Success for a privatisation that fails every test

COMMENT

Selling off the family plutonium was never going to be the easiest task as the Government empties out the bottom of the privatisation barrel. The initial response from institutional investors suggests, however, that the sale of British Energy is going to be another depressingly successful operation.

One day into the institutional book-building and the offer is already fully subscribed at a price that suggests ministers will be looking at a valuation near the top end of their pounds 1.26bn-pounds 1.96bn range when bids close a week today.

There is no reason the sale should have flopped. British Energy shares should be the nearest thing you can get to Government bonds since every penny of juice they produce is used.

And even at pounds 2bn, it is still a steal. Furthermore, the proceeds will not be enough to cover the cost of just one of its reactors, Sizewell B, much less pay for the nuclear liabilities being left with the taxpayer in the shape of the Magnox stations.

For a fleeting moment there was just the chance that British Energy would prove a sell-off too far even for the Government's well-oiled privatisation machine. But in the end, all the worries about falling electricity prices and its ability to make real profits have melted away in the face of the yields on offer.

The fact that the flotation is heading for success only goes to prove the old adage that anything can be sold if the price is low enough.

Perhaps taxpayers should be used to rum deals by now. But this privatisation also fails the test that it sets an industry free from the dead hand of state ownership since, once in the private sector, British Energy intends to build, er, no more nuclear reactors. Ministers should not be slapping themselves on the back too heartily.

Costain shareholders get another raw deal

There's more than a touch of deja vu in Costain's confident announcement yesterday that its refinancing proposals would "transform the balance sheet" and "provide a firm base from which to move forward". Now when was it that Costain, or Constain as it was aptly rechristened by Reuters at one stage yesterday, last made such extravagant claims? Why, it was when the company last raised money from the stock market about three years ago. And yes, it said exactly the same thing about five years ago too, at the time of the rights issue before that. This is a company which has had so many second chances that it stretches credulity to give it yet another.

The problem is that Costain's downtrodden shareholders really don't have any choice. Iniquitous though the terms of the latest fund-raising are, if they are not agreed, the company will go under and shareholders will lose everything. They are being asked to surrender a good proportion of accepted shareholder rights as a the price of Malaysia's money. The first thing to go is the requirement that anyone acquiring a stake of more than 30 per cent has to make an offer on equal terms to all. After all they have been through, many shareholders would quite like the 50p-a-share the Malaysians are buying in at. But they are not going to get it. Unless you agree to waive this requirement, shareholders are told, there will be no Malaysian money at all, and the company sinks.

The second thing shareholders are asked to forget is that their rights in the fund-raising might actually be worth something. Shareholders are offered the chance to participate in the financing as if it were a rights issue.

If you really want to, you can subscribe three new shares at 50p for every one held. In normal circumstances, those who do not subscribe could expect their rights to be sold in the market and as a consequence receive a nice little cheque in the post. Not in this case. The shares remain suspended until the refinancing is agreed and in the bag. The result is that nobody will know for certain whether it is worth subscribing until it is too late to do so.

Costain's shareholders have suffered so many indignities over the years that a few more at this late stage hardly seem to make a lot of difference. The latest refinancing dilutes them down to just 25 per cent of the company's capital, worth perhaps pounds 30m if they are lucky. Not so long ago this company was valued at pounds 1.7bn. Most shareholders will be wondering why they didn't allow the company to go to the wall at the time of the last rights issue three years ago.

Jam tomorrow leaves Clarke in a jam today

When the Treasury publishes its summer forecast next week, the fun-loving Kenneth Clarke will again have to promise jam tomorrow, even though there is none today. That growth rate of 3 per cent really is on its way, he will insist, only it is going to have to be postponed until next year. And government borrowing? Yes, that too will be falling soon, justifying tax cuts for all, only it won't be this year, it will be next.

The Chancellor can be relied on to deliver the summer forecasts with his usual robust cheer. After all, the economy has given him plenty of grounds for satisfaction recently. The consumer upturn he predicted has got into full swing.

Inflation is falling and will almost certainly slip below the 2.5 per cent target later this year. Unemployment will probably continue to fall, although more slowly than in the recent past. What does it matter if the precise growth and borrowing figures are not what they were supposed to be?

In some respects, this bluff Midlands good sense is absolutely right. Nobody's forecasts are ever exactly right; it is the Treasury's unfortunate lot that its own forecasts are subjected to much closer scrutiny than everybody else's. Far too much fuss is made about small changes in numbers whose precision is completely spurious. The gist of Mr Clarke's prediction - that the economy is picking up steam - is correct.

But for the sake of the Tory Party's credibility the Chancellor will have to make good one of his promises: that the government budget will balance in the medium term. Unlike the 3 per cent growth figure, a declining deficit is meant to be a policy rather than the Treasury's best guess about how spending and tax revenues might turn out. Conservatives, even those like Mr Clarke who believe in a role for governments, are supposed to want to shrink it in size.

Luckily, "the medium term" is well after the latest possible election date, but even so the Government must keep the PSBR falling if it is to live up to its claim of sound economic management. The logical conclusion is no tax cuts without even bigger expenditure cuts.

Most City economists think there is next to no chance of meeting tougher spending targets, however tempestuous the current round of discussions. Does that mean no tax cuts this year? Budget Day in November will reveal whether electoral considerations are strong enough to turn Mr Clarke into a jam-today Chancellor.