Economic Regulation - IATA
Economic Regulation - IATA
Economic Regulation - IATA
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09 - <strong>Economic</strong> <strong>Regulation</strong> 63<br />
The report provides the following key conclusions:<br />
Independent economic regulation<br />
is often necessary.<br />
<strong>Economic</strong> regulation is justified for airports and ANSPs<br />
where constraints on market power are insufficient and<br />
where the exploitation of this market power can have a<br />
significant cost in terms of economic inefficiency. In such<br />
cases, the value of the aviation infrastructure – both to<br />
users and from the wider economic benefits it provides –<br />
can only be optimised through an independent and<br />
credible regulatory framework providing appropriate<br />
incentives for efficient service delivery and cost-effective<br />
new investment.<br />
<strong>Regulation</strong> can provide significant benefits.<br />
Infrastructure industries – including airports and ANSPs –<br />
often contain firms with natural monopoly characteristics.<br />
In these cases, basic competition law may not be sufficient<br />
to protect customers and the wider economy from any<br />
potential abuse of market power, allowing a firm to raise<br />
prices in order to receive excessive and unjustified profits<br />
or to cover for inefficient delivery of services, or both.<br />
Effective regulation can provide important incentives<br />
for greater efficiency, improved service quality and<br />
investment in accordance to user needs – incentives that<br />
wouldn’t otherwise exist.<br />
However, regulation is not costless.<br />
<strong>Regulation</strong> is a second-best solution to free market<br />
competition. It does involve costs, in terms of both<br />
resources needed and the risk of regulatory failure in<br />
responding to insufficient or asymmetric information.<br />
Therefore, regulation is necessary only where there is a<br />
clear need to constrain the existence of market power for<br />
an airport or ANSP, and where the benefits of regulation<br />
in terms of improved economic efficiency clearly outweigh<br />
the costs of regulation. A market contestability test can<br />
be used to assess which airports have market power that<br />
is both material and subject to limited constraints.<br />
The type of regulation chosen is important.<br />
<strong>Economic</strong> regulation for airports and ANSPs is available<br />
in a variety of different models, several of which have<br />
already been implemented in some countries. The<br />
different approaches to regulation reflect different views<br />
and objectives in pursuing efficiency and investment.<br />
Experience can provide important lessons on where best<br />
practice is shown and where problems can arise. In <strong>IATA</strong>’s<br />
view, price-cap regulation is the most effective regime for<br />
improving airport and ANSP efficiency.<br />
<strong>Regulation</strong> should be flexible enough<br />
to respond to changing objectives.<br />
Given the heterogeneous nature of airports and ANSPs,<br />
there is no perfect regulatory model to fit all situations.<br />
Instead, the principles of good regulation should be<br />
established within a robust and credible framework.<br />
Additional incentives and consultative processes can<br />
then be built in to the standard framework to ensure<br />
that an appropriate balance is achieved between greater<br />
efficiency for existing assets timely and cost-effective<br />
new investment and flexibility for the model to adapt to<br />
major external cost shocks.<br />
An effective regulatory framework<br />
can provide benefits for all.<br />
An incentive-led process helps to improve efficiency and<br />
the business investment planning process, delivering<br />
capital investment in accordance with the needs of existing<br />
users while also safeguarding the rights of potential<br />
new users. In addition, a well-structured, independent<br />
regulatory regime is seen a “credit positive”, helping to<br />
boost credit ratings and lower debt financing costs for<br />
the regulated company. Fair and transparent regulation<br />
can reduce – not increase – risk and uncertainty for<br />
airports and ANSPs.<br />
The need for good regulation exists whether an airport<br />
or ANSP is publicly or privately owned. A regulatory<br />
structure that incorporates the key principles discussed<br />
in this report can improve the constructive engagement<br />
between airports, ANSPs and users, to the benefit of all<br />
stakeholders in the industry.<br />
<strong>IATA</strong>’s preference is, where regulation is needed, it should<br />
involve detailed cost efficiency targets and service quality<br />
standards. It should preferably be based on price-cap<br />
regulation with single-till procedures. Such a system<br />
has been successful in improving efficiency where<br />
implemented and can be expanded and improved to meet<br />
changing investment needs. Nevertheless, even where<br />
an alternative regulatory framework is chosen it must<br />
meet certain key principles – including independence,<br />
appropriateness, transparency and consultation – if it is<br />
to be effective in improving the aviation industry for the<br />
benefit of all stakeholders.