Outlook: Have-a-go Bridgeman takes on the City

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The Independent Online
On any reasoned assessment, it is hard to challenge John Bridgeman's decision to refer Britain's unique system of underwriting rights issues to the Monopolies and Mergers Commission. There is compelling evidence that the use of fixed-charges represents a complex monopoly, offering unjustifiably high rewards for fairly insignificant risks. The institutions plainly enjoy a lucrative cartel.

This monopoly is complex in more ways than one, however, and the Monopolies watchdog should use wisely the year it has been given to decide if there is a monopoly and, if so, whether it operates against the public interest. It must avoid a repetition of its last major investigation into a complex monopoly, its probe at the end of the 1980s into the brewing industry.

On that occasion, the MMC found against the industry, but the upheaval that was forced on the brewers had unexpected and unfortunate consequences. There is now a greater concentration of brewing power than before the MMC's experts stuck their noses in and it is far from clear that their intervention has benefited the consumer. By the same token, it is questionable that outlawing the underwriting cartel will do anything to reduce the cost of capital to companies, and if it fails to do that, then there is not much point in doing it.

Even so, the City really only has itself to blame for finding itself up before the beak. A few high profile innovations have been dreamt up by the likes of Schroders in recent times, but the fact remains that most cash calls still pay a flat 2 per cent of proceeds when they come to the stock market for money. It is no surprise that Mr Bridgeman has been so underwhelmed by the response to his repeated threats to refer. The OFT has studied 60 different rights issues over the past year and found that in the great majority of cases, the risk does not justify the reward. In other words, underwriting commissions are money for old rope.

Unfortunately for the MMC, however, there are no easy answers here. The cost of new capital is made up of a large number of different elements of which underwriting commission is only one. Lower the cost of underwriting commissions and you might, by for instance increasing the size of the necessary discount, increase the cost of the capital in other respects. While it is tempting to think that Schroders' apparent success in cutting the cost of Berkeley's recent rights issue is de facto proof that 2 per cent is too much, it is arguable that that deal's combination of deep discount and maintained dividend actually pushed the ultimate cost higher than might have been achieved under traditional methods.

Furthermore, the underwriting cartel is not much different from any other fixed commission system. For every loser there is a winner; for every company which is paying too much, there is a more high risk company which is probably paying too little. Change the system, and this Robin Hood type subsidy disappears.

All the same, this is an investigation well worth having, if only because it would be nice to have some authoritative answers to these difficult questions. It is well accepted that the cost of capital to companies in Britain is generally higher than in other developed countries, but the cause of this is far from clear. Is it structural or economic? If the MMC can help answer this question, then it will have earnt its keep.

Restructuring the Far East

Tony Blair, the prime minister, once declared himself an admirer of the tiger economies of the Far East. It will be interesting to see whether he is prepared to repeat that praise when he visits Japan next year. The tigers now look sick to the point of near extinction, and even the mighty Japanese economy is floundering in a manner which profoundly challenges the idea that the Asian approach to business and finance ever had much to commend it.

The addition of Korea to the region's sick list has demonstrated beyond any doubt that the illness is endemic, that there are common structural faults throughout these economies. How naive of Mr Blair and the rest of us not to have spotted them before, for although the exact causes of this crisis are many and varied, there is one underlying theme. South East Asia's exotic mix of free market capitalism and command management (totalitarianism by another name) doesn't work.

The one with the other has a natural tendency towards corruption and manipulation - the very antithesis of what markets are meant to be about. These countries, Japan included, have been deceiving themselves and deceiving the outside world. They have milked our free trade principles and the forces of international capital for all they are worth while persistently turning a blind eye to their rules. Now it's pay back time.

The International Monetary Fund is expecting any moment to be called on to assist Korea. Only misplaced national pride has prevented the Korean Government going to the IMF already. When it happens, this is going to be a bail out to make Mexico look like a Vicar's tea party. We in the West have much to gain from this crisis, if by helping out we can impose our will and ways on these corrupt and inward looking economies. The IMF should extract a high price in terms of political, economic and institutional reform for its aid.

Power generators battle it out

If Victor Rice of LucasVarity wanted an insight into the kind of boardroom bruiser he has got himself by hiring Ed Wallis as non-exec chairman, then he could have done worse than turn up to PowerGen's interim results presentation yesterday.

What Ed says, very definitely goes, as his fellow executives discovered during the course of the presentation. Any dissent was quickly quashed. If Ed says PowerGen's balance sheet is undergeared and inefficient, then that is exactly what it is, never mind that the finance director thinks differently. Likewise, if Ed wants to negotiate his coal contracts with Richard Budge through the financial pages of the Press, then that is exactly what will happen, even if it makes his managing director turn a whiter shade of pale.

With Mr Wallis in the driving seat, PowerGen has so far hardly put a foot wrong, save for the abortive bid for Midlands Electricity, and Ed may be about to put even that right if he gets half a chance. Unlike many of the time-servers in the privatised utilities who inherited telephone number salaries by dint of being in the right place at the right time, Mr Wallis has also demonstrated that his currency is valued outside the cosy confines of a power duopoly.

But PowerGen and its slightly bigger rival National Power are now at an important crossroads. The premium rating enjoyed for so long by PowerGen has all but evaporated as its bigger brother has caught up, fuelled by an aggressive strategy of overseas expansion. National Power is making pounds 130m a year on overseas equity investment of pounds 1bn. PowerGen is making perhaps pounds 20m on an equity investment which so far stands at pounds 500m.

The two stocks now make an interesting choice for investors. Stick with bigger brother and watch as overseas expansion turns it into International Power. Alternatively, hang in with Ed, watch him load up with debt and then either return capital to shareholders or take the vertical integration road. At the moment the markets cannot decide who will emerge on top.

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