The Guardian from London, Greater London, England • 31

The Guardian Friday August 27 1999 31 Finance setting earnings targets The folly of Notebook MarkMilner HP I argets can turn into millstones iust ask Rentokil. Yet their popularity persists. decent chance. Rolls-Royce's business is by no means as lumpy as might be imagined. Behind every engine order is along-running and lucrative demand for spare parts.

Take, for example, the proposed deal with Fastship. Rolls-Royce will be providing support for 20 years. That same deal offers the prospect of a significant broadening of the company's marine customer base. Rolls-Royce places considerable emphasis on its cost-cutting, too. That is all well and good.

But for Rolls-Royce, as for others, economic cycles still turn up and down. Nor is cost reduction an endless resource. The 41m spent on the advanced turbine blade facility is set to pay for itself and more but the number of such investments is finite. Even if Rolls-Royce can smooth the earnings path, should it feel the need to do so? Earnings targets that attract investors are rather like that other City favourite, "the progressive dividend which makes it impossible for companies to cut the pay-out without huge loss of face to say nothing of a share price heading south at top speed whatever the circumstances. If earnings pledges can become a millstone for those who make them, they can also become a soft option for investors an easy alternative to more detailed judgment.

That hardly makes them a benefit to either. King without cash Mervyn King, one of the Bank of England's deputy governors, clearly felt he needed to come up with something startling to catch the attention of the world's top central bankers currently gathered in the mountain resort of Jackson Hole, Wyoming. Mr King took as his text: The heirs of Bill Gates, not those of Alan Greenspan, shall inherit the mantle of monetary policy. Discuss. Or, alternatively the central banker as dinosaur in the age of advanced e-commerce.

Yet Mr King has not suddenly been converted into a free-thinking radical, kicking over the traces of monetary orthodoxy. His contention is that while central banks collectively may now stand at the apogee of their power, they face serious challenges if they are to retain their credibility. On the intellectual front, Mr King argues that central banks need to persuade the general public that low inflation is a good thing without periodically having to let it rip to demonstrate the price of instability. This is little more than an extension of the debate which has dominated general central bank theory in recent years, though it will become progressively more urgent as inflationary shocks are forgotten. Where Mr King makes his most distinctive departure from the gospel according to the Bundesbank is in his decision to address what technological developments will mean to the conduct of monetary policy.

What Mr King is suggesting, in effect, is that the development of technology could make money (in the sense most of us know it) redundant. At present, central banks hold a monopoly over the supply of base money cash and bank reserves. But once transactions are no longer settled through banking systems and new forms of e-currencies arise, central banks lose their leverage over interest rates and with it their key weapon in the battle against inflation. Oversimplifying again, this is only the latest step in an established process. Bullion replaced barter, paper replaced (high value) coins, credit cards have dented the market for cash because each new development was a more convenient method of payment.

But, from barter onwards, payment methods were always susceptible to central control of the supply of gold and silver coins, the issue of currency notes, payments through bank accounts, etc. Now, says Mr King, the possibility is opening up for what he calls a "pure exchange economy" as transactions are settled instantaneously through electronic accounts which owe nothing to central banks' control over methods of transmitting money. So central bankers would lose control of both the supply of money and its price. The only problem Mr Gates' heirs would need to crack would be public confidence in the electronic systems' integrity. Mr King's "e- equals extinction" thesis may sound a (ouch heavy going for a summer seminar.

But central bankers are forever banging on about the efficacy of preemptive action. Let them heed their own lesson. They may be in a hole, but this is not the time to stop digging. Turbulence ahead Despite the headline numbers, the latest set of forecasts from the CBI does not make comfortable reading. For the economy as a whole take-off may be smooth, but some sectors are set to encounter turbulence.

According to the CBI, manufacturing output will fall this year and grow at only half the rate of the wider economy in 2000. Exports will fall this year and, though next will see a recovery, it will still be at a slower rate than that at which imports will be rising. Most worrying is the outlook for manufacturing investment. The CBI reckons that will fall almost 15 this year and another 5.8 next. Not quite the stuff of which the best recoveries are made.

Rolls-Royce is the latest to reaffirm its lovaltv to the cause, pledging itself yesterday to the continued pursuit of double-digit earnings growth. Rolls-Royce's target gives it more room for manoeuvre than Rentokil's 20. But can a company in a business of making jet engines for customers as subject to political and economic vagaries as power generators, ministries of defence and commercial airline operators expect as smooth a flow of results as its target implies, not least when it is fighting a price war? Actually it has a Industry leaders say more rate cuts maybe needed Charlotte Denny are still far below normal and there is continuing downward pressure on prices," said Sud-hir Junankar, CBI associate director of economic analysis. The CBI expects manufacturing output to fall by 0.4 over the year, and that the shake-out in manufacturing jobs will continue. Total orders remain weak, but fewer firms are reporting-reduced order books.

"The recovery in the domestic economy is easing the pain of the high pound," said Michael Hume, UK economist at Lehman Brothers. "The pick-up in overseas demand, especially in the euro area and Asia, is beginning to soothe wounds from earlier in the year." A robust bounce-back in household spending this year is behind the CBI's revised Industry leaders yesterday said that further interest rate cuts will be needed to safeguard Britain's fledging economic recovery unless the pound falls against other world currencies. The Confederation of British Industry says the economy is heading for a "smooth takeoff" in 1999 and has revised upwards its forecast for growth this year by 0.4 percentage points, to 1.2. Kate Barker, the CBI's chief economist, admitted that the treasury had got it right last November when it forecast growth of between 1 and 1.5 a figure which was dismissed by many commmenta-tors as too optimistic. But she warned that it was far too soon for the Bank of England to consider raising rates, an option which the Bank's monetary policy com growth forecast.

But Ms Barker said the strength of the recovery depended on sterling falling from its present 2.90 German marks to around DM2.70. "There will be a need for further cuts if sterling stayed strong," she added. Ms Barker said that many of the weakest manfacturers had gone to the wall and the remainder were learning to live with sterling's strength. The CBI would still prefer a lower rate, of around DM 2.65, set for entry into the single currency some 30 pfennigs higher than the entry rate industry leaders were calling for 18 months ago. There are no signs of inflationary pressures in the economy, says the CBI.

It is forecasting that the Bank will continue to undershoot its 2.5 target for inflation for the next 18 months. Its August survey shows goods prices are set to fall over the next four months. The CBI expects unemployment to stabilise at around 1.8m on the government's pref-ered measure, based on the labour force survey. But while overall employment will rise by 160,000 during 1999 and 2000 due to robust growth in services, manufacuters are expected to cut 130,000 jobs over the same period. Despite predicting a small rise in public borrowing this year, the CBI says the chancellor, Gordon Brown, will comfortably meet his targets for controlling public finances.

Sign of the times lenders say the mortgage rush may be easing but endowment policy holders face new worries Photograph: Catherine Benson Rising optimism Baiance of expecting 'factory output to rise 5 40' Don't panic, FSA tells endowment borrowers Dan Atkinson mittee discussed last month. "The economy has just shifted out of first gear, and now is not the time to start applying the brakes," she said. "Favourable inflation prospects indicate there is no need to raise interest rates." The CBI also unveiled its latest monthly snapshot of industry which showed that factories are poised to increase output at the fastest rate for more than two years. "Manufacturers can take some heart from these findings, but export order books sonal trends, to 71,800 from 72,500. "July could well have been the turning point in the banks' secured mortgage lending, as data for approvals in the month were noticeably lower than the peak figures in June.

We would therefore expect a moderation in loan demand over the coming months," said Tim Sweeney, director-general oftheBBA. The number of approvals fell firmed it was working with the fraud squad, and that it would be tightening the regulations governing endowments. Concern also has been triggered by falling rates of interest and inflation. "This could mean that some endowment policies, particularly some 'low cost' or 'low start' endowments, might no longer be on track to pay out a big enough sum at the end to repay the mortgage in full," the FSA said. Endowment mortgages, which involve homeowners paying into a savings vehicle that will clear the mortgage at the end of the term, still account for 30 of all home loans sold, despite their tax advantages having been removed in the mid 1980s.

Critics say sales efforts have been motivated by the commission that endowment policies pay. The fraud squad is thought to be looking at three cases in which it could be argued that the buyers of endowment mortgages were sold products unsuited to their needs. The FSA's consumer relations director, Christine Far-nish, warned endowment holders against panic selling of their policies. "Most people who have an endowment mortgage should find that it is doing the job perfectly well." But the agency admitted that most endowment mortgages do not guarantee that the endowment will be large enough at maturity to pay the underlying home loan. Mortgage lending appears to have peaked.

Approvals fell last month for the first time this year as loans reached a record 7bn. The British Bankers Association said that the average price of a house fell slightly, in line with sea 95 96 97 98 Source: CBI Monthly Trends Enquiry City regulators yesterday issued emergency advice to millions of mortgage holders worried their endowments will fail to cover home loans. The financial services authority (FSA) urged people not to cash in their endowments without taking independent advice. The agency has been bombarded with calls from anxious homeowners in the wake of disclosures that Scotland Yard is investigating the alleged mis-selling of endowment mortgages. The FSA con by 8 in July compared with the record levels in June and the value of the loans was 9 HHHHHHHI down.

Ladbroke DTI and One20ne set for new coy rt Life tougher lice attle over mobile phone noes Chris Barrie that bids would be lower as a Pensions mis-selling provisions and new mortality assumptions for annuity business at the Pearl insurance company helped drive Australian parent company AMP to report a 163m) loss for the first half of 1999. AMP said its Pearl insurance unit set aside an additional provision to cover the phase two pensions mis-selling investigation and for new UK mortality assumptions. Alexon uplift Alexon, the Dash, Ann Harvey and Kaliko clothing retailer, yesterday reported a dip in profit from its main businesses but a higher Vodafone, One20ne, Orange and BT Cellnet would have to allow a new entrant to use their networks temporarily until that newcomer had established its infrastructure. One20ne won a judicial review overturning that decision earlier this month. The next generation of five licences is arousing intense interest among media and tele-corns groups, as the technology will allow a wide range of multimedia services to be transmitted to hand-held devices at high speeds.

Yesterday the DTI made it clear that it regarded its original decision as well-founded in law and the best option for consumers. It said it was de termined to promote competition in the next generation of mobile services, and that its legal advice suggested that DTI secretary Stephen Byers did have the powers to require an existing company to allow a newcomer to "roam" on its network. The DTI added that existing operators would not be at a disadvantage because the tele-coms watchdog Oftel would determine fair rates and spare capacity on the existing networks would be used. Support for the DTI's stance came from two companies considering whether to bid. One executive said the lack of a roaming agreement would increase the risk to bidders vying for the fifth licence, and result.

Another said it was "self-evident" that if the government appeal failed, it would be much more difficult for newcomers to draw up a viable business case. One20ne said it supported competition but objected to having its telecommunications licence altered without appeal. The telecoms regulator has ordered BT to stop discriminating against other low-cost telephone companies. Oftel said that consumers were being left without a telephone service among other problems when opting to switch from BT to other companies. Such a transition should be seamless, the regulator said.

The government and the mobile phone operator One20ne were set for a second court clash last night after the trade and industry department announced that it was seeking to reverse its defeat in High Court over future mobile phone licences. In an increasingly bitter battle, the DTI said it was seeking an expedited appeal hearing this autumn in an attempt to preserve the conditions due to be imposed on bidders making offers for the third generation of mobile phone licences. The government had decreed that the existing four mobile phone operators bets offshore John Cassy Hilton Group yesterday unveiled a shake-up of its Lad-broke gaming division by announcing plans to sell its overseas betting interests and move part of its UK operation offshore. Chief executive Peter George said that the changing face of global gaming, increased competition and poorer profit margins were behind the decision to withdraw from the overseas market. Hilton said it has already received "numerous approaches" for its the gaming operations in the US, South Africa and Peru and said the disposals should be "broadly earnings neutral" and completed inside 18 months.

In aseparate move Hilton said it is to follow the lead of rivals Victor Chandler International and William Hill and offer UK punters tax-free bets by ex-pandingoperations in Gibraltar. The uncertainty of the gaming industry led to a 4 fall in' first half profit as gamblers won more on UK horse races and Manchester United clinched an unexpected treble of trophies. "Major bets going against the book cost us 3m more than we forecast," Mr George said. Analysts welcomed news of the reorganisation and shares in Hilton closed up5.75pat243.5p. Offshore betting p35 overall result because of lower losses at the shoe Catties defies branch closure trend chain Dolcis.

Pre-tax profits rose by more than half to4.6m. ma itm 1 1 YES! Please start my 12-issue subscription with It is to Dav venture canital Jill Treanor ErouD Electra14m fnr its i line August copy or money Observer. Title (MrMs etc) Initialfe) Surname half-share in Dolcis. Electra, which backed Alexon's acquisition of the shoe chain from Sears at last vear. has Address made a 100 profit on its 7m investment.

i Postcode Catties, which provides loans to people who have irregular incomes and erratic work, has 300 branches after opening 45 in the first six months of the year, when it attracted 36,000 new customers. The expansion of its customer base led to a rise in its bad debt provision to 36.4m from 23.3m, which Mr Cran said was unconnected to the economic backdrop. "We're on a growth path. I suppose you could look at the bad debts as a marketing cost," he said. The group's customers are generally those who would fail the credit scoring tests used by the big high street banks.

But Mr Cran said Catties "won't touch" another 10m "socially excluded" people who earn less than half the average national wage and probably do not vote. The government's social exclusion unit is working with the financial services industry on ways of providing banking facilities for these people. Catties made 23m of its 24.1m profit from its con sumer division, which includes its Shopacheck branch network through which it provides loans to customers as well as selling products such as mobile phones and, through catalogue sales, beds. The group is 18 months into a five-year business strategy which aims to expand the consumer division through a nationwide branch network. Concern about its bad debt provisions helped knock its shares 18.5p lower to 330p.

It will pay an interim dividend of 2.27p on October 26. Catties, the loan provider and debt collector, is defying the trend set by banks and building societies by pressing on with plans to open another 200 branches in the next three years. Reporting a 16 rise in interim pre-tax profits to 24.lm, Edward Cran, chief executive, said: "We're in a unique position in financial services. We're opening branches and expanding our customer Home match Nationwide building soci 1 1 I enclose a cheque for 25.90 payable to Guardian Magazines 1 2 Please charge 25.90 to my VisaAmexMastercard Expiry dahsDDnn Date Signature MsisaUKEinofferopiwontytoiwsiibsmbmandnotavaih UycudonotmshtorecaveinfonmtionfnmielecttfthirdpMittpl ety extended its involvement in football with a three-year sponsorship of the Welsh football team. This adds to support for the English and Scottish teams..