Jeremy Warner's Outlook: Now the Chancellor targets EU procurement

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The Independent Online

It's taken nearly two government terms, but the Chancellor is now fully out of the closet as a paid-up member of the eurosceptic tendency.

It's taken nearly two government terms, but the Chancellor is now fully out of the closet as a paid-up member of the eurosceptic tendency. Every week brings some fresh onslaught on the Europeans. At the CBI conference in Birmingham last week, Peter Mandelson, the new European Trade Commissioner, warned Britons to stop gloating about superior economic performance. The next day Gordon Brown duly gloated. Maybe you didn't know this was "National Enterprise Week" (don't worry, nor did anyone else), but Mr Brown is already in his element, unfavourably contrasting Europe's highly regulated, safety-first business environment with the risk-driven approach of American business, which he believes Britain shares.

Yet he strikes a popular, if familiar, chord with the publication yesterday of Alan Wood's report on European Union public procurement. This highlights some key weaknesses in the way the single market rules operate, telling us what we already suspected but lacked the evidence to support - that though Europeans pay lip service to the idea of free competition between nations for public procurement contracts, very little of it is actually practised. If France, Germany or Italy can get away with awarding a contract to an indigenous supplier, this invariably is where it will go. Britons are routinely cut out, or that's the implication of his report, anyway.

Mr Wood is chief executive of Siemens in the UK and as his position might suggest, he's a convinced europhile. But he's not pulled his punches in a report which details a series of different abuses. Mr Wood is unable to cite any examples of discrimination in clear breach of Single Market public procurement law. However, he highlights a number of grey areas where the rules appear to be respected yet national firms are none the less favoured.

Only 16 per cent of public procurement - amounting to just 2.5 per cent of European Union GDP - is advertised in the Official Journal at all, and even then, contracts are often shaped to suit a given national supplier, or a way is found of awarding the contract to a national supplier where foreign bidders offer better price or quality. Some contracts are split into smaller lots so as to avoid the procurement rules altogether, while sometimes the price is "squeezed" so as to make it viable only for a state-subsidised supplier. Alternatively, there can be big legalistic and cultural barriers to gaining fair access.

Mr Wood's findings are based solely on anecdotal evidence, and it may be that many of the same criticisms could be levelled at UK procurement policy. For instance, the European Commission cites Britain's failure to implement the EU "Remedies" directive on public procurement, which allows companies to seek compensation if the tendering procedure is unfair. One example of unfair procedure may have been the contract for the Scottish Parliament, which is being investigated by the European Commission.

Even so, it seems all too likely that we are relatively minor offenders set against the French, the Germans, the Spanish and the Italians. We constantly moan about Europe, yet in truth we are much better Europeans than many of our neighbours. European directives on energy and telecoms deregulation have been almost wholly ignored in some European countries, or implemented in a deliberately obstructive way. In marked contrast, the Europeans are free to do whatever they like in our own energy and telecoms markets. EU directives are routinely gold plated and "hardened up" when implemented in Britain in a manner which is guaranteed to have voters and businesses spitting tacks with rage.

A case in point is the insurance directive, the provisions of which require warranties to be treated as insurance. For cars, this will mean that warranties attract insurance premium tax and VAT. Furthermore, any business carrying out work under the terms of the warranty will have to be registered with the Financial Service Authority, adding a whole new layer of regulation and cost. Britain plans to implement these provisions as soon as possible - January next year. Yet according to BMW, the Germans are ignoring them, the French are looking for ways round them, while the Irish have never even heard of them.

The overriding impression is that Europe is clogging up the system with confusing, costly and in many cases unnecessary single market laws while at the other extreme wholly failing to enforce rules that might lead to greater competition and some advantage to more efficient producers. Europe is meant to be a free-trade zone, yet national protections still proliferate.

Mr Brown plans to air his latest programme for reform at today's meeting of European finance ministers. Whether he'll be listened to is another matter. Mr Brown's release of the report, just a day ahead of the meeting, falls into a consistent pattern of anti-European briefing by the Treasury. This plays well to the Chancellor's domestic power base, but infuriates many of his Continental counterparts, and is therefore almost certainly counter-productive. The wheels of European economic reform grind exceedingly slowly. It is not clear that the Chancellor's strictures will make them turn any faster.

HBOS frustration

Of the UK's leading high street banks, only Lloyds TSB has a worse stock market rating that HBOS. HSBC and Royal Bank of Scotland Group are much more highly rated and even Barclays enjoys a higher earnings multiple and a lower dividend yield. Ever since it was floated back in the mid 1990s, the Halifax building society as was has been a dullard compared with others, only just managing to keep pace with the stock market as a whole.

This is a cause of growing frustration to senior executives, not just because a decent stock market rating is a mark of management success, but also because it limits HBOS's ability to grow by acquisition. James Crosby, the chief executive, was forced to pull out of the bidding for Abbey National largely because his own relatively poor stock price couldn't compete with Banco Santander's highly rated paper. Despite the opportunity for mouth-watering cost cuts well in excess of £1bn a year, the deal would have been earnings dilutive to HBOS. Mr Crosby couldn't justify such an acquisition to his shareholders.

So what's the problem? HBOS will enjoy respectable top and bottom-line growth this year, and its longer-term growth prospects in the UK market are much better than anyone else's. For most rivals, the strategy is the unedifying one of defending UK margins on legacy customer bases so that the proceeds can be invested in overseas expansion.

HBOS's strategy is, by contrast, one of aggressive expansion into the current account, small business lending and long-term savings markets, cutting away at the soft underbelly of the incumbents. So far it's worked a treat. There's no reason why HBOS shouldn't eventually grow its share of these markets from the current level of 10-12 per cent to perhaps as high as 25 per cent. The incumbents cannot do a lot about it, as they have too much to lose if they cut their prices to compete.

HBOS is in the same position in reverse on mortgages, where it is the dominant supplier. HBOS's exposure to the mortgage market remains its biggest Achilles' heel. However, that's not because its competitive position is under threat, but because of the dangers of a pronounced fall off in the property market. In the event of a housing market crash, HBOS would undoubtedly survive, but it would also be quite seriously hurt. Again, few pundits believe there will be a crash, notwithstanding the latest scare survey from the Royal Institution of Chartered Surveyors. Yet there plainly will be some kind of a deterioration in consumer credit conditions.

The retail credit cycle hasn't been abolished. Of that we can be certain. The big question for the share rating is how benign it is going to be. Ahead of Christmas there won't be too many answers. Yet by March, when the housing market usually enjoys a seasonal pick up, we ought to know whether the Bank of England has achieved the hoped for soft landing. And if it has, then perhaps finally Mr Crosby can look forward to a re-rating of his share price.