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THE ECONOMIC REGULATION OF AIRPORTS
 In memory of Martin Kunz

This book is dedicated to our erstwhile colleague and friend Martin Kunz,
who was one of the principals founding GARS, Sadly Martin died shortly
before the first meeting. We especially miss his well-founded and
provocative advice in airport regulation, which was his main field of
research.
The Economic Regulation of
Airports

Recent Developments in Australasia, North America

and Europe

Edited by
Peter Forsyth
David W. Gillen
Andreas Knorr
Otto G. Mayer
Hans-Martin Niemeier
David Starkie

Published in Association with the

German Aviation Research Society (GARS)
First published 2004 by Ashgate Publishing

Published 2017 by Routledge

2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright © Peter Forsyth, David W.Gillen, Andreas Knorr, Otto G.Mayer,

Hans-Martin and David Starkie 2004

Peter Forsyth, David W. Gillen, Andreas Knorr, Otto G. Mayer, Hans-Martin

Niemeier and David Starkie have asserted their right under the Copyright,
Designs and Patents Act, 1988, to be identified as the editors of this work.

All rights reserved. No part of this book may be reprinted or reproduced or

utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.

Notice:
Product or corporate names may be trademarks or registered trademarks,
and are used only for identification and explanation without intent to
infringe.

British Library Cataloguing in Publication Data

The economic regulation of airports: recent developments
in Australasia, North America and Europe. - (Ashgate
studies in aviation economics and management)
1.Airports-Law and legislation 2.Airports - Economic
aspects
I.Forsyth, Peter
387.7'36
Library of Congress Cataloging-in-Publication Data
The economic regulation of airports: recent developments in Australasia,
North America
and Europe / edited by Peter Forsyth ... [et al.].
p. cm. -- (Ashgate studies in aviation economics and management)
Published in association with German Aviation Research Society (G.A.R.S.).
Includes bibliographical references.
ISBN 0-7546-3816-2
1. Aeronautics, Commercial--Government policy--Case studies. 2.
Aeronautics,
Commercial--Deregulation--Case studies. I. Forsyth, P. (Peter) II. Series.
HE9777.7.E28 2004
387.7'36--dc22
2003063923

ISBN 13: 978-0-7546-3816-2 (hbk)

 Contents
Acknowledgements
Editors and Contributors
Introduction and Overview
Part A: Australasia

1. Replacing Regulation: Airport Price Monitoring in

Australia
2. A Shift Towards Regulation? The Case of New Zealand

Part B: North America

3. Airport Pricing, Financing and Policy: Report to

National Transportation Act Review Committee
4. The Regulation of US Airports

Part C: Europe

5. Calculating the Short-Run Marginal Infrastructure Costs

of Runway Use: An Application to Dublin Airport
6. Privatisation and Regulation of Amsterdam Airport
7. Airport Regulation in the UK
8. UK-Regulation from the Perspective of the BAA plc
9. New Approaches in Airline/Airport Relations: The
Charges Framework of Frankfurt Airport
10. Privatization in Austria: Some Theoretical Reasons and
First Results about the Privatization Proceeds in General
and of Vienna Airport
11. Regulation in Times of Crisis: Experiences with a
Public-Private Price Cap Contract at Hamburg Airport
 12. Capacity Utilization, Investment and Regulatory
Reform of German Airports
Part D: Towards Institutional Reforms

13. Optimal Economic Regulation: A Short Survey of

Developments from the 1970s to the 1990s
14. Airport Privatisation and Regulation: Getting the
Institutions Right
15. On the Institutional Setting of Ex-Post Regulation in
Regulated Industries
 Acknowledgements
The book is a compilation of selected papers presented at three workshops
organized by the German Aviation Research Society. We would like to thank
the HWWA - Institute of Economic Research, the University of Bremen and
the University of Applied Sciences Bremen for acting as hosts. We are also
grateful to Hamburg Airport, Lufthansa and the Wolfgang-Ritter-Stiftung for
providing financial support.

John Hindley of Ashgate Publishers was encouraging with his active

participation in founding GARS and establishing a book series. His
commitment was critical.

Our thanks also go to Andreas Arndt, Jürgen Müller, Wolfgang Strehl for
their support.
 Editors and Contributors
Doug Andrew is Lead Infrastructure Specialist of the World Bank. He was
Group Director of Economic Regulation at the UK Civil Aviation Authority,
a founding commissioner of Eurocontrol's Performance Review Commission
and a member of Eurocontrol's Regulatory Committee. Previously, he was
deputy secretary in charge of regulation and tax policy in the New Zealand
Treasury, and was educated at Princeton and Auckland Universities. In
addition to his career in the New Zealand Treasury he had secondments as
economic adviser to the New Zealand leader of the opposition (David
Lange) and to the World Bank in the Australian Executive Director's Office.

Bernhard Duijm has been a lecturer in Economic Policy at the University of

Tubingen since 1996. His current position is Temporary Professor of
Economics. He received his PhD in Economics from the University of
Tübingen in 1990. Research interests include competition policy in European
integration, interdependence of competition policy and international trade
policy, and the institutional design of competition and regulation authorities.

Peter Forsyth has been Professor of Economics at Monash University,

Australia since 1997. Prior to this he held posts at Australian National
University and the University of New England. He holds degrees form the
University of Sydney and the University of Oxford. He has specialised in the
economics of transport, especially aviation, privatisation and regulation, and
the economics of tourism. Most recently, he has been paying particular
attention to the privatisation and regulation of airports, and to the use of
computable general equilibrium models in evaluating the economic impacts
of tourism. He has recently published an edited volume of classic articles on
the economics of air transport (Edward Elgar).
David W. Gillen is Professor in the School of Business and Economics,
Wilfrid Laurier University, Waterloo, Canada. He also holds the position of
Visiting Professor in Civil and Environmental Engineering and Research
Economist, Institute of Transportation Studies, University of California-
Berkeley. He obtained his PhD in Economics from the University of Toronto
in 1975. He has held positions at the University of Alberta, University of
British Columbia and Queen's University. He has published over 60 articles
and 15 books in the areas of transportation economics, transportation
management, industrial organisation and management strategy. His current
research covers airline strategies, airport performance measurement and
strategy, network economics and competition issues in airlines and airports.

Anne Graham is Senior Lecturer in Air Transport and Tourism at the

University of Westminster. She has specialised in the research, consultancy
and teaching of airport economics and management for over 15 years.

Cathal Guiomard is an economist and Head of Economic Affairs at the Irish

Commission for Aviation Regulation (www.aviationreg.ie). Previously, he
worked for the Irish Central Bank, and as a member of the Economics
Department of University College Dublin.

Nienke Hendriks is Senior Price Control Review Manager at Ofgem (the

Office of Gas and Electricity Markets) and currently works on the Electricity
Distribution Price Review. Previously, she worked as economic policy
analyst at the UK Civil Aviation Authority. She holds an MSc in Economics
and Finance (Warwick Business School).

Oliver Hogan is with the Irish Commission for Aviation Regulation. A

graduate of Trinity College Dublin, where he studied economics to Masters
Degree level, he was previously employed as an economist with the Office of
the Director of Telecommunications Regulation (ODTR), Dublin from 1999-
2001.
Thomas Immelmann is Director of Corporate Communications, Marketing
and Sales at Hamburg Airport since 1997. Before that he was Director of
Strategic Planning & Product Management of the German Airline LTU
Lufttransport-Unternehmen GmbH & Co. KG in Düsseldorf, and Vice
Director Public Relations and Manager Environmental Affairs for LTU.

Michael Klenk is General Manager, Infrastructure Cost Management for

Deutsche Lufthansa AG, Frankfurt, A lawyer, he joined Lufthansa in 1994 as
a manager of "collective agreements cockpit staff'. From 1999 until 2000 he
was a manager of "airport charges" until appointed to his present position.

Andreas Knorr is Professor for International Economics at the Department

of Business Studies and Economics, University of Bremen, Germany. His
main fields of research are: transport economics, international trade in
services, competition policy and environmental economics.

Peter McKenzie-Williams is with the Transport Research Laboratory (TRL)

UK. A highly experienced aviation economist, with 24 years' specialist work
in the sector, he joined TRL in 1998 as Head of Aviation. His career began at
the Civil Aviation Authority where he was ultimately responsible for
monitoring the financial health of a number of major British airlines. Since
entering consultancy with Travers Morgan in 1989 he has worked for a wide
variety of clients including Governments, local government, airports and
airlines. He has become recognised as a leading expert in the comparison of
airport charging systems and operational and financial performance.

Otto G. Mayer is Head of the Presidential Department of the Hamburg

Institute of International Economics (HWWA). He is also managing editor of
Wirtschaftsdienst and of Intereconomics. From 1995-2000 he was a member
of the board of the Gesellschaft fur Wirtschafts- und Sozialwissenschaften -
Verein fur Socialpolitik (German Economic Association).

William Morrison is an Associate Professor of Economics in the School of

Business and Economics at Wilfrid Laurier University. He graduated with a
PhD in Economics from Simon Fraser University in 1993, specialising in
Industrial Organisation, Microeconomics and Game Theory. Dr. Morrison's
research includes applied theoretical works on transportation markets,
dynamic evolutionary games and experimental economics. In transportation
economics, Dr. Morrison has contributed to research reports on Canada's
airport system and the price elasticity of demand for air travel.

Hans-Martin Niemeier is professor of transportation economics and logistics

at the University of Applied Sciences, Bremen. He received his PhD in
economics at the University of Hamburg and worked in the aviation section
of the State-Ministry of Economic Affairs of Hamburg. His research focuses
on airport regulation and management.

Friedrich Schneider is at the Department of Economics, Institute of

Economic Policy, Johannes Kepler University of Linz, Austria. His research
fields: general economic policy, taxation, shadow economy, environmental
economics, privatization and deregulation policies. He is the author of
numerous articles and editor and referee for various scientific journals.

David Starkie is a Director of Economics-Plus Ltd and Co-ordinator of

Transport Programmes at the Regulatory Policy Institute, Oxford. A former
aviation adviser to the UK House of Commons Select Committees he is now
general economic adviser to the Irish Commission for Aviation Regulation.

Mike Toms is Director of Planning and Regulatory Affairs at BAA plc. He

was previously the corporate strategy director, and has worked in the
industry for 22 years, including a spell as Chief Economist of ACI in Geneva.
He has degrees from the universities of Durham and Nottingham.

Jaap de Wit is Professor in transport economics at the University of

Amsterdam. He was recently appointed as Director of the new research and
consultancy institute Amsterdam Aviation Economics. Prior to this he
worked for almost two decades in different functions within the Directorate
General of Civil Aviation of the Dutch Ministry of Transport. As the chief
aviation economist, he was responsible for the preparations of Amsterdam
airport's privatisation.

Hartmut Wolf belongs to the transport research group of the Kiel Institute of
World Economics. He studied economics at the University of Cologne and
received his PhD from the University of Kiel. His main fields of research are
industrial, institutional, regulatory and transportation economics. He has
published articles and books on air transport deregulation, airport
privatisation and regulation and also on the auctioning of airport slots.
Recently, he was engaged in researching the effects of mobility taxes and
road pricing on the spatial pattern of the German economy. Currently, he
works on a project analysing institutional obstacles for overcoming
bottlenecks in air transport infrastructure.
 Introduction and Overview
Over the past decade, across much of the world, there has been extensive
reform of airports. In several cases, airports have been fully or partly
privatised, and in other cases, they have been restructured as corporations
and required to prepare accounts in a corporatised format. Ownership and
incentives have been changed with a view to making airports more
commercially oriented. Since some airports possess considerable market
power, these changes in ownership and incentives pose the danger that they
will use this market power and raise prices to increase profits and achieve
excessive returns. In most cases, this danger has been recognised, and the
economic power of airports has been restrained by regulation.
The ownership and regulatory problems associated with airports have
only recently attracted much attention. For many years, virtually all but the
smallest airports were either owned by national or regional governments, or
by local communities. There was a presumption that they would not use
their market power to increase charges and profits, and the modest
profitability of most airports seemed to confirm this presumption. When
economists turned their attention to airports they did not focus on the
regulatory or incentive problems. From the late 1960s on, problems of
congestion, pricing, and allocation of scarce capacity were analysed in some
depth (Forsyth, 2000). Another area on which economists focused was on the
evaluation of investments in airport capacity; the costs and benefits of new
airports or runways and on the economic impacts of airport extensions on
local economies. More recently, there has been a recognition of the
environmental impacts of airports, such as their impacts on noise and air
quality, and there has been interest in devising economic instruments that
mitigate these efficiently.
Apart from these aspects, there was little questioning of whether airports
were operating in an institutional setting, which gave them the incentive to
produce and price efficiently. It was presumed that publicly and locally
owned airports would keep prices close to costs, set price structures
efficiently, provide the range of services that users were willing to pay for,
and keep costs down to a minimum. The analysis of other publicly owned
utilities and transport industries, over the past three decades, has shown that
these presumptions could be far removed from reality (see chapters 10 and
14). While publicly owned firms did not charge prices well above costs (and
indeed, often allowed revenues to fall short of total costs), they did not
necessarily produce at minimum cost, and often did not supply what the
users were willing to pay for.
The result of this has been extensive reform of the utility and transport
sectors in most OECD countries. There has been privatisation or
coiporatisation of public enterprises, and associated with this there has been
the introduction of incentive regulation (see Armstrong et al, 1994; Newbery,
1999). In countries, such as the US, which already operated a regime of
regulated private utilities, there was a move from cost plus regulation
towards incentive regulation. In a number of cases, but by no means all,
markets were opened up, to the extent feasible, to competition. There was an
extensive attempt to alter the institutional framework in which utility and
transport industries operate, such that they face stronger incentives to
perform efficiently, and where they possess some market power, the use of
this is constrained in a way that does minimal damage to incentives to
perform efficiently. Evidence from most countries that have embarked on
programmes of reform suggests that performance overall has improved
significantly, though the new environment has introduced its own new
problems (such as greater risk of financial failure of regulated firms).
While governments have been active in reform of telecommunications,
water, energy, surface transport and airline industries, they have been slow
to tackle airports. Nevertheless, there have been substantial changes, mainly
in the last decade. However, the move towards private ownership has been
slower than in other industries. In many cases, governments have opted for
partial privatisation rather than full privatisation. In North America, even
though there is a long tradition of privately owned utilities and transport
industries, there has been a reluctance to move away from public or local
ownership of airports. The move towards full privatisation has been
strongest in the UK and, later, Australia and New Zealand - both countries
which formerly relied on the UK model of public enterprise, and which
followed the UK with extensive privatisation programmes. In continental
Europe, there has been a preference for partial privatisation, with the public
sector remaining with majority ownership.
These changes in ownership have usually been accompanied by the
introduction of explicit regulation. The first example of this occurred in the
UK, where the major London airports owned by the British Airports
Authority were privatised in the mid 1980s and RPI-X regulation was
introduced. In the mid to late 1990s, Australia followed this pattern (since
changed), while New Zealand privatised its three main airports (following
corporatisation) but did not subject them to an explicit form of regulation.
There has been partial privatisation of major airports in several European
countries, including Germany, Austria, Greece, Switzerland, Denmark and
Italy. In some of these cases, explicit regulation has been introduced (e.g. in
Germany). In Ireland, the airport company has been corporatised, although
not privatised, and it is subject to economic regulation. In the Netherlands,
the government intends to partially privatise Amsterdam airport subject to
economic regulation. Canada has chosen not to privatise airports, although
the major airports are now under the control of local authorities. In the US,
however, there has been little change, and the publicly and locally owned
airports are not subject to price regulation, although they are subject to
regulation of investment and financing.
Not much of a pattern has emerged in the types of regulation
implemented across the different countries. When BAA was privatised in the
UK, the government chose to implement RPI-X regulation. In this respect,
the approach taken was similar to that adopted in other privatisations in the
UK. This regulation was designed to avoid the problems which had become
associated with more cost plus forms of regulation, such as rate of return
regulation. The objective was to give the firm an incentive to maximise
profit but to constrain its use of market power in a way that did not weaken,
to any great extent, its incentive to minimise costs. In reality, such regulation
encounters practical problems; in particular, regulators find themselves
under pressure to set the allowable prices with some reference to the firm's
actual costs, and this weakens its incentive to minimise costs. In spite of this,
it is generally accepted as a good compromise, which in its variants that
include "incentive regulation" and "earnings sharing regulation" in the US,
has wide application across the world. (Note that by RPI-X or CPI-X
regulation we mean regulation whereby the allowable price or revenue is set
for a forthcoming period during which it must fall in real terms by X per
cent per annum; by price cap we mean regulation whereby the allowable
price is set in advance. Not all price caps take the CPI-X form.)
In spite of the popularity of this model (full privatisation combined with
RPI-X), the UK is currently the only country which implements it for its
airport industry, and then only in relation to its major London airports.
(Manchester airport is also subjected to price caps, although it has not been
privatised.) When Australia first privatised its airports, it adopted this model,
but it has since moved to a much more light-handed form of regulation or
price monitoring. New Zealand did not formally regulate its airports,
although it did provide for a review of airport pricing behaviour with the
threat of more explicit regulation should this behaviour be unacceptable; a
recent review recommended that Auckland airport be regulated. In
Germany, price-caps are imposed on the partially privatised Hamburg
airport, but rate of return regulation is imposed on Dusseldorf, and
Frankfurt airport is required to negotiate long-term contracts with airlines.
In Austria, the majority public ownership of Vienna airport is partly relied
upon to prevent excessive use of market power, although it is also price
capped. At Amsterdam airport, rate of return regulation is foreseen in the
near future. Formal price regulation does not exist for the North American
airports.
What are the objectives of these institutional and regulatory reforms? A
simple answer would be to promote economic efficiency. This involves
production at minimum cost, provision of services at a quality level which
users are willing to pay for, efficient levels of investment, price structures
that reflect cost or ration capacity efficiently where it is in short supply, or
which enable cost recovery at minimum dead-weight loss. It also involves
provision of adequate services to facilitate competition at the airline level,
and the development of non-aeronautical services which are complementary
to the main business. The institutional and regulatory framework should
create incentives for the pursuit of efficiency, although it must be recognised
that a balance between objectives will normally have to be sought, and that
a first best is rarely attainable.
It is to be recognised that governments have other agendas beyond
efficiency. Governments may wish to maintain the dominant hub position of
the preferred national carrier (see also the discussion on peak charges later
on), or to ensure low cost access to busy airports for commuter and regional
carriers. They may be keen to reap the cash proceeds from privatisation and,
at the time of privatisation, they may set regulatory parameters such that
these are increased. Some governments (especially local governments) wish
to use airports to foster regional development. Airlines and airport
corporations may be powerful in their own right, and they may influence
choice of airport policy. The environmental aspects of airport growth are
now very important, and governments will wish to lessen adverse
environmental impacts. Some of these objectives are consistent with overall
efficiency - for example, efficiency requires that environmental externalities
be taken into account. Other objectives are less consistent with efficiency
goals.
By way of example, the UK government chose to privatise the nationally
owned London airports as a group, and not to sell them separately; it thus
missed the potential for competition between the airports. This would
probably have yielded a lower sale price. The Australian government
abolished formal price regulation just before it privatised Sydney airport;
this would have enhanced its sale price. Environmental constraints have
long held up the expansion of London and other airports. Even busy North
American and Australian airports are required to make special provision for
commuter traffic, which is likely to have a low willingness to pay, even
though peak capacity is scarce. When new, and different price regulatory
systems are introduced and, as, for example, in Hamburg, attempts are made
to ensure that none of the stakeholders is affected too negatively. Regulators
need to take into account the view that publicly owned corporatised airport
authorities, with easy access to revenue flows, may not have strong
incentives to minimise costs and avoid over-investment in facilities, as has
been argued to be the case with Aer Rianta, the airport owner in Ireland.
Thus, the actual ownership and regulatory environments of airports
across the world represent compromises between conflicting objectives -
efficiency has been one of the main motivations for change, but only to an
extent. The very different approaches to the airport problem adopted across
different countries possibly reflect different views on the best ways to pursue
efficiency objectives, but it also reflects the different non-efficiency
objectives that governments are pursuing in their airport policies. Some
governments are keener to maximise revenues on privatisation than others,
some are more keen to promote airline competition, some are more willing
to become involved in detailed economic regulation than others and some
take the view that the the threat of regulation will be sufficient to discipline
pricing behaviour.
There are several tasks for the economist in analysing airport regulation.
One of these is to observe the ownership and regulatory pattern in a city or
country, and seek to explain it in terms of efficiency and other objectives.
Another task is to outline which approaches to airport ownership and
regulation are most likely to be conducive to efficient operation of airports -
have some countries implemented promising models, and are the approaches
taken by others as flawed? Finally, there is the task of assessing which
ownership and regulatory frameworks can best promote efficiency while
recognising the constraints imposed by the non-efficiency objectives
imposed by governments - does a particular framework represent a good
compromise between objectives and is it possible to meet the non-economic
objectives at less cost in terms of efficiency?

Common Themes in Regulatory Diversity

In the light of the diversity of ways in which countries have tackled the
airport ownership and regulatory problem, are there some common themes?
For practical reasons, in the organisation of this book, we have chosen a
geographical structure. The drawback with this approach is that it highlights
the diversity rather than draws out unifying themes. In fact, while the
packages adopted in different countries do differ considerably, they are
mostly responses to common problems, and they use similar regulatory
instruments.
In this introduction, we seek to cut across the geographical contributions
to distil the common themes. In particular, we look at the issues being faced
by governments around the world when designing policies towards airports,
and on the reliance they have on specific instruments. A number of policy
issues and instruments occur repeatedly in the regionally based
contributions to this volume. Some of the key issues and instruments which
emerge are:

The Institutional Framework

Airport Ownership and Incentives
Market Power and Competition
Choice of Regulatory Structure
The Working of Price Regulation
Investment Incentives under Regulation
The Contractual Option
Light-handed Regulation
Commercial Development under Regulation
Excess Demand, Congestion and Regulation

We consider each of these in turn.

The Institutional Framework

Achieving a desirable regulatory outcome is not simply a matter of choosing
a regulatory system and then implementing it. Some institutional
arrangements are more likely to break down or to perform poorly. There are
several aspects which merit consideration. For example, there is the problem
of regulatory capture (chapter 15). Industry specific regulators are regarded
as more prone to capture than are general regulators (who may also be
competition regulators). The close and long term relationship between the
firm and its regulator may result in the regulator becoming dependent on
the firm and accepting its way of thinking.
The commitment of regulators is another problem - regulators may set up
regulatory arrangements, but will they adhere to them (chapters 7, 13, 14)?
They may change regulation after having set it in place, under pressure from
the government, the media or the firm. As a result the firm is faced with
regulatory risk. The short term nature of regulation is also a problem;
regulatory parameters may be set for a short term (three to five years), but
the firm needs to invest for the long term, and it will be unsure what will
happen after the end of the current term.
A related issue is that of the regulator's discretion (chapter 14). Is it
desirable for regulators to be locked into contracts with the regulated firms,
or should they have the discretion to alter arrangements if circumstances
change? Flexibility is desirable because it is never possible to forecast all of
the relevant variables in advance when the arrangements are set in place. On
the other hand, discretion also gives the regulator the ability to behave
opportunistically. For example, a regulator subject to populist pressures may
force the firm to push down prices, but at the expense of investment
incentives and the long-term efficiency of the firm.

Airport Ownership and Incentives

This volume is primarily about regulation rather than ownership, which is a

large topic in its own right. However, it does make good sense to be aware of
the ownership options countries have chosen when regulation is discussed.
 The question of privatisation is considered by Schneider in chapter 10.
Schneider discusses the reason why public ownership of utilities in general,
and airports in particular, has come into question around the world. Some
countries have fully privatised many of their airports, including the UK
(chapter 7), New Zealand (chapter 2) and Australia (chapter 1), but a number
of other countries have chosen to partially privatise, leaving the airports in
majority public ownership. Thus, Vienna Airport is still majority owned by
the government (chapter 10), as are major German airports such as Hamburg
(chapter 11), Frankfurt and Düsseldorf (chapter 12). Partial privatisation may
be seen as a means of introducing commercial motivations and incentives to
minimise costs, while not creating too great an incentive to raise prices -
essentially this is an internal form of regulation (chapter 14).
Notwithstanding this, Germany prefers explicitly to regulate its partially
privatised airports. The Netherlands also decided on a partial instead of a
full privatisation of Amsterdam airport, but this was mainly inspired by the
idea that majority foreign ownership could be excluded in this way (chapter
6). Interestingly, neither Canada (chapter 3) nor the US (chapter 4) have
privatised its airports. Canada has instituted a major shift in ownership,
towards more locally oriented owners rather than central government
ownership, possibly with the objective of creating incentives for the airports
to reflect local objectives. Most of the main US airports are already under
some form of local ownership.

Market Power and Competition

Do airports possess market power and, if privatised and made more

commercially oriented, will they use this power to raise prices to increase
profits? It is generally accepted that airports do possess some market power,
given the limited competition that most city and regional airports face. The
market power issue is central to whether there needs to be some form of
price regulation. It has been most discussed in those contexts where there
has been a decision to rely on light- handed forms of regulation, such as in
Australia (chapter 1). Even in those jurisdictions which have opted for light-
handed regulation, there is a recognition that market power could be used.
In Australia, there is monitoring combined with the threat of explicit
regulation should airports be seen to be abusing their market power. In New
Zealand, the airports were not formally regulated, but they were informed
that their pricing would be reviewed. As it has turned out, the review found
that one airport had been charging higher prices than could be justified on a
cost basis, and the review recommended explicit regulation (chapter 2). It did
not find evidence of charges being substantially above costs; probably
because the airports were disciplined by the threat of regulation. In the
Netherlands, airport competition and airport market power was discussed
intensely during the preparations for a new regulatory system based on the
specific geographical position of Amsterdam airport (chapter 6).
Significantly, few authors mention the argument that the
complementarities between aeronautical and retail services at airports,
together with high margins in the latter, incentivise management to seek
passenger volumes by ameliorating charges (Starkie, 2001). One exception is
the contribution by De Wit (chapter 6) in relation to Amsterdam airport. Nor
do authors canvass the countervailing power argument, namely that airlines
are powerful corporations, and that they possess strong countervailing
power that they can use to force the airports to keep their charges down. For
airlines to have countervailing power vis-a-vis an airport, they need to have
a viable alternative airport to use - and in most instances, this is not the
case. Most major full-service airlines cannot credibly threaten to shift
business away from an airport if they wish to continue serving the city in
which the airport is located. There are some airlines, specifically the new
low cost carriers, which may be able to use secondary airports - this gives
them some leverage over the major city airports. However, this only affects a
small proportion of traffic, and most of the traffic at a city airport is
effectively captive to it. For this reason, most large privatised airports face
some sort of imposed pricing restraint.
Choice of Regulatory Structure

The choice of regulatory structure is an issue for all privatised airports, and
it may be an issue for part privatised and public airports. The first example
of privatisation of state-owned airports was with the formation of BAA plc
in the UK and RPI-X was chosen for regulating its three London airports
(chapter 7). This was a natural choice, given that RPI-X had been recently
developed in the UK as an alternative to rate of return regulation for the
privatised public utility monopolies. The objective of RPI-X and price caps is
to give the regulated firm a strong incentive to minimise costs, by allowing
it to keep any profits it earns, and eliminating its ability to use its market
power to increase profits. It is also likely to give the firm an incentive to
adopt an efficient price structure. Manchester airport, which is under local
government ownership, is also regulated in this way. Australia has tended to
follow the British model of privatisation and regulation, and it implemented
price caps initially when the major airports, except Sydney, were privatised
(chapter 1). Hamburg airport, which is partly privatised but remains under
majority public ownership, is also subject to a price cap (chapter 12).
Price caps are not the only available option. Rate of return regulation is
also an option, although it has been distinctly out of favour around the
world since the 1980s because of its poor incentive properties. Being a cost
plus form of regulation, it gives the firm little incentive to minimise costs,
and it can create incentives to over-expand its capital base. Nevertheless, it
has been adopted as the form of regulation for the partly privatised
Düsseldorf airport (chapter 12). In addition, prior to privatisation in 2002, a
form of rate of return regulation was imposed on Sydney airport (chapter 1).
It is also intended that rate of return regulation will be introduced for
Amsterdam airport in the short run (chapter 6).
A notable absence from the regulatory menu for airports is earnings
sharing or profit sharing regulation. This is a form of regulation which seeks
to strike a balance between incentive regulation, such as price caps, and
cost-based regulation, by setting the allowable prices partly, although not
entirely, with reference to the firm's actual costs. This mixed approach is
common in the US, where regulators have sought to move away from the
rate of return regulation that is in place towards incentive regulation (for the
telecommunications case, see Sappington, 2000). This approach is less
common outside the US and the limited regulatory change to which US
airports have been subjected has meant that the issue of which regulation to
adopt has not arisen. There is an element of this in the sliding scale
arrangements that were adopted for a time at Hamburg airport (chapters 11
and 12) and which are in place at Frankfurt (chapter 9). The pricing rules
adopted meant that unit charges fell with increases in output.
The range of different approaches to regulation has been greatest in the
case of part privatised airports. This has possibly been because the part
public ownership has been relied upon to act as a constraint on the use of
market power. Some part privatised airports, such as Hamburg (chapter 12)
are price capped, while another, Dusseldorf, is subject to rate of return
regulation (chapter 12), and another, Frankfurt, operates with contracts
between it and major users (chapter 9). The New Zealand airports were part
privatised for most of the 1990s, and during this time they were not
explicitly regulated, although there was the threat of regulation (chapter 2).

The Working of Price Regulation

Except in the case of BAA's London airports and Manchester, there is not
much of a track record of price regulation of airports, since most of the
regulatory systems have been in place only a few years. Nevertheless, some
issues have emerged. One of the most complex of these concerns investment,
which is discussed separately below. The implications of regulation for the
choice of price structure and its relationship with excess demand at busy
airports, are also handled separately.
One issue that has arisen is the extent to which regulation has become, de
facto, cost based. Even price regulation systems that do not take account of
costs explicitly, such as pure price caps, can become cost based. Price caps
are normally set for a period, but at the end of this period, new caps are set
for the next period. In resetting the cap, regulators often take the firm's costs
and profitability into account - indeed they may undertake elaborate
assessments of the firm's capital base and set out an allowable rate of return.
Thus, over time the price cap tends to approximate cost plus regulation, and
its incentive power is reduced (although the firm still can keep the profits it
earns during the period of the cap). This trend towards cost plus regulation
has occurred in the UK (chapter 8), and it is an issue that has been
recognised in the recent review of regulation, when a longer term price cap
was proposed (chapter 7). The concern that price regulation would become
more cost-based was a factor in the Australian government abolishing price
capping of airports and replacing the caps with monitoring.
Another problem concerns the volatility of profits under incentive
regulation. Price caps are a rigid form of regulation, which normally do not
take account of unexpected shocks, such as a downturn in demand, for
example after September 11, 2001. If a shock results in a financial crisis for a
firm or industry, the government will come under extreme pressure to
change or remove regulation (although to preserve the incentives for
efficiency, it is necessary for the government to commit to not altering the
price cap). The UK had scarcely privatised its Air Traffic Control System
than it encountered a financial crisis, and the regulator was forced to alter
the price cap. In Australia, the downturn in demand resulting from the
September 11 attacks, combined with the collapse of the second largest
domestic airline, Ansett, resulted in a sharp fall in revenue for some airports.
The government's response was initially to suspend price regulation, and
then to abolish it entirely (chapter 1). The revenue crisis also forced die
regulator of Hamburg airport to alter the formula (chapter 12). This is an
interesting case, because the formula that was implemented initially allowed
for changes in demand to be reflected in changes in allowable prices; while
this could have given flexibility to the price cap, the fact that the formula
was asymmetric caused problems, and the demand responsive aspect of the
formula has been removed. It is worth noting that the contract between
users and Frankfurt airport also provides for prices to be adjusted
downwards as demand grows. The London and Manchester airports were
also affected after September 11, though not greatly, so that the price caps
were not altered. Overall, in three out of four cases, price caps of aviation
infrastructure have been altered in response to revenue shocks - this poses
the question of whether price caps can be better designed to cope with
demand shocks in the future.

Investment Incentives under Regulation

The problem of reconciling price regulation with incentives for efficient

investment is a perennial and difficult one, and no generally acceptable
solutions to it have been proposed. Granted that airports are very capital
intensive, and under-investment can be costly (for example, when it leads to
congestion), how investment is handled is a critical issue. One option is for
users and the airport to come to an agreement on how much capacity is to
be provided - this option is considered separately below.
If regulation takes a cost plus form, the danger, which has long been
recognised, is that there will be excessive investment. Managers may act as
output maximisers, and total profit will depend on the size of the capital
base. This overinvestment is often discussed, and it is noted, in the case of
the German airports, by Niemeier in chapter 12.
Incentive regulation, for example price caps, can produce the reverse
problem, namely that of under-investment. It is important to distinguish
between investments that produce increased capacity, such as an additional
runway at a slot-constrained airport, and those that increase the quality of
the services provided, such as a runway extension which makes it feasible
for airlines to fly longer nonstop sectors. Additional capacity will enable
increased output, and the price-capped airport will gain additional revenue
if it constructs a new runway. However, for the allowable prices to give the
correct signal to add to capacity, it is necessary that they be set at a level no
lower than will cover the incremental cost of that capacity. For an airport
that faces the rising costs of expanding capacity (such as London Heathrow),
prices which achieve this could be high and lead to very high current
profitability. The task of the regulator is a difficult one, since it needs to set
prices just high enough to make capacity expansion worthwhile, although it
is unlikely to have accurate information about the costs of airport expansion.
The airport's immediate customers, the airlines, are not likely to be of
much help. With slot-constrained airports, the profits from inadequate
capacity tend to accrue to the airlines. Airlines appear to have de facto if not
de jure property rights with respect to slots at busy airports, and they are
able to set fares to these airports at levels which reflect the shortage of
capacity - i.e. above cost. The airlines are unlikely to press the regulator to
allow the airport to increase the prices they are charged in the short term, so
that the airport has an incentive to provide more capacity in the long run,
because this would deprive the airlines of their profits from scarce slots.
In the other case, when investment by the airport serves to improve the
quality of service, it need not lead to any significant increase in output. Most
of the benefits from the investment accrue to the users. To this extent, and
unless the airport is able to charge higher prices for better service quality,
the airport will have an incentive to under-invest. Hence, quality monitoring
or regulation might be needed to accompany price regulation, or provision
might be needed to enable the airport to increase prices above those
permitted under the cap for investments which are judge to be worthwhile.
This investment problem has been recognised by several countries as they
regulate their airports. In the UK, much of the recent CAA review of
regulation of London airports focused on creating better incentives for
investment (chapters 7 and 12). Longer term price caps were suggested,
along with upward adjustments to price caps if greater output was achieved.
When Australia applied price caps to its privatised airports, the investment
problem was recognised through the adoption of a mechanism that allowed
for upward adjustments to the price cap should approved investments be
undertaken. While this mechanism did work, and several investments were
approved, the airports considered that it imposed very high compliance costs
- it did result in very detailed involvement on the part of the regulator. The
same danger may result from the Dutch approach, where investments in
essential facilities at Amsterdam airport have to be safeguarded after
privatisation by separate instruments. One of these is an an operator licence,
which can be withdrawn if an adequately equipped airport is not provided.

The Contractual Option

Rather than have direct regulation of an airport, it may be feasible to rely on

negotiations between users and the airport in setting prices and investment
programmes. This option does not resolve the market power problem, since
the airport will have much more discretion over the level of charges than
will the users. Significantly, the contractual approach is only used
extensively in those cases where there is at least majority public ownership
of the airport; for example, in Canada, the US and at Frankfurt.
Airports and their customers can negotiate over the price formula and
paths. This has taken place in Frankfurt (chapter 9). In North America, there
is a long history of negotiations between airports and airlines over the
provision of investment (chapters 3 and 4). Airlines may fund specific
investments, or they may agree on prices and may effectively underwrite
investments by the airport.
This approach does have its advantages over the regulatory option. Only
those investments users are willing to pay for will be given approval, and
the airlines have a mechanism for inducing airports to invest where they
would like facilities to be improved or expanded. Facilitating agreements
between airports and their users was one of the reasons why the Australian
government moved towards price monitoring. There are problems with the
contractual approach, however (chapter 3). Users are neither homogeneous
nor united, and one airline (a carrier that dominates a hub) may support an
investment that another (an new entrant) would not be prepared to pay for,
but nonetheless will make use of if it is provided. Further, it is difficult to
write contracts which cover all contingencies (chapter 13).

Light-handed Regulation
Not all privately owned airports are subject to explicit price regulation. In
New Zealand, the private airports are not price regulated. Since 2002, the
Australian private airports have been subject to price monitoring, not
regulation; and in the UK, airports other than BAA's three London airports
and Manchester are not subject to price caps.
In New Zealand, only two of the three "privatised" airports have majority
private ownership (chapter 2). Auckland and Wellington airports have had
majority private ownership since the late 1990s. While the New Zealand
airports have not been regulated, there has been the provision that they can
be. A recent review concluded that Auckland airport had charged prices that
were excessive, and that it should be subjected to explicit regulation. It also
concluded that Wellington airport had not charged excessive prices. The
threat of explicit regulation may have been effective in disciplining the use
of market power and, significantly, while the review concluded that
Auckland airport had made excessive use of its market power, it did not do
so to any large extent.
Australia has moved away from explicit price caps to a price monitoring
system, although the exact nature of this system has yet to be determined.
There is provision for the review of performance and the re-imposition of
direct regulation should performance be unsatisfactory (though the criteria
for unsatisfactory performance have not been announced). In the UK, while
BAA has the freedom to price its Scottish airports as it chooses, it is well
aware that its other airports in the UK are regulated, and that there are
natural pricing benchmarks in the charges of other airports in the UK.
In some senses, some publicly owned airports are subject to either light-
handed regulation, or no regulation. The US airports are subject to some
general pricing rules (chapter 4), which might be characterised as light-
handed cost plus regulation. The Canadian airports (chapter 3) are not
directly regulated. Public, and especially local public, ownership may result
in managers not wishing to exploit market power to any great extent, thus
public ownership may act as a substitute for regulation.
It is difficult to be conclusive about light-handed regulation of airports.
The threat of a sanction, such as imposition of direct regulation, seems
important in disciplining pricing behaviour, although it remains to be seen
how effective it is. It will also be some time before the performance of light-
handed regulation in ensuring efficient investment becomes evident.

Excess Demand, Congestion and Regulation

For many busy airports, the big issue is congestion, or at least, how to ration
the excess demand. Other airports face excess demand for part, although not
all, of the day. Regulation can impact on how well the excess demand
problem is solved.
Consider the case of moderately busy airports first. Does the regulatory
system in place set up incentives to moderate the costs of excess demand at
the peaks by instituting an efficient price structure? Higher charges at the
peak may resolve the excess demand problem. Of the different types of
regulation, price caps or incentive regulation are generally more likely to
induce efficient pricing structures (chapter 12), though it is an issue which
warrants further research. Alternative forms of regulation may not give
airports much incentive to set up efficient price structures. For example, rate
of return regulation, as implemented at Dusseldorf airport, may give too
strong an incentive to the airport to resolve its excess demand problems by
building more capacity, rather than by rationing its existing capacity
efficiently. Certainly, the response of German airports in the past to excess
demand has normally been to invest rather than ration (chapter 12). The
same thing is perhaps true of the US airports - the strong cost plus
environment (chapter) may be a factor in explaining why they have rarely
adopted pricing solutions to congestion or excess demand problems. The
preference to invest rather than ration is also related to the role of transfer
passenger volumes at hub airports (40-50 per cent at major hubs in Europe).
These passengers are the least captive to the hub airport, but they are extra
costly since they are mainly accommodated during the peaks. Therefore, the
opposite of peak pricing can be observed where various European hub
airports apply reduced passenger charges for transfer traffic (chapter 6).
 With very busy airports, it may not be a matter of simply instituting
higher peak prices, since the airports may be in a situation of excess demand
for the whole of the day. When airports are not busy, or only moderately so,
weight- or passenger-based charging systems have been regarded as a
tolerably efficient means of covering the costs of the airport while creating
minimum distortion in demand patterns. Hogan and Starkie in chapter 5
suggest that the marginal damage cost of using the runway could be
significant; this cost would need to be taken into account, along with proxies
for elasticity, in the design of efficient price structures. However, apart from
this, weight-based charges are no longer efficient when excess demand is
present: such airports have a problem of rationing demand, not covering
costs. BAA has moved away from weight based charging towards a more
uniform charging system at its busy London Heathrow airports. This move is
consistent with better rationing of excess capacity, and it may have been
induced or facilitated by the system of RPI-X regulation (although it has put
a heavy emphasis on passenger-related charges, which may not be fully
justified by passenger costs).
It is apparent that price structures alone, whatever the form of the
regulation in place, are not likely to be sufficient to ration capacity in the
busy airports. Very high price levels are likely to be ruled out by price caps.
Thus, these airports have needed additional mechanisms, such as
administrative rationing systems or the trading of slots in a secondary
market to ration demand to capacity. These systems operate at very busy
airports such as London Heathrow (albeit informally in the case of the
secondary market) in tandem with the price regulatory system.
Administrative rationing is also used at many less busy airports, such as
Sydney, Hamburg and Canadian airports, whilst a few US airports use a
formal trading market.

Future Challenges for Airport Regulation

It will be apparent from the papers in this book that there are many problem
areas with airport ownership and regulation which remain imperfectly
resolved, and that there remain significant challenges for the future. Indeed,
the main contributions of this book may be to identify what the main
problems are, and to examine how they have been handled across the world.
The papers are suggestive of the way to go, but they do not point to
definitive solutions as to how to handle some of the less tractable problems.
A number of challenges for the future can be identified.

The Diversity of Approaches

Something which is evident is that there is great diversity in the approaches

taken by different jurisdictions to the airport ownership and regulation issue.
Different ownership patterns are in place as well as different regulatory
systems, different regulatory institutions, and different emphases on local
community input. There is not much evidence, so far, of any convergence
towards favoured models. It is not as though there is an obvious
recommended model of privatisation or regulation. Unlike with other
industries, there has not been much full privatisation accompanied by
deregulation (e.g. airlines) or by incentive regulation (telecommunications).
It needs to be remembered that most of the changes in airport ownership
and regulation (with the exception of the UK) have taken place only within
the past decade. There has been little scope to evaluate the different models
that countries have adopted. Indeed, those economists who have been
turning their attention to evaluating the efficiency performance of airports
have not yet revealed a link between ownership and regulation. Establishing
whether airports subjected to incentive regulation are performing better
than rate of return regulated airports, and exploring the relative
performance of private, partially private, local and fully government owned
airports might be a priority for the future.
Partial Privatisation

While there has been a definite move towards privatisation recently, often
this has taken the form of partial privatisation. Is this just a precursor to full
privatisation, as it was in New Zealand, or does it represent the conscious
adoption of a hybrid public/private model? This hybrid model appears
particularly popular in Europe where governments have been reluctant to
privatise fully. As the contributions to this book indicate, by retaining
majority public ownership, there may be an intention to moderate the use of
market power, while sharpening the incentives to achieve productive
efficiency.

Local Ownership and Incentives

Many airports have a local geographic dimension that is missing in most

other transport and utility industries. With several airports, there is a strong
local component to ownership - this is so for the Canadian and US airports,
for German and Austrian airports, for some of the medium-sized British
airports, and for some New Zealand and Australian airports.
Local owners should have a strong interest in the performance of the
airport, since they will see it as stimulating development, and many of its
users will be local residents. Hence they may have strong incentives to
ensure productive efficiency, that investment is neither excessive nor
inadequate, and to keep charges down. Local ownership may be a substitute
for the private/regulated model. Granted that there are problems with
regulation, however well designed, in ensuring commitment to keeping costs
down and facilitating efficient levels of investment, so local ownership could
be an efficient alternative.
This is the theory. In practice, local owners may not be as rigorous in
enforcing cost minimisation as they should be, and they may be prone to
empire building. Local authorities may be easily convinced that big new
investments will "bring development to the region", and thus they will over-
invest. Regulatory reviews of the long-standing price-regulated local
authority owned Manchester airport suggests that this is the case. Much will
depend on the relationship between the local community and the airport
management, and whether the former can articulate clear incentives for
efficient performance, and whether the latter are constrained to serve their
owners well.
Again, it is an empirical matter whether a local component of ownership
is a spur to improved performance. The pricing and productivity
performance of local airports, and their investment policies, need to be
compared to those with other ownership structures.

Resolving Investment Problems

Books on regulation tend to conclude that one of the least satisfactory

aspects of regulatory systems concerns their incentives for efficient
investment. This book is no exception. No ownership or regulatory approach
for airports has yet been shown to handle the investment question very
satisfactorily. Admittedly, however, many systems have only been in place
for a short period. Price regulation is directed towards limiting the use of
market power, and it has difficulty in reconciling this with provision of
incentives for long run efficiency. Investment issues can be addressed by the
regulator, for example in the assessment of quality enhancing investments at
a price capped airport, or in evaluating a large addition to capacity.
However, this does rely on the regulator having extensive discretion, and it
may require detailed involvement by the regulator in decisions about
investment.
There are some attempts to come to grips with this problem. In its initial
proposals, the CAA has sought to incorporate better investment incentives
within a structure of price regulation for the BAA London airports which it
regulates. Contractual arrangements between airports and airlines, taking
place within a framework or regulation or monitoring, may be capable of
resolving investment problems. Given that airports are capital intensive, and
many of their efficiency problems stem from poor investment decisions, this
is a problem area which is a research priority.

Regulation and Capacity Rationing

Many regulated airports are subject to excess demand all, or part of, the day.
In most cases, prices charged only play a minor role in allocating scarce
capacity. Normally, the capacity allocation role is undertaken by a separate
administrative system of slot allocation. While such mechanisms achieve
their objective of limiting demand to capacity, and thus avoiding serious
congestion, they are not the least cost means of doing so. Slot allocation is
based on arbitrary criteria, and tends to perpetuate the dominance of the
incumbent airlines. Certainly it would appear that price-regulated airports
could do more, through the adoption of peak pricing, to allocate capacity
efficiently at airports that are not busy for all of the day. A greater, though
not necessarily complete reliance, on pricing rather than slot allocation,
would be preferable. The incentives facing price capped, or otherwise price
regulated, airports to move towards efficient price structures are not clear,
and this is an issue worth further investigation. So too is the separation
between price regulation and capacity rationing at very busy airports -
could better integration of the two tasks improve the outcome?

The Working of Light-handed Regulation

Light-handed regulation has the advantage that it does not require detailed
involvement by an imperfectly informed regulator. Some countries have
taken the step of removing formal price regulation from privately owned
airports, although in each case there is either an explicit or implicit threat of
formal regulation should behaviour be unsatisfactory. It is difficult to tell
how well this will work, since, with the exception of BAA's Scottish airports,
these moves have been made only recently. Much will depend on how
serious a threat airports perceive they are facing (though no doubt the New
Zealand airports see regulation as a real option now), and what the criteria
for unsatisfactory performance are. While giving flexibility to airports and
their customers is desirable, such systems may also mean that the regulator
is given much discretion when it comes to determining whether an airport
has not performed satisfactorily. How light-handed systems work in the
airport context will be an interesting issue for the near future.

The Prospects for Airport Competition

Most of the discussion in this book has taken as read that strong competition
between airports is not feasible. Indeed, in some cases, the scope for
competition has been limited by policy, for example, when BAA's London
airports were privatised as one company. With improvements in surface
transport, airports may be able to compete with one another, especially in
densely settled countries such as the UK. Competition seems to be
developing between main and secondary airports for low-cost carriers; these
airlines and their passengers are price conscious, and are willing to travel
further to save money. Full service airlines are less likely to switch airports
unless the price differential is substantial. This competition may not
eliminate the market power of the main airports, although it will put limits
on it, especially in the role of serving budget conscious passengers. So far,
the main airports do not seem to have responded much to competition from
secondary airports - they have maintained their prices and let them have the
traffic. If the market share of the low-cost carriers continues to grow, the
main airports may be forced to respond, and alter their price structures so
that they do not lose too much traffic - this will require higher prices for the
less footloose traffic. They will need to do this within the context of the price
regulation they face. It does, however, raise the bigger question of whether,
in more competitive circumstances, there is a continued need for formal
price regulation.
References

Armstrong, M., Cowan S. and Vickers, J. (1994) Regulatory Reform: Economic

Analysis and British Experience, Cambridge, Mass. MIT Press
Forsyth, P. (2000) "Models of Airport Performance", Ch.37 in D. Hensher and
K. Button, Handbook of Transport Modelling, Pergamon, 597-608.
Newbery, D. (1999) Privatization, Restructuring and Regulation of Network
Utilities, Cambridge Mass. MIT Press.
Sappington, D. (2000), "Price Regulation and Incentives", in: M. Cave, S.
Majumdar, and I. Vogelsang (Eds.), Handbook of Telecommunications
Economics, http://bear.cba.ufl.edu/sappington/papers.
Starkie, D. (2001) "A New Deal for Airports?" in C. Robinson, Regulating
Utilities, Cheltenham, Edward Elgar.
 Part A
Australasia
 Chapter 1
Replacing Regulation: Airport Price
Monitoring in Australia
Peter Forsyth

Introduction

Australia provides an interesting case study of airport regulation. In the mid

to late 1990s, most of the major airports in Australia were privatised, and
subjected to price-cap regulation. Yet, within five years this regulatory
system had been rejected, and replaced by price monitoring.
One objective of this paper is to explore why this occurred. Price
regulation had given rise to several problems, and further problems were
expected to emerge. Critically, airports had been unprofitable under
regulation, and the events of September 2001 imposed a financial crisis on
them. The government's initial response was to remove or modify
regulation, on a temporary basis. It later decided to remove regulation
altogether, and replace it with price monitoring. This reflected a concern
with the financial implications of regulation, and the longer term
implications for incentives to pursue efficiency.
A second objective is to explore how price monitoring might work. The
details of the monitoring regime to be imposed are sketchy. The system does
embody a sanction for unsatisfactory performance - a return to direct
regulation. Critical to the working of any monitoring system are the triggers
for the imposition of the sanction; these are yet to be determined. There is
some chance that they will be cost based, depending on the actual
relationship of costs to revenue. If so, they will embody poor incentives for
productive efficiency. It is not necessary for this to be so however - the
triggers for sanctions could be designed so as to be consistent with
incentives for productive efficiency.
Another aspect of monitoring is the scope for flexibility. This could be
important in the light of history, whereby regulation proved too rigid to
allow for the adverse external effects which impacted on the airports. Ex
post assessment of performance can allow for the impact of external factors
on the airports more readily than regulatory rules set in advance can. This
aspect of monitoring is analysed. The flexibility advantage could be a real
one, although it comes at the cost of greater discretion on the part of the
monitoring body.
The chapter has a brief review of developments in price regulation of
airports in Australia. The problems that arose with regulation, and led to its
replacement, are considered next. Some of these problems could have been
mitigated by better design of regulation. The new price monitoring
arrangements, and the options as to how they might work, are analysed.
This move to price monitoring does present opportunities for introducing
more flexibility. The paper concludes with some lessons from the Australian
experience.

Airport Policy: A Brief History

Until 1996, nearly all of the airports serving passenger traffic were either
owned by the federal government, or by local authorities. All of the large,
international airports, with the exception of that at Cairns, were owned by
the federal government, and were operated by a public enterprise, the
Federal Airports Corporation (FAC). These airports were not directly price
regulated, though they were subject to a form of price monitoring, called
"prices surveillance", by the Prices Surveillance Authority (PSA), which was
later merged into the main competition regulator, the Australian
Competition and Consumer Commission (ACCC) in 1995. The PSA produced
one report into airport charges in 1993 (PSA, 1993).
From the mid 1990s, all the airports owned by the FAC were privatised,
beginning with the second and third biggest, Melbourne and Brisbane, and
Perth, in 1997. Most of the other airports followed a year later, however the
largest airport, Sydney, was held back from privatisation, partly because of
the problems it posed for future development. The airports were sold in
trade sales, and major investors in them included BAA (Melbourne) and
Schiphol Airport (Brisbane).
Formal price regulation, to be implemented by the ACCC, was introduced
at the time of privatisation (for more details, see Forsyth, 2002). Five year
price caps of the CPI-X form were set individually for each of the airports.
The "X" factor was set with reference to expected traffic growth; for example,
the "X" for Brisbane was set higher than that for Melbourne because of
higher expected traffic growth. There was provision for an inquiry into
regulation at the end of the five year period. Price-caps of this form had
been used to regulate a number of industries in Australia, and some of the
problems that could emerge had been anticipated. For example, the risk of
reductions in quality was noted, and quality of service monitoring was put
in place. The problems with inadequate investment under price-caps were
also recognised, and a mechanism was put in place such that the airport
could obtain an upward adjustment to the price-cap if it undertook
investment that was approved by the regulator (ACCC, 2000).
Sydney airport remained in public ownership, although it was slated for
privatisation in 2001. Prior to this, the airport sought a price increase of over
100%. Using its prices surveillance powers, the ACCC undertook a review of
this increase - it initially suggested that an increase of 76% would be in
order. However, the government did not accept all of the ACCC's analysis,
and it instructed it to allow items (including a dual till) which would have
the effect of making the allowable price increase about 100% (ACCC, 2001).
This was implemented in 2001.
The privatisation of Sydney did not take place until June 2002; this was
because the events of September 2001 (the September 11 terrorism incident
and the collapse, a few days later, of Ansett, the second largest domestic
airline) caused a sharp drop in traffic and considerable uncertainty.
Curiously, the government offered the airport for sale before it had
determined what regulatory environment it was to operate under, even
though this was likely to change from the price surveillance which had been
implemented up to that time. It had just received a report on price
regulation, but had not announced its policy, when it took bids for Sydney,
although it had announced its policy changes when the short list of bidders
was announced.
The government entrusted the five year review of airport price regulation
to the Productivity Commission (PC), its main microeconomic advisor. The
PC commenced a review in late 2000, and produced a draft report in August
2001. This report canvassed the option of relying solely on price monitoring
rather than regulation, but it also raised the possibility of continuing price
regulation (of the price-cap form) on the major airports, with price
monitoring or no regulation for the smaller airports. The airports strongly
supported the first of these options; they had been critical of price
regulation, partly because most had been unprofitable, and because they saw
regulation as too intrusive. The airports also possibly saw the regulator as
behaving opportunistically, taking advantage of every opportunity to keep
charges down regardless of the merits of the situation.
The September 2001 crisis had a major impact on the airports - some lost
nearly a half of their traffic in a week. The airports, which had not been
profitable, asked the government to remove or modify price regulation. In
October, the government suspended price regulation of most of the airports,
although it maintained prices surveillance of Sydney airport, and it
maintained regulation of Melbourne, Brisbane and Perth airports. It adjusted
their price-caps upwards by about 6-7% however (Forsyth, 2003). With their
new-found pricing freedom, the airports increased their aeronautical
charges, in some cases by over 100%.
The PC delivered its final report to the government in January, 2002 and
the government released it publicly in May (Productivity Commission,
2002a). The report advocated the removal of direct price regulation and the
imposition price monitoring for the major airports, to be reviewed in five
years time. Price regulation could be re-introduced if the airports had
abused their pricing freedom. The government accepted the Commission's
recommendations and, from July 2002, all price regulation was removed. The
larger airports, including Sydney, are now subject to price monitoring, and
the smaller airports are not subject to any controls. The competition
regulator, the ACCC, is currently devising a system of price monitoring.

The Experience with Price Regulation

Price regulation of Australian airports was replaced after only a short period
of operation. This came about partly as a response to problems that had
developed, and partly as a response to problems that were anticipated to
develop. As the September 2001 events and the government's response to
them shows, price-caps became very difficult for governments to adhere to -
they caused too much profit volatility, and threatened the viability of the
regulated firms. Apart from this, other problems with price regulation had
become evident during the reviews of pricing -most of these are the normal
problems associated with incentive regulation.
The problems that develop are symptomatic of the form of regulation. If
cost-plus regulation (such as rate of return regulation) is implemented,
several problems can be anticipated. Most seriously, the incentive to
minimise costs and produce efficiently is weakened, since the firm can
simply pass on cost increases. In addition, the firm will have an incentive to
overcapitalise, since it can make more profits with a large capital base than
with a small one (the Averch and Johnson effect). To the extent that quality
is a problem, it is likely that the firm will "gold plate" and supply a level of
quality in excess of that required by its customers. Cost-plus regulation does
not run the risk of bankrupting the firm, since prices can be adjusted
upwards if the firm is incurring a loss.
 Incentive regulation has been implemented in many countries since the
1980s in response to these problems. The essence of incentive regulation is
that the price that the firm is allowed to charge does not depend on its costs.
This is achieved via a price-cap, one form of which is CPI-X regulation. If it
achieves low costs, it is allowed to retain the profits; on the other hand, if
revenues fall short of costs, the firm must bear the loss. Thus, one problem
which does emerge with incentive regulation is that of profit volatility -
profits may be very high (which is awkward for a regulator or a
government), or negative (this is even more difficult for the government
because the supply of an essential service is threatened). Other problems
associated with incentive regulation can be a degradation of quality of
service, and inadequate investment. On the other hand, incentive regulation
does promote efficient production, since the firm has a strong incentive to
keep costs down.
Systems of regulation, as actually implemented, rarely fit perfectly into
one or other of these types. In particular, when price-caps are revised, as
they are periodically, regulators usually take the firm's actual costs into
account, and set prices such that they cover expected costs over the
regulatory period. There is some concern that "incentive regulation" may
degenerate into cost-plus regulation over time, as regulators pay close
attention to the firm's costs when setting prices. In Australia, price-cap
regulation is often implemented with cost-based resets at the end of
regulatory periods - nevertheless, regulation as it is implemented does have
some of the properties of incentive regulation. Effectively, in Australia, most
of the airports were subject to price-caps, which were due to be revised if
such regulation was to continue - this revision might have been partly cost
based. Sydney airport had been effectively subject to cost-plus regulation.
The problems that have emerged at Australia's regulated airports are all
those which could be expected from the type of regulation. Three types of
problems have been of greatest concern; investment problems, problems
with incentives to minimise costs, and profit volatility problems. There are
other problems that can arise with regulation, for example, quality problems.
These had been anticipated, and dealt with adequately. For example, the
quality problem was addressed through the implementation of a quality
monitoring system. Attention will be concentrated on these three main
problem areas.

Investment Adequacy

When price-caps were introduced for the privatised airports, it was

recognised that ensuring adequate investment could be a difficulty. As a
result, a specific investment incentive was built in. This took the form of the
"necessary new investment" provisions (ACCC, 2000). When airports
undertook investments to increase capacity to cater for increased demand,
or to improve the quality of the service (for example, improving landside
access or extending a runway) they could apply to the ACCC to obtain a
price increase to cover the cost of the investment. The ACCC might or might
not approve the price increase; in several cases it did approve increases, but
it did not do so in all cases. It was guided by the responses of the airlines to
the proposed investments - if they were in favour, it would be likely to
approve them.
The curious feature of these arrangements was that they enabled price
increases when investments were required to enable additional traffic to be
handled. Normally, additional demand would lead to additional revenue,
which would cover the cost of the expansion in capacity. Assuming that this
did not entail increasing per unit costs, an airport should have an incentive
to invest in capacity to cater for additional demand. A price rise should not
have been needed - unless the airports were likely to respond to an increase
in demand without increasing capacity, and congestion developed. On the
other hand, when the benefits of the investment accrue to the users, as they
would with a runway extension, the airport would need some incentive to
invest - a price rise would achieve this.
In fact, these arrangements served to correct another problem that was
becoming evident - the initial price caps had been set too low to enable the
airports to invest in extra capacity and cover their costs. Price rises for
capacity expansion were used to compensate for price-caps that were too
low.
The airports were critical of the way these investment provisions were
implemented by the ACCC. In particular, these provisions resulted in very
detailed intervention by the regulator, which was required to make an
assessment even for quite minor investments - this led to high compliance
costs. These provisions may have been simplified if price regulation had
been continued.
These sorts of problems did not emerge with the more cost-based
regulation of Sydney airport. If anything, the reverse problem of excess
investment may have been present. The airport undertook a major
investment programme in the late 1990s in preparation for the Sydney
Olympic Games, and it was subsequently allowed to increase its prices very
sharply. Whether all the investments it undertook were economic remains to
be seen.
Getting investment right is particularly difficult in the case of regulated
airports - perhaps more so than in the case of other regulated industries. This
is because there is no well behaved long run cost function for airports. There
are many indivisibilities, and the cost of additions to capacity vary widely
from case to case. For a given airport, increasing capacity by 20% may be
quite inexpensive, but increasing capacity by 30% may be extremely
expensive, since a new runway on a constrained site may be needed. It is not
possible to set prices which simultaneously cover current costs
(approximately) and which will also be just sufficient in the longer term to
cover the costs of investment.
This inevitably involves the regulator in having a detailed role in the
assessment of investment. Some expansions of capacity can only be funded
if the airport is granted a price increase, and the regulator will need to
evaluate the airport's case. In doing so it will be at an information
disadvantage, and it will need to rely heavily on the airport for information
(and the airport need not have an incentive to provide accurate
information).
 This was a problem which the Productivity Commission paid particular
attention to in its report (it has been particularly concerned about
investment adequacy in other regulatory contexts - see Productivity
Commission, 2001). Whether regulation takes the form of incentive
regulation or cost plus regulation, the regulator will need to be closely
associated with the evaluation of investment. Certainly, light-handed
regulation is not feasible. However, this may not be the main problem.
Given the information asymmetries, there is a high chance that the regulator
will get it wrong, refusing price increases when investment is needed, and
granting price increases when they are not necessary.
With the price-caps as they were applied to the Australian airports,
significant problems of inadequate or excess investment had not had time to
develop. The main difficulty which had developed with the price-caps so far
was that of the intrusiveness of the regulation. It probably would have been
possible to have revised the arrangements so that the airports were given
more discretion over their investment programmes, and to have lessened the
close involvement by the regulator in assessing major investments. However,
this would not have solved the information asymmetry problem; for major
investments, the regulator would need to be involved, and it would have
been making decisions based on limited information.

Incentives for Productive Efficiency

The primary rationale for incentive regulation is that it gives the regulated
firm an incentive to keep costs at a minimum, although achieving productive
efficiency. Most of the Australian airports were subject to incentive
regulation in the form of CPI-X regulation. Interestingly, none of the parties
to the reviews which took place sought to test whether it had achieved this
aim. The ACCC was in favour of continuing price-caps; however, it did not
present any evidence on how well they were working in terms of productive
efficiency. None of the parties wishing to replace price-caps, for example
Other documents randomly have
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The Project Gutenberg eBook of Crito
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Title: Crito

Author: Plato

Translator: Marsilio Ficino

Release date: February 14, 2016 [eBook #51220]

Most recently updated: October 23, 2024

Language: Latin

Credits: Produced by Carolus Raeticus

*** START OF THE PROJECT GUTENBERG EBOOK CRITO ***

PLATONIS

CRITO
Translation by Marsilius Ficinus
WILLIAM CURRY, JUN., AND COMPANY;
SIMPKIN AND MARSHALL, LONDON.

M.DCCC.XXXIV.
 Transcriber's Notes:
For the Latin text the following edition was used:

"Plato's Apology of Socrates, Crito, and Phædo" (Publ.

William Curry, Jun., and Company; Simpkin and
Marshall, London, 1834)

Concerning the Latin text, a quote from the Preface to the

above edition may suffice:

"In compliance with the desire of the Publishers, a Latin

version has been annexed, that of Marsilius Ficinus, a
Florentine, born A.D. 1433, and educated by Pletho,
under the patronage of Cosmo di Medici, for the express
purpose of translating the writings, and reviving the
philosophy of Plato."

Footnotes added by the Transcriber are marked as [TR1],

[TR2], etc.

CRITO
PERSONS OF THE DIALOGUE
Socrates Crito
 SCENE: The Prison of Socrates

SOCRATES.—Curnam hac hora venisti, o Crito? annon valde

adhuc est ante lucem?

CRITO.—Valde quidem.

SO.—Quando vero maxime?

CR.—Profunda aurora.

SO.—Admiror, quemadmodum ipse custos carceris tibi

obtemperare voluerit.

CR.—Familiaris jam mihi est, o Socrates, ob crebrum huc

adventum meum. Præterea beneficii nonnihil a me accepit.

SO.—Venistine modo? an jam est dudum?

CR.—Satis dudum.

SO.—Proinde cur non statim me excitasti, sed silentio

assedisti?

CR.—Nunquam per Jovem, o Socrates, excitassem. neque

enim ipse vellem in tanto dolore evigilare. Sed te jamdudum
admiror, sentiens, quam suaviter dormias; et consulto non
excitavi te, ut quam placidissime degeres. Equidem et per
omnem vitam ob hujusmodi morem beatum te judicavi;
maxime vero in præsenti calamitate, quod eam tam facile
ac placide feras.

SO.—Perabsurdum esset, o Crito, si quis tam grandis natu

imminentem mortem moleste ferat.
CR.—Sed et alii, o Socrates, æque senes similibus
calamitatibus opprimuntur, quos tamen ætas ab afflictione,
quam sors præsens affert secum, non liberat.

SO.—Ita est. Sed curnam adeo mane venisti?

CR.—Nuntium, o Socrates, ferens acerbum; non tibi

quidem, ut mihi apparet, sed mihi potius, et familiaribus
tuis omnibus, et acerbum et gravem. quod equidem inter
gravissima, ut arbitror, numeraverim.

SO.—Quidnam hoc? nunquid navis ex Delo jam rediit? qua

reducta, mihi est moriendum.

CR.—Nondum rediit quidem; sed reditura videtur hodie,

quemadmodum nuntiant nonnulli e Sunio venientes, qui ibi
eam reliquerunt. constat ergo ex his nuntiis, hodie esse
venturam; ideoque necessarium fore, te cras, o Socrates, e
vita decedere.

SO.—Bona, o Crito, fortuna: si ita diis placet, ita esto. non

tamen existimo, illam hodie redituram.

CR.—Undenam id conjectas?

SO.—Dicam equidem. siquidem postridie, quam navis

redierit, mihi est obeundum.

CR.—Sic utique aiunt hi, penes quo rei hujus potestas est.

SO.—Itaque non hac die venturam puto, sed altera.

conjecturam vero ex somnio quodam accipio, quod paulo
ante hac ipsa nocte mihi vistum est: opportuneque videris
somnum mihi non perturbasse.

CR.—Sed quale id somnium erat?

SO.—Videbatur mihi mulier quædam adveniens, pulchra et
aspectu grata, vestes habens candidas, vocare me, atque
dicere, o Socrates, tertia hinc die Phthiam pervenies
latiglebam.

CR.—Quam mirum id insomnium, Socrates?

SO.—Manifestum tamen, ut mihi videtur.

CR.—Manifestum certe. sed, o beate Socrates, etiam nunc

crede mihi, ac salvus esse velis. Mihi enim, si tu obieris, non
una tantum calamitas imminet: sed præter id, quod te
orbatus fuero tali necessario, qualem alterum nunquam
reperiam, videbor utique multis, qui neutrum nostrum satis
noverint, cum potuissem te servare, si minus pecuniis
perpercissem, te penitus neglexisse. Atqui quænam major
potest esse infamia, quam videri, pluris fecisse pecunias
quam amicos? non enim poterit persuaderi compluribus, te
hinc abire noluisse, nobis, quo id ageres, omni studio
contendentibus.

SO.—Quid vero a nobis, o beate Crito, tanti vulgi opinio

æstimatur? probatissimi enim viri, quorum magis habenda
ratio est, hæc ita gesta esse, ut gesta sunt, arbitrabuntur.

CR.—Attamen vides, o Socrates, compelli nos opinionem

quoque vulgi curare. præsentia enim hæc declarant, posse
vulgus non minima malorum, immo fere maxima, si quis in
populo calumniis agitetur, inferre.

SO.—Utinam, o Crito, posset vulgus maxima inferre mala,

ut vicissim maxima posset bona. et bene quidem se res
haberet, neutrum vero potest; quippe cum neque
prudentem, neque imprudentem efficere valeat. faciunt vero
quodlibet, utcunque contingit.
CR.—Hæc quidem ita se habeant. Ad id vero, Socrates, mihi
responde, num forte mei ceterorumque necessariorum
tuorum respectus te retinet, ne, si hinc evaseris,
calumniatores nos postea vexent, quasi te hinc furati
fuerimus: cogamurque vel totum patrimonium, vel
permultas pecunias amittere, vel præter hæc aliud quippiam
pati. Si quid tale times, curam ejusmodi pone. justum
namque est, nos tuæ salutis gratia non hoc solum, verum
etiam, si oportuerit, majus aliud subire periculum. Verum
mihi obtempera, neque aliter facias.

SO.—Et hæc equidem et alia multa, o Crito, considero.

CR.—Ne igitur hæc vereare. neque enim multum est

argentum, quod postulant hi, qui servare te atque hinc
educere pollicentur. Vides præterea, quam tenues sint
calumniatores tui, ut non magna ad eos placandos largitione
sit opus. Tibi vero pecuniæ adsunt meæ, ad hoc, ut opinor,
sufficientes. Proinde si quo mei respectu adductus non
putas meas pecunias erogandas, adsunt hospites isti parati
persolvere. quorum unus etiam huc attulit sufficientem
pecuniam, ad hoc ipsum paratam, Simmias Thebanus. ad
hoc ipsum promtus est et Cebes, aliique permulti.
Quamobrem, ut modo dicebam, nihil tale metuas, quo
minus serves teipsum. Sed neque etiam illud, quod in
judicio dixisti, te remoretur, si hac urbe exires, quo teipsum
verteres te minime habiturum. aliis enim multis in locis
quocunque profectus fueris, te homines colent: ac si velis in
Thessaliam te conferre, reperies illic hospites meos, qui te
plurimi libenter libentissime complectentur; tutumque
præsidio suo adeo reddent, ut nemo in Thessalia tibi
injuriam sit facturus.

Accedit ad hæc, o Socrates, quod rem minime justam

aggredi videris, si, cum salvus esse possis, teipsum perdas,
taliaque contra te facere studeas, qualia inimici ipsi tui
contenderent, contenderuntque, te perdere properantes.
Proinde filios quoque tuos perdere mihi videris. quos cum
liceat tibi educare atque erudiere, deseris omnino, et
quantum in te, eorum mores fortunæ committis. Accident
vero eis verisimiliter, qualia evenire orphanis consueverunt.
Profecto oportebat non genuisse filios; aut in eis educandis
erudiendisque laborem non recusare. Tu vero mihi videris,
quæ elegisset vir segnis ac piger, nunc elegisse: decebat
autem contra viri boni fortisque eligere; præsertim te, per
omnem vitam virtutis studium profitentem. Itaque non
possum tua nostraque vice, familiarum tuorum, non
erubescere, veritus, ne tota hæc res tua ignavia quadam
nostra sic tractata fuisse videatur. Et primum quidem ille
tunc in judicium ingressus, cum liceret non ingredi; deinde
concertatio ipsa judicii similiter acta; et extremus hic finis,
tanquam ridiculum quiddam, per ignaviam segnitiemque
nostram effugisse nos videbitur, quod nec nos te
servaverimus, neque tu ipse te, cum id fieri absque magna
difficultate potuerit, si vel parum in nobis usus industriæque
fuisset. Hæc igitur, o Socrates, considera, ne
[TR1]
præterquam quod mala sunt, etiam dedecori tibi
nobisque sint: sed tibi consule. immo vero non jam amplius
consulendi tempus, sed consultum jam esse oportuit.
unicum vero consilium est; videlicet venienti hac nocte
cuncta hæc facta esse oportere. Sin autem ultra tardamus,
nihil omnino fieri ulterius poterit. quamobrem omnino mihi
adhibe fidem, o Socrates, nec ullo modo aliter facias.

SO.—O amice Crito, studium hoc tuum permulti faciendum

esset, si qua ratione recta susceptum esset. sin minus,
quanto vehementius est, tanto molestius. Considerandum
est igitur, agendane hæc nobis sint, an non. nam ego is sum
non modo nunc, sed et semper, qui meorum nulli paream,
præterquam rationi, quæ ratiocinanti mihi optima videatur.
Rationes itaque illas, quibus superioribus temporibus usus
sum, nec nunc quidem, postquam in hanc fortunam incidi,
rejicere possum: sed similes mihi ferme apparent,
easdemque in præsentia, quas et prius, veneror atque
profiteor: adeo, ut nisi nunc meliores afferre possimus,
plane scire debeas, me tibi non concessurum: non, si etiam
plura, quam nunc, multitudinis potentia comminata, nos
tanquam pueros larvali terribilique facie perterrere conetur,
pecunia et damna, catenas, cædes objiciens.

CR.—Quanam igitur ratione mediocriter considerabimus?

SO.—Hac utique, si id, quod tu de opinionibus paulo ante

dicebas, resumamus: utrum semper recte se habeat necne,
oportere scilicet quarundam opinionum rationem habere,
quarundam vero minime. An forte prius quam in periculum
mortis inciderem, recte id dicebatur: nunc vero constat,
frustra, disputationis gratia, ita dictum fuisse, cum revera
joco cuidam nugisque esset adductum. Cupio equidem, o
Crito, una tecum considerare, nunquid sermo ille prior
alienus appareat mihi, nunc in hac fortuna constituto; an
prorsus idem qui et prius: atque utrum dimittendus sit a
nobis, vel ipsi obtemperandum. [Dicebatur autem, ut
opinor, semper sic ab iis, qui se aliquid dicere existimabant,
ut nunc quidem ego dicebam: nempe hominum opiniones
partim plurimi faciendas ac sequendas, partim vero minime.
Hoc, per Deos, o Crito, nonne tibi recte dici videtur? tu
enim, ut fert hominum conditio, tantum abes a periculo ut
crastino die moriaris; nec te in errorem inducit præsens
calamitas.] Considera igitur: an non sufficienter tibi dici
videtur, non oportere omnes opiniones hominum sequi; sed
alias quidem sequi, alias vero negligere: neque omnium
quidem, sed duntaxat quorundam. quid ergo dicis? hæc non
recte dicuntur?

CR.—Recte.

SO.—An non bonas honorare decet, mala vero contemnere?

CR.—Ita decet.

SO.—Bonæ autem nonne prudentum? malæ contra sunt

imprudentum?

CR.—Quidni?

SO.—Age vero, quonam modo rursus talia dicebantur? qui

in gymnasiis se exercet, utrum cujuslibet hominis laudi, vel
vituperationi mentem adhibebit; an illius tantum, qui
medicus sit, aut gymnasii magister?

CR.—Hujus solius.

SO.—An non timere decet vituperationes, et optare laudes

illius unius potius, quam multorum?

CR.—Procul dubio.

SO.—Hac itaque ratione illi agendum est, exercendumque,

et edendum atque bibendum, qua illi unico videatur, qui
præsideat intelligatque, potius quam, ut videtur vulgo.

CR.—Vera hæc sunt.

SO.—Quid vero, si illi uni non pareat, opinionemque ejus et

commendationes nihili pendat, honoret vero vulgi
ignorantumque commendationes, nunquid a malo tutus
erit?

CR.—Minime.

SO.—Quid autem est id malum, et quonam tendit, et in

quam non obedientis partem?

CR.—In corpus videlicet; hoc enim corrumpitur.

SO.—Recte dicis. Nonne de aliis, o Crito, eadem ratio est?
Ne omnia percurramus: de justis inquam injustisque, de
turpibus et honestis, bonisque et malis, de quibus in
præsentia nobis consultatio est, utrum multorum opinionem
sequi vererique debeamus, an unius potius, qui intelligat,
quem decet et venerari et timere magis, quam cunctos
alios. cui nisi obtemperaverimus, lædemur et corrumpemur
in eo, quod justo quidem melius fieri, injusto autem
corrumpi soleat. an nihil id est?

CR.—Id quidem, o Socrates, arbitror.

SO.—Age vero, si id, quod a salubri quidem fit melius, ab

insalubri vero corrumpitur, corruperimus, imperitorum
potius quam peritorum sequuti judicia, an nobis eo
destructo vivendum erit? est autem id corpus. nonne?

CR.—Corpus.

SO.—Nunquid ergo vivendum nobis cum depravato corpore

atque destructo?

CR.—Nullo modo.

SO.—An forte cum illo vivendum est nobis corrupto, quod

injusto quidem læditur, justo vero juvatur? nunquid vilius
illud, quam corpus existimamus, quidquid illud est e nostris,
circa quod justitia, injustitiaque versatur?

CR.—Nullo modo.

SO.—Sed pretiosius?

CR.—Valde.

SO.—Non igitur, o vir optime, admodum nobis curandum

est, quid de nobis multi loquantur; sed quid dicat is unus,
qui intelligit justa et injusta, atque ipsa veritas. Quamobrem
primo quidem non recte adduxisti, opinionem vulgarem de
rebus justis, et honestis, et bonis, harumque contrariis,
esse alicujus existimandam. At vero dicet aliquis, posse
vulgus nos interficere?

CR.—Nimirum dici id potest, o Socrates.

SO.—Vera loqueris. Sed, o mirabilis, hæc ratio, quam

percurrimus, superiori similis esse videtur: atque hanc
rursus considera, utrum nobis maneat, necne: videlicet, non
multi faciendum esse vivere, sed bene vivere.

CR.—Manet quidem.

SO.—Sed hoc quoque manetne? bene, et honeste, et juste

vivere idem esse?

CR.—Constat.

SO.—Igitur ex his, quæ confessi sumus, hoc

considerandum, utrum justum sit conari me hinc exire,
Atheniensibus non dimittentibus, vel injustum: ac si
appareat, justum esse, tentemus: si minus, dimittamus.
Quas vero tu affers considerationes de pecuniarum sumptu,
de vulgari opinione, de filiis educandis: cavendum est, o
Crito, ne excogitationes revera horum multorum sint, qui
facile interficiunt, atque eorum, qui similiter, inquam, si
possent, reviviscerent, et id quidem absque mente. Nobis
vero, quandoquidem sic exigit ratio, nihil aliud attendendum
est, quam quod modo dicebamus, utrum agamus justa,
pecunias largiendo, gratiamque habendo his, qui me hinc
educant: utrum, inquam, in hoc agamus justa, nos quidem
educti, illi vero educentes; an potius utrinque in his
omnibus agendis, agamus injuste: atque si appareat, nos
iniqua aggredi, ne excogitandum quidem id est; sed
mansuete subire decet et mortem, et quodvis aliud
supplicium prius, quam quidquam agamus inique.

CR.—Recte loqui videris, Socrates. considera tamen, quid

agamus.

SO.—Consideremus, o bone vir, una. ac si qua in parte me

dicentem redarguere poteris, redargue. ego enim assentiar.
sin minus, desine quæso, o vir beate, jam toties eadem
verba repetere: oportere scilicet me hinc, Atheniensibus
invitis, abire. Equidem multi facio, persuaso te hæc agere;
non autem invito. Attende itaque, nunquid considerationis
initium tibi sufficienter dictum sit; conareque quod rogatus
sis ita respondere, ut maxime censeas respondendum.

CR.—Conabor equidem.

SO.—Dicimus sane, nullo modo sponte esse injuriandum;

an forte quodam pacto injuria facienda est, aliter vero
nequaquam? vel potius injuriari nullo modo vel bonum est,
vel honestum, quemadmodum in superiori tempore sæpe
confessi sumus? Quod quidem et nuper est confirmatum. An
forte omnes illæ superiores conventiones nostræ in paucis
his diebus prorsus evanuerunt, ac jamdiu nos tam grandes
natu homines, o Crito, tamque studiose invicem
disserentes, latuit, nihil a pueris nos differre? An potius sic
prorsus res se habet, ut jamdiu dicebamus, sive affirmet id
multitudo, sive neget; et, sive graviora præsentibus, sive
leviora subire cogamur, attamen injuriam facere omnino
malum turpeque esse fatemur illi ipsi, qui facit, an non?

CR.—Fatemur certe.

SO.—Quamobrem nullo modo injuriandum est.

CR.—Nullo quidem.
SO.—Neque, si injuriam passus fueris, eam ulciscendum, ut
vulgus putat. siquidem nullo modo injuriandum.

CR.—Ita videtur.

SO.—Quid vero? mala alicui facere decet, o Crito, an non?

CR.—Non certe, o Socrates.

SO.—Quid autem, qui mala patitur, num mala vicissim

referre illi debet, qui intulit, ut vulgo videtur? justumne id
esset, an injustum?

CR.—Injustum.

SO.—Nempe mala inferre hominibus, non discrepat ab

injuria.

CR.—Vere loqueris.

SO.—Neque igitur ulcisci decet, neque malefacere cuiquam

hominum, quodcunque ab aliis ipse passus fueris. Et vide, o
Crito, ne quid, dum hæc concedis, præter sententiam tuam
nobis assentiare. Perpaucis enim, scio quid loquar, sic vel
apparet, vel apparebit. At vero quibus sic apparet, et quibus
aliter, his non est communis deliberatio; sed necesse est,
eos, cum ultro citroque consilia sua respiciunt, invicem se
despicere. Animadverte igitur et tu diligenter, utrum tibi
mihique communis sit hæc opinio, mecumque sentias:
atque utrum ab hoc principio exorsi deliberemus, quasi
nunquam rectum sit, vel injuriari, vel ulcisci injuriam, vel
malum referre in eum qui intulit. An hic discedis a nobis, in
hoc principio non consentiens? Mihi quidem et jamdiu et
nunc ita videtur. Quod si tibi apparet aliter, dic, et doce. sin
autem in superioribus permanes, jam quid sequatur audi.

CR.—Consentio equidem et permaneo.

SO.—Dico ergo deinceps, immo potius interrogo, utrum[TR2]
quæ quis confiteatur alicui, justa esse, facere debeat, an
fallere?

CR.—Facere.

SO.—Ex his jam ita considera. Si nos hinc abeamus præter

civitatis consensum, utrum male aliquibus faciemus, et his
quidem, quibus minime decet, vel non: et utrum in his
permanebimus, quæ justa esse convenimus, vel contra?

CR.—Nequeo equidem, o Socrates, ad hæc respondere.

neque enim intelligo.

SO.—Verum ita considera, perinde ac si, volentibus nobis

hinc sive aufugere, sive quomodocunque hoc vocandum sit,
veniant leges, civitatisque hujus respublica, et instantes
nobis sic inquiant: Dic nobis, o Socrates, quidnam cogitas
facere? an non intelligis, hac re, quam aggrederis, te nobis
legibus, totique patriæ, quantum in te est, interitum
machinari? an putas, civitatem ullam amplius stare posse,
ac non subverti, in qua judicia publica nullam vim habeant,
sed a privatis hominibus contemnantur atque frangantur?
Quid ergo dicemus ad hæc, o Crito, aliaque hujusmodi.
Permulta enim in hanc sententiam afferre quis potest;
præsertim orator, pro lege ita soluta declamans, quæ
quidem sententias publico judicio latas jubet ratas esse. an
respondebimus illi, civitatem non recte judicando nobis
injuriam intulisse? itane, an aliter?

CR.—Ita per Jovem, o Socrates.

SO.—At enim leges ipsæ sic responderent: O Socrates,

nonne nobis tecum id convenit, standum tibi esse judiciis,
quæ civitas tulerit? Quod si leges ita loquentes
admiraremur, forte dicerent: Noli, Socrates, quæ modo
diximus, admirari: immo responde, cum tibi et interrogare
et respondere sit consuetum. Dic age, quidnam nobis
civitatique succenseas, quo dissolvere nos contendas?
principio, nonne nos te genuimus? atque per nos pater tuus
matrem accepit tuam, et provocavit? Dic ergo, an has inter
nos leges, quæ sunt circa conjugia, improbes, atque his
aliqua in parte, quasi minus rectis, succenseas. Nihil
succenseo, dicerem. Sed an his legibus, quæ educatione
eruditionique natorum provident, in qua ipse quoque
eruditus es? an non recte disposuerunt hæ leges ad hoc
officium conditæ, cum juberent patrem tuum in musica te
et gymnastica erudire? Recte disposuisse concederem. Age
ergo, postquam per nos genitus es, educatusque ac
eruditus, primo quidem num potes negare, te nostrum esse
et natum et servum, ipsumque te et progenitores. deinde,
cum id ita se habeat, an putas jus ex æquo tibi atque nobis
esse; et quæ nos tibi facere aggrediamur, eadem vicissim in
nos abs te referri justum esse judicas? An, cum nec ad
patrem, nec ad dominum, si eam habeas, tibi jus ex æquo
sit, ut, quæ ab illis patiare, in eos referre possis; neque si
jurgio hi te lacessant, contra jurgare, neque si te verberent,
vicissim verberare, neque alia ejusmodi in eos tentare
liceat: contra patriam vero ac leges tibi licebit? adeo ut, si,
nos judicantes id esse justum, interficere te velimus, tu
vicissim nos leges et patriam pro viribus coneris occidere,
dicasque, te in his agendis justa facere, qui virtutis curam
revera habere profiteris. An sic es sapiens, ut te latuerit, et
patri et matri et progenitoribus omnibus patriam esse
anteponendam; atque esse venerabilius quiddam
sanctiusque, et in superiori sorte, tum apud deos, tum apud
homines mentis compotes, patriam collocandam? colereque
eam oportere magis, eique obedire; ac rigidius se gerenti
mitius assentiri, quam patri: et, si quid jubeat, vel
dissuadere illi quantum liceat, vel facere; et patientissime
sustinere, quidquid jusserit patiendum? ac, sive mandaverit
verberari te, sive in vincula conjici, sive in prœlium miserit
ad vulnera excipienda, mortemque subeundam,
obediendum est omnino. jus enim ita dictat; et neque
tergiversandum, neque fugiendum, neque ordinem
deserendum, sed et in bello, et in judicio, et prorsus ubique,
ea sunt, quæ respublica patriaque jusserit, facienda: aut
certe verbis, quatenus justum est, uti licet ad
persuadendum illi eamque placandam: vi autem uti nefas
est, vel contra matrem, vel contra patrem, maxime vero
omnium contra patriam. Quidnam ad hæc dicemus, Crito,
verane loqui leges, an contra?

CR.—Mihi quidem videntur.

SO.—Proinde leges fortasse dicent: Animadverte, o

Socrates, utrum vere dicamus, te injusta contra nos
aggredi. Nos quidem, quæ te et alios cives genuimus,
educavimus, nutrivimus, participes bonorum omnium, quæ
in nostra erant potestate, effecimus: tamen permisimus
cuilibet Atheniensium, cognitis jam civitatis moribus
legibusque, et reipublicæ gubernandæ forma, si cui non
placeamus, licere, acceptis suis, quocunque placuerit hinc
abire. Nec ulla ex nobis legibus impedit aut denegat, sive
quis vestrum, cui nos civitasque minime placeamus, in
coloniam aliquam hinc velit discedere, sive habitationem
alio transferre cupiat, quo minus id pro arbitrio facere
valeat, secumque sua perferre. At vero quicunque ex vobis,
postquam cognoverit, quemadmodum nos judicia
disponimus, et in ceteris omnibus regimus civitatem,
permanserit tamen, hunc jam asseveramus, opere ipso
convenisse nobiscum, quæcunque jusserimus, se facturum.
Atque eum, qui non paruerit, tripliciter injuriari censemus:
et quod genitricibus nobis non obtemperat; et quod
nutricibus non obsequitur; et quod pactus nobis obedire,
neque obedit, neque persuadere nobis studet, si quid minus
recte facere videamur: cumque præcepta nostra libere
proponamus, neque mandemus rigide, sed permittamus
alterum e duobus, aut verbis persuaderi nobis, aut manda
explere; tu horum neutrum facis.

His ergo criminibus te, o Socrates, obnoxium judicamus

fore, si, quæ cogitas, feceris: nec minime Atheniensium te,
sed maxime omnium. Ac si causam requiram, ob quam præ
ceteris sim obnoxius, forte juste me remorderent, dicentes,
me maxime omnium Atheniensium civitatis legibus
consensisse. sic enim inferrent: Magna nobis, o Socrates,
horum sunt argumenta, tibi nos civitatemque placuisse.
nunquam enim maxime omnium Atheniensium in ea moras
traxisses, nisi tibi mirifice placuisset. Itaque nec spectaculi
gratia urbe unquam egressus es, nisi semel in Isthmum,
nec alio usquam, nisi in militia; neque aliam fecisti
peregrinationem unquam, quemadmodum ceteri solent;
neque alterius civitatis te cepit cupiditas, aliarumve legum;
sed nos tibi nostraque civitas satisfecimus; usqueo adeo
vehementer probasti nos, nostrisque moribus victurum te
consensisti: tum in ceteris rebus, tum quia in ea filios
procreasti, utpote quæ tibi placuerit. Quin etiam licebat tibi
in ipso judicio exsilium postulare, si voluisses; atque quod
nunc invita civitate aggrederis, tunc ea volente poteras
facere. Tu vero verbis tunc te extulisti, quasi non graviter
ferres, si mori te oporteret. quinimmo mortem ipsam, ut
dicebas, potius quam exsilium elegisti. Nunc vero nec verba
illa tua erubescis, neque nos leges vereris, sed nobis
interitum machinaris. Facis autem, quod deterrimus faceret
servus, fugam arripere tentans, contra pactiones
conventionesque, in quibus convenisti nobiscum, nostris te
præbens institutionibus gubernandum. Primum responde
nobis, num id ipsum vere dicamus, consensisse non verbis,
sed re ipsa, moribus nostris gubernari debere. An non vera
hæc sunt? Quid ad hæc dicemus, Crito? an non
confitebimur?

CR.—Necesse est, o Socrates.

SO.—Nonne igitur (leges inquient) conventa nobiscum et
pacta transgrederis? quæ neque coactus es nobiscum inire,
neque deceptus, neque ad breve tempus deliberare ad hæc
eligenda es compulsus, sed annos septuaginta deliberare
licuit: quo in tempore licuit et abire, nisi tibi placuissemus,
conventionesque justæ tibi visæ fuissent. Tu vero nec
Lacedæmonem, neque Cretam nobis anteposuisti, quas ipse
urbes assidue prædicas recte gubernari, neque aliam ullam,
vel Græcarum civitatum, vel Barbararum. immo ex hac
rarius peregrinatus es, quam claudi et cæci, mancique alii
soleant. usque adeo Atheniensibus tibi præ ceteris civitas
placuit, atque nos, videlicet leges. cui enim placere potest
civitas, cujus non placeant leges? Nunc vero non permanes
in his, in quibus jamdiu nobis tibique convenit. Permanebis
certe, si nobis credideris, ne egrediens urbe deridendus
evadas.

Considera rursus, si hæc transgressus fueris, et ea quæ

inique cogitas perpetraveris, ad quid tandem id vel tibi, vel
necessariis tuis conducet. Cuique enim constat, in periculo
necessarios tuos fore, ne ipsi quoque in exsilium
expellantur, priventurque civitate, et patrimonio suo
exspolientur. Tu autem si quam in civitatem finitimam te
contuleris, vel Thebas, vel Megaras, (utræque enim
gubernantur recte) hostis primum reipublicæ illius accedes,
et omnes, quibus curæ est patria, despicient
abominabunturque te, corruptorem legum existimantes.
ideoque confirmabis eorum qui te damnarunt opinionem, ut
recte contra te tulisse sententiam videantur. quisquis enim
corruptor est legum, is potissimum et juvenum
imperitorumque hominum videbitur esse corruptor. Quid
ergo? civitatesne, quæ recte gubernantur, et modestissimos
quosque homines devitabis? Atqui si id feceris, vitane
dignus eris? an forte impudenter te his admiscebis, nec
erubesces, de eisdem apud eos disserere, de quibus apud
nos consuevisti; virtutem videlicet et justitiam, legesque, et
instituta legum plurimi esse existimanda. neque putas,
absurdum et ab his dissonans apparere Socratis factum?
Procul dubio putandum est. Fortasse vero civitates has
declinans in Thessaliam ad Critonis hospites abibis. illic
enim absque ordine et temperantia vivitur. Ac forsan
libenter illi te audient, narrantem quemadmodum e carcere
ridicule fugeris, ut fascem quendam tibi super imponens,
aut corio tegens, vel aliis quibusdam te involvens,
quemadmodum solent qui fugam surripiunt, et in alienam
figuram te transmutans illinc aufugeris. quemadmodum
vero vir senex parvo admodum tempore, ut verisimile est,
victurus, ausus fueris, ob vivendi cupididatem in tam
sordida inopia vivere, maximas transgressus leges, nullusne
dixerit? forte: si neminem offenderis. alioquin multa, o
Socrates, atque indigna te audies. vives autem obnoxius
cunctis hominibus atque deserviens. Quid vero facies in
Thessalia? conviviane frequentabis? utpote qui in
Thessaliam, quasi ad cœnam aliquam, adventaveris.
Disputationes vero illæ de justitia, ceterisque virtutibus
ubinam ulterius nobis erunt? Enimvero filiorum gratia vivere
cupis, ut nutrias eos atque erudias. An ergo in Thessaliam
eos perduces, ut illic nutrias eos, atque erudias, hospites
eos efficiens, ut hoc insuper commodi abs te reportent? an
id quidem non facies; hic vero relicti melius te vivo alentur,
atque erudientur a necessariis tuis, te absente? Utrum vero,
si Thessaliam abibis, tui id curabunt: sin autem in alteram
transibis vitam, non curabunt? Profecto si quid opis est in
his, qui aiunt se tuos necessarios esse, credendum est,
curaturos.

Ceterum, o Socrates, fidem nobis adhibens nutricibus tuis,

neque filios tuos, neque vitam, neque aliud quidquam
pluribus facias, quam justitiam: ut cum in vitam alteram
transmigraveris, valeas illic præsidibus horum omnium
reddere rationem. Nempe si leges transgressus hæc feceris,
neque melius, neque justius, neque sanctius id vel tibi
continget, vel tuis; neque illuc tibi profecto conducet. quin
potius injuriam passus abito, si abieris, non a nobis quidem
legibus, sed ab hominibus. Verum si adeo turpiter aufugeris,
etiam versa vice injurias malaque referens,
conventionesque nobiscum initas et promissa transgressus,
atque lædens eos, quos minime oportebat, te ipsum scilicet
et amicos et patriam, nosque leges: nos utique et viventi
tibi infensæ hic erimus, et in altera vita leges, quæ illic sunt
nostræ sorores, haud quaquam te benigne recipient,
scientes, te nos pro viribus disperdere conatum fuisse.
Quamobrem, ne Crito aliter tibi quam nos persuadeat,
caveto.

Hæc equidem, o dulcis amice Crito, audire videor,

quemadmodum Corybantes tibias audire se putant. atque in
me sermonum ejusmodi sonitus adeo reboat, ut alia audire
non possim. Vides, quæ in præsentia mihi apparent: quibus
si quid contradicere aggrediaris, frustra conabere.
verumtamen si quid te profecturum confidis, dicas.

CR.—Ergo vero quod dicam, o Socrates, nihil habeo.

SO.—Desine ergo, Crito; et pergamus hac, quandoquidem

hac nos Deus ipse ducit.

FINIS.

[TR1] "præterquum" → "præterquam"

[TR2] "Utrum" → "utrum".
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