Outlook: Britannic's gamble looks like it is going to end in tears

PFI fiasco; Audit shake-up; Generation gap

Britannic must have thought it was a harsh but smart move to treat policyholders and shareholders alike by scrapping not just the annual bonus but also the dividend earlier this month. Once an annual bonus is declared it becomes an immediate liability, eroding solvency accordingly and with a cushion of assets over liabilities of just 6 per cent, Britannic needed to conserve all the cash it could.

The combination of axing both the dividend and the bonus saves the group £300m. Unfortunately, the gamble has not paid off. Since Britannic's announcement three weeks ago, the savings have been wiped out twice over by the 70 per cent fall in its shares and yesterday they slid a further 12 per cent despite the group's desperate reassurance that it could remain solvent at "appreciably lower" stock market levels than we are now witnessing.

Britannic has been hit by the classic double whammy that threatens all quoted life companies. Not only have its assets continued to erode as stock markets plummet but its own value has shrunk too because scrapping the dividend made income funds forced sellers of Britannic shares.

The position looks about as grim as it can get. Britannic has done just about everything regulators ask of life companies in situations such as this and has effectively closed to new business. But it has suffered a devastating loss of investor confidence. When the credit agencies can cut the ratings of Standard Life and the Pru and declare that meeting solvency margins will be challenging for all by the strongest insurers, then the weakest go to the wall. And in this bear market, Britannic looks like the weakest link. Goodbye.

PFI fiasco

Another Salutary lesson from the whacky world of the private finance initiative where the Ministry of Defence has just blown a £100m hole in taxpayers' funds because of the careless way it let the contract to refurbish its Whitehall HQ.

There are plenty of things wrong with the manner in which the contract was handled but the biggest was undoubtedly the 16 months it took the MoD to bring the deal to financial close once a preferred bidder had eventually been selected. This gave the financial markets plenty of time to line up and get the men from the ministry in their sights. Sure enough, the very day that the MoD went out to raise the bank finance, lending rates went up.

Worse was to come. It was only after the contract had been signed that the MoD discovered the refurbished building would not be big enough to accommodate an extra 500 staff who then had to be billeted elsewhere. Perhaps a full survey would have helped but then the MoD was only spending £750m on a new HQ, not buying a new house.

Having watched the cost of the project escalate by some 15 per cent, the MoD then engaged in a frantic effort to beat its chosen contractor down on price, refusing to sign off the deal under the cost was fractionally below that of funding it through the public sector. The saving, calculated by the MoD at £100,000 or 0.015 per cent, is, as the Public Accounts Committee now diplomatically puts it, spurious at best.

The most remarkable thing about this ill-fated project is that it does not appear to have done the private sector contractor many favour either. Amey, which was part of the consortium selected by the MoD, has just sold its equity stake in the project for a fifth of its estimated value. The only winners, as usual, appear to have been the banks.

It would be nice to think the MoD is better at letting contracts when it comes to its front-line forces. Alas, the £10bn aircraft carrier procurement deal, due to be announced today, looks like being the mother of all compromises. A French design built in British yards with the prime contractorship split between two rival bidders. Oh dear. One for the PAC to get its teeth into a few years down the line.

Audit shake-up

Patricia Hewitt has rightly resisted the temptation to introduce a corporate equivalent of the Dangerous Dogs Act in response to the string of financial scandals that have swept in from across the Atlantic.

The measures announced yesterday to tighten up on company auditing were predictably described as tough. But in truth the Trade and Industry Secretary has been a pussycat compared to the mauling the Sarbanes-Oxley law is inflicting on US companies.

Britain's recent corporate scandals have been caused by incompetence and not mendacity and therefore a sense of proportion is appropriate. Furthermore, when big companies only have four multi-national audit firms to chose from, the art of the possible becomes more important than what is strictly desirable.

It therefore makes sense not to demand compulsory rotation of auditors. But it is also sensible to require lead audit partners to change every five years and prevent auditors from going on to work for their clients without a proper quarantine period.

As for barring audit firms from undertaking non-audit work for the same clients, the best safeguard of their independence is to require maximum transparency. The creation of a single regulator and a new independent audit inspection unit are good housekeeping measures.

There are already more than enough rules and regulations and boxes to be ticked without adding a new layer of bureaucracy or requiring directors to swear to the honesty of their accounts on pain of imprisonment.

The trickiest bit of the Hewitt reforms to implement will the plan to give increased powers to company audit committees. The Higgs review already threatens to cause a run on decent non-execs and so finding the talent to staff these new committees will be far from easy.

Generation gap

Once upon a time the future was orange. Now it's black. 3, the self-conscious name by which Hutchison Whampoa is entering the third-generation mobile phone market, opened its doors yesterday to the world. The svelte, ebony- clad young men who will staff its flagship store on Oxford Street may appeal to the fashionistas who patrol the West End. But will its prices attract many subscribers?

At £400 a handset and then perhaps another £50 a month for a contract, the new 3G phone is destined to appeal initially only to gadget geeks and those with money to burn or desperate to impress friends.

The handsets are due to go on sale in March but for a year 3's subscribers will only be able to hold video conversations with each other since none of the major networks are due to launch their 3G offerings until next year.

Even then, the lack of inter-operability is likely to limit demand. It has taken the networks an age to agree a common technical standard just for swapping still images. How long it will be before mobile can speak unto mobile and send a video clip of Michael Owen scoring the winning goal in the FA Cup is anyone's guess.

Like every technological advance, mass appeal will depend on much cheaper prices but the mobile networks are hung up on the need to recover the ruinously large amounts they paid for their 3G licences. BT persevered for years with the video phone only to accept finally that for the technology to work it was necessary to have one at each end of the line. Right now, picking up a Freeview box or a DVD player looks more appealing than becoming part of the 3 in-crowd.

m.harrison@independent.co.uk