CIVIL AVIATION AUTHORITY OF SINGAPORE BILL

CIVIL AVIATION AUTHORITY OF SINGAPORE BILL: Order for Second Reading read.

6.40 pm

The Second Minister for Transport (Mrs Lim Hwee Hua): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Sir, the Bill before this House provides for the transfer of the airport undertakings of the Civil Aviation Authority of Singapore (CAAS) to a successor company to operate the airport and for the reconstitution of CAAS as the regulator of airport operations. The Bill thus provides for the regulation of airport operations and the introduction of new economic regulatory measures to ensure that the strategic interests of the aviation hub are not compromised after corporatisation.

Strategic rationale for corporatisation

Since its opening in 1981, Changi Airport has grown from strength to strength. From an initial base of just eight million passengers then, we welcomed over 37 million passengers through Changi last year. Equally importantly, the airport is well-regarded internationally and

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has garnered numerous accolades for service excellence and innovative airport management over the years. With the opening of Terminal 3, the upgrading of Terminal 1 and the expansion of the Budget Terminal, Changi continues to be one of the leading aviation hubs in the region and is positioning itself to handle even more traffic in future, notwithstanding the current economic recession.

However, we are mindful that competition is intensifying. Changi has to contend with several challenges. These include the opening of new ultra modern mega airports in the region, the introduction of long-haul aircraft which fly from point-to-point without the need for intermediate hubs, the emergence of global airport companies and the consolidation of airlines into mega-carriers. In particular, the challenge from airports at locations such as Bangkok, Dubai, Hong Kong and Incheon, is getting tougher. These airports are either corporatised or privatised entities which enjoy strong governmental support and have the flexibility to be very aggressive in airport development, promotional efforts and recruitment of world-class airport talent. Changi will have to continue to adapt quickly to this rapidly changing environment and to chart new growth directions in order to remain as a vibrant hub on a sustained basis. Changi needs a combination of enhanced commercial discipline and more flexibility to compete aggressively for global talent, whilst leveraging on Changi Airport's brand name to exploit overseas investment opportunities. This can be achieved by separating the regulator and business functions.

_Allocation of roles
_

Sir, in corporatising Changi Airport, we are therefore planning for the future. We do not want to react only when we are losing our competitive edge. Instead, we

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are making a strategic shift from a position of relative strength. Corporatisation provides the opportunity to multiply CAAS' capabilities, while ensuring that the airport's positive externalities are not diminished through new regulatory tools and alignment levers on the corporatised entity. CAAS currently performs four broad categories of functions: regulatory, promotional, operational and international, including overseas ventures.

Of these functions, we are corporatising those for which the replacement of direct State control with appropriate regulation will not compromise Singapore's strategic interests. This will enable the corporatised airport operator to have more autonomy to be nimble and maximum flexibility to compete. The corporatised airport operator will take on the operational functions of managing Changi Airport and the airport emergency services as well as to invest overseas through the international arm, Changi Airports International (CAI).

The reconstituted CAAS will continue to be the regulator, promoter and developer of the aviation industry. It will undertake strategic and regulatory functions such as air services negotiations, aviation safety oversight, airport economic regulation, air navigation services and running the Singapore Aviation Academy. In addition, the new CAAS will promote the development of aviation-related sectors including air cargo, aircraft maintenance, repair and overhaul (or commonly referred to as MRO) and the future development of the Seletar Aerospace Park. This will be done in conjunction with other economic agencies like the Economic Development Board.

Alignment with national interests

Sir, Changi Airport is a strategic asset for Singapore. It is the lifeline of the air connectivity that is so vital to Singapore

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as a trading hub, and a financial and business centre. There may be questions whether the next step after corporatisation is privatisation. At this point, there are no plans to privatise Changi Airport. The Government will still retain full beneficial ownership of the airport company after corporatisation. Privatisation is a separate and distinct step to be deliberated upon and decided later by the Government.

Nevertheless, we have designed an economic regulatory system that is robust, regardless of ownership, should a decision to privatise be taken in the future. We are not alone in deciding to corporatise our airport. Many other economies such as Hong Kong, the Netherlands and Germany have done so fairly successfully. We are learning from their experiences and from similar efforts in other sectors as well. We are aware that a purely for-profit motive of a corporatised entity could shift Changi's focus away from long-term interests in pursuit of short-term financial gains. Such an over-emphasis on profits would be detrimental to the achievement of wider strategic and economic benefits for Singapore.

Therefore, a comprehensive regulatory framework, one that covers crucial pricing, service standards and competitiveness aspects, will be put in place to balance the State's interest in maintaining Changi's position as an aviation hub against the airport company's need to deliver sustainable economic and financial returns. Airport charges will be kept competitive through a price cap mechanism that will include offsetting against a portion of the profits from the airport's non-aeronautical activities. This mechanism will also help avoid a situation of infrequent, lumpy adjustments to airport charges and would allow necessary cost increases to be made

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through smaller, more regular adjustments instead. Notwithstanding this price cap methodology, ensuring Changi's competitiveness remains an overarching objective.

Next, to address the risk of the corporatised entity under-investing or delaying investments in airport infrastructure, CAAS as the regulator will have a joint role with the airport company in the planning of airport infrastructure, including setting triggers for planting additional passenger capacity as well as stipulating the timeframes for the construction of the necessary infrastructure, runways and other facilities.

Changi Airport's success depends on the support and cooperation of various stakeholders, including airlines, ground-handling companies and maintenance and repair organisations. CAAS regularly consults with these stakeholders on various aspects of Changi's development and operations. They have also been consulted on the corporatisation exercise. Upon corporatisation, a formal and structured consultation process will be put in place to ensure that their views are considered before each review of the price cap for airport charges.

Key provisions of the Bill

Mr Deputy Speaker, Sir, let me now highlight the key provisions of the CAAS Bill.

Part II of the Bill will reconstitute CAAS and provide for its revised powers, functions and governance structure. Part III of the Bill covers the corporatisation of the airport undertaking of CAAS by providing for the legislative transfer of the assets, rights, liabilities, employees and undertaking to the successor airport company. The transfer allows the land occupied by Changi Airport to be sub-leased to the airport company. The tenure of the sub-lease ensures that the airport company is equipped to coordinate the

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continued development of Changi Airport. At the same time, CAAS retains control over long-term airport land-use so as to cater to the needs of other aviation industry players.

The legislative transfer of CAAS employees to the airport company will be on terms no less favourable than those currently enjoyed by them prior to the transfer. As the airport is a critical infrastructure, this legislative transfer will provide a seamless process with minimal disruptions. CAAS' most valuable asset is its pool of experienced and dedicated officers who are obviously highly sought after by foreign airports. This transfer underscores the value that CAAS attaches to employees and recognises the good work put in as well as the contributions they will make towards the success of the new airport company.

The Bill empowers the Minister for Finance to negotiate, enter into and carry out on behalf of the Government the sale of the airport company. The company will be incorporated initially as a subsidiary of the Minister for Finance Incorporated. As soon as practicable after the transfer date, the shares in the airport company may be sold to Temasek Holdings for a consideration to be determined.

Licensing and management of airports

Part IV of the Bill sets out the framework for the regulation of the operations of airports and the provision of airport services and facilities, covering land use planning at airport sites and pricing and quality of services. The regulatory framework will require the airport company to obtain an airport licence to operate Changi Airport. The airport licensee will be required to comply with the licence conditions, codes of practice and standards of performance relating to price, service, safety and airport infrastructure planning. The conditions and codes are supplemented by

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directions and advisory guidelines. This balances the State's interests against the commercial interests of the airport company, as I mentioned earlier. Breach of licence conditions or directions may be sanctioned by financial penalties, revocation or suspension of the licence, or imposition of restrictions. The Bill allows the airport licensee to lodge appeals to the Minister for Transport, whose decision shall be final. In deciding on the appeal, the Minister may seek the advice of an advisory panel of experts.

Restrictions on ownership and management of airport licensees

Sir, Part V of the Bill sets out the framework for regulating the management, ownership and control of airport licensees through the acquisition of shares or of the business. In the event that the airport is privatised, the Bill requires CAAS' approval to be obtained for single shareholding stakes of 5% or above. Section 59 requires CAAS' approval to be secured for the appointment of the Chairman, a Director and the Chief Executive Officer.

Airport operations

Part VI of the Bill deals with airport operations. It empowers the airport licensee to make by-laws after consulting CAAS and with the approval of the Minister for Transport. The by-laws may provide for the proper management, operation, safety and security of the airport, securing the safety of persons and of aircraft at the airport, regulating vehicular traffic at the airport and preserving orderly conduct at the airport. Part VI also has provisions for the airport licensee to permit access to the airport for defence-related purposes and events of national significance.

Special administration orders

Part VII of the Bill empowers the Minister for Transport to make a special

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administration or other orders if there are serious contraventions of the airport licence or of the Act. It could be effected if the airport licensee is unable to pay its debts or for safety, security or public interest reasons. The orders can allow for requiring the airport licensee to take any necessary actions immediately or for appointing a person to advise the airport licensee in the proper conduct of the business.

Mr Deputy Speaker, Sir, let me conclude by noting that hitherto, CAAS has been very successful in transforming Changi Airport into a leading aviation hub. The airport has been pivotal to Singapore's economic development and serves as a gateway for Singapore residents and businesses to the rest of the world. There might be questions as to whether corporatisation should be delayed in this uncertain economic climate. My response is that this is the best opportunity for Changi Airport to develop a new model of governance and sharpen its commercial instincts in order to capture further growth opportunities in the future. Corporatisation will enable Singapore to become an even more vibrant and competitive aviation hub.

Sir, I beg to move.

Question proposed.

6.54 pm

Mr Cedric Foo Chee Keng (West Coast): Mr Deputy Speaker, Sir, I rise in support of the Bill.

I would like to highlight some execution risks with regard to the separation of functions of the CAAS. Sir, I agree with the Minister when she said that the corporatisation would allow the new commercial arm of CAAS to be more proactive, to be nimble and innovative.

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Also, it will help to retain and attract talents and to also venture abroad.

Sir, the intent of separating CAAS makes sense and could work but there are nevertheless significant execution risks in the separation of functions of the CAAS. Unless these risks are identified and managed properly, they will negate the potential benefits of such a move. The key risk of corporatisation, as I see it, is whether or not the new commercial arm which we will call "NewCo" would pursue short-term commercial objectives at the expense of the externalities that Singapore enjoys as a nation from the broader success of Changi.

Sir, let me re-trace the history of Changi. Changi was successful because of the vision and long-term planning of the Government at that time. Its beginnings date back to the 1970s when the Government made the bold decision to shift from the old airport at Paya Lebar to its current site at Changi. At that time, the additional airport capacity that we needed could have been met by building a second runway at Paya Lebar. This would cost less and would have significantly lower risks. Relocating to Changi, on the other hand, would cost over S$1 billion, a princely sum even now but a mega investment in those days. The Government decided to relocate the airport because they had a vision which cannot be fulfilled at Paya Lebar. That vision, even in the 70s, called for three terminals. In other words, Terminal 3 which opened last year was conceived and provided for in the original Changi masterplan some 30 years ago! And with the construction of each terminal, new capacity was added well ahead of demand. That is why Changi has been such a success and an oasis for so many travellers. It provides visitors to Singapore with "first impressions" that few cities can match. The goodwill and externalities it creates for Singapore cannot be measured by a simple financial ratio like "return of

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capital employed". If the Government had gone about planning and constructing Changi as a self-contained commercial enterprise insisting on maximising asset utilisation and short term returns, the "Changi story" would not have been worth telling and it would go the way many airports around the world had become – congested and uncomfortable.

Sir, my concerns with this separation of functions is whether the NewCo will take a different view by focusing on short term returns and therefore conserve capital and allowing our terminal capacity to be fully exploited before investing in new capacity. This tendency to maximise returns will become even more pronounced when this NewCo is subsequently privatised and eventually listed. Sir, I am glad to hear from the Minister that the privatisation and listing decisions have not been made.

Sir, could the Minister enlighten this House how would the Ministry ensure that Changi's advantage is not eroded over time if the NewCo would indeed take a shorter investment horizon? In this regard, how would the board and executives of NewCo be compensated or incentivised? And how would we ensure that Singapore's strategic interests are not relegated to some Annual Economic Profit or bottomline measures?

Mr Deputy Speaker, Sir, another key success factor for Changi has been the close collaboration among all the various agencies working the airport. From Day One, as a team, these agencies realised that if they do not work cohesively and just guard their narrow interests, the impact would immediately filter down to the passengers. Sir, if we lose this teamwork, we lose our competitive edge at Changi. Splitting up CAAS creates a new division and, if we are not careful, many issues can fall between the cracks.

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I would like to ask the Minister how long the Ministry would monitor the transition from one single agency as CAAS to the split functions of the new CAAS and NewCo, and if she could assure the House that the high standards of customer service that passengers have come to expect of Changi will not be impaired with NewCo's formation and its new profit objective following corporatisation.

Sir, I had previously also asked the Minister on how the corporatisation of CAAS would impact the other stakeholders. I am heartened to note that the proposed corporatisation is not intended to be a cost-cutting exercise.

No jobs will be cut and, in fact, new jobs will be created as there is a need to split corporate functions, such as human resource, finance and legal. I also note from the Bill that CAAS employees will be retained in the new structure on terms no worse than their current packages.

Under the Bill, I noted that CAAS property will, where relevant, be transferred over to the new entity and contracts with CAAS will similarly be carried over to the new entity. Although there are safeguards in place for employees and the preservation of existing contracts, there does not appear to be any published safeguards for the other stakeholders which may result in higher airport taxes for passengers, higher levies for airlines, landing charges, higher charges for ground handling companies, etc. I would like to ask the Minister to enlighten this House on whether there will be any immediate effect on the fees that these stakeholders are paying today.

Sir, in conclusion, subject to the matters of concern that I have raised, I support the Bill.

Mr Gautam Banerjee (Nominated Member): Mr Deputy Speaker, Sir, I speak in support of this Bill.

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Singapore, as an island without natural resources, has historically survived and prospered by plugging into the global and regional economy, whether as the port of call for ships sailing between Europe and the Far East, or as entrepot for the region. In the modern era of air travel, the airport has become a critical node in our global connectivity and our economic lifeline. When the Singapore Government made the very bold and strategic billion-dollar bet in the mid 1970s to construct a brand new airport at Changi, it laid the foundation for much of our current economic success. A world-class airport has allowed Singapore to evolve into a regional financial centre, attracted multinational corporations to site their regional headquarters here, supported high value-adding manufacturing businesses, and provided Singapore with a platform to develop into a global city of the 21st century.

Changi Airport is something every Singaporean has reason to be proud of. It is one of the three five-star airports in the world, ranked seventh globally in international passenger volume, and in 2008 alone, it garnered 29 awards. Besides these hard statistics, it always gives me a sense of pride whenever my overseas friends, colleagues and business associates sing praises of how efficient and hassle-free it is to arrive or transit through Changi.

Yet this success story did not just happen. It is a result of shrewd policies, well executed. Changi faces many competitors in the region and beyond, jostling to be the preferred aviation hub. Hong Kong, Kuala Lumpur, Bangkok and Dubai compete with Changi in different market segments and air routes. Today, Changi is ahead of the game because we have an equally successful Singapore Airlines, the foresight of our policy makers to pursue a liberal aviation regime that

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resulted in strong connectivity and attracted fast growing home-based Low Cost Carriers, five-star airport infrastructure and service and a very stable political and economic environment.

The competitive landscape is dynamic, and Changi's competitors are not sitting still and accepting status quo . Many of our key success factors are not unique and can be replicated. Our competitors are poaching our limited aviation talent pool. Significant investments have also been poured into building and upgrading their own state-of-the-art airport infrastructure. Unlike in the era of traditional sea-based trade routes, our location near the equator does not give us any geographical advantage in tapping the growing East-West air traffic from the Asian economic powerhouses of China and India.

We have to innovate and stay nimble in order to keep ahead. Like the bold decision taken in the 1970s to build a new airport in Changi, the current CAAS Bill, with its provisions to separate the regulator from the airport operator role and corporatise the operator, is a piece of legislation that will catapult Changi further ahead of its competition. Corporatisation will give Changi greater freedom to adapt its remuneration structure and human resource policies to attract and retain key talent necessary for its success. In order to compete internationally, Changi needs to attract the best and brightest, and tap into talent pools both locally and internationally. In this global war for talent, Changi has to be flexible and responsive to market forces in order to stay in the game. A corporate structure will better allow it to do so and compete with airports in the region, several of which are already privatised.

Just as importantly, a profit-motivated Changi will challenge its management to be more creative in its product innovation and capacity management, and more

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efficient in operations and use of capital. We have seen how the advent of REITs in Singapore has transformed and injected vibrancy and vitality into many local shopping malls, including old shopping malls, while improving yields for their shareholders. In the case of CAAS, if the improved efficiency and yield can translate into more competitive aeronautical charges for the airport, and a more exciting airport experience for our visitors, we would have taken a big step forward in consolidating our aviation hub position and putting some daylight between Changi and its competitors.

I have deliberately used the example of REITs because a modern airport, apart from being a transportation and logistics centre, is also in some respects a specialty shopping mall with shops, restaurants, bars and leisure attractions such as spas. For Changi to be the premier transit airport in this region, it must not only be a operationally and economically efficient hub for airlines but must also offer a unique airport experience for passengers. A fine balance needs to be maintained between increasing the revenue from airport concessions and the shopping experience, while keeping the airport clutter-free so that passenger flow to departure gates is not affected.

Income from concessions and rental from outlets are an important revenue upside for shareholders and also a means to keep aeronautical charges low via cross subsidy. How our own regulations will be framed is not known yet, but judging from the experience in other countries, the non-aeronautical revenue is likely to be drawn upon to partly subsidise the aeronautical charges. For example, the UK uses a "single tilt" system, where all the non-aeronautical revenue is considered when setting the aeronautical price cap. Other countries use "double tilts", which is the other extreme – no non-aeronautical revenue is used to subsidise the aeronautical charges. A balance between

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these two is important so that there is incentive for the shareholders to be innovative in non-aeronautical business promotions, which makes the airport experience more exciting, and yet use this revenue to bring the aeronautical charges down.

One of the concerns is that in the desire to maximise concession income, the airport may become too cluttered with stores, thus affecting the smooth and swift flow of passengers. Speed of passengers moving from one part of the airport to another is critical for an airport hub due to the large number of transit passengers. Yet the corporatisation of Changi is not without risks. Airports in small countries like Singapore are natural monopolies. With corporatisation, and more so in the event of a privatisation of Changi, which it would appear is not immediately on the cards, the concern is the conflict between profit motivation and the strategic, and socio- economic importance of Changi for the Singapore economy as a whole.

In the Bill, the regulator is charged with the responsibility of keeping this balance, and ensuring competitive aeronautical charges, service excellence and timely investments in airport infrastructure. I would like the Minister to reassure the House that we have enough levers in this Act to ensure we achieve this fine balance both in good times as well as during a crisis. As a Statutory Board, CAAS has not had to grapple with conflicts, such as giving a consistently good return to shareholders each quarter on the one hand and, on the other hand, ensuring that Changi continues to have a long term strategic outlook on being a regional hub which will benefit a wider group of stakeholders and not just its shareholders. This mindset is particularly important when there is a crisis.

For example, in response to the current economic downturn, the current

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CAAS had, in February this year, announced that it was giving out $200 million in 2009 to help airlines and airport partners. This included a $20 million Promotions Development Fund to support the retail, food and beverage and services concessionaires drive sales at the airport. The bulk of this $200 million will come from the Air Hub Development Fund and the Government's property tax rebate. However, it is reported that some $50 million will come from CAAS' own coffers. Post corporatisation, the regulator will set the price cap, and only for aeronautical charges. Should such a relief package be required in the future in unforeseen events like SARS, severe economic recessions or sharp rise in oil prices, would the regulator be able to direct Changi to lower its aeronautical and non-aeronautical charges? Or will any relief have to be shouldered entirely by the Government's Air Hub Development Fund?

Airport master planning is critical, and capacity has to be built ahead of time and capacity requirements. There is the ongoing upgrading of Terminal 1 and the expansion of the Budget Terminal, and the possibility of a Terminal 4. All these are highly capital intensive and also increases the airport operating costs immediately upon the opening of new facilities. The initial overcapacity may result in substantial increase in aeronautical charges to avoid a drop in earnings or return on assets for the operator. A profit maximising operator will seek to push such investments back as much as possible, as we have seen in some UK airports.

Would the Government consider some form of public-private partnership in such future expansion? For example, part of the asset base and operating costs relating to the initial excess capacity could be funded by the Government, and passed

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back to the operator only when normal capacity is attained.

Commercially operated airports, like all infrastructural investments, are likely to be leveraged with debt in order to enjoy the tax benefits from interest expense, and to achieve the desired return on shareholders' equity. Changi has embarked on its overseas ventures. These investments may also be geared up for the same reasons. The current CAAS is not only debt free, but has a large cash kitty built up from years of surpluses. This war chest allows CAAS to invest confidently in its airport infrastructure and sail through the current economic storm unscathed. Other airports, like the privatised BAA in UK, are not so lucky, due to an unfortunate congruence of slowing air travel and increased debt burden. Would the Government consider adding provisions that limit the extent of debt or leverage that the corporatised Changi can take on?

I am not usually a proponent of heavy-handed legislation interfering with commercial matters of corporations, especially if Changi were to be privatised in the future. However, Changi is too critical a national asset for us to leave entirely to market forces. The current global economic crisis has shown that a free market without adequate oversight can have disastrous consequences. For example, we have seen the devastation that excessive debt can bring to otherwise healthy global corporations previously considered invincible. We need to take these lessons on board and factor them into our regulatory regime.

Sir, I support this Bill because it will enable CAAS to operate on a level playing field with some of its key competitors and be agile, nimble and innovative as it navigates through turbulent times. However, we must guard against the ugly side of the free market economy, and here we can learn from the mistakes made in

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other countries, such as the UK, who took the plunge into privatised airports earlier. Unfortunately, for a number of these countries, the first mover advantage was withered away because of an inadequate regulatory framework and poor execution of policy. Our policy and regulatory track record in other sectors, such as financial services and telecommunications does instil confidence that we should achieve the delicate balance to make the corporatised CAAS a success.

Mr Liang Eng Hwa (Holland-Bukit Timah): Mr Deputy Speaker, Sir, first and foremost, allow me to compliment the CAAS for their announcement last week to hire more than 400 positions as part of the upcoming corporatisation exercise. This is indeed a piece of good news to cheer the very difficult job market at the moment. In many countries, such corporatisation and privatisation exercise will often result in some streamlining of headcounts. Hence, I am heartened that CAAS is not only not reducing headcounts but hiring to staff the two new entities.

The Government has embarked on a corporatisation drive for various statutory boards since the 1990s. By and large, these corporatised entities have continued to serve us well and are able to fulfil both the corporate and national objectives.

Some of the corporatisations have had direct benefits to the public and the economy. A positive case here is, of course, the corporatisation and privatisation of Telecommunication Authority of Singapore (TAS) which leads to the opening up of the telco market and the establishment of Infocomm Development Authority of Singapore (IDA), SingTel and the other telcos like StarHub and M1. Consumers clearly benefited from the liberalisation as the telco market became competitive. It sharply reduced handphone prices, lowered service subscription rates, improved customer services and spurred

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on more innovative products among others. Citizens, at large, also benefited from the privatisation exercise as the Government dished out the new SingTel shares as part of the wealth sharing exercise. Overall, the economy and Singapore are better off.

One key attribute to the success of TAS' corporatisation cum privatisation exercise is the non-monopolistic nature of the telco market. Almost overnight, we were able to create three very competitive players which brought about immediate benefits to consumers. However, not all the corporatisations that the Government has undertaken are as smooth going. Take the case of Port of Singapore Authority (PSA).

Shortly after the corporatisation of PSA in 1997, PSA Corporation suffered the loss of two major accounts in August 2000 to Port of Tanjong Pelapas (PTP).

The loss of Maersk Sealand and Taiwan’s Evergreen resulted in the shifting of their transshipment operations from Singapore to PTP in Johor. It reduced value to our economy while improved the economies of scale for the newly established competitor. Perhaps due to the aggressive pricing and the undercutting by the new port entrant, the loss of the two accounts may well be the commercially sensible thing for PSA Corp. to do. However, from the national standpoint, we may not only have lost valuable spin-off from the two giant shippers but also tactically handed a lifeline to the regional competitor to stay viable.

Indeed, for the other corporatised statutory board, I am not convinced that it would have done any worse had it remained as a statutory board. Of course, corporatisation policy is long term and it may be too early to make that conclusion.

The key motivation for corporatisation has always been that as a non-government entity, its commercially-driven

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model will steer the company towards improving operational efficiencies and better financial performances. There is also better leeway to manage the challenges of the market place and enabling it to be more nimble in today’s rapidly changing business landscape. The Ministry has also cited greater flexibility to attract and retain top talent as another reason for its corporatisation.

While I do not question the benefits of corporatisation, I would want to raise some of the potential pitfalls and concerns which I hope the Minister can address.

Firstly, do we see Changi Airport our only international airport and its services as a public good as opposed to a private good? Air traffic accounts for a very significant proportion of traveller arrivals and departures in Singapore. The spending from overseas visitors adds significantly to domestic consumption and is a crucial source of revenue for the retail, hotels and hospitality industries among others. Having more aircraft coming to Changi will also enhance our ground handling businesses. Maintaining our leading edge as an international air hub is hence of strategic importance economically. We need to continually attract and retain airlines to and through Changi Airport. In some cases, this strategic and competitive positioning may not necessary make immediate commercial sense. For example, in the face of a new entrant and in a bid to maintain our leading air hub status, Changi Airport may need to temporarily price its charges very low to defend its position and fend off new competition. It may even have to be priced below the required commercial returns of a corporate entity in the short run. Would a profit-seeking company be prepared to go that extra mile for the overall economic gain of the country?

Understandably, as a commercial entity, the company’s strategic horizon

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will be shorter than that of a national agency like CAAS. The perennial question that was asked by the Member who spoke before me is how would the new airport company align its shorter term commercial interest with that of the country's longer term strategic interest?

The situation can get even trickier if the new company is eventually listed. The interest of the shareholders would need to be taken into consideration. The Minister has just said that there are currently no plans to privatise the corporatised entity. But we know that corporatisation is often the first step that will pave the way for privatisation and the eventual listing. Hence, it will be good if the Minister can give a clear indication whether listing of the new company is the long-term intent.

Next, I hope that the Minister can also elaborate further as to why a two-entity structure is a more compelling one than the current structure.

Currently, CAAS is the single entity entrusted with the mission to make Singapore a leading air hub in the world. There is no ambiguity at all in terms of who is in charge and accountable for this mission. However, in the new two-entity set up, we would not have the same clarity as to who owns the aspiration to make Changi the best airport in the world. It is this clarity and the strong sense of ownership to the task that produced passionate civil servants like the late Mr Sim Kee Boon who seeks success at Changi Airport as his "National Service" to Singapore. I hope we can still see the likes of the late Mr Sim Kee Boon owning and championing the various causes for Singapore.

With this corporatisation, the aspiration to be the premier air hub in the world would be shared between two organisations. And that is where the

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problem of ownership will arise even with very well defined roles and responsibilities.

Another natural question – how different is a statutory board helmed by a set of competent board members and management different from a corporatised entity with similar board members and management? It is well recognised that statutory board like CAAS has done very well financially. Changi Airport, for example, besides widely acclaimed as the best airport in the world, continues to generate healthy operating surpluses. In fact, some would argue that a statutory board in Singapore may have better governance and financial discipline as it is not only audited by an external auditor but there is an oversight by the Ministry as well as the periodic performance audit by the Auditor-General’s Office.

My third concern is also a common one. Changi Airport is the only international airport we have. There are no immediate alternatives for carriers coming here and, hence, they have to accept whatever price that is imposed on them by the airport company. Would the new company exploit this demand stickiness to earn short-term supernormal economic profits? Also, how responsive is the new company to lowering its charges in a severe downturn such as the one that we are currently experiencing? A case in point is the former JTC properties now managed by Mapletree. I read in the press reports that the company is unable to match the 15% rental rebate that the former owner JTC is offering to its tenants in the light of the downturn. According to the reports, the company’s borrowing commitments may be the reason why it has limited room to reduce its rental.

The point is that once the commercial control is transferred, the Government will lose some of its direct influence on pricing and charges.

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Another implication of corporatisation is that the cost of borrowing for the non-government entity will increase. Even though the new company remains in national airport business and is in the so-called "too strategic to fail" category, the borrowing cost for these corporatised entities would, nevertheless, still be priced like any corporate with equivalent rating. It has happened to PSA and SingPower, which have seen their borrowing costs increased since corporatisation.

Similarly for the upcoming Sports Hub project which enjoys the support of the Government. As soon as the project is wrapped under a corporate vehicle, the borrowing cost would be priced accordingly. My concern is whether this higher borrowing cost would lead to a re-pricing of the charges and airport taxes. Would there be a repeat of the Mapletree situation where the new company has no room to reduce charges even in a severe downturn due to the lending covenants with the banks?

Finally, Mr Deputy Speaker, Sir, while there are obvious merits in the corporatisation, we should not be too "romantic" with it and see it as a natural path for all statutory boards. I hope the Government can allay the fears and concerns of ordinary Singaporeans even as we continue to take this path to restructure our public assets and services.

Mrs Lim Hwee Hua: Mr Deputy Speaker, Sir, first allow me to thank all three speakers, Mr Foo, Mr Banerjee and Mr Liang for giving their support to the Bill. I think Members have obviously recognised and underscored the importance of a world-class airport to Singapore's economic future. What is important is to understand that an excellent Changi Airport is really only the means to an end and the end is to entrench Singapore as a major business and trading hub.

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All Members have raised a very important concern and that is the question of balancing the strategic interest with the corporate interest. And this is mainly because the airport generates, as we all know, positive externalities for the Singapore economy as a whole but which may not accrue to the airport company itself. Hence, when we designed the economic regulatory framework, we took pains to align the interest as far as possible. Let me give a few examples. For example, NewCo is strongly incentivised to grow passenger traffic as it will raise its own revenues in the process of doing so. The service standards will be specified and closely regulated, so that there will be no slippage. The planting of infrastructure will also be clearly specified as part of the licence. So these are some of the safeguards.

Let me now briefly expand on each of the three very important areas which Members have raised. Firstly, price regulation to ensure competitiveness. Secondly, maintenance of the service standards. And, thirdly, the development of Changi as an aviation hub which includes masterplanning.

Firstly, on price regulation. I agree with Mr Banerjee that there is a need to balance the achievement of the aeronautical and the non-aeronautical revenues. Let me inform the House that we will adopt a hybrid till. This is where a proportion of the non-aeronautical revenues or profits will be used to keep the aeronautical charges competitive, thereby providing some incentives for the operator to enhance its non-aero revenues.

Sir, a commonly asked question, including by Mr Foo, is whether corporatisation will lead to higher charges. Let me now remind the House that the

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very aim of corporatisation is to ensure that Changi's competitive edge is maintained. The concerns about monopolistic pricing risk should really be discussed in the context of Changi's role as a hub airport where competition is actually a lot tougher than that for a non-hub airport, because competition is regional and global in nature. And Changi, through the years, has been very much alive to these real pressures regardless of its legal structure even in its current state as a statutory board. Nonetheless, we will institute a price-cap regulation as it will serve to protect strategic interests better. This mechanism will apply to aero charges including items like the passenger service charge. And the Government has decided that there will be no change to Changi Airport's charges for a period of two years after corporatisation.

Let me reiterate again that the competitiveness of Changi Airport remains an overarching consideration and concern of the Government. Should there be exceptional circumstances, for example, a severe economic recession or the emergence of a new competitor playing along rather different pricing rules, the Government will be prepared to step in with other measures.

Sir, let me now move on to service standards. Essentially, the service standards will be a combination of ex-ante and ex-post service standards. Let me explain. The ex-ante standards are set for some key critical matrix, for example, passenger service and cargo. Specific standards will relate to short-shipped or mishandled baggage, passenger delays and passenger satisfaction, which will be through comprehensive surveys. Each key indicator will be linked to penalties for non-compliance or, if appropriate, incentives for over achievement. The ex-post monitoring would be done on other matrix where it can help ensure high safeguards whilst avoiding the impediments of excessive regulatory scrutiny. So this will

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cover areas such as other operational performance indicators, and are monitored on a quarterly basis, and where NewCAA, the restructured CAAS, may demand remedial actions by NewCo. Examples will include immigration and check-in procedures, for example, the percentage of passengers who cleared the check-in procedures within 10 minutes. So these service standards will be specified.

Let me now move on to the development of Changi as an aviation hub and the masterplanning process. Let me assure the House that both NewCAA and NewCo will be jointly responsible for the development of Changi as an aviation hub, so it does not only reside in just one organisation. In fact, NewCAA will formally establish a new aviation development role. Both NewCAA and NewCo will jointly undertake masterplanning of the airport and adopt a long-term perspective, as a long lead time, as we all know, is required to add capacity. There is also a mandatory five-yearly review of the masterplan by both NewCAA and NewCo and triggers will be specified. The triggers, as I mentioned in my speech just now, would be two sorts, for example, the existing terminal capacity utilisation and, secondly, the constraints that may be posed by the runway and other capacity for aircraft movements. Terminal 4 expansion is really some years away. The appropriate funding model, whether it is Public Private Partnership (PPP), will be considered in due course.

Let me now touch on some of the other questions which have been raised by both Mr Banerjee and Mr Liang on the capital structure of NewCo. Let me reiterate that there are no plans to privatise NewCo whether through a listing or otherwise. So there is no timeline for that. Post-corporatisation, NewCo will have to shape its capital structure accordingly for operational flexibility as well as financial soundness. The

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Government does not intend to regulate the level of gearing but will leave NewCo to decide on what is appropriate. NewCo's cost of borrowing, as Mr Liang is concerned about, will be priced commercially, and be more reflective of the underlying risk-reward profile that NewCo has. It is also useful to remember that the cost of Government's capital is not zero. There is an opportunity cost which will approximate the market cost of capital.

Statutory boards are currently operating under a regime of value adding in excess of cost of capital. So, this is not too alien a concept to them.

Sir, let me just conclude with the following comments that Changi Airport is where and what it is today really because of three key factors: firstly, the foresight in planning for and investing in capital intensive infrastructure; secondly, the rather enduring partnerships with the different stakeholders, especially the airlines, and most importantly, the dedication of the thousands of employees who have toiled hard and sought excellence every step of the way. These are the very same ingredients that we will need, going forward, as we can expect competition to intensify. So, a corporatised Changi Airport and a restructured regulator will help sharpen the commercial and competitive instincts while ensuring that the strategic interests are not compromised. There would no doubt be refinements and changes that we would need to make as we proceed but this Bill attempts to provide the necessary regulatory and economic framework upon corporatisation. Let me assure Mr Cedric Foo that MOT will monitor well beyond the legal separation of the two entities.

Once again, let me thank Members for the support of the Bill.

Mr Cedric Foo Chee Keng: Mr Deputy Speaker, Sir, can I ask the Minister again what she envisages as the period of

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transition between the single CAAS and NewCAA, NewCo?

Mrs Lim Hwee Hua: As of 1st April, which is just recently, the two entities have actually crossed over into operational separation. The intention is for them to be legally separated by July. But, essentially, this is really work-in-progress and refinements will be made along the way. We are not in a rush, and we are continually reviewing it even post-corporatisation.

Mr Cedric Foo Chee Keng: Mr Deputy Speaker, Sir, I recognise that separating the functions of CAAS makes strategic sense. But nobody can fault the current CAAS, in its current form, for having done things poorly. In fact, it has done very well. Therefore, I see this as an important step but it is not really an urgent step. Would the Minister agree that if we can take longer than three months to ensure that the transition takes place in an orderly manner, we will all be better off for it?

Mrs Lim Hwee Hua: Mr Deputy Speaker, Sir, I would like to assure the

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Member that this is clearly a balance between not dragging out the process as well as making sure that we do not rush through the processes. But his comments are well taken.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mrs Lim Hwee Hua].

Bill considered in Committee; reported without amendment; read a Third time and passed.