PUBLIC SECTOR - Top-flight performers stay public

Last year, a leading UK retail, property and transport services plc made operating profits of #45m on #200m turnover and was voted best operator in the world after an authoritative independent customer survey.

This year it won planning approval for a huge development for which there is proven customer demand. It is a City analyst’s “must buy” – but no private investor is ever going to get a share of the takings of Manchester Airport plc. The members of Manchester city council and the neighbouring nine districts that own all the shares like the rich dividends their investment in the airport gives the local council taxpayers. Sids are not wanted in Manchester.

Throughout the 1980s, to suggest that a company could be successful and profitable under public ownership would have been to invite political ridicule. Thatcherism did not just require the privatisation of public corporations. It destroyed the idea of “natural monopolies” that needed to be regulated and protected through state ownership. Instead, these monopolies were opened up to competition. It was assumed that in the fierce heat of competition for customers, only private sector, profit-oriented, bonus-enhanced executives could run them.

Manchester Airport knows all about competition. It battles with other airports to be a hub for long-haul flights from which airlines hop to their final destinations in northern Europe. In this market it is not just up against Heathrow and Gatwick, but also the other international airports throughout north-western Europe.

So it has good reason to value the moniker “world’s best airport for overall passenger convenience in 1996”. It won the award, from the International Air Transport Association (IATA), ahead of Changi airport in Singapore and Schiphol in Amsterdam, after a poll of 45,000 international air passengers.

It follows a four-year programme of management restructuring that has, according to finance director Norman Renfrew, transformed the way the company relates to its customers.

He admits that before 1992, the airport had faults that Thatcherites would have regarded as hallmarks of a state-owned company. Back then, Manchester provided safe and reasonably efficient airport facilities.

Unfortunately, they were not the facilities the airlines wanted. Market research carried out in 1992 that Renfrew and his fellow directors expected to “confirm that we were doing everything right” said quite the opposite.

“Our attitude had been that we knew best what the airlines needed. We were wrong,” he says.

But what happened next throws interesting light on the privatisation debate. A complete restructuring produced a new “customer services directorate” that was to dictate what the airport did. At the same time, the airport set its primary goal to be “the world’s best airport”. It also began an aggressive policy of expansion, investing #250m in a new terminal and raising passenger numbers from 10 million in 1991 to 14.5 million in 1995.

Renfrew says the confirmation that Manchester had achieved its goal of being best world airport came sooner than any of them had expected. Financial and operational success now looks to have been sealed with the granting, in January, of official approval for a second runway, which will cost #174m to build, and which will allow Manchester to meet demand it cannot currently satisfy. It has defied doom-mongers who assume any publicly-owned company relies on subsidies, and it represents a remarkably successful investment on the part of the municipal authorities.

Surely having a 21-strong board of directors, of whom 18 are local councillors, is no way to run a business? Renfrew says it has not held the airport back. “There are four of us who, as executives, run the company day-to-day,” he says. “We have often put business solutions to the local authorities in the past to which their instinct has been to say, ‘We don’t like that’.

But then they think, hang on, this is not the council we are dealing with, this is a commercial operation, we are here to make profits.”

It was not always so. Renfrew recalls that when he arrived at Manchester Airport 10 years ago there was “a nervousness (among the shareholders) about making big profits”. But in more recent years the airport has been a thriving business. You do not have to go far to the west to find a privately-owned airport, Liverpool, that has not grown nearly as fast, and is now dwarfed by Manchester.

Within Whitehall as well, despite the Conservatives’ policy of privatisation, a small number of state-owned companies continue to exist. These are mostly net contributors to the Treasury – unlike the newly privatised train operating companies.

Channel 4, for instance, which is owned by the government’s department of national heritage, made #128.1m profit last year. At the sudden departure in January of Michael Grade from the chief executive’s seat at Channel 4 there was some debate about the artistic and creative legacy he left, but there was no questioning the financial and commercial success the channel had enjoyed under him. Tentative government proposals to privatise Channel 4 have never got up a head of steam, at least in part because it was difficult to argue that private sector management would squeeze any more revenue out of it within the broadcasting constraints placed on it.

The Post Office also claims it is a proven commercial success. “By any range of indicators we are a success,” said a company spokesman. “As well as returning #1.25bn to the Treasury in dividends alone over the past decade, our Royal Mail division has also improved productivity by one-third, which is five times the rate of improvement in the service sector as a whole.”

According to these public corporations, they can show a company in a competitive market can be profitable and efficient whether it is owned by government ministers, councillors, institutional shareholders or speculative investors. So where does this leave the 1980s orthodoxy that the public sector cannot run commercial businesses? Phil Davies is an academic who has advised both the public and private sectors, and who now teaches strategic management at Cranfield. He says the principles of good management are the same for any commercial organisation.

It makes no difference whether the executives are accountable to a pension fund trustee or to a civil servant – they still have to apply the principles in order to generate profits. He says: “Public sector management is no less inherently good than the private sector’s – it is just a question of the constraints that the government imposes on state-owned companies that it does not place on private sector ones.”

He cites the example of the Post Office, which recently beat all the privatised utilities in a survey of customer service standards by the National Consumer Council. “Within the limitations set by government, the Post Office has been very efficient,” he says. Like any other large company, it has split itself into profit centres, such as Royal Mail and Post Office Counters, and has delegated powers and responsibilities to local managers. “Business is common sense and can be applied across the board,” Davies says. Renfrew, who has also worked in the private sector, agrees. “The principles of managing any commercial business are the same: keeping the customer happy, watching the cashflow and not spending unless you have to,” he says.

If companies such as the Post Office look less entrepreneurial than some plcs, Davies says, it is probably because they are restricted by Treasury rules which date back to the 1976 International Monetary Fund crisis.

Both the Post Office and Manchester airport are keen for these restrictions to be lifted. Manchester Airport is forbidden to borrow by the government, which would rather see the local councils that own it selling their shares to raise capital. This means it is funding the second runway entirely out of retained profits. At the same time, it is prevented from investing the cash pile it has built up in anything other than what Renfrew calls “very low-risk equity”. He says that if the airport were allowed to invest its cash commercially it could be earning returns of 20% or 30% instead of the 7% it gets currently.

The Post Office has also sought permission for a range of joint ventures and investments in recent years, but has been refused by the government.

It says this means it faces unfair competition from private sector delivery companies, which are not bound by the same rules. This issue is one of the few on which there is a sharp difference between the Conservatives and new Labour. While pledges to privatise the state-owned London Underground and the Post Office are likely to be prominent in the Conservatives’ general election manifesto, Labour will keep both in the public sector. Labour does so explicitly on the grounds that both are well managed organisations.

According to Kim Howells MP, the Labour front bench industry spokesman, the Post Office has a fine record of profitability and customer service.

Rather than privatise it, Labour would give it back some of the commercial freedoms taken away in 1976.

If Davies is right, Labour can make a seriously-argued case for keeping commercial companies such as the Post Office under public ownership. But looked at from the point of view of the Post Office’s private sector competitors, the case seems more dubious. There is no doubt that Royal Mail, which holds a monopoly over postal deliveries costing less than u1, and Post Office Counters are highly profitable. Both are also, to an extent, shielded from competition in the interest of preserving a comprehensive nationwide service. The parcels delivery part of the business, Parcelforce, is however chronically loss-making. While it eked out an operating profit last year of #1m, that was overshadowed by u54m of exceptional restructuring costs.

According to Pat Howes, chief executive of arch rival Securicor Distribution, it is a business ripe for privatisation. He says: “Parcelforce has not had a good record at all. That is not sour grapes – it is well documented that it has lost millions of pounds in the past 10 years.” He says Parcelforce is crippled by restrictive practices and trade union problems that companies like his banished in the 1980s. And the losses continue despite the huge advantage Parcelforce has of being attached to the Post Office group.

Howes wants to see the Post Office’s 20,000-strong branch network opened up to private sector distributors. He cites the example of the US, where a customer can bring a parcel to a high street kiosk and choose whether to have it delivered by DHL, Federal Express, UPS or any other distributor.

“Why shouldn’t post offices offer a package service to companies like ours, and be the honest broker between them instead of favouring Parcelforce?” he asks.

The Post Office defends Parcelforce’s performance, saying the private sector is not under the same obligation to deliver parcels to the remotest addresses in the UK. It is certainly not giving up on Parcelforce: at the end of January it announced a u100m investment in two new distribution centres, aimed at strengthening its position in the growing express delivery market which is currently dominated by Securicor.

If the Conservatives are to sell the last few privatisations to the public, they will have to show that businesses such as Royal Mail would do better in private hands. Alan Jones, managing director of TNT UK, says his company could deliver letters “at lower postage prices than those charged by the strike-ridden Royal Mail”. He points to the transformation of BT through competition, and says the Post Office “would benefit from the same medicine”.

But as Phil Davies says, the public just seems to think that some businesses should be in the public sector. Under Margaret Thatcher, privatisation was driven by a feeling that the taxpayer should not be propping up failing companies. While the Post Office and the other public corporations keep churning out profits, the argument for leaving them alone seems a strong one.

Tim Weekes is a freelance journalist.