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"

Neville Simms was grappling with the classic salesman's dilemma yesterday - how to convince Tarmac's shareholders that getting out of housing was the right thing to do while keeping potential buyers interested in stumping up the best part of pounds 400m for the division.

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.

Start your day with The Independent, sign up for daily news emails
News
people
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
News
news
ebooks
ebooksA special investigation by Andy McSmith
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
Sport
football
News
i100
News
Perry says: 'Psychiatrists give help because they need help. You would not be working in mental health if you didn't have a curiosity about how the mind works.'
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?