Chapter 21 - The Infrastructure & Transport Special

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The Infrastructure & Transport Special

PPP/PFI, Regulated Assets, Concessions & Transport Cram Sheet - Coming Soon Available on launch day Overview Chapter Roadmap Infrastructure is the bridge between capital markets and essential services. This chapter maps the entire landscape: from regulated utilities generating inflation-linked returns through regulatory frameworks, to concession-based transport assets where demand forecasting determines investor returns, to PPP/PFI structures that transfer public sector risk into the private market. You'll learn how a regulated asset base (RAB) is set, how price reviews can destroy value overnight, why infrastructure can sustain 60-80% gearing versus 30-50% in corporates, and where the real diligence risks hide. Part I: Core metrics and risk allocation - RAB, RCV, gearing, revenue models Part II: Sub-sector deep-dives - utilities, transport, social infra, digital Part III: Valuation mechanics - DCF, multiples, transaction types Part IV: Diligence red flags - regulatory reset, demand, construction, political risk Part I: Foundations Core Metrics I: RAB & RAR RAB (Regulated Asset Base) The value of assets that a regulator allows an infrastructure company to earn a return on. Set at initial price review and rolled forward via depreciation, capex, and inflation adjustments annually. Periodic resets (typically 5-8 years) recalibrate RAB based on actual asset condition, capex efficiency, and updated cost of capital assumptions. RCV (Regulatory Capital Value) RCV is the opening balance sheet value of assets in some regulatory regimes (e.g., UK water). Used as starting point for RAB calculations. RCV grows each year by: capex added + inflation adjustment - depreciation. RAR (Regulatory Asset Ratio)

RAB ÷ Enterprise Value. Indicates what % of the company's market value is backed by regulated assets. Ratio >80% = high regulatory dependence, lower growth optionality. Ratio <60% = more commercial revenue exposure, higher growth potential but higher risk. Key insight: RAB is set by regulators, not the market. If a company is bought at EV = 1.5x RAB, the acquirer is betting on outperformance (cost efficiencies, ODI rewards). If bought at EV < RAB, something is broken (risk of regulatory intervention, high capex catch-up needed). Part I: Foundations Core Metrics II: RCV & WACC Dynamics Regulatory WACC The cost of capital set by the regulator in each price review. UK water regulator (Ofwat) sets allowed WACC; Ofgem does the same for energy. This WACC is applied to RAB to determine allowed revenue. Recent trend: regulators cutting allowed WACC as bond yields fall, compressing infrastructure returns. Allowed vs. Actual Return Allowed return = Regulatory WACC × RAB. Actual return depends on: (1) cost management (keeping opex below allowed level), (2) capex efficiency, (3) regulatory outperformance (ODI incentives). If actual WACC < allowed, company captures the spread. Cost of Equity Compression Risk As government bond yields fall, regulators cut allowed equity cost of capital. This directly reduces allowed returns. Ofwat cut allowed CoE from 4.8% (2017) to 2.75% (2020) - a 205 bps decline. Equity investors face year-on-year return compression without any operational change. Regulatory Return (Simplified) Allowed Revenue = RAB × Allowed WACC Net Outperformance = (Actual WACC − Allowed WACC) × RAB Part I: Foundations Core Metrics III: Gearing & Coverage Ratios Net Debt / RAB