State Airports (Shannon Group) Bill 2014 Regulatory Impact Analysis April 2014
Summary of RIA Summary of Regulatory Impact Analysis (RIA) Department/Office: Transport, Tourism and Sport Title of Legislation: State Airports (Shannon Group) Bill 2014 Stage: Publication of Bill Date: April 2014 Related Publications: Options for the Future Ownership and Operation of Cork and Shannon Airports; by Booz & Co. for the Department of Transport, Tourism and Sport (Dec. 2011) Report of Change Management Task Force (Nov. 2012) Report of Aviation Business Development Task Force (Nov. 2012) Available to view or download under Publications at: http://www.dttas.ie Contact for Enquires: Airports Division Phone Number: 01 6041617 This Regulatory Impact Analysis (RIA) relates to the State Airports (Shannon Group) Bill 2014. In November 2012, the Government confirmed, inter alia, a previous decision in principle (of May 2012) that a new, State-owned, commercial entity (referred to as Shannon Group in this RIA) would be established comprising the Shannon Airport Authority (SAA) and a restructured Shannon Development (SD). The Government also noted at the time that new legislation would be drafted to establish the new Shannon entity on a statutory basis. Given that the decision to merge SAA and SD has already been taken by the Government, the options for implementing that decision in terms of the optimum structure for the new entity are considered in the RIA: 1. Do nothing 2. (a) Abolish SAA and merge functions into SD, or vice versa (b) SAA take-over of SD as a subsidiary, or vice versa (c) Abolish both SAA and SD and merge functions into a new company 3. Establish a new commercial State body with SD and SAA as subsidiaries
SUMMARY OF OPTIONS COSTS BENEFITS IMPACTS Option 1: Do nothing SAA and SD continue to operate independently Opportunity cost of not achieving growth in aviation related industry and jobs. Failure to implement Govt. policy Potential synergies between the airport and surrounding region not realised Future viability of Shannon Development in doubt Option 2: (a) Abolish SAA and merge functions into SD (or abolish SD and merge functions into SAA) (b) SAA take-over of SD as a subsidiary (or SD take-over of SAA as a subsidiary) (c) Full merger of both SAA and SD into a new State body (and dissolve both SAA and SD). Minor initial set up costs Except for (c), requirement for extensive legislation minimised Integration of administrative and management functions Potential synergies between the airport and surrounding region realised State aid implications Perception of a take-over of one body by the other Potential for IR issues to arise Extensive primary legislation required for option 2(c) Option 3: Establish a new commercial State body with SD and SAA as subsidiaries Minor initial set up costs Improved operational efficiency and performance Create synergy between SAA and SD for business development Bring greater coherence and focus to the development of the Shannon campus Potential for growth and job creation Oversight in the delivery of shared vision Potential IR issues minimised Avoids potential State aid issues Preferred Option: Option 3 establish a new commercial State body with SAA and SD as subsidiaries. 1. Policy context Background The State Airports Act 2004 provides the legislative basis for the establishment of the three State Airports of Dublin, Cork and Shannon as fully independent and autonomous airports under State ownership. However, a number of issues delayed actual separation of the airports including the need to build up DAA s distributable reserves, negotiation and implementation of measures to address Shannon s cost base and the funding of DAA s capital investment programme.
At the end of 2008, the then Minister for Transport announced a deferral of any decision on the separation of the State Airports until 2011. However, passenger traffic at Shannon Airport has been on a downward trajectory over the years from a peak of 3.64 million in 2006 to less than 1.4 million in 2012. Booz Report Booz and Co were engaged in 2011 to carry out a study of Options for the Future Ownership and Operation of Shannon and Cork Airports. They were asked to advise on possible options for the future ownership and operation of Cork and Shannon Airports and to consult as widely as possible with stakeholders. 1 The Booz report, and separate financial analysis provided by the DAA, was clear that not alone was Shannon Airport loss-making, but that it would continue to be so unless there was a fundamental change in strategic direction for the airport. Government decision to separate Shannon airport from DAA Against that background, the Government made a decision in principle in May 2012 to establish Shannon as an independent autonomous airport and to merge it with a restructured Shannon Development to form a new, State-owned, commercial entity. (Ownership of Cork airport by DAA would be maintained for the present.) The Government also decided that Shannon Development s functions in relation to indigenous enterprises and foreign direct investment should transfer to Enterprise Ireland and the IDA respectively while its functions in relation to tourism should transfer to Fáilte Ireland. In November 2012, the Government confirmed its decision in principle of May 2012. An Order, specifying the date of separation of Shannon airport from the DAA (the Shannon appointed day ) was executed by the Minister in December that year following its approval by both Houses of the Oireachtas. As decided by Government, Shannon airport was officially separated from the DAA on 31 December, 2012. Steering Group/Task Forces A Steering Group was established in June, 2012 tasked with developing an implementation strategy for the proposed new Shannon entity (comprising Shannon Airport Authority and a restructured Shannon Development). Part of this work was the identification of the optimum organisational structure of the merged entity which would best support the future development of the Shannon area. The Group also assessed how a strong international aviation sector could be developed in the region, centred on the airport, and assessed the human and financial resources 1 The consultant s report was completed in December 2011 and was noted by Government in January 2012. As the report contains commercially sensitive information, much of which was provided in confidence, it has been published in a redacted format.
required by the new entity. Two Task Forces were established to assist the work of the Steering Group and the reports by those Task Forces in November 2012 are available on the Department s website. Based on the work of the Task Forces and its own consideration of the issues involved, including an independent evaluation (KPMG) of the business cases for Shannon and the DAA, the Steering Group was satisfied that an independent Shannon Airport, coupled with a restructured Shannon Development, could not only develop and grow its passenger traffic and route network but could also be a catalyst for new job creation, particularly in aviation-related services, in a centre of aviation excellence in and around the land bank of the two companies. Having regard to the work of the Steering Group and Task Forces, the Minister for Transport, Tourism and Sport together with the Minister for Jobs, Enterprise and Innovation submitted their proposals to Government in November 2012 which were subsequently agreed. 2. Objectives One of the high level goals in the Department of Transport, Tourism and Sport s Statement of Strategy 2011 2014 is to ensure the sustainable development of Irish airports. The restructuring of the State airports, which involved the separation of Shannon airport from the DAA, will help to ensure the future viability of Shannon airport. Overall, the objective of the Shannon project is to:- address the problem of two State entities the airport at Shannon and Shannon Development operating below their potential; make better use of State assets to develop and grow passenger traffic at Shannon airport while also seeking to promote new job creation opportunities in an expanded centre for aviation related services in and around the airport; and rationalise and consolidate the delivery of enterprise and tourism functions which would eliminate duplication of work by public bodies and provide a more streamlined and focused role for the restructured Shannon Development within the proposed new commercial Shannon entity. 3. Analysis of Options Option 1 Do nothing Shannon Airport Authority and Shannon Development would continue to operate independently. This option fails to implement the Government decisions of 2012 to establish a new State-owned commercial body comprising SAA and a restructured Shannon Development.
Option 2 (a) Abolish SAA and merge functions into SD (or abolish SD and merge functions into SAA) (b) SAA take-over of SD as a subsidiary (or SD take-over of SAA as a subsidiary) (c) Full merger of both SAA and SD into a new State body (and dissolve both SAA and SD) These are variations on essentially the same general theme namely, the take-over, to varying degrees, by one of the existing companies, SAA or Shannon Development, of the other. Option 2(c) represents a further evolutionary step, the full merger of the two existing companies. Aside from option 2(c), these options would minimise the requirement for extensive legislative amendment. There may, however, be a perception that one company is being taken-over by the other and that the value created by the former is superfluous and is being thrust aside. Allied to this, there could be greater potential for IR issues, given the different business cultures between commercial and non-commercial bodies. In the case of SAA, staff and management went through substantial transfer processes leading up to the separation of Shannon airport from the DAA in December 2012 and it would be preferable if another re-organisation of that company, so soon after separation, could be avoided. State aid issues may also arise with these options. Option 3 Establish a new commercial State company with SD and SAA as subsidiaries This option involves the establishment of a new commercial entity with wholly-owned subsidiaries: (i) SAA to own, manage and operate the airport and (ii) the re-structured Shannon Development to own, manage and operate the land/property interests of Shannon Development. This is considered the optimum structure for Shannon Group. It provides a coherent and co-ordinated approach to the management of both the SAA and SD. In common with option 2, it provides for the creation of synergies to capitalise on the positive features of both companies and allows potential to exploit business opportunities in a flexible way under a commercial remit. Legislative amendment to give effect to this option would be less extensive than under 2(c) above and, given that SD and SAA would maintain their separate legal identities, the potential for negative impact on IR issues is minimised. In addition, through the provision of a corporate structure involving a holding company and subsidiaries, this option also avoids potential State aid issues. 4. Conclusion With the exception of the Do Nothing option, all the options outlined above seek to maximise potential synergies between the restructured Shannon Development and the airport at Shannon for new business development and job creation. Option 3, however, is considered the optimum structure for the new Shannon entity. Under this option, it is proposed to establish a new commercial State company, Shannon Group plc, which will be limited by shares and registered under the Companies Acts. It is proposed under the Bill that it will acquire the shares in SAA and SD which are currently held by the Minister for Public Expenditure and Reform. Shannon Group and its subsidiaries will have a commercial remit. Through the two wholly-owned subsidiaries, Shannon Group will be able to drive traffic growth at the airport and exploit synergies between the two in order to
expand and develop an aviation services centre in and around the airport. It will also exploit the potential of the other lands and properties of SD. This option, through the provision of a holding company and separate wholly-owned subsidiaries, minimises the potential for State aid issues. 5. Alignment of Irish law with Alternative A in Aircraft Protocol to Cape Town Convention The aviation industry is undergoing rapid growth. As pointed out in the report of the Aviation Business Development Task Force (Nov. 2012), it is estimated that an average of 1,350 new aircraft (100 seats and over) will be delivered each year up to 2030. It is estimated that the commercial aircraft market will have annual funding needs of over $100bn in the coming years. A significant amount of that will be from the aircraft leasing industry as currently up to 40% of the world s fleet are on lease, a share that is expected to grow to at least 50% over the coming decade. Ireland is home to 50% of the world s aircraft leasing industry so an opportunity exists for Ireland to develop its role in aviation finance and to strengthen its position as the main global centre for the aircraft leasing industry. A growing portion of the future funding needs of the industry is expected to come from the capital markets as the more traditional bank lending in this area contracts. A particular debt financing instrument for aircraft assets that has proved popular for both airlines and investors in the US since the 1990s are Enhanced Equipment Trust Certificates (EETCs). These are essentially aviation bonds, an aviation-specific form of asset backed security, where the secured asset is the aircraft. The US is the main jurisdiction for EETC issuance at present and one of the factors underpinning the success of EETCs there is the assurance under the US Bankruptcy Code that, in the event of bankruptcy or insolvency of the airline, creditors can repossess the collateral aircraft within 60 days. This reduces the risk to investors in EETCs and facilitates higher ratings from credit rating agencies for these financial instruments. The reduced risk and higher credit rating has resulted in substantial interest cost savings for airlines and lessors. Ireland has ratified the Cape Town Treaty, an international treaty intended to facilitate the ownership, financing and leasing of aircraft by creating a set of rights and remedies applicable to aircraft where the aircraft and/or the mortgagor, lessee or conditional purchaser are located in a Contracting State to the Treaty. The Treaty sets out two alternative special insolvency regimes ( Alternative A or Alternative B under Article XI of the Protocol) governing a creditor s rights under a lease or financing agreement. Alternative A is similar to Chapter 1110 of the US Bankruptcy Code and essentially provides that after a nominated waiting period (to be specified by the Contracting State) a creditor or lessor automatically acquires the right to repossess the aircraft asset. At the time of ratification, a Contracting State to the Treaty may make certain declarations opting in or out of the application of certain provisions. Ireland was among the first countries to ratify the Treaty and upon ratification (through the enactment of the International Interests in Mobile Equipment (Cape Town Convention) Act, 2005), Ireland made some declarations. However, since Ireland already had a mature and well developed legal architecture governing examinership and insolvency, it was not considered necessary at that time to make a declaration (provided for under Article XXX(3) of the Protocol) relating to Remedies on Insolvency.
However, it is now considered necessary for Ireland to adopt the Alternative A insolvency regime in Irish law to support the development of aviation finance in Ireland (and capitalise on the opportunities that will arise in this area in the coming years) and to defend and strengthen our position as a centre for aircraft leasing. The option of making a Declaration is no longer open to us so, instead, it is proposed to amend our law to implement Alternative A with a waiting period of 60 days. This will align our arrangements with the 60 day period under the US Bankruptcy code and will facilitate the issuance of EETCs in Ireland. This will support the development of aviation finance in Ireland and help to sustain Ireland s leading global position in aircraft leasing in the face of growing competition from jurisdictions such as Singapore which have already adopted the equivalent of Alternative A. This bespoke insolvency regime will only apply to assets covered by the Convention and Aircraft Protocol. The Do Nothing option is not considered feasible since Ireland s leading global position as a centre for the aircraft leasing industry could be eroded as more countries adopt the Alternative A insolvency regime. The vast majority of States that have ratified the Cape Town Convention and Protocol have adopted Alternative A with most opting to match the US waiting period of 60 days (with some opting for shorter periods). The preferred option for Ireland is to join the growing list of countries which have adopted Alternative A. This will strengthen the aviation leasing and finance community in Ireland and the synergies between that community and the other aircraft support industries in Ireland e.g. aircraft maintenance, engineering, etc. There is no material downside in adopting the Alternative A regime in Ireland; the risk of inaction, however, could be significant. 6. Impacts National Competitiveness Coupled with the separation of Shannon airport from the DAA in December 2012, these measures are focused on both increasing the overall number of passengers flying to and from Ireland through increased efficiencies and on attracting new aviation-related business that would otherwise not be based in Ireland. These measures will also support growth and employment and assist Ireland s economic recovery. Compliance burdens, including Administrative burdens It is not anticipated that the formation of the new Shannon entity will impact on Irish businesses or on the administrative burdens they face. Employment Renewed traffic growth at Shannon airport and the expansion and development of aviationrelated services in and around the airport is anticipated to provide an employment stimulus in the Limerick/Shannon region. Whether there is a significant policy change in an economic market, including consumer and competition impacts The proposals do not involve significant policy or regulatory changes nor is it envisaged that they will have significant impacts on competition or consumer welfare.
Rural communities The proposals are considered to have a potential positive impact on people in the Limerick/Shannon areas through increased employment opportunities and on the wider Mid West region through increased air transport connectivity. Other impacts There are no impacts for the following: Socially excluded or vulnerable groups, the Environment, the Rights of Citizens, North South and East West relations. 7. Consultation There has been extensive consultation with stakeholders on the proposals underpinning the Bill. This included consultation by the Booz & Co. study team as part of their study Options for the Future Ownership and Operation of Cork and Shannon Airports, which sought input from a wide range of stakeholders including airport authorities, local and regional authorities, political representatives, trade unions, chambers of commerce, business and tourism bodies. In addition, the Aviation Business Development Task Force, which was tasked with examining the feasibility of creating an international aviation centre at Shannon, received input from a wide range of industry and community stakeholders, over 100 in total, in Ireland and abroad. The General Scheme of the Bill was also referred to the Joint Oireachtas Committee on Transport and Communications for any views or comments they may have. The Committee published a short report on the General Scheme on 6 th November 2013. 8. Enforcement and compliance Not applicable 9. Review On-going review will be undertaken in the context of the normal reporting on performance within annual reports, regular interaction between the Department and Shannon Group, consulting with stakeholders, and regular appearances by the Minister before Oireachtas Committees. 10. Publication This RIA together with the State Airports (Shannon Group) Bill will be published on the websites of the Department of Transport, Tourism and Sport and the Department of Jobs, Enterprise and Innovation.