Interview – Collin Freeland

CF: Yes, that is right. I think it is very understandable that they are confused and probably a bit agitated by all the changes that have gone on in the last 12 months or more. It has been an upsetting time I think for the people out there in terms of knowing what has been going on, knowing who they can talk to. One of the things I must say is that when Gareth Evans, and later Peter Morris, took over the Department of Transport and Communications (OTC), they said to me that in their view the sooner they can get things in the aviation field sorted out the better.

Gareth Evans particularly, because he was there first I guess, made it his special business over the first six to nine months to first of all try to resolve any difficulties holding up the formal establishment of the FAG and then to go on and sort out what the CAA should do, because that was still being discussed. Then he said to me, “Look, get it set up, the sooner the better. There will always be problems and it has been a rush with the CAA, but the best thing for the people in the organisation and in the industry is to get the new system started and then very quickly try to get people to understand it and get it flowing properly. ”

After that he did sort out anything that was holding up the FAG. That took over operations on January 1 and we went through a fairly heavy work programme in terms of getting legislation and getting regulations authorised and so on to get the CAA established and running by July 1 .

Now that has meant first of all that the industry very legitimately is confused and we have got to make sure that they understand what the new system is, particularly who is charging what, by the way, because they raised that with me too. It has also meant that we have established the CAA with currently some change from it was as a department- but not very much and we are looking as quickly as possible at setting up a final management organisation with the CAA. So we are not in final form yet in terms of the management structure of the place. We do need to make sure that the industry understands on the charging side who is charging for what and why they are charging and what the level of charging is and how it relates to their overall cost.

JS: I think the comment has been made frequently that there are in one or two areas now 110% cost recovery from the aviation industry. How people have arrived at that figure I am not sure.

CF: Neither am L The board approves charges for this financial year at their first board meeting, which is the only one we have had so far. Our charges overall do go down by three per cent in real terms on a comparable basis with the functions that the equivalent of the CAA was. doing last financial year.

We have got two objectives in the CAA. The first one is to try to contain and Where possible to reduce charges. The second one is to relate charges as closely as possible to actual costs. We have moved part of the way in these initial charges in that overall we will be charging less than we were last year in real terms for the functions that we were doing last year. Between industry sectors though, the effect of that does vary.

Firstly, you would have seen that the international sector has not been very happy with our charges. There are two reasons for that. The first one is that for the last two years the international sector has had a $15 million a year rebate to repay overcharging in previous years – that was agreed by the government three years ago that they would cut out the accumulation, if you like, of money. Now that meant that in any case the international sector would be paying $15 million more this year than they were last year.

The second reason is that the government made a decision really to get rid of departure tax and the immigration charge as it then was. The $20 departure tax in the past has been fully attributable to aviation. That was abolished. The $5 immigration charge was not attributable to aviation but was also abolished. In its place the government has put a $10 departure tax which has nothing to do with aviation and the minister announced that. It is now a revenue tax which goes into consolidated revenue. Now that meant that to obtain the same revenue we ‘had to include the equivalent of virtually a $20 extra charge which previously passengers paid into the international airline’s-charging and that increased the charge that the international airlines are paying to us. In. terms of an international passenger, at most he would see a $2 increase on the average fare, in terms of the new CAA charges.

JS: You maintain that position despite various arguments from the Board of Airlines Representatives (BOAR).

CF: Yes I do. In total, if you look at the international airlines, CAA charges are under 4% of their total operating costs. And so I would maintain that I cannot see any great reason for the international airlines to have to increase fares due to CAA charges. Domestic airlines have said that they see no reason to increase their charges due to CAA charges at all. The major domestic airlines, if anything are probably paying the same or slightly less in money terms than they were last year. The reason for that is that the government had introduced a 15% surcharge on the domestic airlines a few years ago. We have now eliminated that surcharge because it was really a government matter – it was not anything to do with the operating side of the thing. The effect of our charges on the general aviation (GA) sector is varied and it is very difficult for us to be sure of the effect of our charges on all sectors of the GAarea, ranging from commuters to the freight carriers to private pilots and so on.

What we did in preparing the new charges there was to ask a couple of commuter airlines if we could run them through their books to see what effect it would have on them. We made some modifications there. We did sit down and talk with the GA associations about the charges and got their comments and are making modifications out of those. The aim was not to disadvantage the GA sector or slug them in any particular area but to try to keep it down to an average increase of under the rate of inflation.

We will not know whether we have achieved that for a few months, but what I have said to a number of GA operators is that if there are particular pockets that are particularly disadvantaged, in other words for some reason or other because of their operation, they are paying a very large increase if that happens, I will be very happy to have a look at it and the board of the authority has endorsed that as a matter of fact. We will be trying to make sure they understand the charging system and what they are paying for and we may also get some feedback if there are particular pockets where they believe they are being disadvantaged. We hope there are not and the aim was not to but you can never be surewith the GA sector, it is so diverse.

The other confusion on charging which is very evident when I go around and talk with industry people in various states, is that they do not know the difference between the CAA’s charges and the FAC’s charges. The FAC and ourselves are hoping to get out an explanation of that in as simple terms as possible to the industry and say this is what you are paying for and this is what you are paying to each group. The other general point that I would like make on charging is both Peter Morris and Gareth Evans at various times have said and have emphasised to us that the establishment of the FAC and the CAA should not result in increased charges to the industry as to the establishment of two authorities. I believe that both authorities have been trying to adhere to that. I saw the announcement the FAC made about their charges where they have said that on average they are going up 6% which is the same as inflation. Ours are going up 3%, just under the inflation rate, and I believe the aim of both authorities is to do what the minister said, in other words it is not a method of increasing charging at all, the aim of establishing the authorities is to have the whole show run more efficiently in a more business like way, being released from public service constraints and if possible to reduce charges to industry and I am

very hopeful that at least in the CAA that is exactly what we are able to do.

JS: What about the question of the asset base of the CAA or its financial structure. There has been criticism that there has not been sufficient financial or asset base put in by the government which was going to require a raising of increased financial money by the CAA.

CF: The Act requires that the Minister for Transport and Communications and the Minister for Finance determine firstly the asset valuation of the authority or the assets transferred to the authority and secondly, a debt/equity ratio – how much of the value of the assets should be debt arid how much should be equity.

We had consultants in the case of the CAA who looked at two valuation methods, the first one was depreciated replacement cost, which is a normal accounting method and the second one was depreciated cash flow, which is really looking at the value of the business over the next X years. In the end, in terms of the CAA, both valuations were very similar, they worked out from memory about $450m as an asset valuation. The ministers decided on a figure which was very close to those valuations.

They then decided on a debt/equity ratio which if you take $450m as our asset valuation, you have to subtract from that current liabilities which worked out about $?Om, so we ended up with a set of assets if you like valued at about $380m and in the decision in terms of how much of that should be debt and how much equity, what they decided was that $150m should be debt, and $100m of that would be debt at the normal rate of interest which currently works out at about 13. 5%.

If you take a $350m asset valuation, $150m of that is debt and the interest rate we pay on that is a normal interest rate of about 13. 5% on $100m and a concessional interest rate on $50m of about 6. 75% and that concessional interest rate phases out over 10 years. So if you like we have got $380m in assets and $150m of that is debt, which again I believe is a very reasonable valuation and debt/equity ratio.

JS: It sounds to me a remarkably low figure considering the amount of aviation infra structure establishment around the country. I am surprised the assets did not come out to a somewhat higher figure than that.

CF: Well, in terms of the total assets in the aviation side, in terms of value, most of them are in real estate and so therefore belong to the FAC, their valuation I think from memory was about $1,000m.

Ours is largely in equipment, some small amount in terms of building our control towers etc but for instance most of our office space is leased from private developers so we have not got assets there. We had a firm of professional valuers who spent about the last 12 months valuing the assets and that was the figure that was taken into the valuation.

JS: You made a statement recently that the CAA will consult with the industry on the earliest possible opportunity on what the future holds in the way of charges and how the CAA will finance itself. You referred to the realisation by people demanding various services that they will now be directly required to fund those services they demand. Can you explain what you are proposing to do there?

CF: I hope within the next month I will be writing to all the industry associations and the airlines to establish a formal consultation process on two major areas and perhaps a third one. The first meeting we need each year with the industry is on our capital programme, where we put down to them what we believe is necessary· in terms of new equipment, installations or whatever, get their input and get their agreement to the fact that they will be paying for that.

There is only one exception to that, and I have mentioned this on a number of occasions is that if the equipment or the facility is required for safety purposes, we would hold the right of veto, but we would also have the requirement to convince them that it was for that purpose.

Other than that, if they do not want it, they can say they do not want that and we will not put it in. I have also said to them by the way, we will go through a process on that, if there is equipment for installations in place now, that they totally as an industry say they do not want, we will stop charging for it now and we will take it out of commission as soon as it needs any maintenance.

JS: Is there anything in particular in prospect in that area at the moment?

CF: No, sections of the industry have raised with me at times that they do not need particular navigational • aids for instance, whether it’s a DME or a VOR or whatever. And I have said, look the otter is there on the table, if you come to us as an industry and say that, provided it is not needed for a safety purpose, fine, we will stop charging now, we will just let it run and when it gcies out of commission it goes out of commission, we will not maintain it, we will just take it out as soon as it needs any maintenance.

We have not had terribly much, there have been some things in the past that have corne up. One of the problems that has come down to me in the past is that certain sections in the industry do not want it and others do. In the future, we will try to have a formalised process whereby we go through that properly with the industry and try to apportion the costs to the people who need it.

But the first meeting we want to have each year is on our capital programme and then further on in the year, we will have another formal meeting with them on our charging for the subsequent year at which we will lay out the basis of our charging, the charges we would propose and so on and talk to them about that.

They may not be happy with some of them but at least they will know and at least they will have an input into that and if they can convince us that we are wrong anywhere, we will change it. Now as I say, I will be writing to them within the next month, trying to set out a programme with them, I see two formal meetings a year – one on the capital project, one on charging. At those meetings the avenue will be available for them to raise anything else, it is a good way I think to make sure we have a discipline of meeting formally with them as well as informally at least twice a year.

JS: So you will be bringing the industry together in its various component parts. One of the long standing complaints I have heard from the department is that there is not a cohesive representation of the industry, because it is such a diverse type of industry. Do you have any expectation of the industry actually forming a single council or do you expect it to continue to deal with the various sectors through their own many and varied organisations?

CF: Well, we will deal with them through the organisations that are available. I do not think I have ever made any secret of the fact that I believe they should have a peak council, but it really is their business. I think that it would be helpful to them,it would be helpful to us, if there was a peak council that brought them together where they could thrash out their own views, instead of, as happened at times in the past, where we have found we have called a meeting of the various industry sectors and found violent disagreement, but in the end we are faced with trying to come to some middle course between all of that.

JS: If the agreement was reached on decommissioning one particular navigation aid or some other facility, do you actually have cost benefit analysis of the cost of each individual piece of equipment and is there a quantifiable effect that would have on the overall budget?

CF: We have not got full cost benefit analysis of each item of equipment. We have introduced on July 1 with the start up of the CAA a much better and a much more detailed costing system which will give us information down to that sort of level in the future. In the past, we have had it broadly aggregated into particular areas of operation.

JS: Another comment you made recently which caused one to wonder and perhaps to worry is that these people will be surprised at the opportunities to raise money. You did qualify that by saying not only by arranging charges. I wonder if you could give me some idea on that and do I also understand from some previous comments and statements by ministers and others that not all charges incurred by CAA will in fact be recovered from the industry.

CF: Correct, on the first point, what I was referring to there was that if you look back in the past, people in the department, the technical people, have developed some very good equipment for instance, the MLS microwave landing system was very largely developed here in Australia. There has not been an avenue whereby we could make money out of that in the past, because any money made goes into consolidated revenue and really there is little relationship to what you might get in the budget. In the future, things of that nature we can patent, we can sell, we can develop and I believe there is a good avenue for making money there which is not hitting the industry.

Secondly, we can now under our charter set up subsidiary companies, go into consultancies and so on and there is quite a demand for that around the world, particularly in the Asia-Pacific region. And I would hope as we develop we would be able to get into those sorts of things. I suppose you could draw the parallel with the United Kingdom CAA and the British Airport’s Authority in that, who alsohave those sort of money making avenues available to them.

On the second point, the government has taken the decision and announced that in terms of the regulatory side of this operation, they will go along the lines recommended by Henry Bosch in the Bosch report. That is that the developments of standards and the surveillance of the industry will be paid for by the government, in other words by the community, as being a responsibility the community should bear.

In the implementation of regulations for instance – a pilot going for a pilot’s exam and getting a certificate, the certification of a new aircraft and so on, there is a specific benefit that should be charged for. So the government will be paying initially about three-quarters of the cost of the regulatory side of the authority from the public purse and they will be doing that under contract to the CAA. In other words they will say, these are the things we want you to do in those areas, we will give them a price for doing that and they will pay for it.

JS: On the question then of regulations and that sort of thing, you have talked about consulting with the industry in the formation of regulations. There has been a long held opinion in most of the industry that there is a lot of over complex and not entirely appropriate regulation. I think to some degree that there has been agreement on that from within the department.

CF: Peter Morris has set up this regulatory review task force which answers to him. It is not the CAA although we will put our comments in too, as I hope the industry will. We are very pleased about that. I understand it will look at the totality of the regulatory system. Is it up to date in the contemporary world or are we back in the dark ages as some people accuse us of being?

They will also be looking at broadly what the regulations should cover in the future, whether there are areas that are too stringent or not stringent enough, and so on. It will be a total look at the whole regulatory system, how it works and what is in it.

The other side of the question is running on a day-to-day basis, administering the regulations, doing the sort of day-to-day changes to regulations that come up when the industry changes with new planes and equipment. That is the responsibility within the CAA itself. Under the Civil Aviation Act, any new regulations will be tabled in Parliament which I think is a good idea. Out Act gives us the authorisations to establish advisory committees of industry to the CAA.

I hope to move fairly early to have an advisory committee on the regulatory side set up. I would hope to see a committee with primarily industry representation, say eight industry people and two people from the CAA sitting on a committee where if we have day-to-day problems in the administration of the regulations – that is somewhere those problems can be brought to with a group of technical experts that can sit down and advise on that. If there are changes to be made to the day-to-day regulations or the way we administer them, we could go to that committee for advice and get their views reasonably quickly.

JS: The other area is the culture change of people in the authority. Although I do not ntirely agree with the widely expressed view that everybody who works for the department is a troglodyte and is totally uncooperative, there is obviously a considerable variation in willingness to accept new ideas and in mental approach to these things. Are you taking measures to change some of the internal thinking in your organisation and the manner of approach to these things.

CF: In any big organisation there will be variations in the way people administer things. Some people will get out of bed in the morning and get stuck into somebody or other. By and large I believe the administration of the regulations has been even-handed. Perhaps people can point to some difficulties they have had and I believe there have been some difficulties in the past. Where they . have brought those to attention we have moved to try to sort them out as quickly as we can. But overall, I firmly believe that the people here have done a very good job in the administration of regulations. We are not a police force on the regulatory side but we have some of the problems that any police force would have in that we end up telling people that they cannot do things at times. That will continue. We will always have that task. I have been following very closely some of the problems the US Federal Aviation Administration has gone through with airlines in the deregulatory period.

It is interesting that while we get a lot of publicity in this country about the department as it was, and I am sure we will get the same in the CAA with it being too hard on the industry. The theme in the US has now swung completely the other way, with the main publicity and pressure being that there are not enough inspectors, they are letting the airlines get away with murder and so on.

There is always a balance between what the community really wants in terms of safety and what the industry itself wants in terms of freedom to move. The regulatory authorities in all countries are faced with trying to interpret that balance all the time. You never get it exactly right in my view and I have talked to three FAA administrators over the last few years and the UK CAA. They have exactly the same problem. The industry thinks we are too hard. The community either does not know – because things are runnipg quite safely (and thankfully they are here in Australia) – or when things do go wrong they are very critical that you are not being hard enough on the industry.

What we need to do in the authority is to try to get that balance between what the community wants in terms of level of safety and what the industry wants in terms of level of freedom, as well as we can. Those are the sort of things we are introducing training programmes on for the regulatory side of the authority to make sure that they are looking at it in a balanced way and trying to get that balance right.

JS: You are probably well prepared for this question, but you must have mixed feelings about Dick Smith being on the board and having some influence on the manner in which you now go about your assigned tasks.

CF: I have talked to Dick on a number of occasions over the years. Dick Smith has always I think had a lot of good ideas for change. Though I have not always agreed with some of the things he has said in the past.

In recent times he has been extremely helpful. As far as I am concerned and as far as the board is concerned, I think that the knowledge he has got in the GA field will be very useful to us. And also the contacts he has got. People in the industry talk to him. From what he has told me, he is very enthusiastic about it. I think it will run well.

JS: What about the staff of the authority. They have obviously come out of a totally public service operation. They are still working in an organisation structured totally along public service line. You talk about becoming a leaner, more commercial less cumbersome organisation. Do you see the staff remuneration and promotion structure moving away from the public service model and more toward private enterprise, in terms of superannuation for instance. Is the industry expected to pay the costs of public service style ‘golden bowler’ superannuation.

CF: The current structure we have is not the final structure. As I mentioned to you, we have moved in very quickly. We have made some changes in structure but only very small ones at the moment.

We did get a firm of external consultants to look at the sort of structure that would be more relevant in (;AA context. We have that report now and I have put it out for comment to various areas. We will be establishing a new structure. The people employed in the authority are employed under the Public Service Act – at least at present.

In terms particularly of the senior management side, we will be advertising inside and outside the service. There is provision that we can employ people on contract and so on. The avenues for change in that sense are, I believe, quite flexible. We have not looked at taking everybody outside the public service at this point. It may be something we should look at in the future.

JS: Obviously you will be going ahead with things like rationalising flight service units.

CF: In consolidating the flight service units from the country areas into the capital cities, we are saving many millions of dollars. It is not so much the staff and salaries, although we do save considerable numbers of staff, but any people that we have in Halls Creek or whatever we have to provide housing for and relief and the rest of it, which adds up to a very considerable sum. So it is very cost effective to bring it back into the city.

JS: What about staff numbers. Do you see further reductions?

CF: I think we have squeezed about as much as we will get with the current systems in terms of staff numbers. Let me try to put that into context. In 1983 the Department of Aviation had about 11,100 staff doing the function it was doing then. Today, between the CAA, the FAC and the people left in the OTC, doing the same functions, there are about 8,500 staff. So we have reduced by more than 20% while doing the same function.

Over the same period industry activity, in terms of flights, has increased by 20%. I do not know of any other public service or other institution that has reduced staff by that amount over that sort of period. And by the way, it is the reason why charges are not going up at the moment. The main reason is that our labour costs have gone down so significantly over that period. A lot of that has been due to new technology getting in. The satellite system has been a tremendous saving of money and people. Also, the people are now orking more efficiently.

We have less people working in corporate services and other areas like that. There has been quite a big drive for efficiency in that sense. Of that 8,500, the CAA has about 7,200 eople in total all around Australia. The vast majority of those are air traffic controllers and flight service people, regulatory people and so on working in the field. I do not see great reductions in those areas.

To continue to reduce charges, we now have to go into the change of technology era in a big way – and that is really what we are doing. In the airways side we are looking at a very big modernisation programme – in broad figures at a capital expenditure programme of about $800 million to one billion dollars over 10 to 12 years, on new radar and communications equipment right throughout. That will bring with it the next big step in economies.

JS: That sounds like an awful lot of money that you have to raise and recover.

CF: Well, we will not be doing it without very rigid examination by the board. One of the reasons that I am very pleased we were lucky enough to get very good business people on that board is that any capital expenditure will not only have to go through the industry meeting that I mentioned, it will also have to be justified in financial and economic terms to the board. In other words, that it will repay its costs, with some dividends and secondly, that it has a high enough priority to warrant expenditure within all the things that we have to do. That is a new experience, if you like, for public servants – ex-public servants or whatever.