Jeremy Warner's Outlook: The private sector is being squeezed until the pips squeak. No wonder we are G7 laggards

Click to follow
The Independent Online

If further proof were needed of the squeeze being put on the private sector by high levels of government spending, it's there in spades in the latest labour figures. The claimant count is now rising at its fastest rate since the recession of the early 1990s, with quite substantial job losses being recorded in manufacturing, retail, restaurants, hotels and catering. The only areas showing any notable gain are the public sector and the City, the latter of which is largely unrelated to the ups and downs of the domestic economy.

These are deeply worrying trends, and as the Chancellor scrapes the bottom of the barrel in his search for new sources of revenue to feed the public sector's apparently insatiable appetite for money, they should act as the gravest possible warning.

While private sector wage growth remains tame at 3.3 per cent, the public sector races away at 4.4 per cent. While public servants can continue to retire at 60, at vast cost to the private sector workers who ultimately pay their pensions, ministers refuse to find the £300m a year it would cost to pay 85,000 in collapsed company pension schemes which the Government said were guaranteed by the state.

As the public sector progressively crowds out the private, a great divide is opening up in society which the Government ignores at its peril. Capital is today completely mobile, and so too is a fair amount of labour, particularly at the highly skilled end of the workforce. The Chancellor is already finding it tough enough to raise the money he needs for spending commitments. If capital and labour begin to shift, the game will be up.

BP: breaking up is hard to do

Should BP be broken up? The very question seems an affront when posed about such an icon of corporate success. Isn't breaking up what companies in crisis do? If it ain't broke, don't fix it, but if it is firing on all cylinders, is at the top of its game and is in virtually every respect a picture of well managed, corporate success - we'll forget the disaster of the Texas oil refinery - why would you want to fiddle with it at all?

That hasn't stopped the oil team at Cazenove from raising this old chestnut afresh. Their starting point is that there is no particular justification for the vertical integration maintained by all the oil majors between up and downstream activities.

If there ever was reasonable cause for such a link, it has long since ceased to exist. These days, distributors tend to buy from the nearest refinery, whether it is owned by the company or not, such are the costs of bulk transport over long distances. The same goes for refineries; they buy their feedstock from wherever they can, usually without regard for their owners' upstream activities.

The oil majors thus fall into three quite separate and disconnected business categories - production, refining and distribution. The only things they obviously share are corporate brand, culture and overheads. BP has already recognised the principle of breaking itself up into smaller bits by selling its bulk chemicals business, and an excellent deal this has proved for shareholder value too.

Why not go further, and divide the company in two? According to Cazenove, it would immediately add 15-20 per cent to overall value and go some way to addressing the underperformance the stock has suffered against its peers in recent years.

From time to time, the BP board considers just such a course of action, though the idea that this is a live issue right at the moment was being downplayed yesterday. Most of the arguments for keeping the two halves together, aren't, to be frank, particularly good ones. One is that the businesses are counter cyclical. When upstream is coining it, as it is at the moment, margins on downstream tend to be squeezed.

Yet go back to when the oil price was in the doldrums, and downstream accounted for more than half BP's profits. Cazenove has run the numbers and finds this to be largely myth. In fact, the earnings of the two correlate each other quite closely. It follows that earnings would be no less smooth if separated, and dividends no less easy to maintain.

One of the other arguments is that when the oil finally runs out, there will still be a business in real estate and distribution of some such alternative transport fuel to sustain the body corporate - life after death as it were. This is the same argument that urges oil companies to become whole energy enterprises, with widespread interests in nuclear and renewables as a hedge against the decline of fossil fuels.

As it happens, BP has already expanded into renewables, but to try to do something on a wider scale outside the core expertise of finding, developing and selling oil would almost certainly be doomed. When BP announces it is going into nuclear is the time to sell.

It might also be argued that there is a positive disadvantage in the vertical integration operated by the oil majors. When Shell tried to dispose of its Brent Spar oil platform by dumping it at sea, it was faced with a consumer boycott of its petrol stations in Germany. Logic dictates that the whole lot should simply be sold to Tesco.

Yet though I have now spent a good 400 words putting the case for a break-up, I wonder whether in practice there would be any point in it. Where, in any case, would you draw the line? Why stop at the separation of upstream from downstream?

Why not also separate distribution from retail, refineries from distribution, exploration from development, and development from production? Separation would be great news for the investment bankers and, if the forecourts ended up as part of a wider retail concept, perhaps for the consumer too. Whether it would do much for shareholder value, or indeed for customers, is open to question.

If BP went this route, would the other oil majors follow suit? Somehow I doubt it. Deprived of its consumer brand, BP's pulling power on the world stage would be consequentially diminished. There is little point in an oil company being in petrochemicals now that such operations are fast gravitating towards geographic areas with the cheapest feedstock, notably the Middle East.

Yet despite the theoretical attractions, there would be something faintly odd about an oil major without any kind of relationship with the end user. I doubt that Lord Browne of Madingley, BP's chief executive, is yet ready for such a mould breaking initiative. This is one risk he doesn't need to take.

ABF makes a sugary bid in South Africa

All of a sudden, Illovo Sugar, a hitherto unloved and largely unnoticed South African sugar company, finds itself the object of a bidding war between Britain's Associated British Foods and France's Tereos. Thanks to subsidies and trade barriers, the world already produces far more sugar than it could possibly consume, so why are these two stalwarts of the world sugar market interested in buying yet more capacity?

The answer lies in reforms the European Union plans to its sugar regime. Approximately one-third of Europe's sugar production is to be closed down over the next two to three years and the market opened up to "Least Developed Countries" such as those serviced by Illovo.

As one of the most efficient sugar producers in Europe, ABF is comparatively unaffected by these reforms; it is not being forced to close any capacity, though margins will obviously be affected. However, by buying into Illovo it would be able to exploit the gap being left in the market by the closure of others.

Unfortunately for ABF's George Weston, Teleos seems to have had very much the same idea. ABF's offer has the merit of simplicity and cash. The asset swap involved in the Teleos bid makes it more complex, but it could be worth more.

With Illovo shares already trading at 58 times earnings, the scope for improvement looks limited, for both bidders. It would be a good deal for Mr Weston, who is keen to make his mark at ABF, but having inherited such a robust enterprise from his father, Garry, he needs to beware the risk of overpaying.

j.warner@independent.co.uk

Comments