LEADING ARTICLE: Labour dials a wrong number

Labour is losing its competitive edge. Mr Blair's British Telecom "deal", announced on Tuesday, was extremely ill advised. Whether an exchange of favours between a putative future government and a monopolistic business, or simply a gimmicky spin for conference on a sensible regulatory change, Mr Blair has sent a worrying signal to the British consumer.

It looks, on first sight, like a neat idea. Give BT access to new markets, and in exchange, they will connect schools, hospitals and libraries to the so-called information superhighway for free. Good for BT, which can mount a challenge to the North American utility companies now cabling much of Britain, and good for consumers, since it brings more competition into a growing part of the telecoms market. Good, too, for schoolchildren, patients and library users, who may otherwise not have the funds to connect up to the knowledge revolution.

But it doesn't quite work like this. BT is being prevented from selling home entertainment services precisely because it did not get on with the job when it had the chance. Cable video is potentially a very lucrative area of business, but it is also an extremely expensive one to enter. Unless the cable companies had been given a period of protection, unthreatened by the better established BT, they would never have had the incentive to invest.

Those who favour grand industrial strategies devised in Whitehall will argue the case for granting BT special favours to avoid the risk of rival cable-layers wasting money duplicating the network. A privileged BT, the argument runs, would have more chance of emerging a strong, international player. But this ignores strong evidence that companies mainly become world-beaters by being forced first to compete in their home markets.

The challenge for government is to ensure that the regulatory framework governing this fast-moving industry furthers at all times the interest of the consumer; that is the way to apply the pressure on the industry to become efficient.

This is not to say that the rules governing the cable video business should remain the same beyond 2002, when the current deal expires. BT almost certainly should be allowed to enter the market then, although that may require further action in the meantime to expose BT to additional competitive pressure in its other markets. The long-term aim is a free market through telecoms and broadcasting, with regulation only where the consumer interest requires it.

The problem is that Mr Blair presented this otherwise sensible regulatory change as a deal, an exemplary act of "new Labour, public and private working together".

So in place of beer and sandwiches with the trade unions, new Labour has wine and canapes with the bosses - still supporting producer interests rather than the little guy.

BT is apparently giving consumers something for free, but that is not what private sector corporations do: they earn profits for their shareholders and seek to use their influence with governments to maximise those profits. There is no such thing as a free telephone line.

Labour is in effect advocating a one-off boost to BT's monopoly power where some of the excess profits are used to do what the state wants, rather than allowing the regulator to ensure that this surplus is passed back to the consumer.

Mr Blair presumably thinks that the BT deal demonstrates the party's enthusiasm for working with the private sector. Yet it flies in the face of a promising trend in Labour's economic thinking in favour of promoting competition, attacking vested interests and standing up for the consumer. Mr Blair should ditch the BT deal, back customer power not big business, and, above all stop making policies on the hoof.