Archived Threads - September 2008
‘Infrastructure and the City’
18.00 for 18.30 on Tuesday 28th October at Indepen
London’s new Mayor wants to champion London’s business at home and abroad and to “use his office to make sure international investors continue to see London as an attractive place to do business”. How does the capital make clear what infrastructure it needs to deliver this, to what extent do infrastructure providers meet that need, and do regulators ensure the right investment takes place at the right time?
London is the best city in Europe to locate a business today; so say Cushman & Wakefield, specialists in the field, who regularly survey top European businesses from nine countries for their views. Last October, London scored well on availability of qualified staff, access to markets, telecommunications and transport.
So why is it that 60% of London-based respondents to a CBI survey in June said that London’s competitiveness is under threat – almost double the figure from the previous year? The biggest bugbear was transport. All of the respondents cited this as a major factor impacting on business and 87% considered that the lack of quality and reliability of public transport directly impacted on productivity. Two thirds thought that congestion was getting worse. Their top message to the new Mayor, Boris Johnson, was to improve the infrastructure and make London a safer place to live and work.
Skills came second to transport in the list of critical factors affecting business performance. Employers revealed that they were more dissatisfied with the literacy and numeracy of school leavers than they had been a year before. And they were not happy about the level of business and customer awareness or the problem-solving capabilities of those coming into the workforce. The CBI is calling on the Mayor to strengthen the skills base.
Sustainability also features in the wish list. In an assessment of global financial centres, carried out in March for the City of London, London rated badly for air quality and water supply. Indeed, the Environment Agency predicts that unless further action is taken to manage water demand, London will require additional sources by 2020. And of course, recent events have led to talk of the lights going out if new sources of power fail to come on stream.
Are there real gaps in provision? Harvey McGrath, the new Chair of the LDA and formerly Chair of London First, will consider what is needed to fulfil the Mayor’s vision and what the priorities should be. Of course, much of what is needed is likely to come under the aegis of regulated industries. How might they help to fill the gaps? Michael Roberts, Chief Executive of the Association of Train Operating Companies has agreed to respond and Steve Norris, who is on the board of the LDA as well as Transport for London will also be contributing. No doubt, the audience will have views both on what the priorities should be and how they could and should be met. The floor will be theirs for open discussion under the Chatham House Rule.
The role of the customer in regulated services
CHEFs 19th June 2008
In June, we considered how well the regulators in industries that are natural monopolies – like water and rail transport – are protecting the interests of the customer compared with more competitive markets. Our speakers were Allan Asher, Chief Executive of the soon-to-be-disbanded energywatch, and Professor Martin Cave, Director, Centre for Management under Regulation, Warwick Business School.
Allan, who has had many years’ experience as a competition lawyer and advocate, including a recent stint with the Consumers’ Association, did not pull his punches. Looking at the way people are cajoled or even hounded into switching energy suppliers, he felt that consumers are not given enough information to make informed choices and that some apparently innovative new services turn out to be ‘toxic’. His view is that the role of the regulator should be to equip consumers to act on their own behalf where they can and to act on behalf of consumers where they can’t. There should be rights for the consumer to litigate. At present, the hand of regulation is too light and Ofgem could be doing more to ensure the competitive energy markets continue to deliver benefits to all British energy consumers. For a more detailed presentation of Allan’s views, see his paper ‘Who really cares for the consumer in regulated industries?’
Martin Cave took as his starting point the stated Australian regulatory aim of ‘furthering the long term interests of end users’. Some conflicts of interest between supplier and customer are inter-generational, caused by investment decisions made many years before. Others may stem from lack of regard for the customer. But furthering the consumer’s long term interests should be at zero cost, so that there is benefit to consumers without damage to suppliers and without cross-subsidising something else. Similarly, there should be a balance between consideration for consumers and returns to investors. If achieving these balances should require a cross-subsidy, this is a matter for government.
In discussion with the CHEFs audience, three main themes emerged in the comments made: the role of the regulator in ensuring both efficient delivery and investment, aspects of vigorous competition and the need to consider social inequality. ‘Sclerotic’ industry codes made things difficult for new entrants to the market. Capital is a constraint in what are effectively state run industries. Investment was seen to stem from a mixture of greed and fear, and monopolies don’t feel the fear. Others pointed out that, in the water industry, the regulatory régime has delivered investment where the private sector might not have done it on its own and it has shown its teeth in exacting fines for lack of performance.
Vigorous competition can result in confusion for the consumer when offerings are not easily comparable. The fact that it is hard to work out whether it is worth switching energy suppliers is illustrated by the number – around 20% – who actually end up with a worse deal. The ‘customer’ has a whole range of different needs, depending on personal circumstances, but social exclusion does not come under the regulators’ powers. How far should the regulator be expected to go?
There is a dilemma at the heart of regulation to which we are likely to return: how does a regulator devise incentives for organisations to ‘do the right thing’ in the sure expectation that the results will be as intended?
Financial services regulation – more of the same or not?
CHEFs 17th July 2008
The July seminar considered the fitness for purpose of our financial regulatory régime. Its actions and those of the industry it regulates have been questioned by the Treasury Select Committee, by Which? and even by the FSA’s own consumer panel. Given the arrival of a new chairman at the FSA and the recent problems it has faced, we thought it was timely to consider whether it might learn from the experience of other régimes, especially those which have more explicit economic principles underpinning them.
Clare Spottiswoode, formerly Director General of Ofgas and now acting as Policyholder Advocate for customers of Norwich Union, introduced the topic. In her new role, Clare has come face to face with the FSA over the intricacies of with-profits financial products and of the associated inherited estates. In this corner of the financial sector, competition is not strong.
Clare defined an economic regulator as ‘an organisation which is designed to bring the greatest wealth to the economy’, through effective competition supported by regulatory rules to protect the consumer when that fails. Then, she evaluated the FSA against this definition. The Financial Services and Markets Act broadly follows the concepts of the Utilities Acts, but the FSA does not have a specific duty to promote competition and has no powers to set price controls. Although the Acts encourage regulators to ‘do the right thing’ by not being bound by precedent, in her experience, the FSA has a tendency to look backwards. It lacks the sort of healthy tension – and exposure of those tensions - that generally exists between the economic and the health and safety regulators in the utility sector; there is no separation of the prudential from other regulatory aspects in the FSA. It does not demonstrate economic thinking and tends not to pay regard to common financial principles. Financial Services, after all, are a very broad industry and individuals in the FSA have to cover a wide range of offerings. And if it is hard enough for customers to weigh up energy deals, just think how much more difficult it is for them to distinguish between financial products!
CHEFs attendees felt that the FSA evidenced a confusion between prudential and economic regulation and that it had grown so big that it would be a ‘hard ship to turn around’. Its own, large rule-book goes against the principles of the Act but to some extent this is due to the constraints of EU legislation. The with-profits suppliers were thought to be producer-centric, having grown out of guilds. While there are some good examples from other regulatory régimes (for example Ofcom is trying to apply economic thinking to broadcasting), none of them is an ideal model for the financial sector.
Clare left us with some tough questions for the FSA: what are its vision and its purpose, and are its culture and operations suited to deliver them?
Leadership capabilities in regulated industries
July - from the Members’ series
In early July, we examined leadership capabilities in regulated industries – is there an imminent skills gap here? We have seen several cycles of forward-looking RPI-X price controls, mainly aimed at driving operating efficiencies in a time of relatively stable asset renewal and expansion. Now, an increasingly prevalent business model is the risk-averse, no-frills infrastructure provider focused on delivering the requisite service standards while winning some extra shareholder value through high capital gearing. The discussion considered the extent to which this model was fit for purpose in relation to the various challenges faced by regulated industries. These include climate change, security of supply issues, replacement of ageing assets, development of renewable energy sources and the empowerment of consumers through smart metering. The scale, novelty and rapidity of change facing management will be exceptional – not unlike the early days of North Sea oil and gas development for the British gas industry. These challenges will require the initiative, ingenuity, capacity for innovation and the risk management skills that are exemplified by the private sector at its best.
The main issues emerging from the debate were around persuading regulators to allow the investment in human capital required to meet these challenges to be reflected in the regulatory asset value and, at the same time, securing more joined up thinking across the regulators.
Skills development apart, the quality and fitness for tomorrow’s purposes of the executive leadership of utilities companies must ultimately be a matter for the company boards and their nominations committees. Regulators can help to inform this process through the exploratory dialogue and consultations on future priorities. Are they all willing to engage with companies on the challenges and opportunities, and get out and about to do so? Are companies up for doing their bit? An early test is the way they account for the specific provision of some £70 million made by Ofgem in the Gas Distribution Networks Review (which came into effect earlier this year) for replenishing accredited skills through apprenticeships and equivalent measures.
Finally, the current Ofgem ‘RPI at 20’ review and other regulatory reform initiatives were thought to offer a good opportunity for regulators and industry to begin work together to support government in the areas of climate change and productivity (including the so-called ‘innovation agenda’).