Canada’s experience with ATC privatization

Note: This article was originally published in The Air & Space Lawyer, Volume 30, Number 2, 2017, by the American Bar Association. Reproduced with permission. 

On November 1, 1996, the Canadian federal government transferred responsibility for its air traffic control system to a private nonprofit corporation. The new entity, NAV Canada, backed by the airline industry, acquired the Canadian civil air navigation system from the govern­ment for C$1.5 billion.¹ In addition, NAV Canada arranged for a further $1.5 billion in financial backing.

Today, NAV Canada continues to be responsible for operating the country’s ANS—which includes the ATC and flight information systems and electronic navigation/landing aids—while also providing aviation weather data and publishing general aviation information.²

With its bold step of privatizing its ANS, Canada fol­lowed in the footsteps of many other countries, such as Germany, Australia, and New Zealand.³ However, the Canadian approach was unique in many respects. NAV Canada is the world’s first fully privatized civil ANS pro­vider. By contrast, in other countries, the ANS remained owned and operated by organizations with varying lev­els of government ownership. The Canadian approach also eliminated direct government control over the management of the resulting independent corporation.⁴

This article focuses on why and how Canada’s civil ANS was privatized, and the key elements of the NAV Canada model.

The route to privatization: Why was the ANS model reinvented?

Prior to the 1996 creation of NAV Canada, the federal govern­ment provided all air navigation services in Canada, mainly through Transport Canada, but also through the Depart­ment of National Defence.⁵ At the time, Transport Canada’s responsibilities and financial burden were enormous: it was responsible for a national railway company, virtually all of the nation’s airports, the ANS, the country’s primary ports, and other important transportation infrastructure, as well as the development of transportation policy and regulation of the entire transportation system (air, marine, rail, road).⁶

Perhaps even more significant than its large structure, the main systemic obstacle to the continued success of Transport Canada’s many operations was the impact of gov­ernment budgeting practices. The ANS was subject to the budget approval process within the Department of National Defence, and of the federal government in general. It had to compete with other core government missions, includ­ing health care and social security. When budget cuts were distributed in the government, it was generally done on a gross expenditure basis. The ANS represented about 25 per cent of Transport Canada’s annual budget, and thus had become underfunded over time. While there were many areas of excellence within the ANS—including a highly skilled workforce—the needs of the system could no lon­ger be met under these conditions.

Compounding the impact of budget cuts was the government’s rigid procurement practices, which inflated acquisition costs and extensive delays. They were esti­mated to add 25–50 per cent to the purchase cost of major systems and equipment. The ANS was also subject to gov­ernment-wide human resources policies—such as staffing levels, training, and labour relations—that were viewed as inflexible while adding to the overall operation expenses.⁷

As a result of these systemic pressures, the decreasing service levels and increasing costs plagued implementa­tion efforts. For example, prior to the ANS privatization, the installation of a Radar Modernization Project radar took six years and cost approximately C$18 mil­lion; after privatization, such installations took six months and cost about C$6 million.⁸

In addition, the government structure of five regional offices with three separate management bureaucracies at each regional office (one for ATC, one for flight service stations, and one for technical operations) burdened the system with a top-heavy management structure.

In the early 1990s, renewal of the infrastructure was pressing, and major system projects were falling behind schedule. Service levels were also impacted with delays, and the overall costs of the system were increasing at an accelerating rate. Transport Canada simply could not keep pace with the hyper-competitive airline industry while operating under its traditional bureaucratic rules and constraints. The stakeholders (including carriers, employees, and the government) were becoming increasingly dissatisfied with the status quo, and they soon realized that reinventing the ANS was a necessity.⁹

In terms of safety, which obviously was a significant concern, a paradigm shift occurred when it was realized that most of the aeronautics industry was already oper­ating under a privately-run model subject to government regulation. Indeed, if private entities were responsible for the operation of airlines and aircraft manufactur­ing, surely they could also be responsible for the ANS? In short, government was no more required to own and operate all air carriers out of safety concerns than it was to operate a service provider for the industry. This real­ization contributed to rendering the new model for the ANS viable from a political standpoint.¹⁰

The establishment of NAV Canada

Three groups were key to the coalition that led to the privatization of the ANS: commercial aviation man­agement, airline pilots, and air traffic controllers. Over time, participation of other stakeholders such as business aviation, general aviation, and the bargain­ing agents of other ANS employees made the alliance stronger. Together, they searched for a constructive alternative that would meet everyone’s concerns.

Before the transfer to NAV Canada, most of the costs of the ANS were financed by the proceeds of the Air Trans­portation Tax, which was paid by passengers on domestic and international air services.¹¹ However, this tax was almost always insufficient to cover the costs of the sys­tem. The aviation industry reasoned that the Canadian government—which was impacted by its own signifi­cant financial issues since the 1980s, and more so by the early 1990s—would not be able to fund the ANS deficits in the future or implement necessary changes to make the system more efficient. This meant that those costs would have to be assumed by the carriers and passengers through higher ticket taxes. In turn, this led the airline industry to conclude that if they were to pay for all the costs of the ANS, they should at least have some degree of control and direction over the use of these funds.

Partly for this reason, the airline industry opposed the government’s initial plan for the creation of a Crown corpo­ration (an entity that is fully government-owned). Instead, the industry’s alliance of stakeholders developed a novel model based on a nonprofit private corporation. With the support of the industry, this gave rise to the nonshare cap­ital corporate structure of NAV Canada: a private sector corporation independent from the government, with a busi­ness-style board of directors and management structure.

The absence of direct shareholders and the struc­tural balance of the board (which included union appointees) gave comfort to key labour stakehold­ers while ensuring that the corporation would focus on its operational mission, without any profit moti­vation for individual investors. The government saw this model in a favorable light as it prevented any damaging perception of a “sell-out” to private interests while providing for balanced participation and repre­sentation of all key stakeholders in the new entity’s governance structure. The model also reserved seats on the board for public interest representatives. Also, as a fully independent private entity acknowledged by the financial markets, the new corporation would be able to obtain financing without government involvement.¹² Finally, NAV Canada’s nonshare capital model made it relatively easy for the federal government to grant the system an effective civil ATC monopoly in the enabling legislation, the Civil Air Navigation Ser­vices Commercialization Act.¹³

The NAV Canada model

Because of NAV Canada’s nonshare capital structure, the airline industry accepted NAV Canada’s monopoly status.¹⁴ The carriers’ ability to elect a significant number of the members of the board of directors also contributed to this favorable attitude. The new structure eventually allowed for representation of foreign air carriers, which was crucial for those carriers because NAV Canada would provide services and control over the western half of the North Atlantic. One of the four airline board seats appointed by the National Airlines Council of Canada is reserved for foreign carrier representation.

As a nonshare corporation, NAV Canada does not have shareholders or share equity. However, its mem­bers perform duties similar to those of a traditional shareholder. The key stakeholders of NAV Canada elect directors to the board as follows:

• Commercial carriers, through the National Air­lines Council of Canada, elect four directors;
• The Minister of Transport, on behalf of the fed­eral government, elects three directors (they must not be government employees);
• Business and general aviation interests, through the Canadian Business Aviation Association, elect one director;
• Employee unions elect two directors; and
• The director member, on behalf of the board as a whole, elects four directors, who must be unre­lated to any ANS stakeholder.¹⁵

Interestingly, during the initial negotiations giving rise to the creation of NAV Canada, private aircraft own­ers decided not to take a board director position as this would, in their view, create a conflict of interest.

In addition to the 14 directors, there is a chief exec­utive officer and an advisory committee comprised of 20 aviation professionals. Foreign carriers are rep­resented on that advisory committee. The advisory committee, which promised to provide sage and expe­rienced advice, appears to the aviation community to have failed to live up to its potential.

The Canadian approach to ANS charges

The pre-NAV Canada system was funded primarily through a tax on passengers, which was collected by the air carriers. Now, ANS customers pay for the ser­vice directly to NAV Canada. The charges, which are based on weight and distance flown,¹⁶ are established within the framework of the ANS Act and the Interna­tional Civil Aviation Organization’s Policies on Charges for Airports and Air Navigation Services.¹⁷ This observance of the ICAO policies reflects the desire to conform with international practice, thus fos­tering global efficiency and uniformity.

The ANS Act establishes principles that govern NAV Canada’s service charges.¹⁸ The statute also includes notice provisions to users for changes in charges and a process to appeal charges to the Canadian Transpor­tation Agency. The policy for determining fees for ANS services was driven by two philosophies: matching fees with the services rendered, and adopting a fee structure that would not cause unsafe behaviour by operators and owners attempting to avoid fee payments. While this was viewed by many as “economic voodoo,” the relative lack of complaints and the general acceptance of the fee structure have validated this approach.

As explained in the NAV Canada Customer Guide to Charges, charges must: (1) be in accordance with a methodology established and published by the corpo­ration; (2) not encourage users to engage in practices that diminish safety for the purpose of avoiding a charge; (3) be consistent across domestic and interna­tional flights and air carriers; (4) differentiate between and reflect a reasonable allocation of the costs of pro­viding landing, take-off, and in-flight services; (5) not be unreasonable or undue in respect of recreational and private aircraft; (6) be consistent with the interna­tional obligations of the government of Canada; and (7) not generate revenues exceeding the corporation’s current and future financial requirements in relation to the provision of civil air navigation services.¹⁹

The Journey So Far

Ever since NAV Canada assumed responsibility for ANS operations from the federal government, it has increased the pace of technological modernization, dramatically improved the system’s efficiency and pro­ductivity, and achieved a one-third reduction in user fees.²⁰ Much of this success can be attributed to the new corporate structure and its broad stakeholder rep­resentation model, which ensures that the interests of all stakeholders are considered. In addition, the inte­gration of management from five regions, with three independent management structures in each region for ATC, flight service stations, and technical operations, into one single management entity has significantly reduced administrative overhead, increased flexibility, and reduced unnecessary bureaucratic requirements.

Labour issues have been stabilized by the implemen­tation of emergency services agreements with various unions. This issue was critical during initial contract negotiations because it directly affected the unions’ right to strike. The matter was referred to, and ultimately resolved by, the Canada Industrial Relations Board. The parties’ positions were diametrically opposed. The unions argued that their members could operate an emergency air traffic service within Canadian domestic and interna­tional airspace that would be completely uncontrolled for the duration of the strike. NAV Canada’s position was that there could only be one system and any attempt to create parallel regimes for the same airspace, whether controlled or uncontrolled, was inherently dangerous. After a 40-day hearing, the matter was resolved by establishing that there can be only “one” system based on the safety case put for­ward by NAV Canada. Since then, labour negotiations have been subject to mandatory arbitration rather than a broad-based right to strike.

To address the issue of aging infrastructure pur­chased from the Canadian government at the time of its creation, NAV Canada has since committed to ongoing investments in infrastructure renewal. NAV Canada has fulfilled this commitment in part by carrying out major projects, such as the wide area multilateralization system;²¹ the replacement of 110 instrument landing systems with new equipment; the construction of new control towers in Toronto, Edmonton, and Calgary; the modernization of the Vancouver Area Control Centre; and the construction of many new logistics centres.²² In fiscal year 2017, it plans to further increase the level of its capital expenditures by investing C$170 million. The bulk of this investment will be focused on the expan­sion and refurbishment of key facilities, including area control centres, ATC towers, and flight service stations, as well as modernizing communications, navigation, and surveillance infrastructure such as the space-based auto­matic dependent surveillance-broadcast (ADS-B).²³

Both the enabling statute and NAV Canada’s man­agement philosophy have focused intensely on safety. The process and cost structure implemented by NAV Canada must not lead pilots or aircraft operators into unsafe behaviour to circumvent high charges. For this reason, there is a low general aviation charge, which applies to most private aircraft owners and is less than C$100 per year. While this charge does not reflect the true cost of providing these services, it reflects the fact that, for most private aircraft owners, the need for ANS services is driven by airline operation requirements and not by general aviation requirements. This is because the safety risks associated with mixing air carriers and small aircraft create a significant hazard to all involved, but would impact air carriers and their passengers dis­proportionately and more significantly. Indeed, in some countries, including many in Europe, this risk is miti­gated by making general aviation so cost-prohibitive and exiled to such remote airspaces that general avia­tion effectively does not exist in those countries.

Since the creation of NAV Canada, and due to the twin demands of safety and cost-effectiveness, the focus has been on extensive use of safety-enhancing technologies, development of educational programs to increase aware­ness of the importance of controller-pilot communications, and collaborative activities to reduce safety-related events. These initiatives have all contributed to NAV Canada’s suc­cess in reducing flight delays and improving efficiency.²⁴ In addition, these developments were partially driven by NAV Canada’s obligation to assume management of the Cana­dian Automated Air Traffic Management System. Under Transport Canada’s management, this billion-dollar program suffered from excessive cost overruns and exten­sive delays. The basis for the CAATS program was to allow electronic data transfer between controllers. While this was a beneficial risk-reducing feature, its implementation was fraught with difficulty. Subsequently, NAV Canada imple­mented and refined a highly modified CAATS program.

Conclusion

The transformation of a government-owned public service into an independent, privatized corporation can be chal­lenging. The structure of NAV Canada has generally been effective in establishing oversight of aircraft operators, the civil ANS, and its related costs. However, there are two areas in which there is room for improvement. The first is that the initial refusal by the general aviation organizations representing private aircraft owners to be represented on the board of directors arguably “sidelined” these stakehold­ers and their interests. Second, the separation of ANS from the airports has created delays and difficulties in the Cana­dian aviation industry. While NAV Canada has a creative structure that allows direct user input in the management of the organization, this structure lacks input from Cana­dian airports, which are owned by the federal government but managed by local airport authorities.

Nonetheless, the NAV Canada example shows that, with the support of a well-organized and mature industry with a record for integrating public safety into its operational structure, and the establishment of a corporate structure rep­resenting broad interests, such a transition can be successful.

Patrick Floyd (patrick.floyd@coulsongroup.com) is general counsel at the Coulson Group in Port Alberni, British Columbia. He was in-house counsel at NAV Canada from 1996 to 2004. Tae Mee Park (TPark@ lexcanada.com) is a partner at Bersenas Jacobsen Chouest Thomson Blackburn LLP in Toronto, Ontario. Prithviraj Sharma (psharma@ icao.int) is an Aviation Professional Assistant (Legal and Regulatory) at the International Civil Aviation Organization in Montréal, Québec.

Endnotes

1. Perry Flint, Private Control: Nav Canada Takes over Ownership and Operation of the Country’s ATC System, 34 AIR TRANSPORT WORLD, no. 1, Jan. 1997, at 66.
2.             NAV CAN., THE TEST OF TIME: HOW NAV CANADA REALLY WORKS 1 (2015) [hereinafter HOW NAV CANADA REALLY WORKS].
3. The Civil Aviation Authority of Australia was established in 1988 as a government-owned business enterprise; the Airways Corp. of New Zealand was established in 1987 as a Crown cor­poration, with the government as a shareholder; the German ATC system is operated by DFS, a government-owned com­pany; the United Kingdom’s National Air Traffic Services was partially commercialized in 1972; in Switzerland, Swiss Con­trol, formed as a not-for-profit corporation in 1988, is 70 percent owned by the government; Portugal’s ANA, commercialized in 1992, is state-owned; South Africa’s Air Traffic Control and Air Navigation Services Co. Ltd., commercialized in 1993, is a government-owned corporation; the Irish Aviation Authority is a self-funding corporation, with all shares owned by the govern­ment. Bruce D. Nordwall, Canada’s ATC First to Go Fully Private, 145 AVIATION WK. & SPACE TECH., no. 19, Nov. 4, 1996, at 25.
4. J.A.A. Lovink, Choosing the Right Autonomy for Operators of Privatized Government Services: The Case of Nav Canada, 42 CANADIAN PUB. ADMIN., no. 3, Sept. 1999, at 374.
5.  Id.
6.  HOW NAV CANADA REALLY WORKS, supra note 2, at 2.
7. Id. at 3.
8. These included the RAMP radar installations in Iqaluit, Nunavut, Yellowknife, Northwest Territories, and Kuujjuaq, Québec.
9.  HOW NAV CANADA REALLY WORKS, supra note 2, at 2.
10.  Id. at 3.
11.  Lovink, supra note 4, at 373; HOW NAV CANADA REALLY WORKS, supra note 2, at 3.
12.  HOW NAV CANADA REALLY WORKS, supra note 2, at 5.
13.  Id.; Civil Air Navigation Services Commercialization Act [ANS Act], S.C. 1996, c 20 (Can.). In 1994, the Canadian govern­ment established the National Airports Policy, which designated all the major airports as National Airports System (NAS) airports. NAS airports are owned by the federal government, but their management was transferred to local airport authorities.
14.  HOW NAV CANADA REALLY WORKS, supra note 2, at 5.
15.  Corporate Governance, NAV CAN., https://www. navcanada.ca/EN/about-us/Pages/governance.aspx (last vis­ited July 11, 2017).
16.  Certain categories of users may be charged on a flat-fee basis so long as the charges are consistent with the charging principles. HOW NAV CANADA REALLY WORKS, supra note 2, at 11.
17.  INT’L CIVIL AVIATION ORG., ICAO DOC. 9082, ICAO’S POLICIES ON CHARGES FOR AIRPORTS AND AIR NAVIGATION SERVICES (9th ed. 2012).
18.  ANS Act, supra note 13, at pt. III.
19.  NAV CAN., CUSTOMER GUIDE TO CHARGES 2–3 (2016).
20.  ROBERT POOLE JR. & VIGGO BUTLER, FRONTIER CTR. FOR PUB. POLICY, NAV CANADA: A MODEL FOR COMMERCIALIZING PUBLIC ENTERPRISES 2 (2002), http://archive.fcpp.org/pdf/ series11.pdf.
21.  This is a system of low-cost ground stations that receive signals from aircraft transponders to determine aircraft posi­tion. WAM is now in operation at Kelowna International Airport, Vancouver Harbour and Lower Mainland, Fort St. John, Springbank Airport in Alberta, and Fredericton, New Bruns­wick. HOW NAV CANADA REALLY WORKS, supra note 2, at 13.
22.  Id.
23.  Press Release, Nav Can., On Its 20th Anniversary NAV CANADA Announces a $170 Million Investment in Infrastruc­ture (Nov. 1, 2016), http://www.navcanada.ca/ EN/media/Pages/NR-34-2016.aspx. ADS-B is a surveillance technology in which an aircraft determines its position via satellite navigation and periodically broadcasts it, enabling it to be tracked.
24. As of August 31, 2016, NAV Canada’s IFR-to-IFR loss of separation rate, a key international safety benchmark, stood at 0.52 per 100,000 aircraft movements. For over a decade, NAV Canada has maintained a rate that is one of the lowest among major global air navigation service providers. NAV CAN., 2016– 2017 CORPORATE SAFETY PLAN, at ii (2016).

Published in The Air & Space Lawyer, Volume 30, Number 2, 2017. © 2017 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association