Blair and Brown fall out over windfall gains

COMMENT: `If the tax were based on total shareholder return, combining dividends paid with the share price increase since privatisation, then BT's windfall tax liability is miraculously blown away, together with that of British Gas'
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The prospect of a windfall tax may be sending shudders through the boardrooms of the privatised utilities. But the closer we get to the day when it could become a reality, the more apparent it is that the dreaded levy is also causing some serious friction at the top of the Labour party.

Given that it is one of only two clear tax pledges so far made by Labour - the other being the commitment to abolish VAT on domestic fuel - it is remarkable how little is known about the wretched thing.

In part that is deliberate. Labour does not want to raise its profile on tax, not even one levied on a bunch as despised as the privatised utilities. At the end of the day, taxes are taxes and no party seeking political power likes to be associated with imposing new ones.

Nevertheless, by now we might at least have expected to know which companies would be caught by it, how it would be structured, at what level it would apply and how much it would raise. We know the answers to none of these. And the reason is that Tony Blair, the Labour leader, and Gordon Brown, the shadow Chancellor, disagree. The steady leaks from the Brown and Blair camps illustrate this.

Mr Brown, who has let it be known that the tax might raise as much as pounds 10bn, would clearly like to cast the net as wide as possible to fund the spending commitments of Labour in office.

Mr Blair would like to draw the line much more tightly for fear of alienating shareholders who are also voters. But in particular, he would like to draw the line so as to exclude BT from the scope of the tax since this is the company that will help deliver another of Labour's manifesto pledges - the cabling up of every school in the land to the information superhighway.

On most criteria, such as a tax based on market capitalisation or the "excess" profit made on top of what is needed to provide a return on capital invested, BT would be winded the worst.

But if the tax were based on total shareholder return, combining dividends paid with the share price increase since privatisation, then BT's windfall tax liability is miraculously blown away, together with that of British Gas. This is due to their below-average stock market performance, for which the two companies can thank their regulators.

Conversely, the privatised regional electricity and water companies would be hit more severely. There is no rhyme or reason to this and plenty of evidence that it is arbitrary and unfair.

In the case of electricity, for instance, why should those overseas predators who have recently acquired RECs pay the tax on windfall gains that have already been distributed to their original shareholders? Why, for that matter, should the two generators, National Power and PowerGen, pay a windfall levy when neither are price regulated utilities and no longer constitute a monopoly?

This, sadly, misses the point. BT and British Gas still account for a large chunk of the 5 million voters who bought into the privatisation programme. If, through sleight of hand, Mr Blair can exempt them from a windfall tax while still realising a windfall gain, what should he care?

Stakis may not save underwriters from MMC

Though routine in other respects, yesterday's Stakis rights issue was ground-breaking because it chipped away at the fixed underwriting commissions which have been a feature of the City for as long as anyone can remember.

The auctioning of sub-underwriting commissions introduced by Schroders might seem just a minor technical change. But behind it seethes an argument in the City about the way companies raise capital.

On the one hand are the traditional merchant banks such as Schroders and the big investing institutions, which are firm believers in fixed underwriting commissions and in pre-emption rights, which give existing shareholders first call on any new issue.

Ranged against them are investment banks such as Morgan Stanley and SBC Warburg, which would much rather see the City adopt New York methods, where securities houses buy up whole share issues and flog them off for a fat fee.

The sub-plot, of course, is that the OFT is mighty suspicious that there is a cartel in operation, and is putting the finishing touches to an investigation and may well recommend a monopolies inquiry.

The critics' principal weapon has been the way fees for underwriting, and especially sub-underwriting by the institutions, have been unchanged for decades. Institutions pick up 1.25 per cent of the value of an issue, and more if the underwriting period is lengthy. By putting some of Stakis's underwriting up for auction, Schroders hopes to demonstrate that there is enough flexibility in the old system to deflect pressure to tinker with it.

With a saving of less than 10 per cent on the old fixed fees, the saving was not dramatic. But Stakis was not the easiest of rights issues to experiment on, since it was quite large and in a sector to which investors are now a bit lukewarm. It at least demonstrates that there is some fat to be trimmed from the fixed commission system. But given that the big integrated investment banks have no interest in helping preserve the status quo by following suit, this exercise may not be enough to stave off an official investigation.

Rogue computers - that makes a change

Hard on the heels of the Bank of England's warning in its excellent new Financial Stability Review of the need for "effective management controls and a culture of compliance", comes another howler - this time from the private client stockbroking arm of the giant US fund management group Fidelity.

Admittedly this is not quite on the scale of another Morgan Grenfell, or even the less calamitous misdemeanours of Jardine Fleming. Nor are we dealing here with the deliberate antics of a rogue trader. Rather it is the entirely undeliberate cock-ups of a rogue computer. The effect on public confidence is not much better all the same. It is that you cannot trust these people in the City with your money.

Presumably this is what Howard Davies, deputy governor of the Bank of England, means when he talks about "reputational risk", for it was surely he who wrote the piece that appears under his wife's name, Prudence, in the Bank's review.

"The market standing and good name of an entire financial group can be put at risk by the activities of one part," he writes, and doesn't Fidelity know it. The business where the computer problems occurred is only a tiny part of this organisation, but there will be a certain loss of reputation throughout.

However, there is another way of looking at this. In a large organisation, the potential loss of reputation is usually significant enough to ensure that adequate compensation is provided. In the hands of the aggrieved, reputational risk is a mighty weapon indeed.

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