X-factor setting in a developing country: the Case of Lima’s Airport

In theory, X-factor regulation provides better incentives for cost reduction than previously
widely-used rate-of-return regulation. However, a deeper look into how this factor is
effectively estimated shows the regulator enjoys a great deal of discretion, especially when
selecting the methodologies used to estimate its components.
This paper describes how the X-factor is estimated in Peru and analyzes the main
controversies (both theoretical al practical) that arose when the X factor for the country’s
main airport was estimated. Conclusions are the following: i) careful planning of the
concession process reduces the probability of unnecessary controversies when the X factor
is estimated retrospectively, since this methodology requires data that needs to be collected
at the time of the concession; ii) cost of capital estimation is a main source of controversies
due to the subjective criteria used in its calculation and its impact in the final result; and, iii)
transparent procedures improve the legitimacy of regulatory decisions, especially in
contexts of limited public resources and weak institutions, typical of developing countries.