Underwriting Greed

Some industries (air travel or motor manufacturing to name but two) are intensely competitive – it’s in their DNA so to speak.  Others, like most of the formerly state-owned monopolies that have been privatized over the years, operate in markets where there is little or no competition and monopoly is the rule.  So, from Thatcher onwards, successive governments have invented a whole raft of regulators to represent the public interest and substitute for the discipline of competition when these firms were privatized.

Sadly, it is abundantly clear that this strategy has failed, that regulators have suffered regulatory capture and that the new private operators are up to their collective necks neck in rent seeking from a long-suffering public.

BAA was privatized in 1987 and since then there has been growing dismay among airlines about its poor service and lack of customer focus which continued after it was acquired by Spanish group Ferrovial in 2006 for £10 billion of which a whopping £9 bn was debt – apparently with the intention of refinancing the deal once the new Terminal Five was completed.  Unfortunately for Ferrovial life is full of uncertainties – in this case extra security measures have raised costs and the credit crunch has put paid to hopes of a refinancing on advantageous terms.

 Also infrastructure costs are proving problematic. As the BAA website rather plaintively puts it:

“BAA believes, however, the Review does not recognise sufficiently: the scale of the task we are embarked on; the pressures of handling such large infrastructure projects; the full cost of the increased security requirements; as well as the impact of the credit market turmoil.”   

Are we really to believe that when Ferrovial acquired BAA they didn’t notice the half-completed Terminal Five or the dilapidated and under-invested state of some of the other assets?  It must have been quite a shock to the poor dears to find out! 

Fortunately for Ferrovial shareholders all is not lost.  The Civil Aviation Authority (CAA) has, like the proverbial US Cavalry, come galloping to the rescue with a bail-out at public expense and BAA is to be allowed to raise charges by 23.5% at Heathrow and 21% at Gatwick.  Ferrovial will make a killing at our expense as much of this increase will inevitably filter down into ticket prices.

This is scandalous in every way.  Firstly, there is the little matter of moral hazard – that individuals and businesses  should take the rap for their own miscalculations.  Secondly, there is the cost to the public; multiply this around the economy and it soon adds up.  Thirdly, there’s what it tells us about running a business in Britain today; don’t bother with research and development or making widgets or whatever – the really juicy returns are to successful lobbying and getting the rules rewritten to order.

Labour may talk the language of commerce but they really don’t understand it.


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