Windfall tax a trick only Labour could perform

COMMMENT

The history of the windfall profit tax, such as it is, suggests that though it might provide governments with a short-term financial fix, its long-term effect is usually negative. That would certainly be the case for this Government were it to attempt to steal Labour's clothes and impose such a tax on the privatised utilities.

At best the net effect on public finances would be marginal. The value of both Railtrack and the nuclear industry, the two remaining privatisations, and the residual value of the National Grid, on which the Government hopes to levy up to pounds 1bn in capital gains tax, would fall materially. Indeed the City might regard the tax as such a serious breach of faith and contract that it would be unprepared to support these flotations at all. Both nuclear and rail are particularly sensitive to any suspicion that the Government might be prepared to break its promises. More than any previous privatisation, the price these two industries fetch will depend on the security of long- term contracts between the Government and the companies up for sale.

In the case of nuclear, the largest part of the fuel cost is dictated by contracts with BNFL, a state-owned company. With the railways, privatisation depends essentially on contracts by the government to maintain specific levels of subsidy to the privatised train-operating companies, which pass the money on to Railtrack in access charges. One of the key questions investors are already asking about the rail sale is how secure these contracts are and to what extent political interference could upset them. A windfall tax would answer that question. Quite apart from any philosophical difficulties the Chancellor might have with a retrospective tax of this, then, it is not practically a very attractive option either.

For the Labour Party it is a different matter. It has no privatisation "contract" with the City, so there could be no breach of faith. Furthermore, the negative impact on the rail, nuclear and National Grid flotations doesn't enter the equation. If they are not already sold, they will, under a Labour Government, remain in the public sector.

Even for the Labour Party, however, a practical analysis of the situation reveals that such a tax may not be a smart move. The Labour Party may be against privatised utilities, but it is in favour of private finance for public sector projects. Nobody is going to put their money into such ventures if when they go wrong and don't make money that is just tough, but when they do make money it is immediately snaffled by way of a windfall tax.

Nonetheless, a utilities tax might happen. The consensus among City analysts is that the water and electricity companies could withstand a windfall profit tax considerably higher than the pounds 3bn kite flown by the Labour Party over the weekend - a number Gordon Brown, the shadow chancellor, wisely refused to confirm.

Smith New Court calculates that water could remain financially viable after a pounds 5bn tax, and electricity after pounds 4bn, taking into account the effects of the latest electricity distribution price review. A levy of say pounds 1.5bn for water would still allow scope for regulatory tightening in 2000, and dividend cover would not fall below two times, says SNC.

With the regional electricity companies, the situation is different. All of them are busy gearing themselves up - clearing out the larder before Labour, or the Chancellor, decide to raid it. It is possible to envisage a situation in which some at least of the money now going back to shareholders would have to be recovered by way of a distress rights issue to fund the new tax. Bidders, both existing and potential, are certainly being given pause for thought.

Bells toll louder for building societies

The bells are tolling ever more loudly for the building society movement. With the last surge of conversion to bank and plc status, 40 per cent of the sector has already disappeared. Now, the next wave of heavyweight desertions is upon us. It is only a matter of time before Alliance & Leicester comes clean and announces its plans for a flotation. All the signs are that Woolwich is leaning heavily in the same direction, even if the formal line remains that it is only at the stage of considering all the options. At this rate, the once great building society movement will be reduced to a residual group of small, regional societies with deep local roots and a fast dwindling band of bigger-sized keepers of the mutuality faith, such as the Bradford and Bingley. These true believers are finding it harder and harder to defend themselves, however.

Abbey National showed the way with its successful hostile bid for National & Provincial earlier this year, smashing in the process the powerful myth that building societies could not be forced by outsiders into making radical changes. There is now hardly a head of a building society in Britain who does not realise he is utterly exposed.

The Alliance & Leicester's determination to convert is in part driven by the calculation that its ambitions will be best-served by putting itself in a position where it can pick off some of the smaller regional societies. Abbey National is already looking beyond N&P; we can also expect TSB to pounce any time now, while Lloyds, with Cheltenham & Gloucester, wants to buy more. Even NatWest Group, in keeping with its new-found reputation of being linked to any financial sector where a deal can be done, is sniffing furiously at potential targets.

Against this background, the Treasury's efforts to make it easier for building societies to compete with banks look increasingly irrelevant. The fact is that there was little in those reforms for the building society customer. In the end, building society members vote with their wallets. Against such a force for change, even a tradition as strong as the 200- year-old building society movement is finding it impossible to stand firm.

Customers will lose out in BT antics

BT has never had a good relationship with its regulator, Oftel. Yesterday's tit for tat, though on a minor enough issue, seems to mark a notable worsening of the position. BT has answered Oftel's objections to an apparent case of cross-subsidisation in the equipment market by simply raising its prices. In the short term, the consumer will have to pay as much as 20 per cent more for BT phones and fax machines - all in the name of fair competition. That's what too much regulation does for you, BT would argue.

Oftel's counter is that artificially low prices in the marketplace are of only chimeric value to consumers if competitors simply can't match the loss-leading antics of the market leader. In the end, choice becomes more limited as competitors drop out of the market. The dominant player is then able to raise prices without the checks and balances provided in a truly competitive environment. However, it is in the nature of such thinking that if it works at all it takes a long term to show through. The score so far: BT 3, Oftel 2, consumers 0.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Night job: Pacha nightclub DJ, Joan Ribas, is the new kingmaker on the island
news
Arts and Entertainment
Nicole Kidman plays Grace Kelly in the film, which was criticised by Monaco’s royal family
film'I survived it, but I’ll never be the same,' says Arash Amel
Life and Style
Retailers should make good any consumer goods problems that occur within two years
tech(and what to do if you receive it)
Life and Style
healthIf one was missed, vomiting blood was seen as a viable alternative
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Guru Careers: Graduate Editor / Editorial Assistant

£16 - 20k: Guru Careers: A Graduate Editor / Editorial Assistant is needed to ...

Day In a Page

Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada