Nuclear generators admit the game is up at last

COMMENT: 'If British Energy had continued to pretend such a project was still on the cards it would have been dismissed as just plain batty'
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The Independent Online
After nearly half a century of dogmatic attachment to the idea of building uneconomic generating plant with taxpayers' money, the nuclear industry's leaders finally gave in yesterday and announced the game was up. An application to build another station at Sizewell in Suffolk has been withdrawn, and an existing permission for Hinkley in Somerset will not be acted upon.

For most observers of the generating industry, the only surprise is that British Energy has persisted so long with its claim that another nuclear power station is a feasible economic proposition - even to the point of brushing aside the Government's nuclear review in the summer, which made clear that not a single dollop of state aid would be available.

In fact a new nuclear power station would need a gigantic subsidy. Every potential institutional investor in the privatisation of British Energy was aware of this, even if the management continued to delude itself. The company is wise to back off now, well ahead of the flotation pencilled in for next summer. If it had continued to pretend such a project was still on the cards it would have been dismissed as just plain batty, hardly a a recipe for successful flotation.

Acknowledging the mortality of Britain's nuclear power industry creates its own problems, however, for no one likes a company without a long-term future. Bob Hawley, chief executive, plays down diversification into gas or other forms of generation, because of overcapacity. He hinted that buying a regional electricity company might be on his agenda, but it is hard to see how.

The Government would not let him bid before privatisation, by which time there may be no Recs left. Furthermore, Tim Eggar, the industry and energy minister, is determined to prevent a repeat of the easy profits after the last electricity privatisation, and will almost certainly load British Energy with enough debt to prevent a buying spree after the flotation.

Even if he did not, any suggestion of grand plans for diversification would probably have investors running a mile. The alternatives, of selling existing technology overseas and joining the burgeoning worldwide industry that decommissions old power stations, are not the most exciting investment proposition around. Lord Hanson prides himself on his ability to make profits by managing declining industries, whether they be sack manufacture or tobacco. Perhaps it is time for him to take a close look at nuclear power. Floating the company at a realistic price continues to look as difficult as ever.

Question mark over our monetary set-up

The betting must still be on an interest rate cut after tomorrow's monetary meeting between Kenneth Clarke and Eddie George, notwithstanding the Governor's supposed opposition. After all, the Government runs no immediate risks with inflation, which remains historically very low, and having called the economy right earlier this year, the Chancellor's tail is up.

The big drawback, however, is that such a move will undoubtedly put a question mark over our monetary arrangements. These were set up after the pound plummeted out of the European exchange rate mechanism, to make sure that there was an alternative framework for keeping inflation under control. At their core are the monthly meetings at which the Chancellor and Governor of the Bank of England discuss a broad range of economic indicators which contain signals about inflation prospects.

Both the Bank and the Treasury predict that underlying inflation will be around 2.5 per cent by mid-1997. Many outside economists would agree with Mr Clarke that this in itself is reason enough to allow interest rate cuts now. Unfortunately, the indicators the Chancellor and Governor are supposed to use to assess the inflation outlook are not yet flashing the green light for lower base rates Mr Clarke would like. Monetary and financial indicators such as narrow and broad money, the exchange rate, share prices and market expectations of inflation all point the other way. Cost indicators are mixed - materials costs are easing, but wage pressures are increasing. Indicators of activity such as output, retail sales and the state of the labour market are the only ones to signal the need for easier policy.

The judgement Mr Clarke needs to make tomorrow is not easy, because it will not be possible to judge whether policy has been about right until we see the inflation rate in two years. That, however, is precisely why he and Mr George look at a long list of indicators that hold signals about inflation. If it is too early to give a verdict on the success of the policy, it is also too early to abandon the rules. And if Eddie George is more acutely aware of this than Kenneth Clarke, it is because he is more likely to be here to see the consequences than the present Chancellor.

Elegant solution to an embarrassing problem

Shame rather than invention appears to have mothered the latest financial wheeze from Mercury Asset Management. Far from enjoying stonking gains, the 70,000 private investors who poured money into MAM's European privatisation investment trust have found themselves languishing in poorly performing markets. Launched at the top of the market early last year, the trust paid the price of collapsing confidence, and the fact that European privatisations have tended not to be priced at the giveaway levels common in the UK. Try as it might to argue that its trust had performed well against the index, the near-19 per cent discount to net asset value told a more dismal story of disappointment. For the sake of its brand image, Mercury clearly felt such continued embarrassment was more than it could afford.

The remedy it has come up with looks clever: a share buy-back that is a first of its kind. MAM will take out about 15 per cent, or pounds 86m, of the trust's share capital over the next year or so, which should both narrow the discount and improve the asset value per share for investors. The key to the technique is the replacement of the trust shares with an equivalent number of preference shares, which will be privately placed with institutions. Although equity in name, these preference shares are to all intents and purposes debt.

This means Mercury gets round the company restrictions on share buy-backs, which must be financed out of distributable profits or the proceeds of another share issue, while at the same time maintaining the size of the trust and therefore its portfolio intact. Instead of decreasing the volume, it has found a way of changing the balance sheet structure, which means there will be no loss in management fees either.

But do not expact a rash of imitation. This sort of move only works with trusts that are below their issue price. Otherwise there are horrific tax complications. So old established trusts need not apply. The trust also needs to be of a decent size to absorb the costs and to make the preference shares worthwhile. Investors will pay some pounds 4m a year to finance the exercise, which looks a small price for a seemingly elegant solution to an old and embarrassing problem.

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