PACC Committee Report
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“That Transport Canada obtain fair market values for each of the airports in the National Airports System, bringing in independent expertise to assist prior to any renegotiation, and to provide these values to Treasury Board Secretariat, Treasury Board and Cabinet.”
Transport Canada is undertaking a Cabinet mandated National Airports Rent Policy Review (Review). The approved parameters for conducting the Review include an assessment of the current policy, determination of rent policy options and whether the Government of Canada is receiving fair value for airport transfers by way of the current rent structure.
The Review is designed to recommend the appropriate business valuation methodology to be applied by Transport Canada in determining the fair value of leased NAS airports prior to any lease renegotiations. It will take into consideration the unique made-in-Canada airport transfer policy framework, the not-for-profit nature of the airport authorities, and the monopoly characteristics of NAS airports.
Five independent consulting firms with experts in the field of business and airport real estate valuations are assisting in the process of determining fair value. Both the Treasury Board Secretariat and Department of Finance will be consulted on various valuation options and their views will be considered in the development and application of primary and alternativemethodologies. Transport Canada will also consult with Central Agenciesand stakeholders on the results of the review including rent policy options and recommendations prior to compiling andpresenting a final report to Cabinet. Cabinet will be provided with the recommendations of the Review, including a range of business valuation options and the resulting values attributed to the airports under review.
“That Transport Canada refrain from renegotiating any lease until a reasonable assessment of fair market value, using a number different evaluation methodologies including cash-flow methodology, of the airport in question has been determined.”
The recommendation of the Committee is consistent with the Government decision that no renegotiation of the financial aspects of existing leases will occur until such time as decisions on the most appropriate rent policy for leased NAS airports resulting from the National Airports Rent Policy Review are reached by Cabinet.
The Department will be receiving advice from five independent business valuation experts and consulting firms on the most appropriate methods for determining value. Valuation experts retained by Transport Canada will conduct rigorous assessments documenting the advantages, disadvantages and complexities associated with various valuation methodologies (e.g. discounted cash flow, depreciated replacement cost, assessed market values, net book value, comparison approaches). The Review will report on results of the recommended approach and a range of alternative valuation options for a representative sample of airports. These assessments shall consider the unique landlord-tenant relationship, air industry operating and competitiveenvironment, the findings of the Auditor General Report on Airport Transfers, the NAS airport transfer policy objectives, federal government real property policies, the views of stakeholders, and the various airside, aviation related and commercial non-aviation activities prevalent at leased NAS airports.
“That Transport Canada use assessed market values as the basis for any further lease re-negotiations.”
No renegotiations of the financial aspects of NAS airport lease agreements (including rent) will occur until Cabinet has decided on the most appropriate rent policy for leased NAS airports. This decision will be guided by the results of the National Airports Rent Policy Review.
In conducting that Review and examining fair value, the Department will consider a variety of valuation techniques, information, and analyses prepared by five independent experts in the field of business valuation and real property.
“That Transport Canada complete a comprehensive, codified transfer application framework immediately and apply this framework to all future lease re-negotiations and that it include reference to the implementation of this framework in future performance reports.”
The Department will develop a negotiation framework based in part on the results of the National Airports Rent Policy Review and the Department’s negotiating mandate. This framework, as well as information on valuation and resulting rent determination, will be made available to stakeholders and interested parties, including the Auditor General.
It is expected that a future negotiating framework will reflect a strategy to implement the recommendations of the Rent Policy Review, and that such a framework will be submitted to Ministers for approval. This will, by necessity, require consultation with appropriate stakeholders as to the renegotiaion process and provide an acceptable degree of transparency.
Transport Canada expects that all parties will have the documented information necessary to ensure a transparent and fair process. In this context, the Government views implementation of the above policy initiatives as the most appropriate framework and necessary guidance for future adjustments or renegotiations.
Transport Canada will be documenting and reporting on the results of this process in the Departmental Performance Report, the Report on Plans and Priorities, and the Annual Report to Parliament (TP13198 E/F) where and as appropriate.
“That Transport Canada engage independent monitors to provide assurance to all parties that renegotiated leases and the negotiations that produce them are fair and equitable, include recognition of the value of smaller regional airports in contributing to passenger volumes of the airport in question, and meet the guidelines and principles established by the government for airport transfers.”
Any future lease renegotiations will be consistent with Cabinet decisions and direction on the results of the National Airports Rent Policy Review, and the various associated studies examining the issues of fairness and equity among similar sizes and classes of leased NAS airports. Lease amendments may also be required as a result of the legislative framework established by the proposed Canada Airports Act.
Previous negotiations of airport transfers and lease agreements for a number of airports, conducted in the context of fair value and the objectives of the NAP, reflected the varying, and often unique, financial and operational characteristics of the NAS airports, which in turn may have led to questions about fairness and equity.
Fairness monitors have typically been utilized in cases involving oversight of administrative processes (i.e., tender calls) as opposed to the conduct and outcome of negotiations. Transport Canada expects that transparency and financial disclosure requirements in the proposed Canada Airports Act, the five-year performance reviews conducted by Airport Authorities, and the Department’s lease monitoring program will provide the necessary public scrutiny, oversight and accountability to produce a fair and equitable process for the renegotiation of the ground leases.
In light of the above, the Government does not believe that independent fairness monitors would be appropriate or necessary to address the issues of transparency or equity in the course of any future negotiations with airport authorities.
“That Transport Canada develop an action plan specifically designed to improve its communication of information on airport transfers and the National Airports System to Treasury Board Secretariat and Cabinet, and submit this action plan to the Committee no later than 31 December 2002. This action plan must include implementation dates.”
It is the Government’s view that decision makers have been consistently provided with sufficient information by which to judge the outcomes of the airport transfer process.
Prior to the Minister of Transport signing an agreement to transfer with any NAS airport authority, the Department was required to inform decision makers, obtain specific Order-In-Council authority, and provide Treasury Board and Governor-In-Council with a comprehensive package, which included the full details of the financial terms and conditions of the transfer and a complete set of the legal instruments contemplated. The documentation submitted also included an analysis describing and certifying how the transfer arrangements would meet the requirements set out in direction and authorities previously given by Cabinet, Treasury Board and other central agencies.
At this time, the process of transferring NAS airports to Airport Authorities through long-term leases is largely complete. At the time of writing, only one NAS airport (Prince George) remains to be transferred, and it is expected to be completed by the end of this fiscal year under the current airport transfer framework.
As a normal practice, the Minister of Transport reports to Cabinet on a variety of transportation issues, including airport transfers and the Canadian airports system. In addition, the Department maintains an airport transfer status report on the Department’s webpage.
Notwithstanding the above, Transport Canada will continue to monitor and review the various methods of communicating airport transfer information to decision makers and ensure that such information is complete, accurate, timely and relevant. Such communication will continue to be done through the Departmental Performance Report (DPR), the Report on Plans and Priorities, and/or the Annual Report, as appropriate, and consistent with the constraints imposed by the statutory deadlines associated with those documents. Transport Canada will also undertake to develop web links and portals to data sources such as the airport authorities.
“That following resumption of lease renegotiations and signing of renegotiated leases, Transport Canada provide, in its annual performance report, details of the new leases, indicating where they differ from the previous lease, explaining the reasons for any rental increase or decrease with reference to fair market value, showing how changes affect the government’s and the Department’s cumulative cash flow, and demonstrating how each renegotiated lease is equitable, uniform, consistent, and fair with regard to the other leases.”
The recommendation of the Committee is consistent with the view of Transport Canada. The National Airports Rent Policy Review is examining whether rent policies achieve an appropriate level of fairness, equity and consistency for all affected parties (i.e., airport authorities, carriers, and taxpayers) as well as the financial impact of any proposed change in rent policy on rent revenues accruing to the government. In this context, Cabinet will have approved the parameters of all key adjustments to airport leases prior to such activities taking place.
The Department will report on the nature and reasoning behind major differences resulting from any existing or modified airport authority rent formulae. In addition to reporting to Cabinet, Transport Canada will provide relevant information in the Departmental Performance Report (DPR), the Report on Plans and Priorities, and/or the Annual Report, as appropriate.
“That, either beginning with its performance report for the period ending 31 March 2002, or with an annual report to Parliament focused exclusively on the National Airports System, Transport Canada provide Parliament with information on the outcomes that have been achieved through performance of its oversight and landlord roles with regard to the National Airports System. This information must include the results of the Department’s lease monitoring program, the results of all studies and/or monitoring of the financial health and viability of the National Airports System, the summary results of all audits of airport authorities, the summary results of all audits of the subsidiaries of airport authorities, the results of all analyses of airport improvement fees, and any assessments of emerging financial risks to the System.”
To the extent permitted by factors such as confidentiality, Transport Canada will provide more information along the lines recommended by the Committee, such as summaries of the analyses of information gathered in the Department’s oversight and monitoring role. This will be done by increasing the level of detail in existing documents such as the Departmental Performance Report (DPR), the Report on Plans and Priorities, and/or the Annual Report, as appropriate, as well as by providing internet links to other sources of relevant information. These measures will also be supported by disclosure and accountability requirements in the proposed Canada Airports Act.
“That the airports in the National Airports System be subject to a performance audit every five years. This audit must be conducted by an independent entity, preferably the Auditor General of Canada, be similar in nature to special audits of Crown corporations and the results provided to the Minister of Transport for tabling in the House of Commons.”
Section 9.02 of the ground lease for both CAA and LAA requires a “performance review” to be carried out every five years by an independent consultant. The review will look at the airport authority’s management, operation and financial performance over the period. The requirements of this performance review are quite similar to those described by the OAG for “special examinations of Crown Corporations”.
For example, the OAG describes special examinations as serving “to provide an independent opinion to the board of directors on whether the corporation's financial and management control and information systems and management practices have been maintained so as to provide reasonable assurance that:
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the assets of the corporation have been safeguarded and controlled;
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the financial, human and physical resources of the corporation have been managed economically and efficiently; and
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the operations of the corporation have been carried out effectively.”
Section 9.02 of a typical CAA lease requires a review to be “conducted and completed of [the airport’s] management, operation and financial performance… Such review shall be conducted by a competent Person who is independent of and at Arm's Length with the Tenant and who is qualified to conduct such a review of the management, operation and financial performance of the Tenant…”
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[the report] … “shall include at least the following:
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the terms of reference of the review;
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statements stating the extent to which the Tenant has been and is operating
a safe and efficient service to the public; and
an efficiently run undertaking in accordance with the Tenant's business plans and approved objects;
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statements stating the extent to which financial and management controls, information systems and management practices have been and are maintained, including the steps taken to ensure that
the assets of the Tenant have been safeguarded and controlled;
the financial, human and physical resources of the Tenant have been managed economically and efficiently; and
the operations of the Tenant have been carried out effectively;
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any further information that is reasonably required by any Nominator or by a majority of the Board;
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any concerns or qualifications that the Person conducting the review has with respect to any matter described in this Section; and
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any other relevant information about the Tenant.
The first set of Five Year Reviews were conducted by the LAAs in 1997 and provided to Transport Canada. More recently, Transport Canada has received reports from:
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Greater Toronto Airports Authority;
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Winnipeg Airports Authority Inc.;
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Ottawa McDonald-Cartier International Airport Authority.
A further seven reports are due in the second half of 2002.
Transport Canada is satisfied that the current LAA/CAA lease provisions for performance reviews are consistent with the special audit (i.e., special examination) process recommended by the Standing Committee. Furthermore, the proposed Canada Airports Act is expected to expand on the requirements for these reviews. In the interim, Transport Canada will continue to monitor the format, content, approach and scope of these reports, and to make any necessary recommendations to Airport Authorities. It is proposed that the results of these reviews be included in existing documents such as the Departmental Performance Report (DPR), the Report on Plans and Priorities, and/or the Annual Report, as appropriate.
“That Transport Canada inform Parliament of its plans to implement recommendations contained in the Auditor General's Report in its annual report on plans and priorities, and of the outcomes that have been achieved in relation to these plans in its annual performance report. This process should begin with the Departments' performance report for 2003-04.”
Transport Canada currently reports progress against the OAG Report recommendations directly to the OAG on an annual basis. The OAG then reports this progress to Parliament. Consistent with our response to Recommendations 5, 6, 7 and 8 above, the Department proposes to include relevant information on current and planned initiatives related to airport transfers and any lease renegotiations in the appropriate reporting document.