Outlook: No alarm bells yet, but King flashes amber

Saatchi revisited; Central Railway; 3i Larcombe
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The Independent Online

It could hardly be described as a standoff, but there's a distinct difference of opinion developing between the Chancellor and the Governor of the Bank of England over the direction of the British economy. Over the past few days, both Gordon Brown and Mervyn King have appeared before the Treasury Select Committee and although they could hardly be described as worlds apart, nor were they exactly singing from the same hymn sheet.

It cannot yet be described as a standoff, but there's a distinct difference of opinion developing between the Chancellor and the Governor of the Bank of England over the direction of the British economy. Over the past few days, both Gordon Brown and Mervyn King have appeared before the Treasury Select Committee and though not worlds apart, nor were they exactly singing from the same hymn sheet.

Only a few months back, the gap between the two seemed to be closing. In the last inflation report, the Bank of England brought its view of likely growth over the next two years into line with more optimistic Treasury forecasts. Now there seems to be a parting of ways again. The Bank thinks the economy is running at close to full capacity; the Chancellor thinks there is still a way to go before we reach that point. Mr Brown believes the economy is rebalancing as business investment accelerates and house price inflation moderates. Mr King worries that the strengthening pound is delaying that process.

Nor is Mr King entirely on message on the public finances. The Chancellor thinks his public spending commitments affordable and fully financed. Mr King warns that taxes would have to rise or spending be cut if the golden rule was in any danger of being breached, such would be the damage to credibility if fiscal disciplines were seen by markets to be in disarray.

These might not seem big differences, and anyway, the politician is bound to accentuate the positive while the monetary authority must always maintain a healthy scepticism. Yet underlying it all is a wider concern, which is the progressive crowding out of private sector activity by the Government's public service ambitions.

The Chancellor promises a war on Whitehall waste, yet for every civil servant he gets rid of, he'll be recruiting a couple more in pursuit of improved, front line public services. If the Government's unemployment statistics are to be believed, there's virtually no slack left in the labour force, which means the private sector must raise pay and perks to keep its workers and recruit more. Ultimately, that's bound to prove inflationary.

For the time being, the Chancellor doesn't have to look beyond the horizon of the next general election, which is little more than a year away. The Bank must attempt to peer a great deal further into the future. The present heady mix of high public spending and debt-fuelled consumption doesn't augur well.

Saatchi revisited

It would be nice to think of the flotation of M&C Saatchi on AIM as marking the stock market return of Maurice and Charles Saatchi, but sadly it cannot realistically be seen in that light. Charles hasn't been involved in the business for some years now, preferring to spend his time on art and a new wife. Maurice is quite likely to be a director, but like Charles, he's as much concerned with other pursuits as advertising ­ he's joint chairman of the Conservative Party as well as opposition spokesman on Treasury affairs in the House of Lords.

Nor is M&C Saatchi at all like the old Saatchi & Saatchi, with its overarching ambition and grand strategic vision. At the height of their power, the Saatchis made an approach for Midland Bank, such was their determination to create an all singing, all dancing business services behemoth.

M&C has no such pretensions, and although the flotation is designed to raise money for expansion into France, Germany, Spain and Italy, its horizons are a great deal more limited. Matt Barrett, the chief executive of Barclays Bank, can rest easy in his bed. M&C's float is not about to be used as a platform to take over the world. Most of the empire that was once Saatchi & Saatchi now lies buried within WPP and Publicis, just rewards, it might be said, for the hubris of the past. The Saatchis may not be much involved in the business any more, but the business has certainly learned from their mistakes. Assuming the partners don't get too greedy, this looks like being one of the hottest IPOs of the year.

Central Railway

After 14 years of blood, sweat and tears, the Central Railway has finally hit the buffers. This, you may remember, was the name given to an ambitious plan to build a freight railway line all the way from Liverpool to northern France by way of the Channel Tunnel.

The promoters promised that every last penny of the £8.5bn needed to construct the line would be raised privately. The only snag was that it also needed the Government to pilot the necessary hybrid Bill through Parliament.

Central Railway's chairman, Andrew Gritten, says the private sector was prepared to do its bit and he has 15 letters of intent from some of the world's biggest investment banks to prove it. The Transport Minister, Kim Howells, has decided that they are not quite the same thing as guarantees and has declined to deliver the Government's half of the bargain lest the taxpayer be saddled ultimately with the bill.

Quite how the line could have cost £8.5bn when only 40 of its 400 miles were to be brand new track is a mystery, which can only partly be explained by the Strategic Rail Authority's insistence on it being gold-plated from start to finish.

The contrast between the fate of the Central Railway and the £5bn Channel Tunnel Rail Link, which has been underwritten by the taxpayer, is an interesting one. Mr Gritten's railway would have taken 5 million lorries off the road. The CTRL will shave 35 minutes off the journey time to Paris. The difference is that the CTRL was always a creature of government, whereas Central Railway came straight out of the private sector. We will never know for sure which one would have done more for Britain, but I'd wager it wouldn't have been the CTRL.

3i Larcombe

3i is a bit of a stock market oddity ­ a quoted private equity firm. Originally set up by the big high street banks in conjunction with the Bank of England to address Britain's supposed deficit in venture capital for business start-ups, 3i has never really outgrown its roots, and it's not been considered at the cutting edge of private equity for some years now. Most private equity is by definition unquoted. Part of the problem at 3i is that the disciplines of the listed sector impose constraints, both in terms of innovation and remuneration. In recent years, there have been some decent deals, particularly on the low-cost airline Go, but the fabulous returns achieved by some of the private equity partnerships have proved elusive.

Is Brian Larcombe, the chief executive, being pushed, or is he, as the company insists, just off to pursue pastures new in deciding to "retire" at an age when most executives would be pleased to be just starting in the top job? Suspicious sorts will say the former, given that there's no successor yet chosen. The company says that's because it wants to look externally for suitable candidates, and it was, therefore, best to announce the retirement before it leaked out through the headhunting process.

To be fair on Mr Larcombe, a 3i lifer, there have been no obvious howlers under his watch, and given the time he's already served before the mast, it's only natural he should want to move on while still young enough to take on fresh challenges. None the less, 3i is right to be taking the opportunity to look externally for a new boss.

It would be wrong to characterise 3i as entirely stuck in time. In recent years it has made itself more international in its reach, and it has also taken on board many of the techniques of state-of-the-art private equity.

Make no mistake, 3i is still a force to be reckoned with. But unable to offer the performance-driven rewards of the big partnerships, it has struggled to recruit and retain the best private equity talent. The company needs to rethink what it is trying to do. That's a task best performed by an outsider.

jeremy.warner@independent.co.uk

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