Cruickshank's crusade is a dangerous game

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One of the great myths of privatisation is that it invariably amounts to a bonanza for investors. While there is no doubting the truth of this for the electricity industry and to a lesser extent water, it is not the case for most of the others. For BT shareholders, it has been downhill virtually all the way since the company was privatised at the end of 1984. Over the last 11 and a bit years, the company's shares have underperformed the rest of the stock market by nearly a third. And unless the regulatory and competitive environment changes dramatically, warns James Golob of Deutsche Morgan Grenfell, shareholders can look forward only to more of the same.

For any management this is a deeply depressing prospect but for Sir Iain Vallance and his team at BT it must be doubly so. Since the early years of privatisation, when the company did indeed take its domestic customers for granted, BT has been transformed into the very antithesis of the complacent old state monopoly it once was. The company's response to the twin pressures of enhanced regulation and competition has been generally astute and appropriate, it is ahead of the game internationally and in forming cross-border alliances, its video-on-demand trials are as advanced as anywhere in the world, and its new chief executive, Sir Peter Bonfield, could hardly be better-regarded by the City. For most companies this would be a happy coincidence of features guaranteed to keep the share price motoring. Not so for BT, which finds itself so hemmed in and hammered by the regulator that even competitors begin to worry for the future.

BT today delivers its response to the regulator's two most recent initiatives - the demand for much tougher rate-of-return criteria and a catch-all fair trading clause that would allow Oftel to act now against alleged abuse of market position and ask questions later. BT's answer is expected to be suitably robust. For the stock market, the return-on-capital document poses the most immediate threat, for it attempts to set the agenda for an even more draconian price cap regime from July next year. Don Cruickshank, director-general of Oftel, has taken the view that BT is making excessive profits at the expense of the customer and wants them reduced.

Mr Cruickshank is a clever and forceful man and, perhaps predictably for someone who once worked for Richard Branson, he stands for the little guy and the consumer against the entrenched power of a privileged monopoly. However, it is not just BT that worries about his proposals. Since competitors must always undercut BT to make headway, they too are concerned about too onerous a rate-of-return cap. At the rate proposed, some of the present wave of cable investments look unviable - not that you will find many saying this publicly.

A whole raft of national telecommunications companies are scheduled to be privatised this year and next, including the big daddy of them all, Deutsche Telecom. A glittering array of choices will be opened up for investors in this industry. Capital will chase those countries where the regulatory regime favours the incumbent operator. That, for the time being, means almost everywhere except Britain. It is not just BT's shareholders who need to worry about this. The Government ought to as well, for ultimately it could mean the reduction of an important national company into another also-ran. It could also, if pushed too far, lead to inadequate spending on telecoms infrastructure more generally.

BT can perhaps expect little sympathy from ministers after its silly and meaningless attempt to cosy up to Tony Blair. But it does matter what happens to BT and it is understandable that its chairman should want to bare his soul to a politician at least prepared to listen. Mr Cruickshank is going to have to compromise his crusading consumerist stance a little if Britain is to be left with a world-class telecommunications player to take us into the next millennium.

Virgin proves more than hot air

We owe Richard Branson an apology. It is not just hot air from Marrakesh that sustains London & Continental's bid for the high-speed Channel Tunnel rail link (Business Comment, 30 January). The consortium does genuinely seem to have won, or so our moles at both the Department of Transport and the Treasury tell us.

The rival Eurorail is all but admitting defeat, with London & Continental (of which Virgin is a part) apparently demanding a lower government subsidy for the project by some way. The only thing standing between L&C and success is the possibility that it will fail the "wealth test", the due diligence process the Government goes through to satisfy itself that the consortium can raise sufficient funds. This is more than a formality. A cornerstone of L&C's proposal is that the whole thing floats on the stock market within the next year. With Eurotunnel still casting a long shadow over privately financed infrastructure projects, that will be no easy task, even for the likes of SBC Warburg, L&C's financial adviser.

Ominous moves on the backbenches

The Ken and Eddie show continues to grip the City - and small wonder with fresh signs of dissension over last month's cut in interest rates. Kenneth Clarke must be wishing he could swap tiresomely steady Eddie for one of those flighty European central bankers who have been slashing rates like there's no tomorrow.

But in all this, there's a real danger that the markets could be losing sight of the big picture. The Ken and Eddie show is played out in public - with a six-week lag. Meanwhile, the Ken and John show takes place behind closed doors at Numbers 10 and 11.

If there is a clear element of mock combat in the monthly meetings between the Chancellor and the Governor of the Bank of England, there is nothing artifical in relations between the two incumbents of Downing Street. Bad blood there spells trouble for the economy and financial markets. The genesis of the policy blunders that wrecked the economic "miracle" of the 1980s came from a Chancellor and Prime Minister who were mortally at odds.

The signs of a whispering campaign against Mr Clarke on the Tory backbenches should thus be occasion for real concern. The political dimension is straightforward: Mr Clarke is on the left of the Conservative Party. Even more deserving of auto-da-fe, the Chancellor is a committed pro-European - he likes the idea of monetary union.

A political bruiser through and through, Mr Clarke may seem perfectly capable of standing his corner in party in-fighting. But there is an obvious danger that he may be pushed too far. He wouldn't be the first to throw in the towel, after all. The likelihood of this happening may be small, but it can't be completely discounted and would undeniably spell disaster for the credibility of the Government's economic policy. Another political risk for the markets to worry about.