Lapthorne quits the gambling table for safety first approach

Inefficient state; Virtual bids
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The Independent Online

Graham Wallace's pay-off from Cable & Wireless hasn't yet been agreed, but all aspects of his strategy have now been so comprehensively torn up that he might as well never have been there in the first place. Unfortunately, the former chief executive's legacy is still all too apparent - nearly £11bn of losses over two years once write-offs, asset impairment charges and rationalisation costs are taken into account. Dividends at this 131-year-old, one-time stalwart of the international communications industry are for the time being also history.

Nor does the latest dollop of losses entirely exorcise Mr Wallace's ghost. The cost of returning the British business to profit has yet to be charged, as has the potentially crippling bill for getting out of the United States. Even if C&W finds someone prepared to take the US business off its hands for the inevitable nominal sum, there will be further write-downs, while the costs of closing it outright would run to hundreds of millions of pounds.

Still, Richard Lapthorne, the new chairman, seems to be doing the right thing in shrinking the company down to a smaller core of relatively stable, national businesses. The Wallace approach to the problem had been to keep spending the group's fast-depleting mountain of cash until he made "Global", the internet protocol and web hosting business cobbled together from expensively made acquisitions, reach break even. He didn't seem to know what came after that.

Mr Lapthorne never bought the Wallace survival plan, which he thought depended too heavily on an upturn in US capacity utilisation and a consequent hardening in prices, both of which are possible but neither of which seem at all likely for the foreseeable future. For Mr Lapthorne, it seemed too much like another throw of the dice. The safety first approach which replaces it was duly rewarded by the stock market yesterday with a 7 per cent rise in the share price, in apparent contradiction of the sea of red.

Mr Lapthorne was more generous than he needed to be about Mr Wallace yesterday, which one can only hope is not part of a softening up exercise to prepare shareholders for full payment of their contractual obligations - £1.5m plus pension benefits. Mr Wallace, he said, was a man of his time, which dictated that any chief executive without an internet strategy as the boom reached its zenith would have been hung drawn and quartered without trial. But did he really have to bet the ranch on the web? As we now know, the whole endeavour was also badly, almost negligently, managed, exposing the company to some massive rental liabilities.

Yet the real problem was that it was a production led strategy, which relied on building out capacity, never mind the cost, and then buying customers to fill it. The volume eventually arrived, though never on the scale anticipated, but the prices fell faster than the traffic could grow, and with no proper controls on capital spending, the ship rapidly took on water.

Alongside Marconi, C&W is a salutary monument to the over exuberance of the internet bubble. The Americans had fraud; the British just plain incompetence. Mr Lapthorne may be retrenching too far in his determination to undo past follies, but as he says, C & W has had enough of constantly looking over its shoulder, wondering where the next nasty surprise is going to come from. It needs a period of certainty.

Inefficient state

Well there's a thing. The Government's first attempt to measure the efficiency of increased public sector spending shows that, er, the taxpayer is not getting value for money. According to figures released yesterday by the Office for National Statistics, the volume of goods and services provided by government either free or at a nominal charge rose by 11 per cent between 1995 and 2001, yet the amount spent on providing these services rose by 14 per cent.

The mismatch suggests a sizeable decline in productivity and seems rather to confirm the view that merely throwing money at a problem doesn't necessarily solve it. The Chancellor has made improved productivity a priority for economic policy. Unfortunately, it seems to be going backwards in the bit of the economy he's directly responsible for. The fact that he's also making the public sector an increasingly large proportion of the economy make the findings doubly significance. The inescapable conclusion is that under Labour, the nation's resources are being used ever less efficiently.

The ONS stresses that its analysis of outputs is only "experimental" and subject to some fairly obvious drawbacks. One is that increased spending often takes time to deliver results.

Another is that spending may have improved outcomes but not outputs as measured for the national accounts. The example cited is that of Government targets for reducing the number of fires and making them less destructive. Only better fire fighting shows up as improved output, even though investment in prevention enormously improves the outcome in terms of reduced fire risk. The debate on what constitutes higher productivity is reminiscent of that wonderful Americanism which defines death as "negative hospital output", as if the only way of judging a hospital's productivity is in terms of the number of patients that manage to leave the premises while still alive.

Productivity in health care is particularly difficult to measure, for it is impossible to gauge the value of individual care. It could be that very considerable productivity gain is being achieved in the National Health Service, but because of the constant racheting up of expectations it will never be properly reflected in patient satisfaction.

A similar point can be made about education. Reduced class sizes, though plainly a good thing that most people would regard as a worthwhile use of taxation, will show up in the statistics as reduced productivity, because fewer children are being taught per teacher.

Despite all these caveats, the bottom line is that using the Government's own figures on its contribution to GDP, output is lagging behind spending, which means that as the public sector grows, the whole economy is becoming progressively less efficient. Which makes the Government's task in justifying higher public spending that much more difficult.

Virtual bids

AWG, owner of Anglian Water, has got a point in complained about the expense and inconvenience it has been put to by Robin Saunders' "virtual bid". The tentative offer from Ms Saunders' principal finance arm at WestLB was first sighted as long ago as January, yet five months later is still waiting to materialise.

Nevertheless, the fees meter began running immediately and AWG has already clocked up £3m defending itself against a bid which does not exist. Worse, the distraction caused by Ms Saunders presence has done terribly things to the business. "The prolonged uncertainty has not been in the interests of our shareholders, our employees, our customers or our business partners," thundered the AWG chairman Peter Hickson.

The Takeover Panel has finally called time, telling Ms Saunders to put up or shut up by 18 June. To drive home the point, Mr Hickson has also written to the chairman of WestLB, Jürgen Sengura, demanding to know whether the German bank intends to bid or not.

However, for all its fulminating AWG largely brought all this expense and distraction upon itself. The Panel, rightly, waited to intervene until it received a direct request from AWG's advisers, assuming, again correctly, that until such a request was made the company must reckon that the potential upside to shareholders of an acceptably-priced bid outweighed the downside of the prolonged uncertainty being endured by the company. Mr Hickson forgot the cardinal rule when dealing with Ms Saunders: many are called, but few are chosen.

jeremy.warner@independent.co.uk

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