ITC debates whether different ownership models matter
Different ownership models in UK transport: do they matter?
The ongoing liberalisation of the UK’s transport industry has seen the emergence of a wide range of ownership models across the sector. These range from the PLC shareholder model increasingly used by many operators, to control by private equity groups, public ownership, or the use of a regulated company limited by guarantee. The jury is out on how these various models affect the running of our transport networks, and which have best served users and stakeholders. With fresh changes in ownership being mooted in the light of a number of recent reports the time is ripe to consider how and why these different ownership models matter. In response to these developments the ITC invited leading figures in UK transport to debate the question of models of ownership at a discussion evening on 9th July 2012.
Simon Linnett, ITC Chairman and an Executive Vice-Chairman at Rothschild, chaired the evening, which involved more than 50 leading experts. Delegates listened to a distinguished panel representing the four main modes and comprising: Graham Dalton, Chief Executive of the Highways Agency; Paul Plummer, Group Strategy Director at Network Rail; Patrick Walters, Commercial Director of Associated British Ports; and Roger Maynard, Special Advisor to International Airlines Group.
Different models of ownership in UK Transport – key issues raised by the speakers:
- The Government Agency model is currently used to operate the Highways Agency, which manages the strategic road network. The road infrastructure is Crown property and maintained out of public funds: aspects that have been used to justify full public ownership. Disadvantages associated with this model include a fluctuating capital budget, limited regulation over spending, the need to cope with frequent changes in government policy, and challenges in creating the right incentives to attract talent. Advantages of the model highlighted include the benefits arising from consistent management over the entire strategic network, lean overheads as a result of the ability to source expertise from elsewhere in Government, and fewer perverse incentives that might otherwise arise from the need to pursue profit.
- The model of a regulated Company Limited by Guarantee is currently used to run Network Rail, which owns and operates Britain’s rail infrastructure. This runs as a not-for-dividend company, with members instead of shareholders, and benefits from financial indemnity provided by the Secretary of State for Transport on behalf of the UK Government. The unusual nature of the model was highlighted as a response to the peculiarities of a national infrastructure monopoly, and it was stressed that this was a model open to evolution. Advantages included very strong capital raising powers due to Government backing, as well as the ability to plan for long-term investment. Disagreement existed over whether the model provided enough incentives to attract talent, however, and also whether the membership structure was effective at holding the executive to account. Nonetheless, the model offered the possibility of evolution along a number of routes, including devolving responsibility, introducing more contestability, and the use of a more streamlined membership giving oversight.
- The Private Limited Company model was discussed in the context of UK Port groups, about half of which now were owned in this way, including ABP. The suitability of the model for Ports ownership was emphasised, matching the need for long-term capital planning and providing good governance in a sector that is largely free from central government interference (other than being subject to Statutory controls). Many of the advantages of this model were noted, including the benefits of having long-term investors when planning strategic capital spending. This not only avoided short-termism when making investment decisions, but also provided confidence when raising capital from the debt markets. The model also ensured good governance, with its few shareholders taking a much closer interest in the workings of the company than was often the case with a public company.
- The use of the Public Limited Company model was becoming commonplace among airlines, and it was noted that BA had led the way in this respect after privatization in the 1980s. The widespread practice of government ownership, it was argued, had led to significant inefficiencies, including overcapacity and restrictive practices. The profitability of BA after privatization showed that a PLC model could deliver greater efficiencies, and this model was later followed in much of Europe. Such a model was particularly suitable for the airline industry, where carriers are replaceable and operate in a very fluid corporate environment. It allows for mergers and acquisitions to take place across national boundaries in a way that would be very difficult if the carriers were publicly owned. Nonetheless, there were drawbacks to the model, including the problem of short-termism and the whimsical behavior of shareholders. It was notable that the advantages of the model had often been more apparent to customers, who had benefitted from lower air fares and much greater travel choice, than it had to shareholders, who had only seen modest appreciation in share prices.
Key themes raised in the discussion:
- The source of funding is critical when determining the best ownership model. Attendees noted that there was a correlation between funding and ownership. It was normally taken as given that public subsidies to an organization make a strong degree of public ownership necessary in order to achieve taxpayer accountability. The use of charges and fares to raise revenue allowed more flexibility, though often these practices were seen by governments as requiring a degree of regulation.
- The level of risk is also a key factor in determining the best model. Some guests argued that the level of risk associated with the largest infrastructure projects was often too great to be absorbed wholly by private sector shareholder companies. In these cases some degree of government guarantee or involvement was often necessary in order to raise sufficient capital.
- A good model will have incentives to attract and keep talented people. A number of attendees noted that in order to deploy capital and expenditure effectively it was essential to have skilled and talented people to running the organization. Creating the right incentives to attract and keep such capable people is therefore a critical test of any ownership model. Too tight a regulatory regime can limit such incentives.
- We should not forget the importance of customer benefit. Some guests argued that the customer dimension required more much attention when analyzing the effectiveness of ownership models. Customer needs differed depending on the type of asset in question. Private ownership in the airline industry, for instance, had delivered strong customer benefits in the form of lower fares and greater choice. However, public ownership was well placed to provide access and services where otherwise they would be uneconomic, such as transport in remote areas.
- Competition almost always helps to improve efficiency. The importance of competition for driving down costs was stressed by a number of guests. Some suggested that the reason that the cost of building infrastructure had not reduced over time was due to the lack of competition inherent in the ownership models used.
- We should be aware of the impact of global investment on ownership. Several delegates noted the importance of foreign investment on UK transport ownership. It was very difficult to get public bodies to co-operate internationally, but private ownership models had opened the door for substantial capital investment from overseas. One concern mooted was that foreign ownership reduced public accountability and diverted research and development to locations outside the UK. On the other hand such ownership brought the advantage of exposure to a broader range of management cultures.
- We should distinguish movable assets from fixed assets when determining the most appropriate model of ownership. Organisations involved with the operation of movable assets, such as airlines or train operating companies, are usually replaceable, and are therefore better suited to forms of ownership that are directly subject to market forces. Where infrastructure assets exist in a competitive market with feasible alternatives, as often occurs with ports and airports, this is also the case. However, fixed assets in sectors where natural monopolies operate, such as the rail and road infrastructure, require different models, often with a stronger degree of public ownership.