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Redefining the models for private
sector investment in infrastructure –
The RAB Model
UK Infrastructure Summit
February 9th 2011
Professor Dieter Helm
Oxford University
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?
What is the problem?
The time inconsistency problem
Regulatory and political risk
Impact on the cost of capital
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
How does the RAB model work?
Sunk
Investment
s
Allowed
expenditure
Current
OPEX
Current
CAPEX
RAB
The
legacy
assets
The
business
+
The CAPEX process
Tendering
Regulator assesses efficient
value
CapexProject
RABFinancing
Equity +
project
financed
Debt
financed
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
What sectors could it be applied to?
Waste
Roads
London transport / london underground
Flood
Renewables
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
London underground / London transport
model
Existing underground
track & stations
CAPEX
REPEX
OPEX Fare-box
Treasury contribution
TfLcontribution
Roads model
Existing Roads
CAPEX
REPEX
OPEXRoad fund licence fees
Charges
Gov’tcontibutions– local & central
RAB
Floods model
Flood defence
infrastructure
CAPEX (ex EA)
OPEX (ex EA)
User charges Water levy
Gov’tcontibutions
Housing & planning
contributions
RAB
Renewables model
+
+
RAB
“WRAPPERS”
WIND
FARMS
CCS
SOLAR
INSTALLATIONS
NUCLEAR GREEN
INVESTMENT
BANK
PENSION
FUNDS
LIFE
FUNDS
UTILITY
BOND
Regulatory consequences
ORRT
Highways Agency
ORR
OWWF
EA economic regulation
Ofwat
Waste (local authority functions)
G.I.B.
=
Renewables
“Wrapper”
What might be the benefits?
Cost of capital
> 10% real
Cost of capital
< 5% real
Project
CAPEX
Completed
asset
Equity &
project financeDebt
Refinancing
point
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
What are the next steps?
NIP programme
Case-by-case evolutionary approach
And....
Buy back existing PFI....
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