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