September 1, 2002
This overview by two of the world’s foremost transportation experts describes a Canadian public policy success story - the conversion of Canada’s air traffic control system from direct control by a government department into a commercialized entity with much more fiscal and operational independence. It discusses the legal principles and structure that transformed the agency into a model for high-performance government.
The search for optimal models of offering public services has its occasional successes. Notable among these in the last decade are reforms in the rules that govern public transportation. Deregulation and privatization of the airlines, airports, railways and ports in Canada - although not without hiccups and unexpected consequences - have produced measurable benefits. Millions more people flew, the CNR became efficient and profitable, the Port of Churchill was reborn. One of these success stories is the agency that handles air traffic control in Canada, Nav Canada.
NavCan’s transformation began with a new policy of commercializing a significant portion of Transport Canada’s assets, first announced by Transport Minister Doug Young in the summer of 1994. His plan to privatize the air traffic control system took shape the following spring. It took its direction from the experience in New Zealand, which sold its counterpart in 1987 and subsequently enjoyed lower prices and more efficient service. The federal government also wanted to shed the burden of a $200 million annual subsidy to the enterprise and a computer purchase plagued with delays and cost overruns. The sale netted the treasury $1.4 billion. The new company’s ownership was shared by airlines, business aircraft owners, pilots and air traffic employees. Control of the new company was shared by a consortium of airlines, business aircraft owners, pilots and air traffic employees and took effect on November 1, 1996.
Air traffic management is the type of function described as a natural monopoly, where the benefits of a competitive provision of the service are not possible. In such cases, the debate turns to the optimal model for making the monopoly perform well. Separating its operation from direct political control and making it subject to the rigor of profit and loss incentives is a policy option with a successful track record. In its new form, NavCan quickly proved itself to be another salutary example. By the fall of 1999, it had increased its efficiency by 32%, lowered its charges to airlines by 33%, increased its average salaries by 33% and shed 14% excess managerial and administrative staff.
Moving Nav Canada into the commercial sector has inproved its performance, lowered its costs and prices, and transformed the agency into a modern, performance-based company. Its unique structure is cited as a model to be emulated as other countries seek to obtain objective values inside a natural monopoly.
In this policy series paper, Robert W. Poole, Jr. and Viggo Butler of the Reason Public Policy Institute discuss the transformation of NavCan into a commercialized enterprise and recommend a similar approach for the United States.
Nav Canada - A Model for Commercializing Public Enterprises
Robert Poole Jr. and Viggo Butler
Over the past 15 years, nearly two dozen countries have commercialized their air traffic control (ATC) systems, as self-supporting government corporations, as private nonprofit corporations or as regulated, for-profit corporations. We strongly recommend the nonprofit corporation approach, as implemented successfully in Canada in 1996. Since it took over ATC operations, Nav Canada has speeded up modernization, dramatically increased efficiency and productivity, and cut user fees by one-third. The most important feature we have adapted from Nav Canada is the concept of a stakeholder board. This approach ensures that the different interests of, say, major airlines, low-fare airlines, regional airlines, cargo carriers, corporate jets, air taxis, and light plane owners are all taken seriously in the corporation’s decision-making, without any of these interests being able to dictate to the others.
Of crucial importance is a workable system of ATC fees and charges. Drawing on international practice, as well as guidelines from the International Civil Aviation Organization, we recommend replacing most current aviation excise taxes with a simple weight-distance fee structure similar to current practice in Canada and Europe, but modified to take into account operations at severely congested airports. Overseas ATC corporations have achieved cost savings of about one-third, which have been passed along in the form of lower user fees.
ABOUT THE AUTHORS
Robert W. Poole, Jr. is Director of Transportation Studies at the Reason Public Policy Institute in Los Angeles, California. A former aerospace engineer with B.S. and M.S. degrees from M.I.T., he has authored a number of policy studies on airport and air traffic control issues and advised both the Reagan and Clinton administrations on ATC reform.
Viggo Butler, the Chairman of United Airports Limited and former CEO of Airport Group International, has served as a U.S. Air Force captain supervising air traffic control. Holding a B.A. from California Polytechnic and an M.B.A. from Pepperdine, he is currently a member of the Federal Aviation Administration's Research, Engineering & Development Authority Advisory Committee.
Full Text of Policy Series No. 11 - (PDF, 14 pgs, 335Kb)
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