Outlook: ONS conveniently finds keeping it all off the books just fine

Silly targets; Harvey Nichols
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The Independent Online

The government is wriggling and squirming all over the place to make its public spending plans fit into the straight jacket of rules set to ensure prudent policy. One of the ploys so used is to get as much spending "off balance sheet" as possible, so it doesn't count towards the rules at all. This is achieved mainly through the Private Finance Initiative, which allows what is in essence public spending to be spread over a number of years by persuading the private sector to provide the finance and then paying it off in installments. If this sounds like public borrowing by another means, that's because it is.

The government is wriggling and squirming all over the place to make its public spending plans fit into the straight jacket of rules set to ensure prudent policy. One of the ploys so used is to get as much spending "off balance sheet" as possible, so it doesn't count towards the rules at all. This is achieved mainly through the Private Finance Initiative, which allows what is in essence public spending to be spread over a number of years by persuading the private sector to provide the finance and then paying it off in installments. If this sounds like public borrowing by another means, that's because it is.

In other cases, public debt is just ignored entirely. Common sense would dictate that debt guaranteed by the state is in fact government borrowing. Network Rail, the not-for-profit successor to Railtrack, would appear to be a case in point. Some £21bn of Network Rail debt is guaranteed by the Government. Without the guarantee, the company could not have raised this money and Railtrack's assets, rather than ending up with Network Rail, would have been liquidated. What's more, the Government is on the hook to repay this money in full should Network Rail prove unable to pay its debts.

So is this public debt or not? The National Audit Office says it is. The Office for National Statistics, which is the final arbiter, last week pronounced that it is not. But please don't call it a row, or even a disagreement. The two bodies have merely adopted different approaches, which often happens in accounting. Len Cook, National Statistician and Registrar General, insists that his method is the purer of the two, since his is the treatment required by European Union standards governing the public finances.

Personally, I think I'll stick with the common-sense approach. Governments set the rules and standards to suit themselves, but you don't need to be an accountant to know that when you guarantee a loan, it is effectively yours.

The broader point is that when governments start to spend heavily only to find that the tax assumptions on which this spending is based are undermined by an economic slowdown, they are forced into ever more elaborate contortions to maintain the illusion of decent housekeeping. Gordon Brown prides himself on his prudence. But actually public debt is piling up all over the place.

Silly targets

I've never understood why chief executives continually nail themselves to the cross of overly ambitious growth targets, or any growth target at all for that matter. So many of them come a cropper in doing it that you would think they'd learn their lesson and stop. It must be a corporate virility thing, I guess, but there seems no shortage of chancers ever willing to be tested on the rack of City expectations.

Another two got their come uppance this week. Ben Verwaayen's forecast of 6 to 8 per cent revenue growth at BT for the next three years has looked questionable ever since he first announced it, and first-quarter results, which showed growth of only 2 per cent, cruelly exposed what had all along been a wholly unnecessary and silly piece of executive bombast. Yesterday, the company appeared to confirm what its house broker, Merrill Lynch, has been saying since Tuesday ­ that the target will be formally abandoned when the second-quarter figures are announced next week.

Mr Verwaayen is new to the job and to the ways of the City, so his over optimism may be understandable. The stock market expects it of us, he would say, and in the interests of transparency it seems only right that internal targets and forecasts are shared with investors. What's more, it gives the team something to aim at and galvanises the company into higher levels of achievement. Well maybe, but actually lots of big companies rub along perfectly well without publicly disclosed targets. The law of averages alone dictates that eventually all targets are going to be missed. As US investors have learned to their cost, they also create a powerful incentive to cook the books and massage the numbers.

Mr Verwaayen is one thing, but perhaps much more shocking was Lord Browne of Madingley's admission that for the third time in eight weeks he is being forced to cut BP's production targets. BP is struggling to meet its forecast for underlying earnings too. Lord Browne is, or should that be was, regarded as a demi-god in the City where he is continually fêted as Britain's most accomplished chief executive. By any standards, BP continues to do well, but when a chief executive as trusted and lauded as Lord Browne says he's going to do even better, people tend to believe him. Once expectations have been built up, it's very hard to get them down again without a nasty bump.

Others to have been caught out in the same way this year include Jean-Pierre Garnier, chief executive of GlaxoSmithKline, forced dramatically to scale back his earnings guidance because of generic competition to his best selling drug, Augmentin. Then there was Martin Read, chief executive of Logica, just one of any number of tech-wreck bosses obliged to downscale his forecast of rapid revenue and earnings growth to one of, er, falling revenues and profits.

There have always been CEOs prepared to perform the growth-targets high-wire act. Eventually they always fall off. One of the most famous was Sir Clive Thompson, chairman of Rentokil. He became known as Mr Twenty Per Cent for his promise to grow earnings by at least a fifth every year. He managed to keep it up for longer than anyone thought possible, but by the end even he was reduced to using ever more elaborate accounting devices to achieve the impossible. These days he struggles to achieve any growth at all. Nobody can keep winning for ever. But that's never stopped chief executives thinking they can.

Harvey Nichols

Dear oh dear. Anyone would think the end of the world was nigh reading the Harvey Nichols interim trading statement yesterday. Like for like sales are down, profits are down, borrowings are up, tax is up, cash flow is suffering, and darling don't even mention the future. Was there nothing positive to say at all? Well no actually. Everything is just terrible, the very reverse of Absolutely Fabulous in fact. It's like Patsy and Edina on a bad hair day.

Normally I'd be congratulating the company on its honesty, but of course there is a sub-text here. The company's chairman, Dixon Poon, has made a 250p-a-share bid for the minority of the shares he doesn't already own, and he needs everyone to think that things are bad and getting worse. The largest minority shareholder, Deutsche Asset Management with nearly 30 per cent of the minority, says it won't accept, and Mr Poon says he won't increase. Mr Poon needs 75 per cent of the minority to vote in favour for his scheme of arrangement to work, so on the face of it, that is that and he's lost.

Not so, says Mr Poon, a Hong Kong-based entrepreneur. If necessary, he'll turn his offer into a straight takeover bid, which would give him the right to delist the shares once he reaches 75 per cent of the total. Given that he already has more than 50 per cent, it should be easily possible. Deutsche's substantial shareholding would no longer be the blocking stake it is under the present offer.

Deutsche is hopping mad about it all, and rightly so. Mr Poon made no attempt to ask his largest outside shareholder whether such an offer might be acceptable before he made it, perhaps because he knew what the answer would be. Harvey Nics might genuinely be down in the dumps right now, but any kind of a long-term view it is quite plainly an excellent franchise with equally excellent growth prospects. Mr Poon is taking his shareholders for a ride and they should give him the bloody nose he deserves.

jeremy.warner@independent.co.uk

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