Jeremy Warner's Outlook: Ciao bella from Francesco Caio as shares in Cable & Wireless take another pummelling

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The Independent Online

It's groundhog day again at Cable & Wireless, where new starts and strategies seem to come and go with a regularity as monotonous as the 6.45 to Manchester. The latest - accompanied by the now customary profits warning - involves the ditching of Francesco Caio just three years into the job as chief executive and his replacement by - well, no one really.

As executive chairman, Richard Lapthorne remains Ober Gruppen Fuhrer of this troubled hotch potch of telecommunications interests, while the operational job is to be split between the UK and international, with John Pluthero of Energis being given the task. Mr Caio has so singularly failed to execute a sorting out of the troubled UK arm. When the Italian-born Mr Caio was fired from Olivetti, the headline writers had a field day with such gems as "Ciao Caio".

Mr Caio would like us to think of his departure from Cable & Wireless as an entirely voluntary affair after a job well done - more ciao, ciao from Mr Caio than ciao, ciao Mr Caio. Get it? Oh never mind. Yet the surreal nature of yesterday's conference call to announce the reorganisation didn't end with this kind of nonsense. Thus is was that Mr Lapthorne said that since Mr Caio was being such a good leaver, he could be assured of a generous pay-off when finally he comes to go in April. He's not failed, he's just restructured himself out of a job.

Meanwhile, Mr Lapthorne excuses his own inability to get a grip on what is admittedly an appallingly problematic legacy by saying that he has done his best and you can't ask for more than that. I'm not sure his shareholders would agree. As for Mr Pluthero, Mr Lapthorne confidently predicts that he "will make mistakes" so it would be completely wrong at this stage to try to hold him to targets. Hardly a ringing endorsement, that one.

The charitable view of this quite risible state of affairs is that what's happening to C&W is no worse than everyone else is facing in an industry attempting to come to terms with unprecedented technological and structural change. The competitive environment is changing daily, and the business model has to be constantly adapted to deal with it.

There's some support for this view from a series of other profits warnings issued in recent months in the telecoms sector - most notably France Telecom, which has ousted its finance director, Michel Combes, in an attempt to restore investor confidence. Yet there is equally good reason for thinking the situation much more serious at C&W, which lacks the insulation against change enjoyed by the incumbents of a still largely inert domestic customer base.

I take no pleasure in saying "I told you so", but C&W's acquisition of Energis always did look like little more than an attempt to distract from underlying problems. I won't yet say that it was a complete waste of money, but there's little doubt that C&W overpaid for a business which was never going to be easy to integrate into the main operation.

The revisionism beggars belief. C&W now says that such was the parlous state of its UK operation at the time, that the only realistic alternative to buying Energis was to close C&W UK down, which would have been almost as expensive as buying its competitor.

Well maybe, but I don't recall this being advanced as the justification back then. Rather, the acquisition would create a powerful new rival to British Telecom with the critical mass to succeed. Instead, C&W trumpeted synergy benefits of up to £50m, a number which if it were ever capable of being achieved now seems to have vanished into the ether.

Mr Pluthero still believes that Mr Lapthorne's medium-term aim of creating a UK operation with £2bn of revenues and a double-digit operating margin is doable. He plans to tell us how when the company announces its results on 28 February. These, we now know, are going to be exceptionally poor, with high levels of churn and a now unstoppable switch from legacy services to internet protocol eating deep into revenues and margins.

No telecommunications company is immune to these influences, but C&W's response seems to have been a particularly late and confused one. Compare this to the plodding, but carefully planned way in which BT is replacing its traditional, switched voice traffic with broadband and internationally generated business contracts. The contrast could scarcely be greater.

Investors have long argued that it might have been better to return the C&W cash mountain to them rather than squander it on more acquisitions. I fear they may have been right. Too late now.

ABI set to challenge Turner's numbers

The insurance industry was taken by surprise by the radicalism of proposals from Adair Turner's Pensions Commission for a state-sponsored National Savings Scheme, yet it has since been marshalling its arguments and resources for a counter attack, and a compelling one it is likely to be too.

Under the auspices of the Association of British Insurers, the industry has been crunching the numbers and deconstructing the analysis. Insurers now believe they can come up with a private sector solution to the problem which would be just as cost effective, if not more so, than the one suggested by Lord Turner.

Just to recap, Lord Turner's Pensions Commission recommends a system of auto-enrolment into a state-administered scheme which would deduct 3 per cent of salary, matched by the employer, unless the employee deliberately decides to opt out. This would potentially generate a vast new pool of savings.

The main drawback to saving by the low paid is that the amounts are so small that they tend to get eaten up by fees. By administering the scheme through the state, perhaps via the pay-as-you-earn tax collection system, Lord Turner hopes to reduce the costs to perhaps as little 0.3 per cent annually, far lower than anything available in private pensions.

As regular readers will know, I've long had doubts about the reliability of these estimates. The number crunching done on behalf of the ABI by the accountants Deloitte seems to confirm my suspicions. Lord Turner may be at the extreme end of optimistic. The real costs are likely to be quite a bit higher than the 0.3 per cent he quotes.

This is not just because of the British government's less than glowing record when it comes to handling big IT projects. Quite apart from the set-up costs, some of the running costs are almost certain to be picked up elsewhere in the state system too, so that in practice there is subsidy from the taxpayer to the new National Savings Scheme.

Lord Turner has also used a set of assumptions about the model saver which are extremely favourable to his proposed scheme. Using more realistic assumptions, you come up with a bigger cost. As it happens, the private sector has already got the systems and the IT to handle an auto-enrolment scheme, since it was obliged to set these up for stakeholder pensions.

The industry was happy to make this investment only because it imagined that one day the Government would impose some form of compulsion on employers and employees. To now turn around and set up what Christine Farnish, the chief executive of the National Association of Pension Funds, rightly calls a monolithic and stalinist, state-backed alternative seems wasteful, unnecessary and misguided.

Remove the obligation to offerpoint-of-sales advice, originally imposed on private pension providers as an antidote to the commission-driven sales approach of the past, and the industry could do it just as cheaply.

To see just how cheap, we will have to await the ABI's submission to the pensions White Paper, but it's unlikely to be any more than 0.5 per cent. There are many arguments for engaging the private sector in this project, but the most powerful from the Government's point of view is that if the cost turns out to be more than estimated, it will be the private sector that picks up the tab, not the taxpayer.

It shouldn't be seen as a defeat for Lord Turner if the ABI wins the argument. He'll have forced the industry to provide pensions at a fraction of the cost previously thought possible. That's quite an achievement.

j.warner@independent.co.uk

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