Jeremy Warner's Outlook: Sir Roy had better hope he's joining at the bottom as Compass loses its bearings again

British Energy on a roll once more; Britain's falling competitiveness

Within months there was a 180 degree about turn on strategy, with the company deciding to sell all of Granada's upmarket hotels. In the intervening period, Compass has also sold Travelodge and Little Chef. With yesterday's news that the travel concessions business, including the motorway service station operation, Moto, is to be sold too, one is left to wonder whether anything is left of the old Granada at all. What was the point of the merger in the first place?

The company has also lurched disastrously from one profits warning to the next. We got the latest helping yesterday. Understandably, the shares plunged another 10 per cent to a new all-time low. Throughout it all, the chief executive, Mike Bailey, has maintained a childishly naive optimism, which he repeated yesterday even as he announced his own departure when he said he expected to hand over "a simpler, more focused group ... poised for growth".

Sir Roy who joins in a few days' time as a non-executive director and will step up to the chairmanship as soon as he leaves his present berth at Centrica, can only hope Mr Bailey is right. If so, Sir Roy will have got his timing spot on by joining at the bottom. Regrettably experience doesn't give much cause for optimism, and there may well be more bad news to come before this company finally hits bedrock.

Compass seems to be doing just fine in the United States and the Far East. It is in the United Kingdom, still a quarter of the group's business, where the problems have occurred. According to Mr Bailey, the fault lies with too aggressive an expansion in the past, when in a dash for growth the group took on excessive quantities of low margin or even unprofitable business. With rising costs and the inability to pass these on in the shape of higher prices, margins as a whole have suffering badly.

Yet I'm not sure this is the whole story. Many smaller competitors claim that winning a contract from Compass is as easy as stealing candy from a child, both on price and giving the client the service he demands. Compass says that in future it will forgo growth for profitability, but there is plainly something wrong here if with all the advantages of buying power that Compass commands it still finds many of its contracts too low-margin to keep.

The reality is that the catering market has become a lot more competitive, and Compass is finding the adjustment a difficult one to make.

Did Mr Bailey jump, or was he pushed? For what it's worth, Mr Bailey says he always wanted to retire by 60. The decision to go three years early was entirely his. Yet, the wolves have been at his door for some years now, and with a new chairman about to join, he must have known his number was up. Mr Bailey hopes to hang on long enough to demonstrate that yesterday's profits warning truly is the last. He may not get that chance.

British Energy on a roll once more

British Energy, the nuclear electricity generator that dare not speak its name, is making profits again. Admittedly, it is impossible to make sensible year-on-year comparisons through the smoke and mirrors of January's £4bn government bail-out of the company. But at the level of both operating and pre-tax profits, it was back in the black for the first three months of the current year.

Soaraway wholesale electricity prices are the main reason for this sudden change in fortune. Nuclear energy is baseload power and just as the collapse in wholesale prices which followed the introduction of new electricity trading arrangements brought BE to the brink of collapse, so the rise in prices has lifted it out of trouble. The job of Bill Coley, the nuclear veteran drafted in a year ago, is to take maximum advantage of that.

No surprise, then, that BE is banging the drum for a new nuclear programme as loudly as it can following Tony Blair's announcement on Tuesday that "all options", including civil nuclear power, will be considered in next year's review of the UK's energy needs. It is hard to escape the conclusion that nuclear power will have some role to play if the country is to meet its climate change obligations and avoid becoming over-dependent on imported gas over the next 20 years.

But there are some hard decisions to be made first. The quicker these are addressed the better because BE can only go on extending the lives of its reactors for so long.

The first is what to do with the waste that is already sitting at Sellafield and the additional waste that a new nuclear programme would produce. Luckily, Professor David King, the Government's chief scientific adviser, calculates that another generation of nukes could operate for 60 years and only increase the size of the waste pile by 10 per cent such is their efficiency and lower fuel burn.

The second is what to do with the wholesale market. At the current sky-high oil prices, new nuclear may be competitive with gas-fired stations but that may not always be so. Anyone developing and building new reactors will need guarantees of long-term contracts for their output at fixed prices.

Mr Blair wants to resolve the nuclear issue before he leaves office. But Mr Coley says a decision needs to be taken by the end of next year if the new capacity is to be built in time.

Britain's falling competitiveness

We have, I guess, known for some years now that the roots of Britain's economic "miracle" lay primarily with the housing market and the boom in consumption it has delivered, but it has taken a string of recent disappointments in the statistics to bring the message home loud and clear.

Yesterday's sharp downward revision in GDP growth for the second quarter makes it virtually impossible for the economy to achieve 2 per cent growth this year. We can assume that with the terrorist bombings and a further deterioration in the retail environment, the third quarter was equally bad. It would need a gigantic leap in growth for the fourth quarter, which doesn't seem at all likely, to get the grand total above 2 per cent. Lest we forget, the Chancellor's forecast is still for 3-3.5 per cent growth. Even the bottom of the range is now cloud cuckoo land.

Indeed, the only thing that seems to be keeping the economy growing at all is still rising public expenditure. Plainly the engine cannot keep running on vapour for ever. There's still been no significant pick-up in business investment to compensate for the lack of growth in consumption, which is itself a consequence of the excessive spending spree of previous years.

Things are not yet disastrous. We are still growing more strongly than sclerotic Europe, but, as yesterday's slippage from 11th to 13th place in the world competitiveness rankings produced annually by the World Economic Forum (WEF) seems to underline, we do seem to be on a deteriorating trend.

The WEF rates Britain as the best prepared of the G7 economies in Europe for the challenge of Chinese and Indian competition, but rising levels of tax, red tape and a still struggling educational system are all identified as points of concern, allowing Australia and the Netherlands to rise above us in the league table.

Britain may be better placed than Germany and France to weather the next big economic downturn, but that's not much cause for comfort. The Chancellor is already perilously close to breaking the golden rule on the public finances. By some estimates he already has. In a global economic downturn, which may be no more than two to three years off, he couldn't keep spending as he is.

j.warner@independent.co.uk

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