Littlechild factor lingers among investors

COMMENT

Nine out of 10 share owners said their funds preferred not to buy UK privatisation issues. Well, not quite, but today's dissection by the National Audit Office of the way ministers mishandled the sale of National Power and PowerGen is the nearest we are likely to get to seeing retribution visited on the Treasury and old whiskers himself, Professor Stephen Littlechild.

The taxpayer may not like the NAO's finding that institutional investors have been put off in their droves from subscribing for future privatisations by the antics of the director general of electricity supply, the Financial Secretary and his advisers BZW and Kleinwort Benson. But for those who wondered whether anyone would ever be brought to book for the spectacular mugging the markets took in March last year, the NAO's report will be sweet justice.

For the record, it is worth recounting events a year ago as the Government prepared to sell off its remaining shareholdings in the two generators.

On 27 February the Treasury was informed that Professor Littlechild was thinking of ordering a fresh review of electricity prices. For the next four days they gazed at their navels before concluding that it would have no effect on the generators sale.

The following Monday, 6 March, the partly-paid shares began trading and even managed to go to a premium until Professor Littlechild clubbed the entire sector the next day with his price review. Shares in National Power and PowerGen plunged below their issue price and remained in the doldrums for the best part of two months while overseas investors thought about withholding payment and the two generators consulted their lawyers about whether to sue.

The Treasury's subsequent internal review found itself not guilty on the inspired grounds that it had not been in possession of price-sensitive information that required disclosure in the prospectus.

Well, what else were the poor tortured souls supposed to have done? Pulled the sale and waved goodbye to pounds 3.6bn in receipts or alerted the markets and watched the syndicte of international banks managing the offer take a beating? In the end they decided that non-disclosure was the better part of valour and ploughed ahead.

But, as the NAO demonstrates, a sour taste continues to linger in the mouths of the investment community. In the cold light of day four months after the shenanigans of March 1995, nearly half those institutional investors polled rated the sale unsuccessful and 91 per cent say it had a negative effect on their likelihood of participating in future privatisations. These are institutions that the Government must rely on to ensure that the much more problematic sales of Railtrack and British Energy pass without disaster.

Who could now blame them for approaching these two offers with much greater caution when confronted with ministers bearing heavilty regulated utilities for sale? The upshot may be less interest and still lower prices. Revenge is sweet but voters may not share the satisfaction.

Blair learns his tax lessons

The Grand Hyatt Hotel in New York is no doubt a more convivial spot for a Labour leader to spell out his party's tax policy than some stuffy committee room in the Commons. It is also a safer place, particularly when his delivery is bereft of anything that even approximates to a hard number.

Four years ago the Shadow Chancellor John Smith ended Labour's dreams of power by unveiling the shadow budget it would have enacted if in government to a cramped Westminster press conference. The electorate took one look and ran a mile into the arms of John Major.

Tony Blair's address to the British American Chamber of Commerce in the US yesterday shows that New Labour has learnt the lesson. It was, unsurprisingly, long on ideals but shorter on figures, and why not?

It did not matter that more people would have been better off under John Smith's detailed tax proposals than would have been worse off. But by setting out where the break point lay he allowed his opponents to spread the message that Labour was the enemy of endeavour and self-improvement. Why strive for a better standard of living when it would only be taken away in tax?

Mr Blair has avoided that pitfall while promising that the days of "reflex tax and spend policies are over" to be replaced by the need to build a "new trust on tax". Reading between the lines, this may take school teachers, policemen and some middle managers out of the top tax rate.

But we will have to wait for Gordon Brown, the Labour manifesto and economic circumstances at the time to discover where trust ends and betrayal begins.

For the 600 or so businessmen who made up Mr Blair's audience yesterday that is an important consideration. His speech was designed for domestic consumption but it was also cleverly dressed up to reassure the international business community that Labour will not scare off inward investment.

Part of the package is to ensure that British tax levels are internationally competitive. At the moment they are. The UK's main rate of corporation tax is lower than all its main European competitors and only higher than Norway and Sweden.

But the tax rates businessmen look at most avidly when deciding whether to relocate abroad are the ones they will pay out of their own pockets. The UK's top marginal rate of tax, at 40 per cent, is substantially below that of Germany, France, Belgium and Italy as well as that of Japan, giving Labour the leeway to raise the top rate while still taking millions of working people out of the highest tax bracket. That might appeal back home but whether it would tempt American and Japanese executives over here is less obvious.

BET bid leaves a nasty hangover

The most boring bid in recent memory is mercifully drawing to a close, with Rentokil looking like it will capture its prey. But the acquisition of BET will leave a nasty hangover in the shape of the combined pounds 100m- plus in fees Clive Thompson's shareholders will have to fork out.

This raises wider questions about what value the City adds to the UK economy. The bidder naturally argues that its superior management will add value to BET and therefore, presumably, that the money is well spent in improving the performance of British industry. No doubt Peter Mason, the new chief executive of Amec, would use a similar case in defending the pounds 4.1m his company spent fending off Kvaerner last year.

But the size of these fees is reaching a level where they are hitting financial performance. In Rentokil-BET's case the fees would wipe out three-quarters of this year's forecast profits. With privatisation issues drying up, the City is likely to lift its efforts to persuade companies to become more acquisitive to boost flagging incomes. But more gravy for the City could spell increased and unnecessary costs for British industry.