COMMENT Investors will have their revenge on Littlechild

"Professor Littlechild is not just shifting the goal posts; he seems to have dug up the entire pitch."

Littlechild by name, Littlechild by nature. That was the view of investors, anyway. In a single day Professor Stephen Littlechild has managed to wreak more havoc in the City than George Soros and Nick Leeson put together. Some £3.5bn was knocked off the value of electricity shares as the electricity regulator admitted that perhaps after all he had got it wrong during the last price review and would need to be tougher.

This may well be the right approach from a consumer point of view - this newspaper and others have been saying it for long enough - but from an investment perspective it looks disingenuous and arbitrary in the extreme. Prof Littlechild is not just shifting the goal posts; he seems to have dug up the entire pitch. Moreover, the timing, coming in the middle of the Government's Gencos offers and the Trafalgar House bid for Northern Electric, could hardly be more disruptive, damaging and unfortunate.

The Treasury must be fuming. Proceeds from the sale of the two generators seem to be secure but those left holding the baby - 1.1 million private shareholders have already paid £1,000 apiece - have every right to feel aggrieved. So, too, do the legion of investors who bought into the regional electricity companies in the belief that when Professor Littlechild set a new five-year pricing regime in August he meant it.

Only kidding, he appeared to be saying yesterday as he announced that the bid by Trafalgar House for Northern Electric, the subsequent Northern defence and widespread public concern about whether the new pricing regime was sufficiently demanding on the RECs had led him to reconsider the position. Though he seems to be entirely within his rights, the City had assumed that what it was told last August was the way it would be.

That he could so easily change his mind is something investors neither knew about still less appreciated. Small wonder that the stock market price of both electricity generating companies fell through the offer price yesterday. In the circumstances, the insistence of advisers that Prof Littlechild's volte face has little if anything to do with electricity generation, though technically true, looks either naive or disingenuous. If the regulator can act like this with one set of utilities, why not another? At a stroke Prof (by the book) Littlechild seems to have sunk all prospect of either the National Grid or Railtrack flotations. The timing of his intervention may look to consumer groups like an admirable show of regulatory independence, but from a City perspective it is crass stupidity, as if one side of Government doesn't know what the other is doing, and a damning indictment of privatisation strategy.

It would be absurd to suggest that utility regulators stick to the letter of the privatisation prospectus. Circumstances change. The scope for efficiencies among privatised businesses and for the introduction of new competition into their markets often prove more dramatic than had been supposed. The regulator must have the right to chop, change and adapt accordingly. By the same token, however, to move the goal posts so unexpectedly just six months after putting them in place is really not on, not if ministers want to continue to sell these businesses to investors anyway. Independent regulators are not just consumer watchdogs; they are also there to ensure that the interests of investors are protected from political whim and prejudice.

Investors are now being obliged to pay a heavy price for Prof Littlechild's misjudgment. They will have their revenge the next time the Government tries to privatise anything.

New mind set that shrinks loans

Barclays had the shrinks in last year, and a very good idea it was, too. Martin Taylor, chief executive, has got the bank's loans down by £9bn, or about a tenth.

Mr Taylor is the industrialist who came into a troubled bank and made no secret of his surprise at its management deficiencies. Much of the past year has been spent talking his colleagues into a new state of mind about what they do. Some of it is so simple it is amazing it was not done before.

Top of his list is shareholder value - "the lodestar we are following" - as the key to all decisions about taking on business. This new refrain at Barclays has been familiar for years at Lloyds under Sir Brian Pitman.

It means examining every business decision in terms of the return it produces and avoiding or getting rid of activities that do not satisfy minimum criteria. There is no point in growth for its own sake unless there are profits.

Such a change of direction can clearly cause great personal distress to traditional bankers. Some of them apparently have difficulty understanding why they should withdraw from any of their core lending businesses, no matter how poor the return on equity.

Loans are now priced by analysing the risk of different types of business and the volatility of returns. Using these calculations, the bank can estimate some of the potential losses when the economic cycle turns down and set aside bad debt provisions well ahead to reduce the shock.

Far from slashing the general provision for bad debt as banks used to do at the peak of a cycle, Mr Taylor has topped it up £74m to £850m. And his managers are forced by the new methods of analysis to think harder about the risk factor on every loan they make, which discourages lending just for volume.

The bank has to get these decisions right or its talk of managing its own capital to match its lending - and handing back money to shareholders when there is a surplus - will be just hot air. Nobody wants a return to the days of high dividends clawed back by rights issues every few years.

But while Barclays is more shipshape under its new skipper, it is still not steaming very fast. Lower lending and a more cautious attitude to speculation at BZW pulled operating profit down. The whole of last year's pre-tax improvement was due to lower bad debts. The gross level of bad debt provisions last year of more than £1bn - in contrast to the net level after recoveries - is still alarmingly high.

Barclays' average post-tax return on shareholders' funds over 10 years is 9 per cent, less than half the level targeted by any respectable industrial company. The 21 per cent return reached last year was not enough because it was on the sharpest part of the cyclical upswing (so talk of profiteering is nonsense).

The real measure of whether Mr Taylor has got it right will only be available in three or four years' time when we see if he can reach his target average return on equity of 15 per cent. So while his first year report shows good progress on the easy part - disciplining an errant bank - Mr Taylor now has to show he can grow Barclays in a tough new regime in which profitability comes before size.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

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...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
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