International Transport Forum Discussion Paper 2015-05
The traditional approach to public infrastructure delivery and management has been challenged in the past decades through different forms of private capital participation. Two well established platforms for private capital participation in the context of public infrastructure procurement are the Regulatory Asset Base (RAB) Model and the Project Finance Model (broadly termed as PPP - Public-Private Partnerships). Based on a literature review, this paper assesses the two vehicles in terms of efficiency in delivery and operation of major infrastructure. Overall the basic concern with regard to RAB is that the approach might lead to excessive capital expenditures, thus slowly increasing the base on which the return is being calculated. Conversely, in the case of the PPP, given the complexity of the projects and the long-period of contractual commitment and uncertainty, it is questionable whether competition could lead to efficient outcomes. Put differently, in the case of the PPP, the basic concern is the required returns, and not the base. Available evidence seems to suggest, that the concern relating to the PPP returns is of a much greater magnitude than the perceived capex bias in the case of the RAB model, given that the latter is not easily detectable. Contrarily to a PPP, RAB is also sufficiently flexible to better accommodate changes in the environment in policy over time, without defeating the economic purpose of the model. Lastly, PPPs are known for their superior performance in in terms of on time and on budget infrastructure delivery. It may be possible to import some of the incentives in infrastructure delivery from the PPPs to a RAB model, but it is not clear, whether the same performance could be achieved with simpler performance construction contract approaches.