At last, recognition of reality and the inevitable

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Perhaps the most telling remark from Richard Giordano yesterday as he announced plans to demerge British Gas's retail arm from its pipeline and exploration business was that he believed the company has too many shareholders. It was "inappropriate" for British Gas to maintain a share register of 1.8 million investors, Mr Giordano opined. We all know what he means but coming from a company originally privatised as a way of expanding direct share ownership in Britain, it seems a bit rich. British Gas invented Sid; now it wants to kill him off.

Privatisation has gone full circle and the contradictions and messy compromises that characterised the gas sell-off have come home to roost with a vengeance. The idea of breaking up British Gas is nothing new. It was explored at length in Whitehall during the run up to privatisation. In the end, however, deregulation and commercialisation of the gas market was put a poor second to the Government's main priorities of maximising proceeds and persuading as many people as possible to join Britain's new share owning democracy. By happy coincidence these no doubt laudable aims dovetailed neatly with Denis Rooke's determination to preserve his empire intact in its transition from public to private sector.

As it is, British Gas has served Sid extremely poorly. Only in part is that the company's fault. Its executives have fought long and hard to preserve the 25-year monopoly that the privatisation prospectus promised. But the demands of the consumer, the market place and the regulator have come to take first place. Yesterday's demerger proposal, and the symbolic ousting of the last of the old guard, Cedric Brown, is a final recognition of reality and the inevitable.

The problem is that having dithered and procrastinated for so long - the Monopolies and Mergers Commission demanded the divestment as long ago as 1993 - British Gas may have left it too late to make the plan work. Last night there were growing doubts, for it is by no means clear that the demerger of domestic and industrial gas supply will indeed achieve its purpose of lancing the boil of the long term North Sea gas contracts. Even after the sweetener of the Morecambe Bay gas field, British Gas Energy will have net assets of only pounds 2.6bn. This is a mere drop in the ocean of the pounds 40bn worth of obligations attached to these long term contractual horrors. While the actual cost of the gas bubble to the new company will obviously be a good deal lower than this, it could easily prove to be substantially in excess of the company's assets.

The point is that at this stage nobody knows. Everything is guesswork. In these circumstances it would be practically impossible to float the new company on the stock market without a guarantee of solvency from the much larger pipeline company. That in turn would defeat much of the purpose of the exercise - to ring-fence British Gas's dividend powerhouse, Transco, from the disastrous legacy of monopoly. Parliament too might have some difficulty with a company in any danger of failing in its statutory obligation to guarantee gas supply. Mr Giordano naturally disputes it but from the outside it looks as if even Equitas (the company Lloyd's is using as a wastebin for all its old liabilities) would stand a better chance of floating on the stock market.

Mr Giordano's problems, or those of his long suffering shareholders, are by no means over. As for privatisation and poor old Sid, we are perhaps witnessing the end of an error (sic).

The OFT chooses the wrong target

In any vigorous debate there is always a danger of over-reaction and choosing the wrong targets. That is precisely what seems to have happened at the Office of Fair Trading, which has decided to refer to the Restrictive Practices Court BSkyB's exclusive contract with the Premier League. The decision appears to have as much to do with politics as competition policy, as even John Bridgeman, the OFT's director-general, appeared to concede, when he admitted bringing ahead the announcement by one day to coincide with yesterday's debate in the House of Lords over the listing of national sporting events.

Just what does Mr Bridgeman hope to gain? Virtually all sporting organisations world-wide collectively negotiate core TV rights - even in the US, where anti-trust legislation is stronger than UK competition law. There may be some scope for watering down the exclusive clauses of the Premier League's own contract, which forbids any club from selling rights to other broadcasters on an individual basis. But this hardly need involve a fundamental review of sport's collective bargaining approach.

What Mr Bridgeman ought to do is to consider the wider competitive issues in pay-TV. BSkyB dominates subscription television; it has all the good films and sporting events, dominates encryption technology, and imposes often-onerous conditions on cable operators for the supply of programming. Every year, the price of a Sky subscription goes up. Good news for BSkyB's shareholders, but not for competition and consumer choice. Let's see what the competition authorities can do about this. Murdoch-bashing over sports contracts should be left to the politicians.

Squaring the circle on spending and taxation

In a speech yesterday at the London School of Economics, Kenneth Clarke did his best to quell the widespread perception that he is at odds with the Prime Minister. But his robust defence of the notion that Britain can have both modern public services and low taxes was as convincing as saying you can have your cake and eat it. It will do little to change the view that, when push comes to shove, Mr Clarke sees public spending as a higher priority than the tax cuts so treasured by Conservative Central Office.

His insistence that he has cracked the problem of the inexorable upward drift in public spending is also a trifle cute. As long as its growth is kept below that of national output, he argued, there is no limit to the fall that can be achieved in public spending as a proportion of GDP. The Chancellor expressed this view as if it was some blinding revelation. In fact it was the fallback position which Mrs Thatcher adopted in the 1980s after her vain attempts to cut spending in real terms. It's the usual cop-out: the magic carpet of growth will fly us into an eastern wonderland of low taxes.

After 17 years in office, in which general government expenditure (excluding privatisation proceeds) only fell below 40 per cent in two years, this is asking us to take too much on faith. But if Mr Clarke's attempt to square the circle is unconvincing, he is in good - or bad - company. Labour's prospectus, which rules out any new public spending commitment bar that financed by a windfall tax, is just as bogus. Don't tell the children but this is the sum of political debate between the two main parties on the crucial issue of public spending and taxation.