COMMENT : This utility bid makes industrial sense

After a month of harassing the government over greedy bosses, the bid for Northern Electric and all the other problems of the privatised utilities, even Labour spokesmen failed to muster more than routine outrage at the offer for Northumbrian Water. For the bid without a price which has been tabled by Lyonnaise des Eaux is in an entirely different category from that by Trafalgar House for Northern Electric.

Trafalgar's offer is unashamedly about financial (rather than electrical) engineering. Other regional electricity companies offer similar attractions to predators. If Northern loses on Friday, as seems likely, it may prove to be the first of many dominoes to fall to bidders outside the electricity industry. Rightly or wrongly, they are all on the block.

In complete contrast, Lyonnaise des Eaux is a company of high reputation which already owns water companies in the UK and has wide international interests. Northumbrian is quite unlike the Recs, which seem to have money to burn. Like the rest of the water industry the company faces heavy investment on environmental and water quality improvement. It is hard to see any financial engineering motive for a bidder.

Since Lyonnaise owns a big water company right next door, with which Northumbrian shares water from the Kielder reservoir, the issues here are clearly industrial logic, competition and charges to the customer. Efficiency gains are the driving force behind the offer.

No other bidder for Northumbrian makes such sense. Indeed, because of the obvious fit the move has been rumoured ever since Northumbrian was privatised. The only thing holding Lyonnaise back was the Government't golden share, which has now expired.

It is also unlikely that this is the beginning of a great wave of takeovers of water companies, if for no other reason than that the scale of their investment needs makes them generally cash negative.

That does not mean there will be no more bids in the industry. Lyonnaise may have ruled out other takeovers in the UK, but Compagnie des Eaux has similar geographical reasons for taking a close look at Southern Water and there may also be scope for defensive regional mergers.

However, it seems unlikely that anybody is going to buy a water company unless they already know about water. Against this background, it is hard to see much of a case for referring any bid to the Monopolies and Mergers Commission. Whether Lyonnaise is prepared to pay the premium which Northumbrian will demand is another issue.

No surprises in the currency market

The only surprise about the currency crisis is that anybody could claim to be surprised about it. Not only have the same currencies been under pressure all this year after a peaceful 1994, they also have several features in common. Big international investors have focused on several factors in picking which countries to abandon. These include the size of the government budget and current account deficits relative to the economy, how much of the trade deficit is covered by short-term rather than long-term capital inflows, and the cost of servicing foreign debt.

In the nervous times that have succeeded the Mexico debacle, investors have made their usual flight to quality: the mark, Swiss franc and yen. Other influences - such as the likely direction of interest rate moves in different countries - clearly matter too, but it is the financial markets' strict fiscal rules that have determined which currencies nose-dived. Other currencies that have so far escaped attention could be due to fall for the same reasons. Of the other Latin American currencies, Argentina is a candidate. It has so far suffered relatively little Mexican fall- out. The other area due for attention is Asia. The Philippines, Indonesia and Thailand could be at risk. However, the foreign exchange markets have found their main victims, and are continuing to pass judgement on them. The pressure is likely to continue until they become cheap enough for investors to overlook their deficit and debt problems.

Barings events grow more mysterious

The usual pattern is for events to become easier to interprete, analyse and explain with the passage of time. Not with Barings. As more is learnt about this astonishing affair, things become not clearer but progressively more mysterious and incomprehensible. What began as a rogue trader in the Far East fraudulently playing on the roulette wheel of high risk derivatives seems to have become the story of how they were all in it together.

Both explanations seem equally incredible. Barings system of management and control has been exposed as inadequate in the extreme - but had the former been true it would have been non-existent. By the same token, for the latter to be true, there would have to have been a conspiracy of quite staggering proportions among the top brass. They would all have had to sit down together and say; "right, we are going to bet the bank and break the law - putting not only our jobs and reputations at risk but our liberty as well".

The truth is unlikely to be so cut and dried. The probability is that it lies somewhere between the two. What will probably emerge is that Barings and its regulators became victims of a lethal cocktail of fraud, poor management control, conspiracy, cover-ups, greed and neglect. What is clear is that the Bank of England and later the world were told less than the truth when the size of the losses first emerged. The sooner the top people at Barings tell it as it was, the better for everyone.

A number of lessons for the Bank of England have already emerged. The first is that there needs to be more intensive international cooperation between regulators. Simex claims to have raised concerns with Barings some time ago but the Bank of England knew nothing of this. A second is that procedures for checking on standards of control need to be dramatically strengthened. If it is true, as seems to be the case, that Barings breached the Bank's rules on the proportion of its capital it exposed to a single risk, a third lesson is that the system for reporting derivative and counterparty exposure has to be significantly tightened up.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent