CAA Benchmarking Proposal

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CAA Benchmarking Proposal Responses to the
CAA PaperPresented by Sylvana Thiele Lori
Palotas
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Main reason for Benchmarking

• 2 main problems with setting regulation
• Regulators dont 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

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Benchmarking for Price Cap Setting

• A firms 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 doesnt have to be used alone
• Benchmarking must be sustainable over time

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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

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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

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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

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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

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Comments on using top-down approach to cost
benchmarking?

• a) key factors which differentiate airports

Source BAA response Use of benchmarking p. 7.
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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

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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

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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

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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

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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

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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

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3. Comments on quantitative techniques and
benchmarking?

• Proposal
• use partial statistical and qualitative measures

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• Thank you for your attention!

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• 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