Outlook: David Webster signs off with a decent deal for Safeway

Air traffic duty; Timing abuse

Nearly a year of arguing before competition regulators has succeeded in generating tens of millions of pounds in fees for City lawyers and investment bankers, but it has not altered the outcome of the battle for control of Safeway one jot. Nobody else other than Sir Ken Morrison was ever going to be allowed to acquire Safeway. The other supermarket chains were already too big to pass muster with regulators, while Safeway is too large and indigestible a bite for private equity.

None the less, yesterday's agreed takeover by Wm Morrison must be a disappointment for David Webster, Safeway's chairman. The price is only marginally better than that agreed almost a year ago. Worse, Safeway shareholders end up with a reduced share of the enlarged group's equity, with the balance made up in cash to allow for the 52 stores Morrison is obliged to sell under the deal struck with regulators. Mr Webster would have hoped for more given that there were at one stage more than five potential bidders vying for Safeway's hand.

Regulators prevented all but Sir Ken from proceeding. They also severely handicapped Mr Webster's negotiating position by making it practically impossible for him to break the company up by selling smaller packages of stores to other supermarket chains. The Competition Commission insisted on the establishment of a fourth force in supermarket retailing. A break-up plainly wouldn't have delivered that outcome.

Still, Mr Webster can at least content himself with the knowledge that though this might not be a brilliant deal for investors, it was the only one he could have done, and as far as consumers are concerned, it is probably the best possible outcome - more competition, more choice, lower prices. In the end, not such a bad sign off for the last remaining of Jimmy Gulliver's three musketeers. As for the septenagarian Sir Ken, words fail. What an achievement.

Air traffic duty

In the interests of open government, I hereby reproduce in full a copy of a memo from the Chancellor of the Exchequer to Alistair Darling, Secretary of State for Transport, which has inexplicably arrived in my in tray.

"Dear Alistair, Having thought at some length about our proposals for doubling the rate of airport passenger duty, I have come to the conclusion that the initiative could not reasonably be passed off as an environmental measure. This is a shame, because as you know, the public finances could have done with the £800m such a measure would have raised.

Yet regrettably, I don't think the public would weather it. As you know, the airline industry is fast becoming Britain's biggest polluter, yet as things stand, it pays virtually nothing towards the cost of the environmental damage it causes. All the progress we are making in reducing greenhouse emissions will make no difference at all if we do nothing about aviation, which for reasons of economic growth, we are rather keen to encourage.

The problem with air passenger tax is it has no beneficial impact on the environment at all unless raised to a level of such onerous proportions that it begins to reduce the number of flights coming in and out of the country. Quite apart from the implications for growth, such an outcome might ultimately lead to a reduction in the level of tax raised from the duty, and we don't want that.

Worse, it would very likely cost us votes. We mustn't get ourselves into a position where the tax on air travel is more than the cost of the ticket itself, which in a large number of low cost fares it would be if we doubled the rate. In any case, I've decided that we are not going to have any more increases in rates of tax this side of the election, environmental or otherwise. So reluctantly, I'm going to allow you to keep the proposal out of the white paper on expanding airport capacity in the South-east.

But before you begin the celebrations, a word in your ear. I gather you think our best chance of tackling this problem would be to obtain EU or wider international support for taxing aviation fuel. Oh dear. You are obviously a virgin in these matters. You've more chance of getting hell to freeze over than achieving an internationally agreed rate of tax on aviation fuel. So suggest you start work pronto on a system of tradable emission quotas. In the long term, this would not only reduce emissions, but we could also tax it very effectively. Duty calls. The baby's crying again. Yours Gordon."

Timing abuse

"If God had not meant for them to be sheared, he would not have made them sheep", Robert Hiscox, a former deputy chairman of Lloyd's of London, once said of the insurance market's "Names". He's a card, that Mr Hiscox, and the remark at least had the merit of being quite genuinely funny. Yet his candour in suggesting that investors are only sheep to be fleeced was also a shocking admission of an always half suspected truth. The US mutual funds industry seems to have adopted very much the same attitude in agreeing to allow hedge funds to take advantage of market timing opportunities to make a fast buck at the expense of ordinary investors.

Of all the abuses discovered on Wall Street this past three years, this is undoubtedly the worst, because it is so plainly dishonest and so obviously disadvantages funds meant for the little guy in favour of money grabbing financial professionals. Eliot Spitzer's crusade against Wall Street has sometimes been of questionable validity and motivation. But by alighting on an abuse that everyone can understand and directly affects millions of small investors, the New York Attorney General has hit the spot with his market timing revelations. Belatedly, Britain's Financial Services Authority has clambering aboard the bandwagon.

To date, the British fund management industry has been able to characterise market timing abuse as almost entirely an American problem. Yet it actually seems highly likely that it happened here too, albeit on a quite limited scale. The reason for believing this is firstly that at least two of the fund managers at the centre of the scandal in the US also have considerable fund management operations in Britain. The other reason is that almost every fund manager you meet admits to having been approached by the hedge fund industry to participate in the market timing scam, but somehow or other managed to resist its siren calls.

The British fund management industry is also more open to this kind of abuse than the American one, if only because most prospectuses in the US specifically ban short term traders from the funds, whereas in Britain there is no such rule in most cases. It beggars belief no one at all in the British fund management industry would have agreed to what the hedge funds were suggesting. Callum McCarthy, the newish chairman of the Financial Services Authority, therefore determined to grip the issue by summoning the industry to account for itself. Each fund manager must either declare itself blameless or admit to its misdemeanours by Christmas eve. It would be amazing if there were not at least one rotten apple in the barrel.

Market timing abuse works like this. In return for placing large amounts of business with the fund manager, the hedge fund is allowed to trade in and out as much as it likes. Mutual or unit trust prices are set only once a day, so that if the portfolio of shares in the managed fund rises in value, the hedge fund has the opportunity to buy at a price it knows will be bettered the next day, when the units will be sold and the profit pocketed. The losers are the fund's long term holders.

We can only hope that the problem is not as widespread here as it has been in the US. After the long bear market, the fund management industry already has a herculean task ahead of it in rebuilding public trust. The last thing it needs is another scandal. Yet that may be what it is about to get.

jeremy.warner@independent.co.uk

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