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A few things transport regulators should know about risk and the cost of capital


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  • Alexander, Ian
  • Estache, Antonio
  • Oliveri, Adele


In reviewing contracts, establishing price limits, or arbitrating conflicts, regulatory agencies and policy advisors face significant information asymmetry in determining the appropriate allowed rate of return, or discount rate. The information gap is especially important in determining the degree of market risk - often a critical component of the cost of capital demanded by operators. The authors consider various methodological problems in the transport sector in establishing the link between regulatory regime and degree of market risk The results of quantitative studies confirm that even for the transport sector - where there is intermodal competition and where contracts are often shorter and regulatory decisions may be less pressing than for utilities - the choice of regulatory regime greatly affects the degree of market risk a company faces. This has important implication for regulatory agencies and actions. When a regulatory agency undertakes a price review, or when issues arise about concession contracts, it is important that regulators assess correctly the required rate of return and cost of capital. They must also assess correctly the level of risk, which affects the required rate of return and the cost of capital. Most regulators in developing countries have a problem: the regulated companies are unquoted or undertake many activities for a range of industries and even sectors. For them this methodology for measuring the cost of capital, calculating the measure of market risk, and estimating the impact of various regulatory regimes on market risk may be useful.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2151.

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Date of creation: 31 Jul 1999
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Handle: RePEc:wbk:wbrwps:2151

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Keywords: International Terrorism&Counterterrorism; Banks&Banking Reform; Payment Systems&Infrastructure; Environmental Economics&Policies; Financial Intermediation; Economic Theory&Research; Environmental Economics&Policies; International Terrorism&Counterterrorism; Banks&Banking Reform; Financial Intermediation;

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  1. Alexander, Ian & Mayer, Colin & Weeds, Helen, 1996. "Regulatory structure and risk and infrastructure firms : an international comparison," Policy Research Working Paper Series 1698, The World Bank.
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Cited by:
  1. Clive Harris & Sri Tadimalla Kumar, 2008. "Financing the Boom in Public-Private Partnerships in Indian Infrastructure : Trends and Policy Implications," World Bank Other Operational Studies 10577, The World Bank.
  2. Rocha, Katia & Camacho, Fernando & Braganca, Gabriel, 2007. "Return on capital of Brazilian electricity distributors: A comparative analysis," Energy Policy, Elsevier, Elsevier, vol. 35(4), pages 2526-2537, April.
  3. A. Estache & M.E. Pinglo, 2005. "Are returns to private infrastructure in developing countries consistent with risks since the Asian crisis?," Competition and Regulation in Network Industries, Intersentia, Intersentia, vol. 6(1), pages 47-75, September.
  4. Bahman Kashi, 2014. "Risk Management and the Stated Capital Costs by Independent Power Producers," Development Discussion Papers, JDI Executive Programs 2014-03, JDI Executive Programs.
  5. Stern, Jon, 2007. "Infrastructure regulatory institutions and their impact: Papers from CCRP, City University Workshop 2006," Utilities Policy, Elsevier, Elsevier, vol. 15(3), pages 161-164, September.
  6. A. V. Thomas & Satyanarayana Kalidindi & K. Ananthanarayanan, 2003. "Risk perception analysis of BOT road project participants in India," Construction Management and Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(4), pages 393-407.
  7. Kirkpatrick, Colin & Parker, David & Zhang, Yin-Fang, 2004. "Price and Profit Regulation in Developing and Transition Economies, Methods Used and Problems Faced: A Survey of the Regulators," Centre on Regulation and Competition (CRC) Working papers, University of Manchester, Institute for Development Policy and Management (IDPM) 30596, University of Manchester, Institute for Development Policy and Management (IDPM).
  8. J. Luis Guasch, 2004. "Granting and Renegotiating Infrastructure Concessions : Doing it Right," World Bank Publications, The World Bank, number 15024, August.
  9. Gaggero, Alberto A., 2007. "Regulatory risk in the utilities industry: An empirical study of the English-speaking countries," Utilities Policy, Elsevier, Elsevier, vol. 15(3), pages 191-205, September.
  10. Paul Noumba Um & Laurent Gille & Lucile Simon & Christophe Rudelle, 2004. "A Model for Calculating Interconnection Costs in Telecommunications," World Bank Publications, The World Bank, number 15040, August.
  11. Sirtaine, Sophie & Pinglo, Maria Elena & Guasch, J. Luis & Foster, Vivien, 2005. "How profitable are private infrastructure concessions in Latin America?: Empirical evidence and regulatory implications," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 45(2-3), pages 380-402, May.
  12. Corria da Silva, Luis & Estache, Antonio & Jarvela, Sakari, 2006. "Is debt replacing equity in regulated privatised infrastructure in LDCs?," Utilities Policy, Elsevier, Elsevier, vol. 14(2), pages 90-102, June.
  13. Marcelo Bianconi & Joe A. Yoshino, 2012. "Empirical Estimation of the Cost of Equity: An Application to Selected Brazilian Utilities Companies," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 0765, Department of Economics, Tufts University.
  14. Meunier, David & Quinet, Emile, 2010. "Tips and Pitfalls in PPP design," Research in Transportation Economics, Elsevier, Elsevier, vol. 30(1), pages 126-138.


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