The regulatory asset base and project finance models: An analysis of incentives for efficiency

Governments world-wide have sought value for money by augmenting the traditional approach to public infrastructure delivery and management by introducing private capital. Two well established platforms for private capital participation are the Regulatory Asset Base (RAB) Model and the Project Finance Model (broadly termed PPPs). This paper reviews available evidence on the efficiency in delivery and operation of major infrastructure of each platform relative to the traditional approach. Overall the basic concern with the RAB model is that its application might lead to excessive capital expenditures, to strategically inflate the base on which the return is being calculated. By contrast, given the complexity of PPP projects and the inherent uncertainty associated with such long-lived contractual commitments, it is questionable whether competition leads to efficient outcomes. Both approaches have some potential advantages and this paper investigates, whether it is meaningful to merge them.