Outlook: Bowker seems to be recreating British Rail, but will it work?

Mobile charges; Bonds v equities
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The Independent Online

All change. The sacking of the French-owned Connex from one of London's busiest commuter rail franchises is the sort of dramatic gesture that Richard Bowker was appointed to make as head of the Strategic Rail Authority. Although he denies it, there is also more than an element of pour encourager les autres in his decision.

If the remaining franchise operators thought they would be kept alive on a drip-feed of public subsidy from Mr Bowker, then the message is: think again. Nearly half of Britain's 25 train operating companies would be technically insolvent but for SRA handouts, and if the SRA can despatch what is by no means the least efficient of them with such ruthlessness, there is no knowing what it might do next.

Mr Bowker is keen to dispel the notion that his action was a further example of the creeping renationalisation of the rail network. He promises that the state-controlled management company which will take over Connex South Eastern's services on behalf of the SRA is only an interim arrangement and that by the end of next year a new franchise should have been successfully let to another private operator. Since this franchise will include not only the old Connex South Eastern but also the new domestic services that will run through Kent on the (publicly funded) Channel Tunnel high-speed link, there ought to be no shortage of takers. Indeed, First Group, fresh from being thrown off the footplate at Greater Anglia, has already thrown in its hat into the ring.

Even so, Mr Bowker appears inexorably to be tightening his stranglehold on the railways, leaving an industry which is only notionally privatised. He might as well just recreate British Rail, make himself chairman, and be done with it. Network Rail, which is answerable to the SRA, is bankrolled by the taxpayer and has already seized back three of the biggest track maintenance contracts. Meanwhile, the SRA has taken direct control of all large infrastructure projects away from the train operators, and 12 of the franchises are now being run as management contracts, which hardly amounts to privatisation at all.

Still, if all this leads to more reliable train services at affordable prices, no one is going to quarrel too much with Mr Bowker's empire building. That, however, remains a very big if. Rail privatisation has been a miserable failure, but what is taking its place has yet to prove itself any better, and there are plenty of reasons to believe it won't be able to.

Mobile charges

The mobile phone operators have got themselves into a terrible mess over price regulation of the so-called termination charge - the amount they charge telephone users for connecting a call to one of their subscribers.

When Oftel, the telecoms regulator, proposed that price regulation be tightened and extended to all four operators, they screamed blue murder and appealed to the Competition Commission, only to end up with an even worse result than Oftel was proposing in the first place.

Predictably they've now had their legal challenge to the Competition Commission findings turned down as well. At least one of them is threatening to appeal, but they would only be wasting their money. The time has come to surrender gracefully and hope that they fare better when the European Union adopts common standards for telecoms price regulation.

None of this makes the imposition of price controls on the termination charge any more justifiable. Despite the fact that mobile telephony is a relatively new industry, it is already one of the most vigorously competitive businesses in Britain. Of the four established operators, only Vodafone is so far making decent profits, and all four of them are struggling with the consequences of overpaying for their third-generation licences.

The case for regulation rests on the premise that although there is fierce price competition for mobile subscribers, there cannot be any such competition with the termination charge, as a caller to a mobile subscriber has no choice but to pay whatever the operator demands. The mobile phone companies insist that if they are forced to reduce their prices in one area, they'll put them up in another. There is already some evidence of this happening with a reduction in handset subsidies and higher charges in pre-paid deals.

However, this was always a rather silly line of argument for it would seem to disprove the claim that competition in mobile telephony is already sufficiently well developed to render price regulation unnecessary. In any case, even if the mobile operators are right to think they can compensate with higher prices elsewhere, Oftel would have succeeded in its underlying purpose of shifting the cost of supporting mobile telephony away from fixed-line callers and on to the networks and their subscribers. The bigger question is whether these fixed-line callers will in fact get the benefit. Oftel reckons that the measures will be worth 5p a minute off a fixed-line call to a mobile phone by 2006, which is not to be sneezed at. However, there is no law or regulation that requires BT to hand this benefit on to its fixed-line subscribers, and although it insists that it will, the temptation will be to use the extra revenue not to cut prices but to subsidise other services. Lack of transparency in telecoms pricing in general makes this all too likely. In the end, the whole issue of price regulation for the termination charge is likely to prove a lot of huff and puff about nothing.

Bonds v equities

Was that another turning point in markets we saw this week after the Federal Reserve disappointed bond-market bulls and cut interest rates by just a quarter point, rather than the half point some anticipated?

Somehow I doubt it, but that's not what most people think. For many, the quarter-point cut decisively marks the end of the long, long bull market in bonds, for together with the accompanying statement from the Fed that the US economy is expected to improve over time, it seems to indicate that actually economic prospects are not as grave as they might seem. A turning point might have been reached. Investors have been deserting the bond market ever since, driving long-term interest rates higher. If money is coming out of bonds, figure equity-market bulls, then logically it must go back into shares, helping to underpin the rally in stock markets we've seen since 12 March.

They may be right, but at this stage it remains a high-risk bet. A sustained rise in long-term interest rates would have the effect of killing off any nascent economic recovery in its tracks. Furthermore, the Fed's statement gave little cause for confidence about the economic outlook. The threat of deflation, it said, remained the primary economic concern, and it saw no evidence yet of a self-sustaining recovery. There's huge money to be made by reading these turning points in markets correctly, but I'm not convinced we're yet seeing one.