Healthy competition is giving Lang a headache

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The Independent Online
Ian Lang, President of the Board of Trade, will very shortly find himself juggling with three potatoes of the middling to hot variety. Yesterday he received the Monopolies and Mergers Commission report into the competing bids for South West Water. The Office of Fair Trading is due any day to submit its recommendation on whether Stagecoach's takeover of the train leasing company Porterbrook should be referred to the MMC. And Mr Lang is about to receive a similar tome advising him what to do about the British Airways-American Airlines alliance. In each case, the decision Mr Lang reaches will have important consequences for competition. In each case, privatised companies are centre-stage.

What could be more appropriate? For the past 17 years, competition and privatisation have been the defining themes of the Government's industrial policy. Now, as it approaches the fag end of this Parliament, it is left with three stinkers on its hands. What is more important? Remaining true to its instincts that healthy competition is the best guarantee of vibrant markets? Or remaining loyal to the companies that it privatised?

By and large, successive secretaries of state have opted for the former. There was a temporary hiatus when Michael Heseltine was in charge at the Department of Trade and Industry. He rolled back the tide of both competition and privatisation by supporting a national champions policy and failing to get the Royal Mail sold off. With Mr Lang's arrival, however, DTI strategy has reverted to the norm as championed by the likes of Norman Tebbit and Peter Lilley. In John Bridgeman, the Director General of Fair Trading, Mr Lang has a like-minded ally.

They will need to be strong and certain in their convictions because the protagonists in each of these three mergers have presented a powerful argument for why they should be allowed to go about their business unfettered.

The argument goes something like this. If you stop us from proceeding, UK plc will be the loser. Foreigners will come and take over our industries or take away our market share. If you allow us to proceed but impose conditions on us that are unacceptable, we will walk away and the consumer will be the loser.

Now there can be little dispute that privatisation has produced substantial benefits. Freed from the constraints of Whitehall control, these former state-owned businesses have become vastly more efficient, versatile and profitable. There is an argument to be had, however, over the way the spoils have been divided up between shareholders and customers. The electricity industry, for instance, has already returned more capital to investors than it was privatised with and the water industry is heading the same way.

BA and Stagecoach and Severn Trent and Wessex, the two suitors for South West Water, would have us believe that if they are allowed to proceed there will be more efficiency gains and more benefits as a result for consumers.

In reality these deals are about building ever bigger and more dominant empires first, enhancing shareholder value second and improving the lot of the consumer third.

For that reason the concessions extracted in return for allowing them to go ahead must be significant. In the case of BA and American, the minimum concession must be the surrender of sufficient slots and associated airport facilities at Heathrow to make increased competition a reality, not just a promise.

In the case of Severn Trent and Wessex, the water regulator, Ian Byatt, can realistically demand price cuts of at least 20 per cent for customers of South West Water alongside lower bills for customers of the two bidding companies as a condition for approval.

It is more difficult to see what undertakings Stagecoach can give to mitigate the effects of allowing it to vertically integrate its passenger rail franchises with a company that supplies the rolling stock. The scope for sweetheart deals is obvious. More seriously, if Stagecoach is allowed to proceed, what is there to prevent the other two leasing companies from teaming up with train operators? In that event, smaller rail operators would be forced to lease their rolling stock from competitors, and powerful ones at that.

Mr Lang could probably do without these headaches with the party conference just a week away. But he should not be distracted by the political noise. They could be three of the last decisions he makes as Secretary of State. For that reason alone, he should get them right.

Will Clarke be bold enough to be boring?

Speaking of political survival invariably brings the Chancellor, Kenneth Clarke, to mind. Earlier this week he enraged the Eurosceptic wing of the Tory party with a piece of provocation that was as wanton as it was bold. The Eurosceptics believe the Government's only hope of avoiding nemesis at the polls is to reject Economic and Monetary Union decisively and rule out British membership of a single currency in the lifetime of the next Parliament.

Mr Clarke, in Dublin for the EU finance ministers meeting, suggested, on the contrary, that it would be "pathetic" for Britain to delay entering EMU. The outrage from the John Redwood camp and the Eurosceptic press was fearful to behold. Demands for his resignation flew thick and fast.

Now the Chancellor is at it again, dropping as heavy a hint as you like that backbenchers should not expect him to deliver a tax-cutting budget to save their skins come polling day. In an interview with London's Evening Standard, the Chancellor says: "Tax cuts can only happen if they are in the interests of the economy. In the past there have been criticisms made of tax cuts which have taken place in the face of rising consumer spending. That is something else for the "tax cuts at any cost" brigade to think about.

Now juxtapose that comment with the latest statistical evidence from the high street. Retail sales are bounding ahead at an annual rate of more than 4 per cent, the housing market looks as if it has made the decisive break back into positive territory and inflationary pressures remain remarkably subdued. It is not unknown for Chancellors to keep the markets and the voters guessing in the run-up to a Budget. But if Mr Clarke is as bold as his word then the last Budget before the election will indeed be the prudent, boring, steady-as-she-goes affair that so many pundits want and expect.

In some quarters Mr Clarke is being urged to go for a 4p cut in basic rate tax - 2p now and 2p after the Tories win the election, thus fulfilling the Government's pledge to get down to a basic rate of 20p in the pound.

Mr Clarke's comments, on the eve of his arrival at the IMF meeting in Washington, would appear to rule that out firmly enough. It could, of course, be that his remarks have been taken out of context and should not therefore be read into too deeply.

I would not bet on it. The Chancellor looks intent on leaving a sound fiscal and monetary strategy in place for whoever occupies 11 Downing Street after the next election.