Swift retaliation if Railtrack fails to deliver

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If the track record of the privatised utilities teaches us anything, it is that once granted new powers their regulators use them in ways that invariably prove unpleasant. The sharp rise in Railtrack shares which greeted publication yesterday of its new licence conditions suggest either that the market failed to read the small print or has simply ignored the lessons of history.

The licence amendments give the Rail Regulator, John Swift, the power to impose unlimited fines on Railtrack if it fails to deliver on its pounds 16bn investment programme without good reason. They also entitle him to direct Railtrack to carry out improvements if he is not satisfied with its progress against a highly detailed set of objectives.

Quite apart from the bureaucratic nightmare that awaits the fat controller running Railtrack, Sir Bob Horton may also discover quite quickly that his definition of "reason" diverges wildly from that of Mr Swift.

The consolation for Railtrack is that it could have been worse. It could have taken its objections all the way to the Monopolies and Mergers Commission and ended up with John Prescott breathing down its neck. Since the Deputy Prime Minister comes from the unreconstructed school that views Railtrack profits as basically taxpayers' money by another name, it was not an enticing prospect.

But Railtrack should not expect an easy ride from Mr Swift. He is jockeying for the top job should Mr Prescott opt to create a single super regulator for the railways so it is not in his interests to soft pedal with Railtrack on its investment plans.

In any case, the demands of the rail network are such that even the pounds 16bn Railtrack had earmarked to spend but until yesterday was under no obligation to actually find, may prove to be a conservative estimate.

Nor is the situation helped by the fact that the greater proportion of Railtrack's costs are outside its direct control. If, conversely, Sir Bob succeeds in meeting his investment targets for a smaller outlay - which was, of course, one of main rationales behind rail privatisation - then he will be hit by a train coming in the other direction. Mr Swift may simply feel inclined to use his next periodic price review, coming up in 2000, to pass those cost savings on to Railtrack's customers in the way Ofwat proposes to do with the water companies.

Regulators are beastly like that, which is why Railtrack, like every privatised utility, longs to replace them with someone who understands the business. Don't be fooled. If Mr Swift fell under a Networker tomorrow the regulatory climate would not get any easier. That is a message the markets have yet to take on board.

Mutuals don't need to get the Abbey habit

Abbey National kicked off the bank reporting season yesterday with a resounding call from its chief executive Peter Birch for the remaining mutuals to convert and a resounding reason for their members to resist any moves to do so. Abbey's net mortgage lending amounted to just pounds 100m in the six months to June compared to the pounds 1.1bn handed out by Nationwide, the largest of the remaining 72 mutually owned societies.

An even more dramatic illustration of the attractions of mutuality, even if it was distorted by the unedifying rush of the carpet-baggers, is providing by the contrasting level of deposits flooding into two institutions in the same period. The Nationwide took pounds 2.65bn in the first half while savers actually gave up the Abbey habit to the tune of pounds 300m.

The reason for this shift in allegiance is simple. Abbey National has provided a fantastic return for its shareholders in the eight years since it pioneered the conversion route, but at the expense of its borrowers and savers who have effectively subsidised the steadily rising dividends enjoyed by its shareholders. The market value of Abbey has soared six- fold since 1989 during which time the dividend has grown by an average 24 per cent a year - its former members have paid for that largesse.

To claim, as Peter Birch did yesterday, that Abbey converted to satisfy customer demand for a wide range of financial products is self-serving.

Consumers want cheap mortgages and high interest payments on their savings - not life assurance policies rammed down their throat with every mortgage offer.

Abbey converted because it took the view, rightly as it transpires, that in a mature housing market where almost 7 out of every 10 of us already own our own home, the returns from core borrowing and lending would remain wafer thin. The former society now makes more profit from selling life policies, general insurance and other non-traditional products than it does from retail banking.

The supporters of mutuality may not be able to hold back the tide of conversion for ever and their cause will not be made any easier if Birmingham Midshires succumbs, as it seems likely to. When its members come to vote, however, they should bear the Nationwide/Abbey National comparison in mind and ask themselves whether banks always know best.

Millennium bomb for the markets

When a business like the computer services company Admiral is praised for holding its staff salary rises down to just 10 per cent, or four times the rate of inflation, something is plainly going badly awry.

For the computer industry, that something is the so-called millennium time-bomb, which more than two years before the end of the decade is already sending demand for IT experts (and the rates they can command) through the roof.

The hyperbole helps of course. The latest estimate is that the cost of reprogramming the world's computer to cope with the millennium change will reach $600bn - more than the cost of the Vietnam war.

For most of us midnight on December 31, 1999 will be the excuse for the mother of all parties.

But for those in the know it means staying well clear of aeroplanes or even cars as the champagne corks pop.

Despite the millions currently being spent on making sure systems are millennium-proofed, no-one really knows what is going to happen such is the complexity of today's networked computer systems.

While that sounds like good disaster-movie fodder, it also has potentially apocalyptic implications for the world's economies and stock markets.

In the run up to 2000 any number of business decisions may be put on hold until the moment of judgement passes - it is no wonder that big institutional investors are already writing to the companies they invest in asking them just what they are doing to defuse the time-bomb.

Stock market crashes tend to come out of the blue because previously "exuberant" investors suddenly find a reason to worry. Bull markets have died for stranger reasons than this.