Affecting private delivery of public services for households and businesses across the UK
Submitting InstitutionUniversity of Bristol
Unit of AssessmentEconomics and Econometrics
Summary Impact TypePolitical
Research Subject Area(s)
Economics: Applied Economics
Commerce, Management, Tourism and Services: Banking, Finance and Investment
Studies In Human Society: Policy and Administration
Summary of the impact
Professor Paul Grout has had a significant impact on national policy on
the delivery of public services by the private sector in the last five
years. His research undertaken at the University of Bristol on private
provision by regulated utility companies and public private partnerships,
using both economic theory and empirical studies, paved the way for his
central involvement in, and directly informed, key regulatory decisions.
These decisions impact materially on almost every individual and
organisation in the UK. His research also directly led to his appointment
in 2012 to the Board of Ofgem (the Gas and Electricity Markets Authority),
the UK energy regulator.
The underpinning research commenced in the early 1990s and is ongoing. It
was carried out by Grout (Professor of Political Economy, 1986- ) and
colleagues at the Universities of Bristol (L. Garside, Research
Assistant/Associate, 1999- , A. Jenkins, Research Assistant, 1998-2000),
Oxford (Professor M. Stevens) and Bath (Professor A. Zalewska). The
research can be grouped together into an examination of two overlapping
(i) The regulation of private provision of public services through
This research, notably but not exclusively in the area of regulation of
private utility companies, gives important insights into the appropriate
rate of return for regulated utilities ; the impact of government
policies and economic and stock market `shocks' on the risk and cost of
capital of private utility companies ; valuation of utilities ;
competition law appeal processes , and privatisation .
For example,  shows empirically that uncertainty about the overarching
political environment (e.g., uncertainty about government policy) impacts
on the risk and cost of capital of regulated utility companies precisely
in the manner predicted by economic theory, and that large economic and
stock market shocks (e.g., the dotcom boom and bust) do not impact on the
risk and the cost of capital of regulated companies differently from the
impact on equivalent companies in the unregulated sector. , using a
sample of competition commission cases between 1970 and 2003, identifies
the characteristics of specific cases that affect the guilty/not guilty
decisions made by the competition commission but also shows that the
decisions reached by the commission depend to a large extent on factors,
such as the experience of the chairman, that are extraneous to the merits
of the specific case.
(ii) The private provision of public services regulated by long-term
This deals with Public Private Partnerships (PPPs), in particular Private
Finance Initiative (PFI) versions of PPPs, across a broad array of public
services. PPPs typically involve long-term agreements between government
and a private sector consortium where the private consortium finances,
builds, owns and operates infrastructure (e.g., roads, hospitals, schools)
which the government pays for over the life of the contract. Examples of
the issues where the research provides important insights include: the
assessment of when a PPP is the appropriate model of delivery (, ,
); the assessment of value for money; and the appropriate rates of
discount for a meaningful public/private comparison .
References to the research
The high quality of the research is corroborated by the quality of the
journal publications and the high amount of associated peer-reviewed
competitive grant funding.
 Grout, P.A. and A. Zalewska (2006), The Impact of Regulation on
Market Risk, Journal of Financial Economics 80, 149-184. DOI:
 Grout, P.A., A. Jenkins and A. Zalewska (2004), Privatisation of
Utilities and the Asset Value Problem, European Economic Review
48: 927-941. DOI: 10.1016/j.euroecorev.2003.06.003
 Garside, L., P.A. Grout and A. Zalewska (2013), Does experience make
you tougher: Evidence from competition law, The Economic Journal
123, 474-490. DOI: 10.1111/j.1468-0297.2012.02560.x. Listed in REF2.
 Grout, P.A. (2003), Public and private sector discount rates in
public-private partnerships, The Economic Journal 113,
C62-C68. DOI: 10.1111/1468-0297.00109
 Grout, P.A., and M. Stevens (2003), The Assessment: Financing and
Managing Public Services, Oxford Review of Economic Policy 19(2):
215-254. DOI: 10.1093/oxrep/19.2.215
 Grout, P.A. (1997), The Economics of the Private Finance Initiative,
Oxford Review of Economic Policy 13(4): 53-66. DOI:
 Grout (Co-I), with S Burgess, I Jewitt, C Propper and I Tonks (all
then Bristol): `Boundaries of the State', Leverhulme Trust, F/00/182/E and
F/182/BB, £3m, 1998-2007.
 Grout (Co-I), ESRC CMPO Centre Grants, RES-343-28-3001 and
RES-343-28-0001, £4.8m, 2004-2014.
Details of the impact
The main pathways to impact were through Grout's central involvement in
Ofgem's key decisions and through his advisory role to various government
4.1 Impact through Ofgem
Amongst many other activities, Ofgem sets the prices (allowed revenues)
that electricity and gas transmission companies (e.g., National Grid), and
the gas and electricity network operators can charge. Professor Grout's
research into private delivery of public services, including his research
into the interaction of regulation and the cost of capital of regulated
companies, impacts directly on the appropriate allowed revenues of
regulated companies. This research and his analysis of optimal structures
of delivery by the public sector led him to be appointed as the sole
special advisor of the key regulatory committees of the Ofgem Board (since
2008), and to the Board of Ofgem in 2012.
The UK approach to the provision of offshore transmission (i.e., the
transmission of electricity from offshore wind farms) is akin to a
traditional PPP model, and Grout's research into the assessment of when
PPPs are the appropriate model of delivery, when they can provide value
for money, and the appropriate rates of discount for a meaningful
public/private comparison, led to him being appointed as Chair of Ofgem's
Offshore Committee (which deals with offshore transmission and
international interconnection) in January 2013. In addition, he has
chaired the key regulatory committees in the absence of the chairman of
the board and has chaired settlement committees that impose `fines' on
energy companies for failing to meet the legal obligations in their
In December 2012 alone the board and these committees, in a series of
decisions, granted over £50bn of approved revenues for regulated
transmission and distribution companies. The fines on energy companies run
into millions of pounds. These decisions impact directly on almost every
individual and organisation in the UK. In addition to the impact on
household bills, energy prices affect UK business costs and profits which
impact on consumer prices both in the UK and around the world. They thus
also affect UK competitiveness and government tax revenues.
In recognition of his key contributions public officials have stated:
Professor Grout's `knowledge drawn from his research into the cost of
capital of regulated companies and how they are affected by the political
environment and large `one-off' events and his research into the decision
making processes of the Competition Commission have moulded final
decisions we have taken in these price reviews', (Chief Executive, Ofgem
[a]). Professor Grout's `voice has been significant, incisive and
important' ... `contributing a wealth of economic knowledge and
experience' (Chairman of the Board of Ofgem [b]). Grout was also cited in
the introduction to the 2012 Ofgem Annual Report for bringing his
considerable expertise in economics to help Ofgem.
(i) The RIIO Committees
The Board of Ofgem is the body that regulates and oversees the energy
markets in the UK. It has RIIO, E-Serve, Offshore, Remuneration and Audit
sub-committees. Since 2008 Grout has been special advisor to all of the
RIIO (Revenue equals Incentives + Innovation + Outputs) sub-committees
and since 2012 has also been a full board member. The RIIO committees
determine all allowed transmission and distribution charges in England,
Wales and Scotland. These network charges account for 21% of total
electricity bills and 18% of total gas bills. The typical dual fuel bill
(i.e. gas and electricity) for a UK household is £1,340pa (Nov 2013).
In December 2012 RIIO-GD1 (Gas Distribution 1) approved total allowed
revenues for the gas distribution companies between 1/4/13 to 31/3/21 of
£24.8bn (in 2009/10 prices) [c], RIIO-T1 (Transmission 1) approved total
allowed revenues in nominal prices for the electricity transmission over
the same period of £22.7bn ([d] and [e]) and RIIO-T1 also approved total
allowed revenues in nominal prices for the gas transmission for a similar
period of £6.9bn [d].
When allowing these network charges Ofgem determines, amongst other
things, the cost of capital, approved revenues, and incentive schemes.
These are all intimately related to Professor Grout's research and
expertise (e.g., ,  and ). Grout's research, for example, into
how the relevant cost of capital of regulated utilities is affected by
political and large shocks to markets (informing whether claims of
particular impact on regulated companies during the financial crisis was
consistent with empirical evidence) fed into this decision process. The
impact of Ofgem's choice of appropriate cost of capital is material. For
example, had Ofgem adopted a 1% higher cost of capital for transmission
and gas distribution companies in 2012 then the direct additional impact
would have been approximately £3.3bn, or approximately an £11pa direct
increase for each household, with a significant indirect effect through
higher energy costs in the corporate sector [f].
Companies are able to appeal against Ofgem's price controls and these
appeals are heard by the UK Competition Commission. Professor Grout's
research into the determinants of the decisions taken by the Competition
Commission  has fed directly into Ofgem's balancing between regulated
prices and avoidance of unnecessary appeals, which delay implementation of
price controls and as a result can be damaging to consumers and industry.
(ii) The Offshore Committee
Grout chairs Ofgem's Offshore Committee. This is a sub-committee of the
board that oversees all offshore investment and in particular the
tendering processes for offshore transmission. The UK approach to offshore
transmission is one of competitive tendering, and has many features that
resemble private finance initiative (PFI) and PPP projects. The National
Audit Office (NAO) estimates there will be potentially around £8bn of
tenders for offshore transmission to be delivered between now and 2020
enabling approximately £52bn of offshore investment. Grout's research into
PFI provides the platform for him to chair the Offshore Committee and
inform final decisions (, ). For example, feedback from the NAO and
the Public Accounts Committee [g] on the offshore tendering process and
policy has led to reconsideration of aspects of licence policy and current
changes to licence policy. Professor Grout's research into PFI models
contributed to amendments, which are currently under public consultation.
4.2 Impact through parliamentary committee and government agencies
i) Grout was the expert advisor (2008-10) to the House of Lords Economic
Affairs Committee for its review and report on `Private finance projects
and off balance sheet debt' [h]. The objective of the review was to assess
the current state of private finance projects and off balance sheet debt
and make recommendations to government for improvements. The expert
advisor has important influence (although no vote) on which witnesses are
brought to the committee, the questions and themes of each hearing, on the
decision making process leading to the report and its recommendations.
Professor Grout's input was heavily influenced by his research on PPPs
(e.g.,  and ). In the Government's response [i] it accepted the
Review's concerns about data and stated that `it had already taken a
number of steps in this area to improve the availability of data on PFI
projects', and noted the suggestion that risk spreading could be expanded
and suggested that `HM Treasury will consider options for such expansion
with departments on a case by case basis'.
ii) Grout was a member of the advisory panel to the National Audit Office
(2006-2007) on their procurement report on PFI, `Improving the PFI
Tendering Process'. He also provided evidence on PPPs to the Scottish
Parliament. Both were based significantly on Professor Grout's research
iii) Grout was an advisor (2007-2008) on the Department for Business,
Economics and Regulatory Reform (BERR) Report on the Public Services
Industry Review [j] and provided commissioned work on the efficacy of
various public service models. Professor Grout's contribution was based
significantly on his research. Indeed, the definition of public services
used in this report to inform the scope of the review is taken from his
work . The foreword to the Report points out that Professor Grout was
`of great help in unearthing the data and critiquing the evidence base of
the PSI'. The Report made eight high-level recommendations, which were a
major input into BERR's `Supporting Innovation in Services', August 2008.
Sources to corroborate the impact
[a] Factual statement, Chief Executive, Ofgem
[b] Chairman of the Board of Ofgem (Gas and Electricity Markets
Authority), and Annual Assessment (2012-13) of Ofgem Non-Executive Board
members for Secretary of State for Energy and Climate Change.
[c] Ofgem: RIIO GD1 Final Proposals Overview, 17 December 2012.
[d] Ofgem: RIIO T1 Final proposals for National Grid Electricity
Transmission and National Grid Gas, 17 December 2012.
[e] Ofgem: RIIO T1 Final proposals for SP Transmission and Scottish Hydro
Electric Transmission ltd, 23 April 2012.
[f] Ofgem calculation, Regulatory Finance and Compliance (letter).
[g] Public Accounts Committee - Twentieth Report: Department of Energy
and Climate Change Offshore electricity transmission - a new model for
infrastructure, 14 January 2013.
[h] House of Lords Select Committee on Economic Affairs. 1st
Report of Session 2009-2010 `Private finance projects and off balance
sheet debt', 17 March 2010.
[i] `Government Response to Private Finance Projects and off balance
sheet debt', HL Paper 114, April 2010.
[j] Department for Business, Enterprise and Regulatory Reform, Public
Services Industry Review, July 2008.