British Gas pays the price for its grand folly

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The Independent Online
Common sense has prevailed, and the Government has told British Gas where to put its levy. The biggest surprise is that it took ministers as long as it did to come down against the idea of making gas consumers bail out a company which largely has itself to blame for highly priced take-or-pay North Sea supply contracts. There was never, in truth, much of a case for assistance even though it plainly might be damaging for the consumer if British Gas descended into serious financial difficulty.

The company has never given a figure for the potential cost of continuing with the contracts. Sceptics have always believed the company exaggerates its plight. However, industry guestimates do point to a liability of pounds 1.5bn or more. Losses of anywhere near this would be exceedingly painful, representing more than three years of dividends at the latest rate of pounds 630m a year. But they are not enough to bankrupt a company with shareholders' funds of nearly pounds 8bn. With the shares hitting new lows almost daily, there is clearly concern in the stock market that the take-or-pay fiasco will none the less be used as grounds for cutting the dividend.

We are perhaps past the stage of needing explanations for this extraordinary affair. When British Gas signed so many high-price contracts - including three after 1991 - it obviously thought its supply monopoly would continue indefinitely. The plain truth seems to be that it simply failed to foresee the consequences of a fall in the gas price and the present gas glut. Or at least it believed its monopoly so secure that it didn't matter what was happening in the market place, it would still be able to charge what it liked.

What makes the producers particularly hot under the collar is that the price British Gas's offshore subsidiary charges its own in-house supply arm for Morecambe Bay gas is even today higher than most of them get from the take-or-pay contracts at issue. In other words it is still paying itself more than it pays most other producers. It can therefore expect little mercy in the negotiations which must now begin with some urgency.

The man put in charge of sorting out the mess, Roy Gardner, needs a radical approach to the problem if British Gas is to emerge with any credit. It may well be that getting out of gas supply altogether, leaving the company as a gas producer and monopoly distributor, proves the most eloquent solution to the problem. Selling the supply arm piecemeal to the producers with the problematic contracts attached would also achieve in one stroke the fully competitive domestic gas market the Government wants.

Labour's mergers policy needs rethinking

By one of those odd coincidences, the Forte takeover battle came to a head just as the Labour Party was sitting down to decide on what kind of mergers policy, if any, to put into its next manifesto. Since old Labour might well have blocked Granada's break-up bid and new Labour is highly likely to form the next government, the party's thoughts on the matter bear some examination. Rightly or wrongly, the Forte battle has come to be seen as the very embodiment of 1980s-style asset-stripping in which the short-term interests of a small group of powerful City investors and fee-earners dominate over other "stakeholders".

As things stand, Labour is committed to that old canard of a mergers policy - that bidders should be required to demonstrate positive benefit or have their takeovers blocked. While in theory this is a fine idea, in practice it would make merger decisions highly susceptible to political whim and favour. It is easier to explain what is meant by the "stakeholder" economy than define the "public interest" in a takeover. The result would be a mergers policy run along the lines of Forrest Gump - you never know what you're going to git (sic). The present Government's purist approach - markets decide unless there are very clear-cut competition concerns - may be at the other extreme but at least it has the merit of predictability.

It so happens that on Wednesday night, as Sir Rocco Forte was nursing his wounds, Labour's advisory task force on competition policy was holding its first meeting in Westminster. By all accounts, task force members came down heavily against the present Labour Party position. The mixed bag of competition specialists and experts from utilities, retailers, cable companies and the National Consumer Council who make up the task force do not decide Labour policy. But they are expected to have a serious input into the manifesto, by helping politicians decide what is practical. Surprise surprise, what they want is to water down public interest and keep competition high on the agenda in merger policy.

In Europe, competition is the only factor. If Labour sticks to its present position it could be faced with the absurdity of having "big" mergers decided by Europe on competition grounds alone while only the smaller domestic ones are subjected to the full public interest works. A better approach would be to make the process by which investment institutions decide on takeovers much more open to public scrutiny and justification.

Minimum wage is the next step for the CBI

In itself, Adair Turner's speech at an Institute of Personnel and Development conference yesterday was rather less remarkable than the way it was billed. True, the CBI's director general told employers to pay their workers more. He even used the "s" word, though he gave the idea of "stakeholding" his own particular spin.

But he also argued that rising real incomes had to be earned through higher productivity. Nor could anyone disagree with the contention that increased pay should be skewed towards profit-related rewards and employee share ownership schemes. His message that Britain must avoid the danger of becoming a low-wage economy is the sort of thing many businessmen have been saying for years. Furthermore, his speech contained the familiar warning of the potential for a new upward wage-price spiral. All uncontroversial enough, it might be said.

However, Mr Turner's remarks have a logical extension that the CBI has so far refused to accept. That is the need for a national minimum wage. It is at the very bottom of the labour market that real incomes have fallen most precipitously. It is there where the sweatshop labour is concentrated. Raising the rewards and skills of those on very low incomes will do more for Britain's competitive position than persuading a few more big companies of the case for profit-related pay. As every businessman knows, to compete on cost alone is the road to ruin.

There is now a very respectable body of research showing that the level of minimum wage proposed by Tony Blair would not cause big job losses. On the contrary, it would improve recruitment and retention in low-paid jobs, and encourage firms to provide more training. The CBI still mistakenly argues the opposite. Even a low minimum would cause problems, it argued in its latest statement on the subject. Mr Turner should take his argument to its logical conclusion.