Little substance in Blair's vision of partnership

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The Independent Online
As Nick Leeson languishes in a Singapore jail for his ill-fated escapade in Anglo-Saxon capitalism, red in tooth and claw, Tony Blair drops in to Singapore to sing the praises of the much nicer sounding "stakeholder economy".

Insofar as this cloudy concept means anything at all, it endorses the general idea of long-term partnership as opposed to the short-term promiscuous goings-on that are said to characterise the UK's freewheeling market economy. In a heavily overcast passage - we're talking cumulo-nimbus here - Mr Blair says it's time for a change in emphasis in corporate ethos from companies as "a mere vehicle for the capital markets" towards a vision of them as a community or partnership "in which each employee has a stake". Mmmm

What this appears to mean is that New Labour is no more enamoured of the City's rumbustious market in corporate control than Old Labour. The general accusation - though not one made in Mr Blair's speech - is that companies are forced to superserve shareholders, by now so bloated on their fat dividends they cannot see beyond the next quarter, let alone their toes. Fear of corporate predators stops managers from pursuing long- term investment strategies. Instead, they insist on unrealistically high hurdle rates for new capital spending that have contributed to the investment famine in this recovery.

While there is something in all this, it is far from clear that the alternative system - for which Labour generally looks longingly towards Germany rather than the Far East - is so superior. Indeed when many Germans look in the mirror of their system of corporate government they're not so keen on what they see, either. Small wonder when they contemplate the disastrous diversification strategy of bellwether Daimler-Benz which the present management is now seeking to rectify. As Sir Geoffrey Owen of the LSE's Centre for Economic Performance pointed out last week, the German system kept a company like AEG on the life support system long after it should have been put out of its misery.

The City certainly keeps industry on its toes - but maybe industry needs to be. Certainly there is no ready miracle cure, as Mr Blair himself concedes when he says that legislation cannot bring about the sort of company he holds high. Verdict: storm clouds - but no rain.

Is Labour bluffing over Railtrack?

Labour yesterday officially launched its campaign to halt privatisation of Railtrack, scheduled to take place in May. Unfortunately it was as unforthcoming as ever on the crucial question on how to reconcile its determination to have a publicly owned rail network with the fact that it has also ruled out renationalisation. "Aces up sleeve", mutters John Prescott. To which the response must be "produce them, or we won't believe you", for at this stage it is hard to see what those aces could be. Or is he just bluffing? As with previous privatisations, Labour's effect looks like being merely to reduce the value of the sell-off, making it even more of a bonanza for investors, rather than halt it altogether.

Discounting Labour's sniping from the sidelines, the flotation of Railtrack is beginning to look a relatively straightforward exercise. From an investment point of view, Railtrack is a utility with a property kicker - in other words as safe a bet as you could hope for. This is a company whose revenues are largely protected by contracts with the train operating companies; many of the financial uncertainties surrounding Railtrack are beginning to fall away.

The government is certain to write-off some of the debt, perhaps from pounds 1.7bn to pounds 1bn, if not to the pounds 500m Railtrack wants. The exact amount depends on how far Railtrack is expected to finance improving the West Coast main line and other projects. Other positive factors include a low tax charge because of the pounds 1bn a year investment plans and an imminent decision by the regulator to allow Railtrack to keep 70 per cent of property development profits, which will be significant even if estimates of a pounds 2bn windfall are silly.

On its own merits, this is a relatively safe utility with a regulatory regime that may prove more stable than those in electricity, telecommunications and gas. Other things being equal, it might have been possible to sell the shares on a yield of less than BT's 6.6 per cent and still have scope for dividend growth. But because Labour is threatening to rewrite the rules if it wins, the thinking is that political risk demands that the shares are offered with a higher yield than BT. Unless there is a complete debt write off, the flotation price is therefore unlikely to exceed pounds 2bn.

Labour has so far proved unable to come up with any workable ideas to implement its policy of putting Railtrack back under public control. Even the political risk may be exaggerated. The City will nonetheless extract its pound of flesh for it.

Stock Exchange cannot hold back the tide

Given the emotions it unleashed, it was perhaps inevitable that the unceremomious dumping of Michael Lawrence should be portrayed by some in black and white terms as the feisty reformer thwarted by a City cartel of luddites, desperate to preserve a lucrative anachronism. Time will no doubt reveal a more shaded picture, in which personality and management style had as much to do with the explosion as the fundamental issues of how shares are to be traded in London.

The leading market makers were clearly alarmed at the prospect of a Big Bang introduction of order-driven trading in August. Given the Stock Exchange's less-than-glorious record of handling big reforms, the risk of a serious market breakdown could not be dismissed out of hand.

If the consultation now belatedly about to begin shows a strong market preference for an order-driven capacity to operate alongside London's traditional quote-driven mechanism, then it is naive to imagine that the market makers will be able to hold back the tide of change. Their skill, after all, is to be able to read the market, and they can see that change, largely techologically-driven, is steadily occurring. Already a large proportion of their business is already done on what are effectively order- matching lines.

The fact is that the share trading market in London is in many respects not as it would appear. That is the weakness in the market makers' defence, and the main justification for the reforms - that they will be formalising an evolution taking place anyway.

But in all this loud clash of views among the market giants, there is a risk that, as usual, the interests of the small investor will be overlooked. For all its faults, the market making system has served the small investor fairly well. The security of always being able to deal is a valuable one. It is not just a question about price, but also about availability. The consultation needs to bare these interests in mind. For the big boys have a way of doing well, whatever the system.

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