Byers down the tubes in early test of new role

DTI; Brown's seven tests; Virgin Atlantic
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The Independent Online

If the Department of Trade and Industry was a bed of nails, then Stephen Byers is unlikely to find his new berth any more comfortable. Unlike the DTI, the Department of Transport at least has money to spend, and ambitious ideas to go with it ­ just look at the Government's 10-year, £180bn transport plan.

The only drawback is that Gordon Brown has deemed that a large slug of this should come from the private sector. And so the Treasury has dreamed up the public private partnership as a means of getting someone other than the taxpayer to foot the bill.

It may not be the cheapest way in the world of borrowing but, so the Treasury argument goes, bringing private sector discipline into the delivery of large transport projects will more than compensate. Unfortunately for Mr Byers the claim is as yet largely unproven. In transport at least, there are few examples of successful PPPs.

The National Audit Office has already dismissed the Channel Tunnel Rail Link as a colossal waste of public money. In a few years time it may have an even bigger turkey to get its teeth into ­ the PPP for London Underground. If the project ever sees the light of day.

Mr Byers may have been hoping to ease himself into the brief slowly. Now he finds his himself having to jump in and break the deadlock reached in talks between Ken Livingstone's Tube supremo, Bob Kiley, and the two private sector consortia selected to take over the network.

The impasse is simply described but devilishly difficult to resolve. On the one hand Ken and Kiley want the £9bn the private sector is stumping up to regenerate the Tube. On the other they are also demanding "unified management control" over the entire system, including how the money is spent. Since the two consortia will only be paid by results, they understandably want control over how to achieve them.

Neither of the two extreme solutions ­ full-blooded privatisation or the abandonment of the PPP ­ is an attractive option for the Government, but the middle way of imposing the PPP on London Underground and then seeing Ken and Kiley in court, promises months of delay while the Tube continues to crumble under our feet. Over to you, Stephen.

Brown's seven tests

City economists are rushing in the wake of Labour's landslide general election victory last week to do their own assessments of when Britain might meet the Chancellor's five economic tests for euro membership. Sur-pri-ise ­ they've all got a different view. Deutsche Bank reckons all the tests have been met already. At the other extreme, Barclays Capital thinks only one of them met ­ the one to do with whether staying out of the single currency will harm inward investment ­ and that the others will take at least five years to pass muster.

Economists are known for disagreeing, but in this particular case, the range of views tells you more about the tests than it does the nature of economists. The tests have been set, presumably deliberately, so that they can be interpreted either way. The Government has promised an independent assessment by the Treasury ahead of any referendum, but even if you were to believe the Treasury capable of independence, it is already obvious that its opinion will be widely challenged, whichever way it jumps.

Never mind the others, the key area for disagreement concerns the test that deals with whether Britain and its business cycle is sufficiently converged with the eurozone economies to be able to live on a permanent basis with a European set interest rate. Most economists would accept that progress is being made, but it is hard to argue that we are yet there. Lower interest rates combined with a lower exchange rate, which would be the effect of an immediate decision to join, would almost certainly put the inflation rate above target, and possibly by a wide margin too.

Furthermore, the British economy is structurally still quite different from the eurozone ones. We have more flexible labour and capital markets, and the mix between the manufacturing, service and financial sectors of the economy makes it significantly out of kilter with the core European economies.

No, the decision about whether to join the euro is always going to be more of a political than an economic one. The tests were and still are more a mechanism for delaying an awkward policy choice than a real set of targets. We already largely meet the Maastricht rules on convergence. Other members of the eurozone have found these sufficient.

Barclays Capital argues that there is in fact an unofficial sixth test ­ that no referendum will be called unless the Government is confident it can win it. Ha, ha, very funny, though Barclays probably underestimates the extent to which the no vote will melt away once sensible and trustworthy politicians come off the fence and start arguing in favour of the single currency.

Gordon Brown, the Chancellor, became increasingly less keen on the euro as his first term progressed. If he continues in that vein, it could make for a re-run of Margaret Thatcher's famous falling out with Nigel Lawson over Europe. Only this time the Prime Minister and the Chancellor would be in different corners. As things stand, the Chancellor's scepticism seems more than justified. The euro lacks credibility as an internationally traded currency, and without reform of the European Central Bank to make it more transparent, predictable and accountable, things are unlikely to change for the better.

So here's scope for a seventh test ­ reform of the ECB. At the present rate of progress, it will be a long time before that one is satisfied.

Virgin Atlantic

Sir Richard Branson seems to be as clever a financier as he is a businessman. He's always selling or mortgaging his past business successes in order to finance future ones. He couldn't have made Virgin Atlantic the success it is without selling his original music business to EMI. He then sold half of Virgin Atlantic to Singapore Airlines to finance his expansion into e-commerce. Half of Virgin Trains went to Brian Souter's Stagecoach, and so on and so forth. Now he's mortgaged his remaining shares in Virgin Atlantic in order to finance the expansion of his mobile phones business into the US.

It seems like high wire stuff and it's a common enough observation that it all leaves Sir Richard horribly exposed if ever there's a serious economic downturn. He could easily lose the lot if his bankers decided to get nasty. But is this pledging of assets for credit really necessary? Sir Richard's mistrust of the stock market is well known, and the feeling is probably mutual. Virgin had a brief and unhappy experience as a public company in the late 1980s. He's attempted to go public twice since ­ first with Virgin Atlantic and then with Virgin Trains ­ only to pull away at the last moment and do a partnership deal with a trade buyer instead.

Accountability and transparency are part of the price entrepreneurs have to pay for a stock market listing, but it does have its advantages too. Better access to credit and the safety net of the equity markets are just two of them. Sir Richard's game plan may still be too high risk for the listed sector, but he's going to have to come back to the stock market one day if he wants to see the Virgin empire outlive him.