COMMENT : Labour should think about a Tube sell-off
Wednesday 26 February 1997
There are basically three options: sell the network off as a single operation; sell off lines individually; or use the British Rail model with a track company to which different train operators would pay fees. Unsurprisingly, given the looming election and Labour's opposition to privatisation of the Tube, there hasn't been much work done in the City yet on which of these options might yield the best result.
Whatever the outcome of the election, it will not alter the Tube's severe investment backlog, estimated at about pounds 1.2bn and rising fast. Underground executives have already had to scrap pounds 700m of improvements over the next three years. With Gordon Brown donning his hair shirt over public spending, the Underground can forget about asking for increases in subsidies.
So it may well be that eventually Labour is forced to dust off the privatisation option despite its distaste. The alternative - a series of investment partnerships with private capital - looks both messy and impractical. As, too, does a publicly owned Underground network allowed to raise its own capital through revenue linked bonds, for while this might technically remove the company from the public finances, in truth it doesn't fool anyone. It is just Government borrowing by another name, and expensive borrowing to boot.
If anything, the Tube system is actually easier to privatise than the rail network. "It certainly isn't the kind of basket case the Government makes out," said one investment banker. The Tube had sales last year of pounds 937m, from which it made an operating profit of pounds 130m. It also received state subsidies worth pounds 383m. On paper that makes it a quite bankable proposition, capable of absorbing substantial quantities of debt to fund investment. Not such an academic question after all, it would seem.
NatWest may regret its caution
"A complex set of results from a group in transition," was how Nick Collier, banking analyst at Morgan Stanley, chose to describe NatWest's results yesterday. A more charitable way of looking at them is that somewhere in there, hidden beneath the confusion of disposals and acquisitions, there could be a good set of results trying to get out.
So let's have a look at what's been happening at NatWest over the last year or so. What the bank realised by selling Bancorp in the US and Banco NatWest Espana has been reinvested in bolt-on acquisitions for the investment banking operation - Gartmore, Hambro Magan and Gleacher in the US. In capital terms, the amount NatWest raised selling off its remaining stake in 3i paid for provisions for branch closures in its main UK retail banking operation. The cost of dividends and share repurchases was roughly balanced by retained profits from continuing operations.
The net effect of all this toing and froing, then, is a surprisingly uncomplex and neutral one. What NatWest made last year, it has now spent in a careful, considered and piecemeal way. The stock market's disappointment with the results yesterday was more a reflection of the lack of any proposals for a renewed share buy-back programme than any immediate concern with underlying performance.
There are, however, some worrying clouds on the horizon. One of the outward manifestations is the continuing high cost, relative to revenue, of investment in information technology. While this is an essential ingredient of modern banking, it highlights an obvious weakness in NatWest's long-term strategy. Once upon a time NatWest was the largest of the big four clearing banks in terms of market capitalisation. But from the Blue Arrow scandal in the 1980s onwards, its approach has been a highly cautious and conservative one, and it now finds itself number four in the hierarchy by quite a long way. Lloyds TSB is now about double the size. NatWest will also be dwarfed by the Halifax when it is floated later this year.
NatWest's reluctance to grasp the nettle and make a quantum leap may prove to have been the wrong approach. The danger for NatWest is that as a middle-ranking player, both in retail financial services and investment banking, it will find itself progressively squeezed, neither small enough to thrive in specialist niche markets, nor big enough to compete with the lead players at the commodity end of these businesses.
Greenspan should try some plain speaking
Alan Greenspan, the most powerful man in financial markets, is likely to be a shade more explicit than usual when he starts his twice-yearly Congressional testimony today - the so called Humphrey Hawkins testimony. The man who once complained that if his meaning was clear, he must have been misunderstood, has a clear enough message to get across this time round.
At a minimum, Mr Greenspan is likely to repeat his Christmas warning about the "irrational exuberance" of US stock markets. After a small hiccup, the Dow swallowed this criticism and has climbed another 11 per cent in just over two months. If it kept up the same pace, it would be approaching the 12,000 level by next December. The Fed chairman is not going to sit back and let that kind of bubble develop unhindered. He will want to fire another warning shot, flagging up the prospect of an increase in interest rates.
The Fed already has a bias towards tightening. Its last published minutes stressed the need for a swift reaction to the first hint of inflationary pressure to counter any tendency for "higher inflation expectations to be embedded in financial markets".
What has happened since then is an unmistakable upward creep in labour costs. Both wages and, even more so, benefits, have been rising for about a year. The pace has accelerated during the past three months. Other indicators, such as monetary growth, are also flashing amber. So even without the irrational exuberance of stock prices, the chairman of the Fed has quite enough ammunition to justify a rate rise in the near future.
If the stock market reacts to this week's testimony with a sizeable correction, it could postpone the day of reckoning. For it is in the price of shares and other assets that the inflationary froth is most evident. If not, there is an odds-on chance of a rise in US interest rates next month. In his testimony last summer Mr Greenspan said: "I am trying to think of a way to answer that question by putting more words into fewer ideas than I usually do." You have to think about that one, don't you? This time round Mr Greenspan would be well advised to forget his fondness for the Delphic and deliver an unambiguous message to markets: read his lips.
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