Clarke's luck with prices may be running out
Friday 13 October 1995
If Mr Clarke is to do more than tease the country when he delivers the Budget, he had better be right. Lower than expected inflation has been vital in allowing him to squeeze public spending plans. It has meant that wage inflation has remained low, making the public sector pay-bill freeze much easier to implement.
The cost of getting it wrong is graphically illustrated by the impact of the September inflation figure on social security expenditure. With inflation at almost 4 per cent rather than the 3 per cent projected at the time of the last Budget, the Chancellor now has to find an extra pounds 650m to uprate social security benefits to take account of inflation. If inflation continued to worsen, this could lay the ground for a pick-up in pay inflation next year, which would knock through to the public sector.
It is, however, still too early to conclude that the game is up on retail price inflation, which has tended to surprise this year by coming in below expectations. Although a rise in seasonal food prices accounted for a quarter of the jump in the inflation rate, the main drive came from an attempt by retailers to rebuild their margins.
We have been here before. So far, consumer resistance to higher prices has largely prevailed. The Confederation of British Industry's distributive trades survey for September suggests that consumers are continuing to punish retailers for their attempt to push up prices by withholding their custom. For all his slip-ups, Kenneth Clarke has been a lucky Chancellor so far. His luck may hold but he will be watching next week's retail sales figures as anxiously as anyone.
North West's strategy is seriously flawed
It is always possible that Sir Desmond Pitcher, chairman of North West Water, will prove the rest of us wrong but it seems unlikely. While there have certainly been more seriously flawed takeovers than North West Water's bid for Norweb, there have not been many in the pounds 1.8bn league. The best that North West shareholders can expect from the high price being exacted for this Lancastrian folie de grandeur is that one and one will end up equalling two; much more likely it will equal a good deal less. The ease with which North West has hoovered up nearly 30 per cent of Norweb's share capital shows the market's strong preference in this case for cash over shares. You do not have to probe very far to find out why.
Forget all the talk about synergies. It is delusion to believe they can possibly exist between water and electricity companies. If there is commercial merit to this takeover it is to do with cost-cutting, cash flow and tax, not industrial logic. Deals done purely for tax reasons are nearly always bad ones; the tax rules can be changed. As for the match between the cash generating attributes of an electricity company and the cash needs of a water company, it remains to be seen how this will survive the effects of the last review of electricity tariff controls.
That leaves cost-cutting, where the scope is clearly considerable. North West's record, however, hardly inspires confidence that it is up to the task. The spanking new pounds 350m computerised billing system North West is so keen to promote, is, in fact, nothing to boast about. It is an IT white elephant with few redeeming features. Like all IT, it is unlikely to be easily adaptable to dealing with the entirely different and more complex billing system that is used by the electricity industry. The scope for costly cock-ups in putting in place the combined facilities management company is substantial.
To make matters worse, North West may have been forced to overpay for Norweb. It is to be hoped that the now almost universal perception of this deal - that it is being driven primarily by fees and ego - is wrong. Sir Desmond and his team are going to have to work hard to overcome it, however. A windfall utilities tax, by this Government or the next, would seal its fate as one of the most ill-judged and ill-conceived takeovers of the present merger boom.
Why no word on the nuclear sale?
Few would disagree that nuclear and rail are the dogs of the Government's privatisation programme. One barked with joy this week, after Sir George Young, the Transport Secretary, announced the Railtrack sale would definitely go ahead in the spring. The other stayed conspicuously silent. Not a word of the nuclear sale was mentioned in the conference speech by Ian Lang, President of the Board of Trade and the minister responsible.
This could be no more than an oversight, or perhaps it reflects the Government's rough indication a few months ago that it would like the nuclear sale to go ahead next summer. Why say more at this stage? On the other hand, if Sir George dared boast at the party conference that he was determined to push through something as unpopular as the rail sale - once dubbed the poll tax on wheels - why is Mr Lang not barking as loudly?
The nuclear companies are unaware of any change of timetable and perhaps there is none, as yet. The sale of British Energy, as it is called, requires a complex merger of two firms and the separation from the organisation of the Magnox reactors, under terms still being argued through with British Nuclear Fuels, their prospective (and reluctant) new owner.
Does silence indicate that the Government, too, is wondering whether it can pull off the nuclear sale? If it slips as little as three months into the autumn the risk of becoming snarled up in an election campaign will be enormous. The market will not be in the mood to buy something so suspect at poll-watching time, and the less the electorate has to be reminded of nuclear power at the hustings the better.
Railtrack is now looking rather different. The City remains deeply sceptical about the company, which is reliant for its income on indirect subsidies funnelled through the train operators that use its services. But Sir George really means to push it through. As the seller, the Government has the whip hand. Not only can it adjust the price and the debt levels to smarten up Railtrack for City consumption, it could also, if pressed, offer guarantees against the costs of changes in regulation and taxation, to offset some of the uncertainty Labour is generating with its threats of renationalisation. Such pledges have already been made to bidders for rail franchises.
The odds are that Railtrack will go through, albeit on terms so generous that it will make even the great regional electricity company giveaway look reasonable by comparison. But it is going to take the re-election of John Major to get nuclear into the private sector.
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