Re. “Babcock bounces as Bear Stearns extracts more value” (March 25, item 17).

The Macquarie infrastructure model is dead, not because of any failure to “internalise management”, but because of a failure to tap the benefits of infrastructure in order to amortize the capital cost. The benefit of a new road, net of tolls, is manifested as an uplift in land values in locations serviced by the new road (or by other routes on which congestion is reduced by the new road). Hence, if the benefit exceeds the cost, the cost (net of tolls) can be defrayed by clawing back some fraction (less than 100%) of the uplift in land values. The rest of the uplift is a net windfall for the land owners — who therefore should enthusiastically support this financing method because it would finance projects that would not otherwise proceed, yielding windfalls that the owners would not otherwise get. But when a Public-Private Partnership builds a toll road, it doesn’t claw back any of the uplift in land values, but tries to finance the whole cost out of tolls. So the tolls are too high, patronage is too low, and the operators can’t pay their debts.

Gavin Putland