Principles of Good Airport Regulation Stuart Holder Associate Director, London Lisbon 22 November 2005

1 Why Regulate Charges?  Traditional view – stop monopolists from over-charging –only applies where airports have market power –protection for airlines and other airport users  But regulation also protects investors –from political intervention for lower charges / higher quality –from unreasonable pressure from users, media, etc A clear framework for establishing tariffs facilitates investment, and so is good for everyone!

2 What Can Go Wrong?  Too much risk and uncertainty –at project inception – will be priced into initial bid –during operation – messy arguments, discourages investment, etc  Profits are too high –pressure (from airlines / politicians / media) to change contract  Profits are too low –discourages future investment / innovation –risk of bankruptcy (disruptive, and discourages private investment)

3 How to Regulate Charges  Allowable tariffs set out in concession contract –but could also use separate legal instruments  Many options for reviewing tariffs over time –purely mechanical formula (eg CPI, possible volume term) –reviews confined to certain issues (eg traffic volumes, future capex) –general review, but some parameters fixed (eg rate of return) –automatic vs discretionary reviews Risk allocations need to be sensible, efficient, affordable, clear and sustainable

4 Hot Topic: Single or Dual Till?  Do profits from commercial activities lead to lower airport charges?  Yes = Single till –lower, more efficient, charges at uncongested airports  No = Dual till –may be more appropriate for congested airports –strong investment incentives + long term view to commercial activities –higher proceeds from any privatisation No obvious “right” answer, and hybrid options exist. But difficult to change once one approach is in place

5 How to Make Regulation Better  Ensure regulator has adequate skills and resources –many failings are from poor decisions, rather than a poor framework –consider effective use of regulatory boards? –ensure adequate funding  Ensure regulatory framework provides: –a clear basis for setting tariffs –an effective appeals mechanism –transparency, and effective participation These will help ensure the regulator uses his discretion sensibly

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