Economic Regulation - IATA

A POTENTIAL WIN-WIN SITUATION
A well-designed and effective framework can provide
benefits for both users and for regulated companies.
An incentive-led process helps to improve efficiency,
often through consultation with users who experience
several aspects of service quality and can provide
constructive help.
It can also improve the business investment planning
process, delivering capital investment in accordance
with the needs of existing users while also safeguarding
the rights of potential new users. Independent and
transparent economic regulation can reduce uncertainty
on both sides, helping to reduce investor risks and
financing costs.
An independent economic regulatory framework can both
constrain the market power of an airport or ANSP and
provide a long-term boost to efficiency and investment. In
some cases, for example in Australia, the market power of
airports is recognised but a price-cap regulatory system
is not put in place because it is perceived as involving too
high a cost and providing a disincentive for investment.
However, this does not appear to be the case in practice.
If used correctly, regulation is not a “zero-sum” game,
where a financial gain to one side is equivalent to a
financial loss to the other. Both sides can benefit from
good regulation, in terms of greater efficiency and low
financing costs.
For airports, a key benefit comes from stable and low
debt costs. A well-structured, independent regulatory
regime is seen by credit rating agencies as a “credit
positive” 6 , helping to boost credit ratings and lower debt
financing costs. Fair and transparent regulation reduces
– not increases – risk and uncertainty for airports. Less
risk means that investors provide capital at stable and
low rates, supporting investment for long-term growth.
Evidence from the credit rating agencies shows no sign
that airports under effective, independent economic
regulation have higher financing costs. Indeed, credit
ratings for airports can actually suffer downward
pressure when the airport looks to expand outside its
core regulated business.
Regulation can also help to mitigate negative factors for
credit ratings in the sector, for example:
• The frequency of regulatory reviews provides important
safeguards.
• Good regulation provides clear and up-to-date
information on costs, efficiency and outputs.
• Good regulation helps to provide sufficient liquidity
for large investments, where efficiently delivered, and
flexibility in the event of negative external factors.
• Regulation can provide investors with timeconsistent
assurances on the recovery of sunk costs,
reducing the risk of any investment in assets
becoming stranded.
• Airports remain customer focused through frequent
consulations with end users.
The stability provided by an effective regulatory framework,
and the boost this can provide to credit ratings, can help
to attract longer-term investment finance into the industry
that is appropriate for the long-term timescales of major
new investments.
The capital intensive, infrastructure nature of airports
and ANSPs requires long term investors with long term
horizons. Regulation can help to avoid the potential
volatility in infrastructure asset prices that is often
associated with short-term speculative finance.
Effective regulation can act as a powerful catalyst
to improve consultation and co-operation between
infrastructure providers and users on both day-today
operations and new investment. It can ensure that
investment is undertaken for sound financial reasons,
though requires openness and co-operation by all
parties.
In effect, the catalyst for greater consultation can lead
to less reliance on the regulator over time, though this
requires retaining a credible threat that if negotiations fail
a robust regulatory framework remains in place to protect
airline users and their customers.
6
See Standard & Poor’s presentation “The Role of Rating Agencies” at Oxera’s conference “The Future of Infrastructure Regulation”, May 2006,
London.