1. The RAB model in financing transport infrastructure September 28th 2012 Prepared for ITF round table Andrew Meaney, Managing Consultant Peter Hope, Senior Consultant

2. September 28th 2012 2 What is the RAB model? -allows recovery of fixed costs -overcomes time inconsistency problem: commitment device -initial value and form of additions/depreciation critical -needs regulator or similar

3. September 28th 2012 3 Issues from yesterday: can RAB help? Transaction costs Problems with the bidding process Lack of flexibility Might be lower than with PPP if piggy-back on existing (competent, well-respected) regulators and the rule of law Still an issue, but for different reasons (initial value) Big advantage for RAB here—mechanism for changing tariffs as circumstances change. Enables upgrades/renewals Sustainability Record of investments and liabilities. Can be used with ‘special administration’. Enables monitoring and transparency Nervous capital markets RAB model well understood by investors; needs credible and trustworthy regulatory framework

4. September 28th 2012 4 PPP and RAB: horses for courses -both PPPs and the RAB model represent potential ways in which the time inconsistency problem may be solved -investor familiarity with both models -relative advantages of the approaches may depend on the specifics of the project -RAB preferable where contracting  inflexibility, high transaction costs -high cost of regulation  RAB not feasible -small saving in the cost of capital  large absolute saving -important to evaluate a number of options

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