Introduction

Airservices Australia is a Commonwealth statutory authority established by the Air Services Act 1995 (Air Services Act). Airservices Australia's legislated functions include airspace management, air traffic flow management, air traffic control services, flight information and aviation rescue and fire fighting services. Its airspace management role is carried out in accordance with the Convention on International Civil Aviation (Chicago Convention), to which Australia is a contracting state.¹

The world's airspace is divided into a series of contiguous Flight Information Regions (FIRs) within which air traffic services are provided. Australia has two FIRs, which collectively cover more than 11 per cent of the globe. In this respect, the Melbourne and Brisbane FIRs include Australia's sovereign airspace as well as international airspace over the Pacific, Indian and Southern Oceans.²

In addition to airspace allocated to Australia under the Chicago Convention, Airservices Australia has entered into contracts with the relevant governments to manage the upper airspace in the Honiara and Nauru FIRs (see Figure 1). These contracts were entered into as part of an Airservices Australia strategy to be the major provider of air space management and related services in the southern hemisphere. The Honiara and Nauru FIRs do not involve high traffic levels and the amount of revenue earned under the contracts represents less than two per cent of Airservices Australia's total commercial revenue.

The upper airspace management contracts with the Solomon Islands Government

There have been two upper airspace management contracts between Airservices Australia and the Solomon Islands Government. The first was made on 27 April 1998. It ran for five years, commencing on 1 June 1998. A second contract was made on 21 May 2003, to run for a further ten years. The terms of the second contract were substantially the same as the 1998 contract.

The upper airspace management contracts have involved Airservices Australia providing two distinct but related services:

• management of the Honiara upper airspace; and
• collection agent³ in relation to statutory air navigation fees collected from airlines using the Honiara upper airspace, and the remittance of those fees to the Solomon Islands Government.

In relation to this second role, the upper airspace management contracts have provided for air navigation fee revenue of the Solomon Islands Government, collected on its behalf by Airservices Australia, to be remitted to a specified Solomon Islands Government bank account. The contracts required that this revenue be remitted once a month, after Airservices Australia had deducted its monthly contract fee. The contracts also permitted Airservices Australia to retain any amounts due to it under other contracts with the Solomon Islands Government for civil aviation development projects.

Shortly after the first contract commenced on 1 June 1998, Solomon Islands Government Ministers and officials began to make requests to Airservices Australia for payments of air navigation fee revenue to third parties. The contracts did not provide for these payments to be made. Requests were received from the relevant Solomon Islands Government Minister, the Permanent Secretary of the relevant Department and the Controller of Civil Aviation (the representative of the Solomon Islands Government nominated in the contract).

The majority of the payments made by Airservices Australia outside the terms of the contracts were to third parties, and totalled some $2.1 million. In addition, Airservices Australia corporate credit cards were used to provide cash advances to individuals (mainly Solomon Islands Government Ministers and officials) and make payments to third parties, with Airservices Australia reimbursing itself from the air navigation fee revenue it was holding on behalf of the Solomon Islands Government. Funds were also remitted to Solomon Islands Government bank accounts other than the one specified in the upper airspace management contract then in force.

Minister's request for an ANAO audit

On 5 May 2006, the then Minister for Transport and Regional Services, the Hon Warren Truss MP, wrote to the Auditor-General requesting that consideration be given to undertaking a performance audit of the administration by Airservices Australia of its contracts with the Solomon Islands Government for upper airspace management.

The Minister's request arose from a review of civil aviation by the Solomon Islands Auditor-General, including the upper airspace management contracts with Airservices Australia. This review had identified irregularities in the administration of air navigation fee revenue collected by Airservices Australia on behalf of the Solomon Islands Government.

The Solomon Islands Auditor-General tabled his report in the Solomon Islands Parliament in October 2006.

Audit objectives

On 9 May 2006, the Auditor-General advised the then Minister for Transport and Regional Services that he would undertake a performance audit and that the specific audit objectives and approach would be established once officers of the Australian National Audit Office (ANAO) had the opportunity to undertake preliminary enquiries with senior staff in Airservices Australia and the Department of Transport and Regional Services (DOTARS).

On 31 May 2006, the Auditor-General designated a performance audit under Section 18 of the Auditor-General Act 1997 (Auditor-General Act). The objectives of the performance audit were to:

• examine the development and administration by Airservices Australia of its contracts with the Solomon Islands Government for upper airspace management;
• assess the regularity of payments made under the contracts and steps taken by Airservices Australia in respect of any irregularities; and
• make recommendations for any improvements in the processes employed by Airservices Australia in developing and administering these and similar contractual arrangements.

Overall audit conclusions

Airservices Australia's administration of the payment of air navigation fee revenue to the Solomon Islands Government departed significantly from the approach specified in the written contracts. Specifically, more than $2.1 million (20 per cent of all payments from the air navigation fee revenue) was paid outside the terms of the upper airspace management contracts. This amount comprised:⁴

• a total of 305 payments to third parties between February 1999 and September 2003 amounting to $2.10 million. The main categories comprised fees and expenses of an aviation adviser contracted to the Solomon Islands Government, education expenses for Solomon Islanders studying at academic institutions in a number of countries, and travel expenses; and
• a total of 17 cash advances and payments totalling $28 558 made using Airservices Australia corporate credit cards. This amount principally related to travel allowances and travel expenses.

Airservices Australia relied upon authorisation from Solomon Islands Government Ministers and officials as sufficient basis to depart from the terms of the written contract when making payments from the air navigation fee revenue. This was not only a departure from sound contract management practices but was not prudent given the number and variety of payment transactions. The manner in which these transactions were processed as deductions from air navigation fee revenue may also have contributed to any irregularities in the use of this revenue by Solomon Islands Government Ministers and/or officials.

Nevertheless, there was no evidence to indicate that payments had been made by Airservices Australia to secure or retain the upper airspace management contracts with the Solomon Islands Government. In addition, a separate investigation by the Australian Federal Police concluded there was no evidence to support a charge of criminal conduct contrary to Commonwealth law by any Airservices Australia employee.

In developing and administering the upper airspace management contracts with the Solomon Islands Government, Airservices Australia was principally concerned with managing its commercial interests and related risks. This commercial focus overshadowed Airservices Australia's broader responsibilities as a Commonwealth statutory authority incorporated by an Act of the Australian Parliament for a public purpose. In particular, Airservices Australia did not:

• Document an assessment of whether its enabling legislation permitted it to contract to administer airspace allocated to other countries.
  • Written legal advice obtained by DOTARS and Airservices Australia during the course of this audit has concluded that the legislation in place at the time the contracts were made provided sufficient authority for Airservices Australia to enter into the upper airspace contracts. However, the legal advices drew attention to differing views as to whether the Australian Government authorised Airservices Australia to enter into the contracts with the Solomon Islands Government and whether the Honiara FIR is “Australian-administered airspace” for the purposes of the Air Services Act. Airservices Australia advised ANAO in September 2006 that it accepts the advice obtained by DOTARS on this issue.
• Identify and assess the nature of the relationship established between itself and the Solomon Islands Government arising from the revenue collection and repatriation elements of the contracts. Specifically, the arrangements resulted in Airservices Australia becoming the contracted collection agent of the Solomon Islands Government.
  • Airservices Australia has not fully met its duty to exercise due care and diligence, avoid conflicts of interest and keep proper and full accounts of all transactions.
• Obtain an understanding of the requirements of the Solomon Islands Constitution governing the collection and remittance of Solomon Islands Government revenue.
  • Developing such an understanding was necessary for Airservices Australia to properly discharge its duties as the collection agent of the Solomon Islands Government.
  • Such an understanding would also have provided Airservices Australia with a sound basis on which to query or decline the various payment requests received, each of which was contrary to the provisions of the written contracts.
• Adequately investigate the nature of the payments being made when concerns were first raised (in June 2001).
  • In particular, a substantive evaluation by Airservices Australia of its administration of the contracts, and the payments being made, was not undertaken until July 2003.
  • Until two internal reviews were conducted in 2003, Airservices Australia had considered payments to third parties and the credit card transactions to be appropriate. Following discussions with the office of the then Minister, payments outside the terms of the contract were stopped in September 2003.
  • A reconciliation of all financial transactions was not undertaken until July 2005. This was as part of an internal audit that was initiated as a result of a June 2005 visit to Airservices Australia by the Office of the Solomon Islands Auditor-General.

For public sector entities, there may be tensions between the pursuit of strategies that promote commercial objectives and the obligations that arise from being established for a public purpose. The audit conclusions underline the potential for such tensions to give rise to risks that require prudent management. Appropriately managing such risks requires public sector entities to understand their authority to enter into contracts, and their obligations under those contracts, paying particular attention to significant or unusual transactions. Sound governance arrangements also involve effective mechanisms to guide officers in their conduct and to respond appropriately when concerns are raised.

Airservices Australia has advised ANAO that it has embarked on a widespread reform process with particular reference to the assessment and management of commercial activities. This includes a recent restructure of the organisation, building or rebuilding business systems and improving governance arrangements. It has also embarked on a leadership program for the management team which is aimed at changing the way decisions are made and implementing more effective behaviours and teamwork with a longer-term objective of changing the culture of the organisation. There is also a renewed emphasis on internal auditing reflected in a more extensive program of audits.

Key Findings - Legislative restrictions on Airservices Australia's commercial activities (Chapter 2)

As a statutory authority, Airservices Australia relies on the powers conferred on it by its enabling legislation in seeking to earn commercial revenue. The Air Services Act was amended in September 2003 to expand the scope of Airservices Australia's statutory functions so that it may pursue additional commercial opportunities overseas and in Australia. As the upper airspace contracts with the Solomon Islands Government were made in April 1998 and May 2003, these amendments did not apply to Airservices Australia's capacity to enter into either of these contracts.

In September 2006, Airservices Australia advised ANAO that, at the time the first contract was signed, it had satisfied itself that it had the legislative power under the Air Services Act to perform the services. However, any analysis underpinning this conclusion was not documented by Airservices Australia. Examination during ANAO's audit of general legal advice obtained by Airservices Australia in March 2002 on the authority's capacity to enter into commercial ventures raised issues about whether Airservices Australia was, in fact, empowered by the enabling legislation in place prior to the September 2003 amendments to enter into the upper airspace management contracts.

In addressing the issues raised by Airservices Australia's March 2002 legal advice, both Airservices Australia and DOTARS have, in the course of this performance audit, obtained legal advice that has concluded that Airservices Australia's enabling legislation (as it then was) empowered it to enter into the upper airspace management contracts with the Solomon Islands Government. However, DOTARS and Airservices Australia have received differing legal advice on whether or not:

• the Australian Government authorised Airservices Australia to enter into contracts such as the upper airspace management contracts with the Solomon Islands Government; and
• the Honiara FIR is “Australian-administered airspace” for the purposes of the Air Services Act.

Subsequently, DOTARS and Airservices Australia have reached a shared understanding that, as at the date of formation of the first contract in 1998, Airservices Australia was empowered to enter into the contract and it was therefore not necessary that Solomon Islands airspace become “Australian administered airspace”.

The nature of the contractual relationship with the Solomon Islands Government (Chapter 3)

At the time of entering into the upper airspace management contracts, Airservices Australia did not identify and assess the nature of the relationship established between itself and the Solomon Islands Government by the revenue collection and repatriation elements of the contracts. This shortcoming existed in two respects.

• Firstly, although Airservices Australia negotiated and signed a contract for it to collect statutory revenue of the Solomon Islands Government, it did not seek to identify the requirements and conditions that needed to be satisfied in remitting the air navigation fees to the Solomon Islands Government. Specifically, Airservices Australia did not appreciate that all air navigation fee revenue it was collecting on behalf of the Solomon Islands Government was required to be remitted, without any deductions being made, to the Consolidated Fund of the Solomon Islands Government.
• Secondly, until 2006, Airservices Australia reported to the Australian Parliament, and advised Australian Government Ministers, that the air navigation fee revenue collected on behalf of the Solomon Islands Government was held on trust. However, in June 2006, the nature of the relationship was assessed. The conclusion reached was that a trust had not been created. Instead, there is an agency relationship between the Solomon Islands Government (as principal) and Airservices Australia (as agent). In this context, as a collection agent, Airservices Australia owes the Solomon Islands Government particular duties, which it has not fully met.

Regularity of payments (Chapter 4)

The upper airspace management contracts provided for air navigation fee revenue collected on behalf of the Solomon Islands Government by Airservices Australia to be paid as follows:

• to Airservices Australia for its fees under the upper airspace management contract and fees under any other contracts with the Solomon Islands Government; and
• to the Solomon Islands Government bank account specified in the contract.

The majority ($8.45 million or 80 per cent) of all payments made by Airservices Australia between June 1998 and April 2006 from air navigation fee revenue collected on behalf of the Solomon Islands Government related to either amounts retained by Airservices Australia as fees for its services, or remittance of air navigation fee revenue to a Solomon Islands Government bank account (but not always the specified account).⁵

The remaining transactions (totalling $2.12 million) involved:

• Payments to third parties, the main categories of which were:
  • $306 162 was paid between September 1999 and August 2003 for travel expenses, including for the purposes of accommodation, daily allowances and airfares;
  • $391 478 paid between February 2000 and September 2003 in relation to student education expenses.⁶ This included amounts for accommodation, daily spending money, tuition fees and airfares. From the limited information available within Airservices Australia for the transactions examined by ANAO, it appears that the Solomon Islands Government intended to employ these students in the Civil Aviation Division following the completion of their studies, or to retain them in employment if previously working for the department responsible for civil aviation;
  • $588 339 paid between May 2001 and September 2003 for the fees and expenses of an aviation adviser to the Solomon Islands Government; and
  • $809 685 in payments to other third parties including: $208 312 for insurance, $136 802 for vehicles and vehicle repairs, $107 104 to Solomon Islands airport contractors, $42 730 for supplies and equipment, $38 471 for airfield maintenance, and $31 658 in salaries and wages.
• Cash advances and payments totalling $28 558 made using Airservices Australia corporate credit cards with subsequent reimbursement from air navigation fee revenue being held on behalf of the Solomon Islands Government. The corporate credit card transactions principally related to travel allowances and travel expenses.

Third party payments and credit card transactions were requested by Solomon Islands Government Ministers and officials. However, they were not in accordance with the upper airspace management contracts.

By Solomon Islands Government Ministers and officials making the various requests to Airservices Australia, and Airservices Australia making payments from the air navigation fee revenue in the manner requested, it could be argued that the parties had agreed to informally vary the contracts. This is despite the contract providing for variations to be made in writing. However, even if variations allowing the payments had been made in writing, in the context of an Australian government entity collecting revenue on behalf of the government of another sovereign nation, making such payments was not prudent.

Action taken by Airservices Australia (Chapter 4)

Between June 2001 and November 2005, Airservices Australia conducted a total of four internal reviews or audits that examined payments made from air navigation fee revenue collected on behalf of the Solomon Islands Government. Over that period, there has been a considerable change in Airservices Australia's assessment of its performance in administering these payments, as follows:

• the first review in 2001 concluded that there was minimal exposure for Airservices Australia as all payments were authorised by the Solomon Islands Government;
• an internal audit undertaken in July 2003 concluded that the contract appeared to be well managed and that, as well as ensuring a high standard of ongoing accountability, the management of the contract had promoted Airservices Australia's and Australia's interests with the Solomon Islands Government. However, concerns were raised that the contract was not being managed strictly in accordance with its terms and conditions;
• an inquiry by Airservices Australia's Office of Security Risk Management, that commenced in August 2003, concluded that payments had been made other than as provided for by the contracts, although written authority had been obtained for payments to third parties and receipts obtained where cash payments had been made. The review also raised a concern that there may be a perception of corruption as payments made directly to third parties rather than the designated Solomon Islands Government bank account would not be visible for normal audit purposes by Solomon Islands Government officials; and
• the final internal review, an audit completed in November 2005, concluded that payments had been made to third parties that were potentially outside the strict terms of the agreement and that improvements were required in relation to the management of monies on behalf of a customer.

In September 2003, as a result of the two internal reviews conducted that year, Airservices Australia ceased making payments other than those explicitly provided for in the upper airspace management contracts. Until this time, Airservices Australia had considered such payments to be appropriate.

Quarantining of Solomon Islands revenue for civil aviation purposes (Chapter 4)

To allow an external entity to collect its statutory revenue, the Air Navigation (Air Traffic Control) Regulations 1998 of the Civil Aviation Act 1986 were amended by the Solomon Islands Government. As a result of the amendments, these Regulations specify that Airservices Australia is authorised to collect the air navigation fees for the upper airspace. In this respect, Airservices Australia is a collection agent of the Solomon Islands Government.

Governments raise statutory fees and charges by compulsion. Accordingly, it is common for the relevant constitution to require a clear separation between the collection of revenue and its subsequent appropriation for expenditure by the relevant Parliament. In this respect, the Solomon Islands Constitution requires that ‘all revenues or other moneys raised or received by or for the purposes of the Government be paid into and form one Consolidated Fund'.

In this context, Airservices Australia would have been better placed to meet its obligation as the Solomon Islands Government's collection agent for air navigation fees had it identified the requirements that needed to be satisfied in remitting statutory fees to the Solomon Islands Government. In addition, obtaining such an understanding would have provided Airservices Australia with a sound basis on which to query or decline the various payment requests received from Solomon Islands Government Ministers and officials.

With effect from 31 October 2005, the Solomon Islands Government has established an Aviation Special Fund to quarantine the air navigation fee revenue for civil aviation purposes. This arrangement requires that all air navigation fee revenue be paid into the Aviation Special Fund. Accordingly, there appears to be a tension between the requirements of the Aviation Special Fund and the terms of the contract, which allows Airservices Australia to deduct its fees before remitting the balance of air navigation fee revenue to the Solomon Islands Government. In these circumstances, Airservices Australia should seek to resolve this issue as soon as practicable.

Improvement opportunities

Airservices Australia has recently been restructured. Concurrent with the restructure, it has been conducting a business improvement program. In addition, the internal audit function has been reviewed and reengineered. There have also been steps taken to address gaps in the authority's approach to managing risk in its off-shore activities.

Such changes address a number of the governance shortcomings that were evident from these audit findings. Nevertheless, there are a number of issues that have not yet been addressed. In this respect, ANAO has made four recommendations relating to Airservices Australia:

• with DOTARS, resolving the current uncertainty about whether:
  • the Australian Government authorised Airservices Australia to enter into contracts such as the upper airspace management contracts with the Solomon Islands Government; and
  • entering into upper airspace management contracts with other governments means this airspace has become “Australian-administered airspace” for the purposes of the Air Services Act;
• clearly identifying the nature of the relationship that is being established by future international business contracts, and any resulting fiduciary and other duties, so as to ensure its practices and procedures satisfy these requirements;
• prior to entering into future contracts that involve it acting as the collection agent of other governments, taking the necessary steps to identify the requirements and/or conditions that need to be satisfied when collecting and remitting statutory revenue; and
• consulting with the Solomon Islands Government so as to ensure that the manner in which Airservices Australia is paid for managing the upper airspace fully complies with the Solomon Islands Constitution.

Entity responses

The following entities provided formal comments on the proposed report of this performance audit.

Airservices Australia

Airservices Australia accepts the recommendations of the audit report and is committed to their swift implementation. Airservices further accepts that its internal processes at the time third party payments were made were inadequate. The organisation identified third party payments as an issue in September 2003 and stopped the practice. Corporate governance procedures have been significantly improved since that time, and particularly so in more recent times as part of an organisation ‘remake' and the focus on a series of business improvement programs. The implementation of the audit recommendations will further strengthen procedures.

Airservices maintains it did assess its legal capacity to perform the services under its enabling legislation at the time it entered the contract.

Airservices acknowledges that it did not assess the nature of the relationship arising from revenue collection and repatriation obligations under the SIG Constitution.

Airservices maintains that, while the organisation's commercial arrangements in the Solomon Islands had no impact on the performance of its domestic public purpose responsibility to deliver safe and efficient air navigation services in Australian airspace, it acknowledges it had a broader public purpose obligation.

DOTARS

The Department of Transport and Regional Services' response to the ANAO's proposed report addresses Recommendation No.1 of the proposed report.

The Department of Transport and Regional Services and Airservices Australia have reached a shared understanding that as at the date of formation of the first contract in 1998, Airservices was empowered to enter into the contract and it was therefore not necessary that Solomon Islands airspace become “Australian administered airspace”.

For the airspace of another country to become “Australian administered airspace” would require an arrangement between the government of that country and the Australian Government. No approach was made by the Government of the Solomon Islands directly to the Australian Government in this regard.

In the absence of some express agreement, the Department considers that the contract was a commercial arrangement for Airservices to assist the Solomon Islands in the administration by the Solomon Islands of its airspace.

Similar contracts entered into by Airservices Australian in the future cannot be taken as Australian administered airspace unless the Australian Government specifically authorises Airservices Australia to act as agent on its behalf for this purpose.

Solomon Islands Auditor-General

Thank you for the opportunity to view this extract prior to finalisation. I would like to commend you on the Report as it is of high quality and accurately reflects the many issues that emerged during these contractual arrangements. Many complementary matters will be raised in my forthcoming Report to the Solomon Islands Parliament.

Footnotes

1 Amendments to the Air Navigation Act 1920 passed by the Parliament in 1947 approved the ratification on behalf of Australia of the Chicago Convention.

2 The Air Services Act defines “Australian-administered airspace” as: the airspace over Australian territory; airspace that has been allocated to Australia by the International Civil Aviation Organization (ICAO) under the Chicago Convention and for which Australia has accepted responsibility; and airspace administered by Australia at the request of another country.

3 The Solomon Islands Air Navigation (Air Traffic Control) Regulations were amended to specify that Airservices Australia was authorised by contract to collect the air navigation fees for the upper airspace.

4 Further details are provided in Chapter 4 of this report.

5 Of the amount remitted to Solomon Islands Government bank accounts, $3.19 million was paid to a bank account specified in one of the upper airspace management contracts. A further $825 000 was paid to a Solomon Islands Government bank account that was not specified in the contracts.

6 Courses undertaken included law degrees, electronic degrees and mechanic engineer training, in a number of countries including Australia, New Zealand, Fiji and Vanuatu.