Turning on the taps while there is still time : COMMENT

"The water industry, like the electricity industry, is at last beginning to respond to therapy, though it seems to be fear, rather than desire for improvement, which is driving the cure."

And then there were three. Goaded into action by public outrage, political pressure and the threat of regulatory dictat, three water companies have now joined their bedfellows in the electricity industry by announcing plans to "share" the benefits of efficiency savings between customers and shareholders. The latest is Yorkshire Water. Yorkshire is also planning to copy the regional electricity company penchant for share buybacks - a nice little wheeze for ensuring that if the Labour Party does get in next time round, there will be nothing left to raid by way of windfall tax.

But let's be charitable about all this and give credit where credit is due. The water industry, like the electricity industry, is at last beginning to respond to therapy, though it seems to be fear, rather than desire for improvement, that is driving the cure. With so many different versions of the new "sharing mentality" now on offer, however, the question arises of what is the correct and fairest way of dividing the spoils.

The politically highly incorrect view is that any distribution of efficiency gains over and above those already built into price controls by the regulator is unfair on shareholders, since the deal was meant to be that all these gains went to them. That was before the regulators so woefully underestimated the scope for efficiency gains, however. Plainly there has to be some form of clawback. At present the size of the clawback is determined entirely by the individual companies on a voluntary basis for their own particular public relations purposes. A degree of competitive benchmarking is creeping into the process but by and large it is erratic and arbitrary, depending on which area of the country you live in. For both shareholders and customers it would be an advance if some kind of best practice rule were introduced.

Monetary arrangements are not working

The drama of last month's interest rate decision was mostly absent from yesterday's meeting between the Chancellor and the Governor of the Bank of England. True, Kenneth Clarke postponed the meeting and Eddie George turned up early anyway. But this time there were no emergency news conferences and radio interviews to justify the decision not to raise base rates. It is still not completely certain that this was indeed Mr Clarke's decision. In contrast to the US, we have no policy announcement as a matter of course after the monthly meeting. There are no rules to govern when the Bank acts if it is going to, so there is some possibility that Monday morning will bring an unpleasant surprise. It looks unlikely, however. So far the Chancellor seems largely to have won the argument. In stark contrast to the tut-tutting and warnings of dire consequences that followed his decision last month to overrule the Governor's advice, it is now fashionable to praise him on the soundness of his judgement.

With each month that passes, however, that judgement is going to look more and more questionable. The truth of the matter is that recent news on the economy has not tilted the balance of the interest rate judgement all that much. In the meantime Mr Clarke has quite blatantly begun to prepare the ground for a loosening of the inflation target. He has announced that the target is not meant to tie the Government to a particular figure at a particular date - below 2.5 per cent by the end of this parliament, for instance. What is more, inflation of 3 per cent will be a triumph, he has said repeatedly.

Mr Clarke may of course be right in his view that the letter of the target is too restrictive. If inflation does not pass 3 or 4 per cent in this business cycle, Britain will be doing better than in the golden age of the 1950s and 1960s. The suspicion is, however, that an easy-going approach to interest rates is being deliberately pursued as a way of promoting in combination with tax cuts and the impending housing market stimulus a pre-election boom.

Whatever the truth, there is no doubt that, as far as the Bank of England is concerned, every month that Mr Clarke holds to the wait-and-see policy is a disaster for its painfully refurbished credibility. The whole point of the monetary arrangements was to liberate interest rate decisions from the Chancellor's personal judgements. Plainly they are not working.

Decisively slower growth might persuade Mr George to change his advice. Another sharp fall in the exchange rate or a big revision to the weak output figures might persuade Mr Clarke to accept the Bank's view of inflationary dangers. But unless the economy lets one of them off the hook, the tension between Governor and Chancellor will grow.

Attention should turn to pension fund trustees

Having tweaked the strings of nostalgia with the wholly irrelevant reminder that it only took 27p to buy a pint of beer in 1975, the National Association of Pension Funds' annual report, published yesterday, then goes on vividly to illustrate just how much the pensions sector has come to dominate corporate Britain over the past 20 years. The assets in occupational pension schemes have grown tenfold in that time to total pounds 300bn, making them easily the single biggest group of investors in the UK, owning some 35 per cent of equities. It is hardly surprising, therefore, that the debate over executive pay, and whether big shareholders are properly exercising their ownership responsibilities, should have turned much of its energy on to pension funds.

Corporate governance is going to be one of the key issues in coming years for pension fund managers. But, as the NAPF emphasised yesterday, we need to be clearer about who actually controls these funds before we start heaping out criticism of what they do or fail to do. Those ultimately in control are not the fund managers, but the trustees. These are usually the directors and employees of a company, local authority or trade union.

Too many of these trustees still leave the decision about which way to vote on shareholder issues up to their investment managers. To be fair, they do this largely because it is the investment manager who is meant to have the expertise level of understanding necessary to make the decision. Even so, when it comes to talking about ownership responsibility, then it is to the trustees, not the fund managers, that other shareholders, and pension fund members, should be turning their attention about voting policy.

Answers are not easy to find, however. This is a far more complex issue than the current emotion-laden debate sometimes suggests. Lines can become awfully tangled between the duties of trustees to ensure the best investment performance for members, and their wider social responsibilities. It may well be that excessive expectations are being raised about what these pension fund owners will be able, or willing, to do.