Oxford Review of Economic Policy, Volume 32, Number 3, 2016, pp.

343–359

Infrastructure: why it is under provided

and badly managed

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Dieter Helm* and Colin Mayer**

Abstract:  The paper records the substantial deficiencies that exist in the design and implementation
of infrastructure programmes around the world. It points to three sources of failure. The first is a
failure to recognize the systems nature of infrastructure and the implication of this for the appro-
priate tools of analysis that should be employed in infrastructure assessments. The second is a pre-
occupation with income and expenditure flows rather than balance sheets in reporting public- as
well as private-sector infrastructure accounts. This has had profound and in many cases perverse
implications for the ownership, funding, and operation of infrastructure. The third is inadequate gov-
ernance of infrastructure programmes to overcome the significant commitment problems that afflict
both private- and public-sector providers of infrastructure. The paper describes a set of responses
that recognize the systems nature of infrastructure, the importance of balance sheets, and the need
for commitment mechanisms in the private and public sectors to promote the efficient provision of
infrastructure.
Keywords: infrastructure, systems, balance sheets, governance, commitment
JEL classification: H54

I. Introduction
Infrastructure: from French (1875), the installations that form the basis for any operation
or system
As the etymology of the word suggests, infrastructure is the sub-structure of an econ-
omy on which other structures, systems, and activities are built. Its foundational feature
lends it three essential characteristics: it is at least partially a public good at both local
and national levels; it spawns a large number of diverse activities; and it is of long
duration and embedded in long-term economic growth, and the spatial and sectorial
characteristics of an economy.

* New College, Oxford, e-mail: dieter.helm@new.ox.ac.uk

** Saïd Business School, Oxford, e-mail: colin.mayer@sbs.ox.ac.uk
The authors are very grateful to Cameron Hepburn, Chris Adam, Chris Allsopp, Ken Mayhew, Alex
Teytelboym, and participants at a seminar with the UK National Infrastructure Commission for comments
on an earlier draft and presentation of this paper. Any errors remain our own.
doi:10.1093/oxrep/grw020
© The Authors 2016. Published by Oxford University Press.
For permissions please e-mail: journals.permissions@oup.com
344 Dieter Helm and Colin Mayer

All major innovations in infrastructure, such as the introduction of electricity, gas,

the internet, telephones, water, sewerage, public health, and education, display these
characteristics. They have laid the foundations for economic activity around the world
in every sector, in most cases over several centuries.
But 140 years after the word was first coined, we are still struggling to provide and
manage infrastructure. In many countries, there is serious under-provision and where it
is available, it is often poorly delivered.1 The most advanced country in the world, the
USA, is repeatedly criticized for its weak infrastructure. The EU has launched a major
infrastructure programme of €300 billion—the Juncker plan—to rectify widely recog-
nized deficiencies in European infrastructure. One of the fastest growing economies in

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the world, India, has failed to provide the massive infrastructure programme the coun-
try needs. The repeated inability to implement infrastructure programmes in Africa is
one of the continent’s main impediments to economic growth.2
As Atif Ansar, Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn report in this
issue (Ansar et al., 2016), despite its supposed success, the record of China in imple-
menting infrastructure projects is no better than elsewhere. In a study of 95 transpor-
tation infrastructure projects, they report that it takes just as long to build projects in
China as in ‘rich democracies’ and that 74 per cent of them suffered cost overruns of
on average 31 per cent of estimated costs—a record that is not significantly different
from that observed in rich democracies. Of the 66 projects for which benefits as well as
costs could be estimated, only 10 per cent could be regarded as outright successes where
benefits comfortably exceeded costs.
Infrastructure failures do not in general reflect a lack of ambition. The UK, for
example, has recently announced a series of large-scale projects in electricity: Hinkley
(£25 billion) and other nuclear power stations (£50 billion), and electricity interconnec-
tors (£8 billion); in rail: a High Speed 2 (HS2) rail link (£55 billion), a Crossrail 2 link
(£25 billion), cross-Pennine rail links (£5 billion), and a rail electrification programme
(£3 billion); a road programme (£20 billion); and an airport programme (£25 billion).
Add in broadband roll-outs and upgrades, renewable energy projects, and water, sewer-
age, and flood defence projects, and it is not difficult to reach an aggregate total of £500
billion projected infrastructure spend over the next 10–20 years.
The failure of infrastructure is not for the most part one of intention, but of deliv-
ery and achievement. Why is it so difficult to get infrastructure right and what can be
done to rectify the problems? The reasons are not hard to find: a failure to recognize
the systems nature of infrastructure; incorrect accounting for infrastructure and conse-
quent failures to fund it appropriately; and inadequate governance and management of
infrastructure programmes. Together these three deficiencies have resulted in a failure
to identify the purpose and benefits of infrastructure investments; to measure their
impact on public and national accounts; to fund them appropriately; and to manage
and implement them efficiently and effectively.
Until these deficiencies are resolved, infrastructure will continue to display the same
characteristics that it has to date: it is inadequate, wasteful, over-budget, over-time,

1  For example, Charles Hulten (1996) describes how the quality of infrastructure can be a more impor-

tant determinant of economic growth than its quantity. Lant Pritchett (2000) argues that existing studies of
public spending have not identified the productivity of public capital.
2  See, for example, Foster (2008).
Infrastructure: why it is underprovided and badly managed 345

and frequently involves corrupt expenditures. So long as this is the case then cynicism
about government’s ability to manage public infrastructure budgets will continue to
prevail and excessive reliance will be placed on poorly specified methods of delivering
infrastructure programmes.
There are corresponding solutions. The first is to provide a proper framework for
identifying what infrastructure is required and the costs and benefits associated with
providing it in different ways. Though conventional cost–benefit analysis has a role
to play, in general it focuses on marginal changes, whereas infrastructure is concerned
with systems. Systems have to be conceived, designed, evaluated, and implemented not
as increments considered in isolation—such as the HS2 rail link in the UK—but as

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integrated wholes.
Second, infrastructure needs to be financed. While the private sector is familiar with
provisioning for capital maintenance and enhancements, and has balance sheets to
account for the state of the assets under their control, governments are largely driven
by cash-based national accounts. Indeed, governments typically have no comprehensive
accounting frameworks for addressing the creation of assets and liabilities for future
generations and, as we shall see, few mechanisms for closing the gaps between savings
and investments, the liabilities to pay future bills, and the amount of debt and equity
invested.
Third, there needs to be a governance system that provides for political decision-
making, without succumbing to the short-termism of what might be called ‘the trophy
project syndrome’. The cynicism surrounding infrastructure expenditure is justified
by the track record of failure. But if we can send spacecraft to the Mars and Venus
with stunning success, surely we can build roads, bridges, and electricity systems closer
to home? An institutional, regulatory, and governance framework is essential for this
and required to prevent the ex post opportunism and time inconsistency problems that
afflict infrastructure.
The three issues—systems analysis, accounting, and governance—and their solutions
are addressed in turn in sections II, III, and IV of this paper. Section V brings them
together to draw some overall conclusions and recommendations regarding the provi-
sion of infrastructure for the future.

II.  The optimal level of infrastructure

Infrastructure investment is often considered in the context of filling gaps in existing
infrastructure systems. There is a deficiency in the provision of x in location y that needs
to be fixed at minimum cost to the public accounts. It starts from the stock of existing
assets and adds on bits here and there. This pragmatic approach has many advantages,
including avoiding the risk of the opposite approach of embracing large, unworkable,
unmanageable, and un-financeable programmes. However, it can easily descend into cri-
sis management, waiting until deficiencies are sufficiently acute as to make new invest-
ment essential or long-overdue, as in the case of US highways and UK airports.
An economic approach should start from a more generic question: what is the opti-
mal set of infrastructure systems? What sort of airport system, energy transmission
and distribution networks, broadband, water supply, and rail and road network does
346 Dieter Helm and Colin Mayer

an economy need over the next 10, 20, and, indeed, 50 years? These systems have major
public-good elements, and are almost always underprovided by markets, except during
periods of ‘irrational exuberance’, as, for example, in the early railway mania in mid-
nineteenth century Britain and the dotcom mania across the developed world in the late
1990s. It is not a question of whether governments have a role to play, but rather how
this intervention should take place.
Over longer periods, both technology and the economy change. In the case of tech-
nology, there have been some infrastructure networks that have remained roughly the
same over long periods. The water and sewerage systems in many urban areas, such as
London, Birmingham, and Manchester, were put in place in the nineteenth century

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and many of the assets still function more than a century later. The canals were built in
the eighteenth century, the railway networks in the nineteenth century, and some roads
have been in existence for a millennium. Other networks are more recent. Broadband
is a new infrastructure less than a couple of decades old. Some are just emerging as
technology creates new forms of connection and interconnectivity in, for example,
search engines in IT, mobile money in payments systems, Bitcoin in money creation,
and electronic trading systems in financial markets. They both compete with existing
monopolies, for example in monetary creation and stock markets, and create competi-
tive concerns of their own, as in the case of Google in search engines.
While in some systems speed of technical change creates a paralysis of decision-
making, a notable feature about the current list of infrastructure projects is their very
long nature. New nuclear power stations are planned with a life of 60 years. Rail pro-
grammes and new airport capacity across the world are likely to be in use in the twenty-
second century.
There are three key features of these types of infrastructure programmes: their scale,
their breadth, and their duration. The magnitudes of expenditures typically dwarf those
that private entities can finance or manage on their own. The programmes, if not uni-
versal, encompass at least a broad segment of a country’s population in the provision of
a diverse range of services; and the relevant time-scale of the programmes exceeds that
of conventional private-sector investment programmes and associated tools for capital
investment appraisals.
All of these point to the problems involved in relying on private capital markets to
elicit the right scale or form of infrastructure provision without elements of public-sec-
tor coordination and planning. But public interventions are also the source of public-
sector failure. The conventional tool with which to evaluate infrastructure programmes
is cost–benefit analysis (CBA). The total social benefits of an infrastructure project
are evaluated, set against the total social costs, and discounted back to the present at a
social discount rate. If the resulting number is positive then a green button is pressed to
mark the launch of the programme, and if there is a funding restriction those projects
with the highest positive number per unit of expenditure are chosen in preference to
others, until available budgets are exhausted.
There are numerous problems with this. The first and most obvious is that given the
time-scale of programmes, all three components of a CBA—benefits, costs, and dis-
counting—are subject to substantial uncertainties. The objective of large infrastructure
programmes is to change the nature of an economy in terms of both its overall activity
and spatial distribution across people, goods, and services. For example, as Paul Collier
and Tony Venables describe in this issue (Collier and Venables, 2016), the role of urban
Infrastructure: why it is underprovided and badly managed 347

infrastructure is to provide the connectivity that is required to allow cities to function

efficiently.
More substantially, CBA in this form is conceptually wrong. It is a partial analysis
that takes all the other components of the infrastructure and the wider economy as
given. For example, in the UK, HS2’s benefits as a stand-alone project are one thing;
HS2 as part of a newly expanded rail network is another. HS2 as an integral part of
HS1 and therefore a link to Continental Europe, as part of an expanded airport system
and a new northern industrial ‘power house’ is a very different concept. Which of these
is the appropriate framework within which to evaluate the benefits of HS2?
These considerations point to a different policy approach. The appropriate question

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is not ‘Should HS2 be built?’ but rather ‘What sets of infrastructures will the economy
need to supply the core inputs in the mid- to late twenty-first century?’ Thus the specific
HS2 decision is part of a broader set of decisions—a combination of the infrastructure
for the core services of water, sewerage, rail, road, broadband, and energy to provide an
overarching ‘national infrastructure plan’ or, in the case of cities, an ‘urban infrastruc-
ture plan’.3
The article by Debora Revoltella, Philipp-Bastian Brutscher, Alexandra Tsiotras,
and Christoph T. Weiss in this issue (Revoltella et al., 2016) provides a graphic illus-
tration of the significance of this broad systems approach in the context of transport
infrastructure4 Their article reports the crucial role that transport infrastructure plays
in promoting economic growth by connecting different regions of an economy to
growth opportunities around the world. Collier and Venables (2016) make a similar
point in relation to urbanization in developing economies. This connectivity is of great-
est significance during periods of economic slack when regions have particularly strong
potential to take advantage of growth opportunities around the world.
Planning infrastructure is what most developed countries have traditionally done for
much of the twentieth century, but the very idea of a ‘plan’ fell out of fashion from 1980
onwards with privatization, liberalization, and an emphasis on competition. Rather
than plan infrastructures into the future, the policy emphasis was on the problem of
limiting and then regulating the natural monopoly market failures and incentivizing
private companies to correct the failures. Infrastructure became an industrial econom-
ics problem. Private companies were left to come forward with profitable investment
projects, and the regulatory emphasis moved to incentives so as to mimic competitive
markets and to minimize incentives to gold-plate assets.
The results have been mixed. Operational efficiency has improved in many privat-
ized utilities, sometimes massively; consumer choice has been expanded; and natural
monopolies have been unbundled. Yet, for all the static efficiency gains, the dynamic
results associated with new investment, capacity, and security of supply have been
limited.
The US and the UK are particularly pertinent illustrations of the deficiencies of the
approach since both countries led the way in privatization and regulation of infrastructure,
first in the US, in the form of rate-of-return regulation, and then in the UK, with price-cap
3  This was indeed the approach taken by the incoming UK coalition government in 2010. A National

Infrastructure Plan would be embedded in the planning system reforms, so that the planning system would
take into account national policy statements for each of the key infrastructure sectors.
4  This accounts for more than three-quarters of the stock of infrastructure assets in the UK (see Joe

Grice’s article in this issue (Grice, 2016)).

348 Dieter Helm and Colin Mayer

regulation. The outcome has been that demand has pushed up against supply in transport
across the US and UK, with airports, roads, bridges, and urban and long-distance railways
all experiencing constraints. In the UK, security-of-supply margins in energy have declined
to critical levels and, having led the way, the UK now lags on broadband.
The reason for under-provision by private-sector firms is not hard to identify. The char-
acteristic of most infrastructure projects is large fixed capacity costs and small marginal
costs. The result is that in periods of excess supply, prices fall to marginal costs (or may be
forced there by regulators), while upside gains are restricted during periods of constrained
supply. Either way there is typically a chronic under-provision by private markets.
Security of supply is a public good. It requires an element of excess supply. Excess

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supply pushes the marginal cost and price down, so that private providers are unable to
recover their average costs. Hence, in the absence of specific watertight contracts that
assure private providers of a revenue stream, covering the high fixed costs incurred,
there will be under-provision. But such contracts cannot be provided on a stand-alone
project basis. The income that will be derived from building a power station depends
on how many others are commissioned. The revenue from a toll road depends not
just on the allowed price cap but also on the interconnection of the road with others,
and on the scale of investment in competing modes of transport from rail and air.
The systems nature of infrastructure renders both the development and implementa-
tion of private-sector provision with a stand-alone, piecemeal approach unworkable.
Public goods require public interventions, and public guarantees that taxpayers or cus-
tomers will pay on a system-wide basis.
Recognizing the system characteristics, and the need for a national infrastructure
plan to capture the interrelationships between these systems, should provide the basic
architecture of infrastructure policy. However, there is one further component that
derives not just from the scale and breadth of infrastructure programmes but also their
duration. They span not just one but multiple generations and have to reflect the inter-
ests of the unborn as well as the current voting population.
When the Victorians built the London sewers, it is unlikely that they had in mind the
benefits that Londoners would derive a century and a half later. They were concerned
with the ‘Great Stink’ in London, and the very immediate needs to clean up the mess.
The project was economic in the short term, without worrying about the long run. But
there are many projects where time horizons make a considerable difference, and this is
where the discount rate problem arises.
There are three key issues to thinking about the future benefits to infrastructure pro-
jects: whether to discount utility; how to account for economic growth; and what to
assume about technical progress. The first has been extensively discussed in the litera-
ture, most recently in connection to climate change (Stern, 2007). The case has been
made that the value of utility to an individual should not vary according to the date
when or the place where they live. Utility, it is argued, should be time and location
invariant.5 Yet this is an extreme egalitarianism that would mandate massive transfers
of wealth now and in the future, and does great violence to human nature. Discounting
future utility is a very human thing to do and not to do so invites political rejection of
the policies that would follow from this extreme viewpoint.

5  This argument was famously made by Ramsey (1928) and more recently taken up by Stern (2007) in

addressing climate change. See Helm (2014) for a critique.

Infrastructure: why it is underprovided and badly managed 349

Perhaps even more complicated is what to do about economic growth assumptions.

Typically policy-makers assume that industrialized economies will grow at around 2–3
per cent per annum, developing countries at 4–6 per cent pa, and the world as a whole
at around 3–4 per cent pa. Discounting is then augmented beyond pure time prefer-
ence for current as against future income by the diminishing marginal utility of income
associated with assumed higher future levels of income and prosperity. But this is typi-
cally applied to accounting in GDP terms. It takes no account of environmental and
other externalities and relies upon a combination of technical progress and an absence
of political, social, and environmental constraints. As we shall see below, while GDP
relies largely on a cash-based approach, the introduction of a balance sheet accounting

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framework points towards lower assumptions. Population expansion complicates the
picture further, particularly in the context of uncertainty about its rate of increase.
The third element is even more challenging—the assumptions about technical pro-
gress. Consider some of the potential ‘predictable surprises’ for infrastructure systems.
If, for climate change reasons, fossil fuels are to be largely phased out by the middle
of this century, then transport systems will probably convert to electricity. Cars may
become driverless. Roads may be transformed into intelligent networks, with charging
built into their very fabric. The difference between a driverless car and a train dimin-
ishes, but the car maintains the flexibility that trains lack. By mid-century, will anyone
want to travel by train, except perhaps long distance?
Next consider energy systems. In a near zero carbon emissions world, the entire energy
systems will need to be transformed. The gas networks might be required for back-up—
but then again they might not if electricity storage develops. Opening up the light spec-
trum, and new applications to harness resulting solar energy might leave nuclear stranded.
In informational technology, the pace of technical change has been even more rapid.
It might be concluded that the faster the expected rate of technical change, the higher
the discount rate, and hence the lower the level of system investment. However, that is pre-
cisely the wrong conclusion. The characteristic of infrastructures is that they are typically
the mechanisms through which new general-purpose enabling technologies are imple-
mented and adopted in the wider economy. Driverless electric cars will not prosper if the
railways are invested in at the expense of smart roads. Decentralized solar prospers with
supporting decentralized energy networks, not an extensive, expensive centralized grid.
It is not the time horizon that is the critical factor but the enabling nature of the
infrastructure systems. A  nuclear power station is vulnerable to technical change, a
smart road system less so. A nuclear power station uses an existing technology; a smart
road system promotes the adoption of new ones. Optimal systems should be robust
to different possible technological scenarios and promote new ones. London’s sewers
passed this test; broadband fibre might pass it, but is vulnerable to wireless systems; and
Hinkley and HS2 are unlikely to satisfy it.

III.  Accounting for infrastructure—the balance sheet,

savings, and investment
In theory, the optimal set of infrastructure systems exhaust the positive net present
value (NPV) investments, and hence are all automatically financeable since the rate of
350 Dieter Helm and Colin Mayer

return is above the cost of capital. In a private company, the new investments would be
represented by a higher asset value on the balance sheet, set against the liability of the
debt and equity to finance them. The value of the company would go up, since the new
assets are worth more than the new liabilities.
In theory again, the same approach should apply to governments but with the wider
public goods and externalities benefits added in to establish the social as against private
benefits and costs. The list of positive NPV investments should include all public goods
systems, for which the social NPV exceeds the social cost of capital. Since the govern-
ment has a monopoly on taxation (and the coercion which goes with it) and because
it has a more diversified portfolio than any private-sector company, its cost of capital

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should be much lower, closer to the riskless rate of return and proxied by the cost of
government bonds.
In practice, this is not what happens, and the gap between theory and practice cre-
ates one of the largest potential sources of economic inefficiency and the opportunity
to enhance competitiveness and economic growth. There are three reasons: the gov-
ernment does not have a balance sheet equivalent to that of a private company; there
is an inbuilt bias in favour of consumption over investment, constraining the supply
of funds; and the standard government approaches to estimating costs and benefits
fail to take adequate account of the wider social costs and benefits, notably at the
systems level.
Conventional government accounting practices seek to answer four questions. The
first is an old one dating back to the origins of central government. It is how to balance
the budget—how to match incoming tax and other revenues with outgoing expendi-
ture. It might be called the ‘Gladstonian question’. Its importance is obvious, as is the
repeated failures of governments to measure accurately income and expenditure, and to
match the two. Indeed, governments have a strong incentive to over-predict the former
and under-predict the latter—to mislead both the voters and their creditors. Given the
monopoly on printing money, and the repeated resort to this expedient throughout his-
tory, the incentive problems in this dimension of public accounting have almost always
been a focus of institutional design.
The second question government accounting addresses concerns the balance of
aggregate demand and aggregate supply and the design of fiscal policy. This is a rela-
tively modern question for national accounting, associated with demand management
around after the Second World War (though the early income, expenditure, and output
national accounts were first sketched in the interwar period). The concept of GDP fits
into this framework as a short-term cash-focused concept, which treats consumption
and investment as just two different types of demand.
The third question is about savings and investment—about governments’ debt and
the structure of that debt. When the Gladstonian budgets do not add up—balance
in cash terms—then the gap has to be plugged. Since it is almost always about defi-
cits rather than surpluses, this means borrowing. In cash terms, it makes no difference
whether this borrowing is to finance consumption or investment. It is just a deficit. This
deficit needs a flow of funds, and this flow adds to the stock of debt. The creditworthi-
ness of a company borrowing for these two different purposes would be correspond-
ingly different, but for a government with its monopoly of taxes, its creditworthiness
ultimately depends on its ability to extract the taxes. A competitive company has no
such option. Shareholders and bondholders can leave; taxpayers have to emigrate.
Infrastructure: why it is underprovided and badly managed 351

The fourth question is about economic growth. National income accounts purport
to measure economic growth through the path of GDP. GDP goes up when the cash
income goes up. This can be achieved by a variety of mechanisms. It can be higher pro-
ductivity feeding through to higher output. It can be by allowing assets to deteriorate
and failing to maintain the net value of capital assets by avoiding the costs of their
maintenance. And it can be through selling assets and depleting natural capital (such
as oil and gas) (Helm, 2015). All three of these have flattered economic growth since at
least the end of the 1970s, notably in the UK. Maintenance of public assets has been
sub-optimal; privatization has contributed cash; and the North Sea oil and gas reserves
have been largely depleted.

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In all of these cases, the answers that emerge are at best misleading and at worst
encourage inefficient economic decision-making, and hence lower the long-run sus-
tainable growth path. The short-term budgetary position is a very poor guide to even
the short-term state of government finances—as the experience of the pre- and post-
economic crisis periods in the last decade have indicated. Budgetary forecasts even one
year out have a very poor record. Furthermore, balancing the short-term budget in
cash terms is unlikely to be an optimal policy objective, since it may lead to a reduction
in investment in favour of stickier and politically more sensitive current consumption,
thereby weakening chances of achieving longer-term balanced budget objectives.
It is the failure to distinguish consumption and investment that plays out in the other
three questions, too. Investment is about the creation of assets—and assets lend them-
selves to balance sheets. Consumption and investment are not the same things, and they
have very different economic consequences. This disregard for asset creation and bias
towards consumption acts to the detriment of long-term economic growth, even if cur-
rent GDP suggests otherwise.
The creation of a national balance sheet shifts the focus towards investment, towards
the maintenance of assets, and towards the matching of these assets against the lia-
bilities. Consider the following example of GDP and budgetary outcomes from 1980
onwards. GDP reported economic growth included the advantages to the then current
generation of the proceeds from the sale of assets (privatization), lower taxes as a result
of lower capital maintenance (not paying to mend potholes in roads), and from the
total surplus from North Sea oil and gas. Each of these increased short-term GDP, but
lowered the long-run sustainable growth path.
Among the prime casualties was infrastructure. Where investment could not be post-
poned or avoided, it was pushed off into the private sector. Privatization of infrastruc-
ture started with BT in 1984. Although BT’s proposed investment in System X exchanges
passed the Treasury investment rules at the time, it meant that government borrowing
would exceed its constraint (defined in Gladstonian terms). Hence the investment was
passed over to the private sector, and a private-sector balance sheet. Water followed a
similar path, with the catch-up capital expenditure to meet the EU directives passed
to private-sector balance sheets. Eventually almost all the infrastructures and associ-
ated utility activities were privatized. Those that remained—like the flood defences and
the roads—are widely recognized to have faced chronic underinvestment and all on a
short-term basis.
Privatization created a private-sector borrowing requirement to replace the pub-
lic-sector one for infrastructure investment. In the process, it also created a credible
mechanism for financing investment in the private sector through the development of
352 Dieter Helm and Colin Mayer

regulated assets bases (RABs). In other words, in the process of shifting assets from the
public to the private sector they were transferred from one sector, namely the public,
without (or with inadequate) balance sheets to a private sector that had proper balance
sheets and credible mechanisms for committing to funding investments, as is discussed
further in the next section.
That was the plus side, and a not inconsiderable advantage at that. But set against
this, among the many problems with privatization, one stands out. Private firms, as
noted above, have no incentive to provide public system goods. They are interested in
positive NPV projects, which customers will pay for. Government needs to work out
what these optimal systems might be.

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In order to align public and private incentives, it is for government to decide what
kinds of systems are required (as discussed in section II). It can contract the privat-
ized companies to do these, but only if they have monopolies to extract the monies.
Alternatively, the government has to pay from tax revenues—either in the normal budg-
etary way, or through imposing special hypothecated taxes (such as green levies).
From the perspective of the sustainable economic growth path, it does not matter
whether these are privately or publicly funded. The taxpayers and the customers in any
event heavily overlap for the basic infrastructure services, and taxpayers both benefit
from the externalities from private utility infrastructure investments and bear some of
the potential liabilities. Thus the appropriate economic approach is to create a national
infrastructure balance sheet, comprising the assets and liabilities of the core infrastruc-
tures, regardless of who owns them. In the private sector, these accounts are in principle
already provided through the RABs. To these should be added the assets of the remain-
ing publicly owned infrastructures—the rail track, roads, flood defences, and so on.
Completeness is not immediately required. The questions are: whether these assets are
being maintained; whether they are being enhanced; and what the corresponding financial
and other liabilities are. The accounts can start off as partial, and be gradually expanded
over time to create a more inclusive set of accounts. For example, pension liabilities and
the stock of national debt might be added. The results help, even partially, to address the
sustainable growth path question that current national accounts largely neglect.
Joe Grice’s article in this issue (Grice, 2016) describes how the Office of National
Statistics (ONS) is leading the way in constructing an aggregate infrastructure balance
sheet of the UK economy. His article details the issues that this raises and the complexi-
ties involved in constructing aggregate accounts. It is an important step forward and
illustrative of what governments should emulate around the world.
Grice’s article records that infrastructure in the UK is evenly split between the private
and public sectors, is predominantly associated with roads and transport more gener-
ally, declined appreciably from the 1960s until the mid-1990s, then increased up to the
financial crisis, and has fallen back again since then. It therefore paints an interesting
picture of the allocation, composition, and changes in infrastructure.
The key question is what will be done with this information beyond providing valu-
able descriptions. There is no strong indication at present that it will have a profound
impact on public policy. There are three respects in which it should. First, balance sheets
should form the basis of informed decision-taking. Instead of determining public pol-
icy on the back of one side of the balance sheet—the liabilities in the form of public-
sector deficits—the balance sheet should reflect net worth, the difference between assets
and liabilities, as it does in any other organization.
Infrastructure: why it is underprovided and badly managed 353

Second, the balance sheets should be the basis of motivating and incentivizing those
responsible for the implementation of public policy. Just as the RAB is an essential
input into incentives in the private sector, so too public-sector balance sheets should be
used to monitor and incentivize public-sector organizations. Third, similar to the way
in which private organizations measure their performance net of capital maintenance,
so economies should report income and production net of the depreciation of capital
assets including infrastructure. In other words, the derivation of infrastructure balance
sheets described in Grice’s article should provide the foundations for a fundamental
shift in the measurement and formulation of public policy from flows to stocks.

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IV.  Governance and regulation of infrastructure
Defining the optimal infrastructure systems, creating a national balance sheet, and
ensuring that capital maintenance is properly provided, would together revolutionize
infrastructure policy. It would help to identify the sustainable economic growth path,
and direct governments towards enhancing economic efficiency.
The fact would remain that much of the investment would be carried out by the
private sector. In this context, infrastructure throws up a special problem: time incon-
sistency. Time inconsistency arises from two connected features of infrastructure invest-
ment. The first is that assets tend to have low marginal costs relative to high average
costs. As noted, many infrastructure systems share public goods characteristics, with
near zero marginal costs. For an investment to be profitable, investors need to be able to
charge prices sufficiently above marginal costs to recover full average costs.
To do this requires market power: the ability to extract monopoly rents in a context
in which entry is limited. In particular ‘hit and run’ entry of contestable markets must
be prohibited or constrained. In most infrastructure systems, the costs of duplication
are high and technical progress sufficiently slow to provide at least an element of tem-
porary (natural) monopoly to recover the costs of investment. Left to their own devices,
many infrastructure developers might anticipate that they could earn monopoly prices
to a sufficient degree. To date this has been largely true for the development of mobile
telephony systems and urban broadband.
The problems come when the government sets the prices that can be charged to pro-
tect customers from monopolies, which might over-recover the economic rents, under-
invest, create barriers to entry, and lock in customers. Energy, water, and roads are
prime examples of pervasive monopoly regulation.
Such regulation works both ways: it attempts to limit monopoly rents, but also to
ensure that some above-marginal-cost pricing can be applied to cover the investments.
The latter is achieved through the regulatory architecture. Regulators are typically
required to ensure that the regulated entity’s functions can be financed, and more spe-
cifically to ensure that the value of efficient capital expenditure is placed in a RAB, to
which the duty applies. The RAB is an excellent invention to overcome time inconsist-
ency, and its success can be seen in the very low cost of capital that applies to RAB-
based regulated utilities in the UK.
The way in which the RAB operates is straightforward. It uses a perpetual inventory
approach to determine the current cost value of assets deployed in a regulated utility. It
354 Dieter Helm and Colin Mayer

takes a starting value of the assets at, for example, the time of their privatization, adds
in new investment, subtracts the depreciation of existing assets, and revalues assets to
current prices. It is the same method as that described by Joe Grice in his account of
how the ONS is seeking to value the stock of infrastructure assets in the UK, and the
analogy emphasizes the potential to incentivize investment in the public as well as the
private sector.
The RAB valuation is a current cost measure to which an estimate of the cost of
capital can be applied to determine the return that a utility should be expected to earn
over a particular regulatory period. This is the basis of the price cap that is imposed
on regulated firms and which they attempt to profit from by pursuing greater efficiency

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gains than assumed in cost projections over the regulated period. By protecting past
investments of privatized companies in this way, the RAB significantly diminishes the
exposure of companies to economic and, in particular, political risk, and it means that
the cost of capital associated with imbedded infrastructure is very low, almost as low as
that of government bonds.
The RAB-based approach solves for time-inconsistency, but several issues remain
to be resolved. The article in this issue by Massimo Ferrari, Alberto Giovannini, and
Massimo Pompei (Ferrari et al., 2016), details the problems of attracting private finance
for infrastructure. They note the benefits of establishing pools of private-sector infra-
structure funds, but they also describe the practical difficulties of achieving this and the
complexities involved in writing the contracts needed at the different stages of infra-
structure projects—design, build, and operate. They argue for more standardization of
contracts to provide greater transparency and better mitigation of risks.
The guarantee that the duty to finance functions provides in the RAB can be general-
ized into contracts. Indeed, much of infrastructure is achieved through contracts rather
than RABs, and the net effect is similar: a contract specifies revenues, and these typi-
cally come from government-related activities. Public–private partnerships (PPPs) and
public finance initiatives (PFIs) fall into these categories, with user charges guaranteed
so that contractors can recover their fixed and sunk investment costs.
Where such contracts are hard to define, or where there is no obvious revenue stream
capable of remunerating the assets, the government can contract the capital expendi-
ture through direct government payments. HS1, HS2, Crossrail 1, and Crossrail 2 are
examples of this approach, where the time inconsistency is internalized in government.
For the reasons described above in relation to the analogy of RAB and ONS valuations
of infrastructure, public balance sheet treatment of these assets would have the same
effects as the regulator duty to finance the functions. The public balance sheet would
need to be financed, and future taxpayer revenue streams identified.
In the public sector, capital expenditure is typically financed out of current revenues.
It is ‘pay-as-you-go’. What privatization achieved was a shift from pay-as-you-go to
‘pay-when-delivered’. This mirrored the revenues with the beneficiaries: only once the
asset had been built and was up and running would revenues flow. Collier and Venables
(2016) describe how land taxation can be used to capture the benefits associated with
urban infrastructure as reflected in land prices. However, here, too, a timing problem
arises in so far as the upfront investments, in particular in newly emerging cities, should
be made before the capital appreciation of land prices occurs.
The problem with pay-when-delivered is that it has to be credible that the customers
(and taxpayers) will actually pay. Consider the list of projects in the introduction above.
Infrastructure: why it is underprovided and badly managed 355

Has anyone worked out what the capacity to pay will be in, say, 15 years’ time for all the
new transport, energy, water, and broadband networks? Will customers and taxpayers
(a) be able to pay, and (b) be willing to vote for politicians who will force them to pay? It
is perhaps easy to believe that water customers could pay their water bills, and perhaps
energy customers, too. But will they be able to pay the combination of all these bills
simultaneously, and a ‘normal’ interest rate on their debts and mortgages? This is what
a national infrastructure balance sheet would illuminate—and with it the question of
whether the current level of consumption is sustainable.
Still more significantly, what a national infrastructure balance sheet does is to elimi-
nate the nonsense of current Gladstonian public-sector accounting and fictitious rea-

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sons for preferring to locate infrastructure activities in the private or public sector.
There are good reasons for doing so to reflect the ability of one or other party to man-
age the assets better or to internalize the externalities effectively. However, there are
bad reasons associated with superficially important but practically spurious accounting
considerations. There should be no simple accounting reason for preferring to locate
infrastructure assets in the private or public sector. Much government policy around
the world has been incorrectly driven by such considerations with damaging conse-
quences for economic performance and social wellbeing.
What the regulatory regime leaves out is the question of who decides what the capital
expenditure should be—who defines the optimal infrastructure systems identified in
section II, and who translates them into specific contracts for private-sector providers.
The need for governments to be able to commit to private-sector providers is widely
recognized and there are a number of mechanisms that are used to strengthen govern-
ments’ commitment to private-sector contracts, not least the adoption of RAB regu-
latory accounting. In the context of developing countries, multilateral agencies, such
as the Multilateral Investment Guarantee Agency (MIGA), provide powerful commit-
ment mechanisms by offering political risk insurance to private-sector investors and
lenders. Where developing countries uphold the interests of their investors, then they
can obtain larger amounts of funding on more favourable terms with the insurance that
MIGA offers than those countries that renege and are excluded from MIGA assistance.
There have been a number of proposals to remove politics from policies through
appointing ‘independent’ infrastructure commissions. These rely on a distinction
between decisions about overall economic objectives, and decisions about specific pro-
jects. Thus politicians can formulate policy regarding, for example, airport capacity and
the relative significance of rail and road transport, but an independent body should
determine what should be built and where it should go.
While there is a role for technical advice, and indeed that is the point and purpose
of a civil service, there is a big difference between technical advice and technical deci-
sion-making. All the infrastructure system decisions are inherently political, not least
because citizens will have to pay for them through future taxes, or user charges, or
some combination of the two. Most involve major decisions about land use and this is
deeply—and rightly—political, too.
Likewise, independent regulators are critical to the determination of the terms on
which private-sector providers are engaged in the provision of infrastructure services.
The use of price-cap regulation for assuring investors about returns over a regulatory
period of, say, 5 years was an advance over rate-of-return regulation and it has been
adopted by many countries around the world. However, even over such limited periods
356 Dieter Helm and Colin Mayer

political expediency often overrides contractual certainty when regulators take interim
measures to adjust ‘fixed’ prices to reflect changing circumstances and, even if they do
not interfere in this way, regulatory periods are but a fraction of the lifespan of most
major infrastructure projects. They can provide little assurance about the long-term
returns that investors can expect on their initial investments.
There are, therefore, limits to the extent to which politics can (or should) be removed
from the implementation as well as formulation of infrastructure policy. This dimin-
ishes the extent to which it is feasible for governments to commit to particular arrange-
ments over long periods of time. It creates political and regulatory uncertainty for
private-sector providers of infrastructure services. International agencies, independent

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commissions, and regulators can and should be used to mitigate such uncertainties as
far as possible, but they cannot extinguish them.
It is important, though, to recognize that the commitment problem is by no means
unidirectional. While the time inconsistency problem of the public sector is well docu-
mented, that of the private sector is at least as pervasive. As noted above, privatization
has been successful at promoting operational efficiencies but not capital expenditures.
For a fixed revenue, private-sector providers seek to deliver as little as possible, at as low
a cost as they can, over as long a period as feasible to maximize profits. Competitive
tendering is used to elicit the best value for money for the construction and delivery of
infrastructure projects and services, and contracts are specified as precisely as is feasible
to avoid gaming. But contracts are at the best of times incomplete and even open to
abuse when they involve the provision of subjective qualities of service over long peri-
ods of time.
Collier and Venables (2016) provide a graphic illustration of this in the context of the
rent exploitation problem that arises in relation to the provision of infrastructure with
resource extraction. The link between the two has been a key way of funding infrastruc-
ture investment, in particular in Africa, during the commodity boom. However, as Collier
and Venables describe, this can result in infrastructure investments that are privately ben-
eficial for the providers but not socially optimal for cities. Designing ways of aligning the
private interests of providers with the public interests of societies is a critical issue.
The problem is that the interests of government and regulators and private-sector
companies are in direct conflict. Governments and regulators are (at least in principle,
though unfortunately not nearly always in practice) concerned with the public interest.
Private companies are interested in maximizing their returns. Governments and regula-
tors want maximum quality at lowest prices for the largest number of consumers (in
particular disadvantaged consumers). Companies want the highest revenues from the
provision of the lowest-cost projects and services. However much reliance is placed on
competitive tendering, well-designed contracts, international agencies, or independent
public bodies, they will not resolve the time-inconsistency problem of both the private
and public sector and the inadequate level of commitment of both parties.

V.  A better way forward

It is not hard to improve on the record of infrastructure investment in both devel-
oped and developing countries. The first, single most important advance to putting
Infrastructure: why it is underprovided and badly managed 357

infrastructure investment on a better footing is to introduce a new accounting frame-

work, which seeks to address the fundamental questions not just about the current state
of government finances, but to help identify the sustainable growth path. For this, a
balance sheet is needed.
The creation of balance sheets forces politicians to address fundamental questions
that current accounting at best disguises. A balance sheet forces governments to address
the questions of whether assets match liabilities and whether the assets are being prop-
erly maintained.
A balance sheet separates out investment decisions, by identifying how investments
increase overall asset valuations, and then setting financing in relation to those assets. It

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separates the Gladstonian question of the short-term cash position and budgeting from
investment decisions, and thereby separates consumption from investment.
A national balance sheet sets aside the ownership question from the sustainable
growth path, and brings centre stage the ability and willingness of either the private or
public sector to pay for infrastructure. It considers consumers and taxpayers together,
and forces a focus on the sustainable level of consumption—and the required savings.
Why has no government introduced this balance sheet national accounting for infra-
structure? There are at least two reasons: first, they still think of the Gladstonian budg-
eting and macroeconomic policy as being the major purposes of national accounts;
and, second, they fear the consequences of confronting the electorates with the under-
lying state of public finances that these balance sheet accounts would reveal.
On the latter, the political obstacles are formidable. Making explicit the level of capi-
tal maintenance so that the assets do not deteriorate; accounting for the economic rents
from depleting non–renewables such as North Sea oil and gas; and setting aside any
revenue effects from privatization would all lead to the conclusion that the sustainable
level of economic growth is lower than currently recorded and that the actual deficit is
significantly worse than stated. But avoiding the political consequences will not make
them go away: a national balance sheet points towards a better treatment of infrastruc-
ture systems and investment in them, and therefore to a higher level of sustainable eco-
nomic growth. The current cash-based approach means a lower long-run growth rate.
Getting the accounts right is one critical aspect of fixing infrastructure, because what
you don’t measure you can’t manage. But what you do measure you do not necessar-
ily manage well. Fixing the governance conundrum is equally important. The current
institutional solutions to the inherent conflict between the private and public sector
in the delivery of infrastructure services have only got us so far and are in some cases
being shown to be increasingly fragile. And that is before we have even begun to think
about our potentially most important infrastructure asset—that is, our natural capital
and environment (see Natural Capital Committee (2015)). We simply cannot afford to
retain a system that is degrading both our material and natural infrastructure.
We need to find ways of aligning the interests of private providers of infrastructure
better with the social interests of governments and regulators. The regulatory contract
described above illustrates the dilemma. The RAB is a measure of the depreciated value
of the investments made by companies at today’s current prices to meet their licence
conditions to operate as infrastructure providers. However, those very same companies’
terms of employment of the investments under corporate and company laws that define
their existence state something very different. The licences specify the amounts, quali-
ties, and duration of the services they provide; corporate and company laws relate to
358 Dieter Helm and Colin Mayer

the financial interests of their investors (with in some cases modest acknowledgement
of the interests of other stakeholders). The focus of infrastructure licences is on qual-
ity and value for money; the fiduciary responsibilities of directors are to maximize the
returns on their companies’ investments. For this to work, there needs to be an easy
and clear distinction between the public and private interests, and this in turn requires
detailed contracts that are complete and specified in advance. It leaves little room for
discretion, whereas in practice the maintenance and enhancements of systems typically
requires significant boardroom discretions (Mayer, 2013).
The problem is particularly acute in relation to core system providers—the track in
railways, the grid in electricity, local loops and fibre networks in telecoms and broad-

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band. The public service obligation on these providers is especially critical because of
their core functions and the importance of management discretion. There are serious
limitations in the degree to which competition can be promoted to align private with
public interests in these areas.
One approach is to retain ownership of these core operators in the public sector.
Another is to seek mutual or cooperative ownership of the assets by relevant stake-
holders and customers. Experience to date of both approaches is often at best mixed.
Public ownership is subject to well-known problems of political interference and cap-
ture; mutual ownership is prone to inefficiency and a lack of accountability.
A third approach is to align the objectives of private operators with the public inter-
est by making the licence condition of core system providers part of the charters or arti-
cles of association of their companies, so that the boards of companies exercise their
discretion with these broader objectives and interests in mind. This does not extinguish
their obligations to their shareholders, but it puts the licence conditions of infrastruc-
ture companies on an equal footing.
That is precisely how infrastructure companies were for centuries structured across
the world, and in the absence of regulators. The railroads and canals were built by pri-
vate companies under royal charters or licences issued by acts of parliament. The public
obligations were a pre-requisite to the granting of licences to operate. That public pur-
pose was extinguished with freedom of incorporation in the middle of the nineteenth
century and, while this may have been wholly appropriate in private companies that
were not supplying public services, it has proved troublesome in the provision of core
infrastructure. It is therefore not surprising that, in the absence of this third alternative,
for most of the core infrastructures in the twentieth century, public ownership was the
adopted solution.
Incorporation of public licences into private charters and articles of association
would help to reduce (but not entirely eliminate) the conflict and contractual abuse that
is endemic in PPPs, PFIs, and privatizations. It makes the private provision of public
sector services a natural function of the private sector and it extinguishes the divide that
exists between the two sectors. It does so by converting the conflict that is intrinsic to
regulated corporations into cooperation, and avoids having to trade off the inefficien-
cies of the public sector against these conflicts in the private sector.
This could be achieved by the inclusion of licence conditions in corporate charters
and articles of association or the adoption of a legal form analogous to the Public
Benefit Corporation in the US, which explicitly allows companies to specify a pub-
lic purpose beyond their commercial interests. In both cases, directors owe fiduciary
duties of honesty, loyalty, and care to their consumers and customers as well as their
Infrastructure: why it is underprovided and badly managed 359

shareholders. These responsibilities derive from the dependence of users on core system
suppliers and the inability of contracts to offer adequate protection in the absence of
such duties.
This model raises a number of consequential questions about the role of regula-
tion, since the trade-offs and discretion in the stewardship and investment in assets
is now internalized with the public obligation company, rather than kept separate in
the privatized model or integrated into the public ownership model. The role of the
regulator would be reduced, focused on governance to ensure that the company abides
by its public duties under its charter and publishes relevant measures of performance
that demonstrate this. The decisions about the optimal systems these institutions are

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charged with delivering would remain political.
A combination of proper accounting for infrastructure across the private and public
sectors together with a revisiting of the governance options described above offers the
prospect of transforming infrastructure around the world. With correct measurement
and effective governance, there is at least a chance of the world obtaining the infrastruc-
ture it needs for its future prosperity and survival; without it, there isn’t.

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