PRB assessment report of Performance Plans for RP1. Hungary. Prepared by the Performance Review Body (PRB) of the Single European Sky

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1 Performance Review Body EUROCONTROL PRB assessment report of Performance Plans for RP1 Prepared by the Performance Review Body (PRB) of the Single European Sky 20 September 2011

2 COPYRIGHT NOTICE AND DISCLAIMER EUROCONTROL This document is published by the Performance Review Commission (PRC) in its role as Performance Review Body (PRB) to assist the European Commission in the implementation of the Performance Scheme. It may be copied in whole or in part providing that the copyright notice and disclaimer are included. The information contained in this document may not be modified without prior written permission from the Performance Review Commission. The views expressed herein do not necessarily reflect the official views or policy of EUROCONTROL or of the European Commission, which make no warranty, either implied or express, for the information contained in this document, neither do they assume any legal liability or responsibility for the accuracy, completeness or usefulness of this information. Printed by EUROCONTROL, 96, rue de la Fusée, B-1130 Brussels, Belgium. The PRC s website address is The PRU s address is pru@eurocontrol.int.

3 TABLE OF CONTENTS 1 HUNGARY INTRODUCTION CURRENT SITUATION AND LEVEL OF PERFORMANCE COMPLIANCE CHECKS SAFETY ENVIRONMENT CAPACITY COST-EFFICIENCY INTERRELATIONS BETWEEN PERFORMANCE TARGETS ADDITIONAL COMMENTS ASSESSMENT CONCLUSIONS...18 ANNEX 1: TECHNICAL ASSESSMENT DASHBOARD...20 ANNEX 2: PERFORMANCE PLAN CHECKLIST...21 ANNEX 3: INVESTMENTS RELATED TO IP1 OF THE ATM MASTERPLAN...24 ANNEX 4: LIST OF UNCONTROLLABLE COSTS...25

4 1 1.1 Introduction s Performance Plan was received on 30 th June 2011 in English. It was signed by DGCA of Ministry of National Development of, Head of NSA and the CEO of HungaroControl s Performance Plan provides performance targets set at a national level for: HungaroControl as the designated ANS provider. OMSZ as the designated MET service provider. The CAA/ MoT as the National Supervisory Authority EUROCONTROL costs are included in the calculation of determined costs In addition, Budapest International Airport (for the provision of airport data) is included in s Performance Plan but with no targets or incentives: is part of the Functional Airspace Block Central Europe (FAB CE) alongside Austria, Bosnia and Herzegovina, Czech Republic, Croatia, Slovak Republic and Slovenia. The PRB notes that for RP1 the FAB CE States have decided to prepare performance plans at national rather than FAB level s Performance Plan covers Hungarian airspace as defined by the Budapest Flight Information Region. Only en-route airspace is considered According to Article 13 of the performance scheme Regulation 1, the PRB has assessed this plan on the basis of the criteria laid down in Annex III of the same Regulation. 1.2 Current situation and level of performance The global economic crises led to a decline of -6.7% in GDP in 2009, but saw a partial recovery by 1.2% in The growth for 2011 is forecast to increase to 2.7% s price inflation was 4.0% and 4.9% in 2009 and 2010 respectively. The IMF forecast it to remain at a similar level of 4.1% in s forint is expected to return more or less to the same exchange rate in 2011 as it was in P GDP (%) -6.7% 1.2% 2.7% Price inflation (%) Exchange rate to Government Bond Rate % 4.0% 4.9% 4.1% % 7.3% 7.3% Figure 1: Key macro-economic indicators s Government bond rate 4 reduced from 2009 to 2010, but remains high compared to other European countries at 7.3% in Commission Regulation (EU) No 691/2010 of 29 July 2010 laying down a performance scheme for air navigation services and network functions. Source: European Economic Forecast (Spring 2011). Source IMF April 2011 Forecast, Average. Source European Central Bank long term bond rates (10 years) collected for convergence reasons, monthly average, for 2011, 5 months only. 3

5 1.2.5 HungaroControl is the sole designated ANS provider in but the PRB notes that has agreements for cross border delegation of ANS provision with Austria and the Slovak Republic HungaroControl is a medium sized ANSP with costs amounting to 1.1% of the EU29 gate-to-gate ATM/CNS provision costs in 2009 as shown in Figure 2. HungaroControl s traffic complexity levels is intermediate and its seasonality of traffic relatively high (See Figure 3). Gate-to-gate ATM/CNS costs 1.1% Flight-hours controlled by the ANSP 1.6% En-route ATFM delay 0.2% 98.9% EU % EU % EU 29 Figure 2: HungaroControl's Key Figures (ACE 2009) ATFM en-route delay/ flight (min.) IFR flights ('000) ATC Capacity/ Staffing Weather IFR FLIGHTS ('000) ATC Other (strike, equipment, etc.) Other (special event, military, etc.) Figure 3: HungaroControl's monthly distribution of delays 4

6 1.2.7 Figure 4 shows that IFR traffic in Hungarian airspace stagnated in 2009 and The Feb./May 2011 STATFOR Forecast expects IFR movements to grow again The current forecast traffic for 2014 is similar to the level of 2009 as forecasted in 2008 hence has experienced a five year shift in traffic. IFR movements ('000) 1, STATFOR MTF Feb vs. May ACTUAL Feb ( B ) May 2011 ( B ) Figure 4: STATFOR February 2008 base case and Feb./May 2011 Base case forecasts It should also be noted that traffic growth in is likely to be further reduced by the proposed straightening of routes on the SE-axis, which could result in a significant drop in traffic in when compared to forecasts for the current route structure The Hungarian State Safety Programme and the state safety action plan are under elaboration and will be finalised after the scheduled ICAO CMA audit in September has implemented acceptable levels of safety (ALoS) for the operation of aircraft, the maintenance of aircraft, the provision of air traffic services and aerodrome operations. In addition according to the LSSIP ( ), the formal process to maintain the acceptable levels of safety under review are still not in place but are planned by the end of According to the LSSIP ( ), the collection, storage and processing of safety and occurrence data is done by the TSB (the AAIB). The national institutional arrangements for the reporting of safety occurrences and deficiencies are partially in place As shown in Figure 5, has reduced the ATFM en-route delay per flight over the period. Between 2008 and 2010 it experienced negligible levels of delay in a period where traffic growth stagnated. ATFM en-route delay/ flight (min.) [Jan.- May] ATC Capacity/ Staffing [C,S] Weather [W] Traffic index (2005) ATC Other (strike, equipment, etc.) Other (special event, military, etc.) Figure 5: Historical ATFM delays per cause index According to ACE 2009, HungaroControl s economic cost-effectiveness has deteriorated over the period This has been through increases in ATCO employment costs and support costs, which have not been matched with productivity improvements. However, in 2009 HungaroControl still has the eighth lowest unit economic costs of European ANSPs. 5

7 1.3 Compliance checks s Performance Plan contains most of the information required by the legislation. However, the following required information is not provided: Description of incentives for each entity. Description of the civil-military dimension. Sufficient description of the monitoring and reporting process. Description of investments necessary for achieving the performance targets. In several other areas s Performance Plan contains incomplete information full details are provided in Annex 2. s Performance Plan should be updated to contain the missing information listed in Section Safety The Performance Plan states that the monitoring of Effectiveness of Safety Management (EoSM), Just Culture (JC) and application of Risk Assessment Tool (RAT) indicators will be done in RP1 once the three indicators are defined at European level It is reported that has implemented an ALoS in ATS, however description of the ALoS is not provided in the Performance Plan. The LSSIP provides information that the ALoS is under review, to reflect changes in the aviation environment The PRB has the following safety observations with respect to the Hungarian Performance Plan: It is noted that s does not define the accountable entities for the safety PIs and that there is no indication of the entities which should use RAT for investigation purposes. There is no description of safety indicators that will be monitored during the RP1. However, the National Performance Plan states that continuous monitoring of safety performance will be ensured. The national institutional arrangements for the reporting of safety occurrences and deficiencies are partially in place according to LSSIP Reporting and investigation system in the sense of a Just Culture, have not yet been established Key points on SAFETY: The PRB invites to continue their efforts on the SSP and encourages to work on a timely implementation. The NSA safety performance monitoring process and capabilities should be clearly described. The PRB appreciates that has put ALoS in place. The PRB requests to provide information on the definition of the ALoS. With due regards to the independence of AIB, PRB encourages to apply the RAT methodology for analyzing and investigating ATM safety occurrences in all entities (not just the ones mentioned in 691/2010). According to information 6

8 available in EUROCONTROL, RAT is used by HungaroControl. The PRB notes that so far no national indicators based on safety occurrences have been developed. is invited to use the opportunity of application of the RAT methodology (during ATM safety occurrence analysis and investigation) to develop new safety performance indicators for monitoring purposes as early as possible during RP1. The performance monitoring and annual reporting during RP1 should also include the performance of the State and its NSA with regard to Effectiveness of Safety Management and Just Culture and of the AAIB with regard to the RAT methodology application when analysing safety occurrences other than serious. In relation to the early retirement of front-line staff, it is to be clarified that this does not raise safety concerns. 1.5 Environment s Performance Plan does not contain any environmental PIs or targets; it does however list of current and recent measures to improve environmental performance including provision of efficient airspace management and implementation of the CDO technique at Liszt airport (page 39 of s Performance Plan). PRB welcomes the innovative approach of to implement en route direct operations and encourages to promote the free route concept as part of FAB CE. 1.6 Capacity Figure 6 presents the delay targets proposed by for each year of RP1 against the historical delays as well as the reference values provided by the capacity planning process of EUROCONTROL in January En-route ATFM delay per flight (min.) Source: CFMU; Performance Plan Historic values Reference values Capacity target X OK OK Figure 6: Capacity targets overview Delay level check in 2014: The capacity target for 2014 (0.03 minutes en-route ATFM delay per flight) is more ambitious than the reference values attributed to by the capacity planning process of EUROCONTROL. The intermediate value for 2013 is equal to the intermediate target (0.07 min/flight) but the intermediate value of 2012 is much higher than the reference value. s Performance Plan is assessed as passing the Delay level check The justification for the high delay target in 2012 is the introduction of a new ATC Centre in the Autumn of intends to operate two centres in shadow mode during the transition period leading to effectively a 50% reduction of ATC capacity. The 7

9 PRB considers that as peak traffic and delay is outside the proposed transition period that the anticipated performance during the transition period might be better than the target set for ANSP Capacity Planning (LSSIP ): Figure 7 illustrates the evolution of ANSP capacity planning in the past four years and compares it to the required capacity reference profile in the LSSIP ( ) HungaroControl is steadily increasing its capacity by 4% per year from 2012 to Figure 8 compares the required reference profile for the period to the ANSP capacity plans (LSSIP ) is highly sensitive to traffic variations due to potential route improvements in the SE-axis. movements per hour Baseline (REF) - shortest routes (REF) - current routes (PLAN) (PLAN) (PLAN) (PLAN) Figure 7: Evolution of ANSP capacity planning (LSSIP) vs. required capacity ANSP capacity plans vs. required reference profile (LSSIP ) 30% 20% 10% 0% -10% -20% -30% Shortest routes scenario Current routes scenario Surplus Shortfall Figure 8: Capacity plan vs. required reference profile Under the current routes scenario the traffic demand might exceed the available capacity. However, the shortest route scenario would result in approximately 14% less traffic leading a surplus of capacity. HungaroControl s capacity planning is considered to be consistent with both scenarios; indeed the predicted level of delay for 2014 as published in the NM NOP, calculated taking into account the Capacity Plan submitted by the ANSP, is zero minutes per flight indicating that no capacity problems are expected in. HungaroControl s latest available capacity plan (LSSIP ) is fully consistent with the required reference profile and the performance target in the submitted Performance Plan Key points on CAPACITY: A. Historically, has experienced no capacity problems to date. B. The capacity performance target set out in s Performance Plan is consistent with the required reference value in

10 C. The PRB notes that expects a high level of delay due to the implementation of the new system in 2012, which will contribute to missing the indicative EU-wide capacity target in D. The PRB appreciates that has adopted a national target for 2014, which is more ambitious than the reference value provided. E. The PRB anticipates better performance in 2012 than the proposed target on the basis that most of the traffic and almost all the delays are outside the period of transition to the new system. F. is sensitive to significant changes in route utilisation patterns by airspace users. The capacity plans for HungaroControl in the latest LSSIP ( ) provides sufficient capacity and flexibility to accommodate the changes in traffic patterns in the future. G. PRB appreciates that HungaroControl plans a higher capacity than the reference profile requires in 2014 which potentially could give room for improvement within the FAB. 1.7 Cost-efficiency Figure 9 presents the cost-efficiency targets proposed by for each year of RP1 together with the historical values since Determined unit rate ( ) Traffic and cost index (2009=100) ATSP Eurocontrol MET CAA/NSA Service Units Real 2009 en-route cost 100 Components of determined unit rate Eurocontrol EUR % -0.3% ATSP EUR % 1.6% MET EUR % -4.0% CAA/NSA EUR % -2.6% Total EUR % 1.3% Figure 9: Cost-efficiency target overview Traffic forecast checks: As shown in Figure 10, s Performance used a more pessimistic forecast than the STATFOR May 2011 base case forecast for However, the STATFOR forecast TSUs for have systematically been revised downwards over the past year, reflecting the uncertainties and the negative effects on Hungarian traffic over this period. Moreover, s Performance Plan describes and justifies in detail the assumptions taken to make the forecast TSUs for RP1; in particular, the current traffic re-routing following the availability of shortest routes (see Section 9

11 1.6), which believes will continue over the period. Following the consultation with airspace users, the Hungarian NSA has contacted STATFOR at the request of users to collect their views on the assumptions made by. The reply from STATFOR (on page 141 of s Performance Plan) states that Considering s point with the re-routing, we have also observed this change; and some of the effects could well be part of the long-term realignment that we have been mentioning for some years. So we can understand your reasons for expecting your forecast between the baseline and the low Information from the CRCO s monthly monitoring of traffic also indicates that actual traffic in the first seven months of 2011 is -1.1% compared to the same period in 2010 (or -3.0% excluding April data due to the Volcanic ash crisis in 2010). This is indeed significantly lower than the STATFOR May forecast for 2011 (+0.2% compared to 2010). The PRB has therefore concluded that is justified in using the traffic forecast set out in their performance plan Finally, the PRB notes that for the cost-efficiency KPI, has set a national traffic threshold of ±5% difference against the forecasted traffic level. In the context of lower traffic forecast than the STATFOR May 2011 base case, such a lower traffic threshold should be revised. 125 Index of Service Units 2009= STATFOR May 11 base STATFOR May 11 high STATFOR May 11 low STATFOR Feb 11 base STATFOR Sep 10 base Performance Plan Total en-route service units ('000) Performance Plan % 0.7% STATFOR May 11 base % 2.8% STATFOR May 11 high % 5.1% STATFOR May 11 low % 1.0% STATFOR Feb 11 base % 2.9% STATFOR Sep 10 base % 3.0% Figure 10: Traffic forecasts s Performance Plan is assessed as passing the Traffic forecast check Economic assumptions checks: As shown in Figure 11 the inflation assumptions used in s Performance Plan are in line with the IMF April 2011 average inflation forecast for every year

12 Inflation Performance Plan 4.9% 4.1% 3.5% 3.0% 3.0% 3.7% 3.2% IMF April 2011 average 4.9% 4.1% 3.5% 3.0% 3.0% 3.7% 3.2% Difference (percentage points) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Performance Plan (index, 2009=100) IMF April 2011 average (index, 2009=100) Figure 11: Economic assumptions s Performance Plan is assessed as passing the Economic assumption check Unit rate trend checks: As summarised in Figure 12, the forecast annual trend in the enroute DUR is much below the EU target over (an increase of +1.3% compared to a reduction of -3.5%). If the trend in the en-route DUR was evaluated using the 2011 forecast as submitted by in November 2010, uplifted to remove the effects of the one-off reduction in EUROCONTROL costs for 2011, the forecast annual reduction would be +0.5% p.a. Units Total determined costs (nominal terms) '000 HUF % 5.3% Inflation % % 0.0% 4.9% 4.1% 3.5% 3.0% 3.0% Inflation index (2009 = 100) % 3.2% Total determined costs (real terms) ' HUF % n/n-1 % 19.2% 3.0% 2.9% 5.6% -2.1% 5.5% 2.1% Total en-route SUs 000 SUs % n/n-1 2.6% 2.3% -0.8% 1.5% 1.5% 1.4% 0.7% En-route determined unit rate (national currency in real terms) 2009 HUF % n/n-1 % 16.2% 0.7% 3.8% 4.0% -3.6% 4.0% 1.3% 2009 Exchange rate 1 EUR= En-route determined unit rate (Euro in real terms) 2009 EUR EU-wide target % n/n-1 % 16.2% 0.7% 3.8% 4.0% -3.6% 4.0% 1.3% 2009 EUR % -3.5% Figure 12: Determined unit rate trend When assessed over the period, the forecast trend in the en-route DUR is even worse (+4.0% compared to -3.2% p.a.) There are significant variations in the annual trend in the en-route DUR over Increases are planned for 2012 (+3.8%) and in 2013 (+4.0%) and followed by a -3.6% reduction in The PRB calculates that the total determined costs for the period are forecast to be higher (+2.5%) than they would have been if there was an equal variation of +1.3% in the en-route DUR. Therefore, the phasing of the forecast DUR reduction raises an additional issue of consistency with the EU-wide target The planned en-route DUR profile in s Performance Plan is significantly worse when compared to the November 2010 data both over (-3.1% in November 2010 compared to +1.3% in s Performance Plan) and over (+1.6% in November 2010 compared to +4.0% in s Performance Plan). The PRB notes that the November profile for (-3.1%) was relatively close to the EU-wide target trend (-3.5%) Against a background of lower traffic forecast, the PRB notes that the en-route determined costs for were planned to increase by +24% (+4.5% p.a.) between (real terms) in November 2010, while in s Performance Plan they are planned to increase by +31% (+5.5% p.a.) over the same period One of the reasons for the planned increase of the DUR in RP1 is that this rate is based on a low traffic forecast. Another reason is the change in the allocation between en-route and terminal activities made for RP1, with a larger share of costs allocated to the en-route activity, as well as a change in the organisation of the organisational units also impacting the allocation of costs to the en-route activity refers to these elements as local circumstances and quantifies their negative impact on the DUR as percentage points p.a. in RP1 in s Performance Plan: (+3.11 percentage points p.a. for traffic difference between the traffic forecast in 11

13 s Performance Plan and the STATFOR September 2010 forecast; percentage points p.a. for the reallocation between en-route and terminal activities and percentage points p.a. for the reorganisation) The PRB computes that the impact of the downwards revision of the SUs forecast (SUF from s Performance Plan vs. the STATFOR September 2010 SUF) and the impact of the revised allocation of costs to en-route (en-route determined costs from s Performance Plan compared to the en-route determined costs allocated using the 2009 allocation percentage of 77.8% to en-route over ) have the effect of increasing the DUR by +3.3 percentage points p.a., whether considered over or The adjusted resulting trends are still over the EU-wide target trend, whether considered over (+0.7% p.a.) or (-2.0% p.a.). 160 Index of Total Cost 2009= Staff costs Other operating costs Depreciation Cost of capital Figure 13: Planned changes in en-route determined costs categories ( ) The PRB notes that there are several very large variations in the different cost categories: There is a massive increase in staff costs in 2010 of +45% (in real terms) due to an increase in ATCO salaries, as well as the setting up of a provision for future retirement costs of employees. Overall, staff costs are planned to increase by +6% p.a. on average over and account for around half of the total increase of the en-route determined costs over the period. There is a huge increase in operating costs in 2011 of +30% (real terms), mainly due to an increase in property management fees, an increase in authority fee and the inclusion of SAR costs. Operating costs are planned to increase by +5% p.a. on average over and account for around one third of the total increase of the en-route determined costs over the period. Investment costs (depreciation and cost of capital) are planned to increase by +31% over and account for around one fifth of the total increase of the en-route determined costs over the period. The main capex over the period relates to the new ATC building (ANS III) scheduled to be in operation as of 2013, upgrades of the MATIAS ATM system, and the conversion of the current building (ANS I) into a Contingency and Training Centre. 12

14 s Performance Plan is assessed as not passing the Unit rate trend check Unit rate level checks: As shown in Figure 14, s en-route DUR remains lower than the comparator States (Czech Republic, Slovak Republic and Slovenia) throughout the period, although the PRB calculates that this difference reduces from - 44% in 2009 to -25% in 2014 as the trend in the enroute DUR forecast by is much worse than the reduction forecast by the comparator States. Determined unit rate ( ) Czech Republic SlovakiaRepublic Slovenia Unweighted peer group average (excl. ) Figure 14: Determined unit rate level s Performance Plan is assessed as passing the Unit Rate Level check If adjusted for differences in PPPs, the PRB calculates that the en-route DUR for in 2014 would be -9% lower than the unweighted average of the comparator States and would not be the lowest of the group anymore. s Performance Plan is assessed as passing the Unit Rate Level check Return on equity checks: The RoE used in s Performance Plan is 10.5% for RP1. The risk premium associated with HungaroControl has been computed as a spread of +3.0% applied on the average 10-year government bond rate of 7.5%. The 3.0% risk premium is slightly higher than the EU average for ATSPs (+2.6%) The PRB notes that the WACC is also 10.5% for RP1 since HungaroControl is fully financed through equity Finally, the average asset base per SU over RP1 is 26, which is around half that of the comparators ( 54) and the EU-wide average ( 52), although the PRB notes that that part of the assets used by HungaroControl are owned by the State and their related costs are included in the cost-base as a property management fee in the operating costs and are therefore not comprised in this asset base. 13

15 12% Return on equity / state long term bond rate 10% 8% 6% 4% 2% HungaroControl ANS CR EU average LPS Peer group average Slovenia Control 0% Average return on equity Total assets per SU State long term bond rate, Nov Apr 2011 average (EU avg. excluding GR, IE, PT) Figure 15: Average Return on Equity and asset base per SU s Performance Plan is assessed as passing the Return on equity check Key points on COST EFFICIENCY: A. s Performance Plan is assessed as passing the traffic forecast check, although the forecast used is more pessimistic than the STATFOR May 2011 base case forecast for The PRB notes that the forecast SUs for have systematically been revised downwards over the past year, reflecting the uncertainties and the negative effects on traffic over this period. s Performance Plan describes and justifies in detail the assumptions taken to make the forecast SUs for RP1. In particular, the traffic by-pass which believes will continue over the period. STATFOR, contacted by the NSA following the consultation with airspace users, understands s reasons for expecting a forecast between the baseline and the low. Finally the PRB notes that the actual traffic in the first seven months of 2011 is -1.1% compared to the same period in 2010 (or -3.0%, if April data is excluded (excluding April data due to the Volcanic ash crisis in 2010). This is indeed significantly lower than the STATFOR May forecast for 2011 (+0.2% compared to 2010). The PRB has therefore concluded that the traffic forecast set out in the Performance Plan is consistent. B. The PRB notes that for the cost-efficiency KPI has set a national traffic threshold of ±5% difference against the forecasted traffic level. In the context of lower traffic forecast than the STATFOR May 2011 base case, such a lower traffic threshold should be revised. C. s Performance Plan is assessed as passing the economic assumptions check. The submitted inflation forecast is in line with the IMF April 2011 average inflation forecast for every year D. s Performance Plan is assessed as not passing the en-route determined unit rate trend checks. The forecast annual trend in the en-route DUR is much worse than the EU-wide target measured over (an increase of +1.3% compared to a reduction of -3.5%). It is even worse over (+4.0% compared to -3.2% p.a.). 14

16 E. There are significant variations in the annual trend in the en-route DUR over Increases are planned for 2012 (+3.8%) and in 2013 (+4.0%) and followed by a -3.6% reduction in The PRB calculates that forecast total determined costs for the period are higher (by +2.5%) than would have been if there was an equal variation of +1.3% in the en-route DUR. Therefore, the phasing of the forecast DUR reduction raises an additional issue of consistency with the EU-wide target. F. The planned en-route DUR profile in s Performance Plan significantly worsened compared to the November 2010 data, both over (-3.1% in November 2010 compared to +1.3% in s Performance Plan) and for (+1.6% in November 2010 compared to +4.0% in s Performance Plan). The PRB notes that the November profile for (-3.1% p.a.) was relatively close to the EU-wide target trend (-3.5% p.a.). If the trend in the en-route DUR was evaluated using the 2011 forecast as submitted by in November 2010, uplifted to remove the effects of the one-off reduction in EUROCONTROL costs for 2011, the forecast annual trend would be +0.5% p.a. G. One of the reasons for the planned increase in s en-route DUR in RP1 is that it is based on a low traffic forecast. Another reason is a change in the allocation between en-route and terminal activities for RP1, with a larger share of costs allocated to the en-route activity, as well as an internal reorganisation change also impacting the allocation of costs to the en-route activity. H. refers to these elements as local circumstances and quantifies their negative impact on the en-route DUR as percentage points p.a. in RP1 in s Performance Plan: (+3.11 percentage points p.a. for traffic difference between the traffic forecast in s Performance Plan and the STATFOR September 2010 forecast; percentage points p.a. for the reallocation between en-route and terminal activities and percentage points p.a. for the reorganisation). I. The PRB computes that the impact of the downwards revision of the SUs forecast (SUF from s Performance Plan vs. the STATFOR September 2010 SUF) and the impact of the revised allocation of costs to en-route (en-route determined costs from s Performance Plan compared to the en-route determined costs allocated using the 2009 allocation percentage of 77.8% to en-route over ) is to increase the en-route DUR by +3.3 percentage points p.a., whether considered over or The adjusted resulting trends are still far from the EUwide target trend, whether considered over (+0.7% p.a.) or (- 2.0% p.a.). J. Against a background of lower traffic forecast, the PRB notes that the en-route determined costs for were planned to increase by +24% (+4.5% p.a.) between (real terms) in November 2010, while in s Performance Plan they are planned to increase by +31% (+5.5% p.a.) over the same period. The PRB notes that there are several very large variations in the different cost categories. K. First, the PRB notes a massive increase in staff costs in 2010 of +45% (in real terms) due to an increase in ATCO salaries, as well as the setting up of a provision for future retirement costs of employees. Overall, staff costs are planned to increase by +6% p.a. over and account for around half of the total increase of the enroute determined costs over the period. L. Second, the PRB notes a significant increase in operating costs in 2011 of +30% (real terms), mainly due to an increase in property management fee, an increase in authority fee and the inclusion of SAR costs. Operating costs are planned to increase by +5% p.a. over and account for around one third of the total increase of the en-route determined costs over the period. 15

17 M. Third, the PRB notes that investment costs (depreciation and cost of capital) are planned to increase by +31% over and account for around one fifth of the total increase of the en-route determined costs over the period. The main capex over the period relates to the new ATC building (ANS III) scheduled to be operation as of 2013, upgrades of the MATIAS ATM system, and the conversion of the current building (ANS I) into a Contingency and Training Centre. There are no indications that alternative solutions at a FAB CE level have been effectively pursued, despite the fact that major synergies and rationalisation of investments are expected from the FAB CE initiative. N. s Performance Plan is assessed as passing the en-route determined unit rate level check. s en-route DUR remains lower than the comparator States (Czech Republic, Slovak Republic and Slovenia) throughout the period, although the PRB calculates that this difference reduces from -44% in 2009 to -25% in 2014 as the trend in the en-route DUR forecast by is much worse than the reduction forecast by the comparator States. If adjusted for differences in PPPs, the PRB calculates that the en-route DUR for in 2014 would be -9% lower than the unweighted average of the comparator States and would not be the lowest of the group anymore. O. s Performance Plan is assessed as passing the return on equity check. The RoE is set at 10.5% for RP1. The risk premium associated with Hungaro Control has been computed as a spread of +3.0% applied on the average 10-year government bond rate of 7.5%. The 3.0% risk premium is slightly higher than the EU average for ATSPs (+2.6%). The PRB notes that the WACC is also 10.5% for RP1 since Hungaro Control is fully financed through equity. 1.8 Interrelations between performance targets s Performance Plan does not provide an explicit analysis of the interrelations between the performance targets, but does state: s Performance Plan provides for indicators and binding targets on key performance areas whereby required safety levels are fully achieved (on page 7) The Performance Plan does not provide any indication that the achieved level of safety could not be maintained in relation to performance targets set for RP The Performance Plan contains no safety impact analysis of the early retirement plan of frontline staff (OPS + engineering). Based on the information in s Performance Plan, there are no significant issues regarding interrelations between the established performance targets. 1.9 Additional Comments Monitoring Performance Plans s performance Plan does not contain a specific section on implementation of the performance scheme. Some indications that performance monitoring will take place are provided through the document, for example Table 7 defines monitoring of Safety PIs and Table 10 defines monitoring of capacity PIs including the thee airport related PIs (ATFM airport delay, additional time in taxi-out phase and additional time in arrival sequencing/merging area). Section also states that the NSA will define corrective measures to ensure the capacity target is met. However, the need to provide an annual report to the European Commission in not mentioned. 16

18 Investments related to IP1 of the ATM Masterplan In the letter of European Commission s Air Transport Director dated 15 th April 2011, States were invited to provide, in their Performance Plans, detailed information on their investments planned for the period , in particular those associated with the 29 IP1 OI steps recognised as critical by the Single Sky Committee s Performance Plan does not specifically address IP1 compliance, but does list major capital projects (see Annex 3). It is noted that these projects do not account for the majority of the capex in the 2011 to 2015 period. s Performance Plan should be updated to include more precise information on investments relating to IP1 OIs of the ATM Master Plan. Military dimension of plan s Performance Plan does not contain a specific chapter on military issues; it does not contain KPIs to monitor the effectiveness of airspace utilisation The Hungarian NSA does however recognise the importance of the flexible use of airspace and during RP1 and onwards application of FUA will be maximised. The Hungarian FUA Report considers that the establishment of FUA compliance monitoring process is reported as still in progress. The PRB recommends that completes the National Performance Plan in respect to civil/military cooperation. In reference to the Hungarian FUA report and the establishment of FUA compliance, the PRB encourages to develop civil/military indicators to be implemented and monitored already during RP1. Stakeholder views on NSA stakeholder consultation The Hungarian NSA organised a consultation on a draft performance plan on 7 th June A list of attendees is not provided but the annexes of s Performance Plan provide a good record of the discussion which is consistent with the correspondence from all airspace users (IATA, ERA, ELFAA, IACA, EBAA and AEA). The following key comments were raised: the pessimistic traffic scenario; the lack of justification of an increased cost base; the need to remove any unjustified fees paid to the State from the cost base; the flawed cost of capital calculations; the significant capital expenditure programme and the apparent short asset life assigned to some of the key investments; the unjustified reallocation of costs to en route services The PRB notes that significant additional information is provided in the s Performance Plan to justify the targets in light of airspace user concerns. A detailed account of the consultation is provided in s Performance Plan. s Performance Plan was subject to public consultation. There is evidence that change were made to reflect the comments received. Uncontrollable costs s Performance Plan provides a list of the costs which are considered as uncontrollable as required by Article 11a(8)(c) of the charging scheme Regulation. Only limited details are provided. This list is summarised in Annex 4 to this report. 17

19 1.10 Assessment Conclusions An overview of the technical assessment of s Performance Plan for RP1 is presented in Annex 1 a one page dashboard. Conclusions on capacity Overall, s Performance Plan is assessed as making an adequate contribution to the achievement of the EU-wide capacity target in The PRB recommends that all FAB CE partners evaluate the capacity situation within the FAB and develop intra-fab solutions to resolve any remaining capacity shortfall. Conclusions on cost-efficiency The PRB recognises that as a result of the relatively low level of its en-route unit cost per SU in 2009 and the low traffic increase forecasted for RP1, has less potential to reduce its en-route DUR than some other States. However, the en-route DURs for RP1 presented in the Performance Plan show a significant increasing trend instead of a decreasing trend as foreseen by the EU-wide cost-efficiency target (key points D to M in paragraph ). The PRB considers that there is scope for further cost-efficiency improvements in, in particular in the following areas: level of ATCO employment costs and overall developments in staff costs; rationalisation of investments and synergies within the FAB CE initiative On the basis of the above, s cost-efficiency target is assessed as not being consistent with, and adequately contributing to, the EU-wide cost-efficiency target. The PRB therefore invites to revise its cost-efficiency target for RP1 in the light of the above comments and key points in paragraph The PRB also recommends that the traffic forecast is reconsidered in the context of the Performance Plan revision so as to reflect the most recent traffic developments by the time of submission of the revised Plan. In addition, should the traffic forecast used by for the calculation of the DUR for RP1 remain significantly below the STATFOR most recent forecast, the national threshold of ±5% difference to the forecasted traffic level should be revised In addition, is also invited to: (a) Clarify the nature of the staff costs recorded under incidental and other expenses and accounting for around one fourth of the en-route staff costs as shown on the graph on page 103 of s Performance Plan; (b) Clarify the situation in respect of the contribution for early retirement (13% of the salaries around 800 MHUF p.a. over RP1) which could be removed following a change in the early retirement system, as such cancellation/modification will have a significant impact on the en-route determined costs for RP1; (c) Clarify the impact of the choice of pension provider on the en-route determined costs; (d) Provide explanations and justifications for the various taxes and fees (accounting for nearly half of the operating costs) that are included in the en-route determined cost-base. The PRB notes that airspace users expressed concerns that the so-called property management fee (circa 30% of the total operating costs or around HUF million per year) could in fact be a government levy calculated as a percentage of the en-route revenue. The PRB understands that as part of the assets used by Hungaro Control are owned by the State, the property management fee 18

20 corresponds to an operating lease. The PRB notes that if the lease is long term, it might be more appropriate to treat it as a capital lease (and therefore capital-related costs rather than operating costs). The PRB also notes that Hungaro Control pays quarterly an authority fee (circa 10% of the operating costs) to the NSA. Given the magnitude and the impact on the achievement of the cost-efficiency target, these two fees deserve further clarification and justifications. (e) Revise the reporting and treatment of the EU subsidies in the Determined Costs. The PRB notes that in the Additional Information provided by to the Enlarged Committee for Route Charges in June 2011, it is reported that With regard to investments co-financed by the EU Cohesion Fund and the Trans-European Transport Network Fund (ANS III project), it is only the proportionate part of self financing which is included in the national cost base. However, according to the Charging Scheme Regulation, the full cost of the project should be included in the cost-base, while subsidies should be reported as other revenues deducted from the total costs for the calculation of the annual chargeable unit rates. (f) Clarify its intentions in respect of the carry-over of the 2010 under-recovery. The large increase in costs in 2010 has led to a significant under-recovery of HUF 1300 million ( 4.6 million, 2009 prices). Page 83 of s Performance Plan indicates that plans to recover this under-recovery 2010 in equal proportions over 15 years based on the possibility given in the 1794/2006 EU regulation. The PRB considers that this should also be clarified given that, in accordance with Annex IV.2.vi) of the revised 1794/2006 EU regulation, the carry-over of over or under recoveries incurred by Member States up to the year 2011 included are limited to the first two reference periods (i.e. up to 2019). Conclusions on compliance In addition, s Performance Plan should be complemented by the following missing elements: The missing information listed in Section 1.3. More precise information on investments and relation with IP1 OIs of the ATM Master Plan. 19

21 Annex 1: Technical assessment dashboard s Performance Plan Assessment criteria Details Conclusion En-route ATFM delay (minutes) per flight Capacity Delay level check Reference values Delay target in Performance Plan Consistent in 2014 ANSP s Capacity Plan OK En-route Service units ( 000) Traffic forecast checks STATFOR (May 2011) Consistent Performance Plan Economic assumptions checks Average Inflation index (2009-=100) IMF Consistent Performance Plan Cost-efficiency Unit rate trend checks Yearly trend EU-wide target Perf. Plan target % +4.0% % +1.3% Not Consistent Determined Unit Rate ( 2009) 2014 Comparators Unit rate level checks Performance Plan Comparison with un-weighted average of comparators -25% Czech Republic Slovak Republic Slovenia Consistent Return on equity checks Average return on Equity % Risk Premium 3.0% Consistent 20

22 Annex 2: Performance Plan checklist Ref Requirement (option requirements shaded) Check (Yes / No / Incomplete Notes / reference in plan 1.1 Description of situation Scope of plan (dates, level) Yes Section 1.1.1, p1 Entities covered Yes Table 1, P5 ANSP (HungaroControl) NSA (The Hungarian Aviation Authority / NSA) The Hungarian Ministry of National Development MET (The National Meteorological Service) NSA responsible for drawing up plan Yes Section 1.1.1, p1 Geographical scope of plan Yes Section 1.1.4, p2 National or FAB plan Yes Section 1.1.1, p1 National For National Performance Plans, NSA or body responsible for providing the aggregation of performance targets for the FAB No Not included 1.2 Overall assumptions Description of macroeconomic scenario GDP forecast Inflation forecast Yes Yes Section GDP: p23 Inflation: p23, figure 4 Traffic forecast Yes Section Developed by HungaroControl and compared to STATFOR Status of aviation safety and Aviation State Safety Programme Yes Section 1.2 Institutional context and governance Yes Section Stakeholder consultation Format and timing Yes Section 1.4, Annex II List of stakeholders consulted Yes P6 Issues raised Yes Section 1.4, Annex II NSA response to issues raised Yes Section 1.4, Annex II Confirmation that information provided 3 weeks in advance Yes Section a Effectiveness of safety management No Section Application of severity classification Just culture targets for each year No No All to be developed during RP1 Description included 2.1b Minutes of en-route ATFM delay per flight Yes Section c Description of route design improvement process Yes Section

23 Ref Requirement (option requirements shaded) Check (Yes / No / Incomplete Notes / reference in plan 2.1d Determined en-route costs for each year Yes Section , , Table 15, 16, 17 Nominal, real, national currency, by entity and nature Determined terminal costs for each year Yes Section , Table 23 En-route service units forecast for each year Yes Section Determined unit rate for each year Yes Section , Table 19 Description and justification of return on equity Yes Section (ANSP) Description of investment needed to achieve targets Capex for each year Breakdown of projects Yes Yes Section 4 (ANSP investments), Table 32 Description of relevance and coherence Yes 2.2 Explanation of consistency with EUwide targets Capacity Yes Section , Cost efficiency Yes Section , Explanation of any interdependencies and trade-offs Yes Section Explanation of carry-overs from previous years Yes Section Description of risksharing and incentives Capacity Yes Section 2.3 No incentive scheme for capacity Cost - efficiency Traffic risk sharing keys Identification of uncontrollable costs Yes Section 2.3, , , Yes Section EUROCONTROL costs included in here 3.1 Individual performance targets for each accountable entity ANSP (HungaroControl) Yes Section MET Incomplete Appears to be included with HungaroControl NSA Yes Section , Table Description of incentives for each entity ANSP (HungaroControl) MET No No Not included NSA No 4 Description of civil-military dimension No Not included 22

24 Ref Requirement (option requirements shaded) Check (Yes / No / Incomplete Notes / reference in plan 5 Analysis of sensitivity to external assumptions Incomplete Section , p61 Comprehensive discussion however no quantitative analysis included 6 Implementa tion of the Plan Measures to be put in place to achieve the targets Safety No Not included Capacity No Not included Environment No Not included Cost-efficiency No Not included Monitoring to ensure safety and business plans implemented Contingency plans if targets are not met during reference period No No Not included Not included Annex A: Reporting Tables and additional information No Not included Spreadsheet with all tables in report included Annex B: Extracts from ANSPs Business Plans No Not included Annex C: Extracts from States Safety Programmes No Not included Annex D: Public consultation material Yes Annex I and II Performance plan submitted on time (by 30 June 2011) Yes Submitted 30 June 2011 Plan submitted in English Yes Plan signed by a person with clear responsibility from the State Yes Signed by Ministry of National Development of, NSA 23