Outlook: Another privatisation ends in disaster as British Energy fails

It's hard to imagine a more alarming corporate statement than the one issued last night by British Energy, the company that dares not speak its real name as the owner of most of Britain's nuclear generating capacity. Roughly summarised, the company is saying that unless it gets immediate government support, it won't be able to meet its financial obligations and will have to declare itself insolvent. Only last week, the company was still insisting that it remained financially sound enough to meet all commitments. Several brokers issued buy recommendations on the strength of these reassurances.

This is the 21st century and companies that come cap in hand to governments are normally told to get lost. Even Labour governments are no longer in the business of rescuing lame duck industries. There are two reasons why it's different in this case. The first is that nuclear is baseload capacity accounting for something like 30 per cent of all electricity consumed in the UK. Takeout British Energy, which accounts for most of that capacity, and the lights will go off. The second is the vast decommissioning costs of nuclear power stations. Privatisation removed these liabilities from the government's books. It doesn't want them back again. What's more, if the stations were closed and decommissioned early, the costs of doing so would multiply in the taxpayer's hands.

The upshot is that the Government cannot afford to let British Energy go to the wall. British Energy has been desperately trying to persuade the Government to reform its idiotic new electricity trading arrangements, which have been a curse for all generators, but particularly nuclear with its relatively high costs. Unprotected by the hedge of a supply business, British Energy has watched impotently from the sidelines as the new trading arrangements have driven the wholesale price of electricity down and down. The market makes no allowance for nuclear's higher costs, or its key strategic position as a source of always on electricity supply.

British Energy was negligent in failing to buy and keep a supply business, where wholesale losses can be made up for through the relatively high price of domestic power. But what's past is past. The Government has no choice but to come to the rescue. Unfortunately, the precedent of Railtrack suggests there will be little if anything in it for shareholders when it does.

Zurich Financial

Corporate restructuring rarely comes as dramatic as that announced yesterday by Zurich Financial, and boy has the severity of the business downturn produced some corkers. After throwing everything in bar the kitchen sink, Zurich's first-half loss comes out at an astonishing $2bn. That's just the hors d'oeuvre. For main course there's a $2bn-$2.5bn rights issue, a swingeing cut in the dividend and billions of dollars worth of further asset disposals, all washed down with a cost-cutting programme that will slash 4,500 jobs. When all's said and done, Zurich reckons it will have raised $5bn to restore its battered finances.

The new man in the hotseat, Jim Schiro, promises that this shocker of an announcement gets all the bad news out of the way. After four profits warnings and a near 90 per cent collapse in the share price since the peak nearly two years ago, investors can only hope he's right. Zurich Financial is the Vivendi of the financial sector, and its previous chief executive, Rolf Huppi, its Jean-Marie Messier. After the merger with BAT's financial services division, which took in Allied Dunbar and Eagle Star, Mr Huppi set about transforming this provincial Swiss insurer into a global powerhouse, taking in everything from fund management to banking. E-commerce particularly fascinated him. Perhaps more than anyone in financial services, he thought the internet was the future, and he invested heavily and unwisely in all manner of internet-based ventures.

As with Vivendi, there was no apparent rhyme or reason to Mr Huppi's acquisition making, other than simply to get bigger and more international, and many of the businesses so acquired were second-class brands or worse. The task of integration always was going to be a challenging one, and to be fair, Mr Huppi probably made as good a job of it as anyone reasonably could. Unfortunately for him, he was swiftly overtaken by events, the calamity of the World Trade Centre attacks coinciding with the worst bear market since the mid-1970s. As for the internet, that's proved as untransforming for insurance as every other traditional industry.

Investors have high hopes of Mr Schiro, a no nonsense American accountant sometimes thought of as a bit of a thug. For the time being, he's being given a following wind by the capital markets, but they won't allow him any more than shortest possible of honeymoons. In theory he's joined at the bottom, and by becoming the first major insurer to get a rights issue away, he's stolen a march on others. Even so, the road ahead won't be easy.

Prudential/Clementi

Anyone holding a Prudential with-profits product must have been feeling pretty pleased with themselves when the company announced its half-year figures in July. Jonathan Bloomer, the chief executive, went out of his way to stress how financially solvent the company's life fund was. Others might be suffering, but the Pru saw the collapse in stock markets coming and took steps from 1998 onwards to reduce its equities weighting to much lower levels than others were running.

Phew!, they must have thought. Not for us the constantly rising penalties for early surrender, or the ever diminishing terminal bonus that others are declaring. Unfortunately, their relief has proved ill founded. On Wednesday evening, Prudential fell into line with others by slashing its terminal bonus on with profits pensions and bonds. Alright, so the reductions of between 5 and 10 per cent are not as large as some others have been declaring, and like Standard Life, there is still no market value adjuster (early surrender penalty) on sums up to £25,000.

Even so it's quite a blow. In recent years all life companies, including the Pru, have quite deliberately shifted the return on with profits products away from the annual bonus declaration, which is guaranteed, and onto the terminal bonus, which is discretionary. Any cut in the terminal bonus therefore has a disproportionately large effect. Policies maturing last week were worth so much. The same policy maturing this week will be worth considerably less. Arbitrary is hardly the word for it. Such declarations seem fully to justify the case for reform of the with profits sector.

By way of defence, the Pru points to performance figures showing that in the 12 years to the end of last month, its with profits life fund beat the index by 17.7 per cent. Furthermore, if you'd stuck anything less than £25,000 in the with profits fund, even as the market was peaking at the turn of the century, you'd still get all your money back plus annual bonuses if you chose to withdraw it now. With the market down 40 per cent in that period, no other stock market linked investment would come anywhere close. That's smoothing for you.

Well maybe. All the same, it's a sour note for David Clementi to be joining on. The Pru is actually in much better condition than many of its peers, but in these markets everyone gets tarred with the same brush, and with Ron Sandler breathing down everyone's neck as well, Mr Clementi could hardly have chosen a more challenging time to take up the chairmanship.

jeremy.warner@independent.co.uk