Economic Regulation - IATA

07 - Economic Regulation 51
This chapter discusses how an effective regulatory framework can be used to deliver efficiency improvements, but
notes how some forms of regulation can provide little incentive towards greater efficiency. Regulation should set clear
targets for performance improvement among the regulated companies, reflecting the different objectives faced at
individual airports or ANSPs.
These targets can be informed by clear and concise benchmarking procedures that allow for general comparison
across companies, while taking due account of their different structures.
Benchmarking systems are already used to great effect in other industries, such as the electricity and gas markets
in Europe, while IATA has developed its own benchmarking scorecard that it uses for airport or ANSP charges
negotiations.
TYPES OF EFFICIENCY
In considering the impact of regulation on efficiency, it is
important to distinguish what is meant by the different
types of efficiency. A particular framework may be strong
in providing incentives for one form of efficiency but
weaker in delivering improvements in other areas.
The three types of economic efficiency are:
Productive efficiency.
This ensures that, for a given standard of quality, each
level of output is produced at the minimum level of costs.
The price-cap regulation framework contains strong
incentives for regulated companies to improve their
productive efficiency, with firms allowed to keep any cost
savings below its target within each regulatory period but
penalised for costs above target.
By contrast, rate-of-return regulation is much weaker in
delivering productive efficiency, with costs reimbursed
whether they are minimised or not.
Allocative efficiency.
This ensures that prices are related to costs, with the
level of output determined by where marginal cost equals
marginal revenue (i.e. capacity is allocated to those who
can maximise the financial and wider economic benefits
from it). Regulation can help to improve allocative
efficiency by improving transparency and in ensuring
ICAO principles of non-discrimination are followed in
setting charges.
However, where an airport or ANSP is capacity constrained,
productive efficiency improvements can reduce costs far
below the market clearing price. Allocative efficiency is
affected as prices do not take full account of the wider
cost of capacity constraints 22 .
Dynamic efficiency.
This ensures that the level of quality and output
improves over time to meet customer needs. In other
words, it ensures that investment is delivered in a timely
and cost-effective manner. Price-cap regulation, in
particular the single-till system, is seen by some as a
constraint on dynamic efficiency as it does not provide
sufficient incentives (e.g. certainty on future returns) for
investment.
However, there is no clear evidence of this, with other
factors, such as the planning system, often being the key
constraint on investment. Price monitoring, rate-of-return
regulation or contracts can help to improve the timeliness
of new investment but require additional safeguards to
ensure it is delivered cost-effectively.
22
In addition to congestion, there are other externalities, such as noise and local air pollution that can impact on allocative efficiency. Some airports
have additional charges for these impacts, though they often fall outside the remit of economic regulation.