Document 11
In Confidence
Of ice of the Minister of Transport
Chair
Cabinet Economic Development Commit ee
Options for supporting regional air connectivity
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Proposal
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1.
I propose that Cabinet agree to a sustainable regional air connectivity fund, of $10 ‒12 million per
year for three years, with a review after three years to ensure the fund is effective and confirm
whether a smaller amount of funding is required in outyears.
2.
I recommend that this be progressed as a budget bid as part of Budget 2020, given the benefits
largely fall to the regions and because of cost pressures facing the aviation sector, or alternatively
further work be undertaken on how the aviation sector could be levied, including what legislative
change would be needed to provide for a levy, and how it would be collected and administered.
3.
The proposed fund would subsidise infrastructure and services to support the provision of
regional air connectivity essential for access to social and economic opportunities, and to deliver
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regional resilience.
4.
I also intend to initiate a review of the joint venture arrangements at five airports partly owned by
the Crown.
Executive Summary
5.
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Transport connectivity is important to the social and economic wellbeing of New Zealand and its
regions, and air services play an essential role in this.
6.
The quality and extent of regional air connectivity is at risk because many smaller airports, mostly
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council owned, cannot cover their operating and maintenance costs from the revenue they
receive from their small user bases. These costs include airport infrastructure, navigational
procedures, and regulatory compliance.
7.
Ratepayers in some regions are contributing to the costs of maintaining airports. The scale of
investment required makes this unsustainable and places a very heavy burden on some
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communities. Airport facilities are deteriorating and large, often deferred, upcoming maintenance
and infrastructure costs will reduce capacity at regional airports or end scheduled services. In
particular, many decades-old runways and terminals are becoming due for major refurbishment.
8.
Over the last few years, Airways has changed its approach to smaller airports that are not used
by its biggest customers. Where it had previously provided some power, lighting and air
navigation services effectively without charge, it has begun to charge or has withdrawn services.
This has added to the costs for airports. Changing regulatory requirements, such as for runway
length or security, could also increase costs for airports.
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9.
Five regional airports are co-funded by the Crown through joint ventures, but the current
appropriation for joint ventures ($2.5 million over 5 years) is not sufficient to manage costs and
avoid deterioration of assets. Other regional airports do not have access to this funding.
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10. The Government does not have a choice to do nothing in relation to regional airports. Around
$11 million will need to be found by the Government to meet its legal obligations to joint venture
airports over the next 5 years. More may be required if Airways transfers costs of airfield power
and lighting onto airports. It is likely that over the next few years other airports wil get to a point
where they need a subsidy, or will stop operating, with significant regional impacts. Some of
these airports are applying to the Provincial Growth Fund (PGF). However, the purpose of the
PGF is to support regional economic growth rather than to maintain current assets, and it is not a
sustainable solution.
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11. Many other jurisdictions, including in Europe, the United States, Canada and Australia, recognise
the importance of regional air connectivity by subsidising essential services that are not
commercially viable.
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12. Subsidies to assist struggling New Zealand airports to maintain infrastructure and scheduled
services would reduce risk and would support an adequate level of service from the national
network. This could be achieved by setting up a fund of at least $10 ‒12 mil ion per year for this
purpose.
13. This investment would:
13.1. maintain local and national benefits from the economic and social activity facilitated by
good air connectivity – including support for the general aviation sector which operates
out of regional airports, and provides tourism and agriculture services
13.2. allow New Zealanders, wherever they live, reasonable access to important services and
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opportunities – including medical, and professional services and business opportunities
that cannot be provided efficiently by other transport modes
13.3. fulfil part of the Government’s responsibility and commitment to support regional
communities and economies
13.4. maintain airports that provide critical emergency and resilience functions.
14. The initial focus of the fund would be on access and resilience, and enabling the general aviation
sector to continue to contribute to the economy. It woul
OFFICIAL d complement the PGF, which currently
supports initiatives focussed on economic growth.
15. Funding would be available for the provision, renewal or refurbishment of core airport
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infrastructure (e.g. precision approach lighting; lit wind socks; taxiway lights; runway lights; apron
lights; remote switching for lights; stand-by power; navigation beacons or support for satellite
navigation; instrument flight procedures; terminals; sealed and marked runways of appropriate
dimensions) to meet minimum safety and operating standards.
16. Applicants for funding would need to be able to show that despite good governance and
appropriate charging they
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reasonable impositions on local ratepayers.
17. The threshold for approval should be high, and consideration should be given to the access and
resilience value provided by an airport relative to alternative transport options, including nearby
airports.
18. The Ministry’s preferred option for funding is Crown funding, as the main purpose of the fund is
regional access and resilience, and fulfilling Government commitments to fairness, regional
sustainability and better connected communities. It would also preserve general aviation services
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(e.g. tourism and agriculture services) in some areas, which is good for regional economies. Most
other jurisdictions crown fund regional air connectivity for these reasons.
19. There are some benefits to the businesses and customers in the aviation sector from having a
large and diverse regional air network. These include economies of scale and scope, greater
network resilience, and feeder services to larger routes. However, I note the smaller airports likely
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25. Regardless of whether the proposed approach to subsidising air connectivity is adopted, I intend
to review the arrangements around the Crown’s part ownership and existing subsidy of five joint
venture airports.
Regional air connectivity is at risk
26. New Zealand has good regional air connectivity, but levels of service are likely to decline as
many operators of smaller regional airports cannot recover the high cost of maintaining their 1982
facilities from the fees they are able to charge airport users. Underinvestment has led to
deterioration of aviation network infrastructure and infrastructure costs are rising. The burden on
local ratepayers, who often support these airports, is heavy and in many cases unsustainable.
(Appendix 1 shows the current good nationwide access to airports.)
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27. Around $11 million will need to be found by the Government to meet its legal obligations to the
joint venture airports over the next 5 years. However, this estimate may be conservative given
increasing infrastructure costs and the fact that some of these airports may need to pay for
lighting and power services currently provided by Airways (see below).
28. It is likely that over the next few years other airports wil get to a point where they need a subsidy
or wil stop operating, with significant regional impacts. Some of these airports are putting in bids
to the PGF. However, the purpose of the PGF is to support regional economic growth rather than
to maintain current assets, and it is not a sustainable solution1.
The benefits of regional air connectivity
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29. Good regional air connectivity facilitates the movement of people and freight across the aviation
system and provides connections with other transport modes. In addition to the regions served, it
benefits the nation as a whole, as well as other parts of the aviation sector.
30. Benefits to the country as a whole from good regional air connectivity include:
• economic benefits from having thriving regions
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• economic network effects, including economies of scale and scope due to more
connections between consumers and producers
• increased efficiency, as it can
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specialised or complex medical services) than to replicate the services locally
• increased connectivity and opportunities for domestic travel and trade
• resilience to emergencies and disasters
• a viable general aviation sector (private and small commercial operators, including tourism
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and agricultural services)
• national cultural cohesion
The Chal enges of maintaining Regional Air Connectivity
Airports face costs that cannot be met commercial y
31. Airports have high costs – especially infrastructure costs – including large periodic bil s for
runway re
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passenger volumes or revenue.
1 The Provincial Development Unit outlined the PGF investment approach for airports in a briefing provided to Regional
Economic Development Ministers on 2 May 2019.
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32. It is often difficult for smal er airports to sustain themselves from airport fees and charges (see
below), or small ratepayer bases. For this reason maintenance is often deferred. This puts these
airports at risk of deterioration, lower levels of service and ultimately risk of closure.
Technology changes and regulatory requirements may add to costs over time
33. A portion of an airport’s costs is also fixed by having to meet regulatory requirements for airport
facilities.
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34. The Civil Aviation Authority (CAA) has reviewed its approach to approving the safety areas at the
end of runways, which may mean that some airports have to extend their runways to retain their
current level of service.
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35. Airports also have to accommodate new technology, such as virtual control towers. These costs
wil be a challenge even for medium-sized airports. As satellite navigation becomes the norm for
aviation, some of these airports may need new instrument flight procedures. These are properly
surveyed approaches, designed for efficiency and safety, which must be regularly reviewed and
updated. The Aircraft Owners and Pilots Association of New Zealand has identified around 30
regional aerodromes that they believe should have instrument flight procedures as part of the
national aviation infrastructure.
Airways has withdrawn provision of air navigation infrastructure and air services from some airports
36. Airways is a State Owned Enterprise that provides air navigation services and infrastructure,
which are paid for by the aviation sector participants that use those services.
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37. Over the last few years Airways has been withdrawing from providing air navigation services at
smaller airports that are not used by its biggest paying customers, or is now charging airports for
its services. In some cases, it had previously maintained power, runway lighting and navigational
aids for as little as $1 a year. This withdrawal, or increase in cost, makes sense given Airways’
commercial focus. Airways may pull services out of more airports as Performance Based
Navigation is implemented in New Zealand and fewer Ground-Based Navigation Aids are
required.
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38. Those airports must now either pay Airways or other providers the ful cost of these services or
forego them (which could affect reliability or safety).
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39. Airways is also currently considering whether it should stay in the business of providing airfield
power and lighting services. It is looking to free up capital for other uses and move this burden
onto airports. This could increase costs for regional airports (and the Crown in relation to the joint
venture airports) and further threaten their viability.
It is difficult for some regional airports to meet these costs
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40. Smaller airports have few sources of revenue other than charging landing fees and fees for other
aeronautical services to aircraft operators2. Regional air services also tend to be commercially
marginal. Their customers – passengers and shippers – are very sensitive to price increases, so
higher fees would risk losing them. As a result, airports are often unable to recover their full costs.
Undercharging airlines amounts to an indirect subsidy, in many cases drawn from the region’s
ratepayers.
41. This is an ongoing problem. Airports that are not recovering their costs or are making only small
profits are
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42. NZ Airports, the association representing 31 New Zealand airports, suggests that airports with
fewer than 200,000 passengers per year are unlikely to be commercially sustainable. On this
2 Even so, these revenues can be so low that some joint venture airports make more from grazing farm animals than from
aeronautical services.
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basis, it identifies 12 airports that it regards as at risk3. These airports handle approximately
3 percent of departing domestic passengers.
43. While I do not have financial information about all these airports, the Ministry of Transport
manages the Crown interest in five joint venture airports, all of which are considered at risk by NZ
Airports, and which comprise a representative range of sizes below 200,000 passengers. The
revenue and expenditure of these airports confirm that small airports tend to operate at a loss.
The 2018 figures are shown below.
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S 9(2)(b)(ii)
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44. The Ministry of Transport is aware that these joint venture airports face large capital expenses
and increases in maintenance costs over the next few years – half of which the Crown is obliged
to pay4. The Ministry forecasts that the existing five year multi-year appropriation (2018/19 to
2022/23) of $2.5 million wil be fully spent in its first two years, and that over five years there wil
be a funding shortfall of around $11 million. It is likely that other smaller airports face similar
costs.
45. In contrast, the larger airports in which the Crown has
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opportunities to generate revenue, both from aeronautical services and from meeting the
terrestrial needs of passengers. Income from the latter can be considerable. For example,
56 percent of Dunedin Airport’s revenue is from non-aeronautical business. Large airports can
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also capitalise on the other business generated by the airport. Christchurch Airport gets nearly a
quarter of its revenue from property that is not providing services to passengers.
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46. The Office of the Auditor-General has also expressed concern about the precarious viability of
smaller airports, especially given their importance to the economic vitality and connectivity of the
communities they serve. In 2016 it reviewed 19 airports and found that small airports were
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making a loss or small profits, and that they struggle to fund maintenance or improvements.
3 Chatham Island, Gisborne, Hokitika, Kaitaia, Kerikeri, Masterton, Taupō, Timaru, Westport, Whakatāne, Whanganui,
Whangarei.
4 Each joint venture airport arrangement is governed by a separate deed, and details vary.
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63. The PGF is focussed on regional productivity and is unlikely to invest in deteriorating airport
facilities unless there is also potential for growth.
64. Furthermore, as the PGF is a three-year commitment, it is not a sustainable option for funding
regional connectivity in the medium to long term. It is a short-term measure with limited scope.
65. Individual budget bids are also unlikely to be an efficient and sustainable approach to funding
regional airports. Furthermore, the threshold for obtaining Budget funding is necessarily high, so
for airports it is probably available only for immediately pressing crises and just-in-time
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responses.
Subsidise regional air connectivity
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66. Doing nothing to support regional air connectivity, or responding only to crises, fail as sustainable
approaches. The biggest costs facing airports – for maintaining their facilities – are foreseeable,
as is their revenue potential. Costs relating to changing conditions – such as in regulations,
technology, coastal erosion or patterns of use – are more difficult to plan for, but should be
expected over the long term. Smaller airports cannot raise enough revenue from their operations
to meet their costs – and this is an intrinsic feature of their business.
67. The only approach that would address the ongoing risks to air connectivity, or would enable
improvement, is subsidising provision of the services the Government considers important.
68. To provide the necessary long-term confidence to the regions and the sector, this would require a
dedicated fund. It would also require a mechanism to deal with the inherently lumpy year-to-year
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costs of renewing airport assets – such as allowing an annual appropriation to be carried over.
69. Given the conservative nature of the above estimated costs to airports, and considering
administrative costs, a fund of $10‒12 mil ion per year for three years, with a review at this point
and a potentially smaller amount in outyears, should be made available to subsidise regional air
connectivity.
70. My proposals below set out an initial approach and a set of broad criteria. If Cabinet agrees to the
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fund, officials would further refine the approach and the criteria, so that we can be confident that
the final scheme best meets the needs of communities and the aviation sector, and provides
value for money.
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The features of a regional air connectivity fund
Purpose
71. The subsidy scheme would be a rolling contestable fund, focussed on the safe and effective
operation of regional airp
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services, and regional emergency management and resilience, given the significant challenges
currently facing smaller regional airports.
Scope
72. Funding would be available for critical infrastructure to keep airports operating. For example, the
provision, renewal or refurbishment of precision approach lighting, lit wind socks, taxiway lights,
runway lights, apron lights, remote switching for lights, stand-by power, navigation beacons or
support for satellite navigation, instrument flight procedures, terminals, sealed and marked
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runways of appropriate dimensions.
73. Funding may also be necessary to develop plans or business cases for efficient investment.
74. It could also be used for infrastructure changes to meet new regulatory requirements.
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Eligibility
75. The fund would be available to subsidise airports that receive or could receive scheduled air
services, or which are regularly used by hospital transfer or charter flights, or which are important
to the general aviation sector.
76. Each application would be assessed independently on its merits. An applicant’s eligibility could
change from one application to another, i.e. airports or services could fall in or out of the scheme
if their situation changes.
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Applications
77. Applicants for a subsidy would need to meet clear criteria. For example, an airport would need to
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show that funding was required to:
77.1. ensure affordable and convenient access to important services and opportunities
77.2. provide resilience and security for communities as part of the regional or national transport
system and in emergency and civil defence response support.
78. Applicants should provide evidence of their inability to meet their full costs from airport revenue
(i.e. demonstrate persistent bottom line losses) despite appropriate standards of management
and governance, or from reasonable impositions on ratepayers. This would include charge-
setting practices that balance actual costs against the ability of airport users to pay, compliance
with legislation, and planning to show how the airport will make best use of its assets and land.
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Allocation
79. Applications could be made from airports, or airports and regional councils, or airlines. Like
subsidy schemes in other jurisdictions, the value or necessity of services would be assessed
against criteria including: the number of people affected, travel time to access such amenities as
hospitals or professional services, the frequency and quality of transport options, cost, the use of
the airport by the general aviation community, and its role in provision of emergency services.
There should be a high threshold for approval.
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80. The necessity of services would be considered in light of the fact that, from a network
perspective, the number and location of airports in New Zealand is not the result of strategic
design. Some are quite close together or serve relatively small communities. Some communities
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might be more cost-effectively served by another option – such as a bus service to a different
airport, or improvements in land transport infrastructure.
81. Broadly, criteria for evaluating funding requests would need to:
81.1. assess the value of air connectivity to a region and to the nation
81.2. consider the cost of
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service gap)
81.3. consider equity, for people and for businesses
81.4. consider effects, positive and negative, that subsidies could have on markets providing
services, including other transport services
81.5. determine the most efficient provision of needed services
82. The Ministry of Transport has been considering criteria by which air connectivity to a region might
be evaluat
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82.1. How far are people from airports?
82.2. Where do services go?
82.3. Is it possible to do a day’s business in a large town or city?
82.4. Are efficient alternative transport modes available?
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93. Depending on this work, and the scope of any intervention, the proposed regional air connectivity
fund could also be available to directly subsidise air services, if gaps are identified in the
provision of sustainable air services, and where these could not be provided commercially but are
necessary to deliver access and regional resilience objectives.
Figure 1: Scheduled services in New Zealand
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Review of the Fund
94. I propose the fund be reviewed within three years to consider evidence that it is meeting its
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objectives. At that time, I would also consider whether the fund needs to be $10‒12 million in
outyears or should be reduced.
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Options for funding
Crown Funding
95. Crown funding would align with the principal reasons to subsidise air connectivity: the benefits of
adequate regional connectivity, and equitable access to services and opportunities. Both of these
concern the nation as a w
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96. The benefits to the country as a whole from good regional air connectivity were outlined in
paragraph 30 above.
97. The Government has the same responsibilities to people living in smaller towns, and even
isolated areas, as it does to people living near the main transport routes. While some of the
disadvantages of regional life may be considered private trade-offs for its benefits, it is
reasonable for all New Zealanders to expect access to certain levels of transport and services.
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98. The Government also has responsibilities for social inclusiveness – ensuring involvement in
national endeavours and activities – and for economic support of the regions. This is the reason
why other jurisdictions have subsidised regional air connectively.
99. Administratively, this option is relatively simple. It would not require new taxes or extended
consultation, and may not require changes to legislation.
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114. Joint ventures like the existing arrangements would create legal obligations for Government – so
would guarantee future funding. However, they would also bind the Crown regardless of the
future efficiency of any funding, and would be inflexible to changes in where funding was needed.
115. I do not propose offering further joint venture arrangements. Rather our strategic approach to
supporting air connectivity should entail a review of the existing joint ventures. A broader
approach to supporting connectivity would make the joint venture airports even more anomalous
than they are now. So, if subsidies for the sector are contemplated, the current joint venture 1982
ownership arrangements should be reviewed. However, I propose to undertake such a review in
any case. A review would look to align the joint venture airports with a regional connectivity
strategy, and would consider options including renegotiation of joint venture deeds or divestment.
However, it is expected that altering these arrangements would be challenging and take
at least
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12‒24 months.
Risks of Government Support
116. Subsidies can reduce incentives for efficiency and raise the costs of the transport network. They
can also negatively affect the allocation of resources or upset neighbouring markets, which might
be working.
117. These risks can be mitigated by having strict funding criteria, making careful funding decisions,
reviewing applicants’ financial positions or making funding contestable. Bet er efficiency
incentives might be created by allowing airports to keep some portion of efficiency gains, or
requiring applicants to share costs.
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118. A review of arrangements for the joint venture airports, which is proposed along with the adoption
of a more strategic approach to subsidies, could recommend changes. Any changes are likely to
be legally complicated, could take some time to negotiate and implement, and could be
controversial. However, an effective subsidy scheme would make support for change more likely.
Consultation
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119. This paper has been reviewed by the Civil Aviation Authority; the Department of Internal Af airs;
the Ministry of Business, Innovation and Employment; the NZ Police; and the Department of the
Prime Minister and Cabinet. They are supportive of the paper and their feedback has been taken
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into account.
120. The Treasury has provided the following comment.
Treasury considers that the case for the government subsidising regional air connectivity has not
been clearly established. The fact that some regional airports are not commercially viable is not in
itself evidence of a market
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failure. Instead, it suggests that the benefits of connectivity do not
outweigh the total cost.
If Cabinet has specific objectives for intervention, such as maintaining resilience, then more
targeted and tailored policy interventions might be more appropriate and effective. Providing a
general subsidy could undermine incentives to operate efficiently and is unlikely to solve the
longer-term funding issues facing regional airports.
However, if Cabinet wishes to proceed with the establishment of a regional air connectivity
scheme, Treasury recommends that it direct officials to undertake further work to develop the
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eligibility criteria and clarify whether Crown funding or a targeted levy on the aviation sector is the
better funding source.
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Financial Implications
121. The proposal is for ongoing operational funding of $10‒12 million per annum to support
sustainable regional air connectivity in New Zealand. Operating funding wil be sought either from
the 2020 budget or an aviation levy. The Ministry of Transport’s preferred approach is for Crown
funding.
122. The findings of the proposed review of the five joint venture airport arrangements may have 1982
implications for future appropriations to manage the Crown’s interests. The existing multi-year
appropriation, running from 2018/19 to 2022/23, is $2.5 mil ion ($0.5 mil ion per year). As noted,
the Ministry of Transport forecasts that this wil be exhausted by the end of the 2019/20 year, and
will fall short of the Crown’s liability over this period by approximately $11 million, necessitating
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further budget bids.
Legislative Implications
123. Currently airports are required to operate as commercial undertakings. NZ Airports has long
argued that this is a perverse requirement for small regional airports, as most are not
commercially viable. Consultation has just been completed on an exposure draft of the Civil
Aviation Bill, which proposes to remove this requirement for all airports.
124. Imposing new levies or taxes would require legislative change.
124.1. The Civil Aviation Act 1990 only enables levies to be imposed to recover the cost of the
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Civil Aviation Authority performing its specified functions.
124.2. Currently, the Civil Aviation Act also only allows levies to be imposed on aviation
document holders, so passengers or shippers could not be levied directly. The Civil
Aviation Bil proposes broadening this to allow levies on all aviation system participants;
however, this is not proposed to include passengers or shippers.
124.3. Any new tax must be authorised by or under an Act of Parliament as required by section
22(a) of the Constitution Act 1986.
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125. It may be necessary or useful to put in legislation any eligibility criteria for access to Government
support for regional air connectivity, even if Crown funded, to reassure the sector of the long term
sustainability of the approach.
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126. The Civil Aviation Bil is expected to be enacted before the end of the parliamentary term in 2020,
and could incorporate changes required to implement a regional air connectivity fund.
Impact Analysis
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127. If the one-off bid for joint venture airports goes ahead, or if Crown funding is agreed to, this would
not negatively affect participants in the sector, and a Regulatory Impact Assessment may not be
required, subject to an exemption being granted by the Treasury.
128. If a new tax is proposed, extensive consultation with the sector wil be necessary and the
proposal wil be subject to Cabinet’s Regulatory Impact Requirements.
Human rights, gender and disability implications
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129. The funding request has no implications for human rights except that the policy intent of the
proposal would enhance freedom of movement by maintaining or increasing transport options.
The proposal is not inconsistent with the New Zealand Bil of Rights Act 1990 or the Human
Rights Act 1993.
130. The funding request has no gender implications.
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131. The funding request has no direct disability implications. However, one function of regional
airports, which this policy is intended to reinforce, is to enable medical services such as patient
transfers, as well as access to facilities such as hospitals and specialist health care. Infrastructure
funded by the proposal might also include facilities to improve access to airports or air services
by people with disabilities.
Recommendations
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132. The Minister of Transport recommends that the Commit ee:
1.
agree in principle to the establishment of a dedicated fund of $10‒12 mil ion per annum to
support regional air connectivity
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2.
agree, that the dedicated fund wil be:
2.1. subject to approval of a budget bid in Budget 2020; or
2.2. further work will be undertaken on imposing an additional levy on the aviation sector
(including who would be levied, how it would be administered and collected, and what
legislative changes would be needed)
3.
agree, if it is proposed to establish a dedicated fund:
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3.1. that the Ministry of Transport should administer the proposed fund
3.2. that al ocation of grants under $1 mil ion would be made by the Secretary for Transport,
and, for larger sums, by the Minister of Transport
3.3. that the fund be reviewed in three years to consider evidence that it is meeting its
objectives and that the sum appropriated is suitable
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4.
note that notwithstanding any decision on supporting regional air connectivity, I intend to
initiate a review of the joint venture airport arrangements.
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Authorised for lodgement
Hon Phil Twyford
Minister of Transport
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Appendix 1
Access to airports in New Zealand
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Appendix 2
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Document 12
Office of the Minister of Transport
Chair
Cabinet
JOINT VENTURE AIRPORTS – APPROPRIATION ISSUES 1982
Proposal
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1.
In relation to the Joint Venture Airport appropriation, this paper seeks Cabinet
approval to:
1.1. incur unappropriated expenditure of up to $0.700 mil ion in 2017/18, which wil
require subsequent validation by Parliament under Section 26C of the Public
Finance Act 1989
1.2. convert the annual Joint Venture Airport appropriation to a multi-year
appropriation from 2018/19 for five years.
Background
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2.
The Ministry of Transport (the Ministry) administers the Crown’s interest in five
regional airports (Whangarei, Whakatāne, Taupō, Whanganui and Westport) which
are operated as joint ventures (JV) between the Crown and local councils. This
arrangement is set out in the deeds agreed to between 1957 and 1973 with individual
councils and the Crown.
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3.
Under the JV agreements the Crown is liable for 50 percent of any operating losses
and capital expenditure (subject to pre-approval). Operation of the airports remains
the responsibility of the individual councils.
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4.
As per a delegation signed in 1985, the Secretary for Transport has the authority to
approve work, and provide the Crown’s share (50 percent) of capital expenditure and
operating losses at the Airports. The limit on this delegated authority is $0.300 mil ion
for any individual transaction. The Ministry does not require pre-approval for small
capital expenditure claims under $0.010 mil ion.
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5.
In 2015/16 the appropriation moved from a multi-year appropriation to an annual
appropriation of $0.500 mil ion with the scope of the appropriation being limited to
“enhancements to JVs terminals and runways and the Crown’s share of operating
losses”.
6.
Historically, $0.500 mil ion has been enough to cover capital expenditure and/or
losses for the JVs. However, a delay in receiving audited financial statements resulted
RELEASED
in a number of historic operating losses and capital expenditure being claimed this
year.
7.
In the 2017/18 financial year the Ministry has received claims totalling $1.122 million,
which is $0.622 mil ion over the current annual appropriation. This additional
Page 1 of 7
expenditure wil result in unappropriated expenditure of $0.700 million which will flow
through to net debt, including a contingency of approximately $0.078 million.
8.
Other appropriations in Vote Transport are expected to not be fully utilised and wil be
returning to the centre, and this amount wil be more than the $0.700 mil ion outlined
in this paper.
Claims in 2017/18
1982
9.
Late in the 2017/18 financial year, the Ministry became aware of a liability totalling
$1.122 mil ion. This total is made up of historic operating losses and capital ACT
expenditure. These claims are made up of $0.703 mil ion from Whakatāne Airport,
$0.357 mil ion from Whanganui Airport and $0.063 mil ion from Westport Airport.
These claims are broken down in Table 1.
S 9(2)(b)(ii)
INFORMATION
OFFICIAL
THE
UNDER
10. Included in the $1.122 million is $0.226 mil ion in claims that either did not receive pre-
approval or were over the pre-approval limit. In the Secretary for Transport’s
delegations, capital expenditure must be pre-approved by the Secretary for Transport
and, as this did not occur, the Ministry is not necessarily legally obliged to pay these
claims.
RELEASED
11. The Ministry has assessed these claims and is comfortable that they represent
legitimate capital expenditure and would have been pre-approved if a business case
had of been submit ed prior to commencement of work.
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12. As a moral obligation to support the JV Airports, the Ministry recommends incurring
the $0.226 mil ion of claims that either did not receive pre-approval or were over the
pre-approval limit as part of the total incurred unappropriated expenditure amount.
13. As a result of these claims an additional amount of up to $0.700 mil ion is expected to
be incurred against the appropriation. This is to allow for a contingency should any
other liabilities present themselves. If the additional expenditure is approved, it will
flow through to net debt and will need to be included in the Appropriation (2017/18 1982
Confirmation and Validation) Bil for validation by Parliament. This wil also be
reported in the Ministry’s annual report for 2017/18. This is required under section
26C of the Public Finance Act.
ACT
14. Other appropriations in Vote Transport are expected to not be fully utilised and wil be
returning to the centre, and this amount wil be more than the $0.700 mil ion.
2018/19 Joint Venture Airport appropriation
15. Based on estimated operating losses and known capital works, total claims on the
2018/19 appropriation are expected to be approximately $0.513 mil ion. This is over
the annual appropriation limit and hinders the Ministry’s ability to approve and fund
any further capital work.
INFORMATION
S 9(2)(b)(ii)
OFFICIAL
THE
UNDER
RELEASED
Page 3 of 7
16. The Ministry is commit ed to paying operating losses and pre-approved capital
expenditure claims totalling approximately $0.369 mil ion for 2018/19. There is also an
additional $0.144 mil ion in capital claims that the Ministry is aware of but has not yet
been approved. These claims include:
16.1. Whakatāne Airport has requested $0.125 mil ion of funding for a Runway End
Safety Area (RESA), a regulatory requirement following the Supreme Court
decision relating to Wel ington International Airport Limited and additional
1982
funding of $0.069 mil ion for a runway lighting project that is expected to be
over budget. Part of the $0.069 wil be incurred in 2017/18 and part wil be
incurred in 2018/19 as the project is due to be completed in July 2018. The
ACT
Ministry anticipates that approximately $0.019 mil ion of this work wil fall into
the 2018/19 financial year. At this stage, without Cabinet approval to move to a
multi-year appropriation, the Ministry is unable to approve the RESA or the
additional funding for runway lighting.
16.2. Whanganui Airport has started work on the demolition of two buildings and
construction of a new garage and security system. This capital expenditure was
pre-approved in September 2017 however, the project was delayed and the
work will not be completed in the 2017/18 financial year. This means that
approximately $0.028 mil ion of this work wil fall into the 2018/19 appropriation.
INFORMATION
16.3. Westport Airport has suffered erosion and storm damage and has indicated
that significant work wil be required to repair its seawall. The seawall protects
the runway and is required to ensure that the airport remains in operation. This
is an ongoing issue and the Crown has already funded half of the existing
seawall. Initial estimates show that this work could cost approximately $1.000
million and should this occur the Ministry will be looking to either submit a bid to
OFFICIAL
Cabinet or increase the JV airport appropriation to fund this work.
17. Due to the cost of airport infrastructure, in general the Ministry would expect to submit
a Budget bid or bid to Cabinet for large capital works, such as major terminal
THE
redevelopments and runway work as required.
The establishment of a multi-year appropriation for 2018/19
18. At this stage it is unclear what the anticipated claims for 2019/20 onwards wil be.
However, it is clear tha
UNDER t in recent years operating losses have been increasing taking
up more of the appropriation and limiting the ability of the airports to carry out and
claim for capital works.
19. To mitigate the risk of exceeding the 2018/19 annual appropriation and to provide
flexibility in out years, I am seeking to convert the current annual appropriation into a
multi-year appropriation (MYA) and to transfer funding from the non-departmental
capital Joint Venture Airport – Crown contribution appropriation to the newly
established MYA for the years 2018/19 to 2022/23.
RELEASED
20. The Ministry wil work with the Treasury to determine whether the current level of
funding for the JV airports is adequate.
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21. To mitigate the risk of an oversubscription happening again, the Ministry wil work with
the JV airports to have greater oversight of their future capital plans and operating
losses to assist in the planning of the JV airport appropriation. The Ministry wil also
be reissuing expectations to the JV Airport’s to ensure that all key documents,
including audited financials, are produced in a timely fashion.
Consultation
1982
22. The Treasury has been consulted and has agreed to the approaches set out in this
paper.
ACT
Financial implications
23. The $0.700 mil ion unappropriated capital expenditure wil flow through to net debt for
2017/18 and wil be met by imprest supply.
24. Other appropriations in Vote Transport are expected to not be fully utilised and wil be
returning to the centre, and this amount wil be more than the $0.700 mil ion.
25. The proposed changes to establish a multi-year appropriation and transfer funding
from the Joint Venture Airport annual appropriation wil be fiscally neutral.
INFORMATION
Legislative, human rights and gender implications and disability perspective
26. Nil.
Regulatory Impact Analysis
27. There is no regulatory impact. OFFICIAL
Publicity
28. No publicity is proposed for these matters.
THE
Recommendations
29. I recommends that the Committee:
2017/18 unappropriated capital expenditure
UNDER
1.
note the Crown’s obligation to fund 50 percent of all pre-approved capital
works and operating losses at the Joint Venture Airports
2.
note the current annual Joint Venture Airport appropriation of $0.500 mil ion
3.
note that $1.122 mil ion worth of claims has been received from the Joint
Venture Airport’s in 2017/18 and that this is $0.622 mil ion above the
RELEASED appropriation level, resulting in the request for approval of up to $0.700 milion
allowing for a contingency
Page 5 of 7
4.
agree to incur the $0.226 mil ion in capital expenditure that was not pre-
approved, noting that the Ministry of Transport wil be setting expectations with
all the Joint Venture Airports to ensure that this does not happen again
5.
agree to incur up to an additional $0.700 mil ion in capital expenditure in
2017/18 on the Joint Venture Airports, noting that this amount includes the
$0.226 mil ion of unapproved capital expenditure
1982
6.
agree that the additional capital expenditure of up to $0.700 mil ion incurred in
2017/18 for the Non-Departmental Capital expenditure - Joint Venture Airports
Crown Contribution appropriation be included in the Appropriation (2017/18
ACT
Confirmation and Validation) Bil for validation by Parliament and that, in the
interim, the capital expenditure be met from Imprest Supply
7.
note that the $0.700 mil ion additional unappropriated capital expenditure wil
flow through to net debt in 2017/18
8.
note that other appropriations in Vote Transport are expected to not be fully
utilised and wil be returning to the centre, and that this amount wil be more
than the $0.700 mil ion outlined in this paper
9.
note that the Ministry of Transport wil report the unappropriated capital
INFORMATION
expenditure in its 2017/18 annual report
Establishment of a multi-year Joint Venture Airport appropriation
10.
note that with known capital works, pre-approved capital works and anticipated
losses the 2018/19 Joint Venture Airport expenditure is anticipated to be close
to or exceeding appropriation levels and therefore, a multi-year appropriation is
OFFICIAL
being sought
11.
note the proposed changes to establish a multi-year appropriation and to
THE
transfer funding from the Joint Venture Airport annual appropriation wil be
fiscally neutral.
12.
agree to establish the following new five-year multi-year appropriation:
Vote
Appropriation
Title
Type
Scope
UNDER
Minister
Vote
Minister of
Joint Venture
Non-
This appropriation is
Transport Transport
Airports –
Departmental
limited to
Crown
Capital
enhancements to joint
Contribution
Expenditure
venture airport
terminals and
runways and the
Crown’s share of
operating losses.
RELEASED
Page 6 of 7
13.
approve the following changes to appropriations to give effect to the policy
decision in recommendation 11 above, with no impact on debt:
$m – increase/(decrease)
Vote
2017/18
2018/19 to 2022/23
2023/24 &
Transport
Out years
Minister of
Transport
1982
Non-
Departmental
Capital
Expenditure:
ACT
Joint Venture
-
2.500
-
Airports –
Crown
Contribution
Non-
Departmental
Capital
Expenditure:
Joint Venture
-
(0.500) (0.500) (0.500) (0.500) (0.500)
-
Airports
INFORMATION
14.
note that the indicative funding profile for the new multi-year appropriation
described in recommendation 11 above is as follows:
$m – increase/(decrease)
Indicative
2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 &
OFFICIAL
annual
out years
spending
profile
THE
0.600
0.475
0.475
0.475
0.475
-
15.
agree that the above proposed change to the Joint Venture Airports – Crown
Contribution appropriation be included in the 2018/19 Supplementary Estimates
and that, in the interim, the capital expenditure be met from Imprest Supply.
UNDER
Hon Phil Twyfo
RELEASED rd
Minister of Transport
Page 7 of 7
