Economic Regulation - IATA

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08 Delivering Timely and Cost-Effective Capital Investment Regulation needs to be designed so as to encourage new investment in consultation with the needs of users. It should help to support the long-term strategic plans, designed by industry stakeholders, in order to deliver timely and cost-effective investment where needed (albeit subject to external constraints such as planning laws). It should also prevent unnecessary, early or excessive investment where it is not needed, encouraging instead the use of existing facilities in a more efficient and productive manner.
08 - Economic Regulation 57 This chapter discusses how the regulatory framework can become more flexible in order to attract timely and cost-effective investment into the industry. It outlines options to improve investment incentives for airports and ANSPs, but also highlights the importance of open and constructive consultation between the infrastructure providers and airline users over the design, cost, timing and financing of new investment. No ownership or regulatory approach for airports has yet demonstrated that it can deliver, in all circumstances, timely and cost-effective new investment. However, the regulatory structure is just one component in the investment decision. As such, it is important not to apportion excessive credit or blame to the regulatory structure for the level of investment undertaken. Nevertheless, regulation can have an influence on the focus of investment, helping to direct capital to where it is most needed to address capacity constraints. The investment climate has been relatively benign over the last ten years, with relatively low and declining interest rates. While this climate is unlikely to change significantly, there is little scope for further major declines in financing costs, raising the importance of factors such as regulation in providing a suitable climate for new and sustainable investment. STRUCTURAL AND REGULATORY CONSTRAINTS ON INVESTMENT The complexities and long timescales involved in designing and constructing major new airport and ANSP investments, along with external planning and approval processes if necessary, means that major investment projects will be undertaken and need to be remunerated across several regulatory time periods. Even smaller, quicker investments – for example, those designed to improve service quality rather than provide additional capacity – will look to receive a return across a longer time horizon than one regulatory period. Therefore, regulation – and in particular price-cap regulation – is argued by some to act as a constraint on investment (or an incentive for under-investment), partly due to the ‘hold-up’ problem whereby firms cannot be certain of returns in future regulatory periods and partly due to ‘ex-post opportunism’ by the regulated firm itself who may renege on part of the agreed capital expenditure in order to increase its return. For regulated prices to give the correct incentive for investment they should be at a level equal to the incremental cost of that capacity. However, with large and lumpy capital investment that could require sharp increases in charges and profits for the regulated company in the short-term, which would not be possible under price-cap regulation. However, as discussed in previous chapters, there is little evidence that price-cap regulation has constrained investment – indeed with the allowed cost-of-capital return sometimes being higher than the actual financing costs many firms have had an incentive to over-invest 24 . For airports such as London Heathrow, the key factors that have delayed new investment are environmental and planning constraints, not the regulatory structure. Indeed, there are other strategic factors that can help overcome the constraints of long-timescales upon investment 25 . • First, under-investment risks imposing significant additional internal and reputational costs on the firm if the airport or ANSP is currently congested – especially for hub airports, where congestion delays can, in the long-term, affect the willingness of transfer passengers to use that airport. 24 See Oxera, (May 2006), “The Future of Infrastructure Regulation”, Conference, London. 25 See D Starkie, “Investment Incentives and Airport Regulation”, in the December 2006 edition of the Utilities Policy Journal.
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Economic Regulation IATA ECONOMICS
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Contents 00 Foreword by Giovanni Bi
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Key Conclusions and Recommendations
Page 8 and 9: Key recommendations for the framewo
Page 10 and 11: 01 Executive Summary Independent ec
Page 12 and 13: Setting the scope for Economic Regu
Page 14 and 15: Experiences of Economic Regulation
Page 16 and 17: 02 Report Outline Airports and ANSP
Page 18 and 19: 03 The Case for Independent Economi
Page 20 and 21: Stability of returns. Airports and
Page 22 and 23: • Does the existence of competiti
Page 24 and 25: A POTENTIAL WIN-WIN SITUATION A wel
Page 26 and 27: 04 The Scope of Independent Economi
Page 28 and 29: REGULATORY TIME-CONSISTENCY Regulat
Page 30 and 31: SINGLE-TILL VS DUAL-TILL REGULATION
Page 32 and 33: DEFINING AND VALUING AN APPROPRIATE
Page 34 and 35: The WACC is typically fixed in adva
Page 36 and 37: 05 The Options for Independent Econ
Page 38 and 39: There are alternative versions of a
Page 40 and 41: LIGHT-HANDED REGULATION (PRICE MONI
Page 42 and 43: 06 The Experience of Economic Regul
Page 44 and 45: AUSTRALASIA Australia revenues rece
Page 46 and 47: EUROPE United Kingdom - Designated
Page 48 and 49: Republic of Ireland Price-cap regul
Page 51 and 52: 06 - Economic Regulation 49 OTHER R
Page 53 and 54: 07 - Economic Regulation 51 This ch
Page 55 and 56: 07 - Economic Regulation 53
Page 57: 07 - Economic Regulation 55 The air
Page 61 and 62: 08 - Economic Regulation 59 FINANCI
Page 63 and 64: 08 - Economic Regulation 61 Adapt r
Page 65 and 66: 09 - Economic Regulation 63 The rep
Page 67 and 68: 09 - Economic Regulation 65 San Fra
Page 69 and 70: 08 - Economic Regulation 67 The Ben
Page 72: www.iata.org PRINTED IN SWITZERLAND
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