PSA Report Slams FAC

These include the suggestions that:

The FAC is taking unfair advantage of its monopoly power to overcharge for non aeronautical activities; that it is not carrying out proper economic analyses of its massive capital works programme;

that it does not properly consult with industry before providing new services (and then charging the industry for them);

that its system of “network pricing” where a landing at Alice Springs costs the same as a landing at Sydney is unjustified.

The PSA report said, among other things, that: “Industry consultation on aeronautical charges is considered unsatisfactory by a broad cross section of industry representatives. The substance and style of consultation has been criticised, rather than the frequency of consultation. Information disclosure by the FAC to its clients is inadequate. . . without adequate information disclosure consultations are unduly constrained and tend to lack substance. To be effective consultative meetings need to involve a willingness to listen, adjust and reach common understanding and broad agreement. ” On the subject of existing charging structures, the PSA said: “The pricing of aeronautical services should be unbundled and charges established for separate services. ” It was said that by doing this it: “. . . allows parties to convey definite responses to price signals (and) helps ensure customers do not pay for what they do not use. ” With respect to the subject of pricing structures between airports, the PSA’s report firstly observed: “. . . airports are not a network in the strict functional sense, as is the case in electricity, telecommunications and gas reticulation. ” It concluded that: “A uniform pricing approach is neither necessary nor efficient. ” It appears that the PSA found the GA submissions to be of little help in sorting out these sorts of economic issues, noting that: “Representatives of the general aviation sector of the industry tend to be more concerned about the level of their own charges than about the principle of uniform pricing. ” Some GA operators have suggested that the GAAP airfields perform an important, if unrecognised, role in relieving congestion at major airports. However, on this issue the PSA said that: “The role of secondary airports in relieving congestion at primary airports can be more efficiently addressed through tackling the problem of congestion directly and applying efficient pricing and other measures to relieve congestion. ” On the question of the FAC’s capital investment programme, the PSA found evidence of what the industry itself had long suspected that the FAC was charging off on its own and building all sorts of new facilities without first establishing whether anyone actually wanted them or not (or, more to the point, wanted to pay for them after they were built). To rectify this, the PSA recommended that: “Airport charges should be linked to specific services (by function and location) to influence their efficient use. Charges at particular airports should be linked directly to investment decisions at those airports. This way users can influence the scale, quantity and timing of new investment. The PSA’s attention was drawn to several instances of investments undertaken which provided levels of services which according to users, were not in keeping with their requirements or foreseeable needs. ” The PSA found that the FAC was not doing full economic evaluations of large projects, including assessment of costs and benefits or alternatives. More importantly, it was not determined whether or not the FAC’s major customers would be willing to pay the extra charges which would be required to pay for these investments. The PSA said that: “virtually no attention is given to scrutiny of the economic justification of projects. ” Worst of all, the PSA found that the FAC’s capital works programme: “. . . increases the asset base of the FAC and increases the required gross revenue to achieve the rate of return target. ” This is precisely what was suspected in last month’s AA: that the FACis”gold plating” its assets. Instead of cutting its prices, it builds more monuments so that it can then increase its charges in order to maintain the required rate of return. Or, because of its network pricing, it could in effect build a new terminal in Alice Springs in order to justify raising landing charges in Launceston.

The PSA also investigated the tangled web of cross subsidies: of non aeronautical to aeronautical charges and between airports. It suggested that unprofitable airports may be regarded as Community Service Obligations (CSOS) and funded directly from the budget, should the Government wish to do so. Or, if no-one wants to pay, closed down.

One interesting point raised was with regard to peak and shoulder surcharges. It pointed out that the FAC needed to consider the cost to others of using an airport facility. For instance, if a Piper Warrior is using the runway, it may be keeping a 747 on hold. The PSA suggested that the landing charge during congested periods should reflect the true costs to other users and this would mean that the peak and shoulder surcharge should rise. Their recommended charge was a uniform minimum fee of $500 per landing and takeoff.

As expected, the FAC immediately went into defensive mode in dealing with the conclusions of the PSA’s report. Rather than respond constructively by taking the conclusions on board and doing something about them, it instead set about defending itself against the PSA’s findings. Its first response was to release a media statement which is in itself interesting for understanding the way in which the collective mind of the FAC works.

It starts off with a very nice political response in which it quotes the PSA report out of context. For instance, it says that: “The PSA acknowledged that the FAC was successful in meeting the objectives set for it by the government”. This sentence should have read “commercial and financial objectives. ” Also, for some reason it neglected to add one of the PSA’s following sentences which was: “However, the current guidelines for the FAC do not encourage the FAC to perform. its responsibilities in a way which is consistent with efficient pricing principles or full public accountability. ” The FAC’s media release then went on to make it quite clear that they intended to continue defending themselves, rather than actually doing anything about the report.

The FAC seems to be missing the point that the PSA has carried out an investigation to which the FAC made a submission, and has reached conclusions concerning the FAC’s conduct. The FAC’s approach is apparently that having lost the battle, it will now continue to fight the war in the public arena. The one thing it appears steadfastly determined to avoid doing, is accept change.

What the whole business with the FAC (and the recent problems in the CAA) has done is to show up some of the inherent problems in the corporatisation of Government Business Enterprises (GBEs) where there is a significant component of public benefit involved. It is becoming painfully clear that in a number of important ways, GBES are not precisely analogous to private enterprise.

The Board of the FAC (and the CAA) is not answerable to shareholders who can sell their shareholdings or remove the Board if necessary. In any case, the Board are not really independent, they are really just another layer of the inherited departmental hierarchy- they are part of the system.

There are issues of safety, equity, public interest, social responsibility and a whole range of related issues by which government in general is distinguished from private enterprise. GBES do not and cannot have the single role of maximising profits. Bureaucracies everywhere tend to develop their own constituencies which maximise their own welfare and protect their own position. Since they do not operate in an open market, it is only through outside surveillance and control that they can be made to behave in a manner which ensures that public benefit is maximised.

Perhaps the current management of the FAC is labouring to the best of its ability under this confusion of roles and responsibilities. But by the way the FAC has responded to the PSA’s report, it is clear that if left to its own devices, there is no way that the FAC intends to clean up its act.

In the not-too-distant future, it appears that the Government in general and the Minister in particular will need to take charge of the situation to ensure that the FAC begins acting in the public interest, for the benefit of Australia as a whole, rather than the current situation of muddling through the best it can, looking after itself, while pleasing no-one.