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Infrastructure investment, the cost of capital, and regulation: an assessment

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  • Dieter Helm
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    Abstract

    The paper considers the role of infrastructure in improving economic performance, and its comparative neglect relative to traditional macroeconomic and microeconomic policies. It explains why infrastructure matters, why Britain's infrastructure performance has been poor, and summarizes the scale of the challenge for the coming decade. Privatization, liberalization, and competition have focused on monopoly market failure and private incentives, but they have neglected the time inconsistency problem which confronts investors in networks with high fixed and sunk costs. The failure to commit which has characterized British approaches to infrastructure has been partially addressed through the creation of regulated asset bases (RABs), backed up by the duty on regulators to ensure that functions can be financed. The paper considers how the RABs can be developed to provide credible long-term contracts over a wide range of activities, and how the financial regulatory regime can complement this commitment, notably through the split cost of capital and the indexation of the cost of debt approaches. The paper concludes by setting out the building blocks of a credible regulatory framework for infrastructure, together with the impacts on reducing the cost of capital. The role of the State in reinforcing this commitment and the associated institutions are also set out. Copyright 2009, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/oxrep/grp027
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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

    Volume (Year): 25 (2009)
    Issue (Month): 3 (Autumn)
    Pages: 307-326

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    Handle: RePEc:oup:oxford:v:25:y:2009:i:3:p:307-326

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    Web page: http://oxrep.oupjournals.org/

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    Cited by:
    1. Tooraj Jamasb & Rabindra Nepal, 2014. "Issues and Options in the Economic Regulation of European Network Security," Discussion Papers Series 505, School of Economics, University of Queensland, Australia.
    2. Gert Brunekreeft, 2012. "On the role of international benchmarking of electricity Transmission System Operators facing significant investment requirements," Bremen Energy Working Papers 0012, Bremer Energie Institut.
    3. Rabindra, Nepal & Tooraj, Jamasb, 2013. "Caught Between Theory and Practice: Government, Market, and Regulatory Failure in Electricity Sector Reforms," SIRE Discussion Papers 2013-22, Scottish Institute for Research in Economics (SIRE).
    4. Arthur Henriot, 2013. "Financing investment in the European electricity transmission network: Consequences on long-term sustainability of the TSOs financial structure," RSCAS Working Papers 2013/27, European University Institute.

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