Jeremy Warner's Outlook: Finding the best way to tackle aviation pollution continues to tax the Government

BT's guarantee may not be all it seems; Is it third time lucky for Tim Waterstone?
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The Independent Online

It's odd, even for a committee of MPs, to be urging the Chancellor to raise taxes further than he already has, but when it comes to the environment, most rational thought seems to go out the door. Thus it is that the Chancellor gets it in the neck for not raising environmental taxes by enough in the Treasury Select Committee's report on the 2006 Budget, and in particular for freezing air passenger duty for the fifth year running.

The MPs note that at a time of growing public concern about climate change, the proportion of Government revenue raised from environmental taxes has fallen from a peak of nearly 10 per cent in 1999 to 8.4 per cent in 2004. Taking the narrower definition of an environmental tax used by the Treasury, the proportion plummets to as little as 0.4 per cent.

By way of example, the committee cites air passenger duty, receipts from which fell by 8 per cent between 2000 and 2004, despite a rise of 35 per cent in the number of chargeable passengers and a 10 per cent increase in carbon emissions by aviation. The Chancellor's excuse when examined by the committee was that oil prices have been rising strongly, so to tax air passengers more seemed oppressive. He also pointed out that the focus of the Government's efforts on aviation and the environment was to bring the industry within the EU emissions trading system.

Neither side is exactly right on this issue. As an environmental tax, air passenger duty is a blunt, even worthless instrument that acts as no kind of incentive to greater fuel efficiency. As it stands, it is too small to act even as deterrent to travel. To raise it to a level that would discourage travel would not only be bad for the competitiveness of the UK economy, but it would also disproportionately favour the well off, who could always afford to pay the duty, to the disadvantage of the less well off, who would be priced out of the market. Nor does it deal with the problem of planes that inefficiently fly only half full.

Emissions trading strikes me as not a whole lot better, as the effect is to reinforce the status quo by favouring incumbents, who start with a certain quota of emission rights. Any new entrant has expensively to buy in. Since the greatest hope of a solution to the problem of carbon emissions in aviation is innovation and competition, the emissions trading system may not be the right approach either.

BT's guarantee may not be all it seems

BT shares rose nearly 2.5 per cent yesterday after the company insisted that three-quarters of its pension fund deficit is underwritten by the Government. If BT is right, then on the face of it, an accounting deficit which was running at £3.3bn is transformed into a much less alarming liability for the company's shareholders of less than £1bn.

But just how reliable is the guarantee which the Government gave BT pension fund members back in 1984 when the company was privatised? Reference to it in the Telecommunications Act of that year is vague and there appears to have been nothing else in writing. Lord Mackay of Clashfern, apparently speaking on behalf of the then government in the House of Lords, could not, on the other hand, have been less ambiguous.

He's quoted in Hansard for February 1984 as saying the Government stood fully behind the pension entitlements of current employees in respect of all service to retirement. Furthermore, he underscores the point by insisting that the guarantee could not be seen as a subsidy as it applies only if the company goes into liquidation and to past contractual obligations only, not future ones.

Back then, nobody much worried about pension liabilities or deficits. It was taken as read that somehow or other they would be honoured, so it should come as no surprise that the Government was careless on the detail. Did the guarantee depend on the company continuing to fund the scheme adequately, was it dependent on the investments being well managed, and so on? None of these issues were addressed at the time.

Spurred on by the introduction of new pension regulation, BT has crunched the numbers and now reckons the guarantee applies to three-quarters of the pension scheme's liabilities. Normally, this would seem of scarcely more than academic interest, since it only applies if the company is wound up. There was a point five or six years ago when BT seemed close to the edge, but today this doesn't seem remotely likely.

However, new pensions regulation - which requires companies to contribute to the industry-wide compensation scheme according to the riskiness of their own pension funds, and to close any deficits within 10 years - gives the guarantee a deeper significance. Does the existence of the guarantee mean BT doesn't have to pay as much by way of compensation scheme levy, or indeed doesn't have to pay as much into its own scheme to close the deficit? Logically it should do. BT's chairman, Sir Christopher Bland, is hoping to have answers to both these questions shortly.

Whatever they are, the effect is unlikely to be as dramatic as some investors might hope. The fact of the guarantee plainly means the fund doesn't have to be as fully funded as otherwise, and also allows the fund to pursue a more high-risk investment strategy than is available to others. But assuming the deficit persists, eventually someone, somewhere is going to have to close it. The prudent thing to do is to close it on the same timescale as everyone else. As for the compensation levy, the effect on earnings of any differences would only be marginal.

By allowing the regulator to be more relaxed about the deficit, the guarantee might make BT more attractive to private equity. On the other hand, it would also make the Government doubly suspicious of any private equity bid. The leverage used in any such bid would make the company more likely to fail, which would leave the Government having to pick up the pensions tab.

As Sir Christopher said yesterday, the guarantee provides an added layer of security for BT's pensioners but, beyond that, its significance may be quite limited. Along with everyone else, BT will eventually have to grasp the nettle and put more into its pension fund.

Is it third time lucky for Tim Waterstone?

Tim Waterstone has been trying to get his hands back on the eponymous bookstore chain he founded ever since he sold it to WH Smith for £40m back in 1994. He even went so far as to bid for the whole of WH Smith in his quest, but was thwarted after WH Smith sold Waterstone's to HMV instead. There was a second attempt a few years later when HMV temporarily put the business up for sale, but that fell by the wayside too. Now he's back for a third bite at the cherry with an offer of £280m, worth 70p a share to investors in HMV.

The response was predictably terse, but there wasn't a definitive no in it. Instead, the HMV board said it would look at anything that would enhance value but had yet to receive a proper proposal. In the meantime, it intends to pursue the alternative acquisition of Ottakar's. Mr Waterstone is right to see this as the worst of all possible solutions.

Both Waterstone's and Ottakar's are in trouble. Put two sick persons together under one roof and you tend to get not a sudden revival in health, but two even sicker ones. The strategy has been all wrong at Waterstone's for many years now.

By taking the chain downmarket, the owners have entered a fiercely competitive arena increasingly occupied by the supermarkets and the internet. At the same time they have alienated the serious book buying public. The result is an inevitable loss of market share for which the excuse of online competition is only a fig leaf for management failure. The strategy in buying Ottakar's seems to be only more of the same. Attempts to squeeze greater discounts out of the publishers will be strongly resisted, wiping out many of the claimed synergies.

HMV has to find some way of delivering value to shareholders having so recently snubbed Permira. Mr Waterstone's buyout might provide a solution.

j.warner@independent.co.uk

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