses of the airport
infrastructure production industry have noted, the transferor did not have many
formal avenues for penalizing the transferee if minor contract violations
occurred, or if management lacked transparency and integrity. In a 1999
research report by Transport Canada,[18]
it was pointed out that two of the four local airport authorities were one year
late in their five-year performance review. The Auditor General of Canada
observed "although it was to have been completed in June 1998, the review
exercise…had not been finalized at the end or our audit in February 2000."[19]
Furthermore,
Transport Canada renegotiated several leases with airport authorities in both
the first and second rounds of transfers. Each renegotiation involved a
trade-off between the parties concerned. Each one had to offer something in
return for something from the other. The benefits put forward by Transport
Canada[20]
for renegotiating the leases for the Calgary, Edmonton and Vancouver airports
were: a) growth and accelerated passenger traffic; b) accelerated capital
expansion; c) the perceived superiority of the Canadian airport authority rent
model; and d) the desire to install the Public Accountability Principles,
including the federal government's appointment of two or three board members.
According
to the Auditor General of Canada's evaluation, Transport Canada would assume
the costs in the form of a reduction in the flow of rents estimated at $289
million over the term of the three leases. The benefits gained by Transport
Canada would take the form of increased investments, adherence to the new rent
calculation model by the three LAAs, and acceptance of a new governance
principle. A variation of this scenario was replayed when the rent was
renegotiated with the Toronto CAA. The private managers agreed to undertake
capital works projects worth $185 million, which were the benefits sought by
Transport Canada, in return for a rent reduction of the same amount, which were
the costs the landlord was prepared to assume.[21]
In total, the four renegotiations resulted in a reduction of $474 million in
foregone rent, or a net loss of $342 million for the term of the four leases.
Some benefits were tangible, such as investments for supporting the rapid
growth in demand, while others were intangible, such as the changes made to the
governance and accountability principles. Only the costs were known with
certainty, whereas the benefits were harder to quantify.
Fair market value
According
to the National Airports Policy, all airport transfers had to reflect the fair
market value. This is defined as the discounted cash flow of future revenues generated
by the activities of the airport. The fair market value is different from the
net book value, which is based on historic costs. Fair market value consists of
net book value plus actual saleability, meaning intangible values such as
airport location. The airports were natural monopolies and their fair market
value depended on their location in Canada. Before making any decisions,
Transport Canada was required to conduct financial analyses to determine the
fair market value. This would then be used as a basis for determining the rent
for the land and the airport infrastructures.
Transport
Canada's transfer of an airport to a local or Canadian airport authority for an
amount other than the fair market value was like granting a subsidy for the
duration of the lease. Transport Canada thereby helped the new commercial
entity to obtain funding with better conditions from financial institutions
since the annual flow of revenue generated by this implicit subsidy was not
included in the annual rent paid to Transport Canada. Another way of describing
the same idea would be to say that transferring an airport for an amount less
than its fair market value resulted in a reduction in the rent collected by
Transport Canada, who was the owner and landlord of all the airport
infrastructures located at an airport.
Furthermore,
some airport authorities could benefit from the assistance program for the
financial viability of transferred airports. Transport Canada's contribution
allowed an LAA or CAA to defer the rent for the first five years. This
accumulated debt would be repaid after five years at an interest rate based on
the five- to ten-year federal bond rate. This was an implicit subsidy because
the interest rate being charged was lower than the rate that a local or
Canadian airport authority would have obtained on the Canadian financial
market.
The
Auditor General of Canada devoted many pages to this issue. Nevertheless, it
considered everything in an overall perspective in which the transferor had
ownership and was attempting to maximize its wealth when leasing its location
and assets to a transferee. It never considered the fact that the political
dynamics were a completely different story. The transferor, Transport Canada,
was a temporary holder of the ownership rights to the airport infrastructures.
When it leased out an airport and the appurtenances for a price that was lower
than the fair market value, it increased the wealth of the users.
Determining the rent
Transport
Canada's transfer of an airport to a local or Canadian airport authority did
not mean that the transferee paid an amount for using all the airport
infrastructures. However, according to the terms of the lease, the transferee
had to pay an annual rent that was a percentage of the flow of revenues
generated by the various airport activities. There were two calculation models
for determining the rent that reflected the two rounds of transfers.[22]
Each one consisted essentially of a base rent, which was determined by the
difference between the base revenues and the base costs, and a participation
rent, which was determined by taking the difference between the actual revenues
and the stated revenues and weighting this amount by a given percentage. The
first formula designed for the four airports in the first transfer, the LAAs,
was complex because the two components, the base rent and the participation
rent, included several categories of revenue. The second formula, which applied
to the CAAs, was simpler. The base rent was calculated by taking the difference
between the aggregate revenues and the base costs adjusted for the consumer
price index (CPI). The participation rent was the difference between the actual
gross revenues and the base revenues weighted by the consumer price index,
which was then multiplied by a given percentage. Except for the Montreal
airport, whose rent was still based on the first formula, all the other
airports used the second, simpler formula, or a variation thereof.[23]
Table
1 shows the evolution from 1992-1999 in the amounts of gross and net rent
received, and the support granted by Transport Canada to the local or Canadian
airport authorities, in millions of dollars and in percentage.[24]
The first line shows the gross rents paid by the new airport authorities. The
second line shows the federal assistance provided to the same new commercial
entities in the form of grants for revenue shortfalls and negative rent, a less
visible subsidy. The third line lists the value of net rent collected by
Transport Canada and the last line shows the percentage of financial support
from Transport Canada for each dollar of gross revenue collected as rent.
Table 1: Rent received and support from Transport Canada, 1992-1999, in
millions
|
Indicators/Years |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
|
Gross rent $ |
35.2 |
62.9 |
71.8 |
81.0 |
90.2 |
201.2 |
214.9 |
230.2 |
|
Federal support $ |
11.8 |
33.9 |
34.7 |
28.3 |
26.6 |
127.5 |
41.3 |
59.7 |
|
Net rent $ |
20.3 |
21.5 |
21.5 |
44.5 |
65.6 |
70.2 |
179.4 |
170.5 |
|
Support/gross rent % |
33.5 |
53.9 |
48.4 |
34.9 |
29.5 |
63.4 |
19.2 |
26.0 |
Source:
Auditor General of Canada (2000), Transport Canada, Airport Transfers: National
Airports System, op. cit., p. 22.
This
table shows that the net rent revenues collected by Transport Canada came to
$593.5 million for the entire period. The revenues have been rising since 1995.
However, this amount hides a complex reality in that contributions from the
Toronto, Vancouver and Calgary airports totalled 95% of the amount paid to
Transport Canada in 1998. A high percentage of these rents reflect the natural
monopoly situation of these airports. Moreover, this amounts to saying that
many airports in the national airport system were having trouble covering their
costs. This was either because the airport infrastructures were too large for
the volume of passengers and cargo handled, or there was considerable
undercapitalization that required sustained investments for a certain number of
years in the future. Excess production capacity, the first hypothesis, resulted
in a fair market value that could be less than the net book value. Inadequate
production capacity that the new tenants had to make up, the second hypothesis,
implied a fair market value that was higher than the book value because of the
discounted value of future revenue flows.
As
for the federal support granted to the airports, it came to $246 million for
the period being considered. But we have to acknowledge that it rose less
rapidly than the growth observed in the net rents. Finally, the share of
government support in proportion to the gross rents appears to have dropped
over time. The average for 1992-1999 was 36.9% while the percentage for the
last two years varied between 19.2% and 26.0%.
"No worse off" situation
Calculating
the market value of an airport infrastructure that subsequently determined the
value of the annual rent to be paid by the new commercial entity had an impact
on certain other lease provisions. Transferring airports to LAAs and CAAs
should have resulted in Transport Canada being in a "no worse off"
situation. This principle applied at two levels: to all airports and to each of
the airports individually. In order to estimate such a situation, the current
discounted value of the future revenue flows since transfer had to be compared
with the hypothetical discounted value of the net cash flows over 20 years that
Transport Canada would have generated as the operating manager. This debate was
a source of disagreement among the new commercial entities and Transport
Canada. It led to the thorny question of what percentage of the added value
that was created by the new private management should be returned to Transport
Canada.
If
an airport infrastructure has been evaluated at its fair market value and if
the rent has been set according to this value, Transport Canada should obtain
an optimal return on its property holdings and airport investments made in the
past. But the landowner, Transport Canada, would have no right to the
additional profits generated by better management by the new tenants. They
would be the only holders of this additional added value since they were the
ones who were performing better with the same initial capital stock. This
situation can be easily compared with that of a company takeover. The purchaser pays the present market value for the
firm's assets and wagers that additional profits will be generated if
operations are rationalized. If the new tenants, the LAAs and CAAs, financed new
investments, they would be the only ones who could claim the returns. But if
some capital expenditures came from subsidies or occasional measures by
Transport Canada, then Transport Canada could have the right to claim a return
on its investments. However, the financial statements available from the new
private airport institutions and the possible net cash flow scenarios from
Transport Canada did not make it possible to answer to this question.[25]
The number of unknowns and intangibles was too high for a semblance of a valid
response to make any sense.
Not
all the additional revenues generated by the better management abilities of the
new managers and their self-financed investments should enter into the equation
for determining the rent. If such amounts were to be included, the rent would
become somewhat of a hindrance to the growth of the LAAs and CAAs. The new
directors would be less inclined to increase revenues since the principal would
claim all or some of them.
Self-sufficiency
The
new commercial airport infrastructure providers had to be self-sufficient for a
period of five years. The National Airports Policy specifically stated that
"existing user fees and charges will be applied more widely."[26]
To the surprise of Transport Canada, the user fees collected directly from
passengers, commonly called airport improvement fees (AIFs), became a reality
in 1993 at the Vancouver airport. Since 1997, most of the airports in the
national airport system have introduced a similar user fee.[27]
The reason is very simple. A new commercial airport infrastructure management
entity has no reputation in the banking market. It does not own the land or
airport infrastructures. Because it is only a tenant, it cannot offer a
physical, tangible guarantee to the lending institutions. However, it is a
natural monopoly because of its location. The fewer competing airports there
are in its area, the more its monopoly rent increases. Moreover, an airport
improvement fee is only a very small share of the price of a ticket. Consumer opposition
is thus fairly weak when travellers learn that they must pay the fee. Since the
demand for air transportation is a derived demand, the result is that airline
customer demand regarding the introduction of such AIFs is inelastic.
The
Canadian banking institutions were following the performance of the new
management in Vancouver.[28]
The introduction of an airport improvement fee sent them a signal that the new
private managers could impose their natural monopoly status to finance their investments.
This was how the local airport authority in Vancouver obtained the necessary
funding. All the other commercial airport infrastructure providers then copied
this recipe to show their intentions to the finance market: they were prepared
to raise the required funds among their clientele to guarantee their loans.[29]
It
should be reiterated that the major Canadian airports benefited from a natural
monopoly whose size was determined by their respective locations. The
landowner, Transport Canada, who transferred the airports in a lease, was
facing the following alternative: either it kept the rents from each of these
airports because of its status as the landowner and then probably distributed
them among the other airport authorities in less advantageous locations; or it
left the road clear for the stakeholders and they claimed the rents according
to their relative importance in the airport production operations, their
political lobbying power and any other considerations that allowed them to put
pressure on the airport authorities.
This interference in the existence of rents was based on the traditional concept of opportunity cost. The land that was being used for airport purposes, although it had no other short-term use, had an opportunity cost that corresponded to the sum that could be obtained by the owner if the land were sold. In the long run, the landowner could completely change the use of the land, if so desired. There was definitely a location rent that was reflected in the sales price.
Table
2 shows, for 1993-1999, the composition of the revenues and their growth for
the four airports in the first round of transfers. All the data, which were
compiled by Transport Canada, are in thousands of dollars. The first source of
revenues includes the landing fees that were charged to the airline companies
for the services rendered. The second source refers to the airport fees and
airport improvement fees that were charged to passengers. The former were
collected by the air carriers when tickets were purchased, and the latter were
usually collected directly from passengers at boarding. The third source
consists of the direct costs assumed by passengers, or the sum of the two
preceding lines. The fourth source contains the revenues that came from
concessions, property leases and parking fees. The total revenues are the sum
of all the sources of revenue for the four local airport authorities.
The
fastest growing sources of revenue were the airport improvement fees (AIFs) and
the other revenues generated by the ancillary and peripheral airport
activities. The AIFs increased from $24.8 million in 1993 to $131.5 million in
1999 and the miscellaneous revenues grew from $132.4 million in 1993 to $260
million in 1999. As for the total revenues for these four local airport
authorities, for the same period they rose from $264 million to $549 million. A
comparison between the AIFs and the total revenues collected by these four
airports in 1999 reveals that the AIFs played a major role in LAA financing.
The airport improvement fees made up 31.3% of revenues for the Calgary airport,
22.7% for Vancouver, 30.4% for Edmonton and 19.5% for Montreal. In percent,
they were higher than the landing fees paid by the airline carriers for the
same year, which were 14.0% for Calgary, 14.8% for Vancouver, 18.1% for
Edmonton and 11.7% for Montreal. Overall, the landing fees represented 14.0% of
revenues compared with 23.9% for the AIFs for 1999.[30]
Furthermore,
as shown in Table 1 above, according to certain terms and conditions, Transport
Canada would contribute to the financing of LAAs and CAAs during the five-year
transition period. It felt that this strategy to "lessen the burden on the
airport authority in the short term" would "provide higher returns to
the government in the long term."[31].
The Auditor General of Canada also observed that other federal sources of
financial support were provided for some of the airport authorities, such as
the Atlantic Canada Opportunities Agency and the Canada Infrastructure Works
Program.[32]
Table 2: Composition and growth in revenues
for the first four transferred airports, in thousands of dollars, 1993-1999
|
|
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
|
1. Landing fees |
|
|
|
|
|
|
|
|
Calgary |
7,931 |
8,060 |
9,423 |
11,272 |
12,126 |
12,948 |
13,447 |
|
Edmonton |
3,540 |
4,552 |
4,788 |
5,701 |
6,255 |
8,282 |
8,346 |
|
Montreal |
18,079 |
18,297 |
19,918 |
19,654 |
17,165 |
17,018 |
18,957 |
|
Vancouver |
14,086 |
15,099 |
18,481 |
27,843 |
36,320 |
37,226 |
36,333 |
|
Total |
43,636 |
46,008 |
52,610 |
64,470 |
71,866 |
75,474 |
77,083 |
|
2. Airport fees |
|
|
|
|
|
|
|
|
Calgary |
12,063 |
12,133 |
13,926 |
16,262 |
15,711 |
16,798 |
17,470 |
|
Edmonton |
4,380 |
4,618 |
5,416 |
6,398 |
6,723 |
7,156 |
6,912 |
|
Montreal |
24,103 |
24,535 |
25,774 |
25,932 |
23,096 |
22,922 |
23,252 |
|
Vancouver |
22,325 |
24,385 |
28,522 |
33,213 |
34,651 |
35,283 |
35,110 |
|
Total |
62,871 |
65,671 |
73,638 |
81,805 |
80,181 |
82,159 |
82,744 |
|
3. Airport improvement fees |
|
|
|
|
|
|
|
|
Calgary |
0 |
0 |
0 |
0 |
2,461 |
14,736 |
30,026 |
|
Edmonton |
0 |
0 |
0 |
1,211 |
2,243 |
14,310 |
13,982 |
|
Montreal |
0 |
0 |
0 |
0 |
4,721 |
30,275 |
31,562 |
|
Vancouver |
24,761 |
37,389 |
42,208 |
49,589 |
51,699 |
53,834 |
55,581 |
|
Total |
24,761 |
37,389 |
42,208 |
50,800 |
61,124 |
113,155 |
131,151 |
|
4. Passenger fees |
|
|
|
|
|
|
|
|
Calgary |
12,063 |
12,133 |
13,926 |
16,262 |
18,172 |
31,534 |
47,496 |
|
Edmonton |
4,380 |
4,618 |
5,416 |
7,609 |
8,966 |
21,465 |
20,893 |
|
Montreal |
24,103 |
24,535 |
25,774 |
25,932 |
27,817 |
53,197 |
54,814 |
|
Vancouver |
47,086 |
61,774 |
70,730 |
82,802 |
86,350 |
89,117 |
90,691 |
|
Total |
87,632 |
103,060 |
115,846 |
132,605 |
141,305 |
195,313 |
213,894 |
|
5. Other revenues |
|
|
|
|
|
|
|
|
Calgary |
19,894 |
20,691 |
23,577 |
25,643 |
30,201 |
34,356 |
35,045 |
|
Edmonton |
7,110 |
6,715 |
7,946 |
10,990 |
12,847 |
15,324 |
16,818 |
|
Montreal |
59,562 |
59,514 |
62,187 |
66,090 |
71,720 |
80,148 |
88,007 |
|
Vancouver |
45,861 |
51,506 |
57,224 |
78,972 |
90,910 |
110,370 |
118,109 |
|
Total |
132,427 |
138,426 |
150,934 |
181,695 |
205,678 |
240,198 |
257,979 |
|
5. Total revenues |
|
|
|
|
|
|
|
|
Calgary |
39,888 |
40,884 |
46,926 |
53,177 |
60,499 |
78,838 |
95,988 |
|
Edmonton |
15,030 |
15,885 |
18,150 |
24,300 |
28,068 |
45,071 |
46,058 |
|
Montreal |
101,744 |
102,346 |
107,879 |
111,676 |
116,702 |
150,363 |
161,778 |
|
Vancouver |
107,033 |
128,379 |
146,435 |
189,617 |
213,580 |
236,713 |
245,133 |
|
Grand Total |
263,695 |
287,494 |
319,390 |
378,770 |
418,849 |
510,985 |
548,957 |
Source:
Database from Economic Analysis, Transport Canada.
The
airport improvement fees nevertheless raised some major questions. Were the
fees collected by the LAAs and CAAs really being used to increase the volume of
investments or were they paying current expenditures? Did the factors that
determined the fees collected by the local and Canadian airport authorities
depend on their respective status as a discriminating natural monopoly, meaning
the application of Ramsey's Rule, or on the estimated cost of their
investments, which were then converted to user fees? Finally, a study conducted
by Transport Canada at the time of the five-year plan revealed that none of the
four local airport authorities had conducted a real review of the distribution
of operating costs.[33]
The subsidiaries
The
supplementary principles of 1988 for the creation and operation of local authorities
allowed LAAs to have subsidiaries whose activities were compatible with the
socio-economic interests of adjacent communities and the province. The CAAs
were also free to take advantage of this possibility, but none have done so to
date.[34]
There are presently 13 subsidiaries with "off-airport" business
activities. The list mentioned by the Auditor General of Canada reveals[35]
that these activities are related to airport management, consulting services,
airport marketing and investments in foreign airports. Some of the activities
take place in Canada and some are outside the country. Certainly, there is no
harm as such in managers of LAAs selling or exporting the technical knowledge,
management software, scientific expertise and management skills that they have
developed on the job to third parties, and earning profits in order to reinvest
them. These subsidiaries are private firms in the purest sense of the term.
The subsidiaries often directly used the name and reputation of the airports to which they are attached to gain credibility on the international market. Thus the managers benefited from the trademark to obtain revenues that they would otherwise have had difficulty obtaining had they started up their own consulting firm as a limited partnership. Thus there are relationships between the local airport authorities and the subsidiaries, with the result that the LAAs are generally responsible for the operations of the subsidiaries.
The
not-for-profit corporation status obliges the LAA managers to comply with
certain governance and accountability principles. The sticking point is that
they have integrated their "off-airport" activities with those
related to the management of their respective LAAs. They have consolidated
everything in their annual report and their financial statements. No outside
observer to LAAs that have such subsidiaries has an overview of the prevailing
situation between the main company and the subsidiaries.
These
are the main problems that have resulted from this method of proceeding. First,
Transport Canada has never prevailed itself of its right to review the private
sector subsidiaries of the LAAs even though the transfer provisions grant it
this right.[36] Second, the
"off-airport" activities could have an impact on the rent paid by an
LAA if funds are transferred between an LAA and its subsidiaries, as the
transfer would result in a direct or indirect reduction in the net cash flow.
Another monetary and political risk is that the subsidiary could default on its
loans.[37]
It would then be up to the parent company to honour the initial commitments.
Once again, the rent from the local airport authority would be affected later
on. Third, Transport Canada mentioned that its subsidiaries had received about
$17 million in interest-free loans from the parent companies. This diversion
could have a negative impact on the net cash flow of the airport authorities
involved and result in cross-subsidies with the activities of the
not-for-profit corporation supporting the other activities undertaken by the
subsidiary, and possibly even both at the same time.[38]
Finally, according to commercial aviation representatives, the managers of the
entities concerned, who were also the managers of the private-sector
subsidiaries, were devoting less time to supervising and operating a major
international airport, which was their primary purpose.
1.1.2.2 The general principles of
governance and accountability
This section covers the structural and internal components that determine and restrict the decisions and actions of commercialized airport infrastructure providers. The topics discussed are the board of directors and the principles of governance and accountability that the managers of the new airport entities must follow.
The board of directors
The
new commercial entities set up boards of directors with different appointment
criteria and different names depending on whether the airport authority was
local or Canadian. In the first round of transfers, the board members were
nominated by the municipal governments and other parties such as chambers of
commerce and boards of trade.[39]
These four transferred airports also differed with respect to their
incorporating act, with Montreal and Vancouver coming under a federal act, and
Calgary and Edmonton operating pursuant to an Alberta provincial act. The board
of directors is composed of eight or fourteen members for the first two
airports, and nine or nineteen for the Alberta airports. In addition to the
number of members on the board, the nomination process is also different. The
Calgary and Vancouver LAAs have few board members who were nominated by the
governments, whereas almost all of the Edmonton board members are nominated by
the governments. The two airports in Montreal, Dorval and Mirabel, are grouped
into one firm: the Aéroports de Montréal. This company has a hybrid structure
because the board members come from a collection of local governments and local
business associations. This organization, the Société de promotion des
aéroports de Montréal (SOPRAM), which is a not-for-profit corporation, appoints
its own board members.[40]
The
nomination process for CAA board members was modified with experience. The
federal government could appoint two or three members, which it could not do
previously.[41] Transport
Canada attempted to convince certain LAAs, when renegotiating their leases, to
adopt the CAA board member nomination procedure. However, interests varied from
airport to airport for other reasons, such as their specific characteristics,
and their respective compositions would not be changed.
Nonetheless,
the stakeholders have been far from reaching unanimous agreement on the
composition of the board of directors, be it a local or Canadian airport
authority. Naturally, each board reflects the interests and concerns of its
airport authority, and not those of the different levels of government and the
business associations that nominate it. But the situation is completely
different with respect to the interests of certain users who are not
represented on the board of directors. They must make do with informal
consultations that do not bind the board of directors, such as in the case of
airport improvement fees and capital projects undertaken by the managers of the
new commercialized entities. This is sometimes compounded by a lack of board
members who have good knowledge, extensive expertise in the aviation industry
in general, and an arm's length relationship with the industry. In short, it is
plausible and possible for the interests of the board of directors to be
different from the interests of those who are not represented on the board, but
who do happen to be stakeholders.
The responsibilities
We
complete these observations on the nomination process with a brief reminder of
the responsibilities of the board members, their duties and their roles in a
private firm.[42] These
elements will be very useful when it comes to analysing the conduct of managers
of the new commercialized entities. At the outset, the board of directors must
ensure the growth of the business and establish a strategic plan that will
ensure long-term survival and prosperity. The second responsibility of the
board is to provide for mechanisms that consider all the risks that the private
corporation could encounter, which first implies an analysis and evaluation of
their respective impacts. Third, the board members must oversee the performance
of the main managers who are delegated to deal with the day-to-day business.
Fourth, they must control the financial statements of the firm and monitor them
in their capacity as the principal. Finally, the board members are accountable
to their shareholders in all issues that involve the organization.
The roles
As a
rule of thumb, the roles of the board of directors are indicative of its
responsibilities. For example, the board of directors must select its managers
from among the most qualified candidates. It must also nominate the members who
will sit on the board of directors. It must ensure that operations run
smoothly, and it must be able to monitor and assess the firm's progress and
performance. When required, the board must report to shareholders and propose
solutions. Finally, the board must organize itself to ensure that its business
management includes good distribution of information or relevant information in
order to avoid complications or misunderstandings that would only be
detrimental to the firm.
The duties
The
main duties of the directors and managers can generally be divided into three
major principles of public liability. First, directors and managers must
exercise the same care, diligence and skill in their role that a prudent person
would exercise in comparable circumstances. They must also demonstrate their
diligence, skill and attention with respect to the corporation's business. They
must supervise and control. Second, they must act honestly and in good faith
with a view to the corporation's best interests. As an agent or representative
of the company, and therefore indirectly of the shareholders, they must be
loyal and honest toward shareholders in all circumstances. Third, they must
generally avoid placing themselves in situations involving a conflict of
interest between their duties and their interests; hence the obligation to
disclose their interests and to abstain from voting if necessary.
The
local and Canadian airport authorities must comply with the responsibilities
and duties that have been imposed upon them by their incorporating act and the
legislation that has evolved over the years. A not-for-profit corporation
differs from a profit-driven corporation in that the former is answerable to
its stakeholders, while a for-profit corporation is directly accountable to its
shareholders. A not-for-profit corporation implicitly defines its members by
those who sit on the board of directors. This discretionary power of the
directors is important because it usually determines which groups benefit from
any improvements to the airport infrastructures or the various expenditures
undertaken by the directors to reduce the net cash flow. Anyone who is excluded
from the board of directors is at a disadvantage in relation to those who are
on the board. The submission from Vancouver's YVR Business Forum to the Canada
Transportation Act Review Panel is very explicit in this regard: "In that
period, it has become clear to our members that the Authority is not fulfilling
the mandate set out for it as a not-for-profit, community-based organisation.
We feel it is out of touch with its stakeholders."[43]
The principles of governance
To understand the current functioning of the local and Canadian airport authorities, it is important to specify the environment resulting from the two rounds of transfers. The expectations of Transport Canada strategy developers were based partly on the system of checks and balances underlying the delegation of management to local authorities. A brief reminder of the explicit and implicit foundations for their expectations follows.
The self-discipline of the LAAs and CAAs, whose activities consist in producing local airport services and promoting economic development in the region, does not require any regulatory intervention. Of course, each LAA and CAA benefits from a natural monopoly because of its respective location. However, their private not-for-profit corporation status also checks their appetite and encourages them to prioritize the needs of users while minimizing production costs. In addition, the members of the board of directors are local representatives whose reputation may be tarnished by conduct that their peers would find unacceptable or inappropriate, hence their interest in complying with the general expectations of the members of their respective communities. The Canadian banking system disciplines both forms of airport authority, the LAAs and the CAAs. Since they cannot finance their operations with share capital, but only with loans in the form of bonds, short-term notes and margins of credit, the Canadian banks determine their respective risk levels and give them the appropriate credit rating. In the end, the fact that consumer demand for air transport is inelastic compared with user charges is not a significant factor.
The
principles of governance and accountability are contained in the respective
leases, in many documents setting out the rules and guidelines for each round
of the airport transfers and in the National Airports Policy statement of 1994.
They supplement the general context described in the paragraphs above. These
components must be considered as a whole when assessing the delegation of the
airports. The main elements of governance and accountability are the informal
consultations and transparency between the different stakeholders working
within an airport infrastructure and the managers and members of the board of
directors. Their explicit goal consists in improving the delivery of
information and in disclosing the issues encountered by each airport authority
to all the organizations that work directly or indirectly to provide airport
services, and also to the final users, who are the passengers and freight
handlers.
A brief summary
of the problems raised by the two rounds of transfers
The
LAAs and CAAs have reacted to this general environment in a way that has
surprised, worried and disturbed those who started the delegation process. In
short, the directors of the new commercialized airport entities enjoy a certain
discretionary power, and especially interests that allow them to act contrary
to the initial expectations of Transport Canada.
The
imposition of airport improvement fees collected directly from passengers to
finance investments and the determination of a reasonable amount have been the
first stumbling blocks. The managers of the LAAs and CAAs have had little
opposition from passengers because there is no formal process to consult with
them and they are not represented by any legitimate pressure groups. The
situation would be different if senior executives raised the traditional
airport fees. Of course, the directors of LAAs are not required to inform air
carriers of such increases whereas the directors of CAAs must provide 60 days'
notice before proceeding with such measures.[44]
However, the commercial aviation companies can at least express their disagreement
and lobby to oppose such changes, whereas passengers cannot. Furthermore, such
user charges suit the airline companies because they are not part of their cost
structure.[45] The quid
pro quo is that the airline companies do not receive any information on what
the airport authorities plan to do with the charges collected. In passing, the
situation in Calgary is exceptional. The airline companies there collect the
AIFs. In return, they are given some right to review the capital improvements
made by the managers.[46]
The
second bone of contention concerns some aspects of the way
"off-airport" activities have been developed. There have been two
distinct approaches, depending on whether the airport authority is local or
Canadian. For an LAA, the external revenues do not enter into the airport rent,
whereas for a CAA they are included just like all the other revenues collected
by the airport authorities. To date, only the LAAs have such subsidiaries,
which have spread out over Canada as well as abroad. Their external activities
cause a problem not only because of the risks inherent to any form of
investment, but also because of the scarcity of information divulged by the
airport authorities concerned. The financial repercussions of any poor
management practices affect all the stakeholders, even those who are not
represented on the board of directors but who will have to cover the costs, and
the Canadian taxpayers who will be denied the revenues from the delegation of
the airport infrastructures. The extent of "off-airport" activities
is a clear sign of the discretionary power of the managers and members of the
board of directors. Finally, the use of private firms is an additional means
for them to increase their compensation, which is something that the general
framework of a private not-for-profit corporation does not allow.
The
third source of disagreement involves the weak influence that airline companies
have on the volume of investments made by airport authorities. This situation
originates in the fact that the airline companies do not have any members on
the board of directors, contrary to NAV Canada for example, or that some boards
do not have any members with expertise and knowledge of the aviation industry
in general. Both the local and Canadian airport authorities are required to
hold only informal consultations. The airline carriers are especially concerned
that the subsidiaries of certain airport authorities pave the way for
cross-subsidy policies, meaning that the revenues generated by normal activities
are used to make up the losses incurred by a subsidiary. A second concern
involves the possibility that the airport infrastructures will overinvest with
respect to their demand for air transport services. These investments would be
more profitable elsewhere: "[T]he cumulative system-wide investment in airport projects may have
implications for national economic efficiency, specifically if it has lower
economic returns at the margin than alternative investments."[47]
The
fourth form of disagreement involves the lack of financial transparency
provided by many local and Canadian airport authorities. Many stakeholders,
including the airline companies, deplore the lack of information that would
help them understand how the user charges set by the airport authorities for
airport infrastructures are determined. The same dynamic exists with respect to
the airport authorities that collect the AIFs from passengers. They do not want
to divulge the percentage allocated to investments or to current expenditures.
Yet they proclaim loudly and clearly that these amounts are used to expand the
airport infrastructures. The lack of transparency also appears in other
situations, primarily in contract practices. Most of the LAAs are not required
to issue calls for tenders to obtain the best price, whereas the CAAs must. But
if a CAA does not ask for tenders from suppliers and uses a sole-source
supplier, it must mention this fact in its report for any sums exceeding
$75,000. According to the report by the Auditor General of Canada, some airport
authorities did not comply with this principle of public accountability.[48]
Other minor cases exist in which some local airport authorities limit the
distribution of information on the remuneration of senior executives and
Transport Canada's five-year report.
In
addition, the performance of the LAAs and the CAAs is influenced by actions
undertaken by Transport Canada as well as its refusal to intervene in certain
situations. Transport Canada, as the owner and landlord of the airport
infrastructures, has the unrestricted right to audit the airport authorities.
It did so once in 1995 for the first four transfers, but it has not exercised
this right again since then.[49]
Many of its rent negotiations and renegotiations have had a significant impact
on the eventual conduct of the airport authorities. For example, when Transport
Canada has compensated an airport authority for the effects of a drop in
revenues because of the economic situation, the authority has often concentrated
its efforts on short-term management, knowing full well that it will benefit
from protection for unforeseen circumstances. It would behave differently if it
had to assume the costs later on. Who will be able to distinguish between what
is endogenous (that which could have been avoided had there been no protection)
and what is exogenous (that which would have been beyond the control of the
directors) after the fact? An airport authority only adjusts to the incentives.[50]
Despite
its inflexibility, the lease nevertheless allows Transport Canada to penalize
some minor infractions. Although Transport Canada vigorously monitors and
applies the financial provisions of the rent, it makes very little use of its
powers regarding the non-financial clauses of the lease. The five-year review
was still incomplete in February 2000, which means a delay of at least one
year.[51]
In another context, Transport Canada has not yet developed a document
describing its responsibilities, duties and roles as the owner and landlord of
airport infrastructures. The same is also true regarding its intentions as
overseer of the National Airport System and guarantor of its integrity and
viability.
1.2 The sale of the air navigation system
The
second policy to transfer assets that was implemented by Transport Canada was
the pure and simple sale of the Air Navigation System (ANS). The approach in
this section consists in presenting the general context of this financial
transaction and its components, which are the main provisions of the incorporating
act, the sales process, the financing, the new charges introduced by the
private not-for-profit corporation and the principles of governance and
accountability specific to this new commercial entity. The section concludes
with reflections on the conduct of the managers of this new private
organization.
1.2.1 The general
context of the sale
In
1991, the Air Transport Association of Canada, the Canadian Business Aircraft
Association, the Canadian Air Line Pilots Association and the Canadian Air
Traffic Control Association wrote jointly to the Minister of Transport
proposing that a not-for-profit company be formed to manage the air navigation
system.[52]
The reasons given by the political authorities to support the request for such
privatization were practically the same as the ones given for the transfer of
airport activities. The air navigation system was losing about $200 million
annually. Some activities to modernize the system were underway, others were
delayed and Transport Canada had to do its part to reduce the deficit.[53]
The
National Airports Policy of 1994 outlined Transport Canada's intent to
commercialize the Canadian air navigation system.[54]
After publishing five discussion papers on the topic[55]
and holding many consultations across Canada on the future status of this new
commercial entity, in 1996 the federal government passed the Civil Air Navigation Services
Commercialization Act[56]
that authorized the sale of assets to NAV Canada for a lump sum. As with the
delegation of the airport infrastructures, the new commercial company was to be
a not-for-profit non-share capital corporation created pursuant to Part II of
the Canada Corporations Act.[57]
It should be noted that the corporation consisted of four members who were
nominated by three stakeholders in the air navigation system.
The
delegation process was longer and more meticulous than the one followed for the
airport infrastructures because Transport Canada sold all the assets it owned.
The department had learned from past experience, and was permanently removing
itself from the delivery of such services. NAV Canada, now a private
not-for-profit corporation, was owned by its members. In this sense it was
different from the airport corporations, which maintained contractual
relationships with Transport Canada. The airport authorities were still tenants
and Transport Canada was the owner of the land and airport infrastructures. Of
course, both types of infrastructure providers shared certain characteristics
with respect to investments, which were major and consisted of massive
contributions or packages since the operation required minimum efficiency. The
same was true for their useful life, which was also quite long. Once the
investments were made, they were dedicated and specific, which made them
difficult to use for other purposes.
However,
their respective contractual arrangements are what made them fundamentally
different. The airport infrastructure authorities could not be subject to the ex post opportunism, or opportunism
after the event, practiced by Transport Canada. Transport Canada would be
penalizing itself for not complying with the terms of the contract since the
leased assets belonged to the Department. But NAV Canada could be exposed to
this risk, which constitutes an additional source of uncertainty. If Transport
Canada ever decided to undertake a unilateral action that would go against the
interests of NAV Canada, the value of its assets would suffer as a result.
Obviously, the federal government's loss of credibility would translate into
penalties in the form of higher interest rates later on to counter its
opportunist actions.
The content of
the Act
Below
is a condensed version of the main provisions of the act that transformed the
air navigation system into a new private infrastructure provider. The letters
patent of the not-for-profit corporation stated: "The objects of the
Corporation are to acquire, own, manage, operate and develop the
infrastructure, equipment, systems and personnel necessary to provide security
services to carriers at Canadian airports as may be required in respect of
passengers, baggage and cargo in a safe, secure, efficient and cost effective
manner.[58]
To
accomplish this, the Act granted it a number of instruments that gave it the power
of a legal monopoly. Subsection 10(1) granted it a de facto monopoly by
excluding all possible competitors: "Subject to subsections (2) to (4), no
person, other than the Corporation, shall, on or after the transfer date,
provide (a) aeronautical information services, (b) air traffic control
services, or (c) specified flight information services, in respect of Canadian
airspace or any other airspace in respect of which Canada has responsibility
for the provision of air traffic control services."[59] Subsection 32(1) set out that "the Corporation may impose charges
on a user for … air navigation services…"[60]
and subsection 35(1) stated the principles for the charges. The principles
included neutrality with respect to risk, no differentiation between the types
of flights and carriers, a reasonable relationship between the charges and
costs of the services provided, and a limit on the level of charges with
respect to the Corporation's current and future financial obligations. In
addition, NAV Canada could seize and detain an aircraft "for the
collection of an unpaid and overdue charge."[61]
Finally, subsection 35(5) set out the obligations of the corporation, which
allowed lenders easy access to information on its financial health.
The
actual determination of the charges took place in several stages. During the
transition period, the charges were "the charges that were imposed by the
Minister immediately before the transfer date."[62] Upon transfer, the new private corporation
could "establish new charges for air navigation services and revise
existing charges."[63]
But during the first two years, the initial NAV Canada charges could not be
subject to a notice or an appeal.[64]
However, they were filed with the Canadian Transportation Agency (CTA) and the
private corporation could "submit the proposed new or revised charge to
the Minister for the Minister's approval."[65]
Once the transition period ended, any new or revised charges proposed by NAV
Canada had to involve the public, users and stakeholders. After the
consultation process, the modification proposal was filed with the Canadian
Transportation Agency. Anyone could then file submissions with the CTA. NAV
Canada had to wait 60 days before receiving authorization from the CTA to
implement the changes. Furthermore, the Canadian Transportation Agency could
allow an appeal only if "one or more of the charging principles set out in
section 35 have not been observed in establishing a new charge or revising an
existing charge or that no notice under section 36 was given or no announcement
under section 37."[66]
Fair market
value
The
air navigation system being sold was an integral part of Transport Canada and
not a distinct or independent entity. This service benefited from the support
of the Department's integrated financial, administrative and human resources
systems. From the start, the purchaser's due diligence review was more
difficult than anticipated. There were no actual financial statements of ANS
activities and the nature and extent of the real property left much to be
desired. In addition, nobody at Transport Canada had a perfectly integrated
picture of the system being sold, or any clear idea of the value of the entity.[67]
The financial advisors hired by Transport Canada estimated in late December
1995 that the value of the perpetual monopoly came to $2.4 billion. "This
estimate incorporated both going-concern and financeability
considerations."[68]
In short, it was the fair market value that Transport Canada had to seek in its
negotiations with the new commercial entity. In passing, it should be noted
that the amount of $2.4 billion did not include the present value of the
overflight charges that Transport Canada had introduced earlier.
NAV
Canada purchased the operating rights and the assets of the air navigation
system for the sum of $1.5 billion. The transfer price, which was less than the
going-concern value, represented "a substantial indirect subsidy to the
aviation industry."[69]
Another way of expressing the same thing is to say that taxpayers were denied
the revenues generated by past investments. The real value of the new
commercialized entity was higher than its purchase price, which made it all
that more attractive to future lenders. The subsidies reduced the level of risk
and procured all future holders of these shares with a higher return than other
bonds of this sort.
The
Auditor General of Canada added other costs generated by the transfer of assets
to the not-for-profit corporation. The most significant were related to the
labour costs. Many employees had specific human capital and could work only in
the new corporation. In addition, the air traffic controllers' union, the
Canadian Air Traffic Control Association, was very militant and never hesitated
to start slowdown strikes or issue strike threats, and to follow through on
them when the circumstances warranted.[70]
Although the employees were captive, Transport Canada required their consent in
order to form the new commercial entity. In short, they had to receive some
form of encouragement to give the green light to the creation of NAV Canada[71].
The means used by Transport Canada to encourage the approximately 6,000
unionized employees to transfer voluntarily to NAV Canada took the following
forms: according to the Auditor General of Canada, the additional severance
costs were estimated at $31.5 million, and employee pension bonuses came to
$275 million. The overall negotiation costs assumed by the vendor came to 26
million.[72] If lost
profits of $900 million in the sale are added to these three types of costs,
the dead loss assumed by Canadian taxpayers came to between $1,145 and $1,275
billion at the very least. The present value of overflight charges is still not
included in this amount.
NAV
Canada also made commitments to its new labour force upon transfer from
Transport Canada. The first came as an increase in employee pay upon signature
of the sales contract. As members of the federal public service, these
unionized employees had seen their pay stagnate for almost five years.[73]
In addition, the private corporation agreed not to undertake any layoffs for a
three- to five-year period after acquiring the air navigation services. If a
work force reduction were necessary, any employees who left would be entitled
to new severance packages.[74]
Financing
NAV
Canada concluded the transaction with Transport Canada on October 31, 1996 by
paying the agreed amount of $1.5 billion. It financed the purchase with a loan
of $3 billion from an international banking syndicate. During the transition
period, Transport Canada paid $1,440 billion pursuant to subsection 98(2) of
the Act. This amount, which was spread over 24 months, compensated for NAV
Canada's revenue losses because Transport Canada still collected the air
transportation tax. Transport Canada ceased all payments two years after the
transfer date. In the meanwhile, NAV Canada issued $750 million in
non-exchangeable corporate bonds in three separate offerings, with the return
varying according to the term, in order to gradually repay its initial loan.
Holders
of the securities issued by NAV Canada imposed bonding expenditures to
guarantee that the managers fulfilled their mandate and met the expectations
that had been set for them. A summary of the three main ones follows. The first
restrictive clause involved the level of charges, which had to be reviewed
annually to ensure that annual operating revenues were not less than the sum of
a) operating and maintenance expenses for the year and b) 1.25 times the net
interest charges and major amortizations for the year, plus c) the
corporation's deposits in the Reserve Fund for repaying the debt, less d) the
balance in the Revenue Accounts at the end of the year. The second restrictive
clause stipulated that NAV Canada could not follow through with any planned capital
expenditures unless it had contributed to the debt Reserve Fund and had met all
its requirements pursuant to the debt servicing (capital and interest). The
third clause referred to the requirement to take out two insurance policies:
one policy for all contingencies related to aviation activities, and one
comprehensive policy to cover its land operations and buildings. NAV Canada's
coverage came to US$2 billion. In short, the flow of NAV Canada's charges was
allocated primarily to the investors and the remaining amounts went to the
general development of the corporation. Thus the bonding expenditures
restricted the discretionary power of the managers.
The
first offering of non-exchangeable bonds sold like hotcakes. There were too
many buyers for the quantity issued. The prime reason for this overwhelming
enthusiasm lay in the fact that the returns agreed to by Transport Canada were
capitalized in the value of the bonds. In other words, the real discounted
value of the future revenue flows was higher than NAV Canada's acquisition
value.[75]
John Crichton's statement that "NAV Canada has the lowest cost of capital
of any major corporation in North America, with four AA or better credit
ratings"[76] only
confirmed an established fact: the power of a legal monopoly, combined with
implicit subsidies incorporated into the low sales price of NAV Canada and the
many restrictive clauses required by the financial institutions considerably
reduced the risk level of its bonds.
The charges
On
November 1, 1998, at the end of the 24-month transition period, NAV Canada
introduced a set of charges that clearly reflected the services rendered.[77]
They included air traffic control, flight information, weather briefings,
airport advisory services and electronic aids to navigation. In its financial
prospectus of 1996, NAV Canada acknowledged that the major air carriers would
pay the largest share of these charges and that the contribution from others,
including private aviation owners and the aviation industry in general, would
be very low.
From
the beginning, NAV Canada would impose daily and annual charges for all
aircraft under 3 metric tonnes, propeller aircraft over 3 metric tonnes and
small jet aircraft weighing 7.5 metric tonnes or less that travelled in
Canada's sovereign airspace.[78]
These lump sums would depend on the maximum permissible take-off weight, the
place of registration of the aircraft and the distance flown. The other charges
would depend on the services required by the aircraft.
The
corporation would also collect overflight charges from aircraft that used
Canadian airspace, but did not take off or land in the country. These charges
would also apply to flights that landed or took off in Canada. The charges
would take into account the distance flown over Canadian territory, and less
than proportionally, the aircraft weight. The charge paid (C) would be a
function of the unit rate (R), multiplied by the weight factor (W), obtained by
taking the square root of the aircraft's maximum permissible take-off weight,
times the great circle distance (D) on Canadian territory for overflights and
international flights, and the great circle distance between the departure and
arrival airports for domestic flights.[79]
Graph 1 shows the change in charges according to weight in metric tonnes and
the distance flown in kilometres.
NAV
Canada would also collect terminal charges, and domestic and international
navigation service charges for all aircraft of eight tonnes that landed at or
took off from Canadian airports.[80]
The charge (C) would apply only to the departure of each flight and would be a
function of the unit rate (R), multiplied by the weight factor (W) obtained by
taking the 0.9 power of the maximum permissible take-off weight. Graph 2
shows the change in such charges.[81]
As for the North Atlantic navigation services and the telecommunications
services[82] charges,
these would be collected for aircraft that flew over the North Atlantic and the
Arctic Ocean during international flights. Both of these charges, called
oceanic charges, would be calculated at a flat fee per flight.
Table
3, taken from the Annual Report 1999[83],
gives an overview of the overall amount of these charges. The 1998 data are
partial because the charges were implemented in two phases and the corporation
did not receive monthly payments from Transport Canada until October. The 1999
results show the effectiveness of the fees introduced by NAV Canada, especially
the share of overflight charges as a source of revenue. Such tariffs did not
exist prior to 1995. NAV Canada has since reduced its fees several times over
the years. It is legally bound to set its rates at levels that enable it to
recover its costs. Any surplus must be used to increase capital expenditures or
to reduce the charges. That is why the corporation postponed the fee increase
planned for November 1998[84]
to March 1999. In September 1999, it implemented a reduction in charges of 7.5%
to 13.7% that would be in effect until the end of 2000. The reduction was
recently extended to December 2001.[85]
The
reductions in user fees were a result of a simultaneous increase in user fees
collected and a drop in operating costs. These reductions, which were realized
after the corporation had met all the restrictive clauses described earlier,
were a residual factor, the net cash flow, that it had to return to its
members. They were an undeniable, supplementary indication that the discounted
value of its future revenues was much higher than forecast, even after all the
subsidies granted by Transport Canada at the time of sale had been taken into
consideration. These fee reductions were an additional, implicit subsidy from
taxpayers to members of Canada's air navigation services.
Table 3: Changes in gross revenue, in
thousands of dollars, 1998-1999
|
Years/charges |
1999 |
1998 |
|
Overflight |
474,229 |
302,176 |
|
Terminal |
331,527 |
116,791 |
|
Daily/annual |
29,166 |
- |
|
Oceanic |
41,267 |
38,317 |
|
Subtotal |
876,189 |
457,317 |
|
Deferred
amount |
|
(72,000) |
|
Total |
876,189 |
385,284 |
Source: NAV
Canada, Annual Report 1999, p. 39.
Before
formulating any observations on the fee system implemented by NAV Canada, it is
necessary to specify the services it was selling. The corporation was providing
different air navigation services depending on the needs of the aircraft. In
short, using the same supply of technology and skilled labour, it was offering
distinct and specific services for each aircraft flown by the air carriers.
This enabled it to distinguish between the users by offering them a customized
service. It could then charge fees that were a function of the price elasticity
of the demand for its services. The analysis below purposely excludes small
aircraft that paid flat fees because of their negligible impact on total
revenues.[86]
NAV
Canada's fee system followed a discriminatory or multiple component pricing
approach. In fact, all air carriers first had to pay a lump sum, or a type of
registration, to be allowed to fly into or over Canada's sovereign airspace.
This amount consisted of several classes. Then, aircraft owners had to pay a
fee that varied according to their use of the air navigation services. Our
greatest interest involves the overflight charges paid by aircraft that used
Canadian airspace only as a transit between their origin and their destination.
Because
of Canada's strategic position in North America, foreign airline companies can
greatly reduce the distance flown, thereby saving their passengers time and
reducing their own production costs. This specific advantage of the great
circle distance means that NAV Canada, a private corporation, has been able to
impose charges according to Ramsey's Rule, meaning according to the inverse of
the price elasticity of demand for such overflights. Subsection 35(2) of NAV
Canada's incorporating act calls this calculation method the "value of the
services". The demand is inelastic because there are no alternate routes.
In fact, any other route that does not use the great circle distance involved
higher operating costs and, in particular, a much longer flying time for passengers.
NAV
Canada has thus benefited from some flexibility in determining the overflight
charges. The upper limit has been restricted by the reservation price, which is
measured by all the additional costs an airline company would incur, in terms
of money and lost time, if it redeployed its aircraft on new non-great circle
distance routes in order to avoid Canadian territory, and by the lower limit
that corresponds to not benefiting from its power as a discriminating monopoly.
In short, as long as the marginal cost of introducing new itineraries that do
not use the great circle distance is higher than the overflight fees charged by
NAV Canada, airline carriers are prepared to absorb the fees. In addition, they
can pass the cost on to their passengers, who are captive.
The
Canadian corporation, which has been providing air navigation services for all
aircraft that use Canada's sovereign airspace, has effectively employed a fee
schedule based on Ramsey's Rule. The main element that has allowed it to apply
discriminatory pricing has been the inclusion of the weight factor taken to the
0.5 power in the overflight rate formula. Nevertheless, its status as a
not-for-profit corporation has limited its capacity to collect a greater share
of the economic rent. Subsection 35(1)i stipulates that the projected revenues
cannot exceed the corporation's present and future financial requirements.
Two
direct signs clearly indicate that the corporation has benefited from the
location rent of being in Canada. The first sign is in the share of the
overflight charges, which made up 54.1% of the fees collected from all users in
1999. This proportion is a little overestimated because it also includes the
international and domestic flights of Canadian aviation companies. The second
sign lies in the total fees paid in 1999 by Air Canada and Canadian Airlines.
These two main Canadian carriers paid a sum of $264 million, or 28% of the fees
charged by NAV Canada. Consequently, all the Canadian airline companies that
use the air navigation services are the big winners because of the existence of
such rates since foreign aircraft pay a large percentage. Foreign companies use
the services of NAV Canada when they fly over sovereign Canadian airspace,
thereby reducing the fees that Canadian aviation companies should be paying.
But this is a double-edged sword since the foreign companies, which are not
members of the Canadian not-for-profit corporation, also benefit from the
reduction in fees introduced by NAV Canada, something that also mitigates the
discriminatory power of NAV Canada.
The
fact that small propeller aircraft and jet aircraft weighing 7.5 tonnes or less
pay flat fees rather than a landing fee reveals the existence of
cross-subsidies. We base our reasoning on an exchange of letters between Lovink
and the CEO of NAV Canada. Lovink proposed that the weight factor be reduced
and applied to all aircraft, both small and large. The NAV Canada
representative's reply was that this suggestion "gives me great concern as
it would aggravate the problems for the regional and other operators of small
aircraft."[87]
In
conclusion, the legal provisions that govern NAV Canada's conduct, as well as
the bonding expenditures, prevent it from appropriating a much larger share of
the location rent. Furthermore, each time NAV Canada reduces its rates, foreign
companies also benefit. In fact, an international comparison with the
overflight charges of other countries shows that the Canadian overflight fees
are lower, by varying degrees, than those charged by Australia, New Zealand,
France, Germany, Great Britain and Italy for three types of aircraft. However,
the terminal fees are higher than those collected by the six countries
mentioned. The authorities at NAV Canada are clearly aware that they can "do
more to increase our customers’ competitiveness, particularly in respect of
terminal charges where we have more work to do."[88]
Aviation safety
The
commercialization of air navigation services in no way implied that Transport
Canada would cease to apply legislation governing aviation security.
Nevertheless, the department differed from its traditional regulatory approach
by introducing six general principles.[89]
For the purposes of this presentation, we discuss only two of them whose
effects are to model the role of government regulation and to open the way for
other means and methods that are better suited to reducing the risk level.
The
third principle states: "...regulation of ANS activities would be employed
only as necessary and where non-regulatory approaches to address safety issues
were not likely to be effective."[90]
Transport Canada explicitly acknowledges that market forces could contribute to
improving aviation safety and that regulatory intervention is a means of last
resort.
As
for the sixth principle, it states: "Regulation of the ANS would be
"cost-effective" not only from the perspective of ensuring that the
costs attendant to regulation are commensurate with the added level of safety
achieved, but also from the perspective of ensuring that regulatory authorities
and responsibilities are shared, as appropriate, between the regulator
(Government) and the regulated (ANS service providers). In this regards,
regulatory authorities would be delegated, to the maximum extent practicable,
to the organization established..."[91]
By delegating safety management to the agent, NAV Canada, Transport Canada was
proposing that NAV Canada become accountable since the not-for-profit
corporation was the most competent to ensure the safety of passengers.
Furthermore, in the same principle, Transport Canada accepted the need to
consider the benefits as well as the costs of its regulation. At the outset,
promoting safety did not mean eliminating all the risks. As there was a price
to pay for any safety measure, efforts needed to concentrate on the ones that
carried the most benefits in relation to their cost. In other words, "but safe is not the equivalent of risk free."[92]
In short, these two statements of principle could only lead to a reduction in
the traditional regulatory scope and a channelling of regulations to areas
where they proved to be the most effective.
Transport
Canada decided that aviation safety regulations would henceforth be based on
performance criteria rather than technical criteria. This change in direction,
which considered the outputs rather than the inputs, meant that Transport
Canada, the principal, had to be able to control and oversee the agent, NAV
Canada. To ensure that the agent complied with the aviation safety measures
that were the very reason for its existence, the principal had to invest time,
energy and resources to update and develop various performance indexes, the
most important of which was "the avoidance, through appropriate air
traffic control, of losses of separation (distance) between aircraft."[93]
Transport Canada, as a provider of air navigation services, had already
undertaken a risk analysis "identifying the areas that need the most
attention"[94] in a
context of resource cost effectiveness. Transport Canada properly fulfilled its
obligations by completing its duties as the principal.
As
for the performance of the agent, NAV Canada, many external forces supplemented
the principal's actions and encouraged it to effectively manage the risks
inherent to its own activities, meaning minimizing the avoidance of losses of
separation between aircraft. As mentioned earlier, the restrictive clauses
required by the bondholders ensured that they would be able to monitor and
control all the aspects of its activities, including the most important –
passenger safety on board aircraft. On its own initiative, NAV Canada made
voluntary commitments to inform all stakeholders, both in Canada and abroad,
that safety was and would remain its main priority. It invested in employee
training and new technologies so that "all maintenance units within the
Operations Group are … registered to ISO 9002 by the fall of 1999."[95]
In its annual report of 1999, NAV Canada stated that the average number of
operating irregularities was 2 per 100,000 movements for the last three years.
In short, there was a perfect balance between aviation safety incentives and
the interests of Transport Canada as the principal, NAV Canada as the agent,
and all the institutions that financed the day-to-day operations.
All
members of the not-for-profit corporation, including the pilots and airline
companies, would lose out if the corporation could not maximize the safety
standards. Moreover, the liability insurance premiums for aviation activities
would also rise considerably if NAV Canada did not exercise prudent conduct
with respect to safety. In short, it was a negative sum game for all members of
the not-for-profit corporation if it did not comply with its safety
requirements. During a conference on transport safety, president John Crichton
insisted on the importance of safety in daily operations, stating that
"from the outset NAV Canada has had an independent office of safety and
quality, whose director reports to the CEO and sits on our executive management
committee."[96]
The principles
of governance and accountability
NAV
Canada is a not-for-profit corporation composed of four members who are
nominated by the following stakeholders: the federal government appoints one
member, the user groups appoint two and the unions representing the air
navigation system appoint one. The board of directors is comprised of 15
members, including 10 appointed by the four members of the corporation. The
other five, including the president, are appointed by the 10 initial members.
Regarding the distribution of board members selected by the four members, the
airline companies and general aviation appoint five, the federal government
appoints three, and the unions appoint two. The other four members are
independent, unrelated directors not chosen by the board. The composition of
the board of directors and the proportional representation of board members on
the various committees tends to promote a balance among the interests of the
various classes of members. Thus they ease the costs of the collective
decision-making that result from the heterogeneity of interests among the
members.[97]
The
regulations require that the members of each of the four groups sit on the
Safety Committee so that the viewpoints of the four members of the corporation
are shared and debated. The internal structure of the private corporation, its
regulations and the influence exerted by its incorporating act and the
institutions holding the bonds mean a high level of accountability toward the
public.
Reflections on
the conduct of NAV Canada
To
date, the conduct of NAV Canada, the holder of a monopoly power, has complied
with expectations because of the internal and external system of checks and
balances that ensure vitality and growth. Nevertheless, potential problems
could arise and affect operations in the medium and long terms. We look at an
issue that also has ramifications on safety – the conduct of the unions,
especially the air traffic controllers' union.
In a
competitive environment, a union seeks to increase the pay of its members while
also defending their non-monetary interests, especially those of the median
union member. The union sees to it that employees who have invested or are
investing in specific training, such as special skills or more extensive
knowledge of the workings of the firm, do not lose their quasi-rent at the
hands of the employers. The union ensures that the shareholders of a company do
not profit from the relative immobility of employees by not paying them
according to their marginal productivity.
In
contrast, the air traffic controllers work for a monopoly, whether it was
public as the ANS was previously or a legal monopoly granted to a
not-for-profit corporation such as NAV Canada. In this context, the first goal
of the unions is not to obtain the traditional measures of protection for their
members, whose specific training makes them vulnerable to a certain form of
expropriation by their employer, but rather to improve their lot to the
detriment of the other members. They demand wage conditions that are higher
than their marginal productivity and obtain non-monetary benefits that have no
relation to their job. They have many means to reach their goals. Besides
strikes that paralyse the air transport industry and generally require
intervention from the federal government through special legislation, they can
carry out slowdown and rotating strikes, threaten to strike and resort to
work-related illness, with stress being the most common and most difficult to
identify.[98] These
practices, which increase the level of uncertainty in the industry, often occur
in industrialized countries. In short, NAV Canada is not sheltered from this
recurring problem, which is part of the air navigation services industry.
The
union members thus take advantage of the power of being able to take the users
of air navigation services hostage, insofar as NAV Canada is the only
authorized supplier to provide the service in Canada. NAV Canada has
significant investments and its fleet of equipment extends across the entire
country. Unionized employees can undertake different methods to acquire part of
the quasi-rent of this non-human capital, meaning the profits from this fixed,
inflexible, non-transferable capital.[99]
This form of appropriation, commonly called a hold-up in the literature, is
mitigated by the restrictive clauses that force the managers to concentrate on
repaying the debt before investing in technology improvements. In other words,
resorting to debt financing rather than equity financing is a type of
countermeasure to the hold-up.[100]
As mentioned earlier, Transport Canada greatly simplified the transfer of its employees to NAV Canada by granting them many financial benefits. Furthermore, the private corporation also agreed not to reduce the work force for a period of three to five years, and to provide employees with attractive severance packages, if necessary. It increased their level of pay over the years. Nonetheless, this did not prevent the air traffic controllers' union from wanting to launch a strike in early fall 2000. Of course, both parties reached a new collective agreement, but under the open threat of special government legislation.
NAV
Canada's work force dropped by 16.7% between November 1996 and April 2000, but
its relative share of the costs remained practically the same at about 60% of
the operating costs. According to NAV Canada's recent business plan supplement
for 2000-2003, this percentage, though valid until the end of April 2000, does
not include the salary increases obtained in early fall. Nevertheless, NAV
Canada felt that thanks to this new collective agreement, it would be able
"to improve productivity levels, increase the number of air traffic
controllers, and reduce the amount of overtime."[101]
In addition, in the Business Plan 1999-2002, the company "will be
developing a gain sharing proposal to tie some portion of employee compensation
to individual, group or corporate contributions in the delivery of safe ANS
services."[102]
This proposal raises some major issues, the first one being that this
incentive-based compensation implies that the observed marginal productivity of
employees would be lower than the productivity set out in the contract, hence
the need to turn to gain sharing to ensure that the unions are forced to comply
with the provisions of the work contract. This dynamic exists only because of
the company's status as a not-for-profit corporation that also happens to be a
legal monopoly.
The
second issue concerns NAV Canada's status as a not-for-profit corporation. Its
incorporating act prevents it from distributing the net cash flow or the
"profits" among its members, in this case the unionized employees. It
can be argued that some members, such as the airline companies, benefit from
the reductions in rates and that the unionized employees should be entitled to
their share. But the argument is misleading because, since 1997, the unionized
employees have been receiving higher pay than their counterparts in the private
sector and employees working in transportation, communications and utilities.[103]
Was NAV Canada attempting to do something indirectly that it cannot do
directly? Furthermore, this demand for gain sharing by unionized employees may
be inspired by the remuneration received by senior executives, which consists
of a base salary supplemented by a bonus depending on an executive's relative
importance in the hierarchy.
The
conclusion that can be drawn is that the set of principles of governance and
accountability towards the public alleviate many problems that the air
navigation system was facing when it was managed by Transport Canada.
Nevertheless, the predatory behaviour of some unions still exists. Certainly,
it is being monitored and controlled better than it was under the previous institution,
which was a government department with no actual rights of ownership. But NAV
Canada must incur bonding expenditures to comply with the expectations of the
users of its services, which is aviation safety that is based on a balance
between the marginal benefits and the marginal costs.
1.3 The transfer of the Canada
Port Authorities
The
third form of the transfer of assets undertaken by Transport Canada involved
the main Canadian ports. Transport Canada took advantage of the opportunity to
streamline existing legislation and to transfer numerous port facilities to
provincial and local interests.[104]
Our interest focuses on the transfers of the 18 main Canadian ports to new
commercial entities, the Canada Port Authorities. The independence acquired would
improve their management and further encourage them to take local priorities
and needs into account. We will present the facts as follows: the first section
consists of a description of the main components of the Canada Marine Act,
which sets out the operating framework for all Canadian port authorities; the
second section covers the principles of governance and accountability that
surround the management of the Canada port authorities. We will complete our
discussion with a few observations.
1.3.1 The general environment surrounding the
transfers
In
December 1995, Transport Canada published its National Marine Policy with the
acknowledged intent of developing a network of efficient Canada port
authorities that would be more attentive to user needs. The diagnosis rendered
was severe, but realistic. A large part of the marine system was
"overbuilt and overly dependent on government subsidization."[105]
In fact, about 80% of marine traffic passed through only 40 of the 572 ports
under the responsibility of Transport Canada. In addition, the rigid collective
agreements and outdated work methods meant that the federal government had to
intervene in labour conflicts more often than it ought to have. There have been
14 special Canadian acts recalling dockworkers back to the job since 1972.
Hence the conclusion that the rate of return on investments was insufficient
and could not continue in a context of budget cutbacks. The solution developed
consisted in delegating port management to local or regional authorities, the
Canadian port authorities.
Part
I of the Canada Marine Act,[106]
passed in June 1998, authorize Transport Canada to delegate management of the
ports, which were financially self-sufficient and indispensable to Canada's
domestic and foreign trade, to the Canada port authorities, or CPAs. These
not-for-profit non-share capital corporations had been formed pursuant to Part
II of the Canada Business Corporations
Act.[107] Thus, they
were exempted from having to pay income tax, and federal Crown lands were not
taxable at the municipal level. Nevertheless, the economic context in which the
Canadian ports operated was very different from the situations studied earlier
involving the local and Canadian airport authorities and NAV Canada. The
airport authorities were a natural monopoly because of their respective
locations, and NAV Canada was a legal monopoly. In contrast, the Canada port
authorities were competing not just with the other CPAs and some other smaller
Canadian ports, but also with the American ports. Throughout their respective
histories, they had been obliged to and still had to adjust to advances in
technology[108] and
produce services at the lowest possible production cost, otherwise they would
gradually lose their clientele. Since they were not completely unfamiliar with
the market discipline, it was logical to anticipate that the set of delegating
regulations put into place by Transport Canada would not introduce major
changes like the ones observed in the earlier transfers. Because Transport
Canada had learned considerably from past experience, it followed that the
reference framework would be plainly defined and that a clear, obvious
alignment would exist between the objectives of Transport Canada and the incentives
of the directors of the new commercial entities.
The main
provisions of the Act
As
with the airport transfers, Transport Canada remained the owner and landlord of
the property and rights attached to the ports whose management it was
delegating. A port would become a Canada port authority when it met the four
criteria set out in subsection 8(1) of the Act, which were financial
self-sufficiency, strategic significance to Canada's trade, link to a major
rail line or highway infrastructure, and diversified traffic. The new
commercial entity then signed a lease for a varying term, according to
subsection 8(2)j, that covered primarily the interests of both parties to the
agreement. Transport Canada was thereby attempting to align the term of the
lease to the useful life of its leased assets and the term of the investments
made by the users. For example, the leases signed by the CPAs for Montreal and
Vancouver were for 60-year terms, but nothing ruled out a renegotiation if new
circumstances so required.
A
Canada port authority was subject to legislation governing its financial
requirements to ensure that its management was efficient. The principles were
as follows. As a tenant, according to subsection 8(2)h, a CPA had to pay annual
charges based on its traffic as measured by its calculated gross revenues. The
scale of charges, which was set out in the letters patent[109]
of each CPA, contained the following: 2% of the first $10 million in gross
revenues, 4% of the next slice of $10 million, 6% of the third slice of
revenues from $20 to $60 million, 4% of the slice of $60 to $70 million and 2%
of any revenues exceeding $70 million. In other words, for gross revenues under
$20 million, all CPAs had to pay rental charges at a rate that increased
slightly in proportion with each slice. The rental charges rose proportionally
when gross revenues were in the $20 to $60 million range. Finally, if gross
revenues exceeded $70 million, the rate of increase of the rental charges
dropped slightly in proportion.
In
addition, a Canada port authority was not an agent of Transport Canada and thus
could not obtain a guarantee from the Department pursuant to section 26. It had
to be financially self-sufficient, and subsection 28(5) granted it the power to
conclude contracts and obtain funds from Canadian banking institutions.
Subsection 9.2 of the letters patent for each CPA set out the limits of their
respective borrowing power. For example, the CPAs for Montreal and Vancouver
could borrow $130 million and $225 million, respectively. The loans reflected
the discounted value of the future revenues, or the net cash flow, that each
Canada port authority, as a tenant of Transport Canada's land and port
infrastructures, could generate by offering different services for its users.
Finally, the last financial requirement set out in legislation consisted of
regulations on the use of the moneys put at its disposal by section 32, on the
requirement of "respecting the insurance coverage that a port authority
and a wholly-owned subsidiary of a port authority must maintain" in
subsection 27(1)e, and on prescribing the remuneration threshold for the senior
directors, the chief executive officer and all other officers in subsection
27(1)d.
In
return for the financial requirements, subsection 49(1) of the Act granted the
port authority the right to fix fees for any services that it provided for its
users. These fees had to be "at a level that permits it to operate on a
self-sustaining financial basis and shall be fair and reasonable."[110]
They also had to be designed such that they did not discriminate among users or
classes of users of the port, give an undue or unreasonable preference to any
user or class of user or subject any user or class of user to an undue or
unreasonable disadvantage, and they could differentiate among users or classes
of users on the basis of the volume or value of goods shipped or on any other
basis that was generally commercially accepted.[111]
However, pursuant to section 53, a port authority could set fees with users
that remained confidential.
Finally,
fixing a new fee or revising an existing fee for wharfage, berthage or harbour
dues, required a notice published in a major newspaper. The CPA also had to
inform the stakeholders. The fees did not come into force before the expiration
of sixty days. Any complaints of is unjust discrimination in a fee fixed under
subsection 49(1) could be filed with the Canadian Transportation Agency.[112]
Some
other important provisions of the act covered the extent of port activities.
They included "(a) port activities related to shipping, navigation,
transportation of passengers and goods, handling of goods and storage of goods,
to the extent that those activities are specified in the letters patent; and
(b) other activities that are deemed in the letters patent to be necessary to
support port operations."[113]
The case of the Canada port authority in Vancouver can be used to illustrate
the content. Subsection 7.1 of the letters patent defined and provided a
comprehensive list of the activities specific to any port. They correspond to
the first part of our citation. Subsection 7.2 described the activities of
Canada Place Corporation, its wholly owned subsidiary. Subsection 7.3 listed
the activities deemed necessary for port operations that could be carried out
by a wholly owned subsidiary. They are related to the second part of the
citation above. It was explicitly stated that these activities could be carried
out by a subsidiary other than Canada Place Corporation.
In
summary, all the activities described in the letters patent formed the core of
a Canada port authority, and the authority could carry them out itself or have
them carried out by one or more subsidiaries. Any other peripheral activities
that were not listed in section 7 of the letters patent required the creation
of another independent legal entity.[114]
Section 61 outlined the responsibilities of CPAs with respect to "the
maintenance of order and the safety of persons and property in the port."
Finally a CPA also had to adopt a land use plan and publish it in a major
newspaper.
The principles
of governance and accountability
The
Canada port authorities are subject to principles of governance and
accountability that clearly reflect the evolution of Transport Canada over the years.
The principles feature a clarity, thoroughness and simplicity that greatly
minimize the supervision and monitoring required for ongoing activities. They
are closely related to the fact that the Canada port authorities have always
operated and continue to operate in a competitive environment that requires
discipline and efficiency on the part of managers and directors. If they are
not on the alert, they will gradually lose their clientele to other Canada port
authorities and other Canadian and American ports that offer quality services
at a better price. We list here only the most important principles.
A
port authority is a not-for-profit corporation whose members are classes of
users. The letters patent actually list the stakeholders for each CPA. For
example, the Montreal CPA comprises four classes of users, and the Vancouver
CPA has 13 classes of users for a total of 29 members.[115]
The number of classes depends on the significance of the activities of each of
the Canada port authorities. Each board of directors consists of seven to
eleven members. The appointment process set out in subsections 14(1)a to 14(1)d
state that the three levels of government – federal, provincial and municipal (the municipalities mentioned in the
letters patent) –appoint one member each and that the other directors are
appointed by the Minister in consultation with selected users or classes of
users mentioned in the letters patent.
The
directors serve part-time and their maximum term of three years may be renewed
only once. The directors appointed by the three levels of government
"shall have generally acknowledged and accepted stature within the
transportation industry or the business community"[116]
while the others "shall have generally acknowledged and accepted stature
within the transportation industry or the business community and relevant
knowledge and extensive experience related to the management of a business, to
the operation of a port or to maritime trade."[117]
Section 17 stipulates that the term of the chairperson, who is elected from
among the members of the board, may not exceed two years and is renewable.
In addition to being responsible for managing the port activities under section 20, the board of directors is required to appoint a chief executive officer, the other offic