Why BT should not be given the keys to the City

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Labour is falling into a deep and well-signposted trap by reviving its plans to release British Telecom early from the ban on offering broadcast entertainment. Both in principle and in practice, this is a mistaken policy.

Establishing a new partnership with business is one thing; for government to enter into "you scratch my back and I'll scratch yours" understandings with individual companies is quite another. This is favour for a favour government and as such it is both unfair and potentially corrupt.

If Tony Blair and his team are going to favour one set of commercial interests (his main business cronies already seem very visible) over another, he's going to find the good will that business as whole presently has for the new administration dissolving before his eyes.

The function of government is to create a framework of public policy for society, individuals and businesses to operate in. Setting up sweet heart deals with individual companies, however well intentioned the aim, only undermines that purpose.

Quite apart from these points of principle, however, there are also some very practical reasons for believing the proposed deal with BT to be flawed. Here's why.

Let's begin by asking what Labour proposes to give away and what it can realistically expect in return. The first part of this question is the easier to answer. BT has been lobbying the government for permission to broadcast TV down its telephone lines for years.

Despite some sympathy for its position, this has been resisted on the grounds that to lift the ban early would be a breach of the Government's commitment to the cable industry. Cable has been investing billions in advanced fibre optic networks on the expectation that its privilege of being able to in offer both broadcast TV and telephony is protected at least until 2001 and possibly longer.

What Labour plans to do, provided BT delivers on its side of the bargain, is progressively phase out this advantage from next year onwards, ending it altogether in 2001 when BT will be allowed to compete on an entirely equal footing.

This would be a concession of considerable importance to BT, the effect of which might be to halt any further cable investment in its tracks. Without its present competitive advantage over BT, cable may feel disinclined to complete the rest of the network. While it is true enough that the cable companies are a shower, having failed largely to capitalise on the opportunity they have been given, few would think it a good thing if all cable investment now came to a halt.

This is more especially the case, since whatever Labour thinks it has agreed with BT, this is not a company about to provide an alternative by spending pounds 15bn wiring up every household in Britain to the superhighway.

Actually, there seems to be some confusion over what BT's side of the bargain is. The deal agreed by Tony Blair at the Labour Party conference two years ago was that in return BT would connect schools, hospitals and libraries. The total cost of this quite limited initiative would not be much more than pounds 60m. Then there was also a vague promise by BT to do its best to develop a nationwide "broadband network". That would be much more costly - anything up to pounds 15bn.

If there ever was a BT blue print for such an ambitious national enterprise, it will now be gathering dust in some forgotten vault. BT has long since moved on. Its recent linkup with BSkyB is deliberately set up as an alternative to such investment, and for the time being this venture provides all the interactivity BT wants. Having now linked up with the dominant supplier of subscription TV, its old network, outdated though it might be, will be sufficient for most purposes.

In other words, it doesn't look as if this very considerable regulatory concession is going to buy the Government very much at all. Against the pounds 60m of investment in schools, libraries and hospitals, the Government must take into account the possibility of a very considerable downside.

First, there is the possibility that cable will give up its already half hearted chase altogether. Second, there is a strengthening of BT's monopoly position in the market, possibly in conjunction with that other great monopolist, BSkyB. Is this what Labour really wants? Our digital future dominated by a combination of BT and BSkyB, and dominated, moreover, via an old technology, out of date, copper wired network?

So here's a bit of advice to New Labour. Never put your trust in a monopoly. They may seem to promise the earth but in truth they offer neither progress nor value. Don't drift back to the bankrupt corporatist values of the 1970s. They didn't work then, and they won't work now. To the extent that BT is now one of Britain's world class companies that we would all wish to support and nurture, it is because of competition and deregulation, not despite it. There may be a lot wrong with the present market driven approach to development of the superhighway, but giving BT and its allies the earth is not the answer.

Like many in the City, I'm waiting with some apprehension to see what sort of approach Margaret Beckett and her new team at the Department of Trade and Industry are going to adopt on mergers. Philosophically, I suspect, they'd quite like to put the kibosh on the whole fee driven business. Certainly most of what they did in opposition would lead you to that view.

Mrs Beckett was herself once very keen on the idea of reversing the public interest test, so that companies be required to prove their takeovers are in the public interest, rather than merely demonstrate they are not against it. You don't need to know much about these matters to realise such an approach would effectively have spelt the end of the mergers and acquisitions game. These things are impossible to prove one way or the other.

As for Nigel Griffiths, the minister put directly in charge of competition policy, he used to be in favour of referring virtually everything to the MMC when in opposition, though admittedly this was a stance apparently dictated as much by his desire to rubbish government decision making across the board as anything else.

Even so, none of this bodes well for City corporate financiers. They'll just have to hope that the wiser counsel of New Labour eventually prevails. Of this, there is a reasonably good chance. Sir Gordon Borrie, the director general of fair trading, has been charged by Mr Blair with conducting a review of most aspects of competition policy. And though Labour will want to toughen up the public interest tests a little, giving much greater priority to employment issues, root and branch reform of mergers policy seems unlikely.