The Regulated Asset Base (RAB) model is a financing approach designed to attract private investment into large infrastructure projects by sharing construction and operational risks between developers and consumers. Under this model, a company is granted the right to charge consumers for the construction and operation of new infrastructure through their utility bills, providing a regulated revenue stream during both the construction and operational phases. This mechanism offers investors a more predictable and stable return, thereby lowering the cost of capital and encouraging investment in essential infrastructure.

In the United Kingdom, the RAB model has been successfully implemented in projects such as the Thames Tideway Tunnel and Heathrow Terminal 5. Building on this success, the UK government has extended the RAB model to finance new nuclear power stations. The Nuclear Energy (Financing) Act 2022 facilitates this by allowing eligible nuclear companies to receive a regulated revenue stream funded by a charge on electricity suppliers, ultimately borne by consumers through their electricity bills. This approach aims to reduce the financial burden on developers and attract a broader range of private investors to the nuclear sector.

However, the RAB model is not without criticism. Some argue that it effectively provides developers with an “open cheque book,” enabling them to overspend during construction, with consumers locked into covering these costs regardless of project performance. This concern is particularly pertinent for large and complex projects like nuclear power stations, where construction delays and cost overruns are common. Therefore, careful regulatory oversight is essential to ensure that the interests of consumers are protected and that projects are delivered efficiently and cost-effectively.

In summary, the RAB model offers a framework for financing large infrastructure projects by distributing risks between developers and consumers, thereby attracting private investment. While it has proven effective in certain applications, its implementation requires meticulous regulation to balance the interests of all stakeholders involved.

Heathrow Airport operates under a Regulated Asset Base (RAB) model, a framework designed to encourage investment in essential infrastructure by allowing the airport to recover costs and earn a regulated return on its investments. This model is particularly relevant to significant projects like the construction of Terminal 5.

Understanding the RAB Model at Heathrow:

1. Regulatory Asset Base (RAB): The RAB represents the economic value of Heathrow’s regulated assets, including terminals, runways, and other critical infrastructure. It’s calculated annually by taking the opening RAB, adding capital expenditure, subtracting regulatory forecast depreciation, and adjusting for any asset disposals. The resulting figure is then adjusted for inflation to determine the closing RAB.
2. Capital Expenditure and Depreciation: Investments in infrastructure, such as the development of Terminal 5, are added to the RAB. Over time, these assets depreciate, and this depreciation is deducted from the RAB to reflect the asset’s decreasing value.
3. Allowed Revenue and Charges: The Civil Aviation Authority (CAA) sets a maximum allowable average charge per passenger, which enables Heathrow to recover operating costs, depreciation, and earn a return on its RAB. This structure incentivizes the airport to invest in infrastructure improvements, as efficient investments can lead to increased returns.

Application to Terminal 5:

The construction of Terminal 5, which opened in 2008, was a significant capital project for Heathrow. Under the RAB model, the substantial investment required for Terminal 5 was added to Heathrow’s RAB. This inclusion allowed the airport to recover the costs over time through regulated charges to airlines and passengers, ensuring that the investment was financially sustainable.

Benefits of the RAB Model:

• Risk Sharing: The RAB model distributes the financial risk of large infrastructure projects between the airport and its users, promoting investment in essential facilities.
• Incentivizing Efficiency: By allowing a regulated return on investments, the model encourages the airport to manage projects efficiently to maximize returns.
• Consumer Protection: Regulatory oversight ensures that charges to passengers remain fair and reflect the value of the services provided.

In summary, the RAB model has been instrumental in facilitating major developments at Heathrow, such as Terminal 5, by providing a structured approach to funding and cost recovery, thereby supporting the airport’s growth and service improvements.