A few things transport regulators should know about risk and the cost of capital
AbstractIn 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 InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2151.
Date of creation: 31 Jul 1999
Date of revision:
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;
Other versions of this item:
- Alexander, Ian & Estache, Antonio & Oliveri, Adele, 2000. "A few things transport regulators should know about risk and the cost of capital," Utilities Policy, Elsevier, vol. 9(1), pages 1-13, March.
- Antonio Estache & I. Alexander & A. Oliveri, 2001. "A few things transport regulators should know about risk and the cost of capital," ULB Institutional Repository 2013/43999, ULB -- Universite Libre de Bruxelles.
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