Jeremy Warner's Outlook: OFT's Fingleton drops a bombshell into the middle of Ferrovial's takeover bid for BAA

Mr Fingleton admits that the timing of his announcement "wasn't perfect", but insists that once it became apparent that an investigation was a serious possibility he had no option but to get it into the public domain. If Ferrovial had acquired BAA under the false impression that the OFT had no objections to the present structure of the UK airport market, it might have had some legal claim over him.

But more on the implications for the bid later. Has Mr Fingleton got a case? It's not just his two fellow countrymen, Michael O'Leary at Ryanair, and Willie Walsh at British Airways, who will think he has. Before taking up his job at the OFT, Mr Fingleton occupied the equivalent position in Ireland, where he both ordered price deregulation of two of the country's biggest airports and their break-up into separate companies.

The prima facie case for something similar at BAA is a powerful one. Once the Civil Aviation Authority had taken the view that there could be no cross subsidisation between airports, much of the purpose of common ownership was lost.

Yet as things stand, airports operated by BAA account for 63 per cent of all UK passenger traffic, with as much as 86 per cent in Scotland and 92 per cent in the London area. This is a mighty powerful monopoly which prevents all possibility of competition in the airport market. As a consequence, prices have to be regulated instead.

Even BAA would concede that a partial break-up might not be such a bad thing provided it was counter-balanced with less onerous price regulation. The effect on the company and shareholder value might even be mildly positive. Mr Fingleton's record suggests he's a deregulator by instinct; let competition do the work instead.

The question for BAA investors, on the other hand, is how far the competition authorities would want to push the issue. With the quid pro quo of lighter regulation, BAA could no doubt live with the enforced disposal of Gatwick and Glasgow, but a total break-up, leaving the company with, say, just Heathrow, would be regarded as disastrous.

If the effect of a more limited break-up on BAA is neutral to positive, then in theory it shouldn't make any difference to Ferrovial's bid for BAA either. In practice, however, the OFT's intervention could hardly be more damaging. Reassuring noises from the Ferrovial consortium last night to the effect that it is perfectly happy to live with the competition inquiry look to me to be premature.

It is hard enough for private equity even to go hostile. The regulatory risk of a competition inquiry will further upset the delicate balance of the largely debt financed takeover vehicle. For the bankers, this may be the uncertainty too far.

Is Rafael del Pino, Ferrovial's chairman, about to fold his tent and return to Madrid? BAA would be unwise to count on it. Everything he has done so far suggests he's utterly serious. Nor should Goldman Sachs, which has approached BAA with an alternative proposal pitched at 870p a share, yet be discounted as a possible contender.

Even so, most private equity bidders would have been holed below the water line by an intervention of this sort. The adventure suddenly becomes that much more high risk. Bankers are already worried enough about their security. Mr del Pino will have to work miracles to prevent them withdrawing their support. It may even be impossible to securitise debt in a company which is under threat of break-up. What certainty can bond holders have that the cash flows remain to support the coupon?

In all the excitement about Mr Fingleton's intervention, the release of BAA's formal defence document rather got lost in the wash. This insists that the company is worth at least 940p a share even on a standalone basis, ignoring any premium a bidder would be required to pay for control. All that may be academic now. For the time being, Ferrovial's 810p a share remains on the table, but the bankers may no longer be comfortable with even that. The £9 a share plus needed to do the trick begins to look a very tall order indeed.

A pensions muddle that's hard to solve

My thanks to David Blake, director of the Pensions Institute, for the following little tutorial on the history of pensions, delivered to me over dinner the other night. Private sector pensions are in fact a comparatively recent phenomenon, though their public sector equivalent dates back to at least the 17th century.

Back then, it was the habit of civil servants who had served their time before the mast to give up their employment to someone else in return for half the job's income, an entitlement that would apply for the rest of their lives. When the retiree died, the incumbent civil servant would be in a position to do the same. Thus was the pay-as-you go system of state pension provision established. The older generation expects to be kept in their old age by the younger one.

Private sector pensions came much later. In general, employees worked until they dropped, or else fell back on family and the workhouse. Quaker-run companies were the first to start pensioning off employees who became so decrepit that they could no longer work. Yet because life expectancy was low, it was a relatively inexpensive benefit to provide.

The root of today's pension crisis is that both state and private sector provision have failed utterly to take account of growing longevity. Thus it is that civil servants can still in many cases hope to retire at 50 with the reasonable expectation of living at the tax payers' expense for a further 30 or perhaps even 40 years. Such generosity is plainly unsustainable.

The unwritten pact that persuades us to pay for the retirement of our parents' generation is the understanding that our children's generation will pay for us. But with growing longevity, the pensions burden becomes intolerable and the pact begins to break down. Already this has been recognised in the private sector, where generous final salary pension schemes are now an endangered species.

Yesterday's White Paper on pensions also begins to recognise it in so far as the basic state pension is concerned. The Government is proposing to fund a more generous state pension by lifting the age of entitlement.

But it has yet to find any traction as far as public sector workers are concerned. As the years progress, this inequality of pension entitlement promises to become a cause of serious social division. The solution is to establish a finite period of entitlement for all tax funded pensions, so that the age of entitlement would move upwards with growing longevity.

There is not much discussion of these issues in yesterday's White Paper, which with quite breathtaking disingenuity blames the crisis in pensions on what happened in the 1980s and early 1990s before the present Government came to power. The Government's performance in this field is by contrast depicted as just dandy. The reality is a catalogue of public policy blunders which has reduced what was once one of the finest examples of funded, private sector pension provision in the world to a discarded heap of rubble.

There is no better example of the law of unintended consequences than the generally well intentioned but utterly disastrous series of initiatives that the Government has heaped on the pensions industry this past nine years. The White Paper, based on Lord Turner's Pensions Commission recommendations, is a rare example of lucid thinking in this area, but as it stands it is also only a statement of intention. To believe any good will come of it is a triumph of hope over experience.

j.warner@independent.co.uk

Comments