This paper examines incentives to invest in transport infrastructure under public and privatised ownership. It argues that the methods used to regulate the UK's nationalised industries up to the end of the 1970s provided inadequate constraint on industries' investment plans but that changes in regulation, introduced after 1978, provided more effective incentives. Evidence on investments behaviour provides support for both these propositions. The paper examines arguments which suggest that privatised utilities subject to price cap regulation will have inadequate incentives to invest. Comparison of the likely social costs of underinvestment and overinvestment suggest that the former will generally be higher, in some cases significantly so, under existing regulatory mechanisms. The paper concludes by suggesting the further investigation of solutions to the dilemma posed by the possibility of underinvestment and the associated social costs; these include competitive supply of infrastructure, greater reliance on short-run pricing and more explicit regulatory contracts in relation to investment. (Author/publisher).
Abstract