Economic Regulation - IATA

01 - Economic Regulation 07
Key recommendations
for Regulatory Practice
Cost efficiency targets end service quality
standards.
The CPI-X mechanism, or a variant of it, is the most
appropriate mechanism for incentivising improvements
in efficiency. However, the mechanism must also be
designed to provide a balance between the risk of
excessive regulatory burden and the risk of setting
charges on the basis of historic costs, rather than
achievable lower costs.
Single-till regulation.
A single till approach determines the level of revenue
and return required and the user charges to be set on
the basis of all services at an airport, irrespective of
whether they are aeronautical or non-aeronautical.
Single-till regulation can mean that charges are relatively
low at capacity-constrained airports, but by itself does
not produce a barrier to new investment. Instead,
it provides strong incentives for efficiency and productivity
improvements.
Asset valuation.
It is essential that the asset base on which airports and
ANSPs are allowed to earn regulated returns is set in
accordance with the investment undertaken and the risk
borne. Artificial increases in asset values should not be
used to justify increases in charges, they simply hand a
windfall gain to an airport or ANSP rather than reflect any
improvement in service levels.
Commercial negotiations for investment.
Airline users should be closely involved in the planning,
design and timing of new investment decisions.
A mechanism should be in place that allows commercial
negotiations to take the lead but provides regulatory
oversight to ensure discussions can proceed on a fair and
transparent basis. The success of this mechanism will be
highly dependent on the amount of information the airport
or ANSP is willing to reveal and on credible incentives
to ensure agreed investment plans are delivered costeffectively.
Airline users and regulators can both have
an important role in determining precise and measurable
outputs and timescales for the investment process, as
well as oversight of the level of resource inputs.
Avoidance of user pre-financing of investment.
While it is important to involve airline users in the
definition and design of new investment, the investment
risks should not be passed on to airlines through a
pre-financing mechanism. Airlines should only pay
for investment once the assets are in operational use
or, in the case of large investments, clearly defined
milestones have been completed. Pre-financing by
airlines is expensive, inefficient, impractical and unfair.
There are more efficient financing mechanisms
(e.g. capital market issues, special purpose investment
vehicles) that can both incentivise and deliver costeffective
new investment.
Cost of capital.
The cost of capital needs to take closer account of actual
financing costs. In some cases, the regulator has erred too
much on the side of caution, allowing an overly generous
cost of capital that exceeds the actual financing costs
faced by the firm. The cost of capital should be set on the
basis of projected or optimal gearing levels rather than
historic levels. However, in order to provide a greater
incentive for new investment, there is scope to explore the
possibility of allowing a split between a lower rate on the
existing capital base and a higher rate to reflect the risks
associated with new investment.
A regulatory structure that
incorporates the recommendations
set out above can improve the
constructive engagement between
airports, ANSPs and users, to
the benefit of all stakeholders
in the industry.