Journal Article

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

Dieter Helm

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 25, issue 3, pages 307-326
Published in print January 2009 | ISSN: 0266-903X
Published online January 2009 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grp027
Infrastructure investment, the cost of capital, and regulation: an assessment

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  • Economic Development and Growth
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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.

Keywords: regulation; split cost of capital; infrastructure; regulated asset base; debt indexation; time inconsistency; role of the State; G32; H54; L90

Journal Article.  11172 words. 

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

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