A4.4 | The effectiveness of incentives is unproven

There are potential limitations to the impact of these incentives because:

■ As Figure 10 demonstrates, the incentives impact the Infracos only at the margins of their profitability and it is therefore difficult to determine the extent to which they impact Infraco shareholder behaviour. However, according to the LUL and Infraco staff we spoke to, they are having some impact at a middle management level.

■ The PPPs are intended to deliver private sector innovation (see Section B2.5), but there is no guarantee that the performance regime will encourage the use of innovative processes or delivery of innovative products by the Infracos.

■ Contractual performance targets, while adjusted during shadow running,7 do not remove all historical volatility. We therefore find it hard to determine whether they are easy or difficult to achieve, and whether they are sufficiently aggressive, although there is always a marginal return for improving performance.

■ Tests during shadow running showed a strong correlation between spending on ambience and improved ambience scores, but for availability the relationship between investment and outcome is less clear.

■ The availability measure becomes more difficult to achieve over time, but operates in isolation from other measures. Therefore, the impact of a capability enhancement on service availability - positive (e.g. due to less signal delays) or negative (e.g. more customers) - is not directly taken into account in the benchmark.

■ LUL can issue corrective action notices for poor performance but although these require the Infraco to undertake - and fund - the necessary corrective action, they do not carry a direct financial penalty. However, the reputation of the Infracos is at stake and there may be adverse financial implications for them, for example with lenders, if they perform poorly. The contractual procedures in this situation are as follows:

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⁷ See Were they Good Deals?, HC 645, Session 2004:05, June 2004.