b

ASIAN DEVELOPMENT BANK RRP: REG 37449

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

AND TECHNICAL ASSISTANCE GRANT

TO THE

PACIFIC AVIATION SAFETY OFFICE

FOR THE

ESTABLISHMENT OF THE PACIFIC AVIATION SAFETY OFFICE PROJECT

August 2005

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund AOC – air operator's certificate CAA – civil aviation authority ICAO – International Civil Aviation Organization LCB – local competitive bidding MRAI – minimum required annual inspection PASO – Pacific Aviation Safety Office PDMC – Pacific developing member country PICASST – Pacific Islands Civil Aviation Safety and Security Treaty SARPs – standards and recommended practices TA – technical assistance TOR – terms of reference USOAP – Universal Safety Oversight Audit Program

NOTE

In this report, "$" refers to US dollars.

This report was prepared by a team consisting of R. Guild (transport specialist and team

leader), M. Minc (principal infrastructure specialist), and L. Lahm (counsel).

CONTENTS

Page LOAN AND PROJECT SUMMARY ii

MAP vii I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2

III. THE PROPOSED PROJECT 4 A. Impact and Outcome 5 B. Outputs 5 C. Special Features 6 D. Cost Estimates 7 E. Financing Plan 8 F. Implementation Arrangements 9

IV. TECHNICAL ASSISTANCE 10 V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 11

A. Institutional Reform 11 B. Technical Impacts 12 C. Economic Aspects 12 D. Financial Aspects 13 E. Regional Cooperation 13 F. Project Risks 14 G. Overall Assessment 15

VI. ASSURANCES 15 A. Specific Assurances 15 B. Conditions for Loan Effectiveness 16

VII. RECOMMENDATION 16 APPENDIXES 1. Design and Monitoring Framework 17 2. Chronology 20 3. Sector Analysis 21 4. Institutional Analysis 26 5. External Assistance for Regional Aviation Safety and Security 29 6. Cost Estimates 30 7. Indicative Procurement Packages 31 8. Summary Economic and Financial Analyses 32 9. Summary Poverty Reduction and Social Strategy 37 10. Project Implementation Schedule 39 11. Technical Assistance for Aviation Legislative and Regulatory Review 40

SUPPLEMENTARY APPENDIXES (available upon request) A. Financial Analysis and Projections B. Pacific Aviation Safety Office Constitution C. Pacific Islands Civil Aviation Safety and Security Treaty

ii

LOAN AND PROJECT SUMMARY Borrower The Pacific Aviation Safety Office (PASO), an international

organization founded by Pacific developing member countries (PDMCs) to provide aviation regulatory oversight on a collaborative regional basis. Members are Australia, Fiji Islands, Kiribati, New Zealand, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu.

Guarantors Kiribati, Papua New Guinea, Samoa, and Vanuatu, on a several

basis. Classification Targeting classification: General Intervention

Sector: Transport and Communications Subsector: Civil Aviation Themes: Sustainable economic growth / Regional cooperation

Environment Assessment

Category C Unlikely to have adverse environmental impacts

Project Description The Project will complete the establishment of PASO and make it

fully operational and able to provide aviation safety and security expertise to countries that need it. The Project has four components: (i) harmonization of aviation safety and security regulations, (ii) recertification of airlines, (iii) institutionalization of a regional surveillance and inspection system, and (iv) refurbishment of the PASO headquarters. Project outputs include (i) updated legislative and regulatory frameworks in each PASO member, (ii) training and capacity building, (iii) airline certifications of compliance with international requirements, (iv) national and regional minimum required annual inspection plans, (v) technical guidance material in each specialized discipline, (vi) an inspection documentation and issues resolution system, and (vii) completed accommodation. The Project will be financed through a regional loan to PASO, guaranteed severally in equal shares by four guarantor countries.

Rationale The PDMCs consist of thousands of islands spread across 30

million square kilometers of ocean. Modern air transport is essential for tourism and trade, which will enable economic growth and reduce poverty. To support this growth, air transport operations are required to comply with internationally recognized safety regulation and oversight standards. However, all PDMCs face severe financial limits and shortages of skilled personnel to perform these essential functions and, consequently, often fail to meet requirements. Noncompliance places safety and security at risk and potentially jeopardizes continued international services. In recognition that regional cooperation can be an effective approach to safety regulation and oversight, PASO was founded to oversee and advise on regional aviation safety and security.

iii

PASO will create regional capacity and economies of scale but requires external assistance to become fully established and operational. Asian Development Bank (ADB) financing will enable the PASO PDMCs to achieve mandatory compliance with international requirements through a cost-effective and financially sustainable organization.

Objective The Project’s goal is to ensure that the PDMC aviation sectors

meet all international requirements for safety and security regulation and oversight. The Project's objectives are to (i) harmonize updated legislative and regulatory frameworks in each PASO member along with training and capacity building; (ii) ensure compliance with international requirements through airline recertification; and (iii) establish and institutionalize a regional surveillance and inspection system by creating a minimum required annual inspection plan, technical guidance material in each specialized discipline, and a documentation and issue resolution system.

Cost Estimates The total project cost is estimated at $2.1 million equivalent. This

includes a foreign exchange cost of $1.4 million (67% of the total cost) and a local cost of $0.7 million (33%). It is proposed that ADB provide a loan of $1.5 million, or 71% of the project cost. The PASO members will contribute the remaining $0.6 million, or 29%.

Financing Plan Sources

$’000 Foreign

Exchange Local

Currency Total Cost

Asian Development Bank 1,400 100 1,500 Governments’ Counterpart Funds 0 600 600 Total 1,400 700 2,100

Recurrent costs of the organization, once established, will be met through revenues for services provided to airlines, airports, and civil aviation authorities in PASO members.

Loan Amount and Terms ADB will directly provide to PASO a public sector loan of $1.5

million equivalent from ADB’s Special Funds resources to help finance the Project. The governments of Kiribati, Papua New Guinea, Samoa, and Vanuatu have each agreed to guarantee $375,000 of the loan. The loan will have a 32-year term, including a grace period of 8 years. The interest rate charged will be 1.0% during the grace period and 1.5% thereafter.

Period of Utilization 1 November 2005–30 April 2011 Estimated Project Completion Date

31 October 2010

Executing Agency Pacific Aviation Safety Office

iv

Implementation Arrangements

The PASO general manager will have overall responsibility for project implementation and shall be responsible for ensuring coordination among PASO members. The PASO Council of Directors, comprising representatives of PASO members, will constitute the project steering committee, with overall responsibility for guiding PASO policy and the Project’s strategic direction. The PASO general manager will be a member of the steering committee.

Procurement ADB-financed goods and services will be procured in accordance

with ADB’s Guidelines for Procurement. Equipment packages valued at $100,000 or less will be procured following ADB’s procedures for direct purchase. Civil works contracts valued at $100,000 or less will be procured using local competitive bidding procedures.

Consulting Services No consulting services are required under the Project. Project Benefits and Beneficiaries.

The Project will increase aviation safety and security in PASO PDMCs to ensure compliance with international standards. It will ensure that laws, regulations, technical documentation, and procedures are current, compliant with International Civil Aviation Organization requirements, and harmonized across the region. The currently fragmented system will be replaced with a consistent and proactive operating environment, improving safety and reducing costs. It will create economies of scale that will allow PASO to become financially self-sustaining, while lowering costs and improving service quality. The economic internal rate of return is 30%. The direct beneficiaries of the Project include the governments of the PASO PDMCs, which will be able to rationalize their civil aviation administrations and lower public sector costs; 43 air transport operators with a total of 266 aircraft, employing nearly 4,000 licensed personnel, which will enjoy lower regulatory compliance costs and more responsive services; and all air transport users, who will benefit from higher safety and security standards. Indirect beneficiaries include employees and other stakeholders in the tourism industry, who will avoid the potentially catastrophic effects of fewer arrivals caused by a serious safety or security incident.

Risks and Assumptions The key technical risks are that international requirements will

continue to grow more complex and burden PASO and the PDMCs’ small administrations and airlines, and that evolving airline fleets will require greater oversight. The financial risks are that airlines will face increased service fees in response to changing requirements, and that counterpart contributions may need to increase. The institutional risks are that governments, operators, and international organizations need to increase their cooperation to support regulatory reform and harmonization.

v

In all three areas, PASO has been designed to adjust its operations, match its capacity to demand, and maintain the international recognition and standing required to mitigate these risks. Better efficiency and cost-effectiveness, combined with improved regulatory oversight and harmonization of the operating environment, will encourage stakeholder cooperation. The risks are manageable and apply equally to PASO and to the alternative of continued outsourcing. Unlike the alternative, however, PASO is the least-cost solution, offers additional quality of service benefits, and can become financially self-sufficient to ensure that service continues. PASO is, therefore, the preferred solution because of its cost-effectiveness, qualitative improvements, and sustainability.

Technical Assistance Technical assistance (TA) is proposed to support the regional

harmonization of aviation safety and security regulations. Specialized expertise is required for legislative and regulatory review, airline certification inspection, and technical design of the guidance material. The total TA amount is $550,000, of which $450,000 will be financed on a grant basis from the Cooperation Fund for Regional Transportation and Financial Security Initiative, funded by the governments of Australia, Japan, and United States, and administered by ADB. PASO and its members will provide the remainder in kind.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Pacific Aviation Safety Office (PASO) for the Establishment of the Pacific Aviation Safety Office Project. The report describes a proposed technical assistance (TA) for Aviation Safety Legislative and Regulatory Review, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve ADB administering the TA.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

2. The Pacific developing member countries (PDMCs) consist of thousands of islands covering 30 million square kilometers of ocean. Modern air transport is essential for tourism and trade, which will enable economic growth and reduce poverty. Air transport operations are required to employ internationally recognized safety regulations and oversight practices. However, all the PDMCs face a severe lack of funds and skilled personnel, and consequently have often failed to meet requirements. Noncompliance places safety and security at risk and potentially jeopardizes continued international services. 3. In recognition that regional cooperation can be an effective approach to safety regulation and oversight, the aviation ministers of the Pacific Islands Forum mandated the creation of a collaborative regional aviation safety oversight program to establish regional capacity and enable economies of scale through capacity sharing, leading to financial sustainability. Eight ADB members, including six PDMCs,1 became members of PASO to overcome traditional constraints. PASO will eventually become self-sustaining but requires external assistance to become fully established and operational. At the request of the aviation ministers, this Project was prepared using ADB TA.2 A. Performance Indicators and Analysis

4. The extent of aviation activity varies substantially among PASO PDMCs, which are home to 43 air transport operators, with 266 aircraft and nearly 4,000 licensed personnel. However, the national industries are fragmented. As a result, national capacity for safety and security regulation and oversight is difficult to sustain due to diseconomies of scale. Most of these countries have no qualified inspectors in key areas but do have ad hoc contracts for services with established agencies from countries with more advanced aviation sectors. 5. As a result, national capacity for safety and security oversight, and the legislative and regulatory frameworks to facilitate it, are usually inadequate. Audits conducted under the Universal Safety Oversight Audit Program (USOAP) of the International Civil Aviation Organization (ICAO) have revealed severe deficiencies in meeting its standards and recommended practices (SARPs), making international air travel less safe and secure than it should be. 6. Common deficiencies in these countries include noncompliant and badly outdated legislation and regulations, operational systems and procedures that do not ensure thorough oversight, incomplete technical guidance materials, under-resourced and poorly performing civil aviation administrations (CAAs), a shortage of qualified technical personnel, and a nearly

1 Fiji Islands, Kiribati, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu; plus Australia and New Zealand. 2 ADB. 2003. Regional Technical Assistance on Civil Aviation Safety and Security. Manila (TA 6119-REG, approved

on 25 August 2003).

2

complete inability to license personnel and certify airlines. Since all these countries depend on their aviation industries to support tourism, trade, and economic growth, and all are signatories to the Convention on International Civil Aviation (the Chicago Convention), improvements are urgently required to comply with the convention and continue to support economic development. 7. Although national airlines and administrations in the PASO PDMCs are small, they operate in an international environment with very strict safety and security requirements. They operate sophisticated modern aircraft to major airports in Australia, Canada, Japan, New Zealand, and United States. Every aspect of their operations must meet the same international standards as huge global airlines, but without the advantages of the depth and resources of larger airlines. 8. In response to these needs, PASO has been formally established, though not yet made operational, in Port Vila, Vanuatu. Overall guidance, strategy, policy, and problem resolution are provided by the Council of Directors, which represents PASO member governments and includes associate members from the aviation industry, multilateral agencies, and established safety oversight authorities. 9. The initial PASO implementation plan, following the approval of aviation ministers of the Pacific Islands Forum in 2001, led to PASO’s incorporation in Vanuatu in July 2003. The members expected that the organization would be operational soon after, but activities have not commenced due to a lack of start-up funding. PASO needs to evolve its operational capability quickly to create the necessary services and begin generating revenues, eventually becoming financially self-sustaining, and thus maintaining its members’ commitment. B. Analysis of Key Problems and Opportunities

10. The global system of aviation safety and security regulation and oversight is intended to make international air operations safe and efficient by requiring all ICAO members to uniformly apply the ICAO SARPs. All ICAO members and signatories to the Chicago Convention are obligated to secure the highest practical degree of uniformity in regulations, standards, and procedures, and to ensure their effective implementation. A state’s responsibilities under the Chicago Convention (Appendix 4) include the airworthiness of aircraft and their correct operation, supervision of licensed personnel, suitability of the physical infrastructure at aerodromes, and security of all aspects of civil aviation. To carry out these responsibilities, ICAO members must develop appropriate laws, regulations, procedures, personnel, and institutions. 11. PASO PDMCs, however, cannot implement all these aspects of safety regulation and oversight because they lack resources and have small industries and administrations. As a result, their laws, regulations, and procedures are generally noncompliant, their personnel are underqualified, and their institutions are not fully effective. 12. PDMCs have received little external assistance for civil aviation safety and security. The European Commission has financed one sizable regional project, and Australia has made two donations directly to PASO (Appendix 5). 13. Clearly, the regional system must be improved to ensure the continuing viability of Pacific aviation. The Project will develop cooperative regional capacity for the required improvements through PASO. The alternatives to PASO are fully developing each CAA to

3

provide independent capacity, or outsourcing most functions to service providers from countries with more advanced aviation sectors. 14. Meeting the minimum national responsibilities would require each CAA to employ qualified inspectors in flight operations, airworthiness, aerodromes, and security, and to upgrade the countries’ legislative, regulatory, and institutional frameworks to support these areas. While it would be possible to create independent capacity in each PASO PDMC, the small national aviation sectors do not require full-time activity from each specialist. The net result would be excess capacity and duplication of effort, translating into much higher costs per unit compared with larger industries and administrations. 15. The PASO PDMCs have addressed this problem by contracting for inspection services as needed, mainly from the CAAs of New Zealand and the United Kingdom. This approach has been effective in responding to immediate needs by providing qualified inspectors when needed, but it has not created systematic and institutionalized capacity. Years of reacting to problems rather than proactively planning to avoid them, and continued poor results from international audits have demonstrated the inadequacy of this ad hoc approach. Although the effort could be increased and improved through outsourcing, the ultimate cost would be much higher than either current (and manifestly inadequate) expenditures or a cooperative regional approach (Appendix 6). 16. These problems and constraints are common to developing countries, which increasingly respond by developing regional capacity. ICAO has created a number of regional organizations for cooperative development of operational safety and continuing airworthiness. These do not provide direct oversight services but are coordinating bodies, providing TA to CAAs that need to improve their safety and security regulations and oversight capacity. This approach would not work in the PASO PDMCs since they either have little or no such capacity to develop. The only operational regional organization is the Central American Agency for Safety Oversight, which is similar to PASO. There are no equivalent organizations in the Pacific region. 17. A regional agency could develop shared capacity and become self-sufficient by reducing duplication, creating economies of scale, harmonizing regulatory systems, sharing scarce technically qualified personnel, and thus reducing the unit costs of oversight. For example, rather than appointing (and then underutilizing) three specialized national inspectors for each of the five countries that have none, a total of four regional professionals could provide services for all. Airlines would save on compliance costs as a harmonized regulatory system would relieve them of the need to operate consistently within multiple national frameworks. Additional benefits would include priority service when safety issues arise, which do not necessarily happen when oversight is provided by contract agencies, and an enhanced opportunity to transfer skills and train the various national CAAs because all oversight would be either provided by or controlled within the region. 18. PASO can create this regional capacity by appointing an optimal staff complement to provide the required level of service across the PASO PDMCs. Given the anticipated scale of the regional industry by the end of the project period, this would require one flight operation specialist, one airworthiness specialist, a combined aerodrome and security specialist, and a general manager qualified in one of the technical areas. 19. A cooperative approach is the most effective way to improve air transport safety and security in the region. Existing contracting arrangements can meet known national needs but

4

cannot build the capacity of national CAAs to plan and manage assistance for unknown ones. In addition to technical services, PASO will be able to provide policy and operational advice to governments through the intergovernmental council. It will also improve guidance to the industry by documenting a consistent and harmonized regulatory system. 20. PASO will be the nucleus of a region-wide initiative. Other PDMCs are expected to join PASO as needed and as the organization demonstrates its value and capabilities. Some countries are expected to use PASO services on a contract basis. PASO is designed to accommodate growth through both mechanisms. 21. PASO will eventually become self-sustaining through contributions by its members and revenues generated from services. The bulk of PASO’s funding will come from each member’s aviation industry through service fees, in the same way that the industry is currently invoiced by national CAAs for services provided under contract by established aviation safety organizations. As PASO will be more efficient and responsive to its members’ needs, it will increase quality and reduce charges to the industry. However, PASO requires external assistance in its inception phase. 22. Air transport is essential to promote tourism, which employs large numbers of women in labor-intensive occupations and contributes up to a quarter of GDP in some PASO PDMCs. By ensuring that an essential public good is always available to support this key transport sector, the Project supports sustainable economic growth and promotes the crosscutting strategic theme of regional cooperation in ADB's poverty reduction strategy3 and long-term strategic framework.4 By supporting regional capacity building, the Project will be important in implementing the Pacific strategy for 2005–2009,5 ADB's subregional strategy and program for the PDMCs.

III. THE PROPOSED PROJECT

23. PASO was founded in July 2003 as a nonprofit organization, incorporated under the laws of Vanuatu. PASO’s operations were to be governed by the PASO constitution. Because it lacked start-up funding, PASO remained an entity in name only. In April 2004, the PASO Council of Directors determined that PASO should be an international entity, governed by the terms of an international treaty, to have the mandate to harmonize the international air and safety operations of its members. By July 2004, the Council of Directors concluded the terms of the treaty to govern PASO’s operations. The Pacific Island Aviation Safety and Security Treaty (PICASST) was opened for signature in August 2004 and entered into force with five signatures in June 2005. PICASST and the constitution are now in the process of being amended to give full effect to PASO’s international regional character. This process is expected to be complete prior to the date of loan effectiveness. 24. The Project will help PASO become fully operational as an independent regulatory oversight organization. PASO will provide services to its six founding PDMCs (Fiji Islands, Kiribati, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu) on a collaborative regional basis. 3 ADB. 2004. Enhancing the Fight Against Poverty in Asia and the Pacific: The Poverty Reduction Strategy of the

Asian Development Bank. Manila 4 ADB. 2001. Moving the Poverty Reduction Strategy Forward: The Long Term Strategic Framework of the Asian

Development Bank 2001-2015. Manila 5 ADB. 2004. Responding to the Priorities of the Poor: A Pacific Strategy for the Asian Development Bank (2005-

2009). Manila

5

A. Impact and Outcome

25. The Project’s goal is to ensure that the Pacific aviation sector meets all international requirements for safety and security regulation and oversight. PASO will provide advisory, certification, inspection, and surveillance services to the national CAAs and aviation industries of its PDMCs. It will identify deficiencies, set out remedial steps, monitor implementation through to full compliance, and provide TA to establish the regulatory environment. The professional staff will consist of three internationally qualified technical specialists in airworthiness, flight operations, and security and aerodromes, plus a general manager qualified in one of the technical areas. These activities will replace the current system of ad hoc external contracting from the CAAs of countries with more advanced aviation sectors. By reporting directly to national CAAs, PASO is expected to qualitatively improve oversight, which is not possible under the current system. 26. PASO operations will be supervised by an intergovernmental Council of Directors, comprising representatives of each PASO member, which will set policy and monitor implementation and enforcement of technical findings. The functions of the Council of Directors are detailed in the PASO constitution and the PICASST. 27. The successful transition of PASO to an operational organization will improve aviation safety and security in a sustainable manner, based on regional cooperation, shared capacity, and economies of scale. Within the 5-year project period, PASO is expected to become the preferred service provider for regulatory and oversight functions, selected for its professional regional staff, lower operating costs, and systematic, focused service to its clients operating in the PDMCs. B. Outputs

28. The Project has four components, required to make PASO fully operational: (i) creating a harmonized regulatory environment, (ii) ensuring airline compliance with international standards, (iii) establishing and institutionalizing a regional surveillance and inspection system, and (iv) refurbishing the PASO headquarters. Project outputs include (i) updated legislative and regulatory frameworks in each member, (ii) training and capacity building, (ii) airline certifications of compliance with international requirements, (iii) a minimum required annual inspection (MRAI) plan, (iv) technical guidance material in each specialized discipline, (v) an inspection documentation and issue resolution system, and (vi) completed office accommodation.

1. Component A: Creation of a Harmonized Regulatory Environment

29. For PASO to be effective and increase its membership, a standard operating environment must be established across all members. The PASO PDMCs intend to adopt the New Zealand regulations, which are already in partial use in several members. Harmonization will allow full economies of scale related to regional cooperation to develop and is crucial to PASO’s success. 30. The outputs of this component will be (i) adoption and implementation of an updated oversight system in each PASO PDMC; and (ii) training and capacity building for airlines, national CAAs, and airport operators. PASO will develop (i) surveillance and inspection procedures, (ii) certification and licensing procedures, and (iii) technical guidance materials. To

6

ensure ownership and cooperation, PASO will provide comprehensive briefings and train officials and management of CAAs, airlines, and airports in the new safety and security systems and their inspection, surveillance, and certification programs.

2. Component B: Airline Compliance with International Requirements

31. Because the PDMC CAAs are weak, most airlines have been self-regulating for years, without sufficient oversight to ensure compliance with ICAO SARPs. With few exceptions, documentation on air operator certification is nonexistent, indicating the lack of competent safety certification of airlines in the region. To ensure compliance, a comprehensive recertification program is essential to establish a baseline for surveillance and inspection. 32. This component’s output will be certification of airline compliance with international requirements. PASO staff will supervise certification audits in airworthiness and flight operations, using ICAO SARPs in combination with procedures and technical guidance developed under component A. Based on PASO recommendations, the PASO PDMCs will issue or revalidate the airlines’ air operator’s certificates.

3. Component C: Regional Surveillance and Inspection System

33. A comprehensive surveillance and inspection program, in the form of an MRAI plan, is essential to guide PASO operations. The core services that will be included in each country’s MRAI and provided by PASO technical staff include regulation, oversight, and personnel licensing in flight operations, airworthiness, aerodromes, and security. Implementing the MRAI in each country through regular inspections and reporting will comprise about half of all PASO activities. 34. The outputs of this component will be (i) design and implementation of an MRAI plan for each member, covering its CAA, air transport operators, and aerodrome operators; and (ii) creation of an inspection documentation and issue resolution system. A system of circulars and directives will be required for official communications with members. These are core activities expected of PASO staff, based on the outputs of component A.

4. Component D: Completed Office Accommodation

35. PASO will be headquartered in Port Vila, Vanuatu. The Government has donated a basic office facility to the Project and provides two administrative staff members as in-kind contributions. Additional furnishings, standard office equipment, and modern communications are required to equip this facility. This component’s output will be a completed office facility ready for occupancy by seven people. Required activities are primarily procurement of furniture and equipment and minor building works for renovation. C. Special Features

36. Regional cooperation through the Project will enable three special features to emerge: (i) incentives for increasing harmonization and membership through "network benefits", (ii) benefits from net positive contributions to regional regulatory and oversight services by the larger and better-developed national CAAs, and (iii) greater independence and accountability for policy and regulatory functions.

7

37. Network benefits refer to the increasing value of membership as the organization’s scope grows. As harmonization proceeds, and economies of scale decrease the unit costs of service provision, it will become increasingly cost-effective for more countries to join PASO as their needs require and as the organization demonstrates its value and capabilities. Its increasing scale and scope will enable PASO to reduce the costs to its members of specialized outside expertise that may be contracted for infrequent services such as approvals of new aircraft types or airlines, and engineering support for major modifications or repairs of aircraft. 38. The potential for net positive contributions to the regional initiative arises with respect to the CAAs of Fiji Islands and Papua New Guinea, which have large organizations that could provide services to PASO as needed. This will allow regional personnel to become fully qualified to international standards and eventually replace international staff. 39. Under the existing system, all but two PASO PDMCs6 combine policy, regulatory, and operational functions within aviation ministries. All international airlines in PASO PDMCs are government-owned, creating potential conflicts of interest. To improve accountability, the PASO constitution and the PICASST delegate ICAO-mandated oversight responsibilities to PASO, facilitating administrative and financial independence. D. Cost Estimates

40. The total project cost is estimated at $2.1 million equivalent. This includes a foreign exchange cost of $1.4 million equivalent (about 67% of the total) and a local cost of $0.7 million equivalent (about 33% of the total). Cost estimates include (i) staff costs, including travel, training, and overheads; (ii) establishment costs of PASO, including communication equipment, technical resources, and minor renovations; (iii) initial working capital; and (iv) contingencies. Taxes are excluded from project cost estimates since PASO is tax exempt in Vanuatu. Cost estimates are shown in Table 1 and details are in Appendix 6.

Table 1: Cost Estimates ($’000)

Item Foreign

Exchange Local

Currency Total Percentage of Base Cost

A. Institutional Development and Strengthening a 1. Harmonized Regulatory Environment 245 120 365 19 2. Airline Compliance 245 120 365 19 3. Surveillance and Inspection System 739 359 1,098 59 Subtotal 1,229 599 1,828 97 B. Office Accommodation 12 37 49 3 Base Costs b 1,241 636 1,877 100 C. Contingencies c 124 64 188 10 D. Financial Charges d 35 0 35 Total 1,400 700 2,100 a Based on minimum required annual inspections. b There are no taxes or duties since the Pacific Aviation Safety Office is tax exempt. c Contingencies at 10% include physical contingencies and local and foreign price escalation. d Interest during implementation will be capitalized. Sources: Asian Development Bank estimates 6 Fiji Islands and Papua New Guinea have independent civil aviation authorities.

8

E. Financing Plan

41. ADB will directly provide PASO with a public sector loan of SDR 1,033,000 ($1.5 million equivalent) from ADB’s Special Funds resources to help finance the Project. The loan will have a 32-year term, including a grace period of 8 years, and interest rates of 1.0% during the grace period and 1.5% thereafter. 42. The governments of Kiribati, Papua New Guinea, Samoa, and Vanuatu will each guarantee one fourth of the total loan amount, equal to SDR258,250 ($375,000 equivalent). Kiribati, Samoa, and Vanuatu are under category A, and Papua New Guinea is under category B2. Each country is eligible for Asian Development Fund (ADF) funding.7 43. PASO members will provide $600,000 equivalent in counterpart funding, in the form of annual membership fees and in-kind contributions (offices and two administrative staff members). The governments will not need to fund any tax liability, as PASO is tax exempt. The governments are committed to providing timely counterpart funds and have incorporated the required amounts into their budgets beginning in financial year 2003. Counterpart funding requirements and debt service on the loan are reasonable compared with each guarantor country's treasury resources and ongoing commitments to other externally funded projects. Table 2 shows the summary financing plan and Appendix 8 presents the detailed plan.

Table 2: Financing Plan ($’000)

Source

Foreign Exchange

Local Currency Total Cost Percentage

ADB Loan 1,400 100 1,500 71 Government Counterpart Funds 0 600 600 29 Total Cost to be Financed 1,400 700 2,100 100

Sources: Asian Development Bank estimates. 44. ADB financing will bridge the cash-flow gap for PASO until estimated revenues exceed estimated costs, 5 years after inception. The balance of the financial requirements for running the organization will be met through revenues generated from services provided to airlines and airport operators in PASO members. Service fees will be set to fully recover costs. The two PASO members that are not guarantors (Fiji Islands and Solomon Islands) will pay a 10% premium on service fees. 45. As a loan to an international organization comprising ADB members, and guaranteed severally by ADB members, the proposed financing is classified as a public sector loan. Direct lending to PASO is consistent with the ADB Charter, which specifies that ADB may finance international or regional agencies or entities concerned with economic development of the region.8 PASO is a regional international organization that will directly contribute to the economic development of the Pacific region (section V.C.). Access to the ADF for this purpose is allowed in its regulations.9

7 The other two PASO PDMCs will not become guarantors of the loan. The Solomon Islands cannot borrow or take

on contingent liabilities in the near term, following its recent lapse into and recovery from arrears. The Fiji Islands does not expect to regularly receive services from PASO and is therefore not willing to become a guarantor.

8 ADB. 1966. Agreement Establishing the Asian Development Bank (Article 11 Recipients and Methods of Operations). Manila (reprinted with corrections June 2002).

9 ADB. 1986. Regulations of the Asian Development Fund (Section 3.02 Eligible Recipients). Manila.

9

F. Implementation Arrangements

1. Project Management

46. PASO will be the Project’s Executing Agency. A financial management assessment, including a review of PASO’s systems for financial and management accounting, reporting, auditing, and internal controls, is in Supplementary Appendix A. The PASO Council of Directors will form the project steering committee, which shall have overall responsibility for guiding PASO policy and the strategic direction of the Project. The Council of Directors consists of one representative from each member government, the Association of South Pacific Airlines, ICAO, the Pacific Islands Forum Secretariat, and the general manager of PASO. The general manager shall have overall responsibility for project implementation and for ensuring coordination among PASO members.

2. Implementation Period

47. The Project is expected to start in November 2005 and end in October 2010. Initial activities, including regulatory harmonization, airline recertification, and design of the regional surveillance program, will be completed in 2006. Field inspections are expected to commence in mid-2006 and continue indefinitely. The project period has been designated as 5 years since that is when PASO is expected to become financially self-sustaining. An implementation schedule is in Appendix 10.

3. Procurement

48. ADB-financed goods and related services will be procured in accordance with ADB’s Guidelines for Procurement. Minor civil works estimated to cost $100,000 or less will be carried out under local competitive bidding (LCB) procedures acceptable to ADB. Local contractors have the expertise and capacity to undertake such minor civil works, and since international contractors are unlikely to be interested, the use of LCB is acceptable. In accordance with ADB requirements, foreign contractors may participate in LCB. Selection and engagement of contractors will be subject to the approval of ADB. Promptly after such award, ADB will be furnished with copies of the bid evaluation report and contract as executed. Equipment contracts estimated to cost $100,000 or less may be directly procured by PASO.

4. Consulting Services

49. No consulting services are required under the Project.

5. Disbursement Arrangements

50. An imprest account will be established by PASO, at a commercial bank acceptable to ADB, immediately after loan effectiveness. Replenishment to the imprest account will be supported by appropriate withdrawal application and related documentation. The initial amount to be deposited in the imprest account will not exceed $150,000 equivalent. The statement of expenditure procedure may be used to reimburse eligible expenditures and liquidate advances for individual payments not exceeding the equivalent of $50,000. Detailed arrangements to establish and operate the imprest account and the statement of expenditure procedure will be in accordance with ADB’s Loan Disbursement Handbook (January 2001).

10

6. Accounting, Auditing, and Reporting

51. PASO will maintain separate project accounts containing detailed descriptions of the sources of receipts and expenditures. A full set of financial statements (income statement, balance sheet, and cash flow and related notes) will be prepared. The annual project accounts and annual financial statements will be audited by independent auditors acceptable to ADB and will be submitted to ADB not later than 6 months after the end of the fiscal year to which they related. PASO was informed about ADB’s policy on submission of audited financial statements and possible penalties for delays in submission. 52. PASO will prepare and submit to ADB quarterly progress reports on financial sustainability and regional cooperation including (i) actual revenue generation against projections, (ii) regulatory harmonization, and (iii) prospects for growth of services and membership. The reports will identify problems and difficulties encountered during implementation and summarize the Project’s financial accounts consisting of expenditures during the reporting period, year to date, and total to date. A project completion report will be provided no later than 3 months after project completion.

7. Project Performance Monitoring and Evaluation

53. The project performance monitoring indicators that have been agreed on during project preparation include national legislative and regulatory improvements, technical certifications, inspection schedules, organizational financial performance, and ultimately full compliance with ICAO SARPs. The relevance and practicability of data collection for the proposed measures have been confirmed with PASO and the governments of its PDMCs. At the beginning of the Project, PASO will develop comprehensive procedures to systematically generate data on inputs and outputs of the four project components and the agreed-on indicators to be used to measure project impacts. PASO will refine the design and monitoring framework, confirm the achievable goals, refine the monitoring and recording arrangements, and establish systems and procedures no later than 6 months after loan effectiveness. 54. Under the design and monitoring framework, PASO will report on baseline and progress data at the requisite time intervals, and analyze and consolidate the data through its documentation, issue resolution, and management information systems. The project performance monitoring system will be flexible enough to adopt remedial action for project design, schedules, activities, and development impacts. PASO will monitor and assess activities, and report quarterly to ADB on the Project’s implementation and financial aspects to ensure that progress and impacts are monitored and reported in line with ADB requirements.

8. Project Review

55. Regular ADB review missions are envisaged, and a midterm review, including ICAO participation, will be undertaken approximately 2 years after project implementation begins. The review will include a detailed evaluation of the scope, implementation arrangements, and achievement of scheduled targets; progress on future growth of activities; and analysis of feedback from project performance monitoring.

IV. TECHNICAL ASSISTANCE

56. A harmonized operating environment will produce benefits broader than those accruing to PASO members, particularly for travelers and airlines of major countries serving the Pacific

11

islands. Because of the positive externalities involved, it is appropriate to supplement project activities through external TA. In conjunction with the Project, an advisory TA is therefore proposed to provide specialized expertise to support specific project inception activities. 57. TA for aviation legislative and regulatory review will provide legal and regulatory advice, technical support to audit airlines for recertification, and information systems development. This TA is required to supplement the technical capacity of PASO staff for one-time activities to support the inspections and systems design. 58. Consulting services will be provided to review and revise national legislation and regulations, provide specialized technical support for airworthiness and flight operation audits, design a database system, and recommend ways to implement the Project. The Project will then result in the adoption and implementation by PASO staff, CAAs, and governments of the TA recommendations. 59. The total TA amount is $550,000, of which the Cooperation Fund for Regional Transportation and Financial Security Initiative (a multi-donor umbrella facility funded by the governments of Australia, Japan, and United States) will finance $450,000 on a grant basis to be administered by ADB. PASO and its members will provide the remainder in kind. Twelve person-months of international and six person-months of domestic consulting services will be required. Selection and recruitment of consultant services will be undertaken in accordance with ADB’s Guidelines on the Use of Consultants, and other arrangements satisfactory to ADB on the engagement of domestic consultants. Details are in Appendix 11.

V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

60. The Project will result in the Pacific aviation sector meeting all international requirements for civil aviation safety and security regulation and oversight. The establishment of a single regional organization that replaces and updates the system of fragmented national authorities will create economies of scale that will allow the organization to become financially self-sustaining while lowering costs and improving service quality. 61. The Project’s direct beneficiaries include the governments of the PASO PDMCs, which will be able to rationalize their CAAs and lower public sector costs; 43 commercial air transport operators operating a total of 266 aircraft and employing nearly 4,000 licensed personnel, who will enjoy lower regulatory compliance costs and more responsive services; and all users of air transport, who will benefit from higher safety and security standards. Indirect beneficiaries include stakeholders in the tourism industry, and those who depend on their earnings, which will avoid the potentially catastrophic effects of fewer arrivals caused by a serious safety or security incident. A. Institutional Reform

62. Aviation safety and security regimes in the PASO PDMCs are fragmented, incomplete, and out of date. Many airlines are self-regulating and national administrations lack the tools to supervise them according to their international responsibilities. The Project will ensure that laws, regulations, technical documentation, and procedures are up-to-date, compliant with ICAO requirements, and harmonized across the region. Airlines will face a consistent operating environment in all countries, thus improving safety and reducing costs. Alignment of national and international responsibilities is mandated through the PICASST.

12

63. National administrations will benefit from higher-quality services than available through existing ad hoc arrangements. Although these inspectors are technically competent, they provide services only when contracted. National CAAs do not have the technical expertise to plan and manage their assistance and, as a result, often react only after problems become apparent. PASO will become a source of dedicated expertise that will provide administrative backup to client governments and ensure oversight is planned and implemented proactively. Since PASO is a regionally controlled international organization mandated by an international treaty, its credibility and stability are safeguarded. B. Technical Impacts

64. A major feature of PASO’s regulatory approach will be a shift away from a reactive and "forensic" oversight that attempts to find errors in every detail of operations after they have occurred and creates incentives for avoidance through its adversarial nature. The Project will instead rely on proactive safety management systems that must be adhered to by airlines and inspectors alike. Such systems, when implemented correctly, place the responsibility for compliance at appropriate points in the aviation industry, create incentives for cooperation to avoid errors in the first place, and can be audited effectively by a regional team. 65. Compliance and enforcement will be enhanced through three mechanisms: (i) harmonization across all members through component A, which will introduce stricter SARPs and make compliance more consistent and transparent to governments and operators; (ii) alignment of national and international responsibilities through the PICASST and PASO membership; and (iii) regular ICAO USOAP audits that mandate an international survey of compliance. Since the risk of continued poor enforcement includes loss of air services, governments and operators will have powerful incentives to improve compliance. 66. Every country with an aviation industry must ensure regulation and oversight in four technical disciplines, yet five PASO PDMCs do not need a full-time expert in any of these areas. With the exception of the Fiji Islands and Papua New Guinea, the PASO PDMCs need a total of four full-time technical experts. Centralizing expertise in a regional organization will create significant economies of scale by eliminating duplication of services and administrative overheads, and by making efficient use of highly qualified but scarce human resources. C. Economic Aspects

67. PASO provides the least-cost way to improve safety and security regulation and oversight in its PDMCs. In aggregate, these cost savings are equivalent to 14% per year when compared with ad hoc contracting, with a net present value of about $573,000 over a 20-year planning period. The resulting economic internal rate of return is 30%. 68. The Project’s wider economic benefit will be that airlines continue to offer services to and from PASO PDMCs. Without the Project, these countries will most probably continue to fail to meet ICAO SARPs and have their noncompliance recorded in ICAO audit reports. In the absence of timely and credible efforts to remedy safety and security deficiencies, international airlines (pushed by their insurers and aircraft lessors) may withdraw services from these countries. Countries with more advanced aviation sectors may deny access to airlines from PDMCs because of safety and security concerns, as recently happened to one PDMC airline for lack of mandated safety equipment.

13

69. It is difficult to quantify the economic benefits of compliance with international standards through improved safety and security regulation and oversight, since the impact of the Project is to reduce the probability of a serious incident of unknown frequency and magnitude. However, some indications of the potential impacts of noncompliance are provided by comparable experiences.10 Major international air disasters cause about a 10% decline in aviation in ADB DMCs for about a year, and major security concerns have resulted in short-term 20% declines. After the coup d'etat in the Fiji Islands in May 2000, security concerns caused an immediate 25% fall in international visitor arrivals, which did not recover to their prior levels until 4 years later. Since tourism is responsible for about 20% of the Fiji Islands’ GDP, this was equivalent to an average loss of 5% of GDP per year. 70. The potential impact of a major aviation incident that evenly affected the PASO PDMCs could thus be estimated at a 10% decline in visitor numbers for a year, equivalent to a fall of 2% of their combined GDP, or a loss of about $135 million if all countries were affected equally. Denial of international services could have an even greater impact. Given that tourism employs large numbers of low-skilled workers, including a high proportion of women, the potential negative social impacts would be significant and widespread. According to this estimate, PASO would only need to avert one serious incident during the Project to maintain a benefit–cost ratio much greater than 1. D. Financial Aspects

71. PASO is expected to become financially self-sufficient 5 years from the inception of full operations. It will do so while charging lower service fees on an equivalent basis than is possible through ad hoc contracting. Since existing oversight and regulation are funded on a fee-for-service basis, airlines and airport operators will also experience financial benefits. E. Regional Cooperation

72. PASO is the first example of a regional organization that PDMCs have been willing to set up on a self-financing basis without ongoing donor grants. It is likely to serve as a model for intergovernmental regional cooperation, particularly in transportation and regulation infrastructure and services. All PASO members would benefit from the harmonization of laws, regulations, and procedures; the availability of a range of supplemental TA; and continuous audits of national oversight needs. As countries take steps to improve their organizations and capabilities, the Project would reinforce those efforts and continue to provide supplementary assistance. 73. PASO has recognized the need for capacity building as a long-term objective. Component A includes activities designed to increase the ability of national administrations to plan and manage improved safety and security systems. All the technical inspectors will be expatriates in the near to medium term as no PDMC nationals are qualified, but this will gradually change. To become an inspector, a candidate must first be a qualified pilot. Although a few PDMC nationals are trained to operate modern aircraft, as their number grows it will become possible to train them as inspectors. It is expected that this might be added to the PASO work program once the inspection system is well established, after about the fifth year of implementation.

10 ADB. 2001. Global Air Transport Crisis Impact Analysis. Manila.

14

74. Since the Project is an innovative approach to common problems facing smaller PDMCs, disseminating lessons learned from PASO should be an important activity for ADB to leverage its experience with regional cooperation, as recommended in the Pacific regional cooperation strategy and program for 2004–2006.11 In the short term, this will begin with consideration of expanding the cooperative model under the Pacific Regional Transport Analysis.12 PASO has invited ICAO to be represented on its Council of Directors, creating a regular link to official government contacts in Pacific countries that are not PASO members. F. Project Risks

75. The Project has technical, financial, and institutional risks. The first technical risk is that ICAO SARPs could grow more complex and increase the need for additional technical staff and procedures that would overburden PASO and the small PDMC administrations and airlines. International requirements have recently been comprehensively revised, however, so the likelihood of substantial additional risk is low in the short to medium term. A second technical risk is that airline fleets may change, requiring either retraining of technical staff, which would increase costs to PASO in the short term, or reductions in staff due to reduced demand for services. This risk is moderate and will require flexibility in PASO staffing and structure to enable adjustments. A third technical risk is whether operators have sufficient resources to implement remedial actions. Although implementation will present challenges, improvements are mandatory with or without the Project. A significant advantage of PASO is that its PDMCs will receive dedicated professional advice and administrative backup for improvements. 76. The financial strength of PDMC airlines poses a risk to their ability to pay service fees for adequate regulation and oversight. However, all airlines are required to enhance their safety and security measures, so costs to airlines would go up with or without the Project. The perception of high costs should be placed in perspective; annual PASO service fees per country are equivalent to the cost of a few weeks of fuel for one modern jet. As the least-cost solution to this problem, PASO minimizes the risk. If government-owned airlines do face payment difficulties, government counterpart contributions may have to be increased. However, these contributions are very low so this related risk would have a low impact. In the extreme case of payment default, PASO would be able to adjust its staffing and operational schedules to reduce costs until the problem was resolved. 77. The institutional risks arise from the need for governments, airlines, and international agencies to cooperate in reforming and harmonizing the regulatory and legislative environment. ICAO has already recognized PASO as a legitimate international organization and will exercise quality control through regular USOAP audits in each country. Governments will need to ensure cooperation between aviation ministries and ministries that draft and enact legislation. Since this activity will be the responsibility of each national administration, with TA support, the risk of incomplete implementation is moderate. However the benefits of harmonization are clear to airlines, which may be expected to advocate completion. 78. Since the Project is intended to maintain the viability of an existing regional aviation industry, and will not affect travel demand, it will have no environmental impacts.

11 ADB. 2003. Pacific Regional Cooperation Strategy and Program 2004-2006. Manila. 12 ADB. 2004. Regional Technical Assistance for the Pacific Regional Transport Analysis. Manila (TA 6119-REG,

approved on 9 January 2004).

15

G. Overall Assessment

79. As ICAO members and signatories to the Chicago Convention, the PASO PDMCs are obligated to ensure aviation safety and security. These countries have three ways to meet their obligations: through PASO, contracting for services, or expanding national administrations. The identified risks would apply equally to PASO and to the alternatives. However, PASO is the least-cost solution, offers additional quality of service benefits, and can become financially self-sufficient to ensure the continuing availability of its services. It is the best solution because of its cost-effectiveness and ability to make qualitative improvements.

VI. ASSURANCES

A. Specific Assurances

80. In addition to the standard assurances, PASO and the Guarantors, as applicable, have given the following assurances, which are incorporated in the legal documents:

(i) Before the end of 2006, PASO will have (a) established and commenced implementation of the ICAO SARPs for airline certification system and audits; (b) designed the regional surveillance program; (c) commenced field inspections; and (d) developed and commenced the training program for the national CAAs, airlines, and airport operators on new safety and security systems and related inspection, surveillance, and certification programs.

(ii) Before the end of 2006, with respect to the regional surveillance and inspection

system, PASO will have (a) designed and implemented an MRAI plan for Kiribati, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu; (b) developed technical guidance material in each specialized discipline; (c) created an inspection documentation and issue resolution system; and (d) established a comprehensive record-keeping system and an electronic database system for recording, archiving, and reporting inspection, surveillance, and certification activities in a manner that is transparent, and made the systems available to all PASO members.

(iii) PASO shall ensure that the PASO members will provide, in a timely manner, all

necessary counterpart funds and in-kind contributions for successful project implementation.

(iv) Within 6 months from loan effectiveness, PASO will establish a PPMS to monitor

and evaluate implementation and development impact at various project stages. PPMS indicators will include national legislative and regulatory improvements, technical certifications, inspection schedules, organizational financial performance, and compliance with ICAO SARPs.

(v) For each of its fiscal years, PASO will maintain (a) a debt service ratio of net

earnings to estimated debt service requirements greater than 6, and (b) a liquidity ratio of accounts receivable to revenues not greater than 25%.

(vi) Beginning in year 6 of the operations, following completion of the Project, PASO

will maintain (a) an operating ratio of operating expenses to operating revenue not higher than 100%, and (b) earnings at least 1.5 times interest payments.

16

(vii) PASO will recruit management and senior technical staff on the basis of

minimum 3-year contracts to ensure continuity in administration and operations. (viii) PASO and ADB will conduct a midterm review of the Project about 30 months

after loan effectiveness. B. Conditions for Loan Effectiveness

81. As conditions for loan effectiveness:

(i) Each of the PICASST and the PASO Constitution shall be in form and substance satisfactory to ADB.

(ii) PASO shall have been registered as an international organization under Schedule 6 of the Diplomatic Privileges and Immunities Act of Vanuatu [CAP] 143.

(iii) Each of the Guarantors shall have signed or acceded to the PICASST.

(iv) Each of the Guarantee Agreements shall be in full force and effect.

(v) Fiji, Kiribati, Papua New Guinea, Samoa, Vanuatu and Solomon Islands shall have entered into service agreements with PASO, governing the financial obligations of those receiving PASO services, each in form and substance satisfactory to ADB.

VII. RECOMMENDATION

82. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan in various currencies equivalent to Special Drawing Rights 1,033,000 to the Pacific Aviation Safety Office, to be guaranteed on a several basis by the Republic of Kiribati, Papua New Guinea, the Independent State of Samoa, and the Republic of Vanuatu, for the Establishment of the Pacific Aviation Safety Office Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Guarantee Agreements presented to the Board.

HARUHIKO KURODA President

26 August 2005

Appendix 1 17

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Indicators/Targets

Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact The Pacific aviation sector meets all international requirements for safety and security regulation and oversight

Full compliance with

all relevant ICAO safety and security SARPs by all PASO PDMCs by 2009

ICAO summary audit

reports

Outcome Implement an effective and sustainable approach to improvement of aviation safety and security, based on regional cooperation, shared capacity, and economies of scale

Establishment of

PASO as an operational agency by 2005

Appointment of a

general manager by the second quarter of 2005

Appointment of four

internationally qualified technical specialists (one each in airworthiness, flight operations, security, and aerodromes) by the third quarter of 2005

Commencement of

inspections in each technical discipline by the end of 2005

Recovery of costs for

inspections by 2006 Achievement of

financial self-sufficiency by 2010

PASO Council of

Directors records PASO work plan

PASO audited

accounts ADB disbursement

records

PASO is officially and

internationally recognized as an approved regulatory and oversight organization

PASO is able to recruit

internationally qualified technical specialists

ICAO SARPs do not grow

too complex and infeasible for small airlines and economies

Airline financial positions

do not deteriorate or increase the inability to make timely payments for oversight

Airline fleets do not

evolve too quickly for PASO to adjust and provide the necessary oversight services

Outputs 1. Create a harmonized regulatory environment across members

Adoption of revised national legislation and regulations by 2006

National legislative gazettes

Sufficient political will to reform and harmonize

Sufficient domestic

expertise for national implementation of recommendations

18 Appendix 1

Design Summary

Performance Indicators/Targets

Data Sources/Reporting Mechanisms

Assumptions and Risks

2. Return each airline to compliance with international requirements through recertification

Issuance of the air operator certificate in accordance with regulations by 2006

National aircraft registries

Airline cooperation with new regime of safety and security management systems

Airlines maintain sufficient

resources to implement recommended reforms

3. Establish and institutionalize a regional surveillance and inspection system

Adoption of coordinated national MRAI schedules by 2006

Implementation of

inspections in each discipline by 2005

Accessibility of

documentation systems by 2006

PASO Council of Directors records

ICAO summary audit

reports PASO work plan

Estimated revenue stream enables MRAI to stay on schedule

Governments and airlines

cooperate with data collection requirements

Availability of airline staff

and aircraft in line with MRAI

4. Complete office accommodation

Physical renovations completed to accommodate four professional and two administrative staff members

Office and

communications equipment acquired and functioning

PASO general manager’s reports

Office facilities continue to be provided by the Government of Vanuatu

Activities with Milestones Inputs 1. Harmonized regulatory environment 1.1 National implementation of recommendations Start: First quarter 2007 Complete: Fourth quarter 2008 Responsibility: Governments 1.2 PASO briefings and training Start: First quarter 2006 Complete: Fourth quarter 2008 Responsibility: PASO 2. Ensure airline compliance 2.1 Recertification audits Start: Second quarter 2006 Complete: Second quarter 2007 Responsibility: PASO and TA consultant team

ADB loan of $1.5 million All member governments’

counterpart contributions of $10,000 per country per year, total $400,000

Government of Vanuatu

contribution of staff and offices, total $200,000

Members participate in

Council of Directors and support TA activities (1 person-month per year per country)

Appendix 1 19

Activities with Milestones 3. Regional surveillance and inspection system 3.1 Design and implementation of MRAI Start: First quarter 2006 Complete: Fourth quarter 2010 Responsibility: PASO 3.2 Development of technical guidance material Start: First quarter 2006 Complete: Fourth quarter 2006 Responsibility: PASO 3.3 Creation of a documentation and issue resolution system Start: First quarter 2006 Complete: Fourth quarter 2006 Responsibility: PASO and TA consultant team 4. Completed office accommodation 4.1 Office equipment Start: Fourth quarter 2005 Complete: Second quarter 2006 Responsibility: PASO 4.2 Renovations Start: First quarter 2006 Complete: Third quarter 2006 Responsibility: PASO

Inputs

ADB = Asian Development Bank, ICAO = International Civil Aviation Organization, MRAI = minimum required annual inspection, PASO = Pacific Aviation Safety Office, PDMC = Pacific developing member country, SARPs = standards and recommended practices, TA = technical assistance.

20 Appendix 2

CHRONOLOGY

Date

Activity

January–May 2004 Regional Civil Aviation Safety and Security. (TA 6119-REG, approved on 25 Aug 2003)

I–II April 2004 Loan fact-finding II September 2004 Management review meeting II–III October 2004 Loan appraisal II February 2005 Staff review committee meeting II August 2006 Loan negotiations III September 2006 Board consideration IV October 2006 Loan effectiveness I = first week, II = second week, III = third week, IV = fourth week. Source: Asian Development Bank

Appendix 3 21

SECTOR ANALYSIS

A. Introduction and Scope 1. This analysis summarizes the level of aviation activity in the Pacific developing member countries (PDMCs) of the Pacific Aviation Safety Office (PASO), the status of national oversight capacity, personnel, and implications for required activities. The need for the Project to build regional capacity is presented. A related institutional analysis that describes the optimal level of oversight and national legislative and regulatory frameworks is in Appendix 4. B. Current Level of Aviation Activity 2. The extent of aviation activity varies substantially among PDMCs, from the extensive aviation industries of the two larger countries, to the much smaller ones of all the others. Table A3.1 provides indicators of the aircraft fleet and licensed personnel in the PASO PDMCs.

Table A3.1: National Aviation Industry Indicators

Fiji

Islands Kiribati PNG Samoa Solomon Islands

Vanuatu

Total

Aircraft Registered 34 3 204 5 4 14 266

Aircraft – jets 6 0 10 1 0 1 18Aircraft – not jets, greater than 10 seats 8 3 39 2 3 5 72

Active Pilots Licenses 364 11 1,723 35 8 33 2,189Flight Crew Licenses – not pilot licenses 54 3 2 0 0 0 59Other Active Licenses – not flight crew 177 6 1,437 11 11 14 1,661Commercial Air Transport Operators 7 1 29 2 1 2 43Air Operator Certificates Issued 7 1 39 2 — 2 53Valid Certificates of Airworthiness 34 3 204 5 — 10 266Approved Maintenance Organizations 7 1 35 1 — 1 46Non-approved Maintenance Organizations 0 1 0 0 — 1 3

Operations Inspectors 4 0 7 0 0 0 11

Airworthiness Inspectors 4 0 5 0 0 1 10“— “ = reliable data not available, PNG = Papua New Guinea. Sources: ADB. 2004. Regional Civil Aviation Safety and Security. Manila (TA 6119-REG); Asian Development Bank estimates; International Civil Aviation Organization Universal Safety Oversight Audit Program reports.

22 Appendix 3

3. Although the Pacific aviation industry is substantial as a whole, it is fragmented nationally. Papua New Guinea alone accounts for three quarters of the overall fleet, and more than half of the jets. Four of the six PASO PDMCs operate modern jet equipment, even if the fleets are small. As a result, national capacity for safety and security regulation and oversight is difficult to sustain due to diseconomies of scale. 4. Five of these six countries have no operation inspectors and four have no airworthiness inspectors, while no country has aerodromes or security inspectors. Where no local capacity exists, these required functions are contracted to the civil aviation authorities (CAAs) of more developed countries outside the region, mainly Australia, New Zealand, and United Kingdom. A summary of the safety oversight competency of each PASO member is in Table A3.2. 5. Only Fiji Islands and Papua New Guinea have independent regulatory agencies, while the other countries combine policy, regulatory, and operational functions within aviation ministries. In addition, all international airlines are government-owned, creating potential conflicts of interest.

Table A3.2: Summary of Safety and Security Oversight Competency Fiji Islands The CAA of the Fiji Islands oversees airport operators, air traffic control and air navigation service providers, aircraft operators, and licensed personnel. The flight operations department has five staff positions; four are held by three expatriates and one national. The airworthiness department has three staff positions, all filled by Fiji Island nationals. UKCAA provides one airworthiness advisor. Kiribati The CAA does not have any direct oversight capability. Airworthiness oversight is handled by the UKCAA representative in the Fiji Islands, who comes to Kiribati as required. However, this service may be terminated soon and no alternative system has yet been developed. There has been no flight operation oversight for about 7 years. The CAA has been headed by a series of expatriate directors of civil aviation for several years. Papua New Guinea The CAA’s Safety Directorate has five subdivisions: airworthiness (eight positions, five filled, two by expatriates); flight operations (nine positions, seven filled by expatriates); personnel licensing (three positions, one filled by an expatriate); standards (newly created, not yet staffed); and infrastructure (newly created, not yet staffed). AusAID provides technical assistance to train inspectors. Samoa The ministry does not have any capability in flight operations and airworthiness oversight, and contracts most of its responsibilities to the New Zealand CAA. Solomon Islands The CAA has no oversight capability. All oversight should be handled by the UKCAA representative in the Fiji Islands, who should visit as needed; however, there have been no visits since late 2000. Vanuatu The CAA oversees airworthiness through one full-time expatriate officer, and flight operations through short-term contracting. Operational oversight for Air Vanuatu is provided by CASA in Australia, while licensing of private pilots is handled by a New Zealand-designated flight examiner. These licenses are issued by the state of examination (Australia and New Zealand) and these approvals are then used as the basis of issuing Vanuatu licenses. AusAID = Australian Agency for International Development, CAA = civil aviation authority, CASA = Civil Aviation Safety Authority (Australia), UKCAA = United Kingdom civil aviation authority. Sources: ADB. 2004. Regional Civil Aviation Safety and Security. Manila (TA 6119-REG); Asian Development Bank estimates.

Appendix 3 23

C. Implications for Required Activities 6. The PASO PDMCs must move beyond the current patchwork oversight system and build a fully capable and independent oversight system responsive to national and regional needs. They must avoid the pitfalls of outsourcing all oversight services and responsibilities—overlooked requirements, delays in service, and lack of priority—which they have experienced. A regional oversight capacity must provide reliable and responsive oversight services to the members and their air transport operators on demand. Service quality must be improved, become more responsive to national needs, and provide a greater margin of safety. 7. Most PASO PDMCs wish to reduce safety oversight costs although they have not funded and staffed their respective CAAs to meet minimum International Civil Aviation Organization (ICAO) standards. The cost of achieving compliance will be higher than current expenditures whether the services are provided by PASO or other agencies.

1. Surveillance and Inspection Programs

8. Inspection and surveillance programs need to create capacity in flight operations, airworthiness, aerodromes, and security. The scale of the regional industry means that flight operations and airworthiness each require one full-time inspector. These staff members should also be able to perform aerodrome oversight. Security oversight requires a dedicated inspector with a very high level of knowledge, experience, and expertise because of security concerns and demands worldwide. One well-qualified security inspector could provide adequate security oversight services to the region. 9. All technical staff must be highly skilled and experienced regulators, not former airline personnel with operations and airworthiness experience. Technical staff inspectors should have experience in policy and as line inspectors. A regional organization will require a general manager with regulatory and policy experience, and equally solid skills as a technical inspector. 10. Because the Pacific region needs full-time permanent capability, staff from better-developed organizations will not be seconded. Organizations such as the US Federal Aviation Administration, ICAO, and the European Joint Aviation Administration occasionally provide expertise but normally for short-term assignments. A negative aspect of secondment is that the technical experts are not typically from the Pacific region and have to spend an inordinate amount of time learning the regulatory system.

2. Airline Recertification

11. Safety certification of an airline is an obligation of the state and an ICAO requirement, and must be completed before flight operations. However, the airlines operating in the PASO PDMCs are effectively self-regulating, as they have been operating for many years with little surveillance or inspection from any regulatory authority. With few exceptions, many airlines have never had a competent ICAO-compliant safety certification as required by ICAO standards and recommended practices (SARPs). In addition to establishing a standardized safety oversight system and surveillance program for the region, these countries also need to recertify or revalidate the air operator certificates (AOCs) of their airlines. 12. The airline certification and surveillance and inspection programs required by ICAO are related but very different in their purpose and effect. The certification of an airline before international operations establishes the fitness of the operator and serves as the baseline for continuing surveillance and inspection by the regulatory authority. The AOC is the state’s

24 Appendix 3

guarantee to other nations that its airline is fit to operate internationally and meets all ICAO requirements. The continuing surveillance, inspection, and audit of the operator by the state guarantee to other nations that the airline continues to meet the original certification requirements for the issuance of an AOC. Both programs are necessary and need to be accomplished in all the PASO PDMCs as soon as possible. 13. An air operator recertification effort of this magnitude will require a higher level of staffing than will an ongoing surveillance and inspection program. A regional technical staff member would be fully occupied in designing and implementing a regulatory system and initiating an inspection and surveillance program. A separate team could recertify all air operators holding an AOC from any of the PASO PDMCs. Most airline recertification work should be outsourced on a short-term basis to avoid overstaffing. D. Potential Regional Capacity 14. The technical level of effort necessary to return each of the PASO PDMCs to minimum ICAO standards is much higher than feasible now, whether these are provided through domestic organizations or through external contracting, as most of these countries have neither sufficient personnel to do the job internally nor sufficient resources to plan and manage external expertise. 15. All of the PASO PDMCs have the capability to implement administrative procedures recommended by a competent safety oversight organization. Changes to national civil aviation laws will by necessity be processed by the independent members. However, with the exception of the Fiji Islands and Papua New Guinea, none of the PASO PDMCs have the resident capability to design and implement the necessary technical systems. Regional capacity is thus required to produce and implement the regulations and guidance material through inspections and audits. 16. PASO is intended to provide advisory, certification, inspection, and surveillance services to the national CAAs and aviation industries of its members by identifying deficiencies, setting out remedial steps, and monitoring implementation through to full compliance. PASO must take a systems approach to develop and implement an oversight regime to include the development of surveillance and inspection programs. 17. The aviation environments of the PASO PDMCs vary in complexity and in the degree of development of safety oversight capabilities. Generally, the more complex the commercial aviation environment, the more sophisticated the flight safety organization. The merit of the Project stems from its multifaceted role. All members will benefit from the activities undertaken by the Project to improve and harmonize laws, regulations, and procedures; a wide range of supplemental technical assistance; and continuous audits of national oversight needs. As countries take steps to improve their organizations and capabilities, the Project will reinforce those efforts and continue to provide supplementary assistance after improvements are made. 18. PASO is governed by a Council of Directors, which represents member governments and includes advisers from the aviation industry, multilateral agencies, and established safety oversight authorities. Its mandate, which is founded in the Pacific Islands Civil Aviation Safety and Security Treaty, is to provide guidance, strategy, and policy, and to resolve problems. 19. PASO cannot replace CAAs’ authority or responsibility for aviation safety oversight. Although members will rely on PASO advice and recommendations to resolve safety issues and

Appendix 3 25

to maintain compliance with ICAO SARPs, they remain responsible for implementing PASO advice and recommendations. 20. The PASO Council of Directors must proactively communicate the need for, and promote, a complete and thorough revamping of the PASO PDMCs’ safety oversight means and methods. What must be clear and unambiguous to the PASO members is the need for a safety oversight system, not the ad hoc and often piecemeal approach in evidence. 21. PASO has been recognized by ICAO headquarters in Montreal, Canada, as a legitimate international organization. The United States Federal Aviation Administration and the European Joint Aviation Administration have expressed their support for regional safety oversight in general and for PASO in particular in recent international meetings. International institutional support for PASO will be instrumental in achieving the credibility to provide regional oversight services. 22. Based on the analysis of safety oversight and regulation requirements, in comparison with national capacities, an independent regional organization such as PASO is clearly necessary and feasible. PASO can provide core technical regulatory services and expertise allowing its PDMCs to meet their safety oversight obligations and improve their oversight capabilities through technical and institutional cooperation.

26 Appendix 4

INSTITUTIONAL ANALYSIS A. Required and Current Status of Oversight 1. The international standards of competence and compliance applied to a safety oversight system are based on the Convention on International Civil Aviation (the Chicago Convention), which assigns responsibility to the International Civil Aviation Organization (ICAO) to organize and publish standards and recommended practices (SARPs) in the form of annexes and supporting documentation. ICAO has developed and maintains 18 annexes covering all aspects of civil aviation safety oversight, supported by related publications. 2. The uniform application of ICAO SARPs by ICAO members is necessary for safe and efficient international air operations. All ICAO members, as signatories to the Chicago Convention, are obligated to secure the highest practical degree of uniformity in regulations, standards, and procedures; ensure their effective implementation; and notify ICAO of any differences between their national regulations or practices and ICAO SARPs. From a safety oversight perspective, an ICAO member’s responsibilities under the Convention include:

(i) airports and navigation aids; (ii) aviation security; (iii) certification of aircraft, air operators, and maintenance organizations; (iv) registration of its aircraft for the purpose of ensuring airworthiness; (v) issuance of an air operator certificate (AOC) to control and supervise the

operationally related activities of each aircraft operator in the state; (vi) licensing, control, and supervision of personnel, certified products, and approved

organizations; (vii) ensuring adequacy of the air operator’s ability to provide safe and efficient

operations prior to the initiation of international flight operations; (viii) ensuring that the operator can conduct operations with respect to the original

certification criteria on a continuing basis; and (ix) taking timely and necessary actions to resolve safety issues relating to meeting

the national civil aviation law and regulations. 3. ICAO defines eight critical elements of a safety oversight system that must be considered by every country:

(i) primary aviation law: consistent with the environment and complexity of the aviation industry;

(ii) specific operating regulations: adequate to address at least the convention and annex standards;

(iii) CAA structure and safety oversight functions: adequate resources and technical supervisory and support personnel;

(iv) technical guidance: sufficient for technical and support personnel to perform their functions in a standardized manner;

(v) qualified technical personnel to inspect the aviation activities to the level of complexity required;

(vi) licensing and certification obligations: processes that the aviation community must complete before initiating the tasks and operations associated with the level of certificate issued;

Appendix 4 27

(vii) continued surveillance obligations: processes to ensure that the aviation industry functions at minimum levels of competency and safety; and

(viii) resolution of safety issues: processes and methodologies to resolve safety issues, including the ability to penalize individuals or operators and to suspend or revoke their authority.

4. These elements of a safety oversight system are required to ensure that the country’s regulatory system is appropriate to the complexity of its aviation industry. However, all the PASO PDMCs, with the exception of the Fiji Islands and to a lesser degree Papua New Guinea, are unable to fully meet all of their safety oversight obligations under the Chicago Convention in accordance with ICAO SARPs. 5. As a result, all but one PASO PDMC has received unsatisfactory results from the ICAO-mandated universal safety oversight audit program (USOAP) during initial and follow-up audits. Common deficiencies in the eight critical elements include the following:

(i) Primary aviation legislation in most countries is seriously noncompliant with ICAO SARPs. Common deficiencies include the lack of provision to establish a CAA, a lack of authority to promulgate aviation regulations, and lack of process to update the civil aviation law to meet ICAO requirements.

(ii) Specific operating regulations across the region generally need substantial improvement. Even members that have adopted regulations from a competent source have not fully developed them. Typically, there are neither systems of orders, directives, and instructions to establish policies and procedures for a national safety oversight system, nor systems to create new or amend existing regulations. As a result, most regulations do not address all ICAO SARPs.

(iii) CAA safety oversight functions and continuing surveillance obligations are hindered, and most of the region's CAAs are unable to fulfill their safety oversight responsibilities because they lack adequate government budgetary support. This contributes directly to poor facilities and an inability to recruit and retain technical staff. Several CAAs are headed by staff members with no formal training in aviation, a problem compounded by a lack of technical training programs.

(iv) Technical guidance systems and materials are underdeveloped and incomplete. Several countries have no inspector handbooks, policies, orders, or directives, and some CAAs have not established a flight operation inspectorate system supported by regulations and procedures so that its own technical personnel can supervise air transport operations.

(v) Qualified technical personnel are in short supply, many of the technical staff positions are vacant, and few CAA personnel assigned to flight operations are pilots. The aggregate personnel numbers (Table A3.1) do not account for expertise. Expatriate technical personnel are generally more highly qualified than nationals but are in the minority. Consequently, little oversight is undertaken by most CAAs, and airlines are effectively self-regulating.

(vi) Licensing and certification obligations need improvement. Some countries have no regulatory requirements or procedures to issue an air operator’s certificate (AOC) and related operations specifications. These functions are typically outsourced ad hoc.

6. Similar results are expected with the new requirements for security audits, which entered into force in January 2005, under the ICAO-mandated Universal Security Oversight Audit Program.

28 Appendix 4

D. National Legislative and Regulatory Frameworks 7. National legislation is often outdated and inadequate for a modern regulatory system, and related operating regulations across the region generally need substantial improvement. A summary of the status of national frameworks is in Table A4.

Table A4: Summary of National Legislative and Regulatory Capabilities Fiji Islands The civil aviation law, with minor exceptions, appears to meet ICAO requirements. With minor exceptions, the CAA seems fully capable of exercising its international obligations. Kiribati The civil aviation law, enacted in 1949 and not amended since colonial times, is grossly outdated. The country has no safety oversight capability. Papua New Guinea The civil aviation law, with minor exceptions, appears to meet ICAO requirements. Regulations are in transition, but the support contract to revise the regulations has been suspended due to funding constraints. Air New Guinea conducts ETOPS operations but has no qualified operations inspector for competent inspection or surveillance of these operations. Samoa The CAA has some in-house safety oversight capability but contracts with the New Zealand CAA for most of its technical oversight obligations and could not stand alone from a technical oversight perspective. Solomon Islands The civil aviation law is outdated as it has not been revised in almost a decade, has not been amended to incorporate industry practices or ICAO SARPs. The country has no safety oversight capability. Vanuatu The civil aviation law does not meet many ICAO requirements and needs revision and updating. The CAA claims to be using the New Zealand regulations but the law does not reflect their adoption. The CAA has one airworthiness inspector and contracts an operations inspector for a period of 2 weeks per year, but this is inadequate for national operations. CAA= civil aviation authority, ICAO = International Civil Aviation Organization, ETOPS = extended range twin engine operations, SARPs = standards and recommended practices. Sources: ADB. 2004. Regional Civil Aviation Safety and Security. Manila (TA 6119-REG); Asian Development Bank estimates. D. Implications for Required Activities 8. In all cases, an attorney with international civil aviation experience should thoroughly review each country's civil aviation law. The character and nature of the international civil aviation industry has changed markedly in recent years, and many important ICAO oversight requirements and SARPs have evolved significantly but have not been reflected in national laws and regulations. 9. Standardization of the regulatory environment will significantly improve the ability of PASO to develop, implement, and maintain compliance with regulatory systems and international standards. Outline terms of reference for the technical assistance to accomplish this reform are in Appendix 11.

Appendix 5 29

EXTERNAL ASSISTANCE FOR REGIONAL AVIATION SAFETY AND SECURITY

Funding Source

Project Title Amount ($’000)

Year Activity

Grant Loan Australia Budgetary support to PASO 100 0 2004 Support for operational

expenses Australia Budgetary support to PASO 100 0 1999 Support for operational

expenses European Commission

Pacific Regional Civil Aviation Communications Project

3,500 0 1998 Provision of communications and security equipment, training

PASO = Pacific Aviation Safety Office. Sources: ADB. 2004. Regional Civil Aviation Safety and Security. Manila (TA 6119-REG); Asian Development Bank estimates.

30 Appendix 6

COST ESTIMATES ($’000)

Foreign Local Total Item Exchange Currency Cost Base Costs A. Institutional Development and Strengthening 1. Harmonized regulatory environment a. Legislative review and recommendations 61 30 91 b. National implementation of recommendations 61 30 91 c. PASO briefings and training 123 60 183 Subtotal (1) 245 120 365 2. Ensure airline compliance a. Recertification audits 245 120 365 Subtotal (2) 245 120 365 3. Regional surveillance and inspection system a. Design and implementation of MRAIa 491 241 732 b. Preparation of technical guidance material 124 59 183 c. Documentation and issues resolution system 124 59 183 Subtotal (3) 739 359 1,098 Subtotal (A) 1,229 599 1,828 B. Civil Works and Equipment 4. Completed Office Accommodation a. Office equipment 12 12 24 b. Renovations 0 25 25 Subtotal (B) 12 37 49 Base Costsb 1,241 636 1,877 5. Contingenciesc 124 64 188 6. Financial Chargesd 35 0 35 Total 1,400 700 2,100

a Minimum required annual inspections. b There are no taxes or duties since PASO is tax exempt. c Contingencies at 10% to include physical contingencies and local and foreign price escalation. d Interest during implementation will be capitalized. Source: Asian Development Bank estimates.

Appendix 7 31

INDICATIVE PROCUREMENT PACKAGES ($’000)

Item Mode Packages Number Financed

Total Value by ADB

A. Minor civil works LCB 25 1 50%

B. Office equipment DP 24 1 50%

ADB = Asian Development Bank Source: Asian Development Bank estimates.

32 Appendix 8

SUMMARY ECONOMIC AND FINANCIAL ANALYSES 1. Most Pacific Aviation Safety Office (PASO) Pacific developing member countries (PDMCs) are unable to meet their audit and oversight responsibilities given their resources, which must be improved to reach minimum ICAO standards. Starting from existing costs of oversight (which are known to provide inadequate services), the economic and financial analyses compare the costs of audit and oversight functions if they were to be upgraded to an acceptable level through expansion of existing arrangements versus expected costs to obtain acceptable oversight provided through PASO. A. Current Costs of Oversight 2. A summary of the available data on overall costs of airworthiness and flight operations oversight in PASO PDMCs is in Table A8.1. Countries with existing staff provided data only on directly attributable costs (primarily personnel). Those countries that rely on contracted assistance provided data that includes travel and overhead.

Table A8.1: Summary of Current Annual Costs of Existing Oversight ($’000)

Fiji

Islandsa Kiribatib PNGc SamoadSolomon Islandse

Vanuatuf

Totalg

Airworthiness (AW) 318 9 255 — 0 100 682 Flight Operations (FO) 170 0 542 — 0 13 725 Combined (AW + FO) — — — 25 — — 25 Personnel Licensing — — 95 — — — 95 Total 488 9 892 25 0 113 1,527

“— “ = not applicable, PNG = Papua New Guinea. a Based on existing staff, with estimated compensation of $35,000 per year for national airworthiness inspectors, and $35,000 to $70,000 for expatriate flight operations inspectors. b Based on contracted assistance, though no flight operations oversight is provided. Substantial one-time expenses for the acquisition and subsequent disposal of an ATR-72 in 2003–2004 were paid by Air Kiribati and are not included. c Based on existing staff; with estimated compensation of $95,000 for expatriate managers, $27,000 per year for national inspectors, and $77,000 for expatriate flight operations inspectors. d Based on contracted assistance. Substantial one-time expenses for recertification of the airline in 2003 not included. e Based on past contracted assistance, though no oversight of any kind is currently provided. f Based on contracted assistance and existing staff. g Costs include travel, per diem, and overhead for contracted services where such costs are charged directly to the client state. For other countries, cost estimates generally are for personnel only. Source: Asian Development Bank estimates from aviation authority and airline data.

3. Although Table A8.1 provides a baseline estimate of expenditures in PASO PDMCs, unavailable or inconsistent data means that the with- and without-project scenarios cannot be easily compared because the baseline (i) includes expenditures in the Fiji Islands that will not change because the country is self-sufficient; (ii) includes substantial expenditures in Papua New Guinea related to a large number of light aircraft, which will not change because the country intends to retain oversight capacity for the fleet; (iii) omits sizable expenditure requirements on personnel licensing and oversight of aerodromes and security, which are not accounted for by any PDMC; and (iv) omits overheads for most countries. These estimates are, therefore, the lower bounds of expenditure for inadequate oversight and regulation in all cases except the Fiji Islands and Papua New Guinea.

Appendix 8 33

B. Projected Cost of Required Oversight Under Existing Arrangements 4. With the exception of the Fiji Islands, oversight is inadequate in all other PASO PDMCs, as they do not fully meet all required ICAO SARPs through institutionalized safety systems approaches. Airline recertification, creation of technical guidance material, establishment of a database to resolve safety issues, and legal assistance are all required to return the PDMCs to a minimum acceptable baseline. Providing acceptable oversight by expanding existing arrangements would mean that countries would forego cost savings to their airlines inherent in a harmonized operating environment, as well as some of the advantages of joint administrative support. 5. Annual costs of required oversight are based on a minimum required annual inspection (MRAI) program that would increase oversight to adequate levels through additional inspections in all disciplines, and provide administrative backup to the individual CAAs that is not currently available through existing contract arrangements. Since the Fiji Islands intends to remain self-sufficient, it does not require significant additional services under any future scenario and has, therefore, been removed from the comparison.1 A summary of annual costs using expanded contracts under existing arrangements is in Table A8.2 below.2

Table A8.2: Summary of Projected Annual Costs of Required Oversight Under Expansion of Existing Arrangements

($’000)

Activitya Kiribatib PNGc SamoadSolomon Islandse

Vanuatuf

Totalg

Airworthiness 56 58 49 43 78 285 Flight Operations 71 77 62 54 97 362 Security 32 32 32 32 32 160 Aerodromes 22 22 22 22 22 108 Total 181 189 166 151 228 915 PNG = Papua New Guinea. a Includes validation of personnel licensing in each discipline. b Based on current United Kingdom Civil Aviation Authority (UKCAA) contract rates. c Based on existing Civil Aviation Authority (CAA) national and expatriate staff costs. d Based on current CAA of New Zealand contract rates. e Based on current UKCAA contract rates. f Based on existing CAA expatriate staff costs and contracted assistance from the Civil Aviation Safety Authority of Australia. g Costs include travel, per diem, and overhead for contracted services. Source: Asian Development Bank estimates from aviation authority and airline data.

C. Projected Cost of Required Oversight Under PASO 6. Projected costs to provide oversight through PASO comprise four elements: personnel costs, travel, overheads, and office accommodation. PASO professional staff will include a general manager (also qualified in a technical discipline) and one inspector each for airworthiness and avionics, flight operations, and security. Aerodrome inspection can be split between the security and flight operation inspectors, as well as some services from the general manager, with cross-training. Professional staff costs have been estimated using international

1 The Fiji Islands does expect to contract with PASO for occasional technical services, primarily on an as-needed

basis when its capacity experiences temporary shortfalls, so it remains a member of the organization. 2 This summary is for the steady-state case expected in project year 5 onward. See section F below for details.

34 Appendix 8

rates, which are generally above regional market rates, to ensure that PASO attracts and retains qualified personnel and establishes its international credibility. There are no costs for domestic administrative staff as the Government of Vanuatu provides two people. 7. Accommodation costs include renovations and standard office and communications equipment. There are no costs for rent as the Government of Vanuatu provides office space as in-kind support. Travel costs are significantly lower than those under scenarios that rely on expanding existing contracting arrangements since the greatest demand for inspections is in Vanuatu. 8. Total costs, which are detailed by project component in Appendix 6, have been allocated by activity and country according to the estimated MRAI schedule. These costs will be used to set service fees on a full cost-recovery basis. A summary of costs to each PASO PDMC for services is in Table A8.3.

Table A8.3: Summary of Projected Annual Costs of Required Oversight Under PASO ($’000)

Activitya Kiribati PNG Samoa Solomon Islands

Vanuatu

Totalb

Airworthiness 46 48 41 36 74 245 Flight operations 59 64 52 45 95 315 Security 27 27 27 27 27 135 Aerodromes 18 18 18 18 18 90 Total 150 157 138 126 214 785 PNG = Papua New Guinea. a Includes personnel licensing in each discipline. b Costs include travel, per diem and overhead for contracted services. Source: Asian Development Bank estimates from aviation authority and airline data.

D. Economic Analysis 9. The economic evaluation was carried out for without- and with-project scenarios. Without the Project, safety oversight would be provided by expanding existing contracting arrangements (section B). With the Project, safety oversight would be provided through PASO (section C). In both scenarios, the annual net economic benefits are the difference between the financial costs of providing services, without any adjustment, since in all cases the inputs (technical assistance versus expatriate labor, plus travel) are traded and the analysis uses border prices as numeraire. Table A8.4 shows the flow of benefits over the 20-year project period and the resulting net present value and economic internal rate of return.

Appendix 8 35

Table A8.4: Summary of Economic Analysis

($’000)

Year Without Project: Oversight by

Contract

With Project: Oversight by PASO

Net Benefits

1 686 1,039 (353) 2 686 589 97 3 686 589 97 4 686 589 97 5 686 589 97 6 915 785 130 7 915 785 130 8 915 785 130 9 915 785 130 10 915 785 130 11 915 785 130 12 915 785 130 13 915 785 130 14 915 785 130 15 915 785 130 16 915 785 130 17 915 785 130 18 915 785 130 19 915 785 130 20 915 785 130

NPV at 10% 573 EIRR 30%

EIRR = economic internal rate of return, NPV = net present value, PASO = Pacific Aviation Safety Office. Source: Asian Development Bank estimates. E. Comparison of Alternatives 10. Regionally, PASO provides the most cost-effective way to improve safety and security regulation and oversight in its PDMCs. Nationally, PASO offers the same cost-effectiveness in all its members requiring services, except for Papua New Guinea, which has national and expatriate inspectors. In aggregate, these costs savings are equivalent to 14% per year, with a net present value of approximately $573,000 and an economic internal rate of return of 30% over the 20-year planning period. 11. Besides providing the minimum required oversight, PASO is expected to offer services that are qualitatively better than ad hoc contracting, since it will be a regionally controlled international organization dedicated to the needs of its members. PASO will result in harmonization that reduces compliance costs of airlines, and standardized record keeping that improves international compliance of governments. PASO will provide national CAAs with administrative backup that is not available through current contracting arrangements. These qualitative advantages are not captured in the financial and economic estimates, so the analytical results should be understood as a lower bound on the total benefits of the Project.

36 Appendix 8

F. Financing Plan 12. PASO will generate revenues though service fees paid by the aviation industry, as is the current practice. Since only four PASO members will become guarantors, while the others will be charged a premium of 10% above basic cost-recovery level in lieu of a capital contribution. This premium will also apply to nonmembers that contract PASO services. 13. Solomon Islands’ needs for safety oversight are in transition so the country will not draw on the full range of PASO services for the first several years. Since it will not require oversight of international airline operations for the next few years, but will require oversight of security and aerodromes, estimated PASO revenues have been reduced by 25% for the first 5 years. This situation is expected to be resolved well within the 5-year project period. 14. The time lag between the start of operations and revenue generation, the need to finance inception activities, and the temporarily reduced participation of Solomon Islands mean that upfront finance is required to achieve eventual self-sufficiency. Under these conditions, a loan of $1.5 million will be adequate to finance the startup costs and transition to self-sufficiency. The balance of the financial requirements will be met through revenues generated from services provided to airlines and airport operators in PASO PDMCs. The financing plan is shown in Table A8.5.

Table A8.5: Financing Plan ($’000)

Sources

Foreign Exchange

Local Currency Total Cost Percentage

Asian Development Bank Loan 1,400 100 1,500 71Government Counterpart Funds 0 600 600 29Total Cost to be Financed 1,400 700 2,100 100

Source: Asian Development Bank estimates.

Appendix 9 37

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis

Is the sector identified as a national priority in country poverty analysis?

Yes No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes No

Contribution of the sector or subsector to reduce poverty in Fiji Islands, Kiribati, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu: Aviation safety and security are linked to poverty reduction through international tourism, which contributes an average of 20% of GDP in PDMCs. Experience elsewhere shows that a negative incident (such as a major security problem or an airplane crash) can reduce tourism by as much as 10% for up to 4 years. Such an impact on the PDMC would translate to a 2% drop in national GDP and a much larger drop in tourism earnings and employment. Since tourism employs large numbers of semiskilled and unskilled people, many of whom are women, such a negative impact would disproportionately harm poor people.

B. Poverty Analysis Targeting Classification:

What type of poverty analysis is needed? None anticipated

General intervention

C. Participation Process

Is there a stakeholder analysis? Yes No Is there a participation strategy? Yes No D. Gender Development Strategy to maximize impacts on women: No specific strategy has been prepared. Since women make up most tourism employees, the Project will safeguard their interests by ensuring uninterrupted air transport. Has an output been prepared? Yes No

38 Appendix 9

E. Social Safeguards and Other Social Risks Item

Significant/

Not Significant/ None

Strategy to Address Issues

Plan Required

Resettlement

Significant

Not significant

None

No resettlement will be required.

Full

Short

None Affordability

Significant

Not significant

None

Since the Project will lower air transport sector costs, it will have small but positive impacts on air transport prices.

Yes

No

Labor

Significant

Not significant

None

There are no labor issues, since the Project will replace activities that are currently contracted from providers from outside the members.

Yes

No

Indigenous Peoples

Significant

Not significant

None

There are no impacts on indigenous peoples.

Yes

No

Other Risks and/or Vulnerabilities

Significant

Not significant

None

There are no other impacts that would trigger safeguard policies.

Yes

No

Appendix 10 39

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q QProject Activity 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4ADB Loan Milestones Loan effectiveness date Project completion date

Component A: Harmonized Regulatory Environment Review and revision of legislation and regulations Adoption of updated national systems Training and capacity building

Component B: Airline Compliance Certifications Conduct certification audits Recommendations for recertification

Component C: Regional Surveillance System Design inspection plans Create documentation system Implement inspection and surveillance

Component D: Office Refurbishment Minor civil works Equipment procurementQ1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q = fourth quarter.Source: Asian Development Bank estimates.

PROJECT IMPLEMENTATION SCHEDULE

2009 20102005 2006 2007 2008

40 Appendix 11

TECHNICAL ASSISTANCE FOR AVIATION LEGISLATIVE AND REGULATORY REVIEW

A. Justification 1. A harmonized operating environment will produce benefits broader than those accruing to Pacific Aviation Safety Office (PASO) members only, particularly for travelers and airlines of major countries serving the Pacific region. Because of the positive externalities involved, it is appropriate to supplement project activities through external technical assistance (TA). In conjunction with the Project, TA is required to supplement the technical capacity of PASO staff for one-time activities to support the inspections and systems design.

B. Scope of Work 2. The overall goal of consulting services is to establish a consistent safety and security oversight framework for all PASO members to enable organizational efficiency and effectiveness. TA will be provided to PASO staff, the PASO Council of Directors, and national civil aviation administrations to provide legal and regulatory advice, provide technical support for airlines recertification audits, and develop information systems.

C. Estimated Costs and Financing 3. The total TA amount is $550,000, of which the Cooperation Fund for Regional Transportation and Financial Security Initiative (a multi-donor umbrella facility funded by the governments of Australia, Japan, and United States) will finance $450,000 on a grant basis to be administered by the Asian Development Bank (ADB). PASO and its members will provide the remainder in kind. 4. Twelve person-months of international and six person-months of domestic consulting services will be required. The recruitment of a firm to provide all required services, using the quality- and cost-based selection process and simplified technical proposals, will be preferred. However, recruitment of individuals may be allowed for services in highly specialized technical areas where no firm proposes providing the full breadth of services required. Consulting services will be recruited in accordance with ADB’s Guidelines on the Use of Consultants, and other arrangements satisfactory to ADB on the engagement of domestic consultants.

D. Implementation Arrangements 5. The Executing Agency for the TA will be PASO, which will be responsible for project implementation and coordination across national government agencies. The general manager of PASO will serve as the TA coordinator. The PASO Council of Directors will serve as the project steering committee. E. Terms of Reference for Consultants 6. An aviation legal specialist (international, 4 person-months) is required to establish the legal and regulatory basis for harmonization in each PASO Pacific developing member country (PDMC). Required expertise includes thorough familiarity with the International Civil Aviation Organization (ICAO) and New Zealand standards and recommended practices, demonstrated ability to analyze national and international legal frameworks, legal drafting experience, and experience in these fields in PDMCs. This TA component will review national legislation and regulations, identify deficiencies and inconsistencies, and recommend revisions so that each

Appendix 11 41

country is compliant with international requirements and able to adopt the New Zealand rules and regulations. Specific tasks include the following:

(i) Review national civil aviation laws and regulations for completeness, currency, and compliance with the Chicago Convention and its annexes, and ICAO standards and recommended practices (SARPs).

(ii) Determine whether national laws and regulations facilitate the regulation of personnel, airworthiness, flight operations, aerodromes, and security.

(iii) Determine whether national laws and regulations provide for the establishment of a civil aviation administration (CAA), and for delegation of CAA safety and security inspection and certification functions to PASO.

(iv) Recommend revisions, including draft text where required, to bring laws and regulations into compliance with ICAO requirements.

(v) Draft standardized text for inclusion in national laws and regulations to obligate national CAAs to adopt PASO recommendations unless there are sound technical reasons to modify or reject them.

(vi) Draft standardized text for inclusion in national laws and regulations to facilitate the adoption and modification of the New Zealand civil aviation rules and regulations.

(vii) Draft standardized text for inclusion in national laws and regulations to facilitate adoption of the Pacific Islands Civil Aviation Safety and Security Treaty and enable recognition of PASO as an authorized provider of regulatory and oversight services.

(viii) Prepare a final report to PASO management that documents all findings and recommendations.

7. An airworthiness inspector and a flight operations inspector (international, 4 person-months each) are required to provide technical support for compliance audits for all commercial air transport operators covered by PASO. Required expertise includes thorough familiarity with ICAO and New Zealand standards and recommended practices, current internationally recognized qualifications appropriate to the types of aircraft and operations to be inspected, previous experience conducting independent certification audits, demonstrated ability to report findings and recommendations in internationally accepted formats, and experience in these fields in PDMCs. The scope of work for this component is to provide technical support to PASO staff in conducting audits and to recommend certifications of airline compliance with national, international, and New Zealand requirements. Specific tasks, common to the airworthiness inspector and the flight operations inspector, include the following:

(i) Help PASO staff audit aircraft and airline certification using ICAO SARPs in combination with PASO procedures and technical guidance.

(ii) Recommend a standardized compliance and enforcement document based on the chosen regulatory system developed under component A.

(iii) Recommend record-keeping procedures and document audit findings in flight operations and airworthiness.

(iv) Help PASO staff recommend to national CAAs ways to recertify or validate existing air operator certificates.

(v) Prepare a final report to PASO management documenting all findings and recommendations.

8. An information systems specialist (domestic, 6 person-months) is required to develop and provide access to a comprehensive record-keeping system. Required expertise includes demonstrated ability for database and secure website development using standard personal computer hardware and software, demonstrated ability to prepare system documentation and user guides for nontechnical users, and experience in these fields in PDMCs. This component

42 Appendix 11

will create an electronic database system for recording, archiving, and reporting of inspection, surveillance, and certification activities, and to make secure access available to PASO members over the internet. Specific tasks include the following:

(i) Research the availability of existing electronic database systems that are either designed for civil aviation oversight or are readily adaptable for it, and recommend the acquisition of suitable software.

(ii) Install and modify the software as required for compatibility with PASO systems, ensuring that the systems are flexible and can be modified as the organization grows and inspection requirements evolve.

(iii) Develop systems for secure internet access to the database by PASO members via standard personal computers and internet-browsing software over dialup connections.

(iv) Prepare systems documentation for maintenance and future modifications of the software.

(v) Prepare a user manual and train PASO staff members in the population and maintenance of the database so they can support users in members.

F. Reports 9. Each consultant will submit the following reports in English to ADB for distribution (nine copies for distribution to PASO and member governments, and three for ADB):

(i) Inception report, within 4 weeks of the start of the TA. In accordance with the terms of reference (TOR), it will outline the consultants’ approach, methodology, and work plan, as well as cost implications for consulting services. The report will provide a clear bar chart of all activities under the TA and recommend changes to the implementation arrangements. It will also identify issues and decision-making requirements, if any, to facilitate TA progress.

(ii) Midterm progress report, halfway through TA implementation. The report will use the same format as the final report and will summarize recommendations and concepts being developed under the TOR. It will provide a detailed background to the TA and identify issues and decision-making requirements, if any, to facilitate progress.

(iii) Draft final report, on completion of the TA. It will provide (a) summary of the TA activities; (b) documentation of all data, analyses, and recommendations developed under the TOR; (c) stakeholder assessments; (d) assessment of the effectiveness of the TA activities; and (e) conclusions.

(iv) Final report, 1 month after receipt of the comments on the draft final report from the government and ADB.

10. The aviation legal specialist will submit a final report following the outline below, subject to revisions agreed to by the consultants and ADB during the course of the TA.

(i) Introduction. Outline the objectives and general methodology used. (ii) Background. Describe the broad national and international contexts, summarize

existing legal and regulatory frameworks, and describe how specific national factors affect the review’s objectives.

(iii) Findings. Describe in detail the changes required to update national legislation and regulations, in order to adopt the New Zealand civil aviation rules and regulations for aviation safety and security regulation and oversight. Provide drafting instructions to revise specific legislation.

(iv) Appendixes. Provide copies of all relevant legal documents in supplementary appendixes, and all reports and data in electronic form.

Appendix 11 43

11. The airworthiness inspector and flight operations inspector will each submit a final report following the outline below, subject to revisions agreed to by the consultants and ADB during the course of the TA.

(i) Introduction. Outline the objectives and general methodology used (ii) Methodology and key objectives. Provide a standardized compliance and

enforcement document with full explanatory text. (iii) Findings. Describe in detail the audit results in each respective technical

discipline for each airline audited. (iv) Recommendations. Prepare a concise report for PASO to use in

communicating its recommendation to each national civil aviation authority for airline certification.

(v) Appendixes. Present all data in summary form. Provide full quantitative and qualitative databases in supplementary appendixes, and all reports and data in electronic form.

12. The information systems specialist will prepare a systems operations manual documenting the design, operation, and maintenance of the database system, including all software.

44 Appendix 11

Table A11.1 Technical Assistance Design and Monitoring Framework

Design Summary

Performance Indicators/Targets

Monitoring Mechanisms Assumptions and Risks

Impact Aviation safety and security regulatory frameworks are harmonized in all PASO PDMCs, lowering costs and improving compliance

National aviation

legislation fully consistent with New Zealand standards and recommended practices by the end of 2009

Safety and security

oversight procedures revised and/or implemented by PASO by the end of 2009

ICAO summary audit

reports PASO national audit

reports

Outcome National aviation legislation and regulations are revised and used as the basis for recertification of airlines in PASO PDMCs

National legislation

revised and adopted by the end of 2007

Airline operators

certificates reviewed and revalidated by the end of 2007

PASO minimum

required annual inspection plans for each member

PASO airline

certification audit reports

Government cooperation

with legal drafting and passage of legal amendments

Airline cooperation with

recertification audits

Outputs 1. Recommendations for revisions to national aviation laws and regulations

Final report documenting legal review, including drafting instructions by the end of 2006

TA review missions Tripartite meetings and

project reports TA completion report

Sufficient domestic expertise for national implementation of recommendations

2. Recommendations for recertification of airlines

Issuance or renewal of air operator certificates in accordance with regulations by 2006

National aircraft registries

TA review missions

Airline can adapt to a new regime of safety and security management systems without undue delay

3. Completed database design and software installation

Secure internet accessibility of documentation systems by 2006

TA review missions Tripartite meetings and

project reports TA completion report

Governments and airlines cooperate with data collection requirements

Appendix 11 45

Activities with Milestones Inputs 1 Legislative review and recommendations Start: First quarter 2006 Complete: Fourth quarter 2006 2 Recertification audits Start: Second quarter 2006 Complete: Fourth quarter 2006 3 Creation of a documentation and issue resolution system Start: First quarter 2006 Complete: Fourth quarter 2006

TA grant of $450,000 from the Cooperation Fund for Regional Transportation and Financial Security Initiative, administered by ADB

PASO member

governments’ counterpart contributions for TA, total $100,000

Members participate on

Council of Directors and support TA activities (1 person-month per year per country)

ADB = Asian Development Bank, ICAO = International Civil Aviation Organization, PASO = Pacific Aviation Safety Office, PDMC = Pacific developing member country, TA = technical assistance.

46 Appendix 11

Table A11.2 Technical Assistance Cost Estimates and Financing Plan ($’000)

Foreign Local Total Item Exchange Currency Cost A. Cooperation Fund for Regional Transportation

and Financial Security Initiativea

1. Consultants a. Remuneration and Per Diem i. International 300.0 0.0 300.0 ii. Domestic 0.0 60.0 60.0 b. Travel i. International 40.0 0.0 40.0 ii. Domestic 0.0 5.0 5.0 2. Reports and Communications 0.0 5.0 5.0 3. Training, Seminars, and Conferences 0.0 10.0 10.0 4. Miscellaneous Administration and Support Costs 0.0 5.0 5.0 5. Contingencies 20.0 5.0 25.0 Subtotal (A) 360.0 90.0 450.0 B. Government Financingb 1. Office Accommodation 0.0 25.0 25.0 2. Counterpart Staff and Support Services 0.0 50.0 50.0 3. Training, Seminars, and Conferences 0.0 10.0 10.0 4. Local Transport 0.0 5.0 5.0 5. Miscellaneous Administration and Support Costs 0.0 10.0 10.0 Subtotal (B) 0.0 100.0 100.0 Total 360.0 190.0 550.0 a Funded by the governments of Australia, Japan, and United States, and administered by the Asian Development Bank (ADB). b Financed by the governments of Fiji Islands, Kiribati, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu. Source: Asian Development Bank estimates.