A necessary scalp, but no way to run a railway

British Telecom; Daimler Chrysler
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The Independent Online

It all seemed so different last Monday when Gerald Corbett, chief executive of Railtrack, stood up to announce his half-year figures. No, he had no intention of going so long as the board was standing full square behind him. He couldn't think of a job he'd rather do and was hugely looking forward to the challenge of managing Railtrack through its latest crisis. Either he was putting on a brave face, while all behind it was a turmoil of self doubt and despair, or something happened to make him change his mind.

It all seemed so different last Monday when Gerald Corbett, chief executive of Railtrack, stood up to announce his half-year figures. No, he had no intention of going so long as the board was standing full square behind him. He couldn't think of a job he'd rather do and was hugely looking forward to the challenge of managing Railtrack through its latest crisis. Either he was putting on a brave face, while all behind it was a turmoil of self doubt and despair, or something happened to make him change his mind.

Did he jump or was he pushed? We may never know the answer for sure - the political steers were that he was fired - but in the end it may hardly seem to matter. Mr Corbett's position had become untenable after the commuter chaos that followed the Hatfield rail crash. Whether he, the board, or the Government realised this first is now of largely academic interest. It may not have been personally his fault, but the situation had become so bad that public decency demanded a sacrificial scalp.

Mr Corbett had his supporters, both within the industry and the Government. Lord Macdonald, the Transport Minister, believed that no purpose would be served by throwing Mr Corbett to the wolves, and the impression was that the prime minister, Tony Blair, shared this view, up until Thursday's rail summit at No 10 at least. But the Railtrack chief executive found no sympathy with the Deputy Prime Minister, John Prescott. The Fat Controller has been gunning for Mr Corbett right from the start.

It is only possible to reflect on the double standards that allow Government ministers to demand resignations in the private sector for incompetence or lack of public confidence while deeming them wholly unnecessary in their own ranks. Perhaps Mr Prescott should turn his attention to Lord Falconer, who defies belief by continuing to brass neck it out as minister for the Dome. But that, as they say, is a different issue.

Mr Corbett has had an ignominious end and the verdict of history is unlikely to be kind. Railtrack is left in a terrible mess. The City can meanwhile reasonably question whether it is Railtrack's shareholders or the Government that now control the railways. Steven Marshall may be an acceptable replacement as chief executive, but since he has only been at Railtrack for a year, and has no previous experience of the railways, no one really knows. On the stock market, Railtrack shares fell 3.5 per cent in response to Mr Corbett's resignation. Given the uncertainty that now surrounds this company, that may be something of an under reaction.

British Telecom

British Telecom's grand restructuring plan, announced amid much fan fare just over a week ago, has so far had little effect on the share price, which touched a new two year low yesterday before staging a late recovery. One reason is that the proposals are at this stage only in outline form. Another is that the most important element of them, hiving off the wholesale network business into a separately quoted company, Netco, will take anything up to two years to happen.

Why so long, and why is BT only planning to float off 25 per cent of the company, some investors are asking. Why not go the whole hog and demerge Netco in its entirety? BT has no good strategic answer to these questions, other than to protest that it may not pay to take undue risks with the business by being too radical. Things are moving so fast in the telecommunications industry that what looks like sound strategy today may well not be in two years time. But there are some big practical constraints on moving faster and further too.

One of these is regulatory. Once retail and wholesale are separated, there should in theory be no need for price regulation of the retail business, but plainly the wholesale network, which will be selling capacity to any number of competing retail services, will need highly regulating. BT faces a battle with the regulator in establishing these wholesale prices.

In most respects, the separation is similar to the breakup of British Gas into the pipeline infrastructure company, Transco, and the customer facing retail business, Centrica, only a lot more complicated. The BT network is dealing not with a simple physical commodity, but with digitally coded voice and data traffic. Local loop unbundling is proving difficult enough; imagine what this is going to be like.

Unlike Transco, BT is no longer a monopoly network, there are several competing trunk networks and any number of local ones, albeit quite limited in extent. In these circumstances the simple 7-8 per cent rate of return on capital assigned by regulators to other monopoly utilities may not be appropriate. BT would want much more.

Then there is the whole question of how the company is financed. One of the reasons BT wants to keep 75 per cent on Netco is so that it can continue to use the business's cash flow to finance other areas of the group, including the dividend. As a separately quoted entity, there would only be two ways of doing this. Netco could either be loaded up with debt, thus reducing the debt burden elsewhere in the group, or it could be made to pay very high dividends. Again, the regulator, Oftel, will be all over anything BT proposes on that front like a rash.

BT's ability to move more radically is also constrained by its debt position. Capital expenditure throughout the group remains at an extraordinarily high level - £4bn this year, £5bn next - and that's not counting the cost of acquiring third generation mobile phone licences.

Most BT debt, expected to hit £30bn next year, is guaranteed at group level, including the $12bn bond issue BT is currently marketing in the US. Restructuring this debt to take account of a wider breakup would not be impossible, but it would be both complex and expensive. It is easy to accuse BT of foot dragging, of too little, too late. But it is not clear that the change of management advocated by some would improve the situation.

Daimler Chrysler

When Daimler Benz agreed to merge with Chrysler almost two years ago, the two companies hired the London Arena in London's Docklands to make the announcement. It was neutral ground, said Juergen Schrempp, Daimler's chairman, and therefore seemed appropriate. Neutral ground? This always seemed an inauspicious start to what was billed as a "marriage made in heaven", and so it has proved.

For much of the last two years, Chrysler has continued to operate on an almost wholly autonomous basis as if it wasn't married to Daimler at all. And over the past year, it has also begun to gobble up its partner's money as if on a power shopping expedition down Fifth Avenue.

Belatedly, Mr Scrempp has been putting his foot down, replacing American executives with his own people. This only served to highlight the two companies' cultural incompatibility. Pay - the Germans found they were paid a fraction of their American counterparts, and resented it bitterly - was just a part of it. On almost every level Daimler failed to get on with the sponging Americans.

Now Mr Schrempp has dispensed with the chief executive and put his own man, Dieter Zetsche, a protege, into the hot seat. To followers of BMW's terrible experience with the British car maker Rover, it all looks horribly familiar. Mr Schrempp is completely confident he can bring the situation under control and stop the haemorrhaging. Now where have we heard that one before?

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