Economic Regulation - IATA

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