The OFT has published its final report on infrastructure ownership and control stock take. Prompted by significant changes in the ownership structures of infrastructure assets the OFT decided to map core infrastructure owners in the UK and assess how ownership structures impacted on consumers. The OFT announced its intention to conduct a stock take of ownership and control across the UK economic infrastructure in May of last year. See our previous law-now for further information.
Type of ownership
The OFT has found that there is a greater use of private unlisted ownership with around 31% of infrastructure assets now being held in private companies and direct investment from investment funds, banks, pension funds and so on. Around 42% of infrastructure assets are held in public listed companies either listed in the UK or as part of a larger foreign listed group. Public ownership makes up around 18% of infrastructure assets and 9% are various forms of not-for-profit structures (trusts or companies limited by guarantee).
Cross-ownership
The OFT found that there is widespread global investment in UK infrastructure, although the majority of owners remained based in the UK. The ownership map also suggests cross-ownership both within the same sector (covering potentially competing assets) and unrelated assets across different sectors. The OFT reported that of the 30% owners who had stakes in more than one asset, almost half had cross-ownership within a single sector. 11% of owners had stakes across two sectors and 6% had stakes in three or more sectors.
Impact of ownership
The OFT examined whether the type of ownership of UK infrastructure had any impact on consumers. The OFT found some evidence that infrastructure asset prices have been rising over time which led to some concern that infrastructure funds might have an incentive to overpay for assets and pass these acquisition costs to customers in the form of higher prices. However, the OFT concluded that it had seen no evidence of systematic overpayment of assets by investment funds.
The biggest impact of ownership type came from the distinction between normal commercial providers and "not-for-profit" or non-conventional companies. There was some concern expressed that non-commercial entities are able to operate more cheaply because of implicit cross-subsidy from the owner, which distorts competition with private operators but does not accurately reflect underlying costs. Further, due to the lack of shareholder pressure, non-commercial entities are likely to have weaker incentives to make efficiency savings. There may also be difficulties in regulating unconventional companies because they do not respond to commercial incentives in the same way as private firms. In a monopoly context, regulators argued that they do not typically regulate companies differently based on ownership structure but they do have regard to what the ownership structure implies for incentives.
Overall the OFT does not believe that type of ownership is the primary driver of outcomes for consumers. Where there is competition in the market, the overall objective of owners may be of less concern. But where there is market power and the infrastructure assets are not regulated there can be concerns around the absence of incentives to outperform and make efficiency investments. Although the OFT found some evidence of rising asset prices resulted from repeated changes of ownership, its view was that this was more likely to reflect the underlying market power of the asset than the impact of the ownership type.
Market power
Ownership of infrastructure assets often confers a degree of market power due to the lack of competitive constraints. Where there are sector regulators, the risk of exploitation of that market power is typically managed through price regulation, output incentives, regulated standards of service and restrictions on vertical integration to prevent exclusion at the wholesale level.
Outside of the regulated sectors, the very existence of market power does not mean that a competition authority should necessarily intervene. The OFT indicated that it is likely to intervene where there is likely to be harm as a result of market power. In determining whether to intervene the OFT will consider whether: (i) the problem could be solved by the market (eg where the emergence of market power is short-lived because entrants are able to undercut the monopoly pricing of an incumbent); (ii) the source of market power might be the result of innovation or competition for the market (intervening to address market power that has been the result of innovation or competition could risk deterring future innovation and/or investment); and (iii) there is likely to be a big impact (the OFT will consider the magnitude of any harm, such as the level of exploitative prices, number of consumers affected and likely duration of harm). The OFT will further consider whether it was likely that a proportionate and effective remedy might be available.
The OFT carried out case studies in four infrastructure sectors – ports, waste, toll roads and car parks, chosen primarily because they are not subject to independent regulation. For more information on the outcome of the case studies conducted by the OFT please click here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 10/12/2010.
