City antipathy fuelled by fear and loathing

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The Independent Online
City advisers to the rail privatisation have been told that a windfall tax on utilities is not on the agenda. This contrasts with the Treasury's refusal to discuss whether a windfall tax is being considered or to confirm its previous dismissals of the idea.

Against the background of City claims that a windfall tax on water and electricity would undermine the prospects for future privatisations, the Department of Transport is believed to have told advisers on the rail sale not to raise the issue of a windfall tax at all.

It is concerned that if advisers begin to make inquiries about whether a tax is likely, it could set off damaging scare stories in the City.

Although there would be no direct impact on rail, prospectuses for the sale might have to refer to the general impact of a government switch towards windfall taxes. However, there is no indication of whether the department's assurances are being backed by the Treasury.

Business leaders slammed proposals for a windfall tax. Adair Turner, incoming director of the CBI, said a windfall tax would arbitrarily interfere with contracts made when the utilities were sold.

Mr Turner said: "If you sell a house and three years later you regret the price you sold you have no right to say you should change the terms of the contract," a move which would set a "dangerous principle". Also a tax would not necessarily catch those who had made the original windfall gains since they may have sold their holdings, he said.

Mr Adair's criticisms were backed by Tim Melville-Ross, director-general of the Institute of Directors, and by the water and electricity industry trade associations.

Meanwhile, IBCA, a London based credit rating agency, said that Labour's proposed pounds 3bn windfall tax would have limited impact on the water industry, although political risk facing the industry would increase.

The impact on any one water company would be limited and felt for one year, and IBCA believed the water companies could meet a levy without any long term impact. IBCA has downgraded the credit ratings of some water companies but it cited slower earnings growth, expansion in other areas and the threat of takeovers that could lead to capital restructurings as reasons for this.

Adair Turner interview, page 22