Future sell-offs jeopardised by power sale fiasco

The regulatory fiasco surrounding the Government's pounds 3.6bn sale last year of shares in National Power and PowerGen could seriously deter investment in future privatisations according to the National Audit Office.

The NAO report, which comes on the eve of the pounds 1.8bn Railtrack sale, shows that 91 per cent of institutions felt the furore had "had a negative effect on the likelihood of their participating in future privatis- tions".

In March 1995, Professor Stephen Littlechild, the electricity watchdog, surprised the City by announcing a renewed crackdown on electricity distribution prices. The news wiped almost pounds 5bn off electricity share prices within a matter of days.

Professor Littlechild's statement was issued the day after the start in share dealings of newly-sold shares in National Power and PowerGen and caused outrage among private and institutional investors world-wide.

Yesterday's NAO report could prove extremely embarrassing for the Government, which is already struggling to play down controversy over Wednesday's announcement of the early resignation of Roger Salmon, the man charged with selling passenger rail franchises. SBC Warburg, advisers to the flotation, could be faced with a cutback in the expected pounds 1.8bn sale price unless it can overcome investor concerns about the railways arising from Mr Salmon's resignation, even though he is not Railtrack regulator.

At the same time ministers are faced with increasing scepticism over the planned privatisation of the most modern part of the nuclear industry in the middle of the year.

Mr Littlechild's announcement last year caused a political furore, with the Labour Party accusing the Government of having "conned" share-buyers in PowerGen and National Power by going ahead with the sale in the knowledge that the regulator may make a statement on electricity prices. Although the statement had no direct effect on the business of National Power and PowerGen, it created a frenzy of uncertainty over the UK regulatory system and its potential implications for the entire electricity sector and utility industries as a whole.

The NAO survey, carried out about four months after the event, shows that fears over UK privatisations persisted in spite of insistence by ministers that the storm had abated. The report admits that the London Stock Exchange confirmed "widespread and lingering concerns in the market". The Exchange also said that future sales involving a regulated industry would probably come under much more careful scrutiny.

The survey shows that these worries are echoed by institutional investors. Almost 80 per cent of those taking part said that Professor Littlechild's intervention has had a negative effect on their perception of the privatised utilities.

According to one City analyst: "The NAO's conclusions are hardly surprising as many US investors remain jaundiced and even UK investors bear the previous experience in mind."

He added: "The report adds to the view that commitments and undertakings in any future sale prospectus will have to be extremely clear-cut. There will have to be full disclosure of the implications of any potential political or regulatory changes."

The NAO report comes amidst growing bearishness over the sale of British Energy, the company formed to take over the nation's most advanced nuclear reactors.

Some analysts believe that the gross value of the flotation could be as little as pounds 1.5bn compared with earlier estimates of pounds 2.5bn.