When Downing Street publicly criticises an independent regulator for attempting to tell the truth as he sees it, then things really have come to a pretty pass. But, then again, nothing which happens on the railways ought to come as a shock any longer.
The threat which Stephen Byers made to strip the Rail Regulator, Tom Winsor, of his powers if he attempted to bail out Railtrack is bad enough. That Mr Winsor should now be subject to the full fury of the Number 10 lobby machine for revealing the fact when asked about it by a cross-party committee of MPs is indefensible.
Gwyneth Dunwoody, the Labour chairwoman of the Commons Transport Sub Committee which elicited this startling disclosure, tactfully suggests there is a "gap" between the accounts given by the Rail Regulator and the Secretary of State for Transport. With a bit of luck Mr Byers will fall down it. He and the Prime Minister justify their determination to brass neck their way through the Railtrack shambles on the grounds that the "decisive" action taken was in the interests of the travelling public.
Yet they have not so far managed to provide one jot of evidence to back up this claim. If anything the railways face at least a year of stagnation and indecision while the wreckage created by Mr Byers is cleared up. After that, the network will still have the same investment needs. The only difference is that the price of providing the finance will have shot up, now that the City can see how shabbily the Government treats investors when they stand in the way.
The same approach, as we can now see, extends to regulators. If Mr Byers is prepared to remove or neuter Mr Winsor for failing to do his bidding, then what price Britain's other independent regulators? For that matter, what price Sir Howard Davies's Financial Services Authority, which is now investigating the whole sorry mess?
Like the rest of the Byers plan for the railways, exactly how he proposes to regulate it, remains deeply unclear. He has pretty well given Mr Winsor his marching orders, but continues to insist there is still a role for an "independent economic regulator". Where he's going to find the next watchdog after the beating given to Mr Winsor is anyone's guess. Or perhaps lapdog would be a better description.
Cult of Equity
It was easy to miss behind the news earlier this week that Philip Hampton is quitting as finance director of BT, but within the body of the press release was a story of much greater long-term import. This was that the BT pension fund is £4bn in deficit and may need a good deal more in the way of a top-up from the company than the £700m already budgeted for next financial year.
If this were a problem confined solely to BT, it wouldn't be much to worry about. BT has already got so many other problems that one more isn't going to make a difference. But in fact BT's pension deficit is part of a wider curse. Most pension funds are heavily exposed to equities, and as a result they've lost around a fifth of their value over the last five years, creating deficits in a legion of different defined-benefit schemes.
It's not just BT. A substantial number of companies are being forced to address the problem, either by increasing contributions or by bringing pension holidays to an end. The effect is further to damaging profits at a time when they are already under severe pressure because of the business downturn.
For most companies with substantial defined benefit pension schemes, the problem is further compounded by new accounting standards – FRS17 – which force deficits to be recorded as a liability on the balance sheet, undermining balance sheet strength and endangering banking covenants.
As Steve Russell, equity strategist at HSBC, points out in an illuminating circular on the issue, a vicious circle is being created. Weak markets in combination with high equity weighting is forcing many defined benefit schemes into deficit, which in turn is damaging both profits and balance sheets. To help correct the problem, pension funds are switching out of equities into bonds, so that assets can more reliably be matched with liabilities, prompting even more weakness in equity markets.
The obvious solution to these problems is for equity funding to be replaced by bond issues, something that can be achieved via share buybacks and company buyouts. To some extent it is already happening. Any further equity market weakness will accelerate the trend, which serves the dual purpose of helping to satisfy increased pension fund demand for more corporate bonds while avoiding the forced selling of equities.
Even so, it's another blow for the "cult of equity". It's ironic really. It was the big pension funds that triggered the dash for equities in the late 1950s and early 1960s. Now they seem destined to hurtle back in the other direction.
The macro-economic backdrop to all this is the low growth, low inflation world we now find ourselves in. At a time of high inflation and high growth, equities were always going to beat bonds hands down. That's not an assumption we can rely on any longer. Already the investment premium equities used to command over bonds has narrowed considerably.
So will the equity yield gap eventually reverse again? To believe the relationship is going to revert to its pre-1959 position, where equities on average yielded more than bonds, requires a really very downbeat view of likely corporate earnings growth, but it's not impossible. There are some powerful deflationary forces at work, and it may be that our investment assumptions haven't yet fully caught up with the new reality we find ourselves in.
Desperate to avoid having to rely on Rupert Murdoch's Sky for its digital distribution, the BBC's Greg Dyke is busy exploring his own "free to air" business model. Up until now, the BBC has been content for ITV Digital to provide the terrestrial platform for its digital distribution, but that's plainly now in some danger. ITV Digital is a disaster area, so disastrous, in fact, that its two owners, Carlton and Granada, might in despair even close it altogether.
So Mr Dyke is planning his own "cheapo" set-top boxes, which for the price of £100, or thereabouts, would be capable of accessing all the main terrestrial channels digitally and anything else free to air that may be around, including the BBC digital channels of News 24 and BBC Choice. ITV Digital has jumped at the idea as a possible salvation. The BBC would actively promote digital TV for the first time, while the new set-top boxes would also be capable of receiving ITV Digital's pay TV channels via the insertion of a simple upgrade card. The cost of subscriber acquisition would thus fall dramatically.
The idea is so compelling that the main mystery is why nobody ever thought to try it before. Free-to-air digital TV has been hugely successful in Germany, admittedly via satellite, but the business concept is largely the same. ITV Digital always used to argue that nobody would buy the box without the kicker of the pay TV channels, but they do in Germany in their millions, so with adequate promotion and a few more free to air channels to add to the roster, there's no reason it shouldn't work here either. Bad news for Sky though.Reuse content