OUTLOOK: The case for cooling off becomes overwhelming
Thursday 02 February 1995
Now there is a new factor to take into account. The Chancellor will in any case have to raise rates soon as part of his planned and orderly approach to countering the inflationary effects of runaway growth. He might as well do it now as later. With the next Budget certain to see the Government attempting to deliver on the Tories' 1992 election pledge, lower taxes, the case for cooling the economy radically ahead of the giveaway becomes overwelming.
Inane idea from Professor Littlechild The inglorious and relatively brief history of utility regulation is already littered with enough silly ideas and initiatives to fill a book, but few are quite as inane as the suggestion from Professor Stephen Littlechild that Trafalgar House, after it has bought Northern Electric, be made to refloat a minority shareholding in the company. The idea is so off the wall that it seems hard to take seriously. Fortunately for Trafalgar, few people at the Department of Trade and Industry do, for if it were given the official stamp of approval, it would undoubtedly be a deal killer.
The electricity regulator's motives are reasonable enough. His concern is to ensure that Northern Electric is ring-fenced after the takeover in such a way that Trafalgar will not be able to pull the wool over his eyes by deliberately understating profitsor siphoning off cash to the detriment of the business and its customers. The existence of minority shareholders would be a powerful safeguard, seems to be the thrust of his thinking. No doubt it would, but does a regulator with far greater powers of discovery and access than ordinary shareholders really need the assistance of a minority to do his job?
Those who believe that utilities are best part of the private sector, as presumably Professor Littlechild does, cannot have it both ways. Either the privatised utilities conform with the usual practices and disciplines of the private sector, which means living with the threat of takeover, or they do not. If it is thought against the national interest that they do, then they should not have been privatised in the first place. The golden share, designed to give the utilities protection from takeover, was always meant to be of limited duration. It has now expired. To allow Professor Littlechild to construct alternative versions of the same thing would achieve nothing and be against most principles of private sector ownership.
The notion that any company would buy another and then float 25 per cent is absurd. What sort of price could an enforced minority command? Not much, is the answer. It would be like paying a pound for 50p. The idea that a utility needs in some way to be independent to be adequately regulated is equally absurd. Utilities throughout the world are owned by conglomerates like Trafalgar House. Generally they run them just as effectively as the highly remunerated managements of our own independent regional electricity companies.
Provided alternative safeguards are put in place to protect the legitimate interests of the regulator - separate accounts and an independent board - there seems no necessity to follow this route. The parallel here is with the rash of TV bids last year, where in each case undertakings were given to the DTI to address legitimate competition concerns.
That is not to say there is no case for reference in this instance. To do so, however, Michael Heseltine, President of the Board of Trade, would have to depart from the usual parameters of mergers policy. Provided competition is not diminished, anything goes, has been the guiding principle to date. There are no competition issues in this case but there are other issues of regional and public interest. Northern Electric is one of the few public companies based in the North-east. To take decision making away from the region and relocate it in an anonymous London head office is hardly likely to be in the region's interests. But then to refer on that basis, Mr Heseltine is going to have to rewrite policy.
Europe caught on the hop There was that unmistakeable sound across Europe yesterday of out-of-joint noses being straightened. The finality of the American administration's presentation of the new Mexico rescue package caught not a few European central bankers on the hop.
Words such as unhappy and premature were to be heard early yesterday morning in London, Paris or Frankfurt, about the sudden transformation of the grand American rescue package into something with dominant international participation. It was not long, however, before the complainers were shuffling into line.
This had not been a common European opposition front - something the Europeans find difficult to muster at the best of times. Rather, the expressions of unhappiness, often for very different reasons, resulted from the breakneck speed at which the international plan was cobbled together.
The frantic negotiations throughout Monday night were as much a response to an American political crisis as a Mexican financial one. The Clinton administration knew it had lost the game with Congress by early Monday evening. It also knew that to acknowledge failure with no alternative to offer would have provoked a severe reaction in international markets.
The outcome, in the circumstances, looks like a pretty good piece of crisis management. after so much vacillation and apparent lack of urgency.
The markets have reacted well, a fast approaching crisis has now receded. The Europeans would no doubt have preferred more time to settle the details of a package presented by President Clinton as complete, but which is still a little loose.
The broad lines of the package did appear, however, to have been thrashed out by the main countries before Mr Clinton went before the cameras. Much of the problem, and the skewed noses in London and elsewhere, appear rather to have come from a lack of sufficient communication between governments and their central banks.
It is now up to the markets. If this confidence-building excercise works, then it is likely little of the package will actually need to be drawn on. Continued haggling over the share-out of the burdens will only raise the risk of the whole exercise beingmore expensive.
The irony of all this is that the Mexicans have, as a consequence of Congress's intransigence, secured a rather better and more internationally based package of support than had been on offer under the old proposals. The Americans have in turn reduced their exposure to the crisis. Everyone is happy, it seems.
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