Economic Regulation - IATA

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.