Comment: A courageous decision in a gloomy market
"Not surprisingly, pouring money into land at the height of a housing boom ended in tears; Tarmac is only just back on an even keel"
Thursday 03 August 1995
His performance was hardly an unqualified success judging by the squeals from the construction and mortgage lobbies, which took Tarmac's withdrawal as the ultimate betrayal of a market already on its knees. The market was equally unimpressed, marking the shares sharply lower as analysts fretted about what the company would do with its windfall.
The timing of the pull-out could hardly be worse, coming the day after Halifax abandoned hopes of a rise in house prices this year. Figures for new mortgage commitments yesterday confirmed the gloomy picture and further falls of 2 or 3 per cent in house prices by the year end are looking ever more plausible. Unpleasant as that would be for homeowners, the effect on the wafer-thin profit margins of housebuilders is a good deal worse. Nobody is going to believe Tarmac when it insists that the slump in the housing market has nothing to do with hoisting the For Sale sign. Whatever the real motivation, however, the decision is probably the right one. And coming from the industry's biggest player it is also a courageous gamble.
It is something of a mystery that it has taken this long for one of the combined contractor/quarry products/housebuilders to question the logic of clumping together two businesses which require steady investment with one which, in growth years, is a massive drain on cash resources. Housing ran rampant in the last boom at Tarmac, leaving little cash over for investing in road-building and digging up rocks. Not surprisingly, pouring money into land at the height of a housing boom ended in tears; the company is only just back on an even keel. Selling the housing division, even in today's market, is the right thing for Tarmac.
Bank stubbornly fights the good fight
The Bank of England trimmed back its inflation forecast in the quarterly report published yesterday but it has stuck to its guns in saying a rise in base rates is needed to reach the 2.5 per cent target. Consistency is one of the great virtues. But is there merit in the Bank's unchanged prescription?
The economic evidence has obviously moved on since Eddie George first advised another rise in rates at the beginning of May. The Bank acknowledges that the economy is weaker and there is still spare capacity. So why is it refusing to change its stance?
One explanation is that the Bank and the Treasury do have somewhat different underlying interpretations of the economy. The Bank thinks the sustainable trend rate of growth is about 2.5 per cent, the Treasury believes it is closer to 3 per cent. The Whitehall economists do not believe that sterling's fall presents a serious inflationary danger, while those at the Bank are clear that the risks of a more general inflationary spiral resulting from higher import costs have increased. A second element is the Bank's belief that the credibility of the inflation target has not yet been established. Bond prices indicate a considerable degree of scepticism.The Bank minds more about this, for the credibility of the policy is inseperable from the credibility of the Bank itself.
In any case, both Governor and Chancellor agree that the judgement is finely balanced. Lean too far one way, raise rates more than necessary, and you run the risk of slower growth at a time when some parts of the economy are seriously hurting. Fall off the other side and the danger is that inflation creeps up until it is too late to do anything about it. Britain has always, but always, since the Second World War made the second mistake. The virtue of the Bank's consistency is its desire to tilt the opposite way for once.
Few grounds for a referral
Referring the entire electricity distribution sector to the Monopolies and Mergers Commission in view of the present spate of takeover bids, as many are urging the Government to do, may have a superficial popular appeal but it really isn't going to solve anything.
Nor is there any rational or logical justification for it. Having privatised the companies in the first place, it would ill become the Government to interfere with the market's right to determine ownership in this way.
The other part of the argument for reference - that the prospect of a change of ownership should through the MMC be used as a way of extracting further concessions for the customer, is equally illogical. It might indeed have been better if these utilities had been made into customer cooperatives but the fact of the matter is they were not; they are joint stock companies whose structure of ownership is an entirely different issue to that of what they are allowed to charge their customers.
There is a recent precedent for using the opportunity of a utility bid to ease the customer's plight. The Lyonnaise des Eaux bid for Northumbrian Water was automatically referred to the MMC with the upshot that Ian Byatt, the water regulator, was given carte blanche to negotiate price reductions before the takeover could proceed. This, however, was not a comparable case. Lyonnaise already owns two water companies in Northumbrian's area. The takeover in an industry where there is and can be no competition will therefore yield considerable efficiency gains.
It seemed to the Commission only fair that if the number of water companies among which the regulator can make performance comparisons is reduced, this should be counterbalanced with a quid pro quo for the customer.
The situation in the electricity industry is not a comparable one. The regional electricity companies certainly have a local monopoly of distribution, but that makes up only a quarter of the final electricity bill. More than half the bill is ultimately paid to generators, where there is tough price competition.
Professor Stephen Littlechild, the electricity regulator, wanted the bid for Northern referred to the MMC but all he managed to secure was a series of negotiated safeguards, mainly about financial transparency, which he was working on when the bid was withdrawn.
Professor Littlechild will undoubtedly secure those again for the Hanson bid for Eastern, and he has already said more than once that the same should apply to foreign takeovers, for which read the bid for South Western.
As for Scottish Power's bid for Manweb, there are no real competition issues here either. It will take some persuasion by Professor Littlechild for the Government to agree that the regulatory risks alone warrant a referral.
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