Transcript CAA Benchmarking Proposal & Responses to the CAA Paper

CAA Benchmarking Proposal
& Responses to the CAA
Paper
Presented by Sylvana Thiele
& Lori Palotas
Main reason for Benchmarking
• 2 main problems with setting regulation:
– Regulators don‘t have sufficient info
– Therefore the firm has an incentive to
influence the system
• Benchmarking suggested as an alternative
to overcome these problems
– CAA proposes that benchmarking could be
used to set price caps
Benchmarking for Price Cap Setting
• A firm‘s future and present price cap would not
be set by its own costs
– incentive gone to ‘game‘ the system
• Setting price caps by this method would be
challenging
– Difficulty in finding the right comparators, do not have
complete information and need to find a way to be
able to take differences of airports into account
– Benchmarking doesn‘t have to be used alone
– Benchmarking must be sustainable over time
Benefits of Benchmarking
• Reduces asymmetries of info between regulators and firms therefore reduces scope of game playing
• Increases incentives for firms to reduce costs through price caps
• Incentives for making appropriate investment decisions
• Comparison is not restricted to cost and efficiency – can be used to
compare other factors
In terms of other Economic Regulation:
• To estimate a fully specified cost function for airports and their
services
• To benchmark costs of major investments
• To estimate long-run incremental costs
• To assess performance on service quality standards
Criticisms of Benchmarking
• Could provide poor incentives for firms to try to meet the
needs of users and customers
– Methodology might not be robust over time
– Benchmarking could set the price incorrectly
• Depending on whether price is set below or above costs
could lead to problems
• Price cap setting should be limited to quality of the
benchmarking and the potential of its benefits should
outweigh the negatives
Problems that are acknowledged in
Benchmarking Airports
• Outputs have to be defined
• Airport data is often limited
• Data adjustments have to be made, therefore a degree
of judgement is unavoidable
• Airports have different strategic objectives
• Lumpy investments / different investment cycles
• Unexplained differences could be wrongly concluded as
an efficiency gap
CAA Assessment and Next Steps
• If benchmarking is not robust enough to set price caps, it
could still be valuable
– E.g. Projecting average or incremental costs or to
improve understanding of key cost & revenue drivers
CAA plans to:
• fully estimate airport efficiency, performance and cost
functions using quantitative techniques
• Make an assessment of the main partial productivity
indicators
• Make a case study comparison between each of the
regulated airports and appropriate comparators
1.
Comments on using top-down
approach to cost benchmarking?
a) key factors which differentiate airports
Source: BAA response – Use of benchmarking p. 7.
1.
Comments on using top-down
approach to cost benchmarking?
b) factors which cannot be meaningfully
address:
Capital intensity
Service standards
Operating costs link to revenue
Product innovation
Airport investment is lumpy
Indirect cost
1.
Comments on using top-down
approach to cost benchmarking?
• Conclusion:
not enough adequate data
too many fundamental differences
large number of external variables affecting
results
unreliable results
 wide error range

1.
Comments on using top-down
approach to cost benchmarking?
• Proposal:
 bottom-up approach
• assessing investment projects
• specific areas e.g. service level agreement
 examination of key processes
• Identification of Material and controllable costs
• Identification of inefficiencies
• quantifiable improvements due to a target setting
approach
2. In what areas is benchmarking
likely to be of greatest value?
•
Benchmarking alternative to regulation for
setting price caps?
 instability of the results may not provide a
sound basis for setting the price cap
➔
regulatory risk for the company
2. In what areas is benchmarking
likely to be of greatest value?
• Proposal:
focussing on key processes
complementary tool:
- measuring operational and economic efficiency
- providing explanatory data
Helpful:
- as a performance guideline for regulator
- for judging the optimum price and service quality
3. Comments on quantitative
techniques and benchmarking?
• Conclusion:
Econometric Analysis:
- need a clear understanding of how to interpret and
use data
- limited to sample sizes
- are error prone
- too complicated
Reasons:
- fundamental differences between airports
- cost data is not available
3. Comments on quantitative
techniques and benchmarking?
• Proposal:
use partial statistical and qualitative measures
Thank you for your attention!
References:
• Civil Aviation Authority: The Use of Benchmarking in the Airport
Reviews, Consultation Paper, December 2000.
• BAA plc: BAA Response, The Use of Benchmarking, February 2001.
• others: Airtours, BARUK, BATA, BMI, British Airways, Gatwick
Consultative Committee, Heathrow AOC, IATA, Manchester
Airport plc, Monarch airlines, Ryanair, Virgin Atlantic Airways.
• Papers online at:
http://www.caa.co.uk/docs/5/ergdocs/benchmarking/benchmarking.zip