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Page 1: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Redefining the models for private

sector investment in infrastructure –

The RAB Model

UK Infrastructure Summit

February 9th 2011

Professor Dieter Helm

Oxford University

Page 2: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Questions

What is the problem?

Why has the PFI / PPP model not delivered?

How does the RAB model work?

Which sectors could it be applied to?

What might be the benefits?

What are the next steps?

Page 3: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

What is the problem?

The time inconsistency problem

Regulatory and political risk

Impact on the cost of capital

Page 4: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Why has the PFI / PPP model not delivered?

The basic structure of PFI deals

Combination of CAPEX and OPEX with sunk cost

recovery

The problem of bidding

Ex post interventions

Cost of capital impacts

Page 5: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

How does the RAB model work?

Sunk

Investment

s

Allowed

expenditure

Current

OPEX

Current

CAPEX

RAB

The

legacy

assets

The

business

+

Page 6: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

The CAPEX process

Tendering

Regulator assesses efficient

value

CapexProject

RABFinancing

Equity +

project

financed

Debt

financed

Page 7: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

The split cost of capital

Competitive tendering Duty to finance functions

CAPEX + OPEX

Equity &

project

finance

WACC

RAB

Debt-only

(massive)

Financial

arbitrage

Marginal

cost of

debt

Marginal

cost of

equity

Page 8: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

What sectors could it be applied to?

Waste

Roads

London transport / london underground

Flood

Renewables

Page 9: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Waste model

Energy from

waste plants

Anaerobic

digestion

plants

Landfill

S

O

R

T

I

N

G

C

O

L

L

E

C

T

I

O

N

Hypothecated

council tax

contribution

Industry

charges

Waste

charge

Page 10: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

London underground / London transport

model

Existing underground

track & stations

CAPEX

REPEX

OPEX Fare-box

Treasury contribution

TfLcontribution

Page 11: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Roads model

Existing Roads

CAPEX

REPEX

OPEXRoad fund licence fees

Charges

Gov’tcontibutions– local & central

RAB

Page 12: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Floods model

Flood defence

infrastructure

CAPEX (ex EA)

OPEX (ex EA)

User charges Water levy

Gov’tcontibutions

Housing & planning

contributions

RAB

Page 13: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Renewables model

+

+

RAB

“WRAPPERS”

WIND

FARMS

CCS

SOLAR

INSTALLATIONS

NUCLEAR GREEN

INVESTMENT

BANK

PENSION

FUNDS

LIFE

FUNDS

UTILITY

BOND

Page 14: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Regulatory consequences

ORRT

Highways Agency

ORR

OWWF

EA economic regulation

Ofwat

Waste (local authority functions)

G.I.B.

=

Renewables

“Wrapper”

Page 15: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

What might be the benefits?

Cost of capital

> 10% real

Cost of capital

< 5% real

Project

CAPEX

Completed

asset

Equity &

project financeDebt

Refinancing

point

Page 16: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

Applied to £500bn CAPEX requirement

1% cost of capital £5 billion PER ANNUM

Assigns political and regulatory risk where best managed

Creates major new low-risk investments

for savings

Page 17: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

What are the next steps?

NIP programme

Case-by-case evolutionary approach

And....

Buy back existing PFI....

Page 18: Redefining the models for private sector investment in ... · sector investment in infrastructure – The RAB Model UK Infrastructure Summit ... “Utility regulation, the RAB and

For information:

“Infrastructure and infrastructure finance: The role of the government and the private sector in the current world", EIB Papers ,vol. 15 (2) on Infrastructure and infrastructure finance.

“Rethinking the Economic Borders of the State”, Social Market Foundation, November 2010.

“The Case for a Carbon Tax” in Greener, Cheaper edited by Simon Less, Policy Exchange, July 27th 2010.

Helm, D. R. and Hepburn, C. (eds), (2009), “The Economics and Politics of Climate Change”, OUP, October.

“Infrastructure investment, the cost of capital, and regulation: an assessment”,OxfordReview of Economic Policy, Volume 25, Number 3, 2009, pp.307–326.

“The Evolution of Infrastructure and Utility Ownership and its Implications”, Oxford Review of Economic Policy, Volume 25, Number 3, 2009, pp.411–434.

“Utility regulation, the RAB and the cost of capital”, Competition Commission Spring Lecture 2009.

“Infrastructure, investment and the economic crisis”, in Delivering a 21st Century Infrastructure for Britain, Dieter Helm, James Wardlaw, and Ben Caldecott, Policy Exchange, 2009.

available here: http://www.dieterhelm.co.uk/publications