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