Heathrow’s problems result from a flawed concept

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There was too much haste in following up on successful early privatisations, in a perhaps justified belief that almost any organisational structure would be better than the British conception of nationalised industry.

Last week, the flood of letters to the editor complaining about Heathrow Airport rivalled Santa’s postbag in the days before Christmas. Tony Douglas, the airport’s managing director, apologised. But his apology demonstrated regret rather than responsibility: the hotelier who is sorry that it is raining, rather than the child who must be sorry he said a naughty word.

And yet there is right on Mr Douglas’s side: the primary fault lies not with BAA but with a structure flawed from conception. The natural sphere of the commercial sector is where there is a direct connection between the revenues of the business and its effectiveness in meeting customer needs. That connection is real for airlines, as long as travellers have a choice. But there is no similar relationship between cash and performance in water supply, or rail networks, in schools or hospitals or in free-to-air broadcasting.

Or in managing Heathrow airport. For BAA, the activities that generate customer satisfaction – providing seats, enough security guards, clean toilets and travelators that work – are a cost, not a source of revenue. Profits are derived from landing charges, parking fees and selling Burberry scarves and smoked salmon. Only a basic knowledge of economics is needed to explain why there are longer queues at the X-ray machines than for the scarves and the salmon.

More competition would help, but Gatwick has limited capacity and Stansted is a longer journey from Heathrow than many short-haul flights. The idea is still current that the scope for commercialisation can be extended by writing customer service contracts.

The Civil Aviation Authority, BAA’s regulator, has tried this, although in a feeble manner. A handful of service indicators are backed by financial penalties, negligible in the context of the airport’s revenues. Railtrack was subject to a similar regime, which continued until its failures were so evident that its licence to operate was withdrawn. The obligations on water companies and broadcasters are more demanding and the contracts in most private finance initiative contracts immensely detailed.

But this process is not working well. Specifications for the London Underground public/private partnerships will be the subject of continuous dispute and negotiation throughout the life of the projects. The experiment of trying to achieve centrally prescribed objectives by imposing targets and penalties has already been tried, on an extensive scale. The place was the Soviet Union from 1917 to 1989 and the experiment did not work.

It did not work for familiar reasons. If targets are not detailed and the penalties are modest – as at Heathrow – they have little effect on behaviour. If the targets are detailed and the penalties large, they distort behaviour – as with hospital waiting lists. And if the targets are very detailed, the people setting them become the managers of businesses about which they can know very little.

The mistake is a failure to recognise that a different approach is needed to activities that cannot be commercial but need to be distanced from day-to- day political control. There was too much haste in following up on successful early privatisations, in a perhaps justified belief that almost any organisational structure would be better than the British conception of nationalised industry.

And so the activities for which that different model is required would veer from crisis to crisis. This week, Heathrow is infuriating its passengers; before that, Channel 4 was broadcasting racist abuse and ripping off its viewers on premium-rate phone lines. Before that the problem was Railtrack, before that Yorkshire Water. These activities are not and never will be normal businesses, which is why privatising Channel 4 would be a mistake and the acquisition of BAA by Ferrovial was inappropriate.

The solution is a differentiated financing and governance structure for these hybrid corporations: a structure that emphasises that their prime accountability is to customers not shareholders. Among the financial, legal and political minds penned every day between the cattle rails at Heathrow security, there is more than enough expertise to work out the fine print.

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