COMMENT: Share sale questions that must be answered

"The Government and its advisers clearly had some knowledge of a looming problem. The crucial decision they made was to do nothing"
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The Independent Online
It is hard to believe it possible so soon after the Barings crisis, but the shambles of the generator share sale is beginning to look far worse for London's reputation as a financial centre. Barings remains a distressing tale of greed, incompetence and the ruin of a family fortune, but the bank's collapse and rescue was over in little more than a week and only a limited number of bond and shareholders have lost money.

It is certainly true that faith in banking regulation has been weakened, and London's smaller merchant banks are bound to have lost some of their international credibility. But the repercussions of the Government's decision to go ahead with the power generator share sale last weekend knowing there was a possibility of a serious new intervention by Professor Stephen Littlechild, the regulator, is of a different order. For many fund managers, especially abroad, this was a sale by the Government on a false prospectus.

The Government's excuse for letting the sale go ahead appears to be that there is no direct connection between an investigation of the prices of regional electricity companies and the value of the generators. At face value, that is perfectly true. The price of power sold by the generators into the grid has nothing to do with what Professor Littlechild allows the RECs to charge.

However, anybody tuned into the market ought to have been able to tell the Treasury that there is a second important factor in the price of utility shares - the perception of regulatory risk, or in other words the possibility of arbitrary and expensive action by the watchdogs. In that sense, the generators' share prices are closely tied to those of the RECs. The market reaction to Professor Littlechild is evidence enough.

The financial damage has been done, but the reputation problem remains a serious one for the Government and the City, and will overhang future privatisations. As with Barings, the only remedy left is to find out exactly what happened. The regulator is something of a wild card, outside government control, and ministers can hardly be blamed for what he does. But the Government and its advisers clearly had some knowledge of a looming problem. The crucial decision the Government made was to do nothing.

Investors must be told who in the Government and among its advisers, Kleinwort Benson and BZW, knew about the regulator's new thinking, when they first became aware of it and when they realised it was likely to result in action; who in Government took the decision that the sale of the generators should proceed as planned; and upon what grounds the decision was based. Was it because when the pathfinder prospectus was delayed a few weeks ago, after Professor Littlechild made an unexpected announcement on the generators themselves, there proved to be hardly any price reaction in the market? Or was it because the Treasury did not want to risk losing revenue at the end of the financial year?

This is not a matter for a long-winded commission of inquiry. Neither is it one for the Public Accounts Committee. After all, by going ahead on time the Government saved revenue, rather than wasting it. Since this was financial judgement by ministers and their advisers, perhaps the Commons Treasury Select Committee should ask the questions.

Tread carefully on currencies

The notion that British interest rates do not depend on the exchange rate is a young one, an infant of only 12 months. In recent days the authorities have been keen to stress that although the level of sterling is certainly on their list of important indicators, there is no target.

Yesterday brought no sign that Kenneth Clarke and Eddie George had decided to raise base rates in response to sterling's plunge. Most observers thought they had probably decided to wait and see how much further it fell. Yet the fact that Britain has not moved will make the pound more vulnerable to the next attack in the currency markets. The ceasefire against the weak currencies is fragile.

There are still two things that governments need to do to bring this episode of currency turmoil to an end. One is to display convincing signs of agreement about interest rate moves and intervention. Yesterday was a start, with Fed chairman Alan Greenspan's forceful testimony that the dollar mattered and US interest rates could rise further. This helped counteract the Fed's earlier incompetence in handling the currency's weakness. But talk about rate moves will only affect sentiment for a while. The US might still have to act - and so might the British authorities.

The second area some governments have to address is oversized budget deficits. Foreign investors have indicated in the most dramatic fashion their unwillingness to fund US, Spanish and Italian overspending. These countries will have to trim decisively government spending and tackle structural problems such as pensions or welfare bills.

The need for action is most urgent in the Italian case. Italy's fiscal position is unsustainable. At current interest rates, the level of government debt is on an explosive path and there is talk by perfectly sane people about a default. If a serious crisis can blow up in Mexico, it can happen in Italy, too. With matters like this under discussion in the nervy currency markets, one false step by the world's policy-makers could be disastrous.

Cookson not knowingly undersold

Richard Oster, Cookson's chief executive, could never be accused of knowingly underselling the company he picked up from the gutter three years ago. In projections of sales and margins to the end of the century he yesterday painted a bright picture of a company that three years ago was all but bust.

No wonder he was less than enamoured of the terms Johnson Matthey was offering at the end of last year, when the two toyed with the idea of a merger.

If targets are met, profits will treble by the year 2000. Last year's operating profits were already nearly three times those achieved in 1991 when the company was recovering from aggressive expansion in the 1980s and the inevitable debt hangover that growth caused.

If this is more than pie in the sky, Mr Oster's Cookson will be as big in five years' time as that proposed merger with Johnson Matthey. The dilution caused by yesterday's modest one-for- five rights issue to pay for bolt-on acquisitions would seem a small price to pay.

Cookson's boom-to-bust-to-boom record is testimony to the wisdom of investing when things are tough, watching cash flow and being unsentimental about changes in the economic landscape. That means selling low-return commodity businesses and reinvesting the proceeds in high-margin growth areas. Good stuff.

But bullish sales forecasts are the stock in trade of a man trying to sell his third rights issue in three years, and should be taken with a pinch of salt.

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