Is a “not for profit” just the ticket for Welsh railways?

Nigel Annett says assumptions shouldn’t be made that a “not for profit’ model can work for every sector.

The success of the Glas Cymru “not for profit” model is in many ways tied to the fundamental nature of the water industry – capital intensive, very long asset lives, cashflow negative and continually having to raise additional funds from the capital markets for investment, stable regulatory regime, predictable revenues, measurable with industry league tables which allow performance to judged, a large and growing investor demand for safe long term bond returns, and perhaps most importantly, an essential public service for which customers have little or no choice but to rely on and trust Welsh Water.  In other words, the “not for profit” model has worked well because it chimes with the most important features of the water industry in Wales.

That is not to say that “not for profit” will not work in other sectors.  But it is always worth asking why “not for profit” is the best model for the outcomes we want to achieve.  What can “not for profit” do that “for profit” cannot do as well?   This has to be a judgement based on hard facts, not wishful thinking.

It should be informed by the particular characteristics of the sector in question.  For instance, if the sector is capital intensive or cashflow negative, or if cashflows are volatile, what risks lie with fixed interest investors?  Can these be mitigated by shifting the risk over to customers, as is the case with subsidies and “contracts for differences” in the energy sector?  What risks are left with fixed interest investors, and what premium will investors require for taking these risks?  Under a “not for profit” model where there is no access for risk-bearing equity capital what risks remain with the company and can these be managed?  The mutual building society sector for instance has built up reserves over many years which are higher than in the equivalent shareholder owned financial institutions, reflecting both their lower risk appetite but also to provide a loss absorbing buffer in the event of a severe stress, such as the financial crisis of 2008.

Away from financing and the fundamental features of the sector in question, do the corporate governance arrangements have teeth to ensure that performance is as good as it would have been under a “for profit” or any other ownership model?  The disciplines that come with shareholder ownership – where risk-bearing equity capital is put at risk – or from real market competition, or from real benchmark competition, cannot be underestimated.  These sorts of disciplines are important – indeed necessary – for driving performance and really have to be replicated in a “not for profit” world if we want to see results that are at least as good.   “Not for profit” needs to be as objective and hard-nosed as any other approach to owning and running important enterprises, perhaps more so when we are asking “not for profit” to be responsible for an important public service.  Any warm feeling that might come from being “not for profit” will not last long if performance falls short.

Nigel Annett is the former managing director of Welsh Water and one of the founder directors of Glas Cymru. He is a non-executive director of the Principality Building Society.

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