Jeremy Warner's Outlook: HIPs - another fine mess they've got us into

LogicaCMG needs succession plan; Shambles of Brown's tax credit system
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The Independent Online

There is no problem so bad that Government interference doesn't make even worse. As if to prove the point, along comes the fiasco of home information packs, a wholly unnecessary piece of busybody meddling in the proper functioning of the housing market that threatens both to add to the costs of buying a house and clog up the system with pointless bureaucracy.

Even now the Government hasn't completely backed off. The reason for stalling next month's planned introduction is simply that not enough home inspectors have been trained to enable the production of HIPs on the scale necessary to prevent the housing market grinding to a standstill. That, and a wholly justified legal challenge from the Institute of Chartered Surveyors.

The guiding principle of all markets should be caveat emptor - or, buyer beware. It's not just that buyers don't need protecting when it comes to a big-ticket purchase such as a house, but that in practice very few buyers would in any case rely on the sellers' survey as the basis for their decision.

The great HIPs project had already been severely watered down in the making, so that, initially, the only substantive element in the report that the seller would be obliged to provide would be on energy efficiency. Even then the whole thing looked like more of a job-creation scheme than a worthwhile piece of protection from the buyer's point of view. Now hundreds of newly trained energy inspectors are threatening to sue for lost earnings. What a wonderful mess the Government's interventionist instincts have got everyone into again.

LogicaCMG needs succession plan

It's about time there was another profits warning from LogicaCMG - it must be all of a year since the last one - so it was good to see Martin Read, the chief executive, duly delivering. What's the problem this time?

Investors have been patient, very patient, with Mr Read's IT services group. Against their better judgement, they've backed a series of mergers and takeovers which have succeeded in bulking the company up overseas and maintaining its position in the first division of European IT services companies.

Yet every time a glimmer of hope appears in the share price, something comes along to snuff it out again. This time it is sluggish private sector growth in the UK and a contract gone wrong. "It's very annoying", says Mr Read. Indeed it is. So annoying, in fact, that he might think it time to move on and let someone else have a go.

Mr Read has been chief executive of Logica for more than 14 years now, which is long enough at the helm of any company but perhaps particularly one which aspires to be at the forefront of IT services, one of the fastest changing industries in the world. Though he refutes the idea, to the outside world LogicaCMG looks like a one-man band.

To be fair, Mr Read is still a well-respected figure within his industry, and few are yet calling publicly for his head. The first seven years of his reign were marked by successes and significant outperformance in the share price. Nor was it ever going to be possible to live up to the inflated expectations that built up during the technology bubble of the late 1990s.

When the millennium bug contracts ceased and the dotcoms went pop, a deep recession set in from which the IT services industry has yet fully to recover. Disappointing expectations have become par for the course in this industry. Mr Read has had no more than his fair share of it.

Yet, having ensured that Logica survived, and given it the bulk to succeed against the big boys of the Continent, is he really the man to lead the company into the next phase of development? For the time being, competition from low-cost India and beyond is more apparent than real. There is also a natural reluctance, particularly in the politically determined public sector, to outsource the management of large IT projects to the southern hemisphere.

But things are changing fast, the Indians are marching ever further up the value chain, and, having been focused almost entirely on the US, the Infosyses, Tatas and Wipros of this world are more and more targeting Europe. The legacy European IT service companies are highly exposed to the low-cost competition these Indian companies are capable of, with their hub-and-spoke business models.

LogicaCMG needs to redefine what it does, and do it in a manner which the Indian competition can't. It's by no means easy. A top computer graduate straight out of college costs around £40,000 a year in Britain. In India, they pay less than a quarter of that for arguably better and more hard-working specimens. Technology means the service element of the job no longer has to be location-specific.

Succession planning needs to begin in earnest, both for the purpose of providing LogicaCMG with its future, and that of giving Mr Read a reasonably dignified exit.

Shambles of Brown's tax credit system

Gordon Brown, the Chancellor, promises a new style of government once he becomes Prime Minister - more open and more receptive to ideas. He should start by reforming his own system of tax credits.

As the Liberal Democrat work and pensions spokesman, David Laws, said yesterday, tax credits have become a complete shambles with perhaps as much as £9bn of public money paid out in error and fraud over the past three years, of which the majority is probably irrecoverable.

The purpose of the tax credit system - to take low-income earners out of poverty - is a laudable one, and to some extent it has succeeded in this aim. Yet it has also dramatically increased the complexity of the tax system, spreading confusion among officials and claimants alike, and providing fertile territory for benefit fraud.

The very system itself is a form of false prospectus, as much of the £17bn a year spent on tax credits is in truth just a form of benefit. Many of those who receive tax credits have no taxable income at all.

Yet still these payments are accounted for as negative taxation rather than as the public spending they are. A little more honesty in the public finances would be a welcome addition to Mr Brown's plans for more open government. Don't hold your breath on that front. Old dogs tend not to learn new tricks.

Nonetheless, the real mischief of the system lies not so much in the manner it is accounted for as in the way it works. Public perception is becoming the very opposite of that intended, with the system seen not as the poverty-prevention measure Mr Brown would like, but rather as a source of social injustice. Around six million families are theoretically entitled so some form of tax credit, yet few of them understand what it is they can claim, while, even among those who do, a myriad of different marginal rates of taxation is created which bear very little relation to people's actual means.

The complexity of the system has made error in payment rife. Sometimes this is the fault of the tax authorities, sometimes the claimant. Frequently it is caused by changing financial circumstance. Attempts to reclaim overpaid amounts are prompting acute financial distress in many already low-income families, as well as allegations of oppressive government. Most of the time, no one is to blame other than the system itself.

Fraud is also rampant. For instance, there are more lone parents claiming tax credits than the Office for National Statistics say there are lone parents in the country. This is because a lone parent gets two lots of tax credit if living apart from their partner.

Might Mr Brown be prepared to listen to these concerns and reform the system accordingly? Tax credits are the Chancellor's invention, and any attack on them is regarded as personal. None the less, he ought to be able to see by now that the system, though well-intentioned, is confused, wasteful, unjust and riddled with scope for abuse. Simplicity ought to be the guiding principle of any tax and benefit system. The Chancellor still seems to have a problem applying it.

j.warner@independent.co.uk

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