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1985 Report of the Auditor General of Canada

Introduction

13.1 The Canadian Air Transportation Administration (CATA), an arm of the Department of Transport, incurred costs of $1.219 billion in 1984-85 to provide a wide range of airport, navigation and regulatory facilities and services (see Exhibit 13.1). CATA has generally provided the travelling public with a high level of service and extensive facilities that promote safety. Consumers of these services include persons who travel by air, national and international commercial airlines, and general aviation (generally smaller planes used by firms and individuals for business and recreation). Revenues from user charges - ticket taxes, landing fees and other levies designed to recover the costs of aviation services from beneficiaries of the system - exceeded $541 million in 1984-85. This represents a cost recovery rate of 44 per cent, a rate that is higher than other modes of transportation under federal jurisdiction, such as rail passenger and marine transportation.

(Exhibit not available)

13.2 Through the National Transportation Act of 1967 and the Aeronautics Act of 1919 (as amended), Parliament has provided a mandate to the Department of Transport to promote an economic, efficient, adequate and safe national civil air transportation system. Although these Acts do not require government ownership, operation, or financial support of aviation facilities, CATA owns and manages most of Canada's airports and air navigation facilities, and makes financial contributions to a range of facilities owned by non-federal jurisdictions.

13.3 The objective of the Air Transportation Program, as stated in Part III of the 1984-85 Estimates, is "to attend to the development and operation of a safe and efficient national civil air transportation system that contributes to the achievement of government objectives, and to operate specific elements of the system." The program's sub-objectives relate to economy, efficiency, cost recovery, equity and accessibility of the aviation system.

13.4 The National Transportation Act indicates how economy and efficiency can be achieved in the transportation sector (see Exhibit 13.2). Commercial viability, with recovery of costs from users, is expected to be a principal means of achieving economy and efficiency, as it is in the private sector. CATA has defined commercial viability as "the ability to generate sufficient revenue to recover the costs of air transportation facilities and services on commercial terms in support of transportation objectives."

(Exhibit not available)

13.5 In the private sector, cost recovery is a matter of survival, and related financial targets foster a disciplined, efficient approach to managing an operation. In a government organization, cost recovery also helps maintain control over expenditures. Faced with the prospect of having to pay fees that are proportional to the services provided, users - that is, airlines and their passengers - will exert pressure to ensure that only necessary expenditures are made. And faced with the need to recover costs, government will have an incentive to offer only those services that users are willing to pay for. Where this discipline is not enforced, there is a tendency for users to ask for increasingly higher levels of service, and for government to provide facilities and services beyond what are needed at the time, leading to financial deficits that must ultimately be covered by all taxpayers.

13.6 In 1969, Parliament authorized the division of the country's airports into two separate categories, those capable of paying their way and those requiring continued subsidization. This was in line with an international trend to look at airports as potentially viable commercial enterprises. Toronto (now Lester B. Pearson) and Dorval International Airports, for which full cost recovery was expected, were financed through a Revolving Fund. (A Revolving Fund is a means by which Parliament provides continuing authorization for an operation that is expected to be largely funded by users.) The others were not expected to be self-sufficient but to recover costs from users to the extent possible.

13.7 In 1979 there was a major reorganization of the system. The system of airports considered to be mature and expected to recover costs was increased to 23 airports financed through the Self-supporting Airports and Associated Ground Services Revolving Fund (the Revolving Fund). The principle of cross-subsidization, whereby surplus revenues from profitable airports may be used to help balance under-recovery at unprofitable airports, was endorsed by the Government. These 23 airports and associated navigation facilities serve approximately 90 per cent of airline passengers in Canada and account for over 46 per cent of all take-offs and landings at Canadian airports.

13.8 Other airports operated by CATA, the en route navigation system, and certain regulatory activities were recognized as needing some financial support from the Consolidated Revenue Fund.

Audit Scope

13.9 We looked at the management process for the Air Transportation Program, using two principal criteria to judge its adequacy. First, we expected it to be designed to promote economy and efficiency through CATA's objective of cost recovery. Second, where spending decisions entailed a departure from full cost recovery, we looked for adequate procedures to identify benefits and costs and justify expenditures on that basis.

13.10 We assessed CATA's work in developing information on the costs and benefits of the services it offers and how it communicates this information to those who use the system and to Parliament. We placed special emphasis on the financial planning and control procedures CATA uses to assess the need for new or expanded airport and air navigation facilities, and examined the costs associated with the service provided to the airlines, general aviation and the travelling public. As well, we examined the Administration's performance measurement systems.

13.11 In addition to controls within CATA, we examined the Department of Transport's corporate controls. In particular, we assessed their adequacy to identify and correct any major deficiencies in CATA's management of the Air Program. Specifically, we assessed the role of the Senior Financial Officer, Internal Audit and Program Evaluation.

13.12 We visited a number of airports and air navigation facilities in Canada to examine operating procedures. We also visited airports of similar size in the United States, with similar traffic and weather conditions, to compare operating methods and costs of operations. In an effort to understand the environment in which the Program operates, we met with representatives of commercial airlines and owners of private planes and reviewed literature on aviation cost recovery in the United States and Australia. We also obtained information from officials of the United States federal government involved with aviation and from members of the financial community in New York who assess the financial strength of airports that seek private capital.

13.13 We did not examine departmental activities that were previously covered by the 1982 Report of the Commission of Inquiry on Aviation Safety (Dubin Report). However, we did follow up on the progress the Department had made in addressing Mr. Justice Dubin's main recommendations.

Government Financial Support to Air Transportation

13.14 In 1984-85, government support to meet the shortfall between the costs of the Air Transportation Program and revenues from airlines, passengers and other users was $678 million. The shortfall for 1980-81 and 1984-85 and the percentage increase in net cost for each major component of the Air Transportation Program are set out in the following table. To measure the financial performance of the Program, including government support to air transportation, costs are defined so as to approximate the costs that a commercial operator would normally incur.

Support to Air Transportation: Shortfall by Component
(in millions of dollars)


Major Components


1980-81


1984-85

Percentage
Increase

23 Revolving Fund airports $ 71 $ 107 51 %
Other airports and related services 192 307 60
Contributions to municipal airports 9 43 378
En route navigation services 77 123 60
Regulatory services 61 98 61
$ 410 $ 678 65 %

13.15 From 1980 to 1985, taxpayers have borne a heavy burden with respect to air transportation. Cost recovery has dropped from 49 per cent to 44 per cent. System costs increased 51 per cent in the period with only 35 per cent increase in off-setting revenues. After removing the effect of inflation, the net increase in government support was 25 per cent (see Exhibit 13.3).

(Exhibit not available)

13.16 There are many reasons for the increasing burden of air transportation costs on the general taxpayer, including the long-term effects on operating and maintenance costs of overbuilding in the 1970s at airports such as Mirabel, Calgary and Halifax. Also, the government's administered price program (6&5), limited CATA's ability to increase revenues in the domestic sector. Nevertheless, a lack of financial discipline with regard to costs was evident from the following:

    - lack of targets for the financial results of individual airports and related facilities, or any other cost recovery targets for individual services;
    - failure to cut operating expenditures and overheads in spite of reduced revenues caused by a decline in traffic in the early 1980s;
    - continued major capital investments in the 1980s despite slow growth in traffic, without obtaining commitments from users of the system on their willingness to pay and without adequate regard to cost recovery objectives;
    - applying uniform national levels of service, operating standards and labour practices without sufficient regard to their financial implications;
    - continuing expenditures for the benefit of general aviation without appropriate policies, plans or monitoring of costs;
    - increasing subsidies to municipal airports without up-to-date eligibility criteria; and
    - failure to develop cost accounting data for specific airport functions, thereby inhibiting effective control over costs and the development of an efficient and equitable structure of user charges.
13.17 The trend of increasing costs for air transportation is likely to continue unless the government injects more financial discipline into its Air Transportation Program. There is cause for concern; all components of the air transportation system show escalating costs even after the impact of inflation is removed.

13.18 The major failing is that the economy and efficiency that could be derived through cost recovery have not been achieved. Development and operations have not been tied to any financial or market test. Without the financial discipline that such tests provide, for control of both capital and operating costs, CATA may never achieve the level of economy and efficiency that was the intent of its cost recovery objective.

13.19 Major new expansion and development programs are under way, such as the Radar Modernization Project ($810 million) and Hamilton Airport Development ($49 million). Such investments are often larger than warranted by the market's apparent willingness to pay. In our 1978 Report we commented favourably on the economic use of capital resources in connection with the projected expansion of the Toronto (now Pearson) International Airport, which was designed to meet clearly established demand. CATA has not consistently followed this approach in subsequent projects, with the result that capital and operational costs at many facilities are high and are not being fully recovered from users.

13.20 We recognize that some government financial support is necessary because it is in pursuit of non-transportation objectives for which aviation users should not be expected to pay. For example, in recent years the Government has decided to provide increased access to certain remote areas, such as the North. However, we were unable to assess the extent to which the rising cost of the system could be fairly attributed to these other objectives, since CATA had not defined precisely what results were expected to be achieved or the related cost. It is our judgement that this weakness limits the usefulness of financial information provided to Parliament.

13.21 Chapter 2 of our 1983 Report, on constraints to productive management in the public service, identified three significant constraints for managers in government. These were: the impact of political priorities on achieving productive management, the many administrative and procedural requirements with which management is burdened, and the few incentives but many disincentives that influence productive management. Our audit found that many of these constraints affect CATA. It is difficult to identify their precise impact on the Air Transportation Program, but there is little question that the competing priorities make it more difficult to hold government managers accountable.

13.22 The Government should ensure that the financial discipline that would be created by stricter adherence to cost recovery objectives is introduced into the organization, management and operations of the air transportation system with a view to promoting greater economy and efficiency.

Department's response: In response to the Government objectives as outlined in the fall Economic Statement and the May Budget Speech, Transport Canada is developing options for a new management structure for the Federal Airports System in Canada. These options will include an evaluation of the financial aspects as well as the potential for increased efficiencies of such a management structure. Work has already begun regarding cost recovery for Air Navigation and Regulatory activities.

13.23 Specifically, the Department should:

    - establish financial performance targets, including targets for cost control and revenue maximization, for each program component within the system, and measure performance against these targets;
Department's response: This is now under way. For example, the Revolving Fund will now be operated on the basis of a financial plan which includes proposed performance targets.

    - reorganize and assign responsibility and authority for financial viability for each operating centre (for example, for individual airports);
Department's response: The department is increasingly moving in this direction. (See also the response to the recommendation in paragraph 13.22).

    - undertake an overhead reduction program to reduce duplication and overlapping of services; and
Department's response: The A-Base review completed this year included the identification of any overlapping or duplication of services. It will be further addressed in the current review of the organization of the department.

    - implement improvements in efficiency at airports and related facilities through more cost effective labour and maintenance practices.
Department's response: We agree with this recommendation which will coincide with the aim of the new airport management structure and will be facilitated through the consultative process.

Management of Revolving Fund Airports

13.24 CATA's formal objective for the 23 airports, as reported to Parliament through Part III of the Estimates, is to "develop and operate those international and national airports included in the Self-supporting Airports Revolving Fund in such a way as to recover their costs".

13.25 The Airport Revolving Fund was reorganized in 1979 to address three problems that were identified by the government: the failure to become financially viable, the lack of a clearly defined management control and accountability structure, and lack of credibility with industry with regard to cost recovery. A number of organizational changes were introduced to strengthen management control and accountability. At the same time, the cost recovery requirements of the Fund were strengthened significantly. In particular, Treasury Board specified that future capital expenditures approved for inclusion in the Fund would be financed by user charges or from the proceeds of the sale of assets, with any shortages provided through interest bearing loans from the Consolidated Revenue Fund. In 1980, Parliament passed the Adjustment of Accounts Act, which placed a statutory limit of $80 million on the total of such loans, further strengthening the need to control costs and generate sufficient revenue to meet future capital requirements without annual parliamentary appropriations.

13.26 Our audit found that the problems that led to the 1979 restructuring of the Fund still exist.

13.27 Although the financial statements of the Fund, prepared by CATA, indicate a small estimated surplus of $5 million for the year ended 31 March 1985, they do not account for all recoverable costs associated with the airports. From the standpoint of full cost recovery, the 23 airports have run a deficit in each year since 1980-81. In 1984-85, we estimate that the deficit was $107 million. This represents a cost recovery rate of 80 per cent. In determining this deficit we included all costs defined by the departmental general policy on cost recovery. These included direct operating and maintenance expenses, all indirect expenses, depreciation, and an amount for the government's interest expenses associated with the capital invested. On this basis, the increase in the deficit since 1980-81 has been 51 per cent. Of the 23 airports, 21 were unable to recover all their costs (see Exhibit 13.4). Many were unable to recover even their operating and maintenance costs.

(Exhibit not available)

13.28 In determining the financial results discussed above, assets were depreciated on the basis of historical cost. Although this approach is an acceptable basis for reporting past financial performance, it understates the size of the Revolving Fund's shortfall from a full cost recovery point of view because it does not fully take into account the need to replace aging capital assets from the Fund's own resources. If the airports were to meet future capital requirements largely without annual parliamentary appropriations as the Treasury Board had required, costs would have to be recovered on the basis of the replacement cost of these assets. On this basis, the shortfall in the Airport Revolving Fund in the year ended 31 March 1985 would be even higher (see Exhibit 13.5).

(Exhibit not available)

13.29 CATA projected that in 1985-86, the Fund would be unable to operate within its $80 million statutory "line of credit". On 1 April 1985 the Fund was reduced to nine airports in another attempt to achieve financial solvency. It should be noted, however, that dropping 14 airports from the Revolving Fund does not reduce the level of government support to the aviation system as a whole. The shortfall in cost recovery is simply moved to another part of the Program. If anything, these airports may now have less incentive to improve their financial performance. Our audit relates only to the Fund as it existed between 1 April 1980 and 31 March 1985.

Financial Planning and Cost Control

13.30 CATA did not develop a commercial strategy or "business plan" to ensure that the financial objective of the Fund would be achieved. The Administration did not set out a time frame over which full cost recovery was to be achieved. Financial targets and controls were not established for capital expenditures, operating costs, and aviation and marketing revenues, so that costs and revenues would be in balance by whatever year CATA designated for full cost recovery. Where projects with low expected rates of cost recovery were approved, they were not accompanied by plans for increased user charges, the sale of assets, or efficiencies in operating practices to balance their adverse effects on the financial health of the Revolving Fund.

13.31 CATA has informed us that in future the Revolving Fund will operate on the basis of financial plans, to be submitted annually to Treasury Board for approval, that will include proposed performance targets and a review of past performance.

13.32 CATA's policies for achieving cost recovery have focused on revenue generation, leaving aside complementary methods of bringing costs and revenues into line, such as adjusting service levels, controlling capital expenditures and overheads, and examining the potential for achieving greater operating efficiencies. As there is a limit to what the market will bear with regard to increased fees and charges, we believe that better cost control would have been important to the successful achievement of CATA's financial objective for the 23 airports in the Revolving Fund. Controlling the cost of airports requires knowing what the various services and functions cost and why. Very few airports have developed appropriate cost accounting systems that highlight costs of major activity centres such as air terminal buildings on a regular basis. In contrast, the U.S. airports we examined maintain detailed cost accounting data for cost control and as information to airlines in determining landing fees and other airport charges.

13.33 Without more specific cost recovery targets and better controls over capital, operating and administrative costs, managers throughout the CATA organization have had little requirement to operate on a "self-supporting" basis. We found evidence that cost recovery has been seen as a secondary consideration rather than as an urgent concern during deliberations over capital investment proposals, level of service decisions, staffing practices, and decisions regarding increased fees and charges.

Acquisition of Capital Assets

13.34 CATA's investment planning process had serious weaknesses which, in our opinion, led to a pattern of investments that had little hope of recovering their costs and weakened management's ability to plan the 23 airports and associated air navigation services in the Revolving Fund as a financially self-supporting system. Many of these investments involve expansion of air terminal buildings and associated facilities that is not related to safety.

13.35 Over the period 1980-81 to 1984-85, CATA spent a total of $410 million on capital projects at Revolving Fund airports alone. We found that CATA frequently approved projects that were expected to fall short of full cost recovery. We examined five projects approved over the period with a combined lifetime cost of $109.8 million, as shown below. Our concern is with the scale and timing of the investments, not with the control over construction costs associated with the facilities acquired.

13.36 Each of these projects is projected to achieve less than full cost recovery. (Projected revenues exclude allocated receipts from the tax on air transportation tickets. Allowance for such receipts could reduce projected losses from $70 million to $49 million.) Such losses contribute directly to the Revolving Fund shortfall, because although the principle of cross-subsidization allows for some projects that do not recover costs, the five projects that we examined were not accompanied by plans for compensatory actions elsewhere in the Fund that would offset the shortfall.

Estimated Financial Results for
Five Capital Projects

(at present value)

(a)
Projected
Costs

(b)
Projected
Incremental
Revenue

(b-a)
Projected
Loss

(b/a)
Cost
Recovery
(per cent)

(in millions of dollars)
Project
Charlottetown air
terminal building


$ 6.6


$ 1.7


$ (4.9)


25.8

Charlottetown parking
lots, crosswind runway,
tower, and other airside
developments

25.0

.6

(24.4)

2.4

Winnipeg air
terminal building

27.2

15.2

(12.0)

55.9

Ottawa air
terminal building

44.7

22.0

(22.7)

49.2

Thunder Bay general
aviation area
development

6.3

.7

(5.6)

11.1

All projects $ 109.8 $ 40.2 $ (69.6) 36.6

13.37 Levels of service. We found that CATA made decisions on capital projects on the basis of predetermined levels of service without fully assessing their financial implications. Air terminal buildings, for example, were expanded once they fell below, or were expected to fall below, CATA's nationally uniform space standards. Although such standards provide a useful means of identifying potential crowding at individual airports, CATA did not consider modifying the scale of expansion projects in light of projected financial losses.

13.38 Users' willingness to pay. CATA did not fully assess the airlines' ability and willingness to pay the full costs of proposed aviation investments. Rental rate agreements with airlines for their use of ticket counters were not secured prior to the approval of the Ottawa and Winnipeg terminal building projects. More recently, CATA has established a policy of obtaining certain commitments prior to approval. However, even where airlines agreed from the start to pay higher rentals for their use of expanded air terminal buildings (such as in Charlottetown), charges were designed to recover only the cost of the airlines' counter space and other areas provided for their exclusive use. Such space accounts for only a portion of the total area in an airport. These charges are therefore insufficient to cover the building's capital and operating expenses, even after other revenues, such as from restaurants and other concessions, are taken into account. CATA does not negotiate increases in landing and other fees with airlines, before investments are made, to determine whether users are willing to pay for the increased cost of common space, for which costs should also be recovered.

13.39 A commercial orientation geared to users' willingness to pay is achieved at many U.S. airports. Contractual arrangements by which airlines agree to cover any revenue shortfalls give airlines the opportunity, during the planning stage, to reject or instigate a re-examination of capital projects that would entail significant increases in the rates and fees they pay for the use of airport facilities. This arrangement is also an important financial control; it protects taxpayers from the higher taxation that would be needed to finance airport losses.

13.40 Failure to consider cost recovery when establishing levels of service and the lack of adequate precommitments from users have contributed to overbuilding in air terminals. The Department is currently expanding terminal facilities at Ottawa at a cost of $48 million. CATA has a set of sophisticated planning techniques for determining the size of air terminal buildings. However, we found a deviation from appropriate standards that resulted in preboarding waiting rooms that were double the size required now or in the near future (see Exhibit 13.6). This additional area represents an extra capital cost of approximately $890,000. CATA informed us that the excess space was requested by the airlines. However, no commitment was obtained to recover the excess costs from them, no analysis was carried out to assess the implications for the Fund of the shortfall that would result from providing the additional space, and no plans were developed to offset the excess cost by increasing fees, selling surplus assets or other actions.

(Exhibit not available)

13.41 Similarly, we found that facilities at Regina Airport were oversized in relation to CATA's own standards, resulting in extra capital costs of approximately $1.5 million. Such increases in size also raise operating and maintenance costs over the life of the building.

13.42 We identified the overbuilding problem in our 1978 government-wide review of regard for economy in the acquisition of capital assets. In paragraph 19.100 of our 1978 Report, we reported that the Department went ahead with plans to build a new air terminal building at Calgary International Airport without agreement from air carriers to pay charges that would recover costs. We expressed the view that reaching an agreement that would provide for cost recovery prior to the start of construction was essential to ensure a concern for economy on the part of airlines and lead them to discourage any unnecessary construction. In the case of Ottawa and Regina, we believe that in not obtaining a commitment from airlines to pay for the added space, CATA has again displayed lack of due regard for economy in the acquisition of these assets.

13.43 Analytical methodology. We found inconsistencies in the way CATA analysed prospective investments that made it impossible either to relate the financial implications of individual projects to the system-wide full cost recovery objective of the Revolving Fund or to inform Treasury Board of these implications. The prevalence and significance of inconsistencies and errors in the information presented to decision makers lead us to believe that long-term financial implications have not been a major concern of management in the acquisition of capital assets.

13.44 The first of these deficiencies relates to cost recovery analysis. Although potential cost recovery was analysed for some prospective capital projects such as air terminal buildings, no analysis was carried out for others, such as the traffic control tower at Charlottetown, which should recover costs under CATA's policy, and the Thunder Bay commercial area expansion. This illustrates CATA's inadequate consideration of the full implications of its investment decisions for the financial performance of the Airports Revolving Fund.

(Photo not available)

13.45 Second, in its analysis of cost recovery CATA did not allocate certain aviation revenues to air terminal building projects in a consistent manner. For example, in calculating incremental revenues associated with the proposed enlargement of the Winnipeg air terminal building, revenues from the air transportation ticket tax were not included. However, they were included in the financial appraisal of the Ottawa air terminal expansion project. Whether such revenues are included or not has a significant effect on determining the financial viability of a project. If ticket tax revenues are included for Winnipeg, the projected loss is $4 million; if they are excluded, the projected loss is tripled to $12 million.

13.46 Third, CATA used several different discount rates in different projects for computing the financial return associated with prospective investments, making it impossible to compare prospective projects on a like basis. Treasury Board has specified that a benchmark 10 per cent real rate be used. The Winnipeg investment analysis as an example, used in error rates lower than 10 per cent, thereby understating potential losses.

13.47 Fourth, we found that CATA overstates the potential for improved cost recovery associated with certain proposed investments by attributing to them revenues that would have accrued to the Air Administration irrespective of the project. In the case of the Ottawa terminal building expansion, CATA told the Treasury Board that the airport's cost recovery rate would approximately triple as a result of the project. This assumed, however, that without the expansion any potential growth in traffic after 1984 would be eliminated by crowding in the terminal building. There is ample evidence from experience at Pearson and Dorval that some additional crowding does not lead airlines and passengers to curtail their use of airports.

13.48 We also found computational errors that led to an understatement of potential losses in a number of instances. For example, in estimating the additional revenues associated with the Charlottetown air terminal building project, analysts significantly overestimated potential return on investment by inadvertently attributing to the expansion air transportation tax receipts that the airport already receives. Projected revenues were overstated by $5.8 million. For the Winnipeg air terminal building project, we found errors in calculating the present value of future revenues and costs. Had the calculation been correct, CATA's projected $6.2 million profit would have been reported as a $4.6 million loss. Such computational errors remain undetected in spite of elaborate management systems and controls introduced in the late 1970s. Thus it would appear to us that an accurate and full assessment of long-term financial implications for the taxpayer has not been an overriding concern of management.

Airport Operations and Maintenance

13.49 Airport operations absorb the lion's share of annual expenditures of aviation authorities throughout the world, and CATA is no exception. For the year ending 31 March 1985, operating and maintenance expenses of Revolving Fund airports were about $280 million, or about 52 per cent of the Fund's total expenditures. Hence, economy and efficiency in maintenance practices are critical considerations. We examined the cost of three major activities - namely maintenance of facilities, provision of airport policing and security services, and provision of crash, fire, and rescue facilities and services.

13.50 We compared three Revolving Fund airports with three similar U.S. airports selected in consultation with CATA. In two of the three comparisons, costs of operating the CATA airports were higher, and in the third they were similar. In particular, our tests indicated that the number of person-years used by U.S. airports is 30 per cent to 40 per cent less than at Canadian Airports, for the three activities we examined, as shown below.

Comparison of Airport Person-years (PYs)


Person-year Ratios

Three
U.S. Airports

Three
CATA Airports

% Lower
in U.S.

Facility maintenance PYs per 100,000
square metres of airport area

10.6

17.6

40

Policing and security PYs per million
enplaned and deplaned passengers

8.2

11.7

30

Crash, fire, and rescue PYs per
10,000 aircraft movements
1.3 2.0 35

(Photos not available)

13.51 Although these findings are based on results for certain activities at three individual airports, our more general comparative analysis of all operating and maintenance costs with 25 other U.S. airports - both large and small - supports our conclusion that costs per passenger are higher in Canada.

13.52 We recognize that there are substantial differences in the ownership and the financial and management structures of CATA and U.S. airports. A key difference is that U.S. airports' survival is based on financial discipline and on their ability to borrow funds in the bond market for capital requirements. They then recover costs from airport users and repay the debt. In contrast, CATA has provided facilities and services without the same bottom-line consideration or the requirement to repay capital obtained through parliamentary appropriations.

13.53 Labour utilization. CATA airports hire most employees for specific maintenance functions. Employees who are underutilized in their specific function are not used for other tasks even though the level of service would not be adversely affected. In the United States, extensive cross-utilization of employees has made it possible for airports to operate with smaller maintenance labour forces and consequently lower costs. For example, at one U.S. airport we visited, employees who normally work as carpenters and painters operate snow removal vehicles when needed. Employees who normally work as plumbers perform routine mechanical and electrical maintenance tasks when needed. Such cross-utilization is also currently practised at certain Canadian airports that are not operated by CATA.

13.54 We also noted high costs for airport policing and security services. These high costs have already been identified by CATA in consultation with the RCMP and the airlines. An examination of the security risks was under way at the time of our audit.

13.55 In the area of crash, fire and rescue (CFR) services, we found CATA operating costs per aircraft movement to be higher than in the United States. This is partly explained by the fact that CATA airports generally have lower traffic volume. However, there is still room for improved productivity, as illustrated below.

13.56 Firefighters at certain CATA airports have free time amounting to an estimated 30 per cent of their shift hours. Although the nature of emergency work naturally leads to long periods of waiting, at the U.S. airports we visited, the CFR crew members were occupied to a greater extent, carrying out runway condition inspections and security patrols of airfield and ramp areas. We understand that CATA is in the process of reviewing CFR job descriptions to make possible more productive use of their time.

13.57 Maintenance procedures. We examined the Airports Maintenance Management System (AMMS), a management tool for planning, budgeting, scheduling and controlling maintenance work at airports. Although we agree with the objectives and general design concepts of this system, there are deficiencies which, if not corrected, could lead to overstaffing. After seven years of developmental work, this system still has weaknesses.

13.58 These weaknesses include excessive frequencies specified for many preventive maintenance tasks, resulting in higher workloads than necessary, inefficient maintenance methods prescribed for some tasks, and excessive amounts of time allowed in most task time standards.

(Photos not available)

13.59 At Dorval airport, if AMMS standards were applied, a need for 62 person-years for building maintenance would be identified. However, we were told that 24 person-years would have been adequate in the estimation of site managers, based on their experience and knowledge of local conditions. At Halifax, the same kind of calculations would show a need for 40 person-years in the building and mechanical trade, whereas 11 person-years would be sufficient in the opinion of the site supervisors.

13.60 We carried out work measurement studies to check the reliability of AMMS standards. In 25 of the 30 tasks we checked, the AMMS standards allowed considerably more time than we found to be necessary. These times were an average of 128 per cent greater than required.

13.61 We also compared preventive maintenance standards with those in place in comparable U.S. airports. According to AMMS specifications, an automobile driven 32,000 kilometres a year is allowed about 49 hours a year for preventive maintenance. In contrast, at one U.S. airport that we visited, only 20 hours a year are allowed for maintaining the same kind of vehicle. The AMMS standards allow 199 minutes per occasion for preventive maintenance of an automatic door; the U.S. airport allows only 36 minutes per occasion for the same type of maintenance task on a similar door.

13.62 Performance measurement. Measuring and reporting performance of airports is an important step in improving efficiency and effectiveness. CATA does not at present have a system in place for regular monitoring of trends in operating costs of individual airports or other facilities or making comparisons among them. The absence of clearly stated financial goals aimed at improving the bottom-line of individual airports and associated facilities has inhibited the development of such systems. Appropriate performance ratios such as cost per passenger, revenue per passenger, cost per square metre of airport space and cost per aircraft movement, are not used to identify increases or unfavourable trends in costs so corrective action can be taken. Also, CATA has set levels of service without first adequately measuring travellers' satisfaction with current services.

(Photo not available)

Airport Revenues and Marketing

13.63 CATA draws revenues from aviation fees and charges, such as landing fees, and from non-aviation sources such as gift shops, land rentals, restaurants, parking and other activities grouped generally under the heading of marketing. Marketing revenues represent a major portion of total CATA receipts (over 28 per cent in 1984-85) and offer substantial potential for enhanced cost recovery. We found that marketing objectives were not interpreted consistently by management, that responsibilities for marketing overlapped, and that opportunities for revenues had not been fully explored.

13.64 Interpretation of marketing objectives. CATA's policy on maximizing revenue, necessary for achieving the Revolving Fund's financial objectives, has not been clearly communicated in terms of specific marketing objectives and targets for each airport. This has resulted in varying attitudes to maximizing revenue generation at different airports.

13.65 CATA's own internal studies have indicated that its air terminal building planners and airport managers, unlike marketing staff, do not give adequate priority to revenue considerations in planning the expansion or modification of air terminal buildings. For example, both at Calgary and Mirabel, most concessions are located on a separate floor in the terminal building, away from the regular flow of passenger traffic, reducing the opportunities for increased revenues through impulse buying. Current renovations at Dorval will result in the restaurant being moved farther from passenger traffic than at present, indicating that insufficient priority is still being given by building planners to revenue maximization.

13.66 Responsibilities for marketing. CATA's multi-layered management processes hinder the efficient operation of the airport marketing function. The marketing roles of headquarters, regional offices and airports overlap. Contract documents for rentals and concessions must often be forwarded by the airports to the regional offices and headquarters for review and approval. This decision-making process, which may also involve central agencies, causes delays in making final decisions on awarding contracts that can result in loss of significant amounts of revenue. In paragraph 15.7 of our 1981 Report we commented on the need to improve control in this area.

13.67 A recent delay in approving the tender specifications and awarding the contract for the food and beverage concession at Dorval airport will result in a loss of about $200,000 in revenue. In another case at Dorval, the duty-free gift shop was closed for over a year because of the delay in awarding a new contract, resulting in lost revenue of about $700,000.

13.68 Missed revenue opportunities. Although there were some exceptions, we found that revenue opportunities for airport lands have not been pursued. Exceptions included Dorval airport's agreements for land for two golf courses and an industrial park. Outdoor advertising, also a good source of revenue, has been developed at Calgary and Edmonton. However, none of the other CATA airports we visited had developed these types of revenue sources or other sources such as shopping centres, conference centres, and office complexes. Commercial developments are an important means by which some U.S. airports improve their financial performance.

(Photos not available)

13.69 We were informed that CATA had proposed that the building of hotels at Halifax, Dorval, Pearson and Vancouver airports be allowed but that these proposals had been indefinitely deferred. We estimate that shelving these projects costs the airports a total of more than $3 million a year in lost potential concession revenues. Such revenue losses must be made up by the general taxpayer.

13.70 Similarly, long-standing efforts to set up arrival duty-free stores at Mirabel, Dorval, Pearson and Vancouver Airports have not yet succeeded. Also, departmental negotiations with the United States to arrange for cash-and-carry duty-free stores at major international airports had not been concluded at the time of our audit.

13.71 Marketing personnel establish rental rates for land use such as private plane parking at public airports. We found cases where management allowed these rates to lag behind the rate of inflation. At Thunder Bay Airport, for example, rents were allowed to decline by 46 per cent in real dollars between 1976 and 1982. In addition to foregone revenue, low rents can create an excess demand for space and thus for capital investment. Over the 1976 to 1982 period, the demand for space among private plane owners at Thunder Bay increased, resulting in congested and unsafe ground movements of planes, fuel, trucks and people. This, in turn, led CATA to expand the airport facilities at a cost of $7.4 million, an outlay that might have been delayed or avoided had rents in earlier years kept pace with inflation. It is estimated that users will cover through rental payments about 11 per cent of the $7.4 million projected cost.

13.72 Overheads. Overhead costs associated with the development, management and administration of CATA airports are high. This is mainly due to the multiple levels in the organization. Although CATA charges the Airports Revolving Fund 30 per cent of direct operating expenses for the expense of its regional and Ottawa headquarters, even this amount fails to account for all overhead costs. For example, we estimate that the Department of Transport provides some $23 million in overhead services to the Revolving Fund airports annually, an amount that is excluded from CATA's 30 per cent charge.

13.73 The cost of administrative staff at CATA headquarters and at the regional level adds considerably to the problem already created by the low level of cost recovery. For example, CATA provides functional guidance and specialist support services to airports for maintenance, using 100 specialists at headquarters and another 100 employees at the regional offices, costing about $6 million a year. However, we recognize that some of these specialists devote a portion of their time to non-maintenance matters such as design and construction standards, policy development, and so on.

13.74 Studies carried out by CATA have recommended a decentralized organization with lower overheads, allowing for more authority and accountability for decision making at airport sites. As one such study noted,

... because of the multi-tiered structure, from the airport upwards in the organization, a number of functional layers - each with its complement of specialists and advisory personnel - become involved in almost all issues of airport operations and development ....
13.75 In conclusion, we believe high airport and overhead costs call for a re-examination of the financial management approach, maintenance practices, and labour utilization at CATA airports. The Department has announced that a new management structure for Canadian airports will be introduced. We were informed that this change is intended to deal with the issues raised.

General Aviation

13.76 CATA operates the air transportation system in such a way that it provides a substantial subsidy to general aviation users - generally smaller planes used by firms and individuals for business and recreation. These account for more than half the take-offs and landings at the 23 airports in the Revolving Fund. The amount of this subsidy, however, has not been determined by CATA. In the United States, disclosure of costs and revenues attributable to general aviation has been a statutory requirement since 1970. Despite requests from Treasury Board, CATA has not established a clear policy for recovering costs that are incurred for the benefit of this special user group.

(Photo not available)

13.77 To gain an understanding of the level of cost recovery from general aviation, we looked at the airport in London, Ontario, one of the smaller airports in the Revolving Fund. We found that a total of $200,000 is spent annually for air traffic control staff that would not be needed without general aviation. General aviation users pay fees and charges in the amount of $61,000 annually, a cost recovery rate of a little over 30 per cent. Adding in other costs at London, such as the provision of taxiways used exclusively by general aviation, reduces the cost recovery rate of this sector to about 16 per cent. We noted that this level of cost recovery is no worse than that reported in the United States.

13.78 The low level of cost recovery from general aviation is significant for three reasons: first, it adds to the Revolving Fund deficit. Second, attempts to achieve full overall cost recovery while continuing to subsidize general aviation would mean that other user groups, primarily airlines and passengers, would have to pay more than their share of airport costs. And third, low landing fees and other charges encourage general aviation users to make more use of certain already crowded airport facilities than they would with the higher fees that would be consistent with full cost recovery.

13.79 The absence of a clear cost recovery policy for general aviation has led to contradictory actions by CATA. For example, the heavy use of Vancouver International Airport by general aviation aircraft, perceived as a safety and congestion problem, led CATA to reactivate an airport for their exclusive use at nearby Boundary Bay at a cost of $10 million. Recently, however, the landing fee for general aviation was eliminated at Vancouver, although an increased fee could have been an important factor in encouraging general aviation users to move to reliever airports such as Boundary Bay.

13.80 While CATA has no comprehensive policy on cost recovery from general aviation users, it has specified in planning documents for certain airports that general aviation is to be served at CATA airports only to the extent that capacity exists. New construction on behalf of general aviation would therefore not be permissible. By not applying this policy consistently, CATA has added to Revolving Fund costs without providing compensating revenues.

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13.81 For example, the Charlottetown 5,000 foot cross-wind runway project was justified largely on the basis of benefits to general aviation users. However, the stated role of Charlottetown Airport is to support commercial air services; general aviation is to be served only "to the extent that airport system capacities are not exceeded". CATA approved the construction, with no fee increases, of the new cross-wind runway at Charlottetown even though, at the time, it could only be justified for aircraft with cross-wind tolerances of 10 knots - that is, general aviation aircraft.

13.82 For the management of the Airport Revolving Fund, the Department should develop a business plan that shows how the full cost recovery objective of the Self-supporting Airports and Associated Ground Services Revolving Fund can be met and maintained.

Department's response: Implemented with the restructuring of the Revolving Fund, 1 April 1985.

13.83 The Department should ensure that decisions on capital investments and levels of service take into account the ability and willingness of users to pay.

Department's response: This is now reflected in the operation of the Revolving Fund.

13.84 The Department should develop a comprehensive policy covering expenditures on general aviation and disclose to Parliament the costs, revenues and benefits associated with such special user groups.

Department's response: A general aviation policy is under development. As the cost accounting system is expanded, it may be possible to provide separate cost and revenue data for general aviation at revolving fund airports.

Management of Other Airports

13.85 CATA owns and operates 71 airports other than those financed through the Self-supporting Airports Revolving Fund. Although these airports serve only an estimated 10 per cent of all commercial airline passengers, they account for more than 45 per cent of the government's financial support of the air transportation system. None of the airports recovers even its operating expenditures. Their overall cost recovery rate is 15 per cent.

13.86 The stated objective for this system of airports, as reported to Parliament in Part III of the Estimates, is:

    - to attend to the development and operation of a network of regional and local airports that enables all areas of Canada to have reasonable access to Air Transportation; and
    - to recover costs from airport users to the extent feasible.
13.87 We reviewed CATA's financial planning for these airports, the process of acquiring capital assets and airport operations. As well, we reviewed the planning and management of CATA's investment in lands at Pickering, Ontario.

Financial Planning

13.88 Certain transportation expenses may not be fully recoverable from users either because of low traffic volume or because they have been made to promote objectives such as regional or other social development. CATA policy requires that where there are departures from the objective of commercial viability, the benefits and costs involved should be identified and the relevant additional costs assumed by the government.

13.89 A major failing is that CATA has not defined the extent to which costs are to be assumed by the government in pursuit of non-transportation objectives for these airports and the extent to which costs must be assumed by users. Part III of the Estimates does not offer Parliament full information on what the non-transportation objectives are, to what extent they are being met, and how much they are costing Canadian taxpayers.

13.90 Consequently CATA is unable to establish targets for an appropriate level of cost recovery. This is a major weakness in the financial management of the Program. As a result, there is little accountability or incentive to reduce costs or increase revenue. Furthermore, there is inadequate meaningful information with which to assess the financial viability of individual facilities and services.

13.91 An illustration is the $49 million expansion of Mount Hope Airport in Hamilton, Ontario. Although this investment was projected to lose $16 million, we could not find any analysis of the benefits associated with the cost to be assumed by the government.

13.92 Similarly, at Hare Bay, Newfoundland, CATA constructed a new $12 million airport to replace St. Anthony Airport, only 23 miles away. No cost-benefit or cost recovery analysis was carried out to justify the investment. We were informed by CATA staff that the airport was built to meet national operational standards. There was no attempt to determine which costs users should pay, and hence no attempt to rely on user willingness to pay as the test of true need. In fact, we were informed that the Province of Newfoundland did not agree that the community needed a new airport.

Acquisition of Capital Assets

13.93 We examined capital projects at Hamilton, Ontario, Boundary Bay, British Columbia, and Springbank, Alberta, with a total capital cost of $61 million. Many of the weaknesses we identified are similar to those we found in the Revolving Fund airports.

13.94 Forecasts of traffic. In general, we found that CATA used state-of-the-art forecasting techniques. However, the management process for planning the airport developments we examined was insensitive to reduced needs as reflected in declining traffic. Investments were approved without assessing whether the traffic forecast on which the need for the project was initially based remained valid at the time the request for funds was submitted to Treasury Board (see also Case Study 1).

13.95 For example, the reactivation of Boundary Bay Airport was proposed in 1979 because of the congestion at nearby Vancouver International Airport and its existing reliever, Pitt Meadows Airport. In 1979, Pitt Meadows was close to capacity. Final project approval for Boundary Bay was not given by the Treasury Board until December 1981. However, beginning in 1979, traffic volume at Pitt Meadows declined, at first slowly and then quite dramatically during 1982 as shown in Exhibit 13.7. This decline in traffic eliminated the immediate need for Boundary Bay. Nevertheless, the project went ahead in 1982 at a cost of $10 million. The annual cost of carrying Boundary Bay is $2 million. In 1984, total traffic for the two airports (Pitt Meadows and Boundary Bay) was only two-thirds of the capacity of Pitt Meadows alone.

(Exhibit not available)

13.96 Inadequate commitment from users. For this group of airports, as for the Revolving Fund airports, CATA often did not get commitments from users to bear any of the cost. Examples were found at Hamilton (see Case Study 1) and Springbank, a reliever airport for Calgary.

13.97 The $1 million extension of the Springbank runway was designed to ensure that CATA's national runway standards were met. CATA claimed that the existing runway created an inconvenience for some 22 private aircraft owners who were operating with take-off weight restrictions during certain times of the year. No attempt was made to find out from them whether the inconvenience they faced was sufficiently troublesome that they were willing to contribute financially to the runway extension. These users had not requested the extension and, even though it involved no cost to them, they pointed out that they did not feel there was an immediate need for the project. Hence, the project was justified on the basis of the need to meet national level of service standards.

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13.98 Private sector alternatives. CATA's own policy requires "minimization (of) federal involvement in those areas that ... can be more efficiently provided by ... the private sector". Despite this policy, private sector alternatives were not fully explored in certain capital projects. In particular, inadequate attention was given to the alternative of relying on municipal or private airports for services CATA is providing for general aviation. Also, CATA has not examined the possibility of private sector operation of control towers at smaller airports.

13.99 According to United States Federal Aviation Administration officials, the private sector approach has substantially reduced operating and capital costs at certain smaller airports. Much of the saving could result from less luxurious facilities; in Canada control towers are built to CATA's uniform national standards. The three storey control tower at Boundary Bay contains two pairs of washrooms, a full kitchen and living room and a passenger elevator for the eight people who work each shift at this location. This tower facility does not recover any of its costs directly from its users. Recent literature on the United States experience suggests that savings due to lower staffing levels, etc. may be possible when these operations are contracted to the private sector.

Airport Operations

13.100 Many of the concerns about operations that we identified at the Revolving Fund airports - dealing with maintenance procedures, labour utilization, overheads, and performance measurement - apply to some extent to all airports. In addition, we noted high costs in the area of crash, fire and rescue services.

13.101 Crash, fire and rescue services. CATA's criteria for determining which airports should have crash, fire and rescue facilities are less stringent than those used in other countries. At the time of our audit, CATA was reviewing those criteria and comparing them with criteria used in other countries to determine whether savings can be made without sacrificing safety. At present, all airports with regular air carrier service are eligible for CFR, irrespective of the number of aircraft movements or passengers involved. The services are provided at 132 Canadian airports.

13.102 For "other" airports, outside the Revolving Fund, the Department should:

    - distinguish between the costs to be assumed by the government in support of transportation objectives and those to be recovered from system users;
    - establish financial targets for cost recovery and define managerial accountability for meeting them; and
    - identify major expenditures in support of objectives other than transportation, state the expected results and related costs of meeting these objectives, and report to Parliament the extent to which the objectives are met.
Department's response: The Cost Recovery Policy and the Operational Planning Framework which are under development will assist in addressing these issues.

Pickering Lands

13.103 Carrying non-productive assets such as the Pickering, Ontario site has had an adverse impact on the costs of the air transportation system. This 7,527 hectare (18,600 acre) site was acquired by expropriation on 30 January 1973 for the purpose of building a new international airport for Toronto. The new facility was to be constructed with four runways and with the capacity to handle an annual volume of 40 million to 50 million passengers by the year 2000.

13.104 Construction on the first phase started on 23 September 1975 but was discontinued soon after when the provincial government announced it would not provide certain essential services for the airport. This was the beginning of the end of Pickering Airport as originally conceived.

13.105 We examined CATA's investment in the 7,527 hectares of Pickering lands to assess whether the lands were being held for transportation purposes. We also estimated the cost of carrying the investment to date, and reviewed the property management procedures in place.

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13.106 There are no plans at this time to build a major airport on the site in this century. Although CATA's planning documents indicate that there is a need for general aviation facilities in the area, the amount of land required would be substantially less than the present holdings. At the time of our audit, CATA had not made any firm decision on selling all or part of the land it holds.

13.107 CATA is unlikely to recover its original investment of $140 million at Pickering. The cost to the taxpayer, including interest cost on the original investment, is estimated at over $275 million. CATA believes that the present realizable value of the land and properties does not exceed $80 million and could be even less on a quick-sale basis.

13.108 Our review of the management of certain residential properties on the site revealed that the rental income on many properties is below market values. CATA is barely recovering the operating costs of many residential properties. Also, for the sizeable acreage let for agricultural purposes, the rental income is less than the interest cost on the funds that could be realized by selling the land. CATA informed us that since the property was not purchased as a rental property, it believes that it was not practicable to offset capital costs as well as operating costs from related revenues.

13.109 To improve the recovery of capital and operating costs associated with any portion of the site that CATA decides to hold indefinitely, it would be essential to increase rents to market levels and enter into longer-term leases than in the past. We recognized that such initiatives would have to be taken in consultation with the Province of Ontario, which owns large portions of adjacent lands.

13.110 In addition to Pickering, we noted that land owned by CATA not needed for transportation purposes and not earning revenue exists at a number of airports such as Halifax, Calgary and St-Hubert. The cost of carrying such land includes grants in lieu of taxes. We did not find any serious effort on the part of CATA to arrange for the sale of the idle land or to transfer its ownership to the Department of Public Works. Idle land has an adverse impact on the financial performance of the Air Transportation Program.

13.111 The Department should develop and disclose a clear plan for the use or disposition of idle land holdings such as those at Pickering, Ontario.

Department's response: The Department is currently conducting a study to determine the long-term requirements for Pickering lands and as a consequence are developing a listing of lands which may be declared surplus.

Case Study 1 - Hamilton Airport Expansion - $48.6 Million

13.112 In examining the proposal for the expansion project now under way at Hamilton Airport, we found that the analysis carried out by CATA failed to identify and disclose the potentially significant financial risks of the project. As a result, decision makers in the Department, and ultimately the Ministers of the Treasury Board, approved the project without receiving full disclosure of the financial consequences of this development.

    - Traffic projections used to justify the project to the Treasury Board were known to be overly optimistic. The project was based on forecasts showing dramatic traffic increases if the airport were expanded. CATA approval documents indicated that these levels of traffic would lead to an increase in cost recovery of operating costs from 30 per cent to 160 per cent. However, these forecasts were out of date by the time Treasury Board approval was sought for the investment in 1982. CATA did not adjust them downward to reflect the marked decline in projected traffic that had occurred prior to project approval. When CATA did formally revise the forecasts, following Treasury Board approval, projected traffic growth was cut by a third, as shown in Exhibit 13.8.
(Exhibit not available)

    Traffic forecasts that CATA presented to the Treasury Board did not adequately deal with several factors that would reduce projected traffic at Hamilton Airport. Seat sales by major airlines, introduced by 1980, were a factor that slowed the anticipated growth rate of charter traffic at smaller airports, which was to play a major part in previously forecast traffic growth at Hamilton. Also, the granting of landing rights to Hamilton's principal carrier at neighbouring Toronto well before 1982 was another factor that CATA did not address in its request for funds submitted to the Treasury Board in 1982. Similarly, the forecasts did not adequately consider the impact of deregulation in the United States. Many travellers use Buffalo and Niagara Falls, New York airports rather than Hamilton, to take advantage of less expensive U.S. fares. Deregulation in the United States was a known factor in 1982 when Treasury Board approval was sought.
    - The estimate of projected losses was not disclosed to Ministers. CATA projected a significant lifetime revenue shortfall of $16 million, which was not disclosed to Treasury Board.
    - The estimate of projected losses contained a number of errors that resulted in significant understatement of the losses. The analysis used an unrealistically low interest rate to calculate the present value of future costs and revenues. In addition, it included in the estimate of future revenues a type of passenger fee that airports of Hamilton's size are not allowed to charge.
    - Lack of user commitment. CATA did not obtain agreements from airlines to rent space in the new terminal building. Indeed, at the time of our audit, no airline had committed itself to operating from the expanded airport.
13.113 In summary, these various weaknesses resulted in a Treasury Board submission which did not set out clearly the financial risks of the project. It now appears that revenues could fall short of recovering costs by $28 million over the life of the asset.

13.114 We were informed by the Department that the Treasury Board submission did not include the points raised above because approval in principle for the project had already been received from Cabinet in 1980. Nevertheless, in our opinion, the Treasury Boars submission that was prepared two years later should have raised these points.

Contributions to Municipal Airports

13.115 CATA provides financial assistance through contributions for both operating and capital purposes to regional and local airports operated by municipalities and other parties. We examined the management controls CATA has in place for ensuring that only eligible airports are supported and that there is compliance with terms and conditions of contributions.

Operating Contributions

13.116 There is no assurance that airports that receive financial support are in fact eligible for such assistance. In 1972 the Government approved a policy for identifying airports that formed part of the national transportation system and were therefore eligible for federal subsidies. In 1976, Treasury Board limited the program in that no new airports could qualify for the operating contribution program. Since 1976, CATA has not applied any tests to determine whether the airports receiving contributions before 1976 remained eligible for federal assistance.

13.117 In 1983, the Treasury Board Secretariat asked CATA to submit updated eligibility criteria for financial assistance to these airports. At the time of our audit, CATA had not made such a submission.

13.118 However, the Department has informed us that new eligibility criteria based on population and accessibility have been developed which, if approved, may disqualify many airports eligible for subsidy at present, while adding others to the list.

13.119 Incentives to minimize subsidies. The current financial assistance policy and related contribution agreement do not provide airport operators with financial incentives that promote economy and efficiency. For example, CATA does not provide financial incentives for augmenting revenues beyond the stipulated minimum although these would encourage operators to explore new sources of revenue to offset costs that would otherwise be eligible for a federal contribution. Nor are recipients required to make their own financial contribution to help defray operating costs with a view to sharing the federal government's burden. Furthermore, the operating contribution agreements do not provide sufficient assurance that only appropriate costs are subsidized. They do not clearly distinguish between specific expenditures that are eligible for funding and those that are not. This weakness has the potential for allowing airport operators receiving subsidies to charge the federal government for ineligible expenditures.

13.120 Contributions to municipal airports are based on annual budgets reviewed and approved by CATA. Nevertheless, specific deficiencies have been noted by CATA's own post-audits of these expenditures. On the revenue side, in some instances billing and collection procedures for landing fees and parking fees were found to be inadequate, resulting in lost revenue. On the expenditure side, excessive or ineligible costs were claimed and reimbursed for items such as employee benefits, providing firefighters, cleaning air terminal buildings, travel, overhead and other administration expenses. For example, at Hamilton, 11 firefighters are provided by the city to Mount Hope Airport at a salary cost of $310,000. CATA post-audits pointed out that costs being claimed were excessive because the number of firefighters was not warranted considering the size and type of scheduled aircraft using this airport. In the absence of incentives to minimize costs, airport operators have little reason to exercise tight control on such expenditures.

13.121 Although post-audits have provided a certain amount of control over the risk of subsidizing ineligible expenditures, they are not a substitute for properly structured incentives.

13.122 Arctic airports. There is a general memorandum of understanding between CATA and the territorial governments on terms and conditions relating to funding the 46 arctic airports. Also, related guidelines recognize CATA's right to conduct reviews and audits of its contributions. However, CATA has not exercised its right with respect to auditing the expenditures it funds. As a consequence, independent assurance is not obtained on whether the contributions were spent by the local airports for the purposes intended.

Capital Contributions

13.123 We noted that CATA made certain capital contributions for airport development that were not fully justified from a transportation point of view. We were informed by CATA that these contributions, although they are from Department of Transport appropriations, are made to meet other government objectives and that CATA is not responsible for deciding to fund or subsequently to evaluate the benefits of these projects. An example is the contribution of $4.3 to the airport in Drummondville, Quebec approved by CATA at the time of our audit. The money is intended for extensive airport development, including an air terminal building, runway extension and the installation of navigational aids. However, an earlier project evaluation submitted to CATA by its Quebec regional administrator recommended that only runway repairs and repaving at a total estimated cost of $337,000 were necessary to meet transportation requirements. The $4.3 million had not been paid at the time of our audit.

13.124 The Department should approve and promulgate the draft policy for financial assistance to municipally-owned airports, including the criteria that will be used to judge airports' eligibility for assistance.

Department's response: A draft financial assistance policy has been developed by the Department. Subject to developments on the new management structure, this draft will be submitted for government approval.

Air Navigation Services

13.125 Aids to navigation provide essential services to aviation (see Exhibit 13.9). Navigational systems make the skies and runways safe and save fuel by providing direct routes. CATA's official objective for this activity, as reported to Parliament in Part III of the Estimates, is to assure the safe and efficient movement of civil aircraft in Canadian and adjacent international airspace. As well, CATA's general policy for cost recovery calls for the full recovery of en route navigational costs from those who use the system, other than costs to be assumed by the government for facilities and services provided primarily to relieve isolation or to serve other government policies requiring a departure from commercial viability.

(Exhibit not available)

Planning and Control Systems

13.126 Our review revealed two general shortcomings in CATA's planning and control of air navigation systems. The first relates to cost recovery and the second to the process of defining system needs and associated operational requirements.

13.127 Cost recovery. The largest and most costly element of the air navigation system - en route aids that guide aircraft along routes from airport to airport - recovered only about one-quarter of its $163 million expense in 1984-85. While we recognize the difficulty of developing and administering specific user charges in this area, we found that in spite of the very large size of the capital projects now being planned, inadequate attention had been given to investment planning and development of charges designed to promote CATA's stated objective of recovering appropriate en route air navigation system costs.

13.128 Income from the tax on passenger tickets represents the domestic en route system's only source of user financing. About 15 per cent of the tax revenues, yielding $32 million in 1984-85, is arbitrarily allocated to the en route system. The remaining 85 per cent is allocated to airport operations. CATA is considering allocating a larger share of ticket tax receipts to the en route system, but such a change would simply lead to reporting increased losses in airport operations.

13.129 CATA continued to plan and implement additional navigation system investments for the benefit of users without reference to cost recovery implications. Although CATA estimates that the benefits of investments such as the Radar Modernization project will include substantial fuel savings to airlines and time savings to passengers, it did not attempt to obtain commitments from future users to pay for some or all of the cost of achieving these savings and has made no cost recovery plan. Furthermore, CATA has not disclosed to Parliament the increase in level of service that such system improvements are intended to provide to the aviation industry and what this will cost the general taxpayer.

13.130 Needs analysis. We found inadequacies in the process used by CATA to determine the needs of the air navigation system and the means by which such needs are translated into specific operational and equipment requirements. Rather than determining the basic need first, and only then specifying the technical requirements, CATA reversed the process. This increases the risk of acquiring assets that may not be fully justified. Specifically, before completing an analysis of its long-term needs, CATA developed a long-term plan, the National Airspace System plan, for acquiring major new equipment systems. This plan recommends expenditures of $3.5 billion on new equipment and facilities. A number of equipment projects included in the plan, such as Radar Modernization (see Case Study 2), are already well under way. Others, such as microwave landing systems, are at the proposal stage. However CATA has just begun its Canadian Airspace Review, which will examine overall system needs, review the present air navigation system, analyse benefits and costs and how they will be shared between users and the government, and determine the levels and types of services CATA should provide.

13.131 We found a number of deficiencies in CATA's process for identifying the need for new navigational facilities and equipment. In particular, there was a lack of rigorous cost-benefit analysis. In the few cases where benefits and costs were compared, the most economical option was not always followed. Managers attributed this to their having to consider non-quantifiable benefits in support of other government objectives.

13.132 In particular, CATA has failed to take advantage of technological changes that could make it possible to consolidate the existing structure of air traffic control facilities. We found that, in the past, when such opportunities existed CATA had either failed to make a rigorous examination of the costs and benefits of consolidation or had failed to act when its own analysis showed that benefits significantly exceeded costs.

13.133 For example, CATA studies concluded that consolidating the Winnipeg and Edmonton area control centres in one facility at Edmonton would cost approximately $9 million less than constructing a new facility in Winnipeg. However, for reasons unrelated to cost, including staff disruption and a perceived risk associated with concentrating services in a single location, CATA recommended construction of the facility at Winnipeg.

Acquisition of Facilities and Equipment

13.134 Over the past several years, many navigational facilities (terminal control units, flight service stations, traffic control towers, instrument landing systems, and so on) have been acquired, installed, and operated without a clear and consistent means of identifying the true need for them. As well, there were no criteria for determining when such installations were no longer required. This has led to the construction and continued operation of facilities that may not be justified by the volume of air traffic, by safety requirements, or by other factors.

13.135 CATA has recently developed criteria based on cost-benefit analysis for determining the need for new traffic control towers and certain flight service stations and for deciding when existing towers should be discontinued. Comprehensive criteria for other navigational facilities, however, have yet to be established. We note that, on the basis of the new criteria for towers, many existing airport towers would not now be justified. Moreover, CATA has recently constructed a new airport tower at Charlottetown, P.E.I. even though there is no justification for the tower based on the benefit-cost criteria introduced in the same year.

Operations

13.136 Our examination of efficiency in CATA's operation of navigational facilities led us to conclude that there is a potential for substantial cost reductions in several areas.

13.137 Staffing. In 1982 CATA determined that area control centres would be overstaffed in the future by approximately 150 air traffic controllers and projected that the overstaffing would continue at least through 1986. A major CATA study in 1984 confirmed this. CATA's response to overstaffing in area control centres was limited to freezing the number of employees at the 1 January 1983 level, at least until 1 April 1986, and allowing voluntary inter-regional transfers to occur. CATA believes additional controllers will be needed after 1987. Even though overstaffing occurs only in certain regions and other regions are understaffed, measures such as CATA-initiated transfers to other regions were not implemented. The cost of carrying these surplus air traffic controllers in the intervening period is in the range of $8 million to $12 million in additional salary costs. CATA pointed out to us that costs associated with not retaining surplus staff, such as separation pay, must also be considered.

13.138 Towers are also overstaffed. As early as November 1981, the application of newly developed control tower staffing standards projected surplus controllers. CATA management has now been aware of the overstaffing situation in towers for approximately four years but has not taken action to reduce the surplus. The cost of carrying the surplus tower controllers is estimated at approximately $8 million.

13.139 Although CATA was aware of a general overstaffing of controllers, training of additional new controllers was allowed to proceed in 1984. Contracts established with two community colleges for the initial training of 192 controllers were not renegotiated, to take into account the reduced need as a result of the slow growth in traffic, despite the statement by CATA that "it may be necessary to place them in other employment until other air traffic control positions become available". The total cost of the training contracts with the community colleges is $6 million.

(Photos not available)

13.140 Overlapping services. During specific periods of the day, an overlap of services exists between certain flight service stations and airport towers. We noted that at 39 airports, both flight service stations and towers operate. At these controlled airports, during specific periods of reduced traffic, CATA has two air traffic units capable of providing similar service, that of landing an aircraft safely. For example, during the midnight shift, Moncton tower and Moncton flight service station are both operating, while each is capable of landing the very limited traffic safely during this period. Also, in the cases where a flight service station is situated close to an area control centre, either facility could provide a flight planning service for visual and instrument flight plans.

13.141 Another aspect of overlapping services is the close proximity of certain flight service stations. The station in Gatineau, Quebec, for example, which provides bilingual services, is only 23 kilometres from the Ottawa station. Consolidation in one location could result in savings.

13.142 There is also an overlap of services offered by the flight service stations and Environment Canada weather offices. At 48 airports, both a flight service station and an Atmospheric Environment Services Weather Office operate. In most cases both are staffed for, and provide, weather briefings to pilots, in addition to other services. Both are also equally capable of taking weather observations.

13.143 Hours of operation. We noted that some towers operated during periods of very limited traffic, when their operation was not warranted for safety reasons. CATA does not have criteria that relate the hours of operation to traffic requirements. Such criteria are used in the U.S. In addition, a 1979 internal CATA study recommended that CATA develop such criteria.

13.144 For the domestic en route system, the Department should develop a cost recovery plan, including recovery for investments such as the Radar Modernization project.

Department's response: In progress. A proposal is expected to be completed this year; industry will then be consulted.

13.145 For the other air navigation systems, the Department should:

    - develop criteria for navigational facilities and equipment that incorporate benefit-cost analysis; and
Department's response: The criteria have been developed and approved by the Minister.

    - review the overlap of services between air navigational facilities such as flight service stations and airport towers.
Department's response: The perceived overlap of services is under review as part of the reorganization.

13.146 Flight inspection. Without reducing safety, CATA could cut down on its annual cost for this activity by approximately $4 million by reducing the frequency of inspection of instrument landing systems and high-frequency radio systems. Our analysis of CATA's own flight inspection data for one specific region provides convincing evidence that navigational aids could be inspected less frequently without adverse impact on safety or serviceability. The increased reliability of the newer solid state equipment has generally resulted in reduced maintenance requirements, yet CATA appears tied to its traditional practices. In the face of the clear international trends toward reduced inspection frequency for aids to navigation shown in the following table, we believe CATA needs to change its existing flight inspection policies to reduce the frequency of inspection. Such a reduction would lead to lower operating and maintenance costs for CATA's fleet of aircraft.

Comparative Standards for Frequencies
of Flight Inspection of Aids to Navigation

Type of
Aid to
Navigation

Canada

U.S.

U.K.

VOR
(VHF radio
system)

2 a year

1 a year

2 a year

DVOR
(High-precision
radio system)

2 a year

1 a year

1 every 5 years

ILS
(Instrument
Landing
System)

3 a year

2 a year

3 a year

Source: International Civil Aviation Organization documents.

13.147 CATA should explore the savings possible through reducing the frequency of inspection of navigation aids without sacrificing safety.

Department's response: Implementation of a management information system in support of flight inspection is under way. When operating, the statistical data provided by the system will permit a continuous review of the frequency of inspections.

Case Study 2 - Radar Modernization Project - $810 Million

13.148 The Radar Modernization project (RAMP) was approved in 1981 by Treasury Board. Under RAMP, CATA will install new air traffic control radar and display systems and modify existing electronic equipment. The project will continue through 1992 at a total cost, in current dollars, of $810 million.

13.149 CATA's policy states that "the cost of facilities and services will be subject to full cost recovery, except for the portion of en route costs to be assumed by the government for facilities and services provided primarily to relieve isolation or to serve other government policies requiring departure from the objective of commercial viability."

13.150 CATA projected that savings in time and savings in fuel for airlines would result from the improved radar facilities. Nevertheless, it did not seek a commitment from users to recover any of the costs of RAMP. Thus, there is no assurance that users will pay for the expanded services that CATA has decided to provide.

Regulatory and Aircraft Services

13.151 The Commission of Inquiry into the State of Aviation Safety in Canada, headed by Mr. Justice Charles Dubin, submitted the last of its three volumes of reports to the Minister of Transport in October 1981. Among its main concerns were the need for an independent agency to investigate aviation "occurrences" -that is, actual or potential accidents; the need for new aviation regulations; the lack of enforcement by CATA of existing regulations; and the need for greater emphasis on monitoring continuing airworthiness.

13.152 In our review of Regulatory Services, we carried out a brief follow-up of the progress made by CATA in implementing Mr. Justice Dubin's main recommendations. We also examined cost recovery, CATA's management information system for identifying high risk situations that require priority attention and the extent to which risk is a factor in scheduling inspections of regional air carriers. Finally, we assessed the extent to which CATA examines the economic impact of its regulations.

Dubin Commission

13.153 Since 1981, CATA has made great efforts to improve its aviation regulation functions. Implementing the Commission's recommendations has been a major priority. CATA has created a separate Aviation Regulation Directorate with an Enforcement Division, carried out special audits of large carriers, standardized many of its procedures through the publication of manuals and set up a new Continuing Airworthiness Division. By an Act of Parliament, an independent Canadian Aviation Safety Board was created to investigate aviation occurrences.

13.154 Most of the deficiencies that the Commission identified with respect to the Aeronautics Act and its regulations had not been corrected at the time of our audit. However, the Aeronautics Act was amended in June 1985, and extensive changes to the existing safety regulations were being proposed at the time of our audit. Solutions to certain problems referred to by Mr. Justice Dubin have not yet been found. For example, the regulations governing landing in poor weather conditions, which were recognized by CATA as unenforceable in 1978, have been studied by CATA, and we were informed that changes have been recommended; but these have yet to be finalized by the government.

13.155 Also, CATA has not received the level of legal support from the Department of Justice recommended by the Commission. CATA finds that the legal support available, which varies from region to region, is insufficient to allow for effective prosecution. The Department of Justice has informed us that the number of violations does not justify providing the services of a lawyer exclusively for aeronautic matters in each region, as recommended by Mr. Justice Dubin.

13.156 The Commission's recommendation that CATA carry out unannounced audits of air carriers had not been fully implemented at the time of our audit. Furthermore, CATA has not yet decided whether to carry out flight checks on single-engine commercial Visual Flight Rules pilots. It is currently conducting surveys to determine the number of pilots to be checked if the recommendation is to be implemented.

Cost Recovery

13.157 Total government support for regulatory services was $98 million in 1984-85. CATA's cost recovery policy for these services states that "costs will be fully recovered, except for costs to be assumed by the government for the development and enforcement of aeronautics legislation, standards and procedures, and for such other costs as may be incurred for government objectives".

13.158 Fees for regulatory services - personnel licensing, aircraft licensing, airworthiness approvals, operating certificates, and aerodrome licensing, cover an estimated 12 per cent of the cost to deliver such services, even after costs to be assumed by government have been removed.

Management Information

13.159 We found that CATA's management information systems failed to identify high risk areas. Ongoing analytical information did not identify areas that pose a high risk for aviation safety. Most of the present reporting systems only describe accidents that have occurred; they do not include contributing causes. Safety information with causal factors is reported regularly by the Department of Defence, for example, to allow it to spot safety problems arising in the operation of its fleet.

13.160 The Canadian Aviation Safety Board has implemented new aviation occurrence reporting systems, which will provide CATA with information such as the causes contributing to specific accidents and incidents. However, CATA requires a more comprehensive management information system that will also draw on sources such as the Canadian Transport Commission, which could supply data on the finances of airline companies. It is widely believed that airlines with weak finances pose a higher risk to aviation safety. CATA's own Enforcement Division could add valuable information on the extent of regulatory violations. Such a comprehensive system would serve to develop management reports that highlight safety trends and alert the Department to high risk situations requiring priority attention. Resources could then be allotted on that basis.

13.161 An initiative is under way in one branch of CATA to create an information system for aviation safety purposes. However, this is still in the planning stage, and it was not clear at the time of our audit whether it would address all the existing deficiencies.

Inspections

13.162 There is no formal system for targeting regional carrier inspections on the areas of highest risk. Much of the work of CATA regional inspectors in the Air Carrier and Airworthiness sections involves reviewing the operations of air carriers and inspecting their operating bases and repair and maintenance facilities. We found that inspectors do not make more frequent formal base inspections, on a systematic basis, of air carriers identified as higher risk operators. Only in the Quebec region did we find a systematic attempt to schedule inspections on the basis of risk.

13.163 Generally, base inspections are required to be carried out at least once a year for all carriers, irrespective of their safety records. However, in practice, none of the regions was able to inspect all the carriers in its jurisdiction at least once a year. We have been advised by CATA that initiatives have been taken to direct more intensive inspection activities to higher risk operators.

Cost-benefit Analysis

13.164 Regulations are not always subject to full cost-benefit analysis. Although the cost to CATA of developing regulations is relatively low, the economic impact on industry can be very high. The need for regulatory reform has been recognized by the Department as a priority. While there appears to be more potential for reform in economic deregulation than in safety deregulation, a major concern that the Department will examine is the need to find a balance between government involvement and the responsibility of industry to self-regulate through its own initiatives.

13.165 We identified examples where CATA's regulations may, in aggregate, have led to significant costs to the aviation industry. However, CATA has in many cases not adequately analysed whether the benefits warranted these costs. For example, in Canada, CATA regulations require that aircraft owners replace parts after the fixed period of time recommended by the manufacturer of the aircraft. CATA has not fully analysed whether the manufacturer's recommended parts replacement schedule is appropriate. In the United States, the manufacturer's recommendations are only a guide; the professional judgement of a certified mechanic is the key determinant.

13.166 In regulating aviation safety, the Department should develop information systems that highlight safety trends and identify high risk areas as a basis for targeting regulatory activities and resources.

Department's response: The Department is in the process of instituting the System Analysis and Functional Evaluation (SAFE) Program for analysing aviation accident and incident reports being received from the CASB and other aviation occurrence reports from various sources. The trend analysis of aviation deficiency records will provide a valuable guide for senior management to determine the most effective direction for CATA's Regulatory and Air Navigation activities.

Aircraft Services - Operational Fleet

13.167 The objective of this activity is to provide efficient aircraft services for transporting and training CATA personnel. To this end, CATA owns and maintains an Operational Fleet of 36 aircraft of eight different types at seven locations across Canada. The total annual operating costs are estimated at $10 million. The fleet flies 16,000 hours a year: 10,000 hours for transportation of staff for inspections in the regulatory function, and 6,000 hours for the training of more than 400 CATA personnel to maintain their flying proficiency.

13.168 We examined the use of CATA's Operational Fleet and the costs of operating it to assess whether the CATA management approach to owning versus renting is satisfactory.

13.169 We also looked at the proficiency flying activity. Specifically, we considered CATA's eligibility criteria for allowing its personnel to maintain flying proficiency at the taxpayer's expense, and whether satisfactory procedures exist for measuring and reporting on the effectiveness of this activity. We did not examine the helicopter fleet operated by the Canadian Coast Guard or the Executive Fleet, now managed by the Department of National Defence.

Fleet Utilization

13.170 Fleet utilization was low in comparison to other government jurisdictions. The average aircraft utilization rate for the Operational Fleet for 1984-85 was 450 hours. CATA has not set a minimum utilization standard. The Department of National Defence operates its transport aircraft at an average annual utilization rate of 900 hours. In the United States the minimum utilization rate needed to justify the acquisition of an aircraft for the Federal Aviation Administration (FAA) fleet is 500 hours.

13.171 For the past two years, several aircraft of the Operational Fleet flew less than 200 hours a year, as shown in the following table.

Aircraft Utilization

1983-84

1984-85

Baron CGM 204 hours 68 hours
Beaver DTY 194 hours 283 hours
Beaver DTZ 129 hours 169 hours
Beaver DTC 122 hours 211 hours
Cessna 206 CFH 201 hours 205 hours

13.172 We were informed that the utilization rate was low because acquisition of new aircraft has not always been matched with disposal of the old. Also, because working hours of both pilots and maintenance personnel are generally limited to 8 a.m. to 5 p.m. five days a week, maintenance is often carried out during hours when the aircraft are required by their users.

Cost of Operation

13.173 The cost of operating certain CATA-owned aircraft is considerably higher than that of renting comparable aircraft. Although CATA rents a very small proportion of its flying hours, its own experience in one region has shown that this can be more economical than operating its own aircraft. In the United States, the FAA has comparable activities. However, 19,000 hours out of a total annual requirement of 25,000 are flown aboard aircraft which the FAA rents or leases from the private sector - a practice that is not widely used in Canada. Savings possible through rental of aircraft flown less than 400 hours a year, based on CATA's own figures and quotations from several rental organizations, are estimated to exceed $750,000 annually.

13.174 Despite the possibility of significant savings, CATA has not decided to meet its aircraft requirements other than through outright ownership.

13.175 The Department should examine the potential for savings from leasing aircraft as opposed to buying them.

Department's response: The Operational Fleet Plan which is nearing completion covers this recommendation.

Proficiency Flying

13.176 All civil aviation inspectors are eligible for proficiency flying, whether or not their job requirements clearly establish the need for this type of training. Under this program, some 400 personnel are entitled to receive recurrent flying training to maintain their commercial pilot ratings. The proficiency flying program consumes about 40 per cent of the Operational Fleet's flying time. Successful completion of the program entitles personnel to an annual extra allowance of $2,400.

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13.177 According to CATA, the proficiency flying activity is based on the requirement "that all civil aviation inspectors maintain a current licence, and be knowledgeable and current concerning state of the art aircraft and associated systems pertinent to the duties of their position". However, the extent of benefits to CATA of maintaining this commercial licence for all inspectors, irrespective of their current job requirements, has not been evaluated.

13.178 Given the stated objective of keeping civil aviation inspectors up to date, at the time of our audit CATA had not done adequate analysis of the kinds of training necessary to ensure that the proficiency flying activity, as it is now constituted, will meet this objective. In fact, the activity does not seem to be designed primarily to keep all its participants knowledgeable and current on aviation developments. For example, some of the inspectors based in Ottawa are tested for their Airline Transport Rating by flying most of their hours in a DC-3 which is over 30 years old. Furthermore, while CATA limits to 48 the number of hours a civil aviation inspector may fly within the proficiency flying activity, it has not done adequate analysis to justify this target.

13.179 Also, satisfactory procedures are not in place to measure and report on the effectiveness of this training activity. We estimate the cost of the proficiency flying activity for individuals who do not fly as part of their regular duties, to be $22,000 each. This figure relates principally to the cost of the aircraft and the cost of working time lost.

13.180 In spite of the high cost of this training, the Department has not adequately dealt with alternative ways of meeting the legitimate training requirements of civil aviation inspectors.

13.181 The Department should examine alternative methods that may be more economical for meeting the proficiency flying activity objective for civil aviation inspectors.

Department's response: The Department has studied alternative methods and agrees that simulator training can make up part of the flying program for civil aviation inspectors.

Departmental Corporate Controls

Senior Financial Officer

13.182 Our review indicates that the Assistant Deputy Minister (ADM), Finance is held responsible by the Deputy Minister for providing leadership in financial management and control for the whole Department. This authority is clearly established by departmental policy. CATA has its own senior financial officer; however, the ADM, Finance is accountable for functional direction to all financial staff and for providing independent advice, guidance and challenge for existing program activities and initiatives such as new airport and air navigation services.

13.183 Advice and challenge. We found that the ADM, Finance has not been able to play a significant role in providing advice or challenging some Air Administration operations and program initiatives that have a significant financial impact. A number of capital investments to expand major airport and related navigation facilities have been made without a timely independent review of their commercial viability or an analysis of costs and benefits where expenditures support government objectives beyond those associated with commercial civil aviation requirements. For example, the Self-supporting Airport and Associated Ground Services Revolving Fund is not monitored or controlled by the ADM, Finance despite the financial difficulties facing this major component of the Program. Moreover, the ADM, Finance does not participate actively in the financial arrangements negotiated with the airlines, the basic users of both airport and air navigation services. Nor does he provide advice on the development of cost information on program activities subject to cost recovery. Lack of adequate cost accounting is a major weakness in the financial management of the Program.

13.184 Challenge by the ADM, Finance of major program initiatives for which large capital expenditures are committed, such as the Radar Modernization project ($810 million from 1980-8l to 1993-94) and the proposed CATA Capital Investment Plan ($500 million a year), occurred so late in their development that it could not effectively question their financial implications.

13.185 Monitoring financial performance. Monitoring by the ADM, Finance of the Air Administration's financial performance is limited to a review of expenditure levels against forecast figures. There is no evidence of analysis by the ADM of such important issues as the need for justifying additional airport capacity and declining cost recovery levels for various activities. Thus, there is no independent challenge of their financial viability or appropriateness. At the time of our audit, a major internal review of the Air Program's total human resource requirements was under way, as suggested by Treasury Board. However, this important study was being carried out without the involvement of the ADM, Finance.

13.186 Functional direction. The functional direction provided so far has tended to focus more on compliance with departmental and central agency systems and procedures than on areas of advice, challenge and performance monitoring. The ADM, Finance is, however, strengthening functional direction to the financial officers in CATA, and the potential for further improvements is being examined.

13.187 A stronger leadership and challenge role, accepted by both the ADM, Finance and Program officials, is needed. We encourage the Department to support and solicit, as a matter of course, the ADM, Finance's active participation and involvement to ensure an effective controllership function.

Program Effectiveness Measurement

13.188 Responsibility for conducting program evaluations in the Department of Transport rests with the Program Evaluation Branch. We reviewed the Branch's studies of the Air Program to determine whether program evaluation was a significant source of effectiveness information for management.

13.189 We found that evaluations completed to date of the Air Administration have examined only a small proportion of its activities. Of the three evaluations of the Air Program completed since 1981, two examined aspects of services provided to other government departments and the third examined aspects of air traffic controllers' training and staffing. We did not conduct a detailed audit of the quality of the studies because the evaluated activities comprise only a few parts of the Air Program that by themselves are not significant. We were informed, however, that the Branch has two evaluations in progress that are examining more significant parts of the Air Program.

13.190 Ongoing performance measurement. In other sections of this chapter we have noted instances where information to management on the performance of the Air Program was inadequate. In particular, the financial performance of CATA is not regularly analysed and reported. Airport operations and maintenance efficiency could be improved, but senior management does not receive regular analysis of efficiency at individual airports. Information is inadequate to ensure that safety activities are properly targeted.

13.191 To understand these deficiencies in management information on performance, we examined CATA's approach to performance measurement. Over the past decade it has made numerous unsuccessful attempts to establish systems to measure performance. We estimate that these attempts have cost more than $1 million. In 1984-85, CATA embarked on another attempt at establishing such a system as part of its operational planning framework. This initiative is unlikely to succeed without defining performance targets that managers are expected to meet.

13.192 To assess whether performance measurement was appropriate for an organization like CATA, we examined whether other organizations in the transportation sector, particularly in aviation, were using it. We found that many such organizations in Canada and elsewhere have established performance measurement systems. For example, Air Canada uses regular surveys of travellers' satisfaction in making changes to its services. The British Airports Authority provides the public with information on its performance against government targets for rate of return on investment, employee efficiency and cost per passenger, and on user satisfaction. In the United States, financial performance is monitored both by some airports and by independent credit rating agencies that provide the public with information on the viability of prospective investments.

Internal Audit

13.193 The role of Internal Audit is to provide the Deputy Minister with an independent assessment of the management process and to identify areas where opportunities for improvement exist. It provides an effective mechanism for managerial control by communicating this information to the Audit and Review Committee, which is chaired by the Deputy Minister.

13.194 In our review of the activities of Internal Audit as they relate to the Air Program, we found that there had been significant progress in using Internal Audit reports to communicate to senior management areas of both strength and weakness. However, we noted areas to which we believe Internal Audit could give greater emphasis.

13.195 Scope of internal audits. A recurring problem is that the scope of audits does not extend to the broader implications of control weaknesses uncovered. For example, a June 1984 Internal Audit report on the key area of revenue and cost recovery pointed to a number of internal control weaknesses in CATA's cost recovery procedures. However, no attempt was made to examine and report on the significant causes for the rapidly declining cost recovery in the Air Program, or the impact the major capital projects under way in the air navigation system could have on cost recovery - in the absence of any commitment from users to pay. Similarly, no information was provided to the Deputy Minister on the fact that CATA had not developed a timely response to the Treasury Board's July 1983 reminder of the need for a comprehensive submission dealing with cost recovery goals and objectives.

13.196 Audit process. The design and execution of the internal audit process are generally sound. Follow-up audits, however, which are designed to indicate to the Deputy Minister how management has responded to reported weaknesses, do not adequately fulfil this function. In some instances, management did not act promptly to remedy reported weaknesses. This suggests that follow-up audits are not done soon enough and do not seriously challenge management's response. The Audit Committee has recognized this weakness and is now concentrating more on the adequacy of management responses.

13.197 There were limits to this Office's reliance on Internal Audit, because the scope of the work Internal Audit undertakes is not broad enough. In specific management and support systems, much of the internal audit work was valuable. However, it did not examine the overall cost effectiveness of major program activities or analyse implications of management control weaknesses in sufficient depth in the context of the whole Program.

Reporting to Parliament - Part III of the Estimates

13.198 We reviewed CATA's Part III Estimates submission for compliance with Treasury Board's instructions for its preparation and for objectivity, completeness, reliability, timeliness and comparability (with prior Part IIIs and other reports) of the information contained in it. In general, we focused on the areas covered by our comprehensive audit.

13.199 We found that, although CATA attempted to comply with Treasury Board requirements, it did not report fully and objectively on performance or, in certain instances, on resource utilization. For example, it did not state fully the reasons for removing 14 airports from the Self-supporting Airports and Associated Services Revolving Fund. Also, it did not disclose fully the reasons for and extent of the increasing deficit of the Air Transportation Program or provide an analysis of aviation services that amount to subsidies to special interest groups such as flying clubs and corporations with business jets.

13.200 Transportation and other government objectives and related goals and milestones were not stated in a manner that would permit the assessment of progress toward achievement. Also, insufficient explanations were provided in support of some major capital projects. For example, although the Radar Modernization project represents an improvement in the level of service provided to airlines, it was reported only as a rehabilitation and replacement of an existing system. An estimation of the financial costs of carrying excess capacity at certain airports and pursuing objectives beyond those associated with civil aviation requirements would also have been very informative to parliamentarians, as would be the objectives and criteria for providing grants and contributions to municipal and local airports that have little interprovincial traffic.

13.201 The financial performance of each major component of the Air Transportation Program, including the level of government support, should be disclosed annually in the Estimates, Part III, and significant variations from the previous year should be explained.

Department's response: This information is currently provided on a cash basis without a separate quantification of costs in support of non-transportation objectives. A study to determine these costs is presently under way.

13.202 The financial cost of developing and operating each major component of the system should include:

    - direct operating and maintenance costs;
    - all indirect costs, including overheads;
    - depreciation; and
    - an allowance for the government's interest on capital employed.
Department's response: A national system that collects direct operating costs by planning elements and support functions has been in operation since 1 April 1984. Refinements and additions to the system will continue.

Other Matters

Internal Accounting Controls

13.203 Scope. We examined internal accounting control by testing CATA's procedures for collecting certain fees and charges levied on air carriers. We also conducted a brief follow-up of our 1978 recommendations on the control over fixed assets.

13.204 Passenger security services fees. Control over the collection of this charge is weak. This fee is a $.20 charge per passenger at 18 airports in Canada, amounting to approximately $4 million a year. Air carriers are expected to pay this fee on the honour system since CATA does not invoice them. The only method of checking payments made by the carriers is to compare them to passenger statistics reported by the carriers to the Aviation Statistics Centre, which produces a report that is sent to the Department of Transport. This report is received monthly but not until approximately 15 months after the month to which it relates. The Department prepares an annual analysis comparing security revenue received with the amounts that should have been received according to the Aviation Statistics Centre data, but since this information is received much later than the period to which it applies, no attempt is made to collect outstanding amounts. According to CATA's own analysis, the net amount of security fees uncollected is approximately $100,000 a year.

13.205 En route fees. CATA is paying the Civil Aviation Authority in the United Kingdom to collect en route fees on its behalf without adequately evaluating less expensive alternatives. These fees are charges by CATA to airlines flying between Europe and North America for the use of telecommunications or other en route services. The revenue from these fees is approximately $10 million a year. Since many of the air carriers using these services do not land in Canada and, even if they do, cannot be seized or detained by the Minister of Transport for non-payment of fees, Canada entered into an agreement with the United Kingdom to have the Civil Aviation Authority bill and collect them. Under the current arrangement, CATA bills the air carriers and the Agency merely collects the fees and remits them to CATA. CATA pays the Agency approximately $140,000 a year for this service. A recent departmental internal audit report recommended that CATA review the costs and benefits associated with this arrangement, but CATA responded that it considered the arrangement to be satisfactory.

13.206 CATA has not, however, done a formal study to investigate alternative means of collecting these fees. Alternative methods that should be investigated include requiring air carriers to pay an advance deposit to CATA to ensure payments of fees due to the government. The Minister of Transport has sought authority to seize or detain aircraft through amendments to the Aeronautics Act. With these amendments, it may no longer be necessary to use the services of the Civil Aviation Authority.

13.207 Fixed assets. CATA values its fixed assets at a net book value of $2 billion. In our 1978 Report, we noted a lack of adequate financial control over fixed assets and made a number of recommendations aimed at improving this control. The Fixed Assets Accounting System - Transport was implemented in 1979 but, after a number of start-up problems, was effectively abandoned in 1982. No other system has been introduced since to provide the financial control over assets that the abandoned system was to provide. As a result, there is no further assurance that CATA's fixed assets have been properly accounted for or that control over their physical existence, movement or use is adequate.

Electronic Data Processing

13.208 Each year for the last five years, Transport Canada has reported substantial increases in actual and projected outlays for electronic data processing; for 1984-85 these outlays were foreseen by the Department to run to nearly $20 million. A national computer network, the Distributed Data Processing Network, has been installed at headquarters in Ottawa and at 12 regional sites, at a capital cost estimated at $21 million.

13.209 In 1982, when the installation of this network was approved by Treasury Board, the Department indicated that its cost would be offset over a period of about 10 years by savings to be realized through the introduction of nation-wide computer systems for areas such as the administration of employee compensation and other personnel management functions, inventory control, departmental financial management and local management of airports.

13.210 We therefore examined the progress the Department is making in developing these systems. We found that progress has been very slow, that the estimated cost to complete the system is growing, that a substantial part of the anticipated savings appears to be in jeopardy and that neither projected nor actual costs and savings appear to be well monitored and controlled by the Department. Because many of these systems are, for the most part, not yet fully in service, it is impossible to be certain that they will meet the needs of the users for whom they were designed. We relied primarily on internal audit for the examination of the cost effectiveness of this activity.

Air Transportation Tax

13.211 Carriers that fly passengers to international connections but do not operate in Canada collect ticket taxes for international flights to Canada and are expected to remit them to the Canadian government. However, we found that approximately $60,000 a year is not being remitted to Canada. In addition, we found that certain foreign airlines operate in Canada without a licence to collect ticket taxes as required by the Excise Tax Act.