Characteristics and Their Impact on Firms Active in Infrastructure Eva Kasper
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Technische Universität München A Definition for Infrastructure - Characteristics and Their Impact on Firms Active in Infrastructure Eva Kasper Vollständiger Abdruck der von der Fakultät für Wirtschaftswissenschaften der Technischen Universität München zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften genehmigten Dissertation Vorsitzende: Univ.-Prof. Dr. Isabell Welpe Prüfer der Dissertation: 1. Univ.-Prof. Dr. Christoph Kaserer 2. Univ.-Prof. Dr. Gunther Friedl Die Dissertation wurde am 11.02.2015 bei der Technischen Universität München eingereicht und durch die Fakultät für Wirtschaftswissenschaften am 15.03.2015 angenommen. Abstract A Definition for Infrastructure - Characteristics and Their Impact on Firms Active in Infrastructure by Eva Kasper The key question of this thesis is whether private investments in infrastructure are profitable. Infrastructure plays a critical part of a country’s development. This thesis develops a definition of economic infrastructure. The definition is based on the assumption that economic infrastructure relies on physical networks. Thus, network theory can be applied. Several parts of physical networks show economies of scale and scope and have long construction lags. Along with the lack of alternative uses for infrastructure assets these impose monopolistic structures. This definition of infrastructure is then applied to different sectors, so that the characteristics of the various subsectors and levels can be assessed. Investors who own and operate infrastructure benefit from monopolistic structures as they can exploit them and gain excess profits. Simultaneously, these monopolistic structures reduce social welfare and thus are often regulated or owned and operated by governments. The thesis points out that private ownership and regulation might be the superior structure, but regulation is necessary especially when cost cutting decreases quality. The assessment of the characteristics of different infrastructure sectors is used to identify publicly listed firms that own and operate economic infrastructure and to analyze their performance. This panel set of data creates the opportunity to empir- ically analyze whether the performance of firms active in infrastructure is correlated to the identified variables of theoretical definition, namely differences of sectors, of network structures, of vertical integration and market power and regulation. The empirical analyses highlight that firms active in various sectors show different current performance (returns on assets) and future expected performance (Tobin’s Q). The performance is influenced by a range of variables, including firm-specific variables, but also country-specific variables and regulatory indicators. In the full set of firms population growth and the reduction of regulation have positive effects on current performance. In contrast, firms owning infrastructure profit from stricter regula- tion while vertically integrated firms profit from reduced regulation. Firms active in undirected networks seem to profit from direct network effects, as population growth and GDP per capita influence performance positively. iii Acknowledgements Writing a thesis is a self-centered task and requires years of focused self-motivation. It took me quite some time to complete this thesis, and, admittedly, sometimes this long-term project took a back seat to the day-to-day tasks at work. But I got there in the end. First and foremost, I would like to thank my supervisor Christoph Kaserer for his encouragement, trust and continuous support throughout the completion of this doctoral thesis. He gave me the opportunity to do research within the fascinating field of infrastructure and had the patience to wait for me to finish the thesis and motivate me whenever needed. Management Engineers granted me the “Presidential Award of Management Engi- neers”, a scholarship which gave me the opportunity to decrease working hours to concentrate on the thesis. I want to thank in particular Heino Brandes and Uwe Weidenauer for their support. I would like to thank Claudia Höfer-Weichselbaumer, who was not only my under- standing supervisor in the administrative department of TUM School of Manage- ment, where I worked during the preparation of this thesis, but who also became my mentor and friend, supporting me in every sense. I am grateful to my family and my friends, who always remained patient and did not complain when I spent my evenings, weekends and holidays researching and writing. Thus, in alphabetical order of their last names, my friends: Carolin Heim, Stephan Jäger, Katharina Knipp, Carolin Müller, Gunda Nitzsche and Hedi Schmid, Karina Schumann. Each of them supported me in different and very important ways. I also want to thank my parents Erika and Alfred Kasper, my little brother Felix, his wife Dagmar and their son Finn Kasper. There are some people I would like to mention here particularly to thank them for their support. Annabell Geidner, Katja Krempel, Astrid Müller and Thomas Steininger discussed the topics of this thesis with me and proofread most of the document. Additionally they motivated me whenever necessary and calmed me iv down. I also want to thank Martin Steininger, who was always happy to discuss empirical issues. Comparably Ivana Jurik, Eva Mahling and Astrid Müller always motivated me and found the right words to keep me going when I was close to quitting. And especially I want to thank Frank Marschall. He started to be a real pain in the neck when he kept asking: “How is your thesis coming along?”. Everybody needs this once in a while. And he helped me to remain calm and focused. I think, without him, I would never have had the strength to finish the thesis. Unfortunately, some friendships did not endure this self-centered long and intensive concentration on a theoretical topic. I am very sorry about these losses but still have these friends in my heart and hope they are doing well. v Contents Abstract ii Acknowledgements iv Contents vi List of Figures xiii List of Tables xv Abbreviations xix 1 Introduction 1 1.1 Relevance of Infrastructure ........................ 1 1.2 Approach of Research ........................... 4 1.3 Hypotheses ................................ 6 1.4 Empirical Findings ............................ 8 2 Infrastructure - Developments in Demand and Financing 11 2.1 Definitions of Infrastructure ....................... 12 2.1.1 Trends in the Discussion of Infrastructure ........... 12 2.1.2 Definitions of Infrastructure in Literature ............ 13 2.1.3 Findings of Empirical Infrastructure Analyses ......... 16 2.2 Contemporary Developments in Infrastructure ............. 22 2.2.1 Increasing Demand for Infrastructure .............. 23 2.2.1.1 Demographic Development .............. 23 2.2.1.2 Environmental Challenges and Drivers ........ 24 2.2.1.3 Technological Development .............. 26 2.2.1.4 Economic Growth and Reliability ........... 28 2.2.2 Infrastructure Financing - The Financial Gap ......... 31 2.2.2.1 Government Spending ................. 31 2.2.2.2 Fees ........................... 33 2.2.2.3 Private Participation .................. 34 2.2.2.4 Cycles of Infrastructure Projects ........... 37 vii Contents 2.2.3 Players in Private Infrastructure Investments .......... 38 2.2.3.1 Enterprises ....................... 38 2.2.3.2 Institutional Investors ................. 39 2.2.3.3 Special Purpose Funds as Investment Vehicles .... 40 2.2.3.4 Governments ...................... 41 2.2.4 Structures and Partnerships in Financing Infrastructure .... 43 2.2.4.1 Project Finance ..................... 43 2.2.4.2 Private Partnerships - PPPs .............. 45 2.2.4.2.1 Characteristics of PPPs ........... 46 2.2.4.2.2 Types of PPPs ................ 48 2.2.4.2.3 Risk Mitigation in PPPs ........... 49 2.3 Challenges for Private Investors in Infrastructure ........... 51 3 Definition of Infrastructure and Relevant Economic Theories 57 3.1 A Definition of Infrastructure ...................... 59 3.2 Networks and Network Theory ...................... 61 3.2.1 Theory of Networks ........................ 63 3.2.2 Structure of Networks ...................... 65 3.2.3 Standards, Compatibility and Complementarity ........ 67 3.2.4 Lock-In and Switching Costs ................... 69 3.2.5 Network Externalities ....................... 70 3.2.6 Negative Network Effects ..................... 72 3.2.7 Directed and Undirected Networks ............... 74 3.3 Competition in Networks ......................... 76 3.3.1 Network Goods .......................... 77 3.3.2 Maximizing the Performance in Networks ............ 78 3.3.3 Identical Production and Economies of Scale .......... 79 3.3.3.1 Subadditivity in Networks and Services ........ 83 3.3.3.2 Sustainability in Networks and Services ....... 83 3.3.3.3 Contestability in Networks and Services ....... 84 3.3.4 Internalization of Externalities in Networks ........... 85 3.3.5 Vertical Integration in Networks ................. 86 3.4 Public and Private Ownership: Motives for Regulation ........ 91 3.4.1 Agency Theory and Incomplete Contracts ........... 93 3.4.2 Public Ownership, Private Ownership and Agency Theory .. 98 3.4.2.1 Social and Political Objectives ............ 98 3.4.2.2 Incomplete Contracts in Public Provision of Goods . 100 3.4.2.3 Privatization and Deregulation ............ 100 3.4.3 Theory of Regulation ....................... 101 3.4.3.1 Regulating Body .................... 103 3.4.3.2 Market Entry ...................... 104 3.4.3.3 Regulation of Vertical Integration ..........