Infrastructure and infrastructure finance : the role of the government and the private sector in the current world

Europe faces major investment in infrastructure in the coming decade in the context of the credit crisis and the broader economic crisis that followed.The article considers what the core market failures in infrastructure are, focussing on the gap between marginal and average costs, the system nature of infrastructures, and the time inconsistency problem. The difficulty for government in providing credible commitments to investors in respect of the fixed and sunk costs is the classic problem in contract and institutional design. The roles of government and the private sector are defined, and the article proposes that the concept of regulatory asset bases (RABs) developed in privatised-utility models provides a way of cementing in commitment and hence ensuring that regulatory and political risk is appropriately allocated. As a consequence, the financial structure of infrastructure investments can be determined,with debt playing the primary role in respect of the RABs, and equity in respect of the creation of new infrastructure.