AVIATION TARIFF REVIEW PROCESS AND METHODOLOGY REGULATING COMMITTEE FOR METEOROLOGICAL SERVICES Climate Change and Air Quality

CONTENTS OF THE PRESENTATION Purpose Introduction and Background Overview of RCMS Legal and Legislative Background Background of Methodology Revenue Requirement Weighted Average Cost of Capital Correction Factor EUROCONTROL Formula Calculating Service Units Tariff Formula Proposed Tariffs – 3 Year MTREF Annual Calendar

PURPOSE The purpose of this presentation is to provide and overview of : Multi-year Price Determination methodology for Aviation Tariffs and Revenue Annual Calendar for the Regulatory Process

INTRODUCTION AND BACKGROUND The Aviation Industry regarded SAWS as a monopoly as they are the only authorised provider of AMS in RSA In 2000, Aviation formally requested that their interests be protected and that a Regulator be appointed The Regulating Committee for Meteorological Services was established in terms of Section 20(1)(a) of the South African Weather Service Act (Act No. 8 of 2001) which reads – “The Minister must establish a committee, to be known as the regulating Committee for Meteorological Services.”

OVERVIEW OF THE RCMS The name of this committee must be carefully noted as this, in itself, provides some insight into its role and function – i.e. it is the “Regulating Committee for Meteorological Services” and not the “South African Weather Service (SAWS) Regulating Committee”. The Regulating Committee must, on behalf of the Minister and civil society, ensure that SAWS implements its statutory mandate in respect of the delivery of meteorological services in an efficient, effective, fair and transparent manner in line with government policy and legislation.

LEGAL AND LEGISLATIVE BACKGROUND South Africa, as a member and signatory, is obliged to enforce the rules and regulations of : ICAO (International Civil Aviation Organization), Chicago Convention WMO (World Meteorological Organisation) The Aviation Industry is governed by “rules and guidelines” from ICAO and are obliged to use specialised services from SAWS SAWS is the sole authorised provider of AMS in South Africa

BACKGROUND OF THE METHODOLOGY The RCMS uses the Rate of Return (ROR) Regulatory Framework to determine SAWS’ revenue from the provision of aviation services: SAWS generates revenue that is sufficient to fund its operating budget for the provision of aviation services (only) Generate a fair and reasonable return from infrastructure investment into aviation Clawback or pass through any losses or surpluses below or in access of budget EUROCONTROL Formula is used to determine the actual tariff As per ICAO member states

REVENUE REQUIREMENT R = E + (V-d+w) i + X RoR formula used to determine the required revenue R = E + (V-d+w) i + X R = Revenue E = Operating Expenditure Budget V = Carrying Value of Regulated Asset Base (RAB) d = Accumulated depreciation on RAB i = Expected return on infrastructure investment based on Weighted Average Cost of Capital (WACC) X = Recovery factor

WACC Uses the Capital Asset Pricing Model (CAPM) to determine a reasonable return on infrastructure investment Infrastructure that is deem essential in the provision of aviation services included in the Regulated Asset Base (RAB) i.e. – Computer Software and Hardware Meteorological Equipment Infrastructure typically not included in RAB iincluded the following Vacant Land Head Office Furniture and Equipment

CORRECTION FACTOR Should there be a shortfall or surplus in the audited financial year the difference is passed through or clawed back from the industry using the formula below: X = (E actual – E budget) + (R actual – R budget)+ (RAB actual – RAB budget) X = Correction factor E = Operating Expenditure R = Required Revenue RAB = Regulated Asset Base

EUROCONTROL FORMULA Charge = W x D x T EUROCONTROL Formula: W = Weight (SQRT{MTOW/50}) D = Distance (KMS/100) T = Tariff in Rands

CALCULATING SERVICE UNITS Service Units are calculated using the EUROCONTROL Formula: TSU = W x D x f W = Weight (SQRT{MTOW/50}) D = Distance (KMS/100) f = Number of flights

T = R/TSU TARIFF FORMULA T = Tariff in Rands R = Required Revenue (using RoR) TSU = Transaction Service Units (using the EUROCONTROL Formula)

RCMS Observation and Trend Analysis RCMS Model Results:

PROPOSED TARIFF – 3 YEAR MTREF 2017/18 2018/19 2019/20 Projected Operating Expenditure R128 442 139 R143 429 729 R147 749 975 Capital Allowance R3 983 152 R4 739 339 R5 884 636 Recovery Factor -R1 895 349 Projected Revenue R130 529 942 R148 169 068 R153 634 612 Projected Service Units 2 583 358 2 660 790 2 740 514 Proposed tariff R50,53 R55,69 R56,06 YoY % change in projected tariffs -5,04% 10,21% 0,66%

ANNUAL CALENDAR Review of previous cycle April May June July Aug Sep Oct Nov Dec Jan Feb Marc Review of previous cycle Consultation process Promulgation process Promulgation of the new tariffs 1st of the month. SAWS presents proposed tariffs to RCMS SAWS responding to aviation comments and submissions RCMS notice to stakeholders on recommendation to Minister Meeting with SAWS Review & prepare for consultation SAWS presents proposed the industry for comments 2nd regulated stakeholder meeting Submission to the minister Meeting with Aviation industry