Journal Article

The evolution of infrastructure and utility ownership and its implications

Dieter Helm and Tom Tindall

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 25, issue 3, pages 411-434
Published in print January 2009 | ISSN: 0266-903X
Published online January 2009 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grp025
The evolution of infrastructure and utility ownership and its implications

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The paper documents the significant changes of ownership since the infrastructure utilities were privatized and, in particular, the shifts from the initial focus on dispersed retail share ownership through takeovers to more concentrated ownership and the emergence of private equity and infrastructure funds. In the process, there has been substantial financial engineering and balance sheets have been geared up towards exhaustion, with major implications for financing future investment. Increased gearing has, on the one hand, introduced the discipline of debt upon management which had engaged in substantive diversification, and on the other provided an arbitrage between the weighted average cost of capital used to calculate the allowed return, and the lower marginal cost of debt. The paper shows how regulation has determined the allocation of risk, and facilitated the observed changes in ownership and financial structures. Three solutions to the exhausted balance sheets are considered to finance future investment: rate-of-return regulation; the split cost of capital; and a collapse back into not-for-dividend, mutual or state ownership. The default outcome already witnessed in the Welsh Water and Network Rail cases is the latter case, which is inferior to the second option.

Keywords: privatisation; ownership; regulation; private equity; utilities; infrastructure; debt; balance sheets; investment; split cost of capital; G32; H54; L90

Journal Article.  11049 words.  Illustrated.

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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