Jeremy Warner's Outlook: BP's problem was execution, not strategy</i>

Tesco looks to 'snip test' for comfort; Hidden purpose in gains tax reform
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The Independent Online

How are the mighty fallen. New chief executives are prone to dump on their predecessors, but on any measure, yesterday's statement from BP is a truly damning indictment of Lord Browne's last three years with the company.

Small wonder that Peter Sutherland, the chairman, was trying to get him out before the man once routinely described as the most admired chief executive of his generation was forced so ignominiously to fall on his sword. It is hard to recall an admission of past failings as humbling as this one from one of Britain's leading FTSE 100 companies.

After a six-month review, the new man in the hot seat, Tony Hayward, complains of "wide-ranging duplication, overlap and excessive organisational complexity". Overhead costs are said to be unacceptably high, while performance is judged to have materially lagged peers. "It has been poor because we are not consistent and our organisation has grown too complex".

Even taking account of the revisionism that always occurs under a new broom keen to make his mark, this is a brutal assessment of the previous regime. Yet not everything was rotten under Lord Browne, and if there is one piece of comfort he can take away from yesterday's hatchet job it is the statement that overall strategy remains robust, with great positions in many of the best hydrocarbon basins and major markets.

Paradoxically, it may be this very strength which is the root cause of past and present traumas. What Lord Browne was indisputably very good at was the deal-making which has created this enviable array of reserves. Without it, BP would long ago have been absorbed by someone else.

Unfortunately for him, successful management of an acquisition has to go far beyond simple headcount reduction. While Lord Browne was out deal-making, standards went to seed. Integration failed to keep up with the hectic pace of deals. These have underwritten BP's long-term future, but they also led directly to the series of disasters which has dogged the company this past three years, and the now painful process of readjustment.

Such failings were not recognised either internally or externally until they were manifested in the Texas City oil refinery blast. Even so, Mr Sutherland plainly sensed them. When the row erupted over Lord Browne's retirement date, the chairman's objection to him carrying on was not about age, but that he had been too long in the job. The perceived need for a fresh pair of hands is now only too apparent.

As luck would have it, Mr Hayward finds himself in the happy position of getting the top job just as these problems peak. The statement looked bleak, but the outlook is in fact good. Without the catastrophes of Texas City, Thunderhorse and leaking Alaskan pipelines, even the present numbers wouldn't look too bad – perhaps not up to the industry-beating standards of Exxon but probably competitive as to operational efficiency and revenue gap with Shell.

The bulk of the competitive shortfall is said to arise from impairment of the US refineries – where the average refining uptime is an exceptionally poor 75 per cent – and delays to production in the Gulf of Mexico. The first of these problems was of BP's own making: BP had neglected its refineries and is now paying the price. The second was largely an act of God: a hurricane knocked out Thunderhorse.

Mr Hayward says his re-engineering will take up to two years to show results. Yet in the meantime, there is quite a bit of revenue momentum building up as new facilities in Angola, Trinidad, the Gulf of Mexico and Indonesia come on stream. By the look of it, Mr Hayward's management style is going to be very different from that of Lord Browne. Despite the lack of hard numbers and targets, it is clear that he means business.

Tesco looks to 'snip test' for comfort

Some time later this month, another weighty Competition Commission tome on Britain's supermarket sector will arrive with a thump on our doorsteps. Few expect it to be any more consequential than either of the previous two. The first, back in 2000, almost wholly absolved the big supermarket groups from charges of "rip-off" practices. To the extent that there was any lack of competition at all, it was blamed on the planning system. The second was equally unnecessary, concluding as it did that only William Morrison should be allowed to bid for Safeway. If it had said anything else, it really would have been a story.

Now we have the threequal, but don't hold your breath. The only real point of interest in this one is that it is not about supermarket-bashing as such, but more particularly about Tesco-bashing. All the other supermarket groups have ganged up to try to paint Tesco, with its giant 26 per cent of the UK groceries market, as the true villain. It's unlikely to wash. In its emerging thinking, the commission has already been dismissive of the claim that Tesco owns so much land for expansion that if it is not stopped it will soon have more than 40 per cent of the market. In fact, there is no automatic link between market share and size of floor space. Gaining market share is more dependent on being competitive.

Tesco is also likely to remain largely unaffected by any tightening up of the code of conduct governing suppliers. Smaller retailers, on the other hand, are much more exposed to any extension in the code's scope. The one area where the inquiry does have the potential to do damage to Tesco is in the definition of market monopoly. In its emerging thinking, the commission stuck to the "local" definition of market.

A supermarket is said to have a local monopoly if there is no comparable rival within a 10 to 15-minute drive time. Tesco has been lobbying hard to change the commission's view, for if this definition was enshrined in planning procedures, it might indeed severely restrict the company's ability to expand.

Does Tesco have much of a case? In support of the view that the groceries should be thought of as a national "market", the company has been applying the so-called "snip test". If a supermarket took advantage of a local monopoly to raise prices or restrict choice, how many customers would switch their shopping elsewhere?

As it happens, it only requires comparatively few to do so to make raising prices a zero sum game, such are the volume-dep-endent margins supermarkets operate on. Research by TNS shows that switching has risen markedly over recent years to well over £10bn of sales in 2005. The drive-time definition of local monopoly therefore looks flawed.

Will the Competition Commission buy it? If it does, the commission will be accused of another pointless report which yet again has only succeeded in wasting everyone's time. Yet creating a noise just for the sake of it does not make for good competition policy. Nor does using policy to protect commercial rivals necessarily serve the interests of consumers.

Hidden purpose in gains tax reform

If both the CBI and the trade unions agree that the Government's proposed capital gains tax changes are a bad idea, then surely they deserve to be heard. Yet both organisations miss what I suspect is the long-term purpose of this reform. Forget private equity. The idea that the new rate was set to clobber these wealthy individuals is a red herring. Nor is it just about raising more money from successful entrepreneurs.

The hidden agenda is rather that of giving the Treasury the flexibility to extend capital gains tax to housing. You won't find anyone admitting this, and obviously no Government would do it in the lead-up to an election, but the case is compelling. There is no reason why housing should escape a tax net which catches just about everything else. The fact that it does has contributed to the house price bubble. It also distorts saving and investment and devalues work. A flat-rate capital gains tax regime set at a relatively low level prepares the ground for such an attack. An enlightened Government would cut income tax to compensate, but perhaps best not to bank on that one.

j.warner@independent.co.uk

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