CAA Funding Review
Questions and Answers
What is a funding review?
Essentially it is a close examination of how an organisation is funded, and what is done with those funds.
The CAA is currently funded by a number of levies, fees and charges for particular services. The small amount of government funding the CAA receives is outside the scope of the funding review.
Why is the CAA’s funding being reviewed?
There is increasing change and development in the aviation community and the CAA needs to be able to do its job, as well as be responsive to this change. To do this, the CAA must invest in new systems, process and training – all of which costs money.
Under the current funding model, the airline sector provides 76 percent of the CAA’s funding, but accounts for just 25 percent of the CAA’s expenditure. In effect, the airline sector is subsidising costs incurred by other parts of the aviation community. This inequity needs to be addressed or at least reduced.
CAA levies, fees and charges have remained largely unchanged for 15 years, and no longer meet the costs of providing those services.
As a result, of all of these factors, the CAA is facing significant forecast deficits over the next three years, and is obliged to undertake a funding review.
Why now?
The forecast deficits that the CAA is facing are not sustainable. Any reserves will be very quickly used up.
The CAA is at the mercy of economic fluctuations and has suffered during the recent downturn. To remain effective, the CAA must reduce this vulnerability by ensuring costs are met by the users of its services.
The CAA must also be able to maintain its cash balances through any future unfavourable economic conditions.
It is intended that the CAA undertakes a funding review on a regular basis (three yearly) to ensure it has the income to undertake its work effectively and efficiently into the future.
What does the funding review say?
The funding review describes the CAA’s operating and financial position, and its current funding model. It outlines an alternative funding model, and gives options for levels of capability.
The review also discusses the costs incurred by each sector of the aviation community, and compares these with the amount each part pays.
The funding review consultation documents propose the CAA takes a middle-road on addressing its capability and funding issues.
What would be different if the CAA’s funding is increased?
The review discusses what the CAA could achieve given each funding option, detailing both existing operational costs and possibilities for the future. While the CAA has indicated its preferred option, views are requested on any of these options, or on entirely different proposals.
Why impose additional costs on the aviation sector when passenger numbers are again picking up, thus providing more passenger levy to the CAA?
There would need to be significant additional growth in passenger numbers above forecasts to eliminate the immediate need to review the current levies, fees and charges. There is also no certainty that passenger numbers will not decrease again in response to future events.
As well as covering its forecast deficits, the CAA has to meet the costs of continuing to develop its capability to meet the needs of the aviation community in an environment of changing aviation technology and expectations.
If there were a significant increase in passenger numbers, any over-recovery would be addressed when the levies, fees and charges were set for the following three-year period.
Why has the CAA not built up sufficient reserves to cover reduced income during difficult economic times?
To date, the CAA has been able to maintain its cash reserves above its minimum policy requirements but, with increasing costs and only small increases in revenue from fees and charges, this has been largely due to overall upturn in passenger numbers over the last decade. The last economic downturn showed how susceptible the CAA is to a sudden reduction in passenger numbers.
The CAA must be able to maintain cash balances in the future that will allow it to ride out unfavourable economic conditions.
Why is the CAA shown as having surplus funds under some of the funding options?
In the lesser funding option, the surplus would allow the CAA to do all of its work, pay for some of its capital needs, address some new capabilities, and maintain a minimum reserve in case the passenger levy significantly reduces again in the future.
In the middle and higher funding options, the surplus also allows the CAA to take on additional projects to prepare for expected significant operational and technological advances in the local and international aviation environment.
Detail is available in the Statement of Cash Flows (see Appendix 3 of the supporting document Financial Information).
What external assurances and oversight of the CAA’s financial management exist?
The CAA is accountable for the way it expends all of its revenue. As a Crown Entity, it is monitored by the Ministry of Transport to ensure it meets its published financial and non-financial objectives.
The funding review details what the CAA would do if it received funding at three different levels. These are known as ‘capability projects’. The Ministry of Transport would monitor the CAA’s delivery of these projects.
Why should the general aviation sector (small airlines, helicopter and agricultural operations, adventure aviation and recreational aviation) bear more costs?
The costs of regulating the general aviation sector have not been met by income from that sector for many years. The proposed changes to fees and charges will go some way towards addressing this imbalance, bringing a better level of equity into the overall aviation community.
Has the review fully addressed this cross-subsidisation issue?
No. Moving to full cost recovery in one step would require an increase in the proposed fees and charges. The CAA is conscious of the need to allow the general aviation sector time to adjust to the new levels of fees and charges, and is therefore proposing a stepped approach to reducing the cross-subsidisation.
Fees, charges and levies would be reviewed again after three years, at which time the cross-subsidisation could be further addressed.
Have costs associated with the CAA’s relocation to Wellington triggered this funding review?
No. The decision to relocate the CAA was made in 2008. The CAA’s current premises do not meet its needs, and its Petone location has long been inconvenient for both national and international deputations and the aviation community.
The expiration of the lease on the current premises provided a timely opportunity to establish the CAA in a central location that is accessible to the aviation community and other government agencies.
On what basis were fixed fees calculated?
The existing fees have been re-calculated on the basis of the fully recovered hourly rate, which includes all costs associated with the service provided, i.e. overheads and salaries. This rate is different under each option. For those services that the review recommends fees should be charged, but currently are not, is based on the same criteria.
What is the basis on which passenger safety levies are charged and how will this change under the preferred option?
Currently airlines pay a departing international passenger
levy of $1.02 (15% GST inclusive) per passenger. Airlines are
not required to pay a passenger levy on incoming international
flights. Airlines operating domestically pay a passenger levy of
$2.05 (15% GST inclusive) for each domestic sector flown.
Under levy structure A it is proposed that airlines would pay a
passengers levy of $1.80 (15% GST inclusive) in 2011/12, rising
to $1.88 in 2013/14 irrespective of whether passengers are
departing internationally or flying on domestic sectors. There
would continue to be no requirement for airlines to pay a
passenger levy on incoming international flights. The domestic
passenger levy would remain applicable to each sector flown.
Under levy structure B the levy rate for departing international
passengers would be the same as under structure A, however there
would be no passenger levy on domestic operations as this would
be covered by a fuel levy. The aggregate incomes generated under
levy structure B would be the same as those generated under Levy
Structure A.
Is this consultation genuine, or has the decision already been made?
This consultation is genuine. The CAA is required to satisfy the Minister of Transport that all submissions have been properly considered in the development of its final recommendations.
While all ideas and comments are encouraged, the CAA has included a range of funding options for submitters to consider. The CAA has indicated which of these it prefers.
Why not contract out the CAA’s auditing function, or the medical unit, to industry?
To date these ideas have not been considered recently by the CAA, however all ideas proposed in response to this funding review will be considered. More generally, all CAA functions will be assessed as part of a separate value for money review, which will run in parallel with the funding review. The aviation community’s views will again be invited.
The CAA has increased its staff levels over the past 10 years, but it appears to have bolstered the numbers of support staff, rather than technical and operational staff?
A shared services review is under way to consider amalgamating the full range of support services of both the CAA and Avsec.
Does the CAA’s new stance on certification signal a shift from outcome focus to a process orientation?
No. The CAA aims to be a risk-focused, outcome oriented organisation. Achieving that requires detailed attention to process, and in the case of certification, this refocused approach is already under way.
Why are flight test fees not stipulated?
ASL is at liberty to set its fees. The CAA recommends to ASL that its fees increase no more than the Labour Price Index.
Why are memorandum accounts only shown for Fixed Fees and for Hourly Charges and not Levies?
Memorandum accounts compare the cost of providing specific services with the revenue generated from the fees and charges for those services. This comparison shows whether the users of those services are being subsidised from another source of revenue or are paying fees and charges that are too high.
The estimated Memorandum Accounts included with the Financial Statements help readers understand the extent of current cross-subsidisation and how the proposed new fees and charges will address this.
On the other hand, Levies have no specific link to any particular service for which individual users can be identified, so there can be no matching of costs to revenues. In effect, levies provide a source of funds to cover the cost of all of CAA’s other activities.
Why are the proposed levies not constant for the proposed three-year review cycle?
The proposed levies, fees and charges have been calculated as the net result of a large number of individual financial estimates that have varying impacts on the costs in each of the three years of the review cycle. The CAA has elected to include the calculated levies, fees and charges for each year, rather than fixed rates for the three year cycle, to give full transparency.
It is likely that standard rates will be set for the three-year cycle where appropriate.