Jeremy Warner's Outlook: Wholesale price cuts put BT back on front foot

Pensions climbdown; Network Rail; Varney's Revenue
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The Independent Online

Two and a half cheers for British Telecom's decision to slash its wholesale prices, but only two and a half because although this is a transformational step in the right direction, the cuts are still not deep enough to make BT's wholesale prices wholly competitive with those that rule in Japan and some parts of Europe and the US.

Two and a half cheers for BT's decision to slash its wholesale prices, but only two and a half because although this is a transformational step in the right direction, the cuts are still not deep enough to make BT's wholesale prices wholly competitive with those that rule in Japan and some parts of Europe and the US.

In some respects, yesterday's package of initiatives merely pre-empts what the regulator, Ofcom, would eventually have forced BT to do anyway. Cut your way through the turgid prose of the Ofcom consultation document on local loop unbundling, also published yesterday, and it basically says "slash your prices or else". In recent months, Stephen Carter, chief executive of Ofcom, has grown increasingly vocal in his demands for big cuts in the price BT charges competitors for using its network, so there is a sense in which BT has jumped before it could be pushed.

Yet the reaction of the share price yesterday ­ a small rise ­ shows the move is by no means regarded as a defeat for BT, and I think it can at last be said of the telecoms leviathan that it has seen the light. There seems to be a seachange realisation that competition is something that should be embraced rather than fought and smothered. The cuts require some short-term pain, but by greatly expanding the potential size of the broadband market, BT should be able to reap considerable long-term gains. That's the gamble Sir Christopher Bland, chairman of BT, and his chief executive, Ben Verwaayen are taking, anyway.

For years, BT has dragged its feet on local loop unbundling, the process which gives competitors the right to install their equipment in BT exchanges so that they can piggie-back off BT's network infrastructure. Obstacles have been put in the way of the physical installation of equipment and the prices charged for access have been too high to allow for the development of decent levels of broadband competition.

The devil is always in the detail, but on the face of it, yesterday's initiative amounts to a dramatic shift in position. There has always been a huge potential market for BT in providing a service to other service providers, but in the past the company's focus has too often been on restricting the use of its network by others so as to keep as much of the telecoms landscape as it could for itself. By stifling choice and competition, BT has harmed both itself and the nation. Broadband development, and the myriad of different services, innovations and business opportunities it makes possible, has been slower than it needed to be.

With yesterday's price cuts, BT has decided to embrace the future. Eventually BT would have been forced into it anyway, but the fact that it has made the change of its own volition is indicative of an organisation that is back on the front foot. Who knows. Perhaps Ofcom won't be forced to break up BT after all.

Pensions climbdown

We don't yet know how it's going to be done, but the Government is set for a climbdown over compensation to 60,000 workers who have lost their pensions because their companies went bust. Andrew Smith, Secretary of State for Work and Pensions, virtually admitted as much in a speech to a National Association of Pension Funds conference in Glasgow yesterday and confirmation is expected any day.

It's pure pork-barrel politics, of course, for up until now the Government's position has been resolutely to refuse for fear of setting a precedent. Of itself, it won't save our beleaguered Prime Minister, who would seem to need a miracle in Iraq if he's to survive for much longer. Yet every little helps, and by bailing out a small group of largely Labour voting workers he will at least buy off one threatened backbench rebellion.

The moral case for compensating these people has always been strong, but the legal grounds for doing so are non-existent, and if the Government is to dole out state money willy nilly in instances like these, how can it resist with Equitable Life and other scandals where it is on much shakier ground?

Mr Smith promises it will be done in a way that doesn't set a precedent, but unless his intention is to strong arm the pensions industry into providing the money, it is hard to see how he can avoid it. An industry-funded compensation scheme is to be set up under the terms of the Pensions Bill to pay for pension shortfalls in insolvent companies, yet legal advice has so far been that this cannot be made retrospective to cover workers in pension funds that have already failed.

If the Government were to reverse that position, it would only hasten companies' stampede out of final-salary pension schemes. The most solvent ones are already spitting tacks over having to cough up for an industry-wide compensation scheme. So the Government must pay, and if it does it will be deluged with demands for money from hard luck causes the length and breadth of the land.

Network Rail

There is a glimmer of light at the end of the tunnel for Network Rail and the good news is that it is not coming from an onrushing train. Yesterday's report from the Fat Comptroller, Sir John Bourn, hardly amounts to a clean bill of health. Network Rail still expects to be spending 30 per cent more in three years time than Railtrack did in its last full year before being shunted off to the receivers. And a rail network where one in five trains still arrives late, is not much to boast about.

But Sir John's verdict is a lot kinder than it would have been had his National Audit Office pronounced judgement a year ago when the industry was going seriously off the rails with performance declining as fast as costs were rising.

Even so, there are plenty of red signals. The lack of any shareholder in Network Rail, other than the Strategic Rail Authority, does not give it much incentive to become more efficient. And, as the NAO notes, it leaves the Government exposed to a hefty credit risk (£23bn at the last count). Gordon, the Brown engine, has managed to keep all this borrowing off the public finances with copious use of smoke and mirrors, the latest wheeze being to refinance some debt with £14bn worth of railway bonds, but it will be the taxpayer who picks up the bill if there is a serious derailment.

The Government's answer is to dangle a carrot in front of Network Rail's managers and a stick to the rear end of this pantomime horse ­ bonus payments for meeting annual performance targets and the sack for missing them. Last year, they hit two of their three targets but missed the one which matters most ­ punctuality.

The NAO is not keen on this arrangement, fearing it will encourage the horse to manipulate performance to keep the nosebag full. Sir John would prefer longer term financial targets. But what is important to passengers is that the trains run on time today, not tomorrow. Until they do, the best incentive is to hold the bonuses back.

Varney's Revenue

David Varney's submission to the Gus O'Donnell consultation on merging the Inland Revenue and Customs and Excise read like a job application and so it has proved. At an annual salary of just £150,000, there wouldn't have been an awful lot of competition for the leading businessman the Government was seeking to oversee the process, so when Mr Varney applied, the Treasury must have bitten his hand off to sign him up. The former mmO 2 chairman would be a brilliant catch for any organisation. The fact that he's chosen public service for his next big challenge shows an admirable degree of altruism. But just in case there was any doubt, Mr Varney's repeated references in his submission to taxpayers as "customers" must have warmed the cockles of the Treasury's heart. I'd no more regard myself as a customer of the Inland Revenue than any other contributor to its £215bn of annual "turnover". I wish Mr Varney luck in attempting to convince us otherwise.