The recession in France has left a varied trail of damage in the leveraged buy-out business.

The worst of the economic downturn may be over, but caution remains the watchword for investors, banks and sellers. Some analysts estimate that total transactions are about 20 per cent down on two years ago, and that only four or five large banks are now active in the sector.

Average gearing for new leveraged deals, or debt-to-equity ratio, has fallen to between 1.5:1 and 1:1 from up to 5:1, according to Mr Dominique Peninon, director of Alpha Associates and president of the French Venture Capital Association (AFIC).

Some deals put together in the late 1980s are now shaky, even though the gearing never reached the spectacular heights of that in the US. Meanwhile, there has been a shake-out of operators in the field, with a number of bank subsidiaries having pulled out altogether.

LBO France, which is known as leader for large transactions, has concluded no deals this year, because asking prices are too high, said its chairman, Mr Gilles Cahen-Salvadore. 'Prices must come down or French economic growth must pick up,' he added.

Others take a brighter view. A team consisting of the Credit Agricole subsidiary (Unicredit), Banque Nationale de Paris and Lazard's Partenaires fund has closed three large leveraged management buy-outs this year, all with an expected return on equity of more than 20 per cent, said Mr Eric Licoys, general manager of Lazard Freres' Fonds Partenaires Gestion.

This is less than the 30 per cent achieved in the past, but it is still healthy because French long-term interest rates are now at a record low, he pointed out.

Overall, the sector has not suffered as much as it might have done. 'Despite high real interest rates in the past few years, the recession and stricter bank lending terms, French leveraged buy-outs have held up reasonably well,' added Marc Bradford, manager of Unicredit's structured finance division.

The market for medium-sized companies is 'still fundamentally expansionary,' and many family enterprises will need a solution to handover problems in the next decade, commented Mr Charles Diehl, director of Barclays Capital Developpement.

Prices in the middle range are now 'more reasonable', because potential outlets are fewer. German and other European corporations that were looking for a foothold in France have other priorities, and the Paris second market for smaller stocks has been 'a disappointment,' Mr Diehl said.

The picture for the buy-out/buy-in balance is mixed. For some operators, buy-outs are still in the majority, while for others buy-ins have taken the lead. For Financiere Saint Dominique, buy-ins are between 10 per cent and 20 per cent ahead, explained the firm's chairman Denis Mortier.

Whichever the case, perhaps more significant is the fact that tougher cash demands mean that it is the financiers rather than management who often end up controlling the enterprise.

One company that has carved out a niche in buy-ins, or rather in taking long-term minority stakes in family firms, is 3i. Each year, between 100 and 150 candidate bosses of about 40 years of age come forward. About 10 are selected, who then usually find the target companies themselves. Where 3i comes in is in putting the financial package together and in negotiating the deal, explained 3i director Mr Guy Zarzavatjian.

What has changed in the company's steady flow of deals is that the ranks of potential bosses have increased sharply over the past few years, as lay-offs because of corporate mergers and dwindling profits have hit more senior managers, Mr Zarzavatjian said. Another change is that only about 3,000 or 4,000 family firms are now healthy enough for 3i criteria, about half that of two years ago.

Even so, Barclays' Mr Diehl is 'astonished by the number of very profitable medium-sized enterprises in France.' This is because they have kept most wage increases at the rate of inflation or below, and have raised productivity.

On a positive note, there is plenty of venture capital around waiting for the right investment, and more spin-offs of healthy subsidiaries are expected to permit corporations to concentrate on core business. However, AFIC's Mr Peninon says that, instead of being sold directly, more firms could and should be spun-off in leveraged deals.

On the fiscal side, the industry may soon be given the flexibility it has been seeking in exoneration of capital gains tax on venture capital firms' and funds' investments, provided that more than 50 per cent are held in non-listed companies.

At the moment, this applies only if the target is the direct holding company of the operating subsidiary and holds less than 40 per cent of the voting rights. But this is rarely the case, as corporate holding structures are often two or three tiers deep, explained Mr Jean- Francois Court, chairman of AFIC's fiscal and legislation committee.

Hopes are now pinned on an amendment to the 1994 draft budget that will allow exoneration for gains on shares in any tier of the structure, provided that the 40 per cent rule is respected, he said.

A number of other technical aspects of venture capital operations should be ironed out soon. 'This will not revolutionise the sector,' but should promote buy-outs by making the venture capital business more 'attractive and profitable,' Mr Court added.

He welcomed proposals just issued by the CNPF, the employers' organisation, to promote the handover of companies. Part of this would be to relax the rules on staff buy-outs, which are known in France as RESs.

Announcing the proposals, CNPF vice-president Ernest-Antoine Seilliere said that RES deals had lost their appeal, causing the market to come to a standstill.

Budget minister Nicolas Sarkozy will be looking at the whole question of companies changing hands when the government's 1995 budget is prepared, and may include measures then. The government has a continuing policy of encouraging small and medium-sized enterprises, in order to create jobs.

The MBO business may not be booming for all, but at least the recession seems to be bottoming out, and regulations look as though they are going in the right direction.

When Dutch commercial vehicle maker DAF collapsed at the beginning of this year, receivers in both the Netherlands and the UK found themselves picking up a bewildering array of pieces.

But their underlying resolve, to find solutions which would keep as much as possible of the business as going concerns, paid off.

The group has been split up, with several different owners and substantial refinancing. But workforces have been retained - though they are much shrunken - and trucks are continuing to come from assembly lines in Holland, Belgium and Leyland, Lancashire, with vans still being made at Washwood Heath, near Birmingham.

It nevertheless took several months to pull together the management buy-out led by Mr John Gilchrist at the Leyland truck manufacturing plant, once the headquarters of UK state-owned Leyland Vehicles which DAF effectively took over in 1987.

That potential backers were not falling over themselves to come forward is not surprising, for what is now Leyland Trucks Manufacturing is operating in markets which have been undergoing one of their most savage recessions since the second world war. In some Continental regions, its end is still nowhere in sight.

In leading the buy-out, Mr Gilchrist, who had been managing director of Leyland DAF, the UK subsidiary of the collapsed group, finally found backing in the form of Pounds 5m of equity funding from Barclays Development Capital, with working capital finance provided by National Westminster Bank in a total package estimated at some Pounds 40m, although the total has never been formally disclosed.

By the time a deal was concluded with the receivers, Mr John Talbot and Mr Murdoch McKillop, of accountants Arthur Andersen, Leyland's workforce had been slashed from 2,200 to 700.

But a structure was also emerging from the ashes of the old group, which has provided Leyland Trucks Manufacturing with a 'captive' customer, while also allowing it to pursue other possibilities for manufacturing vehicles for other truck companies.

The 'captive' customer is DAF Trucks NV, formed in March with Pounds 370m in equity and loan backing from the Dutch and Flemish regional governments, banks and institutional investors, and which effectively represents a resurrection of the Dutch and Belgian truck manufacturing and distribution operations.

Mr Gilchrist's company has signed a long-term contract, under which Leyland's truck output will continue to be sold through 'new' DAF's continental outlets.

As part of what Mr McKillop describes as the biggest and most complex manufacturing receivership in the UK since the collapse of Rolls-Royce in the early 1970s, the rescued Dutch company also reached agreement with the UK receivers to acquire Leyland DAF Trucks, the 'old' DAF's former UK marketing and sales arm in Thame, Oxfordshire.

Thus the Leyland company is also selling to a Dutch group back in control of the UK dealer network, and so providing the key market for the 45 series light trucks and some heavier models produced at Leyland.

The Leyland MBO was also made possible in part by the entire 230-acre site being acquired from the receivers by Lancashire Enterprises, the development arm of Lancashire county council, for development as a business and technology park - thus cutting costs for LTM, which is merely leasing the site of the assembly plant.

Apart from the slashed workforce, far-reaching reforms in working practices agreed with those who have kept their jobs, and a pay freeze agreed until the end of next year, the receivership has freed Mr Gilchrist and his colleagues from the debt burdens and restructuring and rationalisation costs, which did so much to drag down the Dutch group.

Indeed, Mr Gilchrist maintains that Leyland is now a lower cost plant per vehicle than any rival.

Six months after LTM's renaissance, the UK truck market is recovering sharply. Sales of trucks over 3.5 tonnes were up 14.4 per cent in the first 10 months of the year, and Leyland DAF is once more closing the gap to market leader Iveco Ford.

Mr Gilchrist has forecast a turnover of Pounds 140m and an output of about 8,000 trucks annually from 1995, and asserts that the company will be shown to be profitable when the results for the financial year to the coming December 31 are disclosed.

Mr Gilchrist's backers - he refuses to discuss the company's shareholding structure - still have some time to wait before the true strength of the company's renaissance can be judged. It is, for example, lacking the normally lucrative revenue stream which a manufacturer can expect from the sale of parts.

It derives only a royalty income from them, the parts distribution company having been the subject of a wholly separate management buy-in.

In the long term, substantial investments will be required in new products - one of the key factors which brought the old DAF group to its knees.

Mr Gilchrist is undeterred: 'Challenging market circumstances overwhelmed our former parent company. But they have created here one of the leanest manufacturing operations in the European automotive industry.'

The regional pattern of management buy-outs in the UK changed dramatically in 1993, with surges of activity in Scotland and two English regions - the south-east and the north-west - but it is probable that nothing much can be read into this.

There were sharp declines in share in south-west England, East Anglia and the north, and smaller ones in Yorkshire and Humberside, the West Midlands and the East Midlands, while Wales and Northern Ireland slightly improved their normal, if small, shares.

The figures, which relate to the first six months of the year, have been collected by the Centre for Management Buy-out Research, at Nottingham University. How significant they may be, however, is obscure.

Dr Ken Robbie, research fellow in the centre, says this is because management buy-out and buy-in activity suffered a sharp decline in the first six months, recording the lowest first-half total since 1987. This means changes in regional shares may well not herald a new pattern.

Only 206 deals were completed in the first six months of the year - about 37 per cent down on the same period last year. The aggregate market value of Pounds 1.52bn fell about 10 per cent. Activity cannot therefore be seen as 'normal'. Individual deals - or taking longer than usual to conclude them in some areas - may have had a disproportionate effect.

The south-east shows how erratic the change in shares appears. After falling back to 32 per cent of the national market in 1992, it shot up to 39.3 per cent of the first-half deals of 1993 - the highest it has ever achieved.

The north-west, which is the second biggest UK economic region after the south-east, also picked up to a record share - 11.3 per cent, against 10.6 per cent in 1993. Scotland surged most, moving from an 8.8 per cent share to 13.6 per cent.

The biggest dives were in the south-west, which plunged from 8.1 per cent last year to 3.6 per cent in the first two quarters of 1993, and the north of England - the north-east and Cumbria - where the 1992 share of 5.2 per cent collapsed to only 1.8 per cent. East Anglia went from 4.7 per cent to 3.0 per cent.

Yorkshire and Humberside fell by only 0.2 percentage points to 7.7 per cent, the West Midlands by 0.5 points to 8.3 per cent and the East Midlands by 0.4 points to 6.6 per cent. Wales's share moved up slightly from 4 per cent to 4.2 per cent, as did Northern Ireland's, from 0.5 to 0.6 per cent.

What Dr Robbie has noticed, however, is an increasing number of deals involving people working across regional borders. The most notable example was the buy-out of Leyland Trucks from Daf (see this page). The plant is in Lancashire, but most of the professional advice came from corporate finance experts, lawyers and other professionals in Leeds, led by Coopers & Lybrand.

This is different from before. The rise of regional financial centres such as Manchester, Leeds and Birmingham had seen each regional capital keeping deals within the region - and the professional fees generated very much to itself.

The reduction in general levels of activity is one reason why there may now be some 'poaching' in neighbouring regions.

Another is rationalisation within professional firms, with a few top consultants operating on a super-regional basis - covering the whole of the north, say, from Manchester or Leeds - but drafting in local reinforcements when deals move into the final stages of processing.

At the other end of the scale, polarisation of financial and professional services into regional capitals can rebound.

Some companies on Merseyside, for example, resent having to go Manchester for advice. Grant Thornton, the accountancy firm, has therefore put a substantial corporate finance resource into Liverpool, headed by Mr Amin Amiri.

Some advisers are sceptical about the management buy-out market anyway. Mr Lindsay Forbes, director of the British Linen Bank - the merchant arm of the Bank of Scotland - in Manchester, thinks most have been nothing special.

There were many of them in the regions, because of the way many national companies bought subsidiary companies in the 1980s and spread their branch factories around the country. When they had to rationalise, they started lopping in the regions.

Moreover, many of the companies were bought cheaply by their managements from divesting parents which were anxious to be rid of them. They have not had to do much to perform well enough for backers to look to flotation around now to realise their investments.

Mr Forbes says that there remains a shortage of good deals, partly because there are now fewer motivated vendors, but more importantly because there is a perpetual shortage of good managers who can triumph when there is not much general scope for improvement.

A mediocre management can hide its deficiencies when there is only slight economic upturn if price-to-earnings ratios take a quantum leap from a low base. If the price of a buy-out was five times earnings three years ago and it can be floated at 15 times much higher earnings now, everyone makes a great of deal of money.

But a company that costs 12 times earnings now, in an improving economic climate, will probably have to float or be sold at more than 20 times earnings to achieve similar gains. This will require very good management, and this is in shorter supply than deals.

'There's a lot of money looking for a quality home - and not enough quality homes,' says Mr Steven Hartley, Manchester corporate finance partner of Stoy Hayward, the accountants, summing up the current regional MBO market.

In spite of this, Stoys in Manchester has been lead adviser in several MBOs this year, including M & I Materials, Palletower, Armourshield, Sondhi Kellar and Lorco Hygiene, and one MBI - Xenon Holdings.

Mr Tony Hyams, regional director of Barclays Development Capital, also remains bullish. He thinks one reason why the north-west has improved its national share this year is because the financial and professional services sector has developed so strongly in Manchester.

'Over the past few years we have seen a discernible trend for the money to move where the industry is. There is also an increasing preference in industry to deal with local advisers wherever possible.

'Meanwhile, the cautious approach of many quoted companies and trade buyers towards acquisition often leaves the existing management in a strong position as potential purchasers.

'Those choosing the MBO route will find plentiful funds in the regions, not only from venture capitalists, but also from banks which have taken far less of a battering in the north than the south,' Mr Hyams added.

Management buy-out lawyers have had a tough time recently. The recession has changed the market-place. Clients now exert greater influence on the legal services they purchase and on what those services cost. Lawyers are unhappy.

Stiff competition among law firms for the MBO work that was around in the recession gave both management teams and financial institutions the whip hand in negotiating fee levels.

Many deals are now done on a contingent basis. If the deal aborts, the lawyers don't get paid - or, as John Kitching, of Lovell White Durrant, puts it: 'No hay, no pay.'

'It's very difficult', says Tony Keal, of Allen & Overy. 'If a deal collapses, no one wants to bear the cost, because no one is making a return. The management team can't bear the costs, venture capitalists don't want to, and the banks don't see why they should. The result is the lawyers end up carrying the cost.'

Perhaps this is a reaction to perceived overcharging in the past, he says. But he warns that there is a danger of it going too far. Fees have been pushed down to such an extent that it is starting to affect the quantity of due-diligence work that professional advisers can afford to do. Whether that will have some impact on recoveries or failure rates in future is a big question, says Mr Keal.

There is also a danger that the pressure on all parties to ensure the deal gets done, so that the principals make a return and the advisers get paid, is such that it could lead to too much completion for completion's sake.

You could reach the stage where no one is asking whether this deal should really be done, or done in this way, he says.

Matthew Layton, of Clifford Chance, doesn't believe competition among law firms for MBO work has increased that much; especially for the larger buy-outs above Pounds 10m where, he says, there tend to be only a few firms that have the expertise to handle that size of transaction.

But he does accept that clients have become much more conscious of the fees issue. This has meant that law firms have had to work very hard at controlling costs, striving to come up with straightforward documentation which will simplify the negotiation process, and also trying to ensure that there is no duplication of effort among the advisers to the deal.

There is an obvious overlap with the due-diligence work that accountants and lawyers do, for example, which has to be avoided, says Mr Layton.

The recession has also clearly had an effect on the way deals are likely to be structured in the foreseeable future. John Kitching, of Lovells, says that, faced with restructuring a number of the more complex deals put together during the boom period at the end of the 1980s, lawyers learnt the hard way whether their original documentation was any good or not.

Unscrambling and restructuring deals where the agreement of large syndicates of 20 to 30 banks is required has proved particularly stressful. But the positive side, says Mr Kitching, is that those who have slogged it out during the recession will have a better knowledge of what the market will and will not back, which they can use in the future.

Adam Greaves, of Gouldens, who has just advised on the restructuring of Maritime Transport Services, a Pounds 155m MBO which he worked on in 1989, confirms that the experience of unscrambling some of the more optimistically structured deals of the late 1980s will result in much simpler deals in future. The days of ratchets are gone, he says. The trend is towards simple equity share structures, so that if it works it works, but if it doesn't you can at least start again without the complexities of past deals.

All the lawyers are agreed, however, that the level of MBO activity has picked up over the past six to nine months. There have been a lot of flotations at the exit end and a lot of small MBOs, many financed without institutional money by so-called 'business angels', says Adam Greaves.

Matthew Layton says there may have been a slight downturn in the actual number of new MBOs, but there is still plenty of activity because, although debt is harder to obtain than it was in the late 1980s, there is still a lot of equity money in the market looking for a suitable home.

Lawyers have become more proactive and creative in looking at new structures in recent years, partly because the lack of available debt forced them to find alternatives to standard senior debt financing, but also because vendors have become increasingly interested in retaining stakes in the buy-out vehicle. Some deals these days are structured more like joint ventures, he says.

Lower interest rates have been good for buy-outs, but they also mean there is less pressure on vendors to sell; and, as they don't want to sell at a low point in the market, they prefer to keep an equity stake in the joint venture. These deals are much more complex from a legal point of view, Mr Layton adds.

Tony Keal says he thinks the supply of senior debt has actually expanded again, particularly compared with six months ago. The evidence of that is the Gardner Merchant deal, he says. But he agrees that the structure of deals has changed.

'They are now much more conservatively structured. In the heyday of the late 1980s, deals were being structured with debt-to-equity ratios of 6:1; now 1 - 1.3:1 is the norm.'

The unspoken hope of the MBO lawyers is that the Gardner Merchant deal represents the first of a second wave of bigger buy-outs. If that turns out to be the case, perhaps it will at last enable them to return to what they regard as more realistic rates for the job.

------------------------------------------------------------------------ LEADING SOLICITORS ------------------------------------------------------------------------ Acting for Manager Total equity/debt leader ------------------------------------------------------------------------ Clifford Chance 87 29 116 Ashurst Morris Crisp 46 13 59 Allen & Overy 39 11 50 3i Legal 41 0 41 Lovell White Durrant 27 7 34 ------------------------------------------------------------------------ Macfarlanes 23 8 31 Herbert Smith 20 9 29 S J Berwin 13 14 27 Alsop Wilkinson 10 16 26 Dickson Minto 12 13 25 ------------------------------------------------------------------------ Eversheds 6 19 25 Slaughter & May 10 14 24 Freshfields 19 3 22 Wilde Sapte 20 1 21 Turner Kenneth Brown 8 11 19 ------------------------------------------------------------------------ Norton Rose 11 7 18 Cameron Markby Hewitt 13 5 18 Nabarro Nathanson 8 8 16 Travers Smith Braithwaite 8 5 13 Wragge & Co 3 10 13 ------------------------------------------------------------------------ Dibb Lupton Broomhead 2 9 11 Simpson Curtis 2 9 11 Linklater & Paines 7 3 10 McGrigor Donald 4 5 9 McKenna 3 6 9 ------------------------------------------------------------------------ Osborne Clark 1 7 8 Pinsent 3 3 6 Simmons & Simmons 1 5 6 Taylor Joynson Garrett 1 4 5 Kimbell & Co 0 5 5 ------------------------------------------------------------------------ Addleshaw 1 4 5 Halliwell Landau 0 5 5 Dundas & Wilson 3 1 4 Berwin Leighton 2 2 4 Theodore Goddard 0 4 4 ------------------------------------------------------------------------ Walker Morris 1 3 4 Edge & Ellinson 1 3 4 Bird Semple 3 1 4 Maclay Murray Spens 1 3 4 Other/None/Duplication (35) 140 105 ------------------------------------------------------------------------ Total 425 425 850 ------------------------------------------------------------------------ Qualification: Pounds 10 million plus deals, acted in four or more Source: KPMG Corporate Finance ------------------------------------------------------------------------

Pressure is growing for reform of the rules governing conflicts of interest in corporate finance, as accountants muscle in on management buy-outs.

Increasing numbers of accountants recognise the tensions in acting for a range of different parties in a transaction. Yet so far, few of these concerns are reflected in any professional guidelines.

Mr Howard Leigh, managing director of Cavendish Corporate Finance, says: 'Whoever is retained to sell a business should not be advising on buyers, and those who want to keep the audit of both should not advise either.'

He points out that, if the auditors are asked to conduct due diligence, they will end up investigating their own files, which throws up a clear conflict of interest.

If they are advising the company on whether to accept an MBO and at what price, while also advising the MBO team and knowing how much money they will be willing to accept, then they are in a conflict.

The larger accountants traditionally brush off such criticism. They argue that such commentary is self-interest on the part of smaller firms and boutiques that are missing out on work going to the larger firms.

Certainly, Mr Andrew Pollock, of Rees Pollock, a London-based firm, admits that there is still prejudice by potential clients in favour of using the Big Six accounting firms on the basis of their reputation. 'There is conservatism; the IBM factor is going to rule for ever. Clients go for safety,' he says.

The big firms talk about Chinese walls, the use of different partners or different offices to conduct the different assignments, and other safeguards to prevent any conflict.

'We have a rule that if we do due diligence and the audit, we will use entirely separate teams,' says Mr Neil Lerner, head of corporate finance at KPMG Peat Marwick. 'Where both parties are clear about our role, we are happy to act on both sides. The most important thing for the finance houses is to ensure a steady flow of deals.'

However, Mr Leigh says: 'The partners meet and talk at the coffee machine. You should not advise in a situation where you end up face to face with yourselves.' He says concern over potential profit-sharing, or the risks of litigation if things go wrong, acts as an incentive for partners - who are all equity-holders in the same firm - to share information, too.

These are not purely theoretical concerns. 'Everyone denies it happens, but it does,' says Mr Leigh. He highlights the case of a deal with six parties, each represented by a partner from the same firm. 'They knew there was a problem, but they wouldn't stand down. Things had gone too far.'

Some of the larger firms are also changing. Mr Ian Krieger, head of buy-outs at Arthur Andersen, says: 'We have a policy that, if advising management, we won't do the due diligence. We don't feel comfortable otherwise. But we're in a minority. I think there is a need for new rules. Until that happens, people are going to work on both sides of transactions.'

A second concern is the growth in contingency fees. 'There is a lot of ambiguity,' says Mr Leigh. 'People huff and puff about bonuses or premiums on the audit fee.' He says there should not be any discount or contingency element in the audit fee or investigation work.

That issue is reflected in current ethical rules for accountants, which outlaw contingency fees on activities where a professional opinion on financial information is required.

Mr Jock Worsley, chairman of the chartered accountants' joint ethics committee, says there are also plans to introduce draft new rules early next year. These would recommend greater transparency in fee structures, and outlaw any contingency element linked to the audit or other professional opinion on financial information.

But he says there are no plans yet for any wider rules that would limit the potential conflicts of an accountant acting on both - or several - sides in an MBO transaction.

Meanwhile, there seems to be plenty of money available for MBOs, but a frustrating lack of deals. Howard Leigh says: 'Staff in venture capital houses have been doing less, because deals have collapsed and they are now subjecting them to more scrutiny. But they want to get the deals out before the end of the year.'

Ian Krieger says: 'There's a lot of equity money around. The funds are plentiful, but there are not an awful lot of deals around. But business is pretty good. In the last year, we've been quite lucky and our deals have come to fruition. It's the luck of the draw.'

And Neil Lerner adds: 'I think everybody who is honest would admit that 1993 has been difficult. We have had a buoyant year in privatisation and mergers and acquisitions. The only disappointing area has been MBOs.'

---------------------------------------------------------------- LEADING ACCOUNTANTS ---------------------------------------------------------------- Number of deals ---------------------------------------------------------------- KPMG Peat Marwick 145 Coopers & Lybrand 85 Price Waterhouse 63 Touche Ross 52 Ernst & Young 45 Arthur Andersen 38 Others, none, not known (duplication) (3) Total 425 ---------------------------------------------------------------- Qualification: acted in Pounds 10m-plus deals Source: KPMG Corporate Finance ----------------------------------------------------------------

Peter Gee, managing director of the traditional family shoe retailer, Stead & Simpson, has put his career on the line for a Bimbo - and the board is delighted.

The Bimbo in question may well have saved the 160-year-old company from extinction. It is insider speak for a management buy-in/buy-out, which involves both existing and outside managers.

S&S resorted to the transaction earlier this year, when it became apparent that this was the only way to survive. Four years under the ownership of property group Clayform Properties had squeezed both cash and investment at S&S.

'We were looking at a blank wall,' says Mr Gee, whose family has been in the business since it was founded in 1834.

S&S's story in recent years makes unhappy reading. After years of independence as a solid, if somewhat dull company, Stead fell into the hands of aggressive developer Clayform Properties in 1989. Clayform was particularly attracted to S&S's 110 freehold high street properties.

Almost overnight, however, the property market collapsed. Clayform forced S&S to enter into a series of sale-and-leaseback transactions, which provided instant cash for the parent, but left the footwear retailer exposed to the volatile rental market.

When recession set in the following year, S&S found investment in its own business virtually impossible.

It was at this stage that Mr Gee, and Mr Martin Brayshaw, the finance director who came to S&S with the takeover, realised that the retailer had to escape from Clayform's shadow to survive.

In early 1992, they began to investigate the possibility of a management buy-out. By August they had a business plan and had recruited a team including a former British Shoe director to strengthen the merchandising division.

There was only one problem. The oppressed retail sector had fallen heavily out of favour with venture capitalists.

S&S had several characteristics which made it unattractive to potential funders. First, it had been making increasingly heavy losses for three years. S&S would also need to invest in its business, with the return not immediately apparent. The lead time - the period between the design and sale of a product - is particularly long in the shoe industry.

Finally, S&S needed to be freed completely from the worries of funding debt, so it could focus on its products and presentation.

Messrs Gee and Brayshaw found little sympathy for their plight with potential City financiers.

'They were chiefly looking at a company where they felt they could hold the sales line and cut out a load of costs to get profits,' says Mr Gee. 'But we had cut and cut costs as part of Clayform.' S&S could cut no further. Instead, 'what we had to do was drive sales forward.'

Finally at the end of last year, S&S was introduced to venture capitalist Apax. Here, almost unbelievably, S&S found ready listeners.

Apax had been on the lookout for a retailing investment. 'Our view was that it was a good time to go back into the retail sector, the shoe sector in particular,' says Mr Cyril Freedman, of Apax. After years of bloodletting, the UK shoe industry was beginning to show some signs of life.

S&S was attractive for several reasons: the well-known brand name and reputation for value; a focus on less fashion-conscious market towns; and strong administrative and financial controls.

However, there remained the fact that S&S's unusual needs made it something of a gamble. For Apax, the only way to reduce the risk was to add new management and demand a greater equity stake, along with a higher than normal degree of financial commitment from the team. 'It was very important that the people involved had a lot to lose and a lot to gain,' says Mr Freedman.

Enter S&S's current chairman, Mr Ken Bartle, with retail experience, particularly in merchandising, covering Trueform, Freeman Hardy Willis and Lilywhite's. He replaced one of the original team, at Apax's request.

The revised management team was then asked to put up Pounds 500,000 to back Apax's Pounds 4m investment. Apax would get a 70 per cent stake in return.

Clayform, anxious to reduce its debt, sold the S&S business and Pounds 3.5m in borrowings for Pounds 1. Apax's investment was used to pay off the debt and clear the overdraft. By the middle of May, S&S was ready to start its new life with cash of Pounds 750,000 and banking and credit facilities of Pounds 1.75m.

Although these are still early days and cash is still tight, S&S's management is convinced the Bimbo has done its work. It has given S&S the headroom to focus on longer-term investment, while also dealing with the day-to-day battle in the high street. Apax and the management have even put up further funding for S&S to purchase 22 more retail outlets.

Apax, for its part, is looking to stay with S&S for at least three to four years. At that stage, the footwear retailer that fell for a Bimbo may well return to the market.

Widening employee share ownership during a buy-out, through an employee share ownership plan (Esop), is not a priority for most buy-out teams - which may seem surprising.

'It's much easier if you can go to the employees and say, 'Well, we've bought the company, but there's something in it for you',' says Mr Mark Anderson, director of Esop and buy-out specialists New Bridge Street Consultants. The Esop provides a convenient mechanism for share distribution to employees.

However, in the UK there are only 50 to 70 pure Esops, under which all employees are offered shares, according to the Esop Centre. Around 20 per cent were set up under buy-outs.

Under an Esop, an employee benefit trust (EBT) is set up. It buys equity with a loan guaranteed by the company. The allocation of shares can be deferred until a time when the management has its hands less full with the buy-out. Capital and interest payments on the loan by the company are tax deductible.

A profit-sharing trust (PST), in a form approved by the Inland Revenue, is often set up in tandem with the EBT, to distribute the shares. If employees hold the shares given to them by the trust for five years, income tax is not levied on them.

In the 1980s, high profile private-sector buy-out involved Esops, with MFl's MBO perhaps the best known. They are no longer so prominent.

'The Esop is an additional complication, and an MBO is already a very complicated transaction,' explains Mr David Reid, tax partner and Esop specialist with solicitors Clifford Chance. Buy-outs have to be arranged in secrecy. 'The Esop is essentially a further party to the transaction.'

The business climate is unfavourable. 'Esops often involve gearing, and people have cut down on that recently,' says Mr Anderson, though he adds that this is not a problem where shares are offered to the workforce at full value.

It is necessary to look to the public sector to see Esops playing a more significant role in buy-outs. Service organisations with unionised workforces look on employee buy-outs as the preferred method of privatisation, and an Esop is often used to distribute shares. Port authority and bus service buy-out teams have used Esops, which are also likely to feature in rail privatisations.

The biggest employee buy-out this year involving an Esop is believed by its managers to have been that of Mainline Partnership, a Pounds 50m-turnover, 880-bus company, which provides services for the Sheffield area. It was purchased from the Yorkshire Passenger Transport Authority by its 2,200 staff. Shares are being allocated on the basis of length of service.

Another large bus company employee buy-out with an Esop in tow is in the pipeline. Last month, Manchester Passenger Transport Authority nominated an employee team as the preferred purchaser for GM Buses South, a 2,000-employee, Pounds 50m-turnover company servicing the conurbation's southern half.

'There will be an Esop,' confirms the leader of the buy-out team and managing director designate, Mr Peter Short. 'We've been looking at a structure in outline that would involve both an EBT and a profit-sharing trust.'

The ownership structure is still being discussed with funding institutions, but the aim is clear. 'The hope is that the employees will hold approaching, if not actually, 51 per cent,' says Mr Short. The deal should be concluded by the end of the year.

Quadron Services is distributing shares to its 400 employees. Based in Weston-super-Mare, the Pounds 11m-plus turnover company was born this autumn out of an employee buy-out of Woodspring district council's contract services arm. It is involved in cleansing, grounds maintenance, building, leisure and catering services.

A PST was not set up. The company is prepared to meet the relatively small tax liability arising on the shares on its employees' behalf. 'It's administratively easier to do it that way, given the amounts involved,' explains Mr Robin Blagburn, senior corporate finance manager at Unity Trust Bank. The bank often advises trade unions in privatisation buy-outs.

Communicating the potential benefits to the workforce has not been easy. Five trade unions were involved in the buy-out negotiations. 'EBTs, Esops in themselves are complicated devices,' says Mr Mike Martin, buy-out team leader and managing director.

No one group has overall control of the company. The largest portion of equity, 45 per cent, will go to the employees, while management gets 30 per cent and funding institutions the remainder.

Some of the venture capitalists approached were not enthusiastic about the size of the employees' stake. 'They were interested in the concept, but not perhaps to the degree that we were interested in pursuing it,' says Mr Martin.

The workers will have to purchase most of their allocation. 'We want everyone to be a stakeholder,' says Mr Martin. 'We also want them to be dipping into their own pockets, because we think that means something.' The size of the stake on offer to each employee is between Pounds 200 and Pounds 6,000 worth of shares.

Mr Martin stresses that it is too early to see whether the new ownership structure will be successful. He is mindful of problems with other deals, including the outcome of last year's Pounds 31m Medway Ports buy-out.

In September, a year and a half after the deal and in a more promising economic environment, the company was sold to Mersey Docks and Harbour Board. It viewed Medway as being of strategic importance and paid Pounds 104m. Three hundred dockers, who had left the company after restructuring, lost out on the bonanza, receiving Pounds 2.50 for their shares against the Pounds 37.25 they fetched nine months later. Mr Martin says that Quadron will take measures to avoid a similar situation as far as possible, including revaluation of shares at six-monthly intervals.

Esops might be more popular for buy-out teams if reforms took place. Their rarity is due to the unsatisfactory nature of available structures, according to Ms Susie Hughes, director of the Esop Centre. Case-law Esops are, in theory, open to challenge by the Inland Revenue. Problems with the 1989 Finance Act's Esop include its requirement that a majority of trustees be non-director employees. The Esop Centre hopes the government will make the statutory Esop more user-friendly.

Attempting to buy your business at the same time as you are running the company makes for a demanding and exhausting time. Managers who stage a management buy-out can expect an apparently unending round of meetings and presentations, as they attempt to convince financiers that they are worth backing.

They may not even have the certainty that their employer is willing to sell the business to its management. And, while they are preparing their own offer, they may also be required to show other potential bidders round.

Since most managers only carry out one buy-out during their career, everything will be new to them. Managers responsible for running small divisions and subsidiaries may find themselves considering strategic and financial problems which have previously been dealt with by head office.

Fortunately, as buy-outs have become a more accepted part of the commercial world, there is no shortage of advisers who specialise in this area. But the problem then arises of choosing the most suitable accountant, lawyer or venture capitalist without running up large bills.

The first issue that has to be resolved is whether the business is up for sale. Some group managements are opposed to buy-outs on principle - they believe the buy-out team is in too privileged position in any negotiations. It is not unknown for managers who suggest a buy-out to be told to clear their desks.

Finding out if head office is ready to consider a sale can best be done by making an anonymous approach through an accountant or other business adviser. He, or she, should also be able to give an honest assessment of whether the business is suitable for a buy-out.

Financiers tend to like stable businesses in traditional sectors, with strongly positive cash flows to pay off the debt. They are less attracted to high-technology businesses with uncertain prospects in rapidly changing markets.

Advisers should be chosen for their experience in dealing with your type of business. Some venture capitalists specialise in particular sectors, but more commonly they differentiate themselves by the size of deal they back. Some are only interested in the larger transactions of Pounds 10m value or more. Others are quite happy to spend time on smaller deals. Increasingly, on the larger deals, the venture capitalists have been taking a lead role, putting a deal together and only then approaching management to take part.

It is important that the managers feel they can get on with their advisers on a personal level, because they can expect to spend many hours in meetings.

Professional advisers can act as a buffer between the managers and the vendor during negotiations. Many managers find it difficult adopt a dispassionate stance when dealing with the boss with whom they have worked for many years. They feel uneasy about pointing out the weaknesses of a business which they have been responsible for running.

A crucial document in the buy-out process is the business plan. Accountants can help to draw these up, but it is no use presenting a plan which has come out of someone else's computer. It must clearly be the work of the managers themselves.

Many venture capitalists are deluged with business plans, so it is important to keep it short and to the point. Over-elaborate plans, running into hundreds of pages, are unlikely to be read. Venture capitalists complain of business plans which calculate large numbers of future scenarios down to the last decimal point, but which neglect to include essential information about the business or the management team.

The plan should contain a short executive summary, probably no more than two pages, and put the detailed financial calculations into separate appendices.

The body of the plan should describe the background and recent history of the business; its products or services; and its markets and marketing strategy. The quality of the managers and their ability to work together as a team will be vital to the success of the buy-out, so detailed profiles of the management will be needed. On the financial side, there should be summaries of past and projected profit-and-loss accounts, balance sheets and cash flows.

In terms of management, the venture capitalist will be looking for a strong team leader with support from managers with a good mix of other skills. Marketing, production and financial expertise will normally be required. If anotherwise strong team lacks skills in a particular area, the venture capitalist may well suggest bringing in an outsider to fill the gap.

The financiers will be looking for a management that can take a hands-on approach to the problems, which are bound to arise once the business is independent. Managers who have grown too used to the support services provided by a large corporate headquarters may not do as well once they are on their own. Managers can expect to be called on to tackle a broader range of problems in a smaller, independent business.

Fund-raising involves a balancing act. The business must not be saddled with an impossible burden of debt at the outset. At the same time, there must be enough money to see the company through the early years without the need for a refinancing. The banks have become more cautious in their approach to buy-outs, and will not back plans requiring an unrealistic amount of debt.

Set against the total amounts which will be needed to finance a deal, the sums provided by management appear small. Individual managers can typically expect to be asked to provide between Pounds 25,000 and Pounds 50,000 of their own money. The point is that, for many managers, this represents a considerable financial commitment. It is enough to motivate them to work hard, but not too much so that they feel under excessive pressure.

Curious as it may seem, at the point when they are negotiating their independence, managers need to be thinking about how they might dispose of their business. Their financial backers will be looking for an 'exit', either by means of a trade sale or a flotation, after a few years.

If the business does very well, the managers may be able to refinance the deal and buy out their backers, thus retaining full control themselves. But more likely outcomes are a stock market listing or a sale.

Managers must be prepared for the loss or limitation of their independence. But set against this is the prospect of considerable personal wealth if the business does well.

------------------------------------------------------------------------ LISTED AND UNLISTED MBOs OVER POUNDS 10M ------------------------------------------------------------------------ Number Value Dollars m Total Listed % Total Listed % ------------------------------------------------------------------------ 1981-84 25 1 4 857 310 36 1985 23 2 9 869 70 8 1986 27 2 7 939 30 3 1987 33 4 12 2,753 480 17 1988 55 6 11 4,508 940 21 1989 71 12 17 5,851 3,780 65 1990 59 4 7 2,038 170 8 1991 44 1 2 1,880 20 1 1992 55 1 2 2,319 10 0 1993 (to date) 33 0 0 1,631 0 0 Total 425 33 8 23,645 5,810 25 ------------------------------------------------------------------------ Source: KPMG Corporate Finance ------------------------------------------------------------------------

--------------------------------------------------- ESTIMATE OF TOTAL UK MBOs --------------------------------------------------- Average Value size Number (Pounds m) (Pounds m) --------------------------------------------------- 1980 100 40 0.4 1981 180 130 0.7 1982 200 550 2.8 1983 220 240 1.1 1984 200 270 1.4 --------------------------------------------------- 1985 250 1,070 4.3 1986 300 1,300 4.3 1987 350 3,230 9.2 1988 400 5,070 12.7 1989 500 6,490 13.0 --------------------------------------------------- 1990 550 2,840 5.2 1991 500 2,600 5.2 1992 520 3,040 5.8 1993 (to date) 390 2,190 5.6 --------------------------------------------------- TOTAL 4,660 29,060 6.2 --------------------------------------------------- Source: KPMG Corporate Finance ---------------------------------------------------

------------------------------------------------------------------------ Larger management buy-outs 1988/1993 (total funding Pounds m) ------------------------------------------------------------------------ Pounds m 1988 1989 ------------------------------------------------------------------------ 0 - 25 Kirklees Chemicals (10) Busways (10) Radstone Tech (10) Citytab (10) Celebrity CP (10) Rosenthal (10) National Express (10) Fine Art Wallcoverings (10) Lowfield (11) *Range Valley (11) Burlington Int (12) *Abacus (11) Motor World (13) Seckers Silks (11) *Burn Stewart (13) Coin Industries (11) AMG Inds (13) *Maison Caurette (11) Harrap Publishing (13) Lancashire Enterprises (11) *Autoclenz (13) *Haigh Castle (12) *Clairmont (14) Golden West Foods (13) Grand Transport Systems (14) *Severn (13) Lowndes Lambert (16) Tallent Eng (13) Grampian CF (18) Horlicks Farms & Dairies (13)

Peerless (18) *Valor Stoves (14) Maccess II (18) *Country Casuals (14) ABI Caravans (20) Country Holidays (14) John Perring (21) BREL (14) Welland Homes (21) Eurovein (14) Travellers Fare (21) *Hill Leigh (15) Meteor (22) *British Air Ferries (15) Yorkshire Rider (23) *Exide Batteries (16) Wilcomatic (17) Geest CD (17) Godiva (17) *Britannia Data Mgt (18) Barbour Campbell (19) Mercado (20) Solicitors' Law Stationery Soc. (20) *ServiceTec (20) Harland & Wolff (21) Slade (21) *Themes Int (22)

* Rubatex (22) Hamleys (24) ------------------------------------------------------------------------ 25-50 Gooding (26) Elizabeth Shaw (25) *FJC Lilley (27) Aspinal Curzon (25) Harveys Furnishings (28) AEC (28) Mono Pumps (29) *Beacon (29) Eurocamp (32) Trinity (31) UK Shoe (36) Bell Fruit (32) Dwek (37) Fenchurch Insurance (32) *Needwood (38) *Court Cavendish (35) VF Int (39) Norwich Corrugated (36) Alma (40) Britannia (36) Goldsmiths (40) Nottingham Group (37) Sheffield F'masters (42) MBS (41) Video Arts (44) Meco Int. (45) Healthcall (46) Salt Illingworth Morris (49) ------------------------------------------------------------------------ 50-100 *Financial Ins (55) MCD (52) York Trailer (61) Tyzack (52)

Glass Glover (62) *Crockfords (53) ITC (70) Gill & Duffus (58) *Lewis's (74) Kenwood (68) Palmer & Harvey (85) *Square Grip (69) Response (97) Highland Participants (73) IMS Lycrete (98) *James Neill (79) Strand VCI (89) ------------------------------------------------------------------------ 100-250 Invergordon (116) Ryan (113) British Fuels (134) London Clubs (125) Hollis (146) Maritime Transport Servs (155) Argus Press (207) MW Marshall (175) Virgin (248) Charles Church (203) ------------------------------------------------------------------------ 250+ *Cope Allman (265) Allders (260) BPCC (273) Magnet (667) Bricom Inds (405) *Gateway (2,375) *Lowndes Queensway (450) Reedpack (805) ------------------------------------------------------------------------

Pounds m 1990 1991 ------------------------------------------------------------------------ 0 - 25 Mercury SDS (10) *Ambion Homes (10) Viscount Catering (10) Davenham (10) Peter Cox (10) Pleasureworld (10) *Wilcox (10) *Bianco (11) Chemical Manuf. & Refin. *Boythorpe (11) (10) Morris Homes (10) Arncliffe Homes (11) Saith (10) Samuel Banner (11) *Fairmead (10) Games Workshop (11) *Anglian Fast Food (10) *Wallace Int (12) SMT Omnibuses (10) Carpetland (12) Lambert Smith Hampton (10) *Drawlane (12) Nyge CSE Aviation (10) Gibson International (12) *East Lancs Paper Mill (11) Lodge Care (13) Eaton Williams (11) Power Group International (13) *Juliana Sound Services (11) *Bramall Dealerships (15) Fogarty (12) *Sitex Security Prods (15) Licensed Clothing (12) Systems Reliability (16)

Camb. Capacitators (12) *Eagle Taverns Premium Life (12) Kingsgrange (17) John Wilman (12) *BrightReasons One (18) Artfresh (14) DRG Litho Supplies (23) *Cannons (14) PL Holdings (24) *Hermes (14) Teamreason (14) English Glass (15) *Lydiashourne (15) *Canonbury (15) *Betta Stores (16) Kosset Carpets (16) Macfarlan Smith (17) Goldcrest (17) Alexander Drew (19) Flexpack (20) Staffs Tableware (20) *Wimpy Restaurants (20) Toplis & Harding (21) *Hamleys (24)

WW (21) Saga (24) Batleys (24) ------------------------------------------------------------------------ 25-50 Keller (26) Babcock Prebon (25) Hozelock (27) *Lyric Hotels (26) *Ravenhead (27) *Bison Holdings (31) Roxboro (31) Conder Products (34) Appledore (31) *Century Inns (34) *United News Shops II (33) Eurovein II (34) Normand Motor (34) Blue Arrow Personnel (36) Utd Pressings & Fabric. (35) RPC Containers (37) Inveresk (40) Nelson Hurst (38) British School of Motoring MediMedia (41) (42) *Walter Alexander (42) *David Brown (46) ------------------------------------------------------------------------ 50-100 Hay Group (50) *Enterprise Inns (56) Fallowgrange (73) West Midlands Travel (71)

Really Useful (77) *Ushers (75) Anglian Windows (84) National Transcommunications (75) *RMS (95) ------------------------------------------------------------------------ 100-250 Landhurst (158) Brunner Mond (101) Yardley/Lentheric (160) Taunton Cider (101) *Jarvis Hotels (215) Data Sciences (103) Devro (108) Field Packaging (121) Midlands Newspapers (134) Bristow Helicopters (200) ------------------------------------------------------------------------ 250+ Del Monte Foods (258) ------------------------------------------------------------------------ Pounds m 1992 1993 (to date) ------------------------------------------------------------------------ 0 - 25 *Audio & Vision Furniture Inenco (10) (10) Sharelink (10e) Universal Ceramic Mater. (11)

Coolkeeragh Power (11) Aerospace Composite Tech (11) Dopra Group (11) Crown Buckley (12) Whitworth's Produce (11) Westwind Air Bearings (12) Cascade Clubs (12) Robison & Davidson (14e) Dew Group (12) Lowe Alpine (14) Prontaprint (12) Douglas Concrete & Aggr. (15) Bolton Brady (13e) Radiodetection (15) Edgemond Group (13) Gold Crown Foods II (16) *CCA Stationery (14) *Benjamin Priest (20e) Interactive Media Services *Maiden Outdoor Advert. (21) (14) *Chamberlain Phipps Group *Coin Controls (24) (14) *Harrisons Industries (14) Astra Training Services (15e) Barrett Steels (15) Qudis Bytech (15) Hamlet International (16) Vymura International (16) Nova International (16)

Mark Birkbeck (18) Inspectorate (18) MF Industrials (20) Nimbus Manufacturing (22) *Discovery Inns (23e) *RSA Advertising (23) Zotefoams (23) Fosters Menswear (24) ------------------------------------------------------------------------ 25-50 Firsteel (26) Boulton & Paul (25) Clyde Port (26) Strathclyde Buses (25e) Swift Transport (26) *Hydron (27e) Standard Fireworks (27) City Technology (28) Atco Qualcast (28) Galliford Homes (30) British Technology (28) Peverel (31) *Centric Pubs (29) Victrex (32) Civil & Marine Slag Cement Lombard Continental (32) (29) *Marr Holdings (30e) British Int Helicopters (33) International Transport (33) Leyland Trucks Manuf. (35e)

Holmwoods Group (33) Drake Holdings Sycamore Taverns (35e) Medway Port (41) *Inspec Group (45) Salt Union (49) ------------------------------------------------------------------------ 50-100 Kier Group (54) Leyland Daf Vans (52) Aerostructures Hamble (54) Ashbourne Homes (53) *Unicorn Abrasives (56) *Multipart (56e) Goldsborough Holdings (58) *Colas (72) Bowglaze (62) *Teeside Holdings (63) Primary International (73) Caledonian Newspaper Pub'ing (94) ------------------------------------------------------------------------ 100-125 Budge RJ (103) Eurodollar (192) Express Foods (116) Thorn Lighting (200) Wellworth Supermarkets (128) McDonnell Douglas Info. (200e) Gaymer Group Europe (140)

------------------------------------------------------------------------ 250+ Gardner Merchant (402) *BP Nutrition-Consumer Pr(273) ------------------------------------------------------------------------ Larger management buy-outs are taken as those with total funding of over Pounds 10m (subject to allowance for inflation until 1986). UK MBOs include MBIs (indicated by an asterisk), but exclude leveraged acquisitions where the managers' stake is incidental, refinancings and UK funding of businesses with overseas head offices. Source: KPMG Corporate Finance, 1 October 1993

In August, Mr Freddie Aldous finally bought the business he set up 20 years ago. Mr Aldous, EuroDollar's 64-year-old chairman, led an 11-strong management buy-out team, backed by Prudential Venture Managers, which acquired the vehicle rental business from TSB.

He had set up the Swan National car-hire business in January 1973 for his employer, UDT Industries, the credit finance company which was acquired by TSB in 1981. Swan National was relaunched in 1989 as EuroDollar, to reflect the company's growing international strategy, and now ranks as the fifth largest vehicle rental company in the world.

The sale was the latest in a string of disposals by TSB, reflecting its decision to concentrate on its core retail banking business. In July, TSB sold Swan National Leasing, its vehicle contract hire business, to Forward Trust, the leasing arm of Midland Bank for Pounds 182.5m, and the Swan National car dealerships to Lex Services for Pounds 44m

In the case of EuroDollar, Prudential Venture Managers, the arm of the Prudential which invests in unquoted companies, had been introduced to the deal early this year by the corporate finance division of Touche Ross, which was advising EuroDollar's management.

'We were competing against two other groups,' said Mr Martin Clarke, a director of Prudential Venture managers which won the mandate in April after putting forward a proposal under which EuroDollar's management would retain a 40 per cent equity stake in the company.

Mr Clarke and the Prudential Venture Managers team spent the period between April and August in protracted negotiations with TSB which was advised by SG Warburg. 'We had a willing vendor, but what they were most concerned to do was to get the deal and the price right,' explains Mr Clarke.

The complexity stemmed from the fact that, on paper at least, EuroDollar was not a particularly attractive purchase. In its last half-year to March 31 1993, EuroDollar incurred a pre-tax loss of Pounds 7.9m, the result of a deterioration in trading conditions in foreign subsidiaries in Italy and France, part of the EuroDollar network in 27 countries, operating over 40,000 vehicles.

However the core EuroDollar UK business, which has 10 per cent of the UK market and is the largest provider of rental cars to the corporate sector in the UK, had continued to trade extremely profitably. Business clients account for more than 70 per cent of its turnover, and it has a fleet of 12,000 cars and 1,000 vans, operated from some 106 branches across Britain.

Under the terms of the Pounds 118m buy-out deal, TSB received sale proceeds of Pounds 59.9m, comprising cash of Pounds 22m for the net assets of EuroDollar which amounted to Pounds 20.4m on March 31, and Pounds 37.9m in respect of inter-company debt. The balance of Pounds 58.1m was used to repay existing company's debts.

Financing facilities totalling Pounds 192m were negotiated and arranged by Prudential Venture Managers, which holds a 20 per cent equity stake. The other equity investors, sharing a 40 per cent stake, were Charterhouse Development Capital, Electra Private Equity Partners and Morgan Grenfell Development Capital.

Both Mr Clarke, of Prudential Venture Managers, and Mr Norman Murray, deputy chief executive of Morgan Grenfell Development Capital, have joined the EuroDollar board.

In addition to the Pounds 61m in equity, which was used to finance the acquisition, provide working capital and discharge the borrowings of the foreign subsidiaries, Lombard North Central, Forward Trust, UDT and Gmac (General Motors Acceptance Corporation) provided Pounds 100m of leasing finance, and the National Westminster group provided Pounds 31m of bridging loan finance, mainly to acquire vehicles from TSB which are being sold and exchanged for leased vehicles enabling the bridging loan to be repaid.

As Mr Clarke notes, one particularly striking feature of the deal, which was the biggest management buy-out in the 1993 third quarter, is that the company has been unencumbered with conventional term debt from the outset.

Since the buy-out, the company has moved quickly to restructure its overseas operations and has already sold both of its loss-making subsidiaries in France an Italy. The new board is understood to have been particularly keen to sell the Italian business, which it had thought might have to be closed - at considerable expense and perhaps delay. In the event, Mr Clarke says EuroDollar has made a cash contribution to the new owner's rationalisation costs.

As a result, EuroDollar's turnaround prospects have been strengthened, and an early market debut, perhaps within 12 to 24 months, seems likely. EuroDollar's price tag could yet end up looking like a bargain.

A successful buy-out team seeking to raise new funds has had little choice in recent years. Its only real option has been to sell out to a corporate buyer, and face losing the independence which made the buy-out an attractive idea in the first place.

But the past 12 months have seen a considerable change in investors' attitudes, and the number of former buy-outs obtaining a stock market listing has risen sharply. Buy-out companies accounted for one in five of all new companies coming to the stock market in the first six months of 1993, the highest proportion ever.

Nottingham University's Centre for Management Buy-Out Research recorded 13 flotations of buy-out and buy-in companies in the first six months of 1993, compared with 11 in the whole of 1992 and four in 1991.

The main reason for this change in sentiment has been the far more positive view now taken of smaller company shares. Smaller companies performed poorly in the depths of the recession, but are now expected to return to above-average levels of growth.

This has meant that buy-out companies have been able to command attractive price/earnings ratios, typically around 17 or 18, at listing.

At the same time, corporate buyers, which in recent years have been able to pay highly to acquire buy-out companies, have withdrawn from the bidding. Many have been devoting all of their energies to surviving the recession, and have had little time to devote to acquisitions.

Welcome though this increase in the number of listings is, there is still a long way to go before new-issue activity matches the levels attained in the mid-1980s. In 1986, 37 buy-out/buy-in companies went to market, while in the following year there were 35 listings.

And while failure rates among buy-outs have declined over the past year, receivership remains the single most common form of 'exit'. No fewer than 41 buy-outs failed in the first six months of 1993, compared with 28 trade sales and 13 flotations, according to the MBO research centre. Receivership numbers began rising sharply in the late 1980s, to peak at 121 in 1991.

Despite the emphasis which venture capitalists place on finding an exit opportunity, remarkably few buy-outs have achieved one over the past decade or so. Even when receiverships and refinancings (second round buy-outs or buy-ins) are included, only 23 per cent of the buy-outs completed between 1981 and 1991 obtained an exit. Ten per cent went to trade buyers, while 4.4 per cent were floated.

This indicates that a large 'rump' of buy-outs remain under the control of the managers who acquired them. Many will be small buy-outs financed largely by bank debt, where there is no great pressure to achieve an exit, or companies where the managers own most of the equity. Others will have shown a mediocre trading performance, and would not obtain an attractive price if they were put up for sale.

Despite this surprising failure on the part of the buy-out industry to achieve exits, there is likely to be increasing pressure over the next few years. As many of the 10-year venture capital partnerships set up in the early and mid-1980s come to the end of their lives, their managers will need to realise their investments. This could lead to an increase in the sale of businesses.

The growing trade in second-hand venture capital portfolios is likely to speed up this trend. The manager who made the original investment, but now sees it on his books at a lower valuation, will be reluctant to crystallise his loss. If the portfolio is sold, the new manager can review each investment more dispassionately and take a decision to sell when necessary.

Many of the companies which obtained a stock market listing in the late 1980s turned out to be too small to attract much investor interest. They were neglected by analysts and market makers alike, and there was little liquidity in their shares.

Some of the recent buy-out flotations have been of more substantial businesses. Devro, a maker of sausage skins, was capitalised at Pounds 224m; Holliday Chemical Holdings at Pounds 161m; and RJB Mining at Pounds 103m. But a surprising number have still been small. Of 36 venture capital-backed companies floated in the year ended June 1993 (half of them buy-outs), nine were capitalised at less than Pounds 20m, while 11 were valued at between Pounds 20m and Pounds 50m, according to the British Venture Capital Association.

In contrast to the revival of investor interest in new issues, the London Stock Exchange has announced plans to dismantle the Unlisted Securities Market in 1996. The USM did well during the boom years of the late 1980s, but more recently has suffered from a negative image.

On top of this, the loosening of regulations governing the main market has reduced the need for a separate set of rules for the newer company. Meanwhile, in continental Europe, many of the secondary markets set up in imitation of the USM, have failed to establish viable trading volumes.

But although it is now easier to obtain a main market listing in London, the venture capital industry and many City organisations are keen to maintain a facility for listing the smaller company. They have put together an organisation known as the City Group for Smaller Companies to lobby for their interests.

The European Venture Capital Association, for its part, plans to put proposals to the European Commission for a market for venture-backed companies, though it is not yet clear whether this will be on a Europe-wide basis or with a national focus.

The creation of an efficient market for trading in the shares of smaller companies is vitally important for the venture capital industry. As part of its efforts to reinforce the status of venture capital, it is currently attempting to persuade the institutions to treat such investments as a separate asset class. A successful record of achieving exits is vital if it is to achieve this goal.

After the excesses of the late 1980s, the past few years have seen power in the structuring of management buy-out deals shift back to the banks. They have become much more cautious in their approach to buy-outs, and stipulate more conservative lending ratios.

This insistence on proper cover for their loans has not prevented the banks becoming slightly more willing to provide the funds that are needed. 'The banks have come back into the market, and there is more debt available now than there has been for the past three years,' commented Mr Graham Hutton, a director of Morgan Grenfell.

This increase in liquidity is a relief to the venture capital industry, which had begun to fear that shortages of loan finance would seriously limit the profitability of deals. Unless the equity providers can gear up their funds with loan finance, the returns become unattractive. Some venture capitalists feared at one stage that deals were becoming 'under-geared'.

The banks will normally require an equity to debt ratio of 1:1 though some are prepared to move to 1:1.5 on the more attractive deals. But contrast this with the peak of the buy-out boom in 1989, when the banks were willing to provide loans amounting to nearly six times the equity in a deal. These times were unusual, however, and the figures were skewed by a small number of very large deals.

The smaller deals, which account for most buy-out activity in terms of numbers, have always been more conservatively structured. The two-tier nature of the buy-out sector, and its impact on the way deals are done, is revealed in recent research by Nottingham University's Centre for Management Buy-Out Research.

Smaller deals, those valued at less than Pounds 10m, have seen a drop in the amount of equity and mezzanine finance used, while the amount of debt has remained steady. The gap left by the decline in equity and mezzanine has been made up by increases in the amount of vendor loan notes and in the contribution made by the management team. The amount of equity in these smaller deals has fallen over the past two and a half years, from more than 40 per cent to just over 33 per cent, while the contribution of debt has hovered around 40 per cent.

Vendors contributed nearly 11 per cent to the value of deals in the first half of 1993, compared with around 7 per cent in the previous three years. This was the highest share held by vendors since the buy-out centre, established in 1986, began compiling these statistics.

The attraction to a vendor of retaining a stake in a buy-out company is that it will benefit if the company does well. Vendors are concerned that they will look foolish if a business which they have sold prospers, particularly when the deal is done at a stage when the economy seems set for recovery from a long recession. Vendor involvement can also boost the nominal value of a deal, and make a sale appear more impressive to shareholders.

Managements, too, have been increasing their stake in the businesses they buy. The average management contribution to smaller deals rose to 9.5 per cent in the first half of 1993, from between 7 and 8 per cent in the preceding three years.

Larger deals, those valued at more than Pounds 10m, have traditionally been financed by larger amounts of debt, though the gap between debt and equity has closed in the past two years. Equity accounted for less than a quarter of total funding in large deals in 1991, but rose to around one-third in 1992 and early 1993.

The contribution of mezzanine and debt has held steady at about 6 per cent and 45 per cent respectively. As deal prices have fallen to more realistic levels there has been less need to bridge the gap between debt and equity with large amounts of mezzanine finance. Involving an independent mezzanine provider can also complicate a deal, so venture capitalists have sometimes preferred to turn to the vendor if extra funds were needed. But this did not stop the contribution by vendors to larger deals halving in the past two and a half years, from 15 per cent in 1991 to 7.5 per cent in the first half of 1993. The management's contribution fell to just 1 per cent, the lowest level for more than four years.

As the banks have become more experienced at financing buy-outs, so their assessment methods have been refined. There has been a shift from judging deals on balance-sheet ratios, which are not necessarily the most relevant measure when a business is about to undergo radical change.

The banks now look more closely at projected cash flows and interest cover. The recent drop in interest rates has meant that banks can now obtain interest cover of 3:1 on buy-outs, a rate as good as they could obtain on corporate credits. The decline in the use of mezzanine finance has had the additional effect of boosting the security of senior debt.

The banks have also become less willing to leave due-diligence work to the providers of equity capital, and are now more likely to commission their own reviews of a company's finances and market prospects.

---------------------------------------------------------------------- LEADING DEBT ARRANGERS: MAY 1981 - SEPTEMBER 30, 1993 ---------------------------------------------------------------------- Total Av Value Total Total debt of debt No. of number Pounds m Pounds m Investments ---------------------------------------------------------------------- Bank of Scotland 82 1,452 18 140 NatWest 71 1,958 28 102 Barclays/BZW 46 840 18 74 Midland/Samuel Montagu 35 735 21 56 Bankers Trust 20 1,637 82 22 Standard Chartered 18 1,001 56 30 Royal Bank of Scotland 16 387 24 28 Bank of America 10 347 35 23 Lloyds 8 91 11 24 Citibank Citicorp 8 620 78 13 Kleinwort Benson 6 144 24 15 ---------------------------------------------------------------------- 3i 5 28 6 29 Charterhouse 5 429 86 12 Morgan Grenfell 5 125 25 11 S G Warburg 5 2,039 408 5

Chemical Bank 4 1,430 358 8 Continental Bank 4 87 22 5 Scandinavian Bank 4 59 15 4 CIBC Capital 3 26 9 15 Credit Agricole 3 47 16 15 N M Rothschild 3 52 17 8 Den Norske 3 21 7 7 ---------------------------------------------------------------------- TSB 3 19 6 4 Manufacturers Hanover 3 50 17 3 Toronto-Dominion Bank 2 37 19 11 Creditanstalt 1 7 7 19 Industrial Bank of Japan 1 68 68 15 Bank of Tokyo 1 65 65 11 Westpac 1 35 35 11 Allied Irish Bank 1 70 70 11 Banque Indosuez 1 4 4 10 Bank of Nova Scotia 1 7 7 9 Credit Bank of Japan 17

---------------------------------------------------------------------- Dai-Ichi 11 Credit Lyonnais 11 Fuji Bank 10 Nippon Credit 9 Bank of Switzerland 9 Sumitomo 8 Societe Generale 8 Others/no longer active/none 46 700 not known/(duplication) 425 14,617 34 ---------------------------------------------------------------------- Qualification: in Pounds 10 million plus deals, 3 deals arranged or 8 investments made ---------------------------------------------------------------------- Source: KPMG Corporate Finance ----------------------------------------------------------------------

ANALYSIS OF GEARING OF UK MBOS OVER POUNDS 10M ----------------------------------------------------------------------- Period Total Equity Mezzanine Debt Gearing Mezzanine funding Pounds Pounds Pounds (E: M+D) (% of Pounds m m m m total) ----------------------------------------------------------------------- 4 years to ----------------------------------------------------------------------- Dec-84 857 370 0 487 1.3 0 Dec-88 9,069 2,538 706 5,825 2.6 8 ----------------------------------------------------------------------- 6 months to ----------------------------------------------------------------------- Jun-89 1,705 430 158 1,117 3.0 9 Dec-89 4,146 598 706 2,842 5.9 17

Jun-90 1,258 288 151 819 3.4 12 Dec-90 780 263 63 454 2.0 8 Jun-91 700 324 30 346 1.2 4 Dec-91 1,180 432 102 646 1.7 9 Jun-92 1,060 419 64 577 1.5 6 Dec-92 1,259 584 34 641 1.2 3 1993* 1,631 714 54 863 1.3 3 Total 23,645 6,960 2,068 14,617 2.4 9 ----------------------------------------------------------------------- *To date ----------------------------------------------------------------------- Source: KPMG Corporate Finance -----------------------------------------------------------------------

In the early hours of Wednesday, May 26, contracts were finally exchanged on the sale of BP Nutrition's consumer products division to a management buy-in team led by Legal & General Ventures, in a deal worth Pounds 272m.

The transaction was significant, not only because of its size - it still ranks as the biggest unquoted equity deal this year - but also because it was one of the most fiercely contested with no fewer than four teams bidding for the mandate.

BP put the whole of BP Nutrition, with annual sales of Pounds 2.9bn, on the auction block early in 1992, as part of the drive to refocus on its core oil and gas businesses and cut debt.

The consumer foods division was was sold to Sara Lee, the US group, at the end of December. By that stage, the consumer products division, a leading supplier of 'own label' household detergents, cleaners and personal care products to European supermarkets, was also attracting considerable City attention.

Consumer products includes Manchester-based Robert McBride in the UK, Yplon in Belgium and Solaro in Italy. Its 12 factories employ more than 4,000 people and although profits have not been disclosed, its margins on turnover of Pounds 350m last year are believed to be high.

'We started looking at consumer products way before the deal was done,' said Mr Adrian Johnson, a director of Legal & General Ventures, which put the winning consortium together.

The Legal & General Ventures-led consortium was one of four preferred bidders, whose names were shortlisted by SG Warburg on behalf of BP at the start of 1993 to enter the final round. The three others were led by Phildrew Ventures and Citicorp Venture Capital; Electra, working with the Canadian trade buyer, CCL; and Mercury Asset Management, with Montagu Private Equity.

Over the next two months, all four bidders undertook due diligence while negotiating with potential financial partners and puting together their final teams.

As Mr Charles Peal, managing director of Legal & General Ventures, points out, one of the consequences of the competitive auction procedure was that the unsuccessful bidders ran up 'seven-figure costs' conducting due diligence. Mr Peal said Legal & General Ventures limited its own downside risk to Pounds 30,000 by sharing costs with its three other equity partners, and by tying some of the fees to success of its bid.

When the sealed final bids were opened in early April, three of them, including Legal & General Ventures, are believed to have been around the same level, with the fourth bid lagging some way behind.

But the Legal & General Ventures team believe the unified structure of their consortium, and the fact that they had already signed-up Mr Michael Handley, the former divisional managing director of RHM, to become managing director of the new company, gave them a decisive edge.

'Our transaction was a genuine management buy-in,' said Mr Peal, 'that gave us a lot of credibility.' In addition, the consortium persuaded Sir Allen Sheppard, chairman and chief executive of Grand Metropolitan, the food and drinks group, to lead the buy-in team by becoming non-executive chairman of off-the-shelf company formed to complete the purchase - Templeco Sixteen.

On April 6, the Legal & General Ventures team were summoned back to BP headquarters and told they had just a three-week exclusivity period to get the funding for the deal in place, tie-up the the paperwork and agree the sale.

Those weeks were extremely hectic for Mr Johnson and his Legal & General Venture colleagues, Paul Southwell and Ivan Heywood; and they were made worse when, two days into the exclusivity period, the Bishopsgate bomb demolished the offices of Norton Rose, the lead banks' solicitors, and the offices of Phoneix Fund Managers, one of the equity partners.

BP, says Mr Johnson, was sympathetic, but did not formally extend the deadline. Nevertheless the complex transaction - involving equity, bank and mezzanine debt - eventually went ahead, albeit a little later than originally planned.

The deal was structured as follows:

Equity: The bulk of the Pounds 115m in equity funding for the deal was provided by Legal & General Ventures (Pounds 50.5m) and its trans-Atlantic partner, Lehman Brothers (Pounds 50.5m). The Pounds 14m balance came from Phoenix Fund Managers, Ontario Teachers Pension Fund and Barclays Development Capital. Legal & General Venture subsequently sold Pounds 22m of equity to one of the major UK venture capitalists. Following the deal, management will also be invited to become shareholders with up to a 10 per cent equity stake.

Bank Debt: A syndicate of four banks, led by the Bank of Scotland's Edinburgh team (the Bank of Scotland's London team backed another of the bidders), underwrote Pounds 115m of senior debt. The other main underwriters were Bank of Tokyo, Barclays and Morgan Grenfell.

Mezzanine Debt: A further Pounds 30 of mezzanine financing was provided by Mithras, an investment trust managed by Legal & General Ventures, and co-underwritten by Intermediate Capital Group.

In addition, the banking syndicate provided Pounds 12m of working capital.

Since completing the buy-in, the Legal & General Ventures team has provided much of the senior management at the new company, with Mr Ivan Heywood acting as locum finance director until the arrival of Mr Terry Monks from MB Caradon.

Now, the prime objective is to build the business from its current base in order to float it on the stock exchange in about three years.

The BP consumer products buy-in has also generated some controversy. Some critics maintain that it demonstrates that the dearth of big quality deals is forcing financial buyers into unhealthy competitive auctions, pushing target prices up while increasing investor risks and reducing returns.

However, Charles Peal, of Legal & General Ventures, thinks the deal was one-of-a-kind. 'We had been through a period when a lot of the competition had not done a large deal for a long time,' he said. Although he believes some buy-in/out opportunities will generate competing bids, he thinks most market players would think twice now before entering another four-way bid-battle.

Is the pure management buy-in becoming extinct? It has fallen out of favour over the last couple of years, after research and performance reviews showed that it tends to be outperformed by buy-in/management buy-outs (Bimbos).

A review of the performance of 154 buy-ins was conducted by 3i in early 1991. 'If the person buying in was involving the management, they were usually better informed about the business,' says Mr Patrick Dunne, head of 3i's buy-in programme. 'They usually got on better, because they were involving the management within in their plans,' he adds.

Buy-in strategy at 3i has altered accordingly. While still placing substantial emphasis on buy-ins - it backed 15 of the 38 deals in this year's first half - the focus has shifted. Two and a half years ago, around 20 per cent of the buy-ins it backed were Bimbos. The figure has since grown to between 65 and 70 per cent.

Pure MBIs remain as a third of deals. According to Mr Dunne, they can be lucrative. 'You still have situations where a talented md will go into a business and move it forward, take a fresh view and re-energise it,' he says. A common misconception is that most buy-ins are turn-arounds. 'They're mostly people buying into companies which are doing all right, but could do a lot better.'

In August, for example, a pure buy-in team acquired Unimerchants, a Pounds 16m-turnover importer and distributor of Mediterranean food. 'It was a profitable business, but it was not as well managed as it would be, in our view, by ourselves,' says Mr John Durban, leader of the three-man team. He thinks that former parent Albert Fisher Group could not give it the attention it needed. The team is concentrating on rapidly-growing niche markets, notably high-quality imported pasta and olive oil products.

A strong record is usually needed to attract backing for an MBI. Mr Durban has already run two sizeable food businesses: Procter & Gamble's European food processing, catering and bakery division, as well as Pounds 200m-plus turnover edible oils company Acatos & Hutcheson.

No equity was allocated to the incumbent management. Albert Fisher Group's policy is not to encourage its managers to participate in buy-outs. Mr Durban says equity participating might be possible for some of the incumbent team later on.

Institutions and advisers can be more cautious when a team lacks hands-on experience of the company. The Unimerchants MBI took almost a year to arrange, and was probably more protracted than an equivalent MBO.

A classic problem with many buy-ins is the discovery after acquisition of skeletons in the company closet. The Unimerchants team found dinosaurs. 'They seemed to think it would be a wonderful idea to introduce a pasta in dinosaur shapes,' explains Mr Durban. Fortunately, the surplus stock does not present a great problem.

The pace of buy-ins for much of this year has been slower than in 1992, with only 38 deals in the first half, against 134 for the whole of last year, according to Nottingham University's Centre for Management Buy-Out Research (CMBOR).

The value of deals struck appears to be holding up well, with transactions worth Pounds 397m in the first half, against last year's final total of Pounds 679m. However, when this year's monster Pounds 250m buy-in deal of BP Nutrition's consumer products division (see below) is stripped out, the adjusted first-half total of Pounds 147m is much less promising. According to CMBOR, divestments declined to 19.5 per cent of deals in the first half, while buy-ins from receiverships grew to 19.4 per cent of transactions.

Mr Dunne says a lack of confidence in the economy held bidders and vendors back in the early part of the year; but now the situation is looking more promising: he has noticed a pick up since September.

Family-owned businesses remain a key source of buy-in deals. Their proportion of total deal value fluctuates from year to year, but, according to CMBOR's statistics, they have yielded a steady 44 to 52 per cent of deals over the 4 1/2 years to the end of June.

Buy-ins of family companies often arise due to succession problems. Mr Nick Theakston, a partner in KPMG Corporate Finance, thinks a Bimbo bringing in new top management to graft on to existing non-family senior management can be a good solution. However, he highlights a difficulty with these deals: 'Family businesses have a huge amount of emotion involved in them.'

His latest big family deal came earlier this year, when he advised on a Pounds 21m Bimbo of Maiden Outdoor Advertising. Mr Ian Maiden relinquished his post as chairman of the Liverpool-based company after 39 years. The buy-in team was assembled and led by Mr Ron Zeghibe, fresh from putting together a turn-around of Dutch advertising company Mediamax.

The Bimbo involved four of the existing management as well as three outsiders. Luckily, there was no family strife. 'Ian Maiden was extremely level-headed and sensible about it,' says Mr Theakston.

Around 200 would-be buyers-in are registered on 3i's MBI programme, and roughly half the deals it backs draw on the pool. Talent-spotting has been easier recently. 'If you're running and performing well in a recession, then you're probably going to do even better in a good time,' says Mr Dunne. As well as training potential buyers-in, the programme helps 3i to get their measure. 'We seem to do a lot better when we back people we know,' he says.

The Bimbo is no longer the leading-edge buy-in. According to Mr Dunne, 3i is now placing a lot of emphasis on the 'Chimbo' - a variant of the Bimbo, in which investing chairmen buy companies in tandem with the existing management team. The chairmen bring the benefit of experience to bear, on a part-tine basis.

As well as chairmen from its buy-in pool, 3i can draw on its tranche of 300 independent directors. 'Those people have been particularly powerful with younger companies, and we see a future for the angel that not only adds some money but also adds talent,' says Mr Dunne.

The Stead & Simpson Bimbo: case study - Page VII

------------------------------------------- MANAGEMENT BUY-INS OVER POUNDS 10M ------------------------------------------- Under 25m Pounds m ------------------------------------------- 1985 Cullens 10 1986 Acal 10 ------------------------------------------- 1987 ------------------------------------------- Life Sciences Int 11 New Scotland Ins 15 ------------------------------------------- 1988 ------------------------------------------- Burn Stewart 13 Autoclenz 13 Clairmont 14 European Brands 21 ------------------------------------------- 1989 ------------------------------------------- Range Valley 11 Abacus 11 Maison Caurette 11 Haigh Castle 12

Severn 13 Country Casuals 14 Valor Stoves 14 British Air Ferries 15 Hill Leigh 15 Exide Batteries 16 Britannia Data Mgt 18 Service Tec 20 Themes Int 22 Rubatex 22 Hamleys 24 ------------------------------------------- 1990 ------------------------------------------- Wilcox 10 Fairmead 10 Anglian Fast Foods 10 Juliana Sound 11 E. Lancs Paper Mill 11

Cannons Sports Club 14 Hermes 14 Lydiashourne 15 Canonbury 15 Betta Stores 16 Wimpy 20 ------------------------------------------- 1991 ------------------------------------------- Ambion Homes 10 Bianco 11 Boythorpe 11 Drawlane 12 Wallace Int 12 Sitex Security Prods 15 Eagle Taverns 17 BrightReasons 18 Dealerships 15 ------------------------------------------- 1992 -------------------------------------------

Audio & Vision Furniture 10 CCA Stationery 14 Chamberlain Phipps 14 Harrison Industries 14 Discovery Inns 23e RSA Advertising 23 ------------------------------------------- 1993 ------------------------------------------- Coin Controls Group 24 Benjamin Priest 20e Maiden Outdoor Advertising 20 ------------------------------------------- 25m-50m Pounds m ------------------------------------------- 1986 -------------------------------------------

Gillow 45 ------------------------------------------- 1987 ------------------------------------------- Raleigh 42 ------------------------------------------- 1988 ------------------------------------------- Lilley 27 Needwood 38 ------------------------------------------- 1989 ------------------------------------------- Beacon 29 Court Cavendish 35 ------------------------------------------- 1990 ------------------------------------------- Ravenhead 27 United News Shops II 33

Walter Alexander 42 David Brown 46 ------------------------------------------- 1991 ------------------------------------------- Lyric Hotels 26 Century Inns 34 ------------------------------------------- 1992 ------------------------------------------- Centric Pubs 29 Inspec Group 45 Marr Holdings 30e Sycamore Taverns 35e ------------------------------------------- 1993 ------------------------------------------- Hydron 27e ------------------------------------------- 50m - 100m Pounds m ------------------------------------------- 1987 -------------------------------------------

Utd Precision Ind 76 ------------------------------------------- 1988 ------------------------------------------- Financial Ins 55 Lewis's 74 ------------------------------------------- 1989 ------------------------------------------- Crockfords 53 Square Grip 69 James Neill 79 ------------------------------------------- 1991 ------------------------------------------- Enterprise Inns 56 Ushers of Trowbridge 75 Pavilion Services 95 ------------------------------------------- 1992 -------------------------------------------

Unicorn Abrasives 56 Teeside Holdings 63 ------------------------------------------- 1993 ------------------------------------------- Multipart 56e Colas 72 ------------------------------------------- Over 100m Pounds m ------------------------------------------- 1982-84 ------------------------------------------- Kingfisher 310 ------------------------------------------- 1988 ------------------------------------------- Cope Allman 265 Lowndes Queensway 450 ------------------------------------------- 1989

------------------------------------------- Gateway 2,375 ------------------------------------------- 1990 ------------------------------------------- Jarvis Hotels 215 ------------------------------------------- 1993 ------------------------------------------- BP Con Prod Div 273 ------------------------------------------- Incorporates MBIs and Bimbos ------------------------------------------- e=estimate ------------------------------------------- Source: KPMG Corporate Finance -------------------------------------------

British Venture capital institutions have enjoyed the best of times and the worst of times in the management buy-out market over the past year.

Not since the boom period in the mid 1980s have so many of their investments provided them with an exit, either through a trade sale or flotation.

On the other hand, MBO funds are seeing fewer financeable deals, and a number of funds are struggling to raise fresh capital. Without fresh capital, some of those funds that are not 'captives' - financed by pension fund or bank parents - are likely to have to consider merging, leaving the MBO market served by fewer, possibly stronger, venture funds.

So which institutions have fared best in the MBO industry? And which financiers will lead the field over the next few years?

Increasingly, MBO financiers are splitting into those groups that are prepared and able to finance large deals, and those that are not. The industry broadly defines 'large' as deals requiring more than about Pounds 10m of equity, for companies capitalised at Pounds 35m or more - although many of these larger funds would also look at smaller deals.

Any list of the big hitting deal arrangers in the last three years would include Candover Investments, CINVen, Charterhouse Development Capital, Morgan Grenfell Development Capital, CVC, Electra and Prudential Venture Managers.

It was CINVen that led the only really large deal of recent years - the buy-out of Gardner Merchant from Forte, in 1992, for Pounds 400m. A relative newcomer to the big time, Legal & General, led this year's second largest deal, the Pounds 272m purchase of the consumer products division of BP.

The second tier - as measured by a preferred deal size around Pounds 10m - is dominated by 3i, the UK's largest investment capital institution, although the institution has been taking a larger share of deals of up to Pounds 50m.

'We have taken more of those deals in the last three years, because we have done a lot more through our regional network, which we think has given us a competitive advantage,' says Mr Ewen Macpherson, 3i chief executive.

With 18 offices around the UK, the only competitor who comes anywhere near in terms of regional representation is NatWest Ventures. In fact, like 3i, NatWest Ventures is increasingly interested in the larger deals, and led as many deals as Electra in the past year, according to KPMG.

The other big hitters in the second tier include Schroder Ventures, Kleinwort Benson, Midland Private Equity, Murray Johnstone, Phildrew Ventures, Apax, ECI Ventures, and Barclays.

In terms of numbers, however, 3i stands way out in front at the smaller end of the market. According to KPMG Peat Marwick Corporate Finance, 3i, since 1981, has led more than twice as many deals as its nearest rival, Candover. The average size of these deals, however, is less than half those led by Candover and a third those led by CINVen.

A similar pattern emerges in the growing management buy-in market. The institution maintains a list of 150 managers who are prepared to invest and take executive management positions in companies. From a standing start, 3i did 70 MBIs last year, and has about 40 per cent of the market.

Many of these institutions in both tiers of the market, other than captive funds like CINVen, are actively seeking funds. Over the next six months, the funds are likely to reveal the extent to which they have succeeded.

Estimates vary, but somewhere between 30 and 40 venture capital groups appear to be trying to raise new funds. Some industry observers say the funds are seeking about Pounds 1bn of new money. Typically, the funds are turning to large US pension funds and insurance companies, which are identified as having an appetite for some exposure to the unquoted UK investment.

Not all are going to be successful, and some consolidation is likely within the industry with increasing specialisation, according to Mr Iain Tulloch, of Murray Johnstone.

Some of the smaller funds will not have done as well as their larger counterparts, and may have difficulty attracting capital to a new fund. With the fees that arise from running a fund, they may need to seek a merger.

TSB Group has already showed that it no longer gives MBOs high priority, by its decision to put Hill Samuel Development Capital up for sale.

Then there are the banks which provide the debt, without which few management buy-outs would get off the ground. Mr Chris Beresford, partner at KPMG Peat Marwick Corporate Finance, says National Westminster and the Bank of Scotland lead the field, ahead of Midland and Barclays. 'These four have carried the market through since 1990,' he says. 'The rest have been almost nowhere.'

Citibank, Canadian Imperial Bank of Commerce and Westpac were among those that appeared to leave the market in 1990, after the last bout of excesses.

Some MBO industry observers say the banks are displaying a renewed interest, in particular for the larger deals, and that some are showing signs of returning to the market. The Royal Bank of Scotland has signalled its intentions very clearly by luring Leith Robertson, one of the Bank of Scotland's senior management buy-out specialists, to become its corporate director in charge of MBOs and acquisition finance.

If the banks are showing greater interest in lending and new entrants may be about to compete with the big four, the chances are that gearing levels are likely to rise.

In the late 1980s flurry of MBO financings, gearing rose sharply with a commensurate increase in risk. With the onset of recession, the amount of available debt and bank willingness to lend shrank markedly.

That appears to be changing. 'Equity within deal structures is reducing, with equity now being 40-50 per cent, compared with more than 60 per cent two years ago,' says Mr Barrie Moore, of NatWest Ventures.

This is a clear sign of renewed confidence, both in the economy and in the profitability of MBOs. But many voices continue to warn against deal structures which load unacceptable levels of debt on to managements, on the assumption that interest rates will remain low. If history repeats itself, they will not.

------------------------------------------------------------------------ DEAL LEADERS: MAY 1981 - SEPTEMBER 30 1993 ------------------------------------------------------------------------ Total Av val No of No. Pounds m Pounds m Inv ------------------------------------------------------------------------ 3i 57 1,612 28 106 Candover Investments 27 1,874 69 52 NatWest Ventures 24 892 37 84 Charterhouse DC 23 2,723 118 62 CVC Capital Partners 23 752 33 23 ------------------------------------------------------------------------ Schroder Ventures 22 803 37 31 CINVen 20 1,940 97 94 Montagu Private Equity 18 887 49 59 Phildrew Ventures 16 456 29 41 Electra 15 1,286 86 54 ------------------------------------------------------------------------ Bankers Trust 14 1,823 130 20 Barclays DC 13 349 27 47 Granville 13 204 16 13

Kleinwort Benson DC 11 553 50 32 Prudential VM 9 605 67 59 ------------------------------------------------------------------------ Legal & General Ventures 7 482 69 40 Lloyds DC 7 392 56 40 Morgan Grenfell DC 7 472 67 15 Murray Johnstone 7 99 14 25 Baronsmead 6 141 24 22 ------------------------------------------------------------------------ Mercury Asset Management 6 2,722 454 31 Causeway Capital 5 95 19 12 Foreign and Colonial 5 102 20 18 Apax Partners 4 166 42 10 Chase Manhattan 4 240 60 6 ------------------------------------------------------------------------ Scandinavian Bank 4 77 19 5 Swiss Bank Corp 4 144 36 4 First National Bank of Boston 3 65 22 11 Baring Capital Investors 3 654 218 7 CIBC Capital 3 50 17 3 ------------------------------------------------------------------------

Gartmore 3 32 11 9 Hambros 3 64 21 8 Robert Fleming & Co. 3 221 74 8 Salomon Brothers 3 80 27 3 SUMIT 3 42 14 15 ------------------------------------------------------------------------ Bank of Scotland 2 48 24 5 Close Investment Capital 2 22 11 6 Hambro Magan 2 292 146 2 James Capel 2 58 29 2 Unity Trust 2 33 17 3 ------------------------------------------------------------------------ ECI Ventures 1 12 12 21 Standard Chartered 1 125 125 12 Sun Life 24 Commercial Union 12 Scottish Eastern Inv 11 ------------------------------------------------------------------------ Others/ no longer active/ none/ not known/ (duplication) 18 -44

Total 425 23,645 56 ------------------------------------------------------------------------ Address and phone number ------------------------------------------------------------------------ 3i 91 Waterloo Road, London, SE1 8XP 071-928-3131 Candover Investments 20 Old Bailey, London, EC4M 7LN 071-489-9848 NatWest Ventures 135 Bishopsgate, London, EC2M 3UR 071-375-5000 Charterhouse DC 85 Watling Street, London, EC4M 9BJ 071-248-4000 CVC Capital Partners Hudson Hse., 8-10 Tavistock Street, London, WC2E 7PP 071-234-5678 ------------------------------------------------------------------------ Schroder Ventures 20 Southampton Street, London, WC2E 7QG 071-632-1000 CINVen Hobart Hse., Grosvenor Place, London, SW1X 7AD 071-245-6911 Montagu Private Equity 10 Lower Thames Street, London, EC3R 6AE

071-260-9911 Phildrew Ventures Triton Court, 14 Finsbury Square, London, EC2A 1PD 071-628-6366 Electra 65 Kingsway, London, WC2B 6QT 071-831-6464 ------------------------------------------------------------------------ Bankers Trust 1 Appold Street, Broadgate, London, EC2A 2HE 071-982-2500 Barclays DC Pickfords Wharf, Clink Street, London, EC1Y 4XX 071-407-2389 Granville Mint Hse., 77 Mansell Street, London, E1 8AF 071-488-1212 Kleinwort Benson DC 10 Fenchurch Street, London, EC3M 3LB 071-956-6600 Prudential VM Audrey House, Ely Place, London, EC1N 6SN 071-831-7747 ------------------------------------------------------------------------ Legal & General Ventures 3 Queen Victoria Street, London, EC4N 8EL 071-489-1888 Lloyds DC 48 Chiswell Street, London, EC1Y 4XX

071-600-3226 Morgan Grenfell DC 23 Great Winchester Street, London, EC2P 2AX 071-588-4545 Murray Johnstone 7 West Nile Street, Glasgow, G1 2PX 041-226-3131 Baronsmead Clerkenwell Hse., 67 Clerkenwell Road, London, EC1R 5BH 071-242-4900 ------------------------------------------------------------------------ Mercury Asset Management 33 King William Street, London, EC4R 9AS 071-280-2800 Causeway Capital 7 Hanover Square, London, W1R 9HE 071-495-2525 Foreign and Colonial 8th Floor, Exchange Hse., Primrose Street, London, EC2A 2NY 071-782-9829 Apax Partners 15 Portland Place, London, W1N 3AA 071-872-6300 Chase Manhattan Woolgate Hse., Coleman Street, London, EC2P 2HD 071-962-5000 ------------------------------------------------------------------------ Scandinavian Bank Scandinavian Hse., Cannon Street, London, EC4M 6XD 071-236-6090

Swiss Bank Corp 1 High Timber Street, London, EC4V 3SB 071-329-0329 First National Bank 39 Victoria Street, Westminster, London, of Boston SW1H 0ED 071-799-3333 Baring Capital Investors 140 Park Lane, London, W1Y 3AA 071-408-1282 CIBC Capital Cottons Centre, Cottons Lane, London, SE1 2QL 071-234-6000 ------------------------------------------------------------------------ Gartmore 16-18 Monument Street, London, EC3R 8QQ 071-782-2000 Hambros 41 Tower Hill, London, EC3N 4HA 071-480-5000 Robert Fleming & Co. 25 Copthall Avenue, London, EC2R 7DR 071-638-5858 Salomon Brothers 111 Buckingham Palace Road, London, SW1W 0SB 071-721-2000 SUMIT Edmund Hse., 12 Newhall Street, Birmingham, B3 3EJ 021-200-2244 ------------------------------------------------------------------------

Bank of Scotland PO Box No12, Uberior Hse, 61 Grassmarket, Edinburgh, EH1 2JF 031-442-7777 Close Investment Capital 36 Great St. Helen's, London, EC3A 6AP 071-283-2241 Hambro Magan 32 Queen Anne's Gate, London, SW1H 9AB 071-233-1400 James Capel Thames Exchange, 10 Queen's Street Place, London, EC4R 1BL 071-283-5230 Unity Trust 130 Minories, London, EC3N 1NT 071-481-3110 ------------------------------------------------------------------------ ECI Ventures Brettenham Hse., Lancaster Place, London, WC2E 7EN 071-606-1000 Standard Chartered 1 Aldermanbury Sq., London, EC2 071-280-7500 Sun Life 107 Cheapside, London, EC2V 6DU 071-606-7788 Commercial Union St. Helen's, 1 Undershaft, London, EC3P 3DQ 071-283-7500 Scottish Eastern Inv Saltire Court, Edinburgh, EH1 2ES

031-229-5252 ------------------------------------------------------------------------ Qualification: Pounds 10 million plus deals, 2 deals led or 10 investments made Source: KPMG Corporate Finance

------------------------------------------------------------------------ USE OF MEZZANINE FINANCE ON UK MBOS OVER POUNDS 10M ------------------------------------------------------------------------ MBOs using mezzanine Total MBOs ------------------------------------------------------------------------ Ave Amount Total Percent Percent size of of Total value of of deal Mezza- mezza- value of MBOs covered nine nine of deals deals using by layer Pounds Pounds Num- Pounds mezza- mezza Pounds Date Number m m ber m nine nine m ------------------------------------------------------------------------ 1981-84 0 0 0 25 857 0 0 0 1985 5 123 430 23 869 22 29 25 1986 7 96 380 27 939 26 25 14 1987 13 207 1,510 33 2,753 39 14 16 1988 26 280 1,872 55 4,508 47 15 11 1989 38 864 4,825 71 5,851 54 18 23 1990 33 214 1,143 59 2,038 56 19 6 1991 16 132 863 44 1,880 36 15 8 1992 13 98 749 55 2,319 24 13 8

1993* 8 54 588 33 1,631 24 9 7 159 2,068 12,360 425 23,645 37 17 13 ------------------------------------------------------------------------ *To date ------------------------------------------------------------------------ Source: KPMG Corporate Finance ------------------------------------------------------------------------

DEAL LEADERS: OCTOBER 1 1992 - SEPTEMBER 30 1993 ------------------------------------------------------------------------ Number Total Average Number of funding value of deals (Pounds m) (Pounds m) investors ------------------------------------------------------------------------ 3i 7 154 22 8 Electra 5 258 52 7 NatWest Ventures 5 231 46 9 CINVen 3 460 153 7 Granville 3 59 20 3 ------------------------------------------------------------------------ CVC Capital Partners 2 59 30 2 Schroder Ventures 2 55 28 3 Phildrew Ventures 2 68 34 2 Prudential VM 2 202 101 6 Legal & General Ventures 2 306 153 3 ------------------------------------------------------------------------ Candover Investments 1 17 17 3

Charterhouse DC 1 73 73 4 Montagu Private Equity 1 11 11 7 Barclays DC 1 35* 35 4 Kleinwort Benson DC 1 12 12 2 ------------------------------------------------------------------------ Morgan Grenfell DC 1 20 20 4 Baring Capital Investors 1 205* 205 2 Brown Shipley Venture Mgrs 1 33 33 2 Royal Bank of Scotland 1 14 14 1 Gartland & Whalley 1 24 24 1 ------------------------------------------------------------------------ Henderson Venture Mgrs 1 16 16 1 Investcorp 1 200 200 1 Donaldson Lufkin Jenrette 1 22 22 1 Apax Partners 1 15 15 1 Close Investment Capital 1 11 11 1 ------------------------------------------------------------------------ Commercial Union 3 Citicorp 3 Phoenix Fund Mgrs 2 Ontario Teachers Pen. Plan 2

North England VC 2 Causeway Capital 2 ------------------------------------------------------------------------ Others/no longer active/ none/not known/ (duplication) -5 -106 21 ------------------------------------------------------------------------ Total 43 2,454 57 ------------------------------------------------------------------------ Qualification: Pounds 10m-plus deals, 1 deal led or 2 investments made. ------------------------------------------------------------------------ * estimated value ------------------------------------------------------------------------ Source: KPMG Corporate Finance ------------------------------------------------------------------------

Almost every month, the stock market demonstrates the attractions of management buy-outs to the managers involved.

Devro, Holliday Chemicals and Inveresk, which floated this year, all showed dramatic increases in value for investors. To varying degrees, they provide role models for future buy-outs, demonstrating the rewards that can be reaped when managements are freed from the constraints imposed by a parent company.

The failure rate has also been greatly reduced, suggesting that the risks involved are falling. Successful exits of MBOs through flotations or trade sales - the common goal for funders and the liberated management - rose to 24 in the first nine months of the year, compared with 15 during the whole of 1992.

From the venture capital industry's point of view, there have also been rich pickings. Some 48 per cent of the 75 commercial company flotations in the 12 months to June, were funded by venture capital, according to the British Venture Capital Association.

But the UK stock market's rise this year, while providing a more attractive exit route for investors, has also placed the providers of MBO capital in a difficult spot. In the first place, there has been a fall in the number of management buy-out deals that venture capitalists are prepared to fund. As mergers and acquisitions activity has declined, so has the supply of potential MBOs that corporate takeovers tend to generate.

While in 1992 there were 520 MBOs, worth Pounds 3.04bn, the year to November 1993 has seen only 390 with a deal value of Pounds 2.19bn, according to KPMG. The largest, the Pounds 250m buy-out of BP's consumer products division, was a minnow beside the Pounds 2.4bn Gateway deal in 1989, and considerably smaller than last year's largest deal, the Pounds 400m purchase of Gardner Merchant, the catering group.

What is more, companies wanting to sell a division to raise cash or to pursue the new Holy Grail - concentration on core businesses - have found that they have direct access to the stock market. Divisions of large companies are being successfully floated at p/e ratios significantly higher than the levels that venture capital backers are currently prepared to pay.

Vendors are also becoming more demanding, having seen large increases in the values of companies, often in a relatively short time between MBO and flotation. Some of this increase in value has undoubtedly resulted from an increase in management effort and motivation that direct control inspires. But some of the teams that led recent MBOs were fortunate to be working for companies primarily interested in refocusing their activities. If it meant selling a division to an MBO just as it was on the point of recovering, that was of secondary importance.

That has now changed, and vendors are holding out for higher prices. There are fewer distress sales of divisions to MBO teams, and with the pressure off, some vendors are increasingly getting venture capital suppliers to tender for the opportunity to back the MBO team. The most extreme example was the BP deal, where four venture capitalists competed in a beauty contest.

The second issue facing the venture capital industry is its own funding. Venture capital providers have made a concerted drive this year to raise new funds from their own investors. More than Pounds 1bn is probably being sought. All the signs suggest some of the 30 or so institutions raising funds will either not succeed or will raise less than they had targeted. As a result, the market is awash with talk of a shake-out in the industry leading to a concentration of the available funds in fewer hands.

Mr Robert Smith, chief executive of Morgan Grenfell Development Capital, which expects to raise in excess of Pounds 200m for a new fund, says casualties are inevitable. 'I think there are winners and losers - there will be fewer players and smaller funds than hitherto,' he says.

News of the death of smaller venture funds has been exaggerated before. But this time around, the fund-raising will be tough. Back in 1989, a record year for fund-raising, the industry had just enjoyed a wave of MBO exits, first through flotations and then with trade sales. Many venture capital funds boasted impressive internal rates of return to support their marketing efforts. Institutions fell over themselves to invest - at precisely the wrong time in the business cycle, it turned out - and in 1989 alone the industry raised Pounds 1.6bn, some Pounds 956m for buy-outs, according to the University of Nottingham Centre for Management Buy-Out Research.

With some notable exceptions, the recent record of certain funds has been less impressive. Some of the earlier investments after the 1989 fund-raising were disastrous, while many of the more recent successful buy-outs have yet to exit.

Furthermore, the stock market offers stiff competition. Institutional investors, now having to decide whether to lock up funds in an illiquid venture fund, will be comparing the excellent returns they have recently enjoyed from highly liquid listed investments.

Venture fund raisers accept that they are marketing in a more competitive environment, but argue that the current stock market returns may not persist. And for many of the larger funds, the returns are likely to continue improving as the number of MBOs which are floated or sold, increases over the next 18 months. They are also optimistic about a new source of funding - the US.

'A number of the US state pension funds are beginning to look at international investing,' says Stephen Curran, chief executive of Candover which is currently raising at least Pounds 200m. Some of these US groups are beginning to see the attraction of placing small percentages of their enormous funds in 'alternative assets,' Mr Curran says. The UK unquoted sector is particularly attractive. Candover expects to raise about half of its fund in the US - up from the one third it raised from American institutions for its 1989 fund - and recently secured a Dollars 30m commitment from Calpers, the Californian pension fund.

If the venture funds are spreading their net wider to raise funds, they will also have to seek deals more actively once they have completed the time-consuming fund-raising round. Some observers suggest that new deal structures will emerge.

One approach, increasingly favoured by 3i, but likely to gain greater currency, is the Bimbo - the buy-in and management buy-out, where internal management expertise is married with a team brought in by the MBO funder.

There may also be a return to higher ratios of debt-to -equity financing in buy-outs, as the economy recovers and financiers become prepared to take more risks. No one foresees a return to the dizzy levels of the US-style leveraged buy-outs of the late 1980s, which were, in any case, rarely attained in the UK, but having fallen to a ratio of a little over one to one, there is room for gearing to rise.

'The UK economy is moving in the right direction, so it is a safer time to put on gearing than at any time in the last three years,' says Mr Hugh Mumford, at Electra.

A modest increase in the financial risk of MBOs would be acceptable, particularly as the business risk appears to have fallen quite sharply. The first nine months of this year saw a dramatic fall in MBO failures to just three, from nine in 1992, according to KPMG.

This may reflect the recent more conservative approach to pricing and gearing. But as the economy emerges from recession and it becomes easier to predict business performance, the funders of MBOs may have to accept lower returns or risk becoming uncompetitive.

NEW HIGHS (206)

BRITISH FUNDS (28) AMERICANS (1) Ingersoll-Rand, CANADIANS (1) Brascan, BANKS (7) Abbey Natl., Barclays, HSBC, Do. HK, Lloyds, Natl. Westminster, Royal Bank of Scotland, BREWERS (1) Eldridge Pope A, BLDG MATLS (2) BPB Inds., Sheffield Ins., BUSINESS SERVS (2) Dart, Fact (EW), CHEMS (1) Halstead (J), CONTG & CONSTRCN (4) Amco, Banner Homes, EBC, Westbury, ELECTRICITY (16) East Midlands, Eastern, London, Manweb, Midlands, Natl. Power, Northern, Nthn. Ireland, Norweb, Scott. Hydro, Scott. Power, Seeboard, Sth. Wales, Sth. Western, Southern, Yorkshire, ELECTRONICS (2) Bowthorpe, Eurotherm, ENG AERO (1) Smiths, ENG GEN (3) BSS, Molins, Siebe, FOOD MANUF (1) Devro, HEALTH & HSEHOLD (1) Amersham, HOTELS & LEIS (2) Castle Comms., Compass, INV TRUSTS (76) MEDIA (8) Avesco, Capital Radio, Carlton Comms., Haynes Pub., Reed Intl., Sleepy Kids, Southnews, Trinity Intl., MERCHANT BANKS (1) Kleinwort Benson, MTL & MTL FORMING (1) Simsmetal, MISC (3) Birkby, Dinkie Heel, Osborne & Little, MOTORS (3) Dixon, Lex Service, Volkswagen, OIL & GAS (2) Brit. Gas, Petrofina, OTHER FINCL (1) Smith New Court, PACKG, PAPER & PRINTG (5) AG, Bemrose, Repola, Shelton (M), Somic, PROP (11) STORES (6) Courts, Dixons, Do. Pf., Marks & Spencer, Storehouse, Vendome Luxury, TELE NETWORKS (1) Securicor A, TEXTS (1) French (T), TRANSPORT (3) BAA, Brit. Airways, Do. 9 3/4 pc Cv., WATER (3) East Surrey, Nth. West, Yorkshire, MINES (8)

NEW LOWS (23)

BRITISH FUNDS (1) Treas. 14 1/2 pc 1994, BREWERS (1) Taunton Cider, CONTG & CONSTRCN (2) BB & EA, Westport, ELECTRONICS (1) Micro Focus, ENG GEN (2) Ferrum, Wellman, FOOD MANUF (3) Northumbrian, Perkins, Yorkshire, FOOD RETAILING (4) ASDA, Appleby Westward, Geest, Iceland, HEALTH & HSEHOLD (3) Cantab, Drew Scientific, Scholl, MEDIA (1) Saatchi, MISC (1) Shanks & McEwan, OIL & GAS (1) Oceonics, PROP (1) Ossory Ests., STORES (1) Brown & Jackson, TEXTS (1) Campari Int.

Data based on those Companies quoted on the London Share Service.

Other statistics, Page 35

Conglomerate Hanson was actively traded following exceptionally heavy turnover in the US and some technical position taking in UK traded options. In New York on Monday night the equivalent of 150m shares were traded, followed by a further 75m during the first half of yesterday's trading session. Dealers said US investors were 'dividend rolling' - stripping out the dividend following the group's disappointing results at the end of last week.

Since the figures, the shares have come back around 25p from their all-time high. Many investors considered that at their reduced level they offered value, and in London yesterday one house carried out a bullish trade in the options market where the equivalent of 6m shares changed hands. As a result of all this frenetic activity the stock rallied from a low of 257p to close 1 1/2 off at 260 1/2 p with 15m shares dealt.

Bearish speculation in Signet Group, formerly Ratners, saw the shares retreat, although they managed a slight recovery to close 2 off at 20p. The shares have now declined 33 per cent in the past month as talk of poor sales at the group's three core jewellery chains - Ratners, Ernest Jones and H. Samuel - has been heard in the market.

Some stores specialists estimate pre-Christmas sales could be down by as much as a fifth, and yesterday there was talk the company could bring forward a widely expected rationalisation programme. This is believed to focus particularly heavily on the Ratners chain, with some 40 stores facing possible closure. There have also been persistent rumours in recent sessions of the imminent sale of Ernest Jones.

Bank shares continued to race ahead with another burst of institutional buying interest, triggered by ever-increasing hopes of above average dividend rises in the sector. And there were suggestions that the recent blaze of buying activity in the banks, which has caught many of the leading marketmakers short of stock, may well prompt a widening of dealing spreads in the sector.

Abbey National climbed 15 to a record 460p, with worries about shrinking margins, after the bank lowered its mortgage rate, said to have been dissipated. Credit Lyonnais Laing was said to have led a surge of buying in the stock after a lunch with senior Abbey officials. Royal Bank of Scotland advanced to another all-time high of 448p before closing a net 7 ahead at 446p, as did Lloyds, up 8 at 646p.

The interim profits upsurge and doubled dividend from trading house Smith New Court came as no surprise to the stock market, where Smith shares, trading at a lowly 77 1/2 p as recently as September 1992, fell back from a record 423p to close a net 11 off at 411p.

Food retailers again faced another difficult session in the wake of further broker caution. After several weeks of downgrades following analysts concern over the supermarket price war, renewed fears over profitability were sparked last week by Argyll's decision to make property provisions in its results. Yesterday, Cazenove, which has a policy of refusing to comment to the press, was said to have lopped some Pounds 110m - or 18 per cent - from its Tesco profits forecast for the current year to Pounds 500m.

Around Pounds 70m of the downgrade was said to be property provisions, although other brokers were sceptical over the Cazenove figure. One said: 'The Pounds 70m has just been plucked from the air', pointing out that if Tesco adopts the same criteria as Argyll, profits due to property provisions will fall around Pounds 32m. However, shares continued to be undermined by the issue. Tesco lost 3 at 195p, J. Sainsbury 9 at 408p and Argyll a penny at 257 1/2 p.

Pharmaceuticals group Medeva fell 7 to 132p as weakness in the sector was compounded by a downgrade from UBS. The house moved from 'speculative buy' to 'hold' and reduced its 1993 forecast by Pounds 5m to Pounds 40m.

The sector leaders suffered from profit-taking said to have been prompted by a technical trade in the derivatives market. Glaxo lost 12 to 683p and Wellcome slid 22 to 666p. Falls from Zeneca and SmithKline Beecham were limited by support from Goldman Sachs and Kleinwort Benson respectively. Zeneca slipped 7 to 790p and SmithKline 3 to 393p.

British Aerospace declined 6 to 409p after talks to sell its Ballast Nedam unit broke down. A price tag of Pounds 170m had been mooted.

Profit-taking took the shine off good results from Siebe, the shares weakening 20 to 566p. Strauss Turnbull has pencilled in full-year profits of Pounds 220m.

NFC trailed off 6 1/2 to 234p ahead of results and an expected Pounds 200m rights issue today.

Chemicals group Allied Colloids dropped 10 to 228p after reporting lower interim profits. Hoare Govett cut its forecast to Pounds 42m from Pounds 48m and said the shares were now overvalued.

Reports that Thorn EMI had been in takeover talks with Paramount, of the US, in November last year lifted the shares 9 to 989p.

A bumper interim dividend from Midlands Electricity saw the company's shares outpace the rest of a regional electricity sector - itself the best performing area of the market yesterday - which has attracted heavy buying interest since the November 30 Budget.

Midlands' 20.5 per cent dividend increase saw the company nudge its way to the forefront of the Recs' interim 'dividend race', previously headed by Eastern Electricity, which boosted its interim by 20 per cent last week. Many analysts had expected Midlands' payment to top the 7p mark but the actual figure of 7.85p took even the market optimists by surprise.

Midlands' shares touched a record 677p at one point before edging off the top to close a net 22 higher at 675p. It was pointed out, however, that the increase in Midlands' interim was an attempt to equalise the interim and final dividends, similarly to Eastern's move. Mr Nigel Hawkins, utilities analyst at Hoare Govett, said Eastern's move would lead to an annual dividend rise in the region of 14.6 per cent and Midlands' to an increase of 14.8 per cent. Hoare forecast similar moves by Southern, Seeboard and London.

South Wales Electricity, which announced its interims yesterday, was totally overshadowed by Midlands' dividend performance, the shares easing to 699p in spite of lifting its payment by 14 per cent.

East Midland, up 7 at 616p after 623p, is due to report this morning with a dividend increase of at least 12 per cent said to be on the cards. Seeboard, 12 higher at 695p, reports tomorrow. Northern Ireland Electricity forged ahead a further 15 to a closing peak of 241p.

The futures market was enlivened just before the official close by talk of a tussle between two securities houses surrounding expiry of a large tailor-made option, writes Peter John.

Dealers said that an OTC - an option contract containing details drawn up specifically for one client - expired just before the official close of Footsie futures and options dealing at 4.10pm.

Goldman Sachs and Societe Generale Strauss Turnbull were pinpointed as the two houses most closely involved, although both houses denied any knowledge. The expiry was also said to have been behind weakness in the leading health and household stocks - Glaxo, Wellcome and Zeneca.

In any event, it provided a flurry of interest in an otherwise quiet day which began with a narrowing of the premium between the FT-SE 100 Index and the Footsie Futures contract which expires in December.

Concern that talks on the Gatt world trade agreement were not going as well as previously hoped gave an opportunity for some arbitrageurs to sell the December contract.

Then, late in the day, heavy buying in the underlying cash market saw the premium end the day at only 8 points, a return to more manageable levels. December closed at 3246.5 on turnover of 9,924 lots.

Turnover of only 29,697 traded options was enlivened by hefty volume of 6,284 contracts in Hanson. One house bought Hanson calls and sold puts, a bullish stance which takes the view that the underlying shares have fallen as far as they are likely to following disappointing figures at the end of last week.

Profit-takers were successfully resisted on the UK stock market yesterday in a more active trading session. Marked selling pressure early in the day took the FT-SE 100 Index down nearly 18 points, but traders were caught out by the strength of a rally which left the index unchanged at the peak of 3,237.3 reached on Monday. The rally across the wider range of stocks took the FT-SE Mid 250 Index up 2.2 to a new high of 3,568.

No new factors appeared to influence the stock market; sterling and UK bonds eased slightly, although both closed in London above the day's lows. But confidence that UK base rates will be reduced in the new year remained undimmed.

The late rally, which took the Footsie briefly into positive territory, was complicated by a clash in the derivatives markets, where a US securities house unravelled an off-market package written for a single client. The resulting turmoil in equities caused some confusion among the blue chips and boosted the day's Seaq volume total to 686.4m shares from the previous session's 601.9m. On Monday, retail volume was worth Pounds 1.2bn.

Stock Exchange statistics confirmed that November was a very successful trading month for the London-based securities firms. UK equities worth Pounds 52.6bn were traded in what now proves to have been the busiest month since July 1987, just before the market crash of October that year.

The stock market stood up well yesterday to a shrinking of the premium on the December contract on the Footsie. The futures premium has been a significant driving factor behind equities since just before Budget Day. Traders were not disturbed by yesterday's reduction in the premium, which is normal as the contract approaches expiry.

Another cut in mortgage rates by a leading home lending group kept interest rate optimists on the alert. Bank stocks, which have benefited very strongly from the view that rate cuts will work wonders for their unperforming loans, attracted renewed buying in the second half of the session. Store shares, however, shed a few pence in what was little more than a profit-taking pause. Sector analysts are now looking for signs of the consumer spending pattern in the months leading up to Christmas.

Most share sectors moved narrowly around overnight levels, with the electricity utilities outstanding following dividend statements. But profit-taking among the consumer stocks, which have advanced strongly since the Budget offered relief from fears of adverse tax moves, brought widespread falls. Publishing shares, which have outperformed over the past week, also came in for profit-taking pressure.

Equity strategists continued to express satisfaction with the outlook for UK stocks, although some turned their attention overseas. Strength overnight in the Hong Kong market helped some London shares, but there were further worries over Tokyo. London-based securities firms take differing views on the Japanese market. Some still see weakness there as a potential threat to global investors.

However, NatWest Markets has upgraded its weighting recommendation on Japanese equities from underweight to neutral, arguing that prospects of cuts in both income tax and the discount rate should raise recovery hopes. Goldman Sachs takes a similar line, although cautious on 'uncertainty about economic recovery'.

Wall Street

US stocks nudged into record territory yesterday, shrugging off comments by the Federal Reserve vice-chairman which were interpreted as a signal of an early tightening of monetary policy, writes Frank McGurty in New York.

The Dow Jones Industrial Average closed 8.67 firmer at 3,718.88, surpassing the previous all-time closing high of 3,710.77 set on November 16. The Standard & Poor's 500 improved 0.33 to 466.76, while the American SE composite put on 1.58 at 467.40 but the Nasdaq composite shed 1.74 to 769.35. NYSE volume came to 285.7m shares.

Equities opened broadly higher, building on a week of steady, if unimpressive, gains which reflected a stream of good economic news last week. The market briefly stumbled during mid-morning after Mr David Mullins, the Fed vice-chairman, said 'vigilance' was required in view of the economy's strong growth in the fourth quarter. He added that the Fed could not afford to wait until clear signs of inflation emerged before moving to raise short-term interest rates.

His remarks were interpreted by analysts as a signal that the Fed may act sooner, rather than later, possibly as early as the first quarter of next year.

The negative impact on the US Treasury market was discernible but not devastating. In late trading the benchmark 30-year government bond was 3/16 off at 101 1/32 , with the yield shading higher to 6.162 per cent.

A firming trend in crude oil futures, which tumbled to five-year lows late on Monday, failed to lift most of the petroleum-related issues. Texaco gained Dollars 3/8 at Dollars 62 7/8 , but Mobil was down Dollars 1/4 at Dollars 75 1/4 . Exxon was unchanged at Dollars 62 5/8 .

Transportation issues, which often decline on higher crude oil prices, were mixed. Investors took in their stride an announcement by American Airlines that the recent strike by flight attendants would reduce after-tax earnings by Dollars 160m. The stock rose Dollars 1 5/8 to Dollars 67 1/2 . Boeing advanced Dollars 2 1/8 to Dollars 41 after Salomon Brothers lifted its rating on the shares to 'buy' from 'hold'.

Wall Street was well pleased with RJR Nabisco's announcement of a big restructuring programme, pushing the stock up Dollars 3/8 to Dollars 6 5/8 .

Retailing issues were mostly easier after the Johnson Redbook Service said sales had dipped last week from the previous seven days. Sears bucked the trend, rising Dollars 1 7/8 to Dollars 54 1/8 .

On the Nasdaq market, Pairgain Technologies surged Dollars 2 5/8 to Dollars 13 1/8 on the heels of an upgrading by Olde Discount.

Canada

Toronto finished higher in active trading, boosted by strong gains among mining and transportation stocks.

The TSE 300 index rose 29.5 to 4,265.5 and advances led declines by 434 to 384 after volume of 75.1m shares. The mining and transportation group indices climbed 4.11 and 2.33 per cent respectively.

Mexican shares pared early losses on a late surge of buying by foreign investors.

The IPC index, after the market's recent rise to record levels, finished only 2.06 points down at 2,384.08. Just before midday, the market troughed at 2,361.67, a setback of 24.47 points or 1.02 per cent. A total of 136.9m shares changed hands.

Investors were hesitant to sell shares against heightening prospects of a further decline in interest rates, and the Nikkei average, which dropped 3.5 per cent on Monday, closed marginally higher on short-covering, writes Emiko Terazono in Tokyo.

The 225-issue index regained 63.11 at 16,903.49. The Topix index of all first section stocks, which fell 46.25 on Monday, picked up 6.75 to 1,420.61.

Traders said renewed hopes of an imminent cut in the official discount rate kept investors from further selling. Hopes of monetary easing by the Bank of Japan pushed down bond yields, and the No 157 10-year benchmark fell to a low for the year of 3.145 per cent, although it closed unchanged on the day at 3.165 per cent.

After declining to a day's low of 16,791.28 in the morning session, the Nikkei gained ground on speculation of lower interest rates. The index fell briefly on profit-taking, but was supported later by small-lot buying by investment trust funds and foreign brokers which took it to a high of 17,128.81 in the afternoon.

Volume remained flat at 220m shares. Declines outscored advances by 536 to 455, with 156 issues unchanged. In London the ISE/Nikkei 50 index eased 2.39 to 1,157.61.

Professionals were absorbed with the domestic political situation and the government's economic stimulus package. Some investors feared that the government's likely decision to partially open Japan's rice market ahead of the deadline of the Uruguay Round of multilateral talks might expose the strains within the seven-party coalition, further delaying implementation of the fiscal stimulus.

Mr Morihiro Hosokawa, the prime minister, indicated yesterday that he was ready to accept a compromise agreement on rice, while members of the Socialist party, staunchly opposed to the lifting of the rice ban, reiterated threats to leave the coalition.

Foreign buying supported blue chip exporters. Matsushita Electric Industrial put on Y20 at Y1,430 and Toshiba Y5 at Y646, while Toyota Motor advanced Y40 to Y1,750.

Daiichi Pharmaceutical recovered Y30 to Y1,420 and Yakult Honsha by Y50 to Y2,267 after Daiichi denied reports that clinical tests of their new anti-cancer drug had side effects that led to a high death rate in patients.

Nippon Telegraph and Telephone rose Y9,000 and East Japan Railway gained Y11,000 at Y422,000, both rising for the first time in three trading days.

In Osaka, the OSE average firmed 10.91 to 18,705.79 in volume of 16.6m shares.

Roundup

Tokyo's improvement helped some of the Pacific Basin markets to climb to peak levels.

HONG KONG spent the day in record territory but prices turned back from their best levels when the Hang Seng index neared 10,000 as investors remembered the political uncertainties that cloud future prospects.

The Hang Seng still finished 126.88, or 1.3 per cent, ahead at 9,736.57 after an intraday peak of 9,937.36. The previous record close of 9,733.34 was established on November 15.

BANGKOK surged 4.7 per cent to a record close as foreign institutions returned to buy shares before local mutual fund purchases push prices further ahead. The SET index strengthened 65.15 to 1,442.56, surpassing its previous peak of 1,380.84 set on November 12.

KUALA LUMPUR posted its sixth consecutive all-time closing high, the composite index adding 22.14, or 2.1 per cent, at 1,063.25, on the back of strong speculative and institutional buying.

Volume was 940.6m shares, the largest since the record 1.04bn of April 15, and compared with Monday's 901.8m.

SINGAPORE found cause for optimism in the outlook for improved corporate earnings, and the Straits Times Industrial index added 16.00 to close at a record 2,163.54.

Malaysian speculative shares traded over the counter continued to dominate trading and led the 20 top actives.

MANILA was supported by the rebound in other regional markets and growing optimism about the economy. The composite index jumped 75 to 2,509, well eclipsing the previous high of 2,467 registered on November 3.

BOMBAY saw a resumption of buying by local investors and foreign funds after the cumulative 143-point fall of the previous three sessions. The BSE 30-share index finished 81.91, or 2.6 per cent, higher at 3,231.71.

SEOUL saw a mild, across-the-board consolidation following three days of gains, which left the composite index 3.32 lower at 823.17. Institutional profit-taking focused on blue chips, although individual investors continued to seek out low-price bargains.

AUSTRALIA was helped ahead by the strength of the resources sector, on hopes of a recovery in commodity prices, and the All Ordinaries index climbed 20.2 to 2,073.9.

TAIWAN's weighted index ended 24.57 down at 4,683.60, off a day's high of 4,739.87.

Bourses were inhibited by the need for consolidation yesterday, although Milan and Stockholm managed to move firmly ahead, writes Our Markets Staff.

FRANKFURT eased on the official session but rose in the afternoon, when the Ibis indicated DAX index ended at 2,127.38 after easing 3.34 to 2,115.46 earlier. Turnover slipped from DM8.8bn to DM7.6bn.

Chart and technical buying were offered as reasons why Commerzbank put on DM5.80 to DM382.80, and climbed further to DM390.50 in the London afternoon, and why BMW rose DM9 to DM644.

Elsewhere, professionals looked for special situations, and found them in AEG, up another DM5.50 to DM185.90 on structural reorganisation talk ahead of today's supervisory board meeting, and in Escada, the garment company, DM28.50 better at DM299 on a lower than expected 1992-93 loss, a return to the preference dividend list and a forecast return to profit in the current year.

MILAN overcame mid-session profit-taking and the Comit index added 9.31 or 1.7 per cent to 573.46, reflecting growing optimism over the political outlook and timely passage of the budget. Trading was active ahead of today's national holiday.

However, Morgan Stanley, overweight in Italian equities between April and September when it began switching into French defensive stocks, said yesterday that it was maintaining its underweight position ahead of the general election, early next year. Mr David Roche and Mr Richard Davidson attributed their caution to political risks and doubts over whether the PDS would be able to implement the hard nosed economic reform that Italy needed if the debt/GDP ratio was to be mastered.

Credito Italiano rose L99 or 4.4 per cent to L2,358, its privatisation offer looking substantially oversubscribed.

Foreign buying supported industrials. Olivetti rose L59 or 4.4 per cent to L1,911 in volume of 15.1m shares and Pirelli was L47 ahead at L1,994. Fiat added L25 to L4,214, unable to sustain the day's high of L4,280, in volume of 16.7m shares.

PARIS remained caught in a downward correction as concern over the Gatt talks continued to weigh on sentiment. The CAC-40 index sliped 10.62 to 2,176.12, but off a low of 2,167.70 and down from a high of 2,185.82. Turnover was around the FFr3bn level.

Club Med, which is no longer a CAC-40 stock, saw sprightly activity on rumours that it was planning a share swap with the German travel group LTU. Club Med denied the reports but the shares ended FFr26.40 higher at FFr341.80.

AMSTERDAM paused for breath with the CBS Tendency index moving upwards a bare 0.1 to 139.8.

Goldman Sachs, in a global strategy report, remained positive on Dutch cyclicals, expecting this sector to show the largest gains over the next 12 months. The US investment bank forecast a pick up in exports and investments in 1994, 'while consumer spending is expected to show limited growth ..Currently the market is interest rate driven, which is expected to boost the performance of both financials and cyclical companies, the latter also benefiting from a pick-up in exports and restructuring measures'.

KNP BT, the paper manufacturer, added 10 cents to Fl 41.10 on news that it was near to reaching an agreement on the sale of a subsidiary.

STOCKHOLM saw a rebound in Volvo Bs, which put on SKr26 at SKr461 on a return to the argument that the failure of the merger plan with Renault was good for the Swedish company's equity rating.

The Affarsvarlden General index rose 18.5, or 1.4 per cent to 1,356.8. Trelleborg, the mining and metals group, rose SKr5.50, or 7.6 per cent to SKr70.50 with support from firmer metal prices; Electrolux put on SKr8 to SKr296 on the story that it would take over AEG's household appliance subsidiary; and Handelsbanken closed SKr3 higher at SKr109 on the withdrawal of its offer for Gota Bank.

ZURICH paused to consolidate the cumulative 4.6 per cent advance of the previous four sessions and the SMI index finished 1.6 easier at 2,834.8. ISTANBUL lost 3.5 per cent as many investors decided to take profits. The composite index fell 636.3 to 17,391.8 in turnover of TL1,660bn.

Written and edited by William Cochrane, John Pitt and Michael Morgan.

------------------------------------------------------------------------ FT-SE ACTUARIES SHARE INDICES ------------------------------------------------------------------------ Dec 7 THE EUROPEAN SERIES ------------------------------------------------------------------------ Hourly changes Open 10.30 11.00 12.00 ------------------------------------------------------------------------ FT-SE Eurotrack 100 1400.20 1399.16 1399.00 1395.72 FT-SE Eurotrack 200 1467.07 1466.88 1467.08 1465.54 ------------------------------------------------------------------------ Hourly changes 13.00 14.00 15.00 Close ------------------------------------------------------------------------ FT-SE Eurotrack 100 1396.61 1398.76 1399.65 1399.50 FT-SE Eurotrack 200 1466.04 1466.30 1467.36 1467.49 ------------------------------------------------------------------------ Dec. 6 Dec. 3 Dec. 2 Dec. 1 Nov. 30 ------------------------------------------------------------------------

FT-SE Eurotrack 100 1397.37 1387.12 1374.18 1365.54 1343.12 FT-SE Eurotrack 200 1469.43 1464.15 1456.67 1452.41 1420.82 ------------------------------------------------------------------------ Base value 1000 (26/10/90); ------------------------------------------------------------------------ High/day: 100 - 1400.20; 200 - 1468.76 Low/day: 100 - 1393.80 200 - 1464.76 ------------------------------------------------------------------------

Demand for industrial stocks lifted the overall index by 19 to a new high of 4,296, while industrials gained 25 at 4,970. The golds index shed 21 to 1,902. Anglos rose R3.50 to a new peak of R168 and Barlow Rand added R1.50 at R48.50.

There are few more lively social spots in a Riyadh evening than the crowded and often sumptuous share trading salons of some of the city's bigger banks. A highly upmarket betting shop might come to mind were such notions not so unIslamic.

Directly after the Gulf war the association with gambling was not, however, entirely inappropriate to Saudi Arabia's stock market. Having languished illiquidly throughout most of the 1980s, the market suddenly burst to life on a surge of speculative buying, more than doubling the official index within a year, prompting a flush of new issues and recapitalisations and recording some huge oversubscriptions in the process.

That speculative bubble has since deflated. The index has long since flipped from its record high of 233 in April 1992 and has, for the past few months, settled at a steady and modest level of around 180. And, oddly, it is this which gives bankers and economists in the kingdom such cheer: in a region notorious for investors' propensity for speculative excess, Saudi Arabia's stock market has survived a boom and mini-bust and is still going relatively strong.

Although down from its post-war peaks, the market has developed beyond measure from its pre-war doldrums to become considerably the biggest and most vigorous equity market in the Middle East.

At current prices, the market is capitalised at around Dollars 50bn - dwarfing the region's second biggest market in Jordan, where the total value of issued shares is just above Dollars 3bn. In sharp contrast to the sleepy bourses in Kuwait or Bahrain, trade is also fast and furious: the 35m shares traded in 1992 were worth more than Dollars 3.4bn.

The rush of speculative funds which revived the market is mainly over. This was largely the effect of a huge repatriation of wealth by Saudi investors after the Gulf War, partly out of disappointment at the rewards available in international markets and partly out of renewed confidence at the returns and security of investments available at home.

Some economists estimate that SR30bn (Dollars 8.1bn) of private wealth made its way back and, because of the religious opprobrium attaching to interest-bearing instruments, found its home in stocks or property.

On this tidal wave of money (the value of annual transactions rose to SR13.6bn in 1992 from SR4.4bn two years earlier), numerous companies, in particular nine of the joint stock banks, took the opportunity to recapitalise. The subsequent rise in liquidity has given the market a lift and, in general, the number of transactions is now seven times what it was before the war.

But many analysts wonder if the market has reached its natural limit. They point out that while the market is far busier and bigger than any in the region, only about 7 to 10 per cent of issued stocks are actually traded; the remainder tend to rest in the hands of the few wealthy Saudi individuals who dominate the market and effectively serve as market-makers. While they are more content to hold than to trade the bulk of their holdings, the market's growth will be constrained.

New scrip would help, but there are few immediate signs of this. Only three of the kingdom's 2,000 manufacturing companies have so far come to market, and only three companies plan to do so in the near future. This reflects the predominant ownership structure of most enterprises in the kingdom, which tend to be closely held family concerns, with a tendency to resist both the reporting requirements and dilution of ownership entailed in a listing.

Without new paper, trades will also continue to concentrate in just a few leading shares. At present, trade in the eleven listed banks makes up 70 per cent of the daily average trades in all 58 quoted companies - largely due to the flood of shares made available during the past two years' banking recapitalisation. Banks make up six of the market's top ten capitalised companies.

But in the absence of new listings, some market users believe that the exchange could give itself a further fillip by altering its trading structure. At present all trades must be done through the banks, who are allowed exclusive use of the floorless electronic trading system. A substantial grey market also exists but all informal brokers must deal finally through banking share rooms.

Many believe that the absence of a trading floor is depriving the market of a central arena of information and worsens what they say is already a high propensity to trade on privileged information.

It has been suggested that this is an obstacle to opening the market to overseas investors. But while a number of bankers are beginning to investigate possible vehicles for attracting foreigners, the central bank has shown no signs so far of changing the rules.

The continued strength of their currencies allowed Belgium and Denmark to reduce interest rates yesterday, writes Conner Middelmann.

The Belgian National Bank cut its key central rate by 50 basis points to 7.50 per cent and its end-of-day rate by 50 basis points to 9.20 per cent.

The Danish central bank at its latest open market operation lowered its 14-day certificates of deposit rate to 7 per cent, from 7.25 per cent in the previous two-week offer.

Both currencies held up well after the rate cuts, with the Danish krone firming slightly and the Belgian franc ending little changed.

The krone finished at DKr3.933 to the D-Mark, up from Monday's DKr3.934 close. The Belgian franc ended at BFr20.83 per D-Mark, barely altered from BFr20.82 late on Monday.

Further Belgian rate cuts are likely to continue underpinning the currency, as they will boost the flagging economy and alleviate the interest burden on Belgium's massive budget deficits, analysts said.

'Part of the vicious circle has been that a substantial part of the budget deficit is due to high interest payments,' noted Mr Steve Hannah, head of research at IBJ International. 'If they continue getting rates down, that will have a beneficial impact on the budget deficit, thus restoring market confidence.'

The Italian currency continued to rise on widespread relief that the worst is over on the political front.

The lira began to rally after Sunday's municipal elections, where left-wing coalitions swept to power in several major cities at the expense of right-wing parties. It is also supported by hopes that the 1994 budget, which was passed last week by the budget committee of the lower house, will be approved before the end of the year.

The lira opened around L985 against the D-Mark and rose as high as L981.25 during the session. It closed at L983.1, up from Monday's finish of L989.8.

In spite of its recent recovery, 'the lira still looks cheap on fundamental grounds', said Mr Andre de Silva, market strategist at PaineWebber International.

'Whenever the lira has fallen below L1,000 against the D-Mark, buyers have emerged and, from a risk-reward perspective, we are a lot more comfortable in running open lira positions than we are the French equivalent,' Mr de Silva added.

The lira's strength gave a small lift to the Iberian currencies, although trade in all three was thin ahead of today's national holiday in Spain and Italy.

The Spanish peseta rose to Pta81.93 against the D-Mark, from Pta82.33 at Monday's close. The Portuguese escudo ended at Es101.9, up from Es102.0 on Monday.

The French franc drifted lower through the day on concerns over the ongoing Gatt world trade talks and data showing a 34.8 per cent increase in French corporate bankruptcies in October.

After breaking key support at FFr3.4360 against the D-Mark, the franc slipped as low as FFr3.444. It finished at FFr3.440, down from FFr3.434 at Monday's close.

Sterling shed more than a pfennig against the D-Mark, largely on profit-taking amid thin trading conditions. However, some pointed out that recent rate cut speculation was also weighing on the currency. The pound ended at DM2.5450, down from DM2.5575 at Monday's close.

Market opinion is about evenly split over the likelihood of another 1/2 percentage point base rate reduction before Christmas, said Mr Ian Shepherdson, UK economist at Midland Global Markets. He listed three factors favouring a near-term rate cut: 'The Budget's gone down very well in all markets, the fiscal tightening was at least as large as the Bank of England wanted, and most of Europe has cut rates.'

However, he feels next Wednesday's November inflation numbers will clinch the decision on UK rates. 'If the RPI is unchanged at 2.8 per cent or below, the market will be screaming for a rate cut.' But until the RPI release, the pound is likely to drift in a narrow range, traders said.

In the money market, the Bank of England forecast a shortage of Pounds 1.7bn, which it later revised downwards to Pounds 1.25bn.

At its morning operation it purchased Pounds 17m of band 1 bills and Pounds 20m of band 2 bills at 5 3/8 per cent. In a later round it bought a total of Pounds 196bn of band 1 and 2 bills at 5 3/8 per cent, and provided late assistance of around Pounds 755m.

The D-Mark firmed slightly when the Bundesbank revised its October M3 money supply growth numbers to 6.9 per cent, from the provisional 6.8 per cent rate released some two weeks ago.

'The numbers were a touch disappointing - a lot of people had expected a downward revision,' said IBJ's Mr Hannah. M3 growth remains above the Bundesbank's 4.5 to 6.5 per cent target range.

The German central bank will today allocate another round of 14-day repos at a fixed 6 per cent - the first of five fixed-rate repos at that rate. Some DM95bn in repos expire today and traders are calling for a small net liquidity injection.

In late London trading the dollar tested key technical and psychological support at DM1.7000 but finished at DM1.7055, down only a touch from DM1.7060 at Monday's close. In New York the US currency ended at DM1.7032.

-------------------------------------------- Pound in New York -------------------------------------------- Dec 7 Close Prev. close Pounds spot 1.49301 1.5045 1 mth 1.4903 1.5020 3 mth 1.4861 1.4978 1 yr 1.4744 1.4864 --------------------------------------------

Pakistan's cotton scientists are exploring ways to develop new crop varieties that will be tolerant of changing weather conditions, after this year's heavy crop damage.

The government estimates that up to 15 per cent of the expected 12m bales has been lost because of the recent attack of the leaf curl virus. But some scientists suspect that higher temperatures, especially during night time, may have exacerbated the drop in production.

Mr Waheed Sultan Khan, director of the government's cotton research institute in Faisalabad, said yesterday: 'Cotton is a very sensitive crop. We have seen this year that night temperature was 3'C higher as compared to previous years. The night temperature has a great impact on cotton production'. Such environmental changes required that new crop varieties be developed, Mr Khan said.

Concern over environmental degradation causing crop damage is the latest addition to a lengthening list of worries for the cotton industry. Some officials and experts still fear that the fall-out from the Gulf War is continuing to affect the atmosphere. However, few efforts have been made to establish a scientific link. Some experts also believe that higher temperatures have been caused by large scale deforestation in recent years.

Meanwhile, many cotton farmers among the worst affected in villages outside Faisalabad, were yesterday busy sowing other crops to recover some of their losses from cotton. Some have already ploughed their cotton fields without harvesting any crop, because the lint it contained would have earned them less money than they would have had to lay out in picking costs.

'I will never sow cotton again,' said Chaudhary Bashir Ahmed, who farms land about 32km from the city. He has recently ploughed in what remained of his 21-acre crop following the virus attack.

Russia's gold production is set to fall steeply next year, according to some analysts. The drop could be as much as 30 per cent, suggests Mr Andy Smith, analyst at Union Bank of Switzerland.

Ms Natalia Zubareva, representative to Russia and the Commonwealth of Independent States for the RTZ Corporation, the world's biggest mining company, thinks that Russia's gold output will remain steady at about 130 tonnes this year but see a 'significant' fall in 1994.

Mr Smith cites three main reason for the expected fall: shortages of resources; the black market; and obstacles to foreign investment.

More than half Russian gold production comes from two areas, Magadan and the Sakha republic, but by the end of August Sakha had received only 30 per cent of its food and only half of its fuel from Moscow. The republic has publicly warned that it may have to sell its gold and diamond output outside the centrally-controlled organisations to meet its needs.

Mr Smith says interior ministry data shows that about 30 per cent of Magadan's 40 tonnes of gold output last year was sold on the black market.

Other factors depressing output are a steep fall in production of mining equipment and a quadrupling of electricity prices in the far east of the country. Only 46 per cent of the minimum funds required were allocated to the region for geological purposes in the second half of this year.

In a recent speech to the Western Gold Show in San Francisco, Ms Zubareva also stressed that ties between mines and equipment suppliers in different parts of the former Soviet Union were breaking down, that the mineral resource base was deteriorating and delays in state payments to producers were causing great difficulty to the CIS gold industry. She said that in recent years investment in gold mining had fallen but it had now reached the stage where there was no investment at all.

China is the world's sixth biggest gold producer, Mr Cui Dewen, vice-president of the Metallurgical Industry Ministry's gold administration, told Xinhua news agency, reports Reuter from Beijing.

During the past 14 years, production had increased at an average rate of more than 10 per cent, he said, but gave no details.

He claimed more than 20 companies from a dozen countries and regions, including the US, Canada, Australia and South Africa, had shown interest in investing in China's gold mines. China would have an 'active attitude' towards Sino-foreign co-operation in gold production, Mr Cui said, with the departments concerned drawing up detailed policies.

'Readjustment of the gold price (in September) stimulated China's gold production,' he said. 'Some original gold markets have appeared around gold mines and more efforts must be made to standardise these.'

On September 1 the People's Bank, the sole legal buyer, raised the state purchase price to 10 per cent below the international price, converting at the exchange rate on national swap markets.

A combination of a weaker Australian dollar, lower company tax and a small rise in exports boosted profits for the Australian mining industry in 1992-93 (to June 30), according to an industry survey, reports Reuter from Canberra.

The Australian Mining Industry Council said net profits of the 120 companies that responded to its survey rose to ADollars 2.31bn (Pounds Pounds 1.03bn) in 1992-93 from ADollars 1.79bn in 1991-92.

'But despite this the rate of return on shareholders' funds was well below the average for the past decade and the prospects for future growth are dulled by continuing depressed world mineral prices,' Amic said. It noted that the industry's aggregate net profit was still below the ADollars 2.55bn earned in 1990-91.

The survey showed that while the industry's operating revenue rose by 3 per cent, its operating profit before income tax rose by 7 per cent and net profit by 29 per cent, boosted by a 21 per cent fall in income tax.

The substantial fall in income tax reflected cuts in the corporate tax rate, losses carried over and adjustments to earlier provisions, it said. Unit costs also declined.

Overall, mine production rose by 2 per cent after a 1 per cent fall in the previous year, the survey showed.

Smelting and refining production rose only 4 per cent and the generally low growth in industry output in the past three years contrasted with the strong growth recorded in the 1980s, Amic said.

The weaker Australian dollar helped to offset lower world prices, resulting in a 3.6 per cent increase in average prices of Australia's mineral exports for the year.

Amic said investment fell by 23 per cent in 1992-93 but added that some improvement in investment was expected next year, with net expenditure on fixed assets likely to increase by some 39 per cent.

Uncertainty over the government's native title bill continued to cloud the outlook for the industry, Amic said, with exploration expenditure expected to rise by only 4 per cent in 1993-94.

London Metal Exchange base metals prices yesterday built on their recent rally, with aluminium, which had been lagging the field somewhat, taking its turn in the lead.

Having shrugged off news of a further 3,900-tonne rise in LME warehouse stocks to a fresh record of 2,395,450 tonnes, the three months delivery aluminium price managed to break down the technical resistance around Dollars 1,090 a tonne at which its rise had stalled on Tuesday before moving on to a peak of Dollars 1,116 a tonne. The advance was trimmed in late trading, however. The price closed at Dollars 1,108.75 a tonne, still Dollars 20.50 upon the day, and a further Dollars 2.25 was surrendered in after hours dealings.

Dealers said the performance was particularly encouraging to the bulls as by holding above Dollars 1,090 the market had indicated that further gains were possible, while removing the immediate threat of a significant downward reaction.

The three months aluminium price has now recovered by Dollars 70 from the eight-year low reached at the beginning of November.

Other notable performances yesterday included three months nickel's Dollars 90 net rise to Dollars 5,037.50 a tonne - though that was Dollars 82.50 below the 4 3/4 -month high reached early in the day.

Lead's recent surge also continued in the morning, with the three months delivery price touching a 1993 high of Dollars 475 a tonne at one point. The price was trimmed back by the close to Dollars 461.50 a tonne, up Dollars 4.25 on the day, but that still extended its upward run over the past eight trading days to an impressive 10.7 per cent.

The zinc market was in an equally buoyant mood as traders looked forward to Friday's meeting of European producers to discuss proposals for co-ordinated output cuts.

An early breach of chart-based resistance around Dollars 976 a tonne for three months metal primed the market for an assault on the psychological Dollars 1,000-a-tonne barrier. That hurdle was cleared with some ease and the price sped on to Dollars 1,010 a tonne. But the advance quickly ran out of steam in that rarefied atmosphere and by the close the three months position was back to Dollars 998.25 a tonne, up Dollars 24.75 on the day.

Three months copper extended its five-day, Dollars 44 upward run with an early jump to Dollars 1,714 a tonne before running into expected stiff resistance. It recoiled to Dollars 1,700.75 a tonne at the close and at the end of after hours trading was back to Dollars 1,699.50 a tonne, up Dollars 5.75 on the day.

'There is a general round of euphoria in the (base metals) market,' commented GNI, the London trade house, in its daily commodity report, 'and a degree of 'call option' mentality.'

It explained that a speculator believing that prices had already seen the bottom could buy a metal and place a stop-loss selling order below its recent low, creating what it described as 'a synthetic call option - ie the risk is limited and the potential upwards huge'.

'This mentality has been cultivated by the low 3.5 per cent US dollar based interest rates available at the moment,' GNI said. 'For example, to fund a nickel position with a stop below Dollars 4,000 (a tonne) will accrue just Dollars 35 a tonne in funding costs for a year, low for a market where historically prices have shot up to Dollars 20,000 in the not so distant past.'

Russia, blamed by western producing nations for the glut of aluminium on the world market, does not plan to cut its production if other producers do not lower their own output, deputy prime minister Alexander Shokhin declared yesterday, reports Reuter from Moscow. He also told a news conference that recent quotas imposed by the European Union on Russian aluminium exports had had no effect because producers were finding ways to avoid them.

'Russian exporters find other ways to go round these quotas,' he said. 'So far, our aluminium industry has not felt any negative consequences of the EC (EU) quotas.'

A flood of Russian aluminium has undermined Western markets since the Soviet Union's collapse. Russia's non-CIS primary aluminium exports rose to 1.11m tonnes in the January-October period from 735,000 in the corresponding period of 1992, official statistics show.

Mr Shokhin said there was no agreement at last week's talks in Washington, where industry officials from Russia, the US, Canada, Australia, Norway and the EU discussed the worldwide oversupply of aluminium. The next round of multilateral talks is scheduled for January 18-19 in Brussels.

Mr Shokhin said Russia was against any sharp production cuts that would hurt its producers. 'There are limits to a compromise,' he said.

'We are not going to restrict output to the extent that our enterprises have to close down. We're ready to cut production, but we have our own criteria for such cuts. Russia is not going to cut output on its own.'

He said further talks were needed with the EU and the US to find a solution to the problem.

'A lot will depend on whether the EC and the United States manage to agree between themselves first,' he said.

Washington trade officials fear that increasing flows of Russian aluminium will flood the US market after the introduction of EU restrictions.

The EU curbs, announced early last week, extend for another three months quotas initiated in August on imports of unwrought aluminium from the former Soviet Union.

-------------------------------------------- LME WAREHOUSE STOCKS (As at Monday's close) -------------------------------------------- tonnes -------------------------------------------- Aluminium +3,900 to 2,395,450 Aluminium alloy -140 to 49,060 Copper +1,925 to 592,425 Lead -675 to 298,075 Nickel +960 to 119,904 Zinc +6,050 to 870,575 Tin +130 to 19,125 --------------------------------------------

European free market, from Metal Bulletin, Dollars per lb in warehouse, unless otherwise stated (last week's in brackets, where changed). Antimony: 99.6%, Dollars per tonne, 1,600-1,650. Bismuth: min. 99.99%, tonne lots 2.30-2.50. Cadmium: min. 99.5%, 0.35-0.40. Cobalt: MB free market, 99.8%, 11.00-11.45 (10.95-11.40); 99.3%, 10.10-10.55). Mercury: min. 99.99%, Dollars per 76 lb flask, 85-100. Molybdenum: drummed molybdic oxide, 2.65-2.75). Selenium: min 99.5%, 4.25-4.90. Tungsten ore: standard min. 65%, Dollars per tonne unit (10kg) WO, cif, 27-39. Vanadium: min. 98%, cif, 1.35-1.45. Uranium: Nuexco exchange value, 6.90.

Members of the executive board of the International Coffee Organisation begin a three-day meeting in London today at which they will discuss the organisation's future role, delegates said, reports Reuter.

'There will be plenty of time to look at the issue of what we want to do with the ICO. . . but I doubt it will be time enough to take a decision,' one producer said.

Members have theoretically until the end of September next year to decide on the organisation's role after the collapse of difficult negotiations on a new economic pact in March.

Delegates agreed to extend the existing administrative accord by a further 12 months to October 1, 1994, but were then shocked in September by an announcement from the US, the biggest consumer, that it would not accede to the extension.

Its decision has been linked with a scheme devised by producers to hold back some supplies from the world market. This came into effect from October 1.

The US subsidiary of SG Warburg took another step in its attempt to gain a profitable foothold in the US capital markets yesterday when it lead-managed a Dollars 112.7m issue of new common stock for Cummins Engine, the big Indiana-based engine manufacturer.

Although the deal is not particularly large by US standards, it is rare for the US arm of a European investment bank to lead-manage an equity issue by a well-known US corporation. While Warburg has co-managed a number of US issues, Wall Street investment banks traditionally run the books for US companies.

Warburg's New York unit, under its American chairman Mr Thomas Wyman, has been pursuing US underwriting business aggressively in the past two years as part of a strategy to reduce the firm's reliance on European investment banking transactions and building a US business independent of the UK parent.

At the same time, Warburg has continued to emphasise its strengths in international capital markets. It was this global reach that helped the firm win the mandate from Cummins.

The company, which is the world's largest manufacturer of engines, with almost half of its sales generated overseas, wanted to sell a large part of its new stock issue to non-US investors.

Although Cummins would not say why it chose Warburg as lead underwriter, Mr Michael Cohrs, head of equity syndication at Warburg, said the firm's ability to distribute Cummins' shares to non-US investors, particularly in the UK and continental Europe, was a crucial factor in winning the deal.

Three big US firms, CS First Boston, Goldman Sachs and JP Morgan Securities, were co-managers of the issue.

Ultimately, about 45 per cent of the 2.3m common shares sold in yesterday's issue went to non-US investors, primarily in the UK, Japan, Switzerland, Denmark and France.

Warburg said the issue was oversubscribed. It was priced at Dollars 49 per share and at the close of trading Cummins shares were up 5/8 at Dollars 49 5/8 on the New York Stock Exchange. Cummins will use the sale proceeds to reduce its debt.

Dresdner Bank raised DM475m through a five-year issue of equity-linked warrant Eurobonds yesterday, a form of financing which has become virtually extinct in Germany due to shareholder opposition to waiving pre-emptive rights.

Only two such issues have been launched this year, by companies which still had authorisation from their shareholders to raise equity-linked financing without offering pre-emptive rights.

In March, Allianz, the insurance group, raised DM950m through a five-year issue of equity-linked warrant Eurobonds while Veba, the utility, raised Dollars 300m through a seven-year Eurobond issue with equity warrants.

An official at Dresdner Bank said the bank had been keen to launch the deal before its authorisation from shareholders expired in the spring.

In recent years, German companies have been discouraged from seeking further authorisations at annual meetings because of shareholder opposition.

Bankers said that in the future, raising equity-linked financing would be a far more complicated process because the bonds would have to be offered to shareholders first.

The rarity value of these issues contributed to the success of Dresdner's offering. The bonds, which were priced at 115, traded at 116.70 bid late in the afternoon.

The warrants were quoted at 18.50, compared with their theoretical value of 17.40, thereby increasing the conversion premium to 18 per cent from 16 per cent at the launch.

Elsewhere, the Province of New Brunswick made its annual outing to the Eurobond market when it raised CDollars 200m through an issue of 20-year Eurobonds, the first offering with this maturity in the Canadian dollar sector. The borrower last tapped the Eurobond market in March 1992.

Lead manager Wood Gundy is donating the commissions and trading profits from this deal to Children in Crisis, a charity currently concentrating its aid efforts on children in the former Yugoslavia. Around CDollars 150,000 was raised yesterday but Wood Gundy hopes to raise a total of CDollars 2m.

The bonds were priced to yield 100 basis points over 10-year Canadian Treasuries but were not freed to trade late yesterday.

Syndicate managers expect the Republic of Argentina to launch its first issue of global bonds today. The 10-year offering, via Merrill Lynch and Salomon Brothers, is likely to raise Dollars 750m, up from an original amount of Dollars 500m. The bonds are likely to be priced to yield around 280 basis points over US Treasuries.

There were also rumours that a Scandinavian sovereign borrower was interested in taking advantage of arbitrage opportunities which are currently available in the 10-year area of the Euro-yen sector.

Swiss Bank Corporation and Mexico's largest private financial group, Grupo Financiero Banamex-Accival, are to form an alliance to trade Mexican equity derivative products.

SBC said the move would strengthen its presence in Mexico, where it expects to see more initial public offerings and investments by global money managers.

Starting next year, the joint venture plans to make markets in over-the-counter options on equities, exchange-listed warrants, futures and forwards, equity swaps and convertibles.

Grupo Financiero's two main subsidiaries are the National Bank of Mexico and Accival, the securities broker.

With crude oil prices firming, US Treasury bonds slipped yesterday morning after the vice-chairman of the Federal Reserve said vigilance was required on inflation in view of the economy's growth rate.

By midday, the benchmark 30-year government bond was down 7/32 at 101, and the yield rose to 6.17 per cent. At the short end, the two-year note was off 3/32 at 100 3/32 , to yield 4.183 per cent.

After the long bond surged nearly a point on Monday, selling pressure resurfaced as oil prices firmed on the Nymex. Crude oil futures had tumbled to five-year lows late in the previous session.

Bond activity remained light, however, ahead of the release later this week of November price data, which are expected to show inflation is in check, at least for the moment.

Traders now appear less concerned with current conditions than with possible developments in the first quarter of next year. Comments by Mr David Mullins, the Fed vice-chairman, served to support the view that the central bank could move to increase short-term interest rates sooner rather than later.

His remarks held bond prices in negative territory, aided by profit-taking by dealers and speculative buyers, who had helped bid up the market during the past two sessions.

UK government bonds slipped by between 1/16 and 1/4 point ahead of today's gilt auction, with stock in the auction area experiencing the largest declines.

The Bank of England is auctioning Pounds 3bn of 6 3/4 per cent stock due 2004, and dealers said the 10-year area of the curve underperformed other maturities as market-makers and clients prepared for the sale of stock.

Despite the release of a batch of 'bond-negative' news yesterday, German government bonds rallied and closed firmer, though off the highs of the day.

The upward revision in October money supply data came as a disappointment since market participants had expected any adjustment to be downwards: M3 money supply grew at an annualised rate of 6.9 per cent, up from the provisional 6.8 per cent reported last month,

However, even less encouraging was the release of higher than expected GDP figures, which showed that western German GDP grew by a seasonally adjusted 0.5 per cent in the third quarter.

The high-yielding European bond markets saw strong gains initially, with Spain following Germany's strength early in the day and rising three-quarters of a point, helped by renewed foreign interest.

The Italian government bond market also saw a good rise on the back of confidence in the political situation, but lost some of the gains when news emerged that the treasurer of the Italy's federalist Northern League party had been arrested on suspicion of corruption. Prices ended about a quarter point higher.

Dutch government bonds closed firmer, with the new tap stock providing the main focus of attention in the market.

The finance ministry said the tap sale of the new 5.75 per cent bond due 2004 raised Fl 1.8bn yesterday after Monday's Fl 7.5bn. Today will be the last day of the tap sale.

Japanese government bonds continued to climb to new intra-day highs, prompted by hopes of a cut in the official discount rate, but prices slipped back on profit-taking to end the day little changed overall.

The March futures contract rose from its opening level of 116.58 to touch a high of 116.69 before closing at 116.54. In the cash market, the yield on the benchmark No 157 JGB opened at 3.15 per cent and ended at 3.185 per cent, corresponding to the low price of the day.

Market participants said several contributing factors were driving the rate cut hopes. Last week, Bank of Japan and government officials were reported to be predicting an ODR cut in the week of December 13.

At the same time, the central bank has allowed money market rates to slip below 2 per cent, which some regard as a sign that an official rate cut is in the wings.

The steady stream of depressing economic news is expected to continue with the release this week of third-quarter GDP figures and the release on Friday of the quarterly Tankan survey of business sentiment, which is expected to be gloomy.

Mr Gerard Lyons, international economist at DKB International, predicts that GDP will fall by 1.0 per cent quarter-on-quarter: 'I'm expecting to see the biggest quarter-on-quarter drop since the first quarter of 1974.'

Ameritech, the Chicago-based local telephone company, yesterday took the first step to becoming the first Baby Bell regional telecommunications group to enter the long-distance calling market. It has asked the US Justice Department for permission to offer a long-distance service, initially on a test basis.

The seven Baby Bells are currently banned from the long-distance market under the terms of the 1982 anti-trust court case which spun them off from American Telephone & Telegraph. Regulators feared they would use their monopoly power in the local market to compete unfairly in the long-distance arena.

However, technological factors and a pro-competition regulatory environment are gradually whittling away at the local monopoly.

Mr John Zabriskie, executive vice-president and head of manufacturing at the US drugs group Merck, is leaving the company to take over as chairman and chief executive of Upjohn, a chief rival.

The appointment ends the search for a new Upjohn chief executive that began last April, when the previous chairman and chief executive, Mr Theodore Cooper, died of cancer. The company said last night Mr Ley Smith, Upjohn chief operating officer, would continue to serve as interim chief executive until the 54-year-old Mr Zabriskie assumed his duties in the new year.

Mr Zabriskie said yesterday he was sad to leave Merck after 28 years, but that the 'opportunity to lead a company in my own right became an irresistible challenge'.

News of the appointment was warmly received by investors and analysts, and Upjohn's shares rose Dollars 5/8 to close at Dollars 31 1/8 on the New York Stock Exchange.

Mr Joseph Riccardo, an analyst with the Wall Street broking house Bear Stearns, hailed Upjohn's choice. 'John Zabriskie is a seasoned pharmaceuticals executive who had a very good career at Merck. He is a good manager and leader and will be a valuable asset to Upjohn.'

Mr Zabriskie's main challenge at Upjohn will be to steer the company through what could be a difficult transition. Although it has some promising products under development, Upjohn faces the expiration of US patents on several of its leading drugs; new legislation affecting the tax charge for its Puerto Rican manufacturing facilities; and a healthcare environment that President Clinton's planned reforms have turned increasingly hostile.

The departure of Mr Zabriskie, meanwhile, clouds the issue of who will succeed Mr Roy Vagelos as chairman and chief executive of the world's largest drugs group when he retires next year.

Fourth-quarter earnings at Deere and Company, the US agricultural, industrial and lawn equipment manufacturer, jumped to Dollars 103.5m, or Dollars 1.33 a share, before special accounting charges.

Deere said strong North American sales in all equipment lines lifted profits.

Last year, the group recorded fourth-quarter profits of Dollars 4.2m, or 5 cents.

Before special charges, Deere posted full-year income of Dollars 286.3m, or Dollars 3.70 a share, up from Dollars 37.4m, or 49 cents, a year ago.

Including the special charges, it suffered a net loss of Dollars 920.9m, or Dollars 11.91, in fiscal 1993. Those charges included a one-time accounting charge of Dollars 1.1bn for post-retirement employee benefits.

In spite of the Dollars 80m restructuring of its European operations, announced in the second quarter, overseas agricultural equipment operations incurred large operating losses in the fourth quarter and for fiscal 1993.

The full-year's losses 'substantially exceeded' last year's operating loss.

Deere's worldwide sales jumped 15 per cent to Dollars 2.18bn in the fourth quarter, from Dollars 1.9bn in the same 1992 quarter. Production tonnage was up 31 per cent from last year's fourth quarter.

Fourth-quarter earnings at Deere and Company, the US agricultural, industrial and lawn equipment manufacturer, jumped to Dollars 103.5m, or Dollars 1.33 a share, in the fourth quarter, before special accounting charges.

Deere said strong North American sales in all equipment lines boosted profits.

Last year the group recorded fourth-quarter profits of Dollars 4.2m, or 5 cents.

Before special charges, Deere posted full-year income of Dollars 286.3m, or Dollars 3.70 a share, up from Dollars 37.4m, or 49 cents, a year ago. Including the special charges, it suffered a net loss of Dollars 920.9m, or Dollars 11.91, in fiscal 1993. Those charges included a one-time accounting charge of Dollars 1.1bn for post-retirement employee benefits.

Despite the Dollars 80m restructuring of its European operations, announced in the second quarter, overseas agricultural equipment operations incurred significant operating losses in the fourth quarter and for fiscal 1993.

The full-year's losses 'substantially exceeded' last year's operating loss.

Deere's worldwide sales jumped 15 per cent to Dollars 2.18bn in the fourth quarter, from Dollars 1.9bn in the same 1992 quarter. Production tonnage was up 31 per cent from last year's fourth quarter, when Deere shut down some of its factories to limit the build-up of inventories.

For the fiscal year, Deere reported worldwide sales of Dollars 7.75bn, up 11 per cent from 1992's Dollars 6.96bn. North American equipment sales made up Dollars 4.9bn of that total, up 19 per cent from last year.

Mr Hans Becherer, chairman, said North American sales of agricultural equipment in 1994 should reach 1993 levels.

'Due to the lower 1993 grain production and the resulting reduction in carry-over stocks, a substantial increase in planted and harvested acreage of corn and soya beans is expected in 1994,' he said.

Many companies in the fast-evolving telecommunications business are bigger than Canada's BCE. However, in the scramble for a toehold in the converging worlds of telephones, cable television and entertainment, only a handful have managed to leave their footprints in as many places.

With its plan to buy an initial 30 per cent stake in Colorado-based Jones Intercable, BCE is now about to secure a significant presence in one of the pioneering parts of the business - the US cable-TV industry.

'We're not finished,' says Mr Derek Burney, chairman of BCE Telecom International, a wholly-owned unit through which BCE is channelling its international expansion.

BCE Telecom's mandate, Mr Burney says, is 'to make investments internationally covering the full range of telecommunications in areas where we either have expertise to offer or where our expertise will complement that of our partner in a way that we both benefit'.

Mr Burney, who until last year was Canada's ambassador in Washington, says BCE is especially seeking opportunities in Latin America and Asia.

BCE's telecom interests now stretch from stakes in Canadian, UK and New Zealand telephone companies, to a 52 per cent interest in Northern Telecom, the telephone equipment maker. It also has interests in cable-TV franchises, telephone directories, and cellular and mobile phone systems.

The decision to focus on telecommunications marks an about-turn from BCE's strategy a decade ago. Then, the prospect that its offshoot, Bell Canada, would not maintain its stranglehold on Canada's domestic telephone market led BCE into an ambitious - and costly - diversification.

However, Mr Raymond Cyr, architect of BCE's entry into financial services, pipelines, computer services, printing and property development, made way in 1990 for Mr Red Wilson, former head of Tate & Lyle's Canadian subsidiary.

The unflappable Mr Wilson, 53, has often said that the survival of any serious player in the telecommunications business depended on its ability to deliver a wide range of services.

The last of the non-telecom businesses, comprising financial services group Montreal Trustco and property developer Brookfield Development, were sold last week. A CDollars 750m (USDollars 564.3m) loss on these investments will be charged to BCE's fourth-quarter earnings.

The Montreal Trustco sale has left BCE with a stake of almost 5 per cent in Bank of Nova Scotia, Canada's third-biggest bank.

BCE's latest purchase is one of the US's lesser-known but more innovative cable-TV companies. Mr Glenn Jones, chairman and controlling shareholder of Jones Intercable, 'is considered one of the industry's visionaries,' says Mr George King, analyst at Canseco Capital Management in Indianapolis.

Jones Intercable is among the pioneers in bringing school and university courses to cable-TV subscribers - a service which has yet to catch on. It also has several interests in the entertainment business, among them a subsidiary which provides programmes to 600 US radio stations.

BCE and Jones became acquainted through their joint ownership of Encom Cable, which owns six contiguous franchises in London. Besides cable-TV, Encom offers voice and data services in its franchise area, a model which North American telephone and cable companies are seeking to emulate.

Jones is the seventh-biggest US cable operator. However, its strength is not so much the cable systems which it owns, as those which it manages on behalf of about 20 limited partnerships.

The partnerships are typically liquidated after between five and seven years, leaving Jones with an interest in the residual value and an obvious route for expansion.

Much of the Dollars 400m which BCE has committed to invest in Jones is likely to be earmarked for purchases of systems owned by defunct partnerships, as well as outside systems. BCE has an option to lift its 30 per cent stake in Jones to a controlling one.

While BCE's diversification drive in the 1980s proved to have been an indisputable mistake, its telecommunications investments have not been trouble-free either. Northern Telecom is in the middle of a painful restructuring, having lost Dollars 989m in the first nine months of this year.

Bell Canada, BCE's cash cow, is also in transition, hobbled on the one hand by growing competition in Canada's long-distance telephone market, and on the other, by continuing regulation of its monopoly on local services in Ontario and Quebec.

BCE's challenge, like that of other companies trying to bring the strands of the telecommunications and cable-TV businesses together, is to demonstrate that a stable of diverse investments can produce more innovation and a better return for shareholders than each company operating by itself.

BCE's consulting arm, Bell Canada International, will be integrated with BCE Telecom next month as part of the effort to promote exchanges between the companies in which BCE is a shareholder.

Mr Burney says: 'We're not looking to some grand international alliance where all the pieces come together.' However, he points to the cable-cum-telephone partnership with Jones in the UK, and says: 'We do see complements.'

BCE and Mercury Communications, the UK telephone company in which BCE bought a 20 per cent stake earlier this year, have begun to tap into each other's resources.

About half-a-dozen Bell Canada managers have been parachuted into senior positions at Mercury, while several Mercury employees have been seconded to Bell. BCE and Cable & Wireless, Mercury's parent, are meeting in the UK this week to discuss further co-operation.

Similarly, Jones has commissioned Bell-Northern Research, Canada's biggest privately-owned research group, to help on a systems integration project.

'We would expect that the full range of the family's expertise could be brought to bear in some shape or form in this investment, as it has in others,' Mr Burney says.

AMR, parent of American Airlines, estimates that fourth-quarter after-tax earnings will be reduced by more than Dollars 160m because of the strike by flight attendants last month, agencies report.

As a result, AMR would report a 'significant loss' for the fourth quarter and a loss for the year. For the fourth quarter ended December 31 1992, AMR reported a loss of Dollars 200m, or Dollars 2.66 a share, on revenues of Dollars 3.6bn.

The airline said it lost about 1.3m passengers in November because of the dispute.

Flight attendants at American Airlines went on strike for five days just before the November 25 Thanksgiving holiday. The strike ended after President Clinton interceded.

The company said its system-wide load factor in November declined 7.63 points, to 51.44 per cent from 59.07 per cent a year ago, due to the strike.

It said November system-wide revenue passenger miles fell 16.8 per cent to 6.28bn from 7.55bn a year ago, while available seat miles declined 4.5 per cent to 12.21bn from 12.78bn.

For the year to date, load factor declined to 60.5 per cent from 64 per cent.

Royal Bank of Canada, the country's biggest financial institution, has had another disappointing year, with earnings hit by restructuring charges and unexpectedly high loan losses, especially in real estate.

Net earnings totalled CDollars 300m (USDollars 225.7m), or 46 cents a share, in the year to October 31, compared with CDollars 107m, or a loss of five cents a share, in 1992. Return on equity was a meagre 2.4 per cent, following last year's negative return of 0.3 per cent.

The previously-announced charges, totalling CDollars 410m, reflect the costs of integrating the operations of Royal Trust, which the bank acquired earlier this year, and an internal restructuring plan. RBC is cutting 4,100 jobs from its payroll, equal to almost 8 per cent of its workforce.

After the charges, the bank posted a CDollars 420m fourth-quarter loss, equal to CDollars 1.47 a share, against a loss of CDollars 473m, or CDollars 1.63, a year earlier.

Loan-loss provisions for the year were CDollars 1.75bn.

This is lower than the CDollars 2.05bn set aside in 1992, when the bank was hit by its exposure to Olympia & York, the failed real estate developer.

The final 1993 provisions, however, are more than double the CDollars 820m estimated at the end of the first quarter. Provisions for sour commercial real-estate loans have now reached 20 per cent of the bank's gross property portfolio.

Ms Donna Toth, analyst at Nesbitt Thomson in Toronto, said RBC's problems stemmed from aggressive lending policies with inadequate controls. Several of the bank's most senior corporate credit officers have taken early retirement in the past year.

On the brighter side, Mr Allan Taylor, chairman, said retail banking and treasury operations performed strongly, while the bank's investment banking subsidiary, RBC Dominion Securities, posted record earnings. Non-performing loans have dropped to CDollars 3.26bn on October 31 from CDollars 3.48bn a year earlier, with the level of non-performing consumer loans falling for the first time in four years.

The inclusion of Royal Trust from September boosted assets by 19 per cent to CDollars 164.9bn. Royal Trust's operations have been 'close to' break-even since then.

Reynolds Metals, the US aluminium group, is considering restructuring some of its operations, mainly in the fabricating area. It wants to improve worldwide performance in 'extremely difficult market conditions' in the aluminium industry, Reuter reports.

The actions could result in charges of between Dollars 150m and Dollars 225m after tax, or Dollars 2.50 to Dollars 3.75 per share, the group said.

It said the most significant operations being looked at were parts of its business at the McCook, Illinois, sheet and plate plant. Freeport-McMoRan Copper & Gold of the US said its PT Freeport Indonesia unit was to sell its existing and planned power transmission and generating assets for about Dollars 200m.

The buyer is a joint venture between Duke Energy, an affiliate of Duke Power, and PowerLink, a unit of Northstar Energy.

Malayan United Industries' Hong Kong unit, Firstway International Investment, has bought 52.8 per cent of Morning Star Holdings for HKDollars 229.91m (USDollars 19.23m) and will make a general offer for the Hong Kong-based travel company, Reuter reports from Kuala Lumpur.

An initial public offering of shares in Elders Australia has closed heavily oversubscribed, AP-DJ reports from Sydney.

Mr Jim Rayner at underwriter Barclays de Zoete Wedd Australia said the issue raised ADollars 98.2m (USDollars 43.8m).

Power Corp of Canada, the chief holding company of Montreal financier Mr Paul Desmarais, and China International Trust and Investment have formed a 50/50 joint venture to invest an initial CDollars 60m (USDollars 45.4m) in a new industrial park at Pudong near Shanghai, writes Robert Gibbens.

CITIC-Power Investments, based in Hong Kong, will take a two-thirds interest in the park with one-third owned by Shanghai Zhangjiang Hi-Tech Park Development.

Univa, Canada's second biggest food distributor, which is being reorganised, reports net income of CDollars 7.6m (USDollars 5.7m), or 7 cents a share, for the third quarter to November 6, down from CDollars 9m, or 8 cents, a year earlier, on sales 4.3 per cent lower at CDollars 1.43bn, writes Robert Gibbens in Montreal.

After special charges of CDollars 117m, Univa's net loss was CDollars 74.1m, or 88 cents, in the latest quarter. Nine-month operating net income was CDollars 25.6m, or 23 cents, compared with CDollars 17.7m, or 16 cents, on sales little changed at CDollars 4.8bn. After special charges, the nine-month net loss was CDollars 59.1m, or 75 cents.

Wheelock and Co, the Hong Kong holding company for the late Sir Yue-kong Pao's listed empire, reported a 61.1 per cent rise in profits after tax and minority interests to HKDollars 940.3m (USDollars 121.7m) from HKDollars 583.7m for the six months to September 30.

Wheelock, formerly World International, has interests ranging from trams to property to cable TV. Wharf Holdings, a diversified conglomerate and the company's main subsidiary, contributed some 70 per cent of profits.

Analysts said much of the growth in earnings was made from treasury operations. Income from this source rose by around 40 to 45 per cent; brokers reckoned underlying profits growth was closer to 30 per cent.

Mr Woo said the group would pursue its strategy of buying stakes in companies manufacturing in both Hong Kong and China, which sell to western industrialised countries but which may have potential markets in China.

Earnings per share over the six months rose to 46.1 cents, compared with 28.5 cents last year. The dividend rose to 9.5 cents a share, up from 7.5 cents last year.

Xerox, the US document processing company, is reported to have agreed to a Dollars 225m settlement of an anti-trust lawsuit which alleged that it suppressed competition in the market for high volume copiers.

Lawyers for plaintiffs said the company would issue Dollars 225m of certificates which could be used to buy Xerox products.

The plaintiffs, who include customers and independent service organisations (ISO), complained that Xerox refused to give the ISOs access to parts and software, allowing the company to overcharge for equipment, parts and service.

Wheelock and Co, the Hong Kong holding company for the late Sir Yue-kong Pao's listed empire, reported a 61.1 per cent rise in profits after tax and minority interests to HKDollars 940.3m (USDollars 121.7m) from HKDollars 583.7m for the six months to September 30.

Wheelock, formerly World International, has interests ranging from trams to property to cable TV. Wharf Holdings, a diversified conglomerate and the company's main subsidiary, contributed some 70 per cent of profits; Wharf itself previously announced a 44 per cent increase in first-half net earnings to HKDollars 1.38bn.

Mr Peter Woo, Wheelock's chairman, said profits improved on the back of largely healthy performances from all associates.

Analysts said much of the growth in earnings was made from treasury operations. Income from this source rose by around 40 to 45 per cent; stripping out these earnings, brokers reckoned underlying profits growth was closer to 30 per cent.

Mr Woo said the group would pursue its strategy of buying stakes in companies manufacturing in both Hong Kong and China, which sell to western industrialised countries but which may have potential markets in China.

Since the name change two weeks ago, Wheelock Pacific, the company's investments, retail and trading arm, has made its first investment by taking a 25 per cent stake in Climax International, a Hong Kong-listed paper products company.

Wheelock's stated policy is to invest up to 20 per cent of its balance sheet - or HKDollars 20bn - in China. The group's investments in China are currently less than 10 per cent of assets; however, Mr Woo said it wouldembark on many projects over the next two years that would increase exposure to China by a further 5 to 10 per cent of assets.

Earnings per share over the six months rose to 46.1 cents, compared with 28.5 cents in the same period last year. Shareholders are to receive a dividend of 9.5 cents a share, up from 7.5 cents last year.

Sanyo Electric, a leading Japanese consumer electronics company, is planning to invest Y22bn (Dollars 203m) in flash memory chip production.

Flash memory, an advanced silicon chip which 'remembers' what has been written on it without the need for constant electronic refreshment, is now a Dollars 500m market worldwide. Forecasters are predicting 100 per cent growth each year for the foreseeable future.

It is seen as essential for success in portable computers and other portable electronics products. Intel, the world's largest semiconductor company and leader in the flash memory field, is marketing the chips as a replacement for hard disk drives in portable computers.

The technology was invented by Toshiba of Japan, but Intel secured the leadership position by improving chip designs and making them both manufacturable and affordable.

Flash memory has the advantage of high shock resistance, speed and low power consumption. While it is still more expensive than hard disk storage, it is expected to replace conventional semiconductor memory chips (DRams) as the leading high-speed memory technology by 1995.

Sanyo plans to begin production of 1m bit chips in February and 4m bit chips in May. The company has signed a licensing agreement with Silicon Storage Technology (SST), a California-based chip designer and manufacturer.

Sanyo will use SST's design and technology to manufacture the chips, which will then be supplied to the US company under the Sanyo brand name. Sanyo will also sell its chips in the merchant market, and supply processed silicon wafers, on which the chips are printed, for flash memory cards.

Sanyo said its monthly output of chips would be about 500,000 each of the 1m bit and 4m bit variety.

Sales next year from all suppliers are expected to amount to some 60m chips.

Fletcher Challenge, New Zealand's second biggest company, believes it has found a solution to the depletion of the world's natural forests and the increasing shortage of timber. It is called the radiata pine.

The pine is being developed by Fletcher Challenge in its New Zealand and Chile plantations to produce a rapidly growing supply of high quality wood for construction.

It is the main attraction of a new class of share that the company has created to realise the value of its forestry assets. The shares, known variously as targeted, letter or alphabet stocks, have been used by US companies such as General Motors and USX to separate out specific activities without restructuring or floating them off. Fletcher Challenge claims to be the first large non-US company to adopt the practice.

Existing shareholders are receiving one forest division share for every four ordinary shares. 'For an investor who wants liquidity on an international scale, just wants to invest in forestry and wants to be on the fast growth side, this is the unique investment today,' said Mr Hugh Fletcher, chief executive.

Trading in the shares in New York begins next Monday, but began last week on the Australian and New Zealand stock exchanges. It has already added about 15 per cent to the recognised value of the forest assets, taking them to about NZDollars 3bn (USDollars 1.6bn).

'I would consider any initiative that does that to be a great success,' said Mr Fletcher.

The 400m new shares represent half of Fletcher Challenge's total forestry assets worldwide, or 244,000 hectares of solid wood forests in New Zealand and Chile and the related log trading business.

The radiata pine accounts for 95 per cent of these plantations. It can produce a large, quality sawlog, for making solid wood products, in 25 to 30 years. Fletcher Challenge has been developing it over the past 15 years to be disease-resistant and to contain as few knots as possible.

The company estimates that this type of high-value pruned log will account for about 26 per cent of the forest division's total harvest by 2015, compared with about 2 per cent now, as plantations mature. At the same time, the overall harvest volume is expected to double to about 4m cubic metres.

The emphasis is on quality, rather than the volume of producers of timber for pulp. The New Zealand radiata pine grows by 25 to 30 cubic metres a year compared with 10 to 12 cubic metres in plantations in the southern US and three to five cubic metres in the natural forests of north west US.

The company hopes to attract investors interested in the environment, said Mr Fletcher. The way to save the rainforests 'is to plant fast-growing plantations'.

It expects the price of wood to rise as demand grows with an increase in population and per capita income, especially in Asia. At the same time, the supply of large logs is declining because much of the best quality timber has already been cut, particularly in south east Asia, and because conservationist pressures are reducing felling in natural forests, notably in the US states of Oregon and Washington.

'In contrast to most commodities, where real prices have declined over time, here's a commodity where nature is constraining the supply side and there's a reasonable prospect of increasing real prices,' said Mr Fletcher.

The company has signed agreements with environmentalists in New Zealand, saying it will not cut down natural forests to plant the radiata pine but will use poorer quality farmland prone to soil erosion, which the trees should help prevent. Adding to the environmental attractions, it says one hectare of radiata pine extracts nine tonnes of carbon dioxide from the atmosphere every year.

RJR Nabisco, the US tobacco and food group, yesterday announced that it was to cut 6,000 jobs from its worldwide workforce of 63,000 as part of a cost-cutting drive aimed at improving productivity.

The restructuring would result in a charge of Dollars 445m to net income in the fourth quarter, equivalent to 32 cents a share.

However, the company added that it would enhance future net earnings by an average of Dollars 250m a year.

Nabisco emphasised that the job losses would be spread across the group's tobacco and food operations in the US and overseas, at all levels of the workforce.

Mr Charles Harper, chairman and chief executive, said: 'Our restructuring programme is intended to improve margins in both the tobacco and food businesses, so we can resume our earnings growth track next year.'

The company said other components of the charge included reductions in corporate expenses, promotion and merchandising programmes, and manufacturing cost improvements.

In October, Nabisco had warned that fourth-quarter net income would be hit by a restructuring charge. Yesterday the shares rose by Dollars 3/8 to close at Dollars 6 5/8 in anticipation of future earnings growth.

Nabisco's announcement comes less than two weeks after Philip Morris, its closest rival in the food and tobacco industry, unveiled similar plans for a restructuring aimed at defending its brands from low-cost competitors.

Philip Morris said it would cut its world-wide workforce of 168,000 people by 14,000, in a move that would produce a Dollars 457m charge to fourth-quarter earnings but would later result in a Dollars 600m-a-year enhancement of earnings.

Both companies have been hard hit by a price war which broke out in the US cigarette market earlier this year when Philip Morris reduced the price of its best-selling Marlboro and other premium brands by 20 per cent.

RJR Reynolds, which makes Winston and Camel cigarettes, reported a 58 per cent fall in third-quarter net income because of the price war, and warned that cost-cutting measures would follow.

HJ Heinz, the US food products company, yesterday said its second-quarter earnings, excluding a one-time gain for divestments, slipped 15 per cent, mainly because of the negative impact of currency fluctuations.

However, the weaker financial performance belies the underlying strength of Heinz's leading brand franchises, which showed volume growth, improved prices and better market shares in the three months to October 27.

Sales were 4 per cent ahead at Dollars 1.8bn, against Dollars 1.73bn a year earlier. However, Heinz's large presence in Britain and Italy, which have witnessed sharp devaluations of their currencies over the past 15 months, worked against the Pittsburgh-based company.

If exchange rates held steady, revenues would have shown an 11 per cent gain. Heinz does not give separate figures on its domestic and international sales and earnings.

The company, which includes Heinz ketchup, Star Kist canned tuna and 9 Lives cat food in its brand stable, said net income was Dollars 193.1m, or 75 cents a share, against Dollars 154.1m, or 60 cents, in the 1992 quarter.

If a Dollars 127m pre-tax gain from the sale of an Italian confectionery business and a US rice operation were excluded, however, earnings would work through at 51 cents.

Increased marketing expense and a higher rate of taxation also had a negative impact on the bottom line. Advertising costs and other brand support rose 13 per cent on the year, while the provision for income taxes climbed 65 per cent to Dollars 115m.

For the first six months, net income was Dollars 345m, or Dollars 1.34 a share, more than double last year's total of Dollars 164.3m, or 64 cents. Sales were 3 per cent higher at Dollars 3.39bn, against Dollars 3.3bn.

Mr Terry Bivens, an analyst with Argus Research in New York, said the performance was disappointing.

On Wall Street, the shares fell Dollars 1/2 to Dollars 36 3/8 in morning trading but recovered to close Dollars 1/8 higher at Dollars 37.

The Swedish government's plans to sell Gota Bank were dealt an unexpected blow yesterday when Svenska Handelsbanken, one of the country's leading commercial banks, pulled out of the bidding.

The move means that Skandinaviska Enskilda Banken and Nordbanken are the only bidders for Gota which collapsed into state hands last year under large losses. The only foreign bidder, General Electric, has pulled out.

Mr Arne Martensson, Handelsbanken chief executive, said information had emerged 'which made us increasingly hesitant about buying Gota Bank'.

His main criticism was that the government's price expectations were far too high. 'A privately-owned international bank like Handelsbanken cannot pay a price for Gota Bank which would risk our rating and our international competitiveness,' he stated.

Mr Martensson declined to specify what had emerged during the valuation process to cool the bank's enthusiasm for Gota. A total of SKr43bn (Dollars 5.3bn) of Gota's problem loans have been hived off into a separate entity called Retriva and will not form part of the purchase.

Gota Bank has SKr60bn worth of healthy assets which analysts say could attract more than SKr2bn.

Observers suggested that SE Banken's credit rating might suffer if it bought Gota Bank, tipping the odds in favour of a purchase by Nordbanken, which was bailed out by the state last year.

'Nordbanken is the front runner now which means that taxpayers' money just shifts from one pocket to the another,' said Mr Peter Mansson, financial analyst with ABB Aros Securities.

Some commentators believe that the synergy benefits of a Nordbanken/Gota Bank merger will be considerable, enabling the state to get a better price for the combined entity than two components.

CS Holding, the financial services group built around Credit Suisse, said its business performance continued to be extremely satisfactory in the second half of the year.

However, Mr Rainer Gut, chairman, warned that provisions for bad debts would remain high because of the continuing business recession, especially in Switzerland.

CS reported consolidated net income of SFr882m (Dollars 588m) in the first half, up 65 per cent. Net income in the full year 1992 was SFr1.03bn.

Mr Gut was speaking at a special shareholders' meeting in Zurich to approve the creation of shares to finance the purchase of the shares of Leu Holding that it does not own.

Last month, CS bought a 15 per cent block in Leu, Switzerland's fourth largest banking group, for SFr416m in shares and cash, raising its holding in Leu to 70 per cent. It has since offered the same terms - one CS bearer share and SFr720 in cash for every six Leu shares - to the remaining minority shareholders.

Resolutions to create new shares and to split the existing bearer and registered shares 5-1 were approved.

Mr Gut gave no indication of CS's plans for Leu once the takeover was completed, but said that it was having a good year.

'The turnround at Bank Leu and successful operations at Bank Hofmann and Clariden Bank allow Leu Holding to reckon with a result that will be markedly higher than in the previous year,' he said. Leu's net income was SFr104m last year.

Mr Gut said CS Holding's total assets at the end of the third quarter were practically unchanged from the SFr343.3bn reported at the end of June.

Whirlpool, the world's largest white goods producer, is selling its Italian compressor business to Embraco of Brazil. The unusual Dollars 106m deal will create the world's second-biggest compressor producer after Matsushita of Japan.

Whirlpool is transferring its factory at Riva di Chieri, which makes Aspera brand compressors, to the Brazilian company, a long-time strategic partner in which it holds a minority interest.

The deal includes a five-year agreement to provide compressors - one of the basic components of refrigerators - to Whirlpool Europe. Embraco already supplies them to Whirlpool in South and North America.

The sale fits into Whirlpool's overall strategy of making more effective use of its global network. The two formerly-separate manufacturing units - Riva, near Turin, and Embraco's plant in Joinville, Brazil - will work together to enhance their position in the world compressor market.

Mr Miguel Etchenique, Embraco's chairman, said the purchase would assure his company an important presence in Europe, the world's largest home appliance market.

Electrolux, one of world's leading white goods manufacturers, said yesterday it was considering the sale of Blaw-Knox Construction Equipment, its US subsidiary, as part of a strategy to streamline its structure.

The group has decided that the business, which it acquired with its purchase of White Consolidated in March 1986, was not a core activity.

White Consolidated, said: 'Electrolux is primarily a consumer goods company and Blaw-Knox does not have any relation to any of our other operations.' Lehman Brothers, the US investment bank has been retained as an adviser.

Blaw-Knox is based in Mattoon, Illinois and has 700 employees. Its sales in 1993 are expected to be more than Dollars 80m.

The company is the leading manufacturer of asphalt paving machinery in the US and has large European operations based in Rochester in the UK.

Electrolux has experienced tough market conditions in 1993, particularly in Europe. But the weaker Swedish krona and restructuring helped drive a 31 per cent increase in profits in the first nine months to SKr961m (Dollars 119m).

AEG, the German electronics group, declined to comment on reports that it was planning to sell its household appliances group to Electrolux. AEG's supervisory board meets today. Electrolux last year took a 10 per cent stake in the AEG unit.

Mr Allen Yurko, chief operating officer of Siebe (left) with Mr Barrie Stephens, chairman and chief executive, after reporting interim results.

They will be the last figures presented by Mr Stephens in his joint role.

At the end of the month Mr Yurko steps up to become chief executive.

Mr John Prohaska is retiring from the board at the end of the year and Mr GW Sarney, president and chief operating officer of Siebe control systems, joins the main board from January 1.

Mr Stephens said Siebe continued to experience an improvement in certain of its markets, namely North and South America, and to a more limited extent the UK. He said: 'The group's second-half order book is ahead of the level seen at the beginning of the financial year, which is encouraging.'

London Industrial, a property company specialising in small working units, yesterday raised Pounds 14m through a share placing with institutions.

Mr Harry Platt, managing director, described the company as 'a provider of starter homes for small businesses.'

The placing through Smith New Court of 5.05m ordinary shares at 320p each, values the company at Pounds 29.3m. Of this 4.58m are new shares, with the remainder from existing shareholders. Pro forma net tangible assets after the placing are Pounds 28.8m, equivalent to net asset value per share of 315p.

The money raised will be used to finance the purchase of four estates, including one in Stevenage, the first outside the M25, for a total of Pounds 8.5m. The remainder will be used on capital expenditure and further expansion.

While gearing will fall from 167 per cent at the end of September to 80 per cent after the placing, the company plans long term gearing of about 100 per cent.

The company was established in 1986 when 12 institutions subscribed Pounds 16.7m to acquire 18 estates from the Greater London Council's industrial property portfolio. It has since expanded through acquisitions, joint ventures and extensions.

Before the latest acquisitions, which will be concluded shortly, the portfolio comprised 27 estates with 900 units and 700 tenants. The average unit is 1,000 sq ft, with an average rent of Pounds 6.71 per sq ft.

Mr Platt said the occupancy rate of the original 18 estates had been 72 per cent when the company started, and had risen to 95 per cent before the recession. He believed the bottom of the market had been reached in the summer of 1991, when the rate fell to 75 per cent. The company total for its 27 estates is now 77 per cent.

He was confident that the company, which has overhead staffing of 17 people, could almost double the amount of property managed without increasing overheads.

The group made pre-tax profits of Pounds 355,000 on rental income of Pounds 2.53m in the six months ot September 30. In the last full year pre-tax profits were Pounds 1.03m on rental income of Pounds 4.76m. The board intends to recommend a final dividend of 5p for the year to end March, giving a total of 7p.

Dealings in the shares are expected to begin next Wednesday.

Profits of Julian Hodge Bank, the family-owned Cardiff bank, rose from Pounds 5.32m to a record Pounds 8.13m pre-tax in the year to October 31.

The figure included a surplus on investment sales of Pounds 3.38m (Pounds 1.3m).

The bank, which specialises in commercial and industrial lending, is chaired by Mr Julian Hodge, son of Welsh financier Sir Julian Hodge who founded the bank seven years ago.

Mr Hodge said the bank had increased its deposit base by a quarter to Pounds 24.7m despite a period of low interest rates. Shareholders' funds had more than doubled since 1988 to stand at Pounds 48.4m.

'The current economic outlook is the most promising for a number of years,' he said.

Exceptional costs left Atkins Group, the Leicestershire-based textile company, in the red for the six months to October 2.

On turnover 15 per cent up at Pounds 8.81m (Pounds 7.69m) pre-tax losses were Pounds 96,000 (Pounds 16,000 profits). Losses per share were 2.1p (0.33p earnings) but the interim dividend is raised to 3.85p (3.6p).

The sales improvement noted at the annual meeting continued and operating profits advanced 33 per cent to Pounds 138,000 (Pounds 104,000).

However the Pounds 281,000 cost of ending fabric dyeing, which was less than estimated, less Pounds 113,000 surplus on sale of plant resulted in an exceptional charge of Pounds 168,000, against profits last time of Pounds 48,000.

Technological and operational improvements helped Drummond Group, which makes fabrics and associated products for the clothing industry, increase pre-tax profits from Pounds 57,000 to Pounds 370,000 for the half year to September 30.

These are the group's first results since the sale of its South African subsidiary and profits included an exceptional Pounds 196,000 arising from this disposal. Operating profits on continuing operations were Pounds 469,000 (Pounds 33,000 losses), on sales of Pounds 23m (Pounds 21.8m).

Net earnings per share came to 1.17p (1.64p losses), but in the light of the further improvement required, the interim dividend is again omitted.

In a year of 'considerable change' Creston, the construction components group, achieved a reduction in losses from Pounds 1.09m to Pounds 642,000 pre-tax.

Turnover for the 12 months to end-June amounted to Pounds 6.25m (Pounds 8.89m) and losses per share worked through at 3.2p (5.7p).

During the period Co-ordinated Land and Estates was acquired for 31m shares and the disposal of 5m shares in Ex-Lands was completed. Since June, Creston's original businesses have been reorganised and it is proposed that the name of the company be changed to Creston Land & Estates.

Mr John Ansdell, formerly finance director of Trafalgar House, has been appointed a non-executive director.

Creighton's Naturally, the USM-traded creator of natural health and beauty products, achieved an increase in profits from Pounds 617,000 to Pounds 819,000 pre-tax for the half year ended September 30.

The near-33 per cent improvement reflected first time contributions from acquisitions made earlier in the year. Associate undertakings contributed Pounds 158,000 (nil). Turnover totalled Pounds 4.85m (Pounds 4.6m).

Earnings emerged at 11.6p (9.1p) and the interim dividend is lifted to 2.2p (2.1p). Creighton's shares closed 10p higher at 213p.

Holmes & Marchant Group, the marketing services company, reported pre-tax profits of Pounds 1.25m for the year to September 30, against losses of Pounds 4.76m. The improvement was accentuated by the comparative figure being restated for FRS 3.

Lower exceptional costs of Pounds 294,000 (Pounds 3.02m) and a lower charge for discontinued activities of Pounds 10,000 (Pounds 2.96m) were the main factors behind the improvement. Net interest payable fell to Pounds 826,000 (Pounds 1.08m).

Turnover fell to Pounds 32.3m (Pounds 33.6m) but operating profit rose to Pounds 2.38m (Pounds 2.3m). Earnings per share came out at 4.1p (losses 18.9p).

On prospects the company said there was little evidence that recessionary pressures were easing.

Northumbrian Fine Foods, the USM-quoted food manufacturer, achieved a turnround from pre-tax losses of Pounds 1.06m to profits of Pounds 104,000 in the half year ended September 30.

The company said the benefits of reorganisation were being seen but continued sales growth and stringent cost controls would be needed in the second half to counter effects of the price war between the retailing multiples and intense competition between manufacturers.

Turnover amounted to Pounds 8.1m against Pounds 11.1m which included Pounds 4.11m from discontinued activities. Earnings per share came through at 0.28p (2.96p losses) and again there is no dividend.

Evans of Leeds, the property investment company, raised pre-tax profits by 10 per cent from Pounds 3.67m to Pounds 4.04m in the six months to September 30.

The company said the result was satisfactory as the market was still difficult, with rental levels rising only slowly and tenants remaining cautious about taking on new commitments.

Total revenue advanced from Pounds 10.4m to Pounds 12.1m. Earnings per share came to 4.72p (4.28p) and an increased interim dividend of 1.58p (1.48p) is declared. A 1-for-1 scrip issue is also proposed.

Wace Group, the pre-press and specialist printing concern, has agreed with de Zoete & Bevan the placing of 3.69m new 20p shares at 170p each, to raise Pounds 6.27m before costs.

The directors said the proceeds will be used for the early termination of a number of operating leases on printing equipment; to fund the surrender of an empty leasehold property in New York at a cost of Pounds 800,000, and to pay for the group's final earn-out obligations, which are estimated at Pounds 1.6m and due to be paid next April.

They added that the primary objective during 1994 and 1995 was the continued reduction of borrowings through strong operational cash flow.

Improved trading conditions, particularly in the earthenware sector, enabled John Tams Group to report pre-tax profits for the six months to the end of September ahead by 32 per cent at Pounds 501,000, against Pounds 379,000.

There were problems at the Royal Grafton bone china operation but the company said the situation had improved since August.

Turnover for this USM company was Pounds 11.6m (Pounds 9.93m) with exports increasing from 45 per cent to a little more than half of the total. Trading profit was ahead at Pounds 614,000 (Pounds 606,000), but interest charges were lower at Pounds 113,000 (Pounds 227,000).

Earnings per share came out at 1.42p (1.25p) and an interim dividend of 1.6p (1.59p) is declared.

Apollo Metals, the aluminium processor and distributor which gained a listing in May, turned in pre-tax profits down from Pounds 1.26m to Pounds 1.03m in the year to September 30.

The outcome was struck on turnover up by 20 per cent from Pounds 23.4m to Pounds 28.2m and after an increased interest charge of Pounds 391,000 (Pounds 159,000).

The directors said the proceeds of the Pounds 4.9m placing and open offer were received at the end of June - too late to have a significant impact on interest costs in the second half.

As a result, and despite capital expenditure amounting to Pounds 2.1m during the year, the company now had a strong balance sheet and gearing at the year-end stood at just 7 per cent.

A final dividend of 2.4p (2.3p) is proposed making a total for the year of 3.6p (3.45p). The dividend is 1.4 times covered by earnings per share of 5p (6p).

Despite a 19 per cent fall in turnover, pre-tax profits at Eurocopy, the office equipment distributor, improved by 54 per cent from Pounds 1.71m to Pounds 2.62m in the year to end-September.

Mr Cyril Gay, chairman, said the drop in turnover - from Pounds 34.2m to Pounds 27.6m - resulted from lower machine sales and service revenue, coupled with the absence in the second half of furniture sales after the April disposal of the furniture division.

However, losses in the sales divisions were reduced substantially through a combination of better margins and lower costs, he added.

Earnings per share came out at 3.6p (2.32p) and an improved final dividend of 1.2p (0.5p) raises the total for the year to 1.7p (1.6p).

Cranswick, the integrated supplier of grain, feed, livestock and meat products, reported a fall in profits from Pounds 968,000 to Pounds 745,000 pre-tax in the half year to September 25.

Mr Jim Bloom, chairman, said that assuming pig prices had stabilised, the board anticipated a more satisfactory result in the second half.

Turnover improved to Pounds 54.2m (Pounds 49.6m). The maintained interim dividend of 2.4p is payable from earnings of 3.8p (6p) per share.

Reduced pre-tax losses of Pounds 268,000 were announced by Lister for the six months to September 25. Losses last time for the textile products maker which also has interests in property, engineering and insurance broking, amounted to Pounds 1.62m.

Turnover rose from Pounds 16.5m to Pounds 17.6m with textiles accounting for Pounds 16.4m (Pounds 15.5m). Operating losses were Pounds 57,000 (Pounds 509,000) with only the insurance activities showing a profit.

Losses per share were cut to 1.85p (9.97p).

Border TV, the USM-quoted ITV licensee for the Border region, lifted pre-tax profits from Pounds 519,000 to Pounds 802,000 for the six months to October 31. The shares closed 12p higher at 150p.

The result was on reduced turnover of Pounds 4.85m (Pounds 5.9m) but the company said that comparisons were not meaningful as it no longer sold airtime for Channel 4.

Earnings per share nearly doubled to 6.7p (3.4p) and the interim dividend is raised to 1.6p (1.3p).

In its first results since coming to the market in June, AG Holdings, which makes rope and cable reels, beat its prospectus forecast of Pounds 2.7m with a pre-tax profit of Pounds 2.91m for the 12 months to July 31.

Turnover of Pounds 15.8m compared with Pounds 10.7m at March 31.

Earnings per share came out at 11.4p and there is a special dividend of 2p as forecast in the listing.

An upturn in business across the product range enabled Martin Shelton, the USM-quoted diaries, calendars, gifts and betting office equipment supplier, to swing from losses of Pounds 144,000 to profits of Pounds 90,000 pre-tax for the half year ended September 30.

The shares responded via a 12p rise to 80p.

Sales improved from Pounds 1.68m to Pounds 2.1m. Earnings worked through at 1.18p (losses 1.88p) and the interim dividend is lifted to 1.25p (0.75p).

As foreshadowed in October and reflecting reliability problems with a specific bought-in component, Drew Scientific Group, the analytical instrument designer and manufacturer, suffered pre-tax losses of Pounds 842,000 for the half year to September 30, compared with Pounds 151,000 profits.

The loss includes Pounds 248,000 attributable to continuing research and development expenditure and Pounds 94,000 associated with relocation of activities and rectification of instruments.

Turnover dropped from Pounds 1.75m to Pounds 420,000. Losses per share were 3.44p and there is again no dividend.

Baring Tribune Investment Trust is placing a further Pounds 10m nominal of 9.125 per cent debenture stock 2012.

The stock will be placed on a yield basis, and will form a single series with the Pounds 15m of the stock currently outstanding.

On turnover up 42 per cent from Pounds 8.13m to Pounds 11.6m in the six months to September 30, Morris Ashby, the USM-quoted diecasting and machining group, reported pre-tax profits of Pounds 839,000, an increase of 31 per cent on the previous Pounds 639,000.

Mr Norman Gardner, chairman, said: 'Overall, only one of our top 20 customers placed less business with us.'

He added that the long term future looked healthy with a strong forward order book, but some customers were showing less confidence than had been expected.

Earnings per share were 6.3p (5.5p) and the interim dividend is raised to 2p (1.7p).

BSS Group, the heating, plumbing and process control supplier, lifted pre-tax profits by 24 per cent to Pounds 5.06m for the six months to end-September, despite the continuing recession in construction.

Turnover rose from Pounds 112.5m to Pounds 123.3m. Industrial and commercial sales rose from Pounds 74.9m to Pounds 78.5m. Mr Alan Milne, finance director, said the group had increased its market share while the overall market had fallen. Operating profit in the division rose from Pounds 5.38m to Pounds 6.88m.

Sales in the domestic division, now the UK's second biggest distributor to the heating market, increased from Pounds 37.6m to Pounds 44.8m, reflecting in part the acquisition of Cadel last year. But the division fell into the red to the tune of Pounds 567,000, compared with a profit of Pounds 172,000.

In July BSS put Cadel and two other recent acquisitions together to create Zenith Plumbpoint. Mr Milne said there were signs of a small upturn in the domestic division's depressed market.

Overall, Mr Milne said the group had seen the bottom of its market, and profits would rise. It would continue to increase market share, improve margins and improve its domestic business.

Interest payable fell from Pounds 776,000 to Pounds 515,000.

Earnings per share increased from 11.4p to 12.3p, reflecting the increased number of shares in issue after last year's rights. The interim dividend is maintained at 5.75p.

An operating loss on insurance activities and a Pounds 2.5m provision to cover the potential costs of resolving Lloyd's disputes cut pre-tax profits at Sturge Holdings from Pounds 7.75m to Pounds 1.21m in the year to September 30.

A sharp decline in insurance fee income and profit commission was offset by a rise in other fees and commissions, and by substantially higher income at Wise Speke, the stockbroking subsidiary, leaving overall turnover flat at Pounds 33.4m (Pounds 33.2m.)

Fee income fell by 32 per cent to Pounds 9.86m reflecting a reduction in the amount of insurance capacity managed by Sturge coupled with lower fee scales. Similarly profit commission (paid by syndicates to the agency) dropped by 29 per cent to Pounds 4.18m.

These declines were partly offset by an increase in other fees and commissions to Pounds 4.56m (Pounds 3.03m) but overall the insurance agencies incurred a Pounds 3.44m operating loss on turnover of Pounds 18.6m, compared with a Pounds 4.07m profit on turnover of Pounds 23.5m the previous year.

In contrast Wise Speke reported record operating profits of Pounds 2.1m (Pounds 100,000) with fees and commissions jumping by 54 per cent to Pounds 14.8m (Pounds 9.64m.)

Overall, the group reported a Pounds 1.32m operating loss compared with a Pounds 4.14m operating profit the previous year. Net interest and other income of Pounds 2.53m (Pounds 3.61m) helped the group edge back into profits at the pre-tax level.

Earnings per share of 1.5p compared with 9.4p a year earlier. The final dividend is cut to 2p (5.5p) making a total for the year of 3p (8.25p).

Mr David Coleridge, chairman, noted that the results represented 'a significant fall,' but pointed out that the profit was struck after making the further provision to cover Sturge's contribution to the Lloyd's offer to Names.

Commenting on the outlook Mr Coleridge said: 'Whilst the profit outlook for the group in the near future remains difficult, the prospects for Wise Speke are good and the portents for the insurance agencies are more favourable'.

Shares of Eldridge Pope rose 9p to 134p yesterday after the USM-traded retailer, brewer and wine shipper announced near-doubled annual profits.

In an upbeat statement, Mr Christopher Pope, chairman, said: 'A fundamental restructuring is now being achieved . . . there are now considerably brighter prospects for the company.'

The full benefits of the trading alliance with Carlsburg-Tetley will be felt from the spring of next year, he said.

Although turnover dipped to Pounds 42.7m (Pounds 43.1m) in the 12 months to September 30 - reflecting the disposal of the beer wholesaling business to Carlsburg-Tetley in July - an 11 per cent upturn in operating profits, coupled with sharply reduced inter-est charges, left the pre-tax line 95 per cent higher at Pounds 1.76m (Pounds 901,000 restated for FRS 3).

The outcome took in a net surplus of Pounds 252,000 on the restructuring, comprising a profit on sale of goodwill of Pounds 4m less a series of write-offs and provisions.

The company is also writing down the balance sheet carrying value of its main site in Dorchester by Pounds 2.6m, redu-cing total net assets to Pounds 57.6m, against Pounds 59.1m. Borrowings fell from Pounds 17m to Pounds 8.85m, leaving gearing at 15.4 per cent.

After a tax credit of Pounds 51,000 (Pounds 136,000), resulting from losses and reliefs in previous years - set to continue for another two years at least, Mr Pope said - earnings per share improved from 5p to 8.6p.

A proposed final dividend of 2.15p brings the total for the year to 3.55p (3.25p). Mr Pope reiterated that 'restoring the dividend to its former level and beyond is a top priority'.

Improved overseas sales and continued reorganisation helped Tunstall Group, the manufacturer of communication and security systems, increase pre-tax profits from Pounds 2.6m to Pounds 6.47m in the year to September 30.

The pre-tax figure for 1992 has been recalculated from Pounds 5.29m to comply with the FRS 3 accounting standard.

The main impact of FRS 3 was to restate the 1992 figures to take account of a Pounds 4.1m loss on discontinued operations and a Pounds 1.35m exceptional profit.

Turnover on continuing operations improved from Pounds 36.2m to Pounds 44.8m, with income from overseas operations up 37 per cent to Pounds 10.5m (Pounds 7.65m).

Mr Michael Dawson, chairman, said that the performance of Tunstall International, the division handling overseas sales, had 'become increasingly important in the development of our business'. The group's policy of dividing its operations between eight trading companies enabled it to cut costs and exploit new market opportunities, he added.

Stringent financial controls also bolstered Tunstall's bank balances, up to Pounds 6.4m (Pounds 2.1m) in spite of substantial capital expenditure.

During the year, the group spent Pounds 1.6m on new product development, Pounds 2.6m on upgrading its Yorkshire assembly plant and Pounds 500,000 on the acquisition of Eses, the Spanish security company.

Further expenditure is also planned on Mion Electronics, a new subsidiary set up last month to take over the design and manufacturing business of Tunstall Electronics.

The group's positive performance, however, was hampered by a sharp decline at Tunstall ComSystem, its German subsidiary. Pre-tax profits fell from Pounds 272,000 to Pounds 59,000 as recession hit trading.

In a move to improve liquidity among such subsidiaries, the group announced a 1-for-1 scrip issue of new ordinary shares at 5p.

The final dividend is raised to 4.5p (3.75p), making 7p. Earnings per share rose from 21.6p to 26.5p.

Separately, Tunstall said yesterday it was seeking substantial damages over the 1988 acquisition of Tann-Synchronome from Anchor Line.

Mr Dawson said the group spent Pounds 265,000 last year on legal costs. The case, alleging faults in Tann-Synchronome's fire security products, is due to be heard in June 1994.

Wellman, the specialist engineer, swung from profits of Pounds 321,000 to losses of Pounds 527,000 pre-tax for the six months to the end of September.

The deficit took account of an exceptional provision of Pounds 253,000, being directors' compensation for loss of office.

A 26 per cent decline in turnover to Pounds 9.87m resulted from the timing of contract deliveries at the furnace and process engineering companies.

The directors said second half sales would be higher as large contracts fell due for delivery. Margins, however, would be lower. The order book at Pounds 17.5m was Pounds 6.5m higher than a year earlier.

Losses per share emerged at 1.8p, compared with earnings of 0.5p. As an indication of confidence in future profitability the interim dividend is held at 0.3p.

High livestock prices together with the devaluation of sterling pushed Sims Food Group, the meat processor and supplier, Pounds 1.3m into the red at the pre-tax level during the six months to September 30.

That compared with previous profits of Pounds 2.5m.

Sales were 3.2 per cent higher at Pounds 148.9m, including Pounds 8.2m from acquisitions. Sims, which has seen its shares fall from 182p in June to last night's 102p, cut its dividend by a third to 2p.

Mr John Stone, chairman, said the group's dire predictions about the state of trading had proved 'all too accurate'.

Livestock prices had increased by between 18 and 30 per cent during the first half, while Sims was only able to raise its prices to retail customers by between 12 and 14 per cent.

However, Mr David Brady, finance director, said the situation had improved substantially since September. A restructuring, for which Pounds 6.6m had been provided last year, had been completed resulting in a significant reduction in costs and capital employed in the business.

Sims also intended shortly to sell its stake in TS&W, a meat importing business, to management for a cash payment of about Pounds 4m.

The retail division, which had incurred substantial losses in the first six months, had returned to profitability in the second half due to the restructuring.

The strongest performance came from the manufacturing division, which increased organic sales by 21 per cent. Mr Brady said the acquisition of Oakland Fast Foods in July had exceeded expectations and Sims intended to focus its investment in this division in the future.

Losses per share of 3p compared with previous earnings of 5.3p.

The group reported net debt of Pounds 21m, leaving borrowings representing roughly 70 per cent of shareholders' funds.

A series of trading records were broken in the City last month amid exceptional conditions in equity and gilts markets. The Pounds 110.5bn turnover of UK and overseas stocks made it the busiest month ever for equity trading in London.

Equity trading broke the previous record of Pounds 109.3bn set in August. A total of Pounds 52.6bn was traded in UK equities, the busiest month since July 1987, and it was the second busiest month for overseas equities, with turnover of Pounds 57.9bn.

Figures from the Stock Exchange showed that November was also a record month for new issues, with 42 companies joining the market, raising a total of Pounds 1.8bn.

This brings the year's total to 158 companies, raising Pounds 5.1bn.

There were no new gilt issues during November, but turnover remained strong. The month's turnover was Pounds 143.6bn, bringing the year's total to a record Pounds 1,438bn.

Twelve of the new companies were Lloyds investment trusts, which raised Pounds 758.9m, with an average market capitalisation of Pounds 82.9m. A total of 17 companies were capitalised at Pounds 50m or less, raising Pounds 368.5m between them.

Seven companies were capitalised at over Pounds 100m. The largest was Elan Corporation, capitalised at Pounds 892.3m, which came via the Unlisted Securities Market.

Mr Alan Sugar, chairman of Tottenham Hotspur, yesterday took majority control of the football club by acquiring 500,000 shares from Mr Tony Berry, former chairman of the Blue Arrow employment services group.

The transaction, announced following consultation with the Takeover Panel, takes Mr Sugar's stake from 47 per cent to 50.1 per cent.

Mr Berry sold the shares at 100p each. He is a long-term ally of Mr Sugar, who is also chairman of Amstrad.

The deal gives Mr Sugar 8.15m shares in the company, while Mr Berry's stake has declined to 300,000.

Tottenham Hotspur said last night: 'The aggregate number of shares in which Mr Berry and Mr Sugar - who are deemed to be acting in concert for the purposes of the City code on takeovers and mergers - are interested remains unchanged at 8.45m.'

Shares in the club remained unchanged yesterday at 105p.

Caffyns, the Sussex-based motor dealer, yesterday announced that BIL Securities (Far East), the New Zealand investment company owned by Sir Ron Brierley, had disposed of its 23.6 per cent stake in the company.

The disposal by the company, a wholly owned subsidiary of BIL (Far East Holdings), follows the sale of other stakes earlier this year in Guinness Peat Group and Budgens, the food retailing chain.

The group's holding in Caffyns comprised 1.18m ordinary 50p shares and two tranches of preference shares.

Caffyns shares rose 10p to close at 388p on the news.

Perkins Foods warned yesterday that its profits would fall 'somewhat short' of market expectations for the year ending December 31. The shares fell 8p to close at 74p.

The company, which expects second half pre-tax profits to be similar to the first half's Pounds 10.1m, also said it would be making exceptional provisions of Pounds 4m for the closure of some loss-making operations.

However, it expects an improvement next year, and intends to maintain the final dividend at 2.7p a share, which would give a total for the year of 4.45p (4.4p).

The company said that since the interim statement 'trading conditions have deteriorated with poorer than anticipated sales and operating margins in September and October'.

While the group was experiencing a seasonal improvement in demand, 'operating margins are expected tor remain under pressure.'

Last year pre-tax profits were 8.7 per cent down.

Charter, the industrial group, is still planning to make a substantial acquisition but believes most quoted UK companies are currently looking overvalued.

Mr Jeff Herbert, chief executive, said the group would be more likely to buy a division from a multinational or look to parts of the world where companies were on a lower rating. He wants to add an extra leg to Charter's current portfolio, which supplies equipment to the mining and rail industries, and building products, including quarrying.

Charter is on the acquisition trail after unwinding its links with Anglo American Corporation, the South African mining group. Charter sold its 38 per cent stake in Johnson Matthey, the world's biggest platinum marketing group, for Pounds 342m in February. It then then used part of the proceeds to buy out a 36 per cent stake in Charter held by Minorco, Anglo American's Luxembourg-based investment company.

Charter has net cash of Pounds 147m, and will receive another Pounds 42m in 1996, but Mr Herbert said the money was not burning a hole in his pock-et. 'We intend to follow the advice of our top shareholders, who have told us 'be thorough, be patient, but get it right'.'

Charter's pre-tax profits fell from Pounds 37.9m to Pounds 31.3m in the six months to September 30, reflecting the Johnson Matthey disposal. However, operating profits of continuing operations rose by 5 per cent to Pounds 19.5m on turnover of Pounds 288.4m (Pounds 262.2m).

Mr Herbert said: 'There have been some signs of recovery in our markets, but conditions for our coal and materials businesses remain difficult. Taken as a whole, we expect continued modest improvement from our operating businesses.'

Earnings per share fell to 19.6p (23.2p), but the interim dividend is held at 7p.

Charter said it had discovered historic misreporting of contracts in its Cape insulation business in France, which had led to a write-off of Pounds 3.9m to reserves and the dismissal of the managers involved. An ind-ependent review of contracts throughout Cape had shown it was an isolated incident.

COMMENT

Profits were a little higher than expected because of an exceptional gain of Pounds 2.6m on the disposal of a limestone quarry, but Charter's shares dropped from 731p to 719p as analysts pondered indications that both Pandrol rail fasteners and Andersen mining equipment had an unusually strong first half. The performance of the continuing businesses is respectable, given market conditions, but interest in Charter focuses on its expansion plans. The shares are on a 20 per cent premium to the market, reflecting the uplift in earnings which should follow the investment of cash, and the earnings enhancement caused by the buy-back of Minorco's shares. How the shares perform from here will depend on the execution of the group's long-pondered acquisition plans.

Stagecoach, the acquisitive bus company that came to market last April, yesterday announced a 47 per cent rise in pre-tax profits to Pounds 8.8m in the six months to October 16.

Turnover rose from Pounds 68.7m to Pounds 80.7m, excluding discontinued operations. However, the latest figure included the contribution of several acquisitions as well as new business generated by introducing modern coaches - shortly to be equipped with lap seat-belts - on some medium-distance routes.

Mr Brian Souter, chairman, said Stagecoach was interested in the prospect of acquiring one or more of the London bus companies when they were privatised and believed the company could make acquisitions without calling on shareholders for additional capital.

Stagecoach, which has 6 per cent of the UK bus market, believed that more modern buses and better services could reverse the decline in bus travel. Some cities in the south-east were introducing transport policies favouring buses which had boosted demand.

The company was also a potential bidder for British Rail franchises though it did not expect the shape of the future rail market to become much clearer before the spring. It would be the end of 1994 before it took a final decision on whether to bid, said Mr Brian Cox, a director.

Earnings per share for the opening half rose to 4.4p (3.3p). The company is paying a 1.5p interim dividend and forecast a final of 2.5p.

Operating profit, excluding new acquisitions, rose 13 per cent to Pounds 10.5m reflecting increases in efficiency. It invested Pounds 22m in 256 new buses. Interest charges on new buses are far lower than the cost of maintaining old buses which can run to Pounds 5,000 to Pounds 6,000 a year. When the company's five-year replacement programme is completed the average age of the fleet will have fallen from 10 years to six years.

The group's gearing is currently standing at nearly 140 per cent because of its recent acquisitions. However, it took comfort from the fact that its interest cover was five times earnings, Mr Derek Scott, finance director, said.

Taunton Cider, reporting an adjusted 11 per cent increase in first half profits to Pounds 11m, said yesterday that the take-home cider market had been invaded by an unprecedented number of low-priced brands.

Volume sales of economy products - which were undercutting private label brands - surged 62 per cent in the six months to end-September to account for most of the market growth.

Private label volumes had declined 13 per cent under intense competition from the economy brands supplied by Belgian producers and smaller UK cider makers, said Mr Peter Adams, Taunton's chief executive.

Though Taunton's premium packaged brands, such as Diamond White, Red Rock and Brody, almost matched sector growth of 8 per cent, the reduction in its private label sales left overall volumes slightly lower.

Mr Adams said that the company intended to protect its brands and strengthen its position in the market. Brand promotion would be increased and, in partnership with retail customers, reductions were planned in private label prices. 'We believe we can maintain margins by cutting costs,' Mr Adams said.

Taunton's pre-tax profits grew to Pounds 11m, against a reported Pounds 8m or an adjusted Pounds 9.9m after taking out borrowings of Pounds 1.9m which were repaid after flotation in July last year.

Earnings per share, also adjusted for the effect of flotation, grew 13 per cent to 6.9p (6.1p) - last year's actual earnings were 6.3p. The interim dividend is raised 10 per cent to 2.65p (2.4p).

Operating profit was 6 per cent ahead at Pounds 10.8m on marginally higher turnover of Pounds 65.1m (Pounds 65m).

Increased distribution in the pub trade lifted sales of Dry Blackthorn and Autumn Gold, the mainstream draught brands. Draught volumes rose 6 per cent, well ahead of the sector's overall 2 per cent growth, and gained market share. Packaged cider sales through pubs, however, were 1 per cent lower.

Recently launched products, including Fres, a light cider, and Drum perry, showed 'encouraging early signs,' said Mr Adams.

Discussions had begun with potential partners on developing overseas opportunities and on adding premium beers to the company's drinks portfolio, he added.

Capital spending on extending packaging facilities and technological improvements amounted to Pounds 4.4m in the first half. The full year's programme, aimed at reducing costs, is expected to total Pounds 10m.

COMMENT

Taunton has met some concerns by regaining share in the mainstream draught cider market only to find a more serious problem developing in the take-home sector. The growth of tertiary brands may prove more difficult to combat - and scepticism about Taunton's ability to do so without further loss of volume or damage to its margins is reflected in the downgrading of full year profit forecasts from Pounds 22m to Pounds 20.7m. However, the cider market remains buoyant, though growth is slowing to about 6 per cent; second half sales are ahead; and a prospective p/e of 13 gives few hostages to fortune.

Mr Julian Mounter, former chief executive of Star TV, the Asian satellite venture, is involved in a consortium looking seriously at acquiring an ITV company.

It is believed that Mr Mounter, a former Thames Television executive who went on to make a success of running Television New Zealand, is providing the television expertise for a weighty consortium.

The members of the consortium have not yet become public, but it is believed that they include a substantial UK company which would like to enter the television market and a company from the European Union.

All the signs are that for the right deal the consortium has already lined up the finances to buy any of the free-standing ITV companies.

Mr Mounter, who is at the moment in Hong Kong, declined to comment yesterday other than to emphasise that the UK television market was just one of the prospects he was looking at.

It is thought unlikely that the consortium plans an early intervention in either of the two takeover deals already under way - Carlton Communication's agreed bid for Central Independent Television or Granada's contested bid for London Weekend Television.

The available targets to such an outside consortium, probably after January 1 when the barriers to takeovers of ITV companies become lower, would include Yorkshire-Tyne Tees, Anglia Television and HTV.

An international outside investor might take the view that the present government proposals to allow one ITV company to hold two franchises, however large (apart from London), are only the first stage in the liberalisation of commercial television. The rules will be debated in the House of Commons today and in the House of Lords next Monday.

Under such an argument it would make sense to acquire an ITV company quite soon, even a middle ranking one, and hope that further expansion is possible at a later date.

The consortium being advised by Mr Mounter, who left Star soon after Mr Rupert Murdoch's News Corporation bought a controlling interest, is also looking at the possibility of bidding for a Channel 5 licence.

Associated British Engineering turned in a pre-tax profit of Pounds 106,000 for the half year to September 30, against a Pounds 46,000 loss last time.

The result was struck after an increase in pension fund contributions to Pounds 93,236, against Pounds 24,000 last time which reflected a surplus on the fund.

All group businesses showed depressed conditions in the UK, but improved in overseas markets. Diesel power engineering turned round from Pounds 99,000 losses to Pounds 161,000 profits, but catering equipment losses rose to Pounds 223,000 (Pounds 49,000). Earnings were 0.02p (0.04p losses).

The company is acquiring from the Leyland Daf receivers certain assets of a business specialising in the rebuilding and reconditioning of diesel engines.

Midlands Electricity yesterday gave the electricity sector a fillip when it announced a 20 per cent increase in the interim dividend and indicated that the full year rise would be about 15 per cent.

The move, accompanied by an announcement that pre-tax profits for the six months to September 30 rose 34 per cent from a restated Pounds 66.7m to Pounds 89.5m, produced a 22p rise in its shares which ended the day at 675p.

Other shares in the sector rose on the expectation that the remaining regional electricity companies would also announce dividend rises above expectations.

Turnover was higher at Pounds 625.5m, compared with Pounds 660.7m. The dividend of 7.65p (6.35p) was paid from earnings per share of 30.1p (22.6p).

The company also announced a Pounds 10 rebate to quarterly billed customers payable from January 1994. Together with the earlier reduction this would give a price reduction for the full year of 7 per cent for the average domestic customer.

Midlands said total units distributed rose 2.3 per cent, with industrial sales up 1.6 per cent. 'The revival in demand has been led by the region's manufacturing sector,' said Mr Bryan Townsend, chairman.

Commercial sales rose 1.7 per cent and there was 3.8 per cent growth in domestic sales.

Profits from distribution profits rose by 8 per cent to Pounds 66.4m, against Pounds 61.2m, and the supply side increased from Pounds 9.6m to Pounds 17.6m.

The restatement of the accounts stems from a change in coal contracts and is to 'enable the supply business cost of sales to be more closely matched with the relevant turnover'.

Mr Mike Hughes, chief executive, said he expected a reduction of 400 in the workforce of the core business during the year leaving a total of 5,400 employees at the year end.

In non-core activities, retailing made a loss of Pounds 500,000, against profits of Pounds 1m last year. The company said this was affected by start-up costs of joining the E&S joint venture with two other regional electricity companies.

'There is no reason why the bigger business cannot make a profit but retailing will probably make a small loss this year,' said Mr Hughes.

The generation business incurred a slightly smaller operating loss of Pounds 1.2m (Pounds 1.4m) as a result of development costs. The company's policy is to write off all costs as they occur when developing businesses abroad.

The company is involved in potential generation projects in Turkey and China where its policy is to be an 'informed investor' typically with a 30 per cent stake in a project.

COMMENT

The market was no doubt pleased with Midlands' optimistic comments on the state of the local economy but what really impressed it was its statement that it had achieved a 'proper balance' between the interests of shareholders and customers. Midlands may be pressing the accelerator on profits and therefore on dividends but, the market reasons, the rebate should help it to soothe the regulator when he looks at price controls in the distribution review. Another plus for Midlands is that it is has the ability, if it needs to, to claw back a fair chunk of the Pounds 33m from customers because of previous under-recovery in tariffs. If the total dividend for the year is 22.95p, and the company suggested yesterday that figure was a reasonable expectation, the prospective yield is 4.3 per cent, about average for the recs. However, the shares may struggle to achieve a higher rating because of concerns over the company's exposure to gas and its overseas ambitions.

3i, the UK's largest investment capital provider, yesterday reported a 10 per cent increase in net assets to 618p per share in the six months to September 30.

Mr Ewen Macpherson, chief executive, said the improvement demonstrated 3i had a 'robust underlying portfolio' and provided a 'strong indication of the financial performance of the sector in which we operate'.

The group is to pay an interim dividend of 4.7p (3.3p) to its shareholders, the UK clearing banks and the Bank of England. The 42 per cent rise brings the interim back in line with recent increases in the final dividend which have not been matched at the interim stage, the group said.

The total return - a combination of dividend revenue less costs and net interest, realised investment profits and the appreciation of the unrealised portfolio - was Pounds 151m compared with a fall of Pounds 73.8m in the first half of 1992.

Pre-tax revenue rose from Pounds 18.8m to Pounds 37.6m helped by a swing in the interest line from a net charge of Pounds 11.3m to a Pounds 2.4m credit.

Two indications of the improved welfare of the smaller companies that 3i serves came from the dividend earned figure and the level of provisions.

Dividend income rose from Pounds 44.4m to Pounds 51.4m and net provisions fell from Pounds 46.9m to Pounds 19.2m. Mr Larcombe said the lower provisions level showed 'the underlying portfolio is no longer deteriorating.'

Within the total return, revenue rose from Pounds 16m to Pounds 28.2m, partly reflecting the recovery in dividends, but also a reduced interest bill as the flow of new investments slowed. Mr Brian Larcombe, finance director, said the deal flow had begun to pick up again four months ago.

The group made after tax realised investment profits of Pounds 30.6m, compared with losses of Pounds 16.2m including provisions, in the first half last year. This equated to realisation profit over cost of Pounds 62.1m, against Pounds 35.8m in the comparable period of 1992.

3i invested Pounds 138m in 264 investments in the period, compared with Pounds 200m in 414 projects in the first half of last year.

Shareholders' funds were up from Pounds 1.19bn to Pounds 1.48bn.

The buoyant state of world stock markets helped Templeton Emerging Markets Investment Trust increase its net asset value by 38.9 per cent in the six months to end-October.

Emerging markets are developing countries where economic growth is expected to be higher, and the prospect for corporate earnings better, than in the developed world. Templeton runs the largest investment trust in the sector.

Fully diluted net asset value was 343.57p on October 29, compared with 247.3p on April 30 and 214.23p a year earlier. As is the trust's policy, there is no interim dividend.

Mr Mark Mobius, the trust's managing director, said 'Emerging markets have shared in the generalised rise in worldwide share prices over the past year with some markets, such as Turkey and Brazil, showing remarkable rises. We continue to find bargains in a wide range of markets.'

The current geographical split of the trust's portfolio is as follows (percentages in brackets): Brazil (17.7), Turkey (16.2), Philippines (11.4), Hong Kong (8.5), Indonesia (6), Portugal (5.9), Greece (5.8), Malaysia (5.7), Mexico (5.3), Singapore (4), South Korea (2.7), Argentina (1.2), Chile (1) and others (3.3). The trust also has 5.3 per cent of its assets in cash.

South Wales Electricity yesterday unveiled an 18 per cent rise in interim pre-tax profits to Pounds 44.4m from a re-stated Pounds 37.6m and said it was increasing the dividend from 6.6p to 7.5p.

The 13.6 per cent dividend rise was less than both Eastern Electricity and Midlands, the only other regional electricity companies to report so far this season, and Swalec was the only rec to see its shares fall on the day.

Earnings per share for the half year to September 30 advanced by 19 per cent to 31p (26p).

Swalec increased turnover from continuing businesses from Pounds 259.8m to Pounds 274.7m. Cost of sales rose to Pounds 172m (Pounds 163m) and operating costs amounted to Pounds 64.1m (Pounds 62.4m).

Operating profits in the distribution side grew by 10 per cent to Pounds 32.9m.

Electricity distributed was up overall by 1.7 per cent, with domestic usage up 2 per cent and commercial by 0.9 per cent. Industrial customers took 1.5 per cent more with large industrial customers leading the way.

Supply profits at Pounds 2.1m were unchanged after last year's figures were restated to reflect seasonal volume patterns.

Celtic, the company's contracting arm, contributed Pounds 200,000 to profits against last year's first half losses of Pounds 700,000.

Staffing fell by 2 per cent in the half year to 2,534.

Mr David Jones, departing chief executive, said that further small reductions would be likely for the rest of the year.

COMMENT

The City likes cautious utilities, but not, judging by the reaction to its results, when they are as cautious as Swalec. The rec was giving little away yesterday, either in information about the company, or by comparison with other recs, in the dividend. Its shares, down 2p to 699p, are on a yield of about 4.5 per cent if the company pays out 25.4p for the full year. The prospective yield is among the highest of the recs and reflects the concerns about the company's recent expansion in contracting. Swalec may rise in the ratings list when Mr Andrew Walker, formerly of TI and Dowty, gets his feet under the table, and when and if it can demonstrate the telecommunications diversification is a winner. But there is nothing immediately to suggest a re-rating.

Hanson, the Anglo-US industrial group, could raise up to Dollars 245m gross from the flotation of Beazer Homes USA, its US house building subsidiary, according to the prospectus filed yesterday with the US Securities and Exchange Commission in Washington.

The group plans to offer 6m shares in Beazer Homes USA at between Dollars 17.50 and Dollars 20 a share and Dollars 125m of senior notes due 2004.

It had announced with its year-end results last week its intention to float off its Beazer subsidiaries in the US and UK.

Sale of the US and UK businesses, acquired in 1991, could raise more than Pounds 400m.

Hanson's activities include gold mining, chemicals, material handling, tobacco, forest products and lumber.

The tour operating sector acquired its third quoted company yesterday with the placing of 28.3 per cent of the shares of Inspirations, the holiday company.

The company is to be listed on the Unlisted Securities Market, with dealings expected to begin on December 13.

The two other quoted companies involved purely in the package holiday business are Airtours and Owners Abroad, the second and third largest tour operators. The holiday market leader, Thomson, is a Canadian-controlled public company, but also has extensive media interests.

Mr Vic Fatah, Inspirations' chief executive, was the founder of Sunmed Holidays, which merged with the tour operating arm of British Airways in 1987 to create Redwing Holidays. Redwing was sold to Owners Abroad in 1990.

The placing by stockbrokers Beeson Gregory values the company at Pounds 23m. The company said the placing was twice subscribed.

In the 11 months to September 30, Inspirations made pre-tax profits of Pounds 2.5m on Pounds 118.4m turnover. The company carried 166,700 people during the period. In the year to October 31 1992, pre-tax profits were Pounds 749,000 on turnover of Pounds 49.7m.

The company sells holidays under the Inspirations and Style brands. It also has a retail arm with five travel agency outlets. Under an agreement reached last May, AT Mays, the UK's fourth largest travel retail chain, manages the chains.

Inspirations has undertaken to acquire or start up a minimum of 50 retail outlets by the end of next year. It also has an airline seat broking business.

Ladbroke, the leisure and hotels group, yesterday cancelled its alternative scrip dividend in light of a sharp decline in its share price in the last month.

The offer to pay shareholders in equity instead of a 4.92p cash dividend was conditional on a market price of more than 151p per share at the close of business on Monday.

About 6 per cent of shareholders, owed dividends totalling Pounds 3.5m, had elected to receive shares.

Ladbroke's shares, which were 174p on November 8 when the offer was made, closed at 148p on Monday. They fell further last night to 145 1/2 p.

The announcement follows recent controversy over Ladbroke's dividend policy. The leisure group was last week believed to have retreated on an earlier decision to take advantage of the foreign income dividend (FID) scheme when making its 1993 final payout.

FIDs are perceived to be detrimental to Ladbroke's pension fund investors, which benefit from tax credits on normal dividends but not on foreign income payouts.

This, along with a substantial share sale by a senior executive last month, is thought to have contributed to the recent fall in Ladbroke's share price.

Chubb Security, the electronic alarm and locks group, yesterday announced a 37 per cent increase to Pounds 34.2m in pre-tax profits for the six months to October 8.

The increase, achieved on turnover up from Pounds 338m to Pounds 355.1m, was due mainly to tight cost controls and success in defending market share since the demerger last year from Racal.

Turnover, however, would have been almost flat had it not been for Pounds 9.5m generated by exchange rate movements and changes in accounting policies for currency translation.

Beneficial exchange rates also contributed Pounds 1.1m to operating profits, up from Pounds 27.1m to Pounds 35.3m.

The policy change involves translating turnover and profits from Chubb's extensive overseas operation at an average exchange rate during the half year, rather than by the prevailing rate at the end of the accounting period.

Earnings per share rose from 4.75p to 7.08p, and the interim dividend is 2p (1.5p).

Mr David Peacock, chief executive, said: 'In spite of the worldwide recession and provided present trading conditions do not worsen, prospects for the full year are expected to be satisfactory.'

He also emphasised his determination to press ahead with the second phase of a cost-cutting programme which has already resulted in Pounds 23m in savings since mid-1992.

The programme is designed to increase Chubb's operating margins and share of a worldwide market estimated at Pounds 7bn. It has already begun to refocus its operations with cutbacks in administrative staff and increased emphasis on a larger sales force.

Cutbacks in administrative staff were largely to blame for Pounds 1.9m in redundancy costs, although this was down sharply on a Pounds 5.7m charge at the half year stage last time.

As part of the rationalisation, Chubb said it had introduced 13 new products in the period, with seven more planned before the year end.

Most of the new products are aimed at increasing the market share for the group's electronic security division.

Turnover in the division increased from Pounds 170.3m to Pounds 178.2m in the half year. Operating profits also increased to Pounds 17.9m, compared with Pounds 14.9m last time.

In the physical security division - manufacturing locks, safes and fire extinguishers - turnover rose from Pounds 167.8m to Pounds 176.9m.

Operating profits came in at Pounds 17.4m (Pounds 12.1m).

Improved cashflow, meanwhile, of Pounds 13.1m turned net debt of Pounds 4.8m at the year end in March into net cash of Pounds 8.3m at the half way stage.

See Lex

Talks on the sale of Ballast Nedam, British Aerospace's Dutch construction subsidiary, are to be scaled back after BAe and Boskalis, the Dutch dredging company, failed to reach agreement on a full takeover.

Boskalis, which had said in October that it was prepared to pay about Fl 500m (Pounds 177m) for Ballast Nedam, will continue to discuss other forms of co-operation with Ballast Nedam short of outright acquisition.

BAe said it still intended to sell Ballast Nedam. 'Discussions will continue with Boskalis on a non-exclusive basis with the possibility of other parties becoming involved in these or other negotiations,' it said.

Boskalis's exclusive rights to negotiate a Ballast Nedam deal expired on December 1. The three companies would not say why a takeover had not proved to be possible. BAe said there had been no material change in Ballast Nedam's financial position since the negotiations began.

Boskalis, which had earlier announced plans for a Fl 300m share issue to help pay for the acquisition, said it was now calling off the share issue.

The failure of the merger talks renews uncertainty about Ballast Nedam's future. Earlier this year Ballast Nedam's chairman resigned after BAe turned down his plan for a flotation on the Amsterdam stock exchange.

Shares in Allied Colloids, the chemicals company, fell 10p to 228p yesterday as pre-tax profits for the six months to October 2 dropped 15 per cent from Pounds 22.5m to Pounds 19m.

While the fall was predicted at the AGM in August, it turned out to be greater than expected. The company blamed exchange rate movements and other increased costs, including insurance.

Overhead costs rose by about 16 per cent. The insurance premium rose from Pounds 1.5m a year to Pounds 5m following a fire at Bradford in July. The costs of defending patents also increased.

Sales rose by 17 per cent from Pounds 136.3m to Pounds 159.3m. However, about 10 per cent of the increase was accounted for by the change in exchange rates following the UK's departure from the ERM.

The company increased sales in all areas apart from the UK, which accounts for about 15 per cent of group turnover.

Sales in North America grew to Pounds 52m (Pounds 44.4m) and in Asia to Pounds 18.1m (Pounds 12.5m). European sales improved to Pounds 53.8m (Pounds 45.5m), but the company reported continuing difficulties in Germany.

Sterling devaluation hit the cost of petrochemicals and other raw materials, many of which are priced in D-Marks. The company had been unable to recover this in selling prices.

The second half is expec-ted to be better as exchange rate benefits emerge as a result of hedging curren-cies.

The company also said that raw material prices had stabilised, and it expected a modest improvement in margins.

Earnings per share fell to 4.99p from 5.47p. The in-terim dividend is increased from 0.94p to 1p.

COMMENT

The City, disappointed that the first half had come in below Pounds 20m, yesterday downgraded its full year forecasts from Pounds 50m. It is now expecting pre-tax profits to be about Pounds 44m - roughly equal to last year. This implies a much better second half as about Pounds 5m flows in through currency benefits. While sales continue to show strong growth, the rise in costs gives some cause for concern. On the latest forecasts the shares are on a prospective p/e of almost 20, a good premium to the market. The company cannot afford any further slippage in margins.

Shares in Nelson Hurst, the insurance broker which is coming to market via a placing and intermediaries offer, were priced yesterday at 140p valuing the group, which specialises in professional indemnity in east Asia and Latin America, at Pounds 63.3m.

Nelson Hurst was the subject of a management buy-out from Citicorp, its former owner, in May 1991 and the flotation is designed to give the group, which is raising Pounds 30.6m through the issue, greater financial flexibility.

Of the 25.2m shares on offer, 17.9m are being placed firm with institutional investors by Charterhouse Bank, which has underwritten the issue. A further 7.37m shares have been placed subject to clawback to meet retail demand through intermediaries.

The group is forecasting operating profits of not less than Pounds 7.2m and pre-tax profits of not less than Pounds 5.19m for the year to December 31.

On the basis of a notional tax rate of 33 per cent, pro-forma forecast earnings per share for the current year are 10p, and the p/e at the issue price is 14.

COMMENT

son Hurst's offer price represents a modest discount to the market and other recent issues. This reflects concern over possible market indigestion rather than any uncertainty about the group's profit potential. Nelson Hurst is an international player with strengths in specialist product areas.

Increased competition, particularly in the face of a decline in oil exploration activity in the North Sea, hit Oceonics, the survey services group, hard in the first half.

Pre-tax profits for the six months to end-September fell from Pounds 1.77m to Pounds 222,000.

Turnover dropped from Pounds 20.6m to Pounds 13.2m, mainly as a result of the absence of a large offshore construction project.

Losses of 0.2p per share compared with earnings of 0.5p.

Northern Investors, the venture capital investment trust, raised net asset value to 306.2p at September 30, against 284.4p a year earlier and 295.6p at March 31.

First-half earnings per share were lower at 2.8p (4p) and the interim dividend is 1.5p (2p).

Shares in Siebe, the inter-national controls and engineering group, fell 20p to 566p yesterday although the company announced a 17 per cent rise in pre-tax profits to Pounds 94.2m in the six months to September 30.

The shares enjoyed a strong run before the results. There was disappointment that Pounds 10m of the Pounds 14m increase in pre-tax profits came from currency translation, and concern about the impact of recession in continental Europe and Japan.

However, Mr Barrie Stephens, Siebe's chairman and chief executive, was upbeat: 'These results are particularly gratifying at a time when many of the market places in which we trade are in recession.

'They also demonstrate the wisdom of building up our presence in the fast-growing process controls sector and in this regard our United States operations are especially important.'

Group turnover rose 18 per cent to Pounds 895m, of which Pounds 118m was attributable to currency translation, and earnings per share advanced 16.2 per cent to 13.6p (11.7p). The interim dividend was lifted by 10 per cent to 3.66p (3.3275p).

Sales grew 2.7 per cent in constant currency terms and net margins were maintained at 10.5 per cent, in spite of the impact of a Pounds 2m US healthcare charge, which will continue at a similar level, and an increase in severance charges from Pounds 2m to Pounds 3m, for redundancies in continental Europe.

Siebe's worst performer was its specialist mechanical engineering. Sales in automotive and garage equipment to continental Europe fell 19 per cent, and profits fell from Pounds 8.5m to Pounds 4.8m. This division bore most of Siebe's 400 job losses.

In controls, operating profits increased from Pounds 78.4m to Pounds 96.7m. Temperature and appliance controls benefited from the recovery in the US and South America. Control systems increased sales, with gains in the US and Asia offsetting lower activity in Europe and Canada.

An increase in cashflow from Pounds 34.2m to Pounds 44.4m helped cut gearing from 60 per cent at the April year-end to 56.2 per cent at September 30. Mr Stephens said Eckardt, the recent German acquisition, would fit well with the group's Foxboro process control business.

Lex, Page 24

1. Bemrose to buy:

Bemrose Corp., the Derby security and promotional printer, is to pay Dollars 27m (Pounds 17.9m) cash for McCleery-Cumming, the second largest US publisher of advertising calendars.

2. Playboy to religion:

Styles range from religous subjects, scenic wildlife and American art to 'Playboy' glamour calendars.

3. Geo. Washington bedrock:

Two-thirds of sales are generated from the 'George Washington' range of calendars sold through more than 3,000 independent US distributors.

4. Blue chip:

The balance of sales are customer-specific designs produced for large commercial customers like Ford, General Motors, John Deer, Wal-Mart and Texaco.

5. Selling out:

Four of McCleary-Cumming's management team own the majority of the company's shares. Selling to Bemrose, they will retire as multi-millionaires. 'Quote to come: we only did it for the grandchildren'.

6. Printing profits:

It posted pre-tax profits of Dollars 5.05m in the year to February, up from Dollars 4.45m a year earlier, on sales of Dollars 31.8m (Dollars 32.5m.) Net assets at the end of February were Dollars 8.49m.

7. 90 years young:

The McCleery-Cumming calendar business started in 1903 and expanded by buiyng the calendar division of Newman Rudolf of Chicago in 1944.

8. A chunk of 'Hawkeye' state on the Skunk

The company, which employs up to 350 people including 200 staff who work seasonally. It has a 20-acre site on the Skunk River in Washington, Iowa.

9. Shareholders tapped:

Bemrose will fund the deal with a 1-for-4 rights issue at 325p per share, underwritten by SG Warburg, to raise a net Pounds 19.5m. The shares closed up xp at 3xxp yesterday.

10. Bemrose booms:

Bemrose forecasts pre-tax profits, before exceptional credits, of at least Pounds 10m (Pounds 6.25m) in the year to January 1, for earnings per share of 27.90p (22.18p).

11. 'Excellent fit':

Mr Roger Booth, Bemrose's chief executive, said the acquisition was 'an outstanding opportunity'. Bemrose, already number three in the US market, moves a whisker shy of number one slot. The deal will ehance earnings in 1994.

12. Make-up-your-mind time:

The deal is subject to shareholder approval at an extraodinary meeting on December 23.

---------------------------------- COMPANIES IN THIS ISSUE ---------------------------------- UK ---------------------------------- 3i 27 AB Engineering 27 AG Holdings 29 Abbey National 46 Allied Colloids 26 Apollo Metals 30 Atkins 30 BAe 26 BSS 29 Baring Tribune 29 Border TV 29 Brammer 20 Cable & Wireless 20 Charter 28 Chubb Security 26 Cranswick 29 Creighton's 30 Creston 30 Drew Scientific 29 Drummond 30 East Midlands Elec 46 Eldridge Pope 29 Eurocopy 30 Evans of Leeds 30 Hanson 46 Holmes & Marchant 30 Inspirations 26 Julian Hodge Bank 30 Lister 29

London Industrial 30 Lonrho 26 Midlands Elect 27 Midlands Electricity 46 Morris Ashby 29 Nelson Hurst 26 Northern Investors 26 Northumbrian Foods 30 Oceonics 26 Shelton (Martin) 29 Siebe 30,25 Signet Group 46 Sims Food 29 Smith New Court 25 South Wales Elect 27 Stagecoach 28 Sturge 29 Tams (John) 30 Taunton Cider 28 Templeton Emerging 27 Tunstall 29 Wace 30

Wellman 29 ---------------------------------- Overseas ---------------------------------- AEG 31 AMR 34 BCE 34 Boskalis 26 CS Holding 31 Cox Enterprises 25 Deere & Co 34 Deutsche Bank 25 Electrolux 31 Fletcher Challenge 31 Gota Bank 31 Heinz 31 Nabisco 31 Royal Bank of Canada 34

Sanyo Electric 32 Southwestern Bell 25 Univa 32 Wheelock 32 Whirlpool 31 Xerox 32 ----------------------------------

Deutsche Bank's 11 per cent increase in operating profits for the 10 months ended October to DM4.2bn (Pounds 1.66bn) came exclusively from foreign operations, Mr Hilmar Kopper, chairman said yesterday.

Record group-wide risk provisions of almost DM2.5bn, up 54 per cent on last year, led to a fall in earnings at the German-based parent of 9 per cent to DM2.36bn, he said. Some 90 per cent of the provisions, which he expected to rise to almost DM3bn for the full year, were to cover domestic risks.

The German recession had now caught up with the banks, Mr Kopper told a press conference, and its effects would continue to be felt in the new year.

Providing for risks was a 'recession barometer, and right now it is showing a storm warning,' he declared.

The cyclical and structural crisis had had a serious impact on the credit-worthiness and income of Deutsche's domestic customers, Mr Kopper warned. 'As the house bank to thousands of small and medium-sized companies, we are feeling the effects of this,' he said.

The bottom of the industrial recession had been reached. 'But the bad news is that we will stay quite a while at this low point,' he added.

Deutsche, Germany's biggest private sector bank, also holds 10 per cent or more of the equity of 25 leading non-banking companies, worth almost DM24bn, according to details released for the first time yesterday.

These holdings include 10.65 per cent in Metallgesellschaft, the metals, mining and engineering group.

In the midst of roaring bull markets we are suddenly confronted with the curious spectacle of distressed pension funds, on both sides of the Atlantic. Rising securities prices can imply lower future returns, so they bring no comfort at all to those who are seeking to pay for future liabilities from investments made out of future cash flows, or from the roll-over, at maturity, of existing fixed income securities into future issues at lower interest rates.

The better-known sob story is that of the big US corporations anxiously tracking the long Treasury bond yield. General Motors has said that each percentage point drop adds Dollars 5bn (Pounds 3.3bn) to its pension deficit, which is probably now more than Dollars 20bn.

There is a rather less publicised debate going on in the UK amongst actuaries about the impact of the minimum solvency standard proposed by the Goode Committee. Some fear it may trigger a shift of strategy by British funds away from 90 per cent equities and towards a much heavier bond exposure.

The discontinuance basis of valuation has returned to prominence; it forms a fragile link between rising equity prices and slumping bond yields. A similar problem is aggravating the US crisis, because of the attempts by the Pension Benefit Guaranty Corporation and the Securities and Exchange Commission to tighten valuation rules. Many US plans are undervaluing their liabilities by applying unrealistically high discount rates.

If schemes are terminated, they need to contain enough assets to provide the promised benefits. The most conservative test of solvency on this basis is whether there is enough money to buy the required annuities from life assurance companies. In the UK, not only have the gilt yields which underpin annuity rates dropped by 2 percentage points so far this year but life companies are offering exceptionally poor rates because they are suffering from balance sheet strains.

Hitherto, British pension schemes have tended to regard their American counterparts with slightly patronising sympathy because of the latter's need to cope with unhelpful rules. The US pensions accounting standard FAS 87 focuses on the market values of assets and has thus encouraged a high bond element in portfolios, aiming at low volatility.

The equivalent UK standard SSAP24 permits smoothed actuarial valuations, so that a dive in the stock market can be made to disappear by fancy figuring. British funds have gone confidently for the high equity returns (19 per cent a year since 1979) and have prospered.

But now they face two awkward problems. The stringent solvency test is around the corner, unless the actuarial profession can mount a rescue. Second, the latest surge in equity prices has been based largely on the stretching of the valuation basis rather than on improved fundamentals. So the actuarial smoothing, based upon dividend growth, has temporarily gone into reverse: thanks to Norman Lamont's raid on pension funds' dividend tax relief in March, the actuarial valuations this year will show a slight fall in UK equities.

The Goode Committee suggested that one way in which the problem of a minimum solvency standard could be moderated would be through the issue of special gilts by the government. These would be deferred income index-linked bonds, and would partly get around the problem of unacceptably poor annuity rates. However, each terminated scheme would have a different liability profile.

Actuaries are now telling the Bank of England that in an ideal world the government would issue a whole series of zero coupon index-linked gilts with a long spread of maturity dates. It would then be possible for each fund to put together a package of zeros, maturing in different years, which would closely match its expected pension liabilities. Each zero being attractive to many different funds, it would be a reasonably liquid investment.

The irony is that the British and American governments see themselves as successful in driving down their cost of borrowing, but now they are faced with the troubles of pension schemes which have based their funding on the expectation that investment returns would be high. One thing leads to another . . .

Buoyant equity markets in London and overseas helped Smith New Court raise interim profits to Pounds 31.3m, against Pounds 6.7m, the securities house disclosed yesterday.

The rise, confirmation of the exceptional profits generated by securities houses this year, prompted a doubling of the interim dividend to 2p despite the firm's policy of only adjusting the dividend at the year end. Diluted earnings per share rose to 25p, against 6.1p. Sir Michael Richardson, chairman, said the opening few weeks of the second half had shown a continuation of business levels.

The disclosure of Smith New Court's profits coincided with figures from the stock exchange showing that November was the busiest month ever for equity trading in London, with a stock turnover value of Pounds 110.5bn.

Smith New Court's short-term borrowings to finance equity marketmaking positions were reduced by the firm's access to extra capital. It completed a Pounds 45.1m rights issue in August to finance expansion.

Mr Michael Marks, chief executive, said that earnings had been evenly split between marketmaking, its core business from its roots as a jobber, and fees from corporate and institutional broking into which it had diversified.

He said that more than 60 per cent of revenues had come from overseas, including broking and marketmaking in Asia Pacific and New York. The firm saw 'huge opportunities' in India, China and Latin America.

Despite the increase in bonuses expected at securities houses, he said that expenses from existing staff had 'risen like everything else, but not exploded'. The company has recruited 60 more staff since last year, bringing it to 1,360.

Capital and reserves rose from Pounds 92.3m to Pounds 175.3m, helping to finance the sharp rise in assets held on the balance sheet of Pounds 4.62bn, against Pounds 2.66bn. Current liabilities to fund the equity book positions rose from Pounds 4.43bn to Pounds 2.55bn.

The firm expects an appeal in a legal dispute with Citicorp about the sale of Ferranti to be resolved 'shortly'. It is holding the principal and interest involved as a result of the original judgement, and could benefit by Pounds 14m.

Shares closed 11p down at 411p. The two for seven rights issue price in June was 210p.

Lex, Page 24

Southwestern Bell, the US regional telecommunications group, and Cox Enterprises, the privately-owned media group, yesterday formed the latest multi-media alliance in the US when Southwestern agreed to invest Dollars 1.6bn (Pounds 1.1bn) in a partnership which will own most of Cox's cable television systems.

The deal follows a UK partnership between the two last spring when Cox took a 25 per cent stake in a cable television and telephone system run by Southwestern.

Mr James Robbins, who heads Cox's cable business, said that 'after looking at many potential partners we realised the best match was with our existing partner in the UK'.

Southwestern Bell, one of the seven Baby Bell local telephone companies, provides telecommunications services in Texas and neighbouring states. Atlanta-based Cox is a Dollars 2.5bn turnover media group with interests ranging from newspapers to television broadcasting stations.

Under a memorandum of understanding, Southwestern will take a 40 per cent stake in the private US partnership, which will own 21 of Cox's cable systems, with about 1.6m subscribers in 16 states. The combined venture will have a market value of around Dollars 4.9bn and will be the sixth or seventh largest cable operator in the US.

The partnership will exclude two Cox cable systems, in Oklahoma City and Lubbock, Texas, because Southwestern Bell provides a telephone service there. US law forbids telephone companies from owning cable businesses in their telecommunications service area.

Cox has offered to place in the partnership various other cable interests, subject to separate negotiations. These could include a Dollars 500m investment Cox has agreed to make in QVC, the television home shopping network, to finance its hostile Dollars 10bn bid for Paramount, the US film and publishing group.

The Cox deal is the latest example of US local telephone and cable companies forming alliances in preparation for the growth of a multi-media home entertainment industry.

Cox and Southwestern said much of the telephone company's Dollars 1.6bn investment would help 'aggressively expand cable subscribership' and acquire interests in programming.

In spite of their telephone number salaries, many City analysts have proved incapable of understanding company accounts, according to an academic study released yesterday.

Just a handful of analysts could see through the most elementary forms of creative accounting in a test of their scrutiny of financial statements.

Leading City institutions have had to toughen up their accounting skills considerably since the study was conducted at the end of the bull market in 1990.

The research was conducted on 63 experienced investment analysts at five City stockbrokers by Mr Gaetan Breton from the University of Quebec in Montreal and Professor Richard Taffler from the City University Business School in London.

Of 1,325 possible corrections they could have made in calculating financial ratios from a set of accounts full of 'window-dressing', just 34 adjustments were made in total. Fifty-two analysts made no corrections.

But two-thirds of analysts said they had seen window-dressing in the accounts and 61 per cent believed, most incorrectly, that they had made the adjustments to remove these effects. Window-dressing schemes used were extraordinary items, deferred taxation, non-capitalisation of leased assets, creating profit via asset disposals, non-consolidated subsidiaries, non-subsidiary subsidiaries, pension contribution holidays, merger accounting and hidden interest charges.

Prof Taffler said he believed the quality of accounting understanding may have improved since the study was conducted.

Mr Chris Clark, head of research at Credit Lyonnais Laing, said: 'In the last two to three years, more people have realised their accounting knowledge is inadequate. I suspect everybody knows they need to raise their operating standards.'

He said the annual Extel ratings of City analysts 'have created a lot of highly-paid prima donnas' who resist improving their financial understanding. 'When I joined in 1989 the quality of accounting understanding was abysmal. I now look for analysts who are accountants.'

Lonrho, the international conglomerate, has withdrawn financial backing from a controversial film about the Lockerbie bombing, which it is co-financing with Libya.

Mr Stephen Walls and Mr Peter Harper, two of Lonrho's newly-appointed non-executives, persuaded the Lonrho board to end its involvement in the film. They are also expected to press for Lonrho to withdraw from further co-operation with Libya, which owns a third of Lonrho's Metropole Hotels subsidiary.

Mr Dieter Bock, the German joint chief executive, was also keen to abandon the film project, which had been started on the initiative of Mr Tiny Rowland, his fellow joint chief executive.

However, Mr Allan Francovich, the film's producer, said yesterday he had not been informed by Lonrho of its withdrawal of a Pounds 633,000 contribution to the film. He added: 'I am not going to be stopped (from completing the film) by anyone'. He said he had insisted there should be no interference from Libya or Lonrho in the content of the film and that he had uncovered new evidence about who carried out the 1988 bombing, which resulted in 270 deaths.

The United Nations recently froze Libyan assets held abroad to increase pressure on it to hand over for trial in the west suspects accused of blowing up the Pan Am airliner.

Mr Rowland, however, yesterday said he and Mr Bock were 'at one' on the Libyan issue. While the board had decided to stop the financing of the film 'for the time being', he said that work already completed was of commercial value to Lonrho. He recently said that Lonrho was ready to complete deals worth hundreds of millions of pounds with Libya if the documentary film showed it to be innocent of the Lockerbie bombing.

Mr Rowland is now satisfied that the Libyans were not involved in the bombing. 'There was no sign of their involvement at all. If there had been any evidence . . . we would have handed it over to the British government,' he said.

Mr Jacques Delors, president of the European Commission, will tell European Union leaders at their summit starting on Friday that cutting wages and wholesale labour market deregulation are not the ways to beat the jobs crisis and strengthen Europe's competitiveness.

Cutting wages and pruning welfare payments to price Europe's unemployed into jobs would be 'socially unacceptable and politically untenable', and would 'only worsen the crisis by depressing domestic demand', according to the Commission white paper on growth and jobs. This strategy document, circulated yesterday to member governments, is intended to be the centrepiece of the summit.

The Commission's approach contrasted sharply with the call yesterday from Unice, the EU employers' confederation, for a comprehensive reduction in labour costs and the privatisation of welfare systems.

Unice's report, Making Europe more Competitive, is timed to gain employers a prominent voice in the summit debate.

The report wants:

To reduce Europe's high non-wage labour costs, especially social security contributions for the low-paid and young workers.

Real wage increases to be kept below rises in productivity.

Higher wage differentials, especially by cutting minimum wages and marginal tax rates.

The Euro-employers also want relaxation of rules on working hours, easier hire-and-fire laws, lower unemployment benefit and more limited access to the social security system. Unice also wants a general roll-back of the public sector and a review of EU legislation with a view to scrapping regulation which implies costs for industry.

The central employment section of the white paper emphasises lifelong training, lifting non-wage costs off low-skilled work, job-sharing and more part-time work within companies rather than as a national scheme. It envisages a push to develop services for work-seekers. 'Unemployment benefits can only be reduced so far before the poverty line is reached,' the white paper says, adding: 'These limits have already been reached in several countries.'

A senior EC official called the approach 'readjusting regulation to fit the present situation'.

EU urged to catch up, Page 2

The small proportion of shareholders who declined to take up Smith New Court's rights issue in June must be kicking themselves. Even after yesterday's round of profit-taking, the shares stand at almost double the 210p rights price. Rising world equity markets can take much of the credit. The upward march on the shares was notably halted in September and November, when UK equities were weak.

While the market is bubbling, though, cost control is perhaps the biggest management challenge. On the basis of yesterday's half-year figures, Smith's traders and analysts will be among those City folk looking forward to bumper bonuses in the New Year. Since staff costs make up 75 per cent of Smith's controllable costs, wage inflation is a serious threat. But big bonuses will not worry shareholders if basic salaries and the formula linking bonus payments to profits remain firmly under control.

Smith makes undisclosed provisions for bonuses throughout the year, so second-half profits should not buckle under the strain of one-off payments. The worry is that the shares still behave like a geared play on UK equities, despite its efforts at diversification overseas. It is odds-on that Smith will under-perform again should the London market hit a sticky patch.

Sir Ernest Harrison claimed throughout Williams Holdings' hostile bid for Racal that Chubb Security was worth Pounds 700m. That now looks like more than defensive bluff. Chubb's shares have out-performed the stock market by 40 per cent since it was demerged from Racal in September 1992. Its market capitalisation now stands at Pounds 1bn. While that underlines how neglected it had become prior to demerger, Chubb's management deserves full credit for subsequently getting to grips with costs.

Although cost savings arising from the first phase of restructuring are impressive, progress will be more difficult from here on. The challenge now is to generate additional sales while resisting downward pressure on margins. Replacing administrative staff with salesmen and rolling out a stream of new products is an active response. If sales can be driven higher while keeping the lid on fixed costs, margins should anyway improve.

Yet Chubb will have to increase sales in difficult markets almost from a standing start. Without exchange rate benefits, turnover grew by only 3 per cent in the first half. In electronic security, margins fell slightly. The cost of expanding the sales force without compensating efficiencies elsewhere is blamed for this temporary squeeze. The benefit of the sales drive should, in theory, show through in the second half. With the dividend covered almost three times by earnings and net cash in the balance sheet, Chubb has room to increase the payout if progress proves slower than expected. On a multiple of around 22 times this year's forecast earnings, though, no one is holding the shares for the yield.

The stress which Siebe places on its cash flow is perhaps a response to those who regard its ability to maintain margins through the recession with suspicion. Had it simply relied on judicious use of acquisition provisions at Foxboro, the company would surely not have met its targets for reducing gearing. The fact though, that yesterday's interim figures provided further positive news on this score is no longer quite enough. Having taken the axe to Foxboro's costs, the time has come when the controls division should be seeing more benefit from operational gearing and volume-driven growth. There has been some recovery in the US, but that is offset by weakness in Europe. Some Pounds 10m of the Pounds 14m increase in pre-tax profits was accounted for by exchange rate changes, and margins in the controls division have fallen slightly. Siebe's claim that they would have increased without the new charge for retirement healthcare and the consolidation of two small acquisitions is scant consolation. That would still have left them below the 16.3 per cent earned in 1992-93, while the retirement charge will recur.

Siebe is thus not yet able to deliver strong organic growth. This may owe more to economic circumstance than to any management shortcomings. But it suggests further reliance on acquisitions which would also help explain Siebe's interest in conserving cash. The market seems to have factored in the implications for earnings quality. A prospective multiple of around 18 times puts Siebe on a lower rating than other cyclical stocks such as those in building materials.

The much-touted marriage between France Telecom and Deutsche Telekom appears to have been watered down to cohabitation in a service flat in Brussels. The partners are pooling sophisticated services for multinational companies - very much in line with the joint venture between BT and MCI. Yet there is no comparable sharing of equity, nor a merging of mainstream international telecoms businesses. In part, that may be because the two companies are not ready - France Telecom may not even become a limited company and the privatisation of Deutsche may be postponed. The suspicion must be, however, that the European Commission would take a dim view of the two companies collaborating in markets which are not yet open to competition.

Pitching into competitive data services is merely to follow the herd. But the market is not large by telecoms standards, and margins are unlikely to be high. Perhaps telecoms companies have focused on this area because it is one of the few where regulation does not currently prevent competition. The limited capital commitment also means that it will be hard to come to much harm.

Still, alliances made in haste for niche markets may be repented at leisure when wider competition is allowed. The participants will, however, probably have plenty of time to reflect on that. Closer links between France Telecom and Deutsche Telekom would have to be offset by more open access to domestic markets. Neither would be keen to allow that, at least while their high business tariffs subsidise domestic users. That would be an open invitation for BT and Mercury to pick off their best customers.

Mr Jacques Delors, president of the European Commission, will tell European Union leaders at their summit starting on Friday that cutting wages and wholesale labour market deregulation are not the ways to beat the jobs crisis and strengthen Europe's competitiveness.

Cutting wages and pruning welfare payments to price Europe's unemployed into jobs would be 'socially unacceptable and politically untenable', and would 'only worsen the crisis by depressing domestic demand', according to the Commission white paper on growth and jobs. This strategy document, circulated yesterday to member state governments, is intended to be the centrepiece of the two-day Brussels summit.

The Commission's approach contrasted sharply with the call yesterday from Unice, the EU employers' confederation, for a comprehensive reduction in labour costs and the privatisation of welfare systems.

Unice's report, called 'Making Europe more Competitive', is timed to gain employers a voice in the summit debate. It wants:

To reduce Europe's high non-wage labour costs, especially social security contributions for the low paid and young workers.

Real wage increases below rises in productivity.

Higher wage differentials, especially by cutting minimum wages and marginal tax rates.

The Euro-employers also want relaxation of rules on working hours, easier hire-and-fire laws, lower unemployment benefit and more limited access to the social security system. In a manifesto that only the UK among the 12 would feel altogether comfortable with, Unice also wants a general roll-back of the public sector and a review of EU legislation with a view to scrapping regulation which implies costs for industry.

The central employment section of the white paper emphasises lifelong training and retraining, lifting non-wage costs off low-skilled work, job-sharing and more part-time working within companies rather than as a national scheme. It envisages a big push to develop services for those seeking employment. 'Unemployment benefits can only be reduced so far before the poverty line is reached,' the white paper says, adding: 'These limits have already been reached in several countries.'

A senior Commission official described the approach as 'not deregulation, but readjusting regulation to fit the present situation . . . social engineering that goes with the market.'

The paper maintains that restored growth might deal with cyclical job losses, and advocates a big investment drive in information technology and pan-European rail, road and energy networks to raise competitiveness.

But Mr Delors and Mr Padraig Flynn, the social affairs commissioner whose department designed the jobs strategy, say structural unemployment requires government and industry to promote more employment-intensive work patterns.

Stress at work is increasing sharply and should be recognised officially as a health and safety issue, a report urged yesterday.

Professor Tom Cox of Nottingham University, who prepared the report for the Health and Safety Executive, said the problem needed government recognition if employers were to tackle it effectively.

The report, published ahead of HSE guidelines due out next year to help employers manage stress at work, recommended further research into the problem, along with training for employers. Recent Manchester University research showed that 90m working days a year were being lost in the UK through stress.

The recommendations come at a time when growing numbers of employees are seeking compensation from their companies for stress-related illnesses. Several test cases are due to come before the courts. In one, a former City worker alleges that her 10-15 hour day caused a mental breakdown. Another employee claims that stress through overwork led to a gynaecological disorder. In a third case, a junior production manager is claiming that shortage of staff led to illness through overwork.

According to one of Britain's leading stress counsellors, the problem is growing more acute as companies emerge from recession with smaller workforces and leaner managements.

Mr Alistair Anderson, managing director of Personal Performance Consultants UK, which has contracts with 60 companies covering 130,000 workers nationwide, said he had noticed a disturbing number of suicides involving work pressures. 'I believe the demands on the workforce are greater than they have ever been,' he said.

'Downsizing in companies has meant that often people have been left ill-equipped and ill-prepared for the job expected of them. That in itself creates great stress.'

The report by Prof Cox, an occupational psychologist, identified excessive periods of repetitive work, lack of management support and overdemanding work schedules as contributory causes of stress.

Added factors were low pay, poor relationships with managers, lack of variety, shift working, long hours, job insecurity and conflicting demands of work and home.

Something is badly wrong with the US airline industry. Deregulated 15 years ago and run entirely by the private sector, it should be a shining beacon of enterprise and profitability in a global industry otherwise characterised by state-owned monopolies, inefficiency and heavy losses. Instead, it is on the ropes.

US airlines carried a record number of passengers last year: they also lost more than Dollars 4bn. In the past three years, the industry has lost nearly Dollars 10bn - in nominal terms more than all the profits it has made since the Wright brothers achieved the world's first powered flight in 1903. Despite windfall gains from a recent fall in jet fuel prices, the industry is heading for more heavy losses this year.

The big carriers are in retreat, hacking away at their domestic networks in the hope of discovering a profitable core. Older aircraft are being retired and orders for new ones deferred, hitting Boeing and the other manufacturers. The airlines are shedding jobs by the thousand, and asking remaining employees to work harder for less, as they struggle to cut costs.

Now the industry's plight is starting to intrude into the public consciousness as labour unions fight the job losses and changes in working practices. A strike by American Airlines' flight attendants disrupted tens of thousands of passenger journeys in the run-up to last month's Thanksgiving holiday, before President Bill Clinton leaned on management to accept a union demand for binding arbitration.

So what has gone wrong? The obvious explanation is that too many aircraft are chasing too few passengers. That argument appears to be contradicted by last year's record passenger numbers. But load factors can be misleading: in reality, the airlines found themselves faced with such a large surplus of capacity that they filled the empty seats by launching a ruinous price war, hence the record losses.

Recession is part of the reason why overcapacity arose in the first place. The relatively prosperous years of the 1980s encouraged airlines to order new aircraft, but long lead times meant these started to arrive just as the economy was turning down. Apart from last year's upward blip, passenger numbers have been stagnant (or worse) for five years.

US bankruptcy law must also share the blame. Normally, company failures might be expected to rectify the imbalance between supply and demand by putting the worst-hit carriers out of business. Sure enough, some famous names have gone - Pan Am and Eastern, for example - but chapter 11 of the US bankruptcy code has given companies such as Continental Airlines, Trans World Airlines and America West protection from creditors, enabling them to go on flying, when they would otherwise have failed.

More important, however, than either of these factors is the structural change being wrought in the industry by the arrival of a new wave of carriers typified by the Texas-based Southwest Airlines (see below). These have eaten heavily into the big carriers' domestic markets by offering services at bargain prices. Their fares are often a third of those of the bigger carriers.

Passengers who fly with these smaller carriers enjoy few frills. The aircraft are one-class, seats are not assigned and the service is rudimentary. But the secret of the smaller carriers' low fares is behind the scenes, in the much higher levels of productivity they achieve from their workforces.

For years, the strategy of the big US carriers has been based on the hub-and-spoke system - that is, flying passengers from feeder cities on the spokes of the system into a big central hub, then redistributing them on to other flights to their destination. The system is seen as the most efficient way of offering the widest choice of destinations to the largest number of customers, and has been copied around the world.

The hub-and-spoke concept, however, suffers at least one big disadvantage. In order to provide for all the flights to connect with one another, they all have to converge on the hub at about the same time. That means employing the staff and resources necessary to cope with high levels of activity at the peak, only to have them standing idle during the troughs that occupy the rest of the day.

The small carriers do not have to suffer this waste of resources because they do not have hub-and-spoke operations. Instead, they run highly intensive shuttle services on busy routes between pairs of cities. Staff are kept fully employed because aircraft follow one another in and out of the airport all day, and turnround times are cut to the bone because the aircraft do not have to wait for connections.

Surprisingly, perhaps, the smaller carriers' staff are often paid at much the same rates as their colleagues working for the bigger carriers. Many belong to unions, too. But they work much more flexibly and productively than the big carriers' staff. Pilots spend less time waiting around and more time flying, and get paid only when they are in the cockpit. Flight attendants clean the passenger cabin in the few minutes' interval between the aircraft's arrival and departure.

The result of the small carriers' high productivity levels is that the big carriers - though counting themselves among the leanest, fittest and most competitive operators in the world - have taken on the appearance of dinosaurs in their home territory, and have been forced into a drastic reappraisal.

One strand of the reappraisal common to all carriers is their desperate need to cut costs - particularly labour costs, which typically account for at least 35 per cent of the total. Some airlines have shown themselves willing to trade massive equity stakes in return for concessions from their employees, as a result of which the labour unions now own 37.5 per cent of Northwest Airlines, 45 per cent of Trans World Airlines, and are negotiating for 60 per cent of United Airlines. Too often, the alternative has seemed to be a crippling strike that few are prepared to face - though American Airlines was ready for a fight, until President Clinton intervened.

Meanwhile the airlines have also had to reassess the fundamental structure of their operations, even to the extent of questioning whether the hub-and-spoke concept is valid any more. At the very least, they are withdrawing from short-haul feeder routes and handing them over to smaller operators - either wholly-owned subsidiaries, as with the American Airline companies flying under the American Eagle name, or more often to partially owned or independent regional carriers.

But perhaps the most significant sign of the times is the move by the non-union Continental Airlines to set up a low-cost shuttle service called CALite, which mimics the no-frills carriers by providing frequent direct flights between cities instead of requiring people to change flights at a hub. CALite also does it cheaply: it invites passengers to combine ultra-low 'Peanuts Fares' to some destinations with another offer called 'Add A Penny, Add A Pal', under which the passenger's companion flies for 1c each way.

CALite is still in its early days, but its evolution demonstrates a growing acceptance among the big carriers that domestic air travel in the US has been transformed once and for all by the no-frills carriers into a commodity business - low-cost, high-volume and with little added value.

Each is responding in its own way. American is pulling out of routes where it cannot compete. United is trying to negotiate a deal with its unions which would result in the setting up of a low-cost operation, like CALite, to handle short-haul domestic flights. Delta is also thinking of following the Continental example.

The fact that the airlines are prepared to contemplate such radical action indicates that, although they have made some progress in adjusting to the new era, they still have a long way to go. With or without economic recovery, the turmoil looks set to worsen.

The Franco-German telecoms alliance announced yesterday provokes a certain queasiness. Deutsche Telekom and France Telecom are Europe's two largest telecommunications operators, are still state-owned and have wide-ranging monopoly powers. There is a danger that, by joining forces, they will form a cartel dominating the heart of Europe.

Yet it would be wrong to oppose the link-up on principle. The division of Europe's telecommunications market on national lines is the result of a long history of state-run monopoly. Now that markets are slowly being opened to competition and carriers are being privatised, it is natural for the industry to restructure on cross-border lines.

The Franco-German alliance is a milestone in this trend. Other examples include British Telecom's alliance with MCI of the US, American Telephone & Telegraph's Worldsource consortium and a three-way link-up between the Dutch, Swedish and Swiss operators, called Unisource.

The benefits for customers from an end to the industry's balkanisation could be considerable. The main potential prizes are an end to the 'frontier effect', under which cross-border calls typically cost three times as much as national calls of the same distance, and a wider range of trans-European business services.

This is not to say that Deutsche Telekom and France Telecom are motivated by a desire to deliver lower call charges. Their alliance seems largely defensive, stemming from fear that their monopoly bases could be eroded by competition from BT and AT&T. The duo believe they will be more able to withstand competition if they form a united front.

Retrograde step

Nor is it to say that the benefits of an end to balkanisation will flow through to customers automatically. If the Franco-German link-up delays competition, it will be a retrograde step.

The details of the deal are less alarming than feared when news of it first leaked last month. Early reports suggested that the two groups wished to merge all their international activities, including ordinary phone calls, and also link up with AT&T. Such a deal between the world's three biggest international carriers might indeed, as BT said, have been 'grotesque' - particularly since the duo still have monopoly rights to provide ordinary voice services.

The actual deal is more limited. It focuses on data services and value-added business services, which have theoretically been liberalised throughout the European Union. But there are still concerns. In the short term, it remains to be seen whether the markets for data services are genuinely open to competition. In the longer term, plans for the duo to take equity stakes in each other and expand their alliance may prove anti-competitive. The danger is that they could exclude rivals from their markets and use their enlarged home base to dominate other markets.

Public interest

Rather than blocking such link-ups and so losing the potential benefits of cross-border restructuring, Europe's competition authorities must seek to make alliances work in the public interest. This means adopting a more vigorous approach to opening up markets.

So far, the European Commission has been rather timid. Under its latest plans, not only will liberalisation of basic voice services be delayed until 1998. There is also no sign that competitors will be allowed to build their own networks, meaning they will have to rely on infrastructure owned by the national monopolies.

Deutsche Telekom and France Telecom yesterday showed no sign of wanting more radical action. Nor did the EU's telecom ministers, also meeting in Brussels.

Things might be different if Mr Jacques Delors, the European Commission's president, realised the connection between liberalisation and his much-cherished goal of trans-European networks. The end to Europe's balkanisation, at least in telecommunications, will not best be achieved by the Commission launching 'Brussels bonds' and channelling the funds to monopolies. A better approach would be to open up the market and rely on competitive private enterprise to build the infrastructure. Mr Delors should devote his energies to securing this end.

It pays to have a sense of humour when you fly by Southwest Airlines, the Dallas-based carrier leading the low-cost revolution in US air travel. Herb Kelleher, the 62-year-old chairman, is a man who likes a joke, and encourages a similar attitude among his staff, writes Richard Tomkins.

Flight attendants have been known to astonish passengers by concealing themselves in luggage lockers and springing out unexpectedly into the aisles. Passenger announcements are invariably tinged with levity ('Please be aware all seating is unassigned,' people are told as they board an aircraft in Dallas. 'Y'all sit yourselves anywhere, just like in church.')

Southwest can afford to be funny. Indeed, as virtually the only US airline to have stayed consistently profitable over the past few years, it is laughing all the way to the bank. Stock market analysts are predicting it will increase pre-tax profits by more than 50 per cent to Dollars 140m in the year just ending - not a vast sum by US corporate standards, perhaps, but enough to make it the nation's most profitable airline.

How is that an upstart like Southwest can make money while its bigger rivals prove so adept at losing it? The answer lies in its low cost structure. The airline specialises in short-haul, point-to-point services with frequent flights, no frills and fast turnrounds, and its workers are hard-working, flexible and enthusiastic. Result: its operating costs per available seat mile are 26 per cent lower than the average for the big carriers.

That cost structure has translated into rock-bottom fares that have enabled Southwest to trounce the competition. Spreading across the south from its home territory in Texas, where it is easily the dominant carrier, it has become the biggest operator of flights within California and has driven American Airlines out of the short-haul market in the south-west.

In September it began an assault on the north-east by offering flights on the Baltimore-Chicago and Baltimore-Cleveland routes at fares up to 85 per cent less than those available from existing oper-ators.

Taking a flight by Southwest Airlines is a novel experience for passengers accustomed to elaborate checking-in rituals, fawning service and endless parades of drinks and meals.

Southwest has quite deliberately trivialised the ritual, making it a bit like catching a bus but more fun. Passengers just turn up, and if they miss the aircraft, it doesn't matter, because there will be another one along in a minute.

Refreshments might be limited to a bag of peanuts and a soft drink, but the light-hearted banter from Southwest's staff leaves most people feeling much better at the end of their journeys than any number of in-flight meals.

Best of all, the flights are cheap. The low-fares strategy has proved highly addictive to the US consumer. People are not only deserting other airlines to fly by Southwest: they are also choosing to fly rather than drive, or to undertake journeys they might not otherwise have made.

One question inevitably raised about the Southwest formula is whether its success will last. After all, people are bound to trade down in a recession. Maybe, as the US economy picks up, passengers will want to pay more and go back to the old-fashioned levels of service traditionally associated with air travel.

But not even Southwest's bigger rivals believe that. They openly acknowledge that Southwest and its ilk have changed US flying habits for good. According to American Airlines, most passengers will now happily put up with lower levels of in-flight service if it means they can afford to spend another couple of days at their desti-nation.

'Basically, the American public is saying: 'Strap me in that metal tube and get me there for 59 bucks,' ' the company says. Or as Mr Stephen Wolf, chairman of United Airlines, told a US newspaper: 'Even the wealthy are concluding that they should buy a lower-priced ticket on Southwest and use the difference to buy a eucalyptus tree for their home.'

A case of the biter bit? William Waldegrave, the UK public services minister, missed the start of his own conference in London on Service for the Citizen yesterday. So he didn't hear the prime minister's proud boast that his Citizen's Charter now forces electricity companies to pay their customers compensation if they turn up late to read the meter.

However, Waldegrave will not be offering compensation to the delegates who paid Pounds 665 for the pleasure of attending. Delays at Brussels airport, rather than Waldegrave's poor time-keeping, seemed to be the problem.

While Britain's education secretary John Patten still seems to be making heavy going of his first cabinet job, the business career of his well-presented wife, Louise, goes from strength to strength.

Yesterday she picked up another nice little earner, an advisory role at Bain & Co, one of the more aggressive management consultants. Over the past year she has moved up from being a partner of PA Consulting to join the big-league head-hunters at Heidrick and Struggles, and has added a non-executive directorship of Ladbroke on the way. And unlike her husband, she has still not turned 40.

Caroline Portillo, wife of Britain's chief financial secretary, is also making a name for herself at one of Louise Patten's rivals, Spencer Stuart. So, if, heaven forbid, two of Britain's cabinet ministers ever lost the support of the electorate, they should not have much difficulty finding a new job.

Cecil Rhodes may turn in his grave at this item of news. For the first time since they became eligible in 1976, there will be more women US Rhodes Scholars at Oxford next year (17) than men (15).

Otherwise, the Ivy League was again the most successful, winning nine places, including two room-mates from Harvard. Rutgers got two, having been shut out for a Rhodes since 1953. Bill Clinton, class of 1970, saw his alma mater, Georgetown, win one, too. Appropriately for this most feminist of presidents, she is a woman.

The plight of Brian Fox, in charge of establishments and organisation at her Majesty's Treasury, is bound to strike a special cord with fellow organisation men. What type of organisation moves the organisation man without telling him what he is to do next?

Fox is being shunted aside as part of a Treasury reshuffle caused by the need to find a billet for one of its old boys - the prime minister's press secretary Gus O'Donnell who returns in a few weeks' time. O'Donnell gets to be assistant secretary in charge of monetary policy - a post now occupied by Paul Gray who has been given Fox's job. Yesterday the ping pong-loving Fox was still in the dark about his next move.

The British Foreign Office may be trying to reduce staff numbers, but some diplomats have obviously got the message already.

Take Ian Kydd, the 46-year-old head of the FO newsroom, who hopes not to be responding to media enquiries for almost a year if he gets selected to sail round the world on Chay Blyth's Ocean Challenge 1996-97.

Kydd beat more than 2,600 applicants, only to be treated, during the final this weekend, to a chilly aquatic assault course in deepest Oxfordshire. If he makes it as one of the two lucky (?) crew members part-funded by The Times, he will at least know someone in every port, he says.

With some experience of sailing Laser dinghies in Lagos harbour in his last posting but one, he is also a bit better-placed than some who sign up for Blyth's little outing without a clew.

Observer wishes him luck in giving those media sharks the slip.

However, it is good to see that Her Majesty's Treasury doesn't have to throw the same sort of money around in order to secure loyalty and greater efficiency of its staff.

At yesterday's meeting of the Treasury and Civil Service Committee, Joseph Halligan, an official dealing with social security, surprised MPs by admitting that his motivation was helped by performance-related pay. It had an impact on his living standards and was relevant to his future promotion.

With a marked quickening of interest, the MPs pressed Halligan on how much of his pay packet was performance-related?

'Two per cent,' replied the bureaucrat. 'But it makes a difference ..'

Goh Chok Tong, Singapore's prime minister, knows what market forces can do to his business. He is finding it increasingly hard to fill his cabinet with the best people because of the hefty salaries on offer in Singapore's high-growth private sector. Two of his ministers plan to quit within the next six months.

To try to stop the political rot, his government has announced wide-ranging pay increases, starting with Goh's own basic salary. It's been increased by 20 per cent to SDollars 45,867 a month. When bonuses are taken into account, it rises to more than SDollars 60,000 per month. In US dollar terms this is equivalent to Dollars 450,000 a year, which is more than twice the salary of the president of the United States and four times what Britain's prime minister is paid.

'If you pay peanuts you'll get monkeys for your ministers,' says Goh.

The wrangle at Lloyd's long ago ceased being an issue of fairness and became one of cold practicality. How much damage could lawsuits from Names caught up in the spiral of losses in the late 1980s do to the institution as a whole? How much was it worth to the rest of Lloyd's to buy them off?

Yesterday's offer, of compensation worth some Pounds 900m, is an example of that chilly calculus at work. It is heavily skewed towards those Names with the strongest legal case and the greatest demonstrated determination to pursue it. On average, it amounts to just under a third of the total compensation claimed by the lossmaking Names to whom it is being made. But those with the strongest cases - members of action groups, heavily exposed to the 'spiral' of reinsurance, perhaps in syndicates managed by Gooda Walker - can expect average compensation of up to about 40 per cent of their losses.

If they accept. Perhaps the most intriguing aspect of the proposed settlement, apart from its sheer complexity, is the way it will force each potential litigant to assess individually whether or not to accept the offer. Lloyd's new managers - Mr David Rowland, chairman and Mr Peter Middleton, chief executive - have promised that the offer will go ahead only if it receives acceptance from a substantial majority of the 21,000 Names eligible for it. Despite the immediate hostile reaction of the Names' action groups, that is an open question.

Finely balanced

For some people, bankrupt two or three times over, entitled only to the lower end of the settlement's compensation scale, the question is a simple one: there is nothing to be gained from such modest terms. The offer 'leaves ruined Names ruined', as the leader of one action group put it yesterday. For others, particularly 'working' Names with limited exposure, earning a steady flow of income from the market, the issue is equally clear cut the other way.

For most, though, the question is finely balanced. They must weigh the individual offer they will be receiving in the next few days against the chances of success in continued legal action. How much of their potential recoveries from such lawsuits will be gobbled up in lawyers' fees? How much of any award that a court makes will ever turn up in hard cash, paid not by now bankrupt Lloyd's agents but from the limited sums available from their errors and omissions insurers?

For anyone contemplating such a difficult decision, the question would be simpler if Lloyd's could promise finality, the confidence that the nightmare was at last over. Alas, that is not what the settlement offers. It covers only current claims for the years up to - and in some cases including - 1990. Claims still to come in - especially the potentially devastating 'long-tail' claims over environmental and other damage in the United States - are not included. Nor are losses in respect of later years, some of which will also be bad.

Reinsurance vehicle

Lloyd's is working on a device to provide the finality that the battered Names so desperately seek: a reinsurance vehicle which will shoulder the claims of the past and allow Names to escape from them once and for all. Even assuming that it works, however, it will come into existence only in 1996 - and it will probably require Names to make a further yet-to-be-specified contribution.

The settlement proposed yesterday is thus an intermediate step, buying time from the point of view of Lloyd's new managers, providing some partial compensation from the point of view of the Names affected. It does not offer one thing the Names have sought: a sense of moral vindication, a recognition that they are innocents in a system that was at best mismanaged, at worst a scandal.

For some people, especially those lured into Lloyd's by ties of family or friendship rather than investment decision, that will be enough to make it unacceptable. That such flawed judgments were common in the 1980s boom is a sad reflection on the market's leaders of the time. It is not, however, a reason to reject the proposed settlement. Names would be best advised to judge it in the light of a prudent, rational calculation of their own interests. If that is not enough to deliver the acceptance necessary, so much the worse for Lloyd's.

Sir, So 'most economists subscribe to a core of theory - mostly micro-economic - that is useful and should therefore be heeded by politicians' (Michael Prowse, December 2, reviewing Alfred Malabre's book Lost Prophets).

I am intrigued - what core of theory has he in mind? Given that the Treasury has now decided that the pay of all public sector workers over the next few years must be met out of an existing wage bill, and that therefore jobs must be traded for higher wages, which economists did the chancellor heed when resurrecting the 'wages fund' doctrine?

David Parker,

Department of Commerce,

University of Birmingham,

Edgbaston,

Birmingham B15 2TT

John Birt, the director-general of the BBC, is reluctant to confess. But press him hard enough and he says: 'I have - I am sorry to say it, it's a genuine feeling - a strong sense of success.'

Probe a little deeper and Birt, who as recently as March, was under widespread attack when it was revealed he had a consultant's contract with the corporation and was not a staff member, goes further: 'I don't think I have had an unpleasant time. I think I have had one of the most satisfying years of my life. There is a very, very strong feeling here of achievement.'

For Birt and the BBC it has indeed been a remarkable year. The corporation has experienced one of the most radical changes in its history - Producer Choice has been implemented. This is the name given to the move away from a 'command economy', where all services to producers were provided from the centre, to an internal market where producers control their own budgets and can buy outside services.

As a result, several thousand staff jobs have gone but Pounds 100m has been saved this year to spend on programmes.

Even more important for the BBC is the government's decision to allow the compulsory annual licence fee, now Pounds 83, to rise in line with retail prices for the last three years of the corporation's Royal Charter until the end of 1996.

This relatively generous licence fee settlement indicates that the government acknowledges the BBC is taking serious steps to cut costs.

For Birt, the year has been not just one in which he survived a public mauling, but also one in which he achieved a significant victory over his opponents in the organisation - those he has mocked as ancient warriors pointing their old muskets. The licence fee award is a triumph that even Birt's most begrudging detractors would have to recognise. It might also pave the way for Birt to deliver a second, perhaps more startling, win. In the debate over the Royal Charter - the conditions under which the BBC operates - he may be able to persuade the government that there is a continuing role for a universal licence fee, which every television set owner must pay, in an age when cable and satellite television offers ever-increasing choice.

So does Birt feel he has won?

'Won is a funny word. Won in what respect?' he asks. He adds that there is a growing public understanding of the BBC's achievements in reforming itself over the past few years and again creating hits, such as Absolutely Fabulous, and dramas, such as Scarlet and Black. There is, Birt says, a sense that programmes are being put first and 'a degree of excitement' that a public sector institution is reforming itself and doing it effectively.

But won?

'I'm not going to use that expression. I don't even think like that. That implies that you've passed a finishing post. We are not through the charter review debate, nor is the job finished,' Birt says.

He is speaking in his first newspaper interview for almost a year. Apart from wanting to spell out the scale of the accomplishment at the BBC, he also wants to counter the arguments advanced by Ian Hargreaves in his pamphlet, Sharper Vision, published recently by Demos, the independent think-tank. Hargreaves, a former director of news and current affairs at the BBC and now deputy editor of the Financial Times, argued that the BBC's future would be most effectively protected by privatisation, including a stake for the staff. Over a 10-year period the company would move towards a mixed method of funding - licence fee, advertising and subscription - and would thus be liberated from ties to government.

While the political battle for such changes has almost certainly been lost, they have aroused high-level interest - Michael Heseltine, trade and industry secretary, has started looking at the export potential of British programmes, and is known to be intrigued by such radical views.

Birt's disagreement, in particular with the idea of mixed funding, is total. 'If you change the method of funding, you are inevitably going to change the nature of the institution and the programmes it supplies,' he says.

In a commercially funded system such as ITV, however regulated, you take decisions on a business basis, he says. As programme director at London Weekend Television, Birt commissioned such popular and profitable programmes as Blind Date and London's Burning.

Advertising on the BBC would put the two systems of broadcasting 'in naked and direct competition', changing both ITV and Channel 4 as well as the BBC.

Birt believes that in 10 years the BBC licence fee, now 23p a day, will be more defensible and seem better value as viewers get used to paying much larger sums for cable and satellite channels. He concedes, however, that the BBC has to find easier ways for poor people to pay. The corporation is also developing a more aggressive global strategy - exploiting 'the most powerful broadcast media brand name in the world' and its programmes by transmitting television and radio programmes around the world in both English and local languages.

Bob Phillis, the BBC deputy director-general and head of the World Service, is working on a comprehensive plan for all the corporation's business interests. The main points include organising the BBC's activities on a regional basis, setting up an arm's-length relationship with BBC Enterprises, the commercial wing, and creating specialist satellite television channels with or without partners.

'We will greatly increase the amount of money coming into the BBC from our commercial activities chiefly outside the UK,' says Birt, who believes that the contribution could rise from about Pounds 60m a year to three times as much by the end of the decade.

While he acknowledges the sense of hurt and insecurity the rapid reforms he has initiated have already caused, the modernisation of the BBC will continue apace. Overheads are still too high, there is still excess capacity - which means more jobs will go - and too many middle managers are inflexible and uncommunicative with their staff, and will have to be replaced by younger people, Birt says.

Mostly he talks of success and is hard put to think of any serious errors made over the past year. Producer Choice has been 'a very great success', and modest teething problems must be set against the massive gains.

There has been no recent switch in the BBC's programme philosophy, he adds; policy has merely been caricatured as wanting to provide only those programmes, such as opera and hard-hitting documentaries, that commercial television is less likely to make. The policy was, and remains, to offer high-quality programmes for the entire audience.

'No change. There has been no change. No change whatsoever. No. No,' says Birt.

Surely most people would regard his freelance contractual arrangement with his employer as a grievous error?

'Weeeeeell. I mean, wouldn't they?' he says, adding that when he arrived at the BBC in 1987 'dozens of people in ITV' had exactly the same arrangements, and at the BBC 'other members - plural - of the BBC board of management had exactly the same arrangements'.

As the row fades into history, there seems to be no doubt in Birt's mind, as he enters his second year in charge of one of the world's most famous broadcasting organisations, that his first year was 'a very great success indeed'.

Sir, Michael Grade's letter ('Advertisers threatened by ITV changes', November 27), urges the ITC to preserve its present 25 per cent limit on the share of ITV revenue that can be sold by any single ITV sales house. This is both self-seeking and unduly alarmist.

The ITC has said it will review the sales house rules early next year: one of the factors it will take into account is the way the TV air-time market is changing.

Channel Four takes nearly 18 per cent of the market at the moment and is by far the largest single commercial broadcaster in the UK. (It will still be number two even if the Central and Carlton air-time is sold together.)

If the ITC revised the rules to permit an lTV sales company to take up to 25 per cent of the market, this would make life less comfortable for Channel Four but would scarcely imperil its existence.

Advertisers already have real choice in the TV market, and this choice will grow as satellite and cable companies increase their audience share.

It is in everyone's interest (including the advertisers) that ITV remains a strong channel, commissioning and producing original British programmes on a scale exceeded only by the BBC.

Rationalising its present fragmentary structure, in both the ownership rules and the sales rules, is a necessary prerequisite for this.

Greg Dyke,

group chief executive,

London Weekend Television,

London Weekend Television Centre,

Upper Ground,

London

SE1 9LT

Sir, As a former director of human resources in an NHS trust hospital, I agree that efficiencies attained in the private sector are attainable in the NHS. However, I believe that there are five significant pre-conditions:

(1) Any savings made on reducing central bureaucracy should not be immediately clawed back by the Treasury but rather made available by trusts to facilitate change.

(2) Boards of directors must be allowed real freedom, without the interference of national pay bodies, to negotiate locally whatever salaries are required to recruit and retain the best clinical and managerial staff within their overall budget.

(3) The rules on capital spending must be relaxed to allow private investment.

(4) The cost of large-scale redundancies, which currently is borne in year and therefore can prevent a trust from meeting targets, should either be centrally funded or allowed for over a longer period, say five years.

(5) The rules on transfer of undertakings for public employees needs to be sorted out to facilitate contracting out of non-core activities.

Public service organisations want to do better but government has to deliver.

Phil Davies,

teaching fellow,

Cranfield School of Management,

Cranfield, Bedford, MK43 0AL

Sir, There are times when a mere fulsome apology will not do, and the reaction of the British Bankers' Association to the December Which? report on banking services is one of them ('Customers report banking errors', December 2).

If, as our survey suggests, one in five bank and building society customers has suffered mistakes in standing orders or direct debits, people should check their statements; but it is adding insult to injury for banks to demand the same. Mistakes are the banks' responsibility; so is spotting them. Urging vigilance on customers is an acknowledgement of failure and an encouragement to complacency.

The Bankers' Association emerged with further, equally shameful comments aimed at deflecting criticism, complaining that our survey of more than 3,600 banking customers was, astonishingly, 'too small', and that Which? members are more likely to grumble about banking problems. On both counts, professional opinion disagrees. So, no doubt, would the chief executives of Abbey National, First Direct, Girobank and Yorkshire Bank, which topped our poll in terms of overall satisfaction. If they can please customers, why not the Big Four?

The code of banking practice promised a new era of improved standards of service. It has clearly failed to deliver. If the code cannot be improved considerably and enforced rigorously, it should be replaced with statutory standards imposed at government level. Only then will the disgraceful concept of DIY account management be consigned to where it belongs: in the past.

John Beishon,

chief executive,

Consumers' Association,

2 Marylebone Road,

London NW1 4DF

Maastricht fatigue (MF) is endemic throughout the European Union, though observable in its most acute form among British members of parliament. The main symptom is an inability or unwillingness to listen to any proposition intended to improve the institutions or processes of the Union.

Specialists differ about the precise causes of the disease and about the treatment. One school of thought sees MF as a normal reaction of the human organism to prolonged exposure to the subject in question, and recommends that the patient be shielded as far as possible from further exposure. The other holds that MF is caused by the form that discussion about European institutions took between about mid-1991 and autumn 1993.

According to this view, while the reaction may indeed be 'normal' it is not healthy and, if allowed to develop, may have dangerous effects. This school favours a homeopathic remedy: the source of the trouble should be used as an antidote but in carefully adjusted doses, enabling the patient to develop appropriate antibodies.

I hope the second school is right, because the idea that the next bout of argument about Euro-institutions can be put off, or confined to a minimal convulsion which no one will notice, is surely an illusion.

Negotiations now in progress between the EU and four applicant countries - Austria, Finland, Norway and Sweden - will produce, within a few months, a new treaty of accession, requiring ratification not only in the new member states but also in the existing ones. And the Maastricht treaty itself provides for its own revision at an intergovernmental conference (IGC) in 1996. That, too, will produce changes which will have to be ratified.

It would make sense to telescope these two processes. The 1996 IGC could be brought forward and the applicant countries could be invited to take part in the conference but to delay putting their accession to the vote until the results of the meeting were known. Then both old and new members would be taking a decision, in late 1995, about the institutions of a wider Union which their governments would all have agreed on.

That idea is too radical for the present mood of European governments. They prefer to negotiate enlargement quickly - obliging the new members to join the EU as it now stands - and then wait until 1996 to discuss such minimal adjustments as seem unavoidable. This thinking is a classic symptom of MF, but it is also the thinking that produced Maastricht in the first place.

In 1991 governments avoided any radical reform of EC institutions, particularly in the direction of greater democracy. They knew that, in a reformed system, states with larger populations would have greater influence and that this would be difficult for smaller states to accept. But Danish voters suspected (rightly) that such a reform was being planned behind their backs, and this was one of the reasons they voted No in June 1992.

Now, by putting off reform until enlargement has gone through, governments are nourishing the same suspicion among voters in the candidate countries, many of whom are now swinging against the EU. Attempting to secure a Yes vote, governments in those countries will promise to block any reform that reduces their share of influence once they are in. That ensures that the 1996 IGC will be confrontational and sterile.

Perhaps the price of joining a workable and democratic union of 16 is simply too high for voters in some applicant countries to accept. If so, it would be better to establish that fact before the final decision on enlargement is taken, rather than put them in a position where they can only defend their sovereignty by making the union unworkable.

But there is a chance they would not come to that conclusion if the reform proposed were sufficiently radical. Its object should be to make the central institutions of the union strong enough to take effective action on matters of genuine common interest, but to restrain them from interfering unnecessarily with the lives of citizens in matters which could be dealt with at the level of member states (or lower). This should be done in a document which non-lawyers could understand, arrived at through a public debate in which ordinary people and their elected representatives would participate.

Such is the object of A Proposal for a European Constitution*, published last week. Sadly, I hear this document is being rubbished in Brussels as an 'Anglo-Saxon' product, though only one of its 13 authors is a native English-speaker, while French and Germans make up the majority. No doubt Mr Jacques Delors's entourage dislike it for being permissive rather than prescriptive on matters social and monetary, and for reserving 'to the member states, or to the people' those rights and powers not delegated 'expressly or by necessary implication' to the union.

The authors wisely avoid the word 'federal' but it is clear they have drawn inspiration from federal constitutions, including that of the US. In the nature of things few people will agree with everything they suggest. (I, for instance, would take issue with their claim to be defending the separation of powers when they allow the council of ministers to remain the central body, both executive and legislative.) But in their central object of launching an informed public debate before next summer's European elections, and well ahead of the 1996 IGC, they surely deserve to succeed. If there is a homeopathic remedy for MF, this might be it.

*By the European Policy Forum, 20 Queen Anne's Gate, London SW1H 9AA. Price Pounds 25.

Sir, David Owen ('Councils' rules on homeless may be relaxed', December 2) does his best to explain how temporary accommodation for homeless families is to be permanent. Let common sense prevail: temporary housing is not suitable for families with children who need stable schooling and continuity in their lives.

Now that we have stopped building council houses, there is enormous pressure on the existing stock of re-lets, and no amount of shuffling the people who need it can conceal the underlying shortage or the economic stupidity of current policies. Scarce private rented accommodation costs between Pounds 100-Pounds 150 a week and traps people on benefits, with rising costs to the national and council tax payer.

This policy makes no economic or social sense. In the longer term it is unsustainable because of the shortage of private rented accommodation which the Budget did nothing to reverse.

The housing benefit bill will rise and threaten the government's spending targets. What will we do then? I hope the government knows the answer to that question because, other than rising levels of homeless people on our streets, we do not.

Sheila McKechnie,

director,

Shelter,

88 Old Street,

London, EC1V 9HU

There must be something pretty funny about Ben Elton because some of us continue to laugh even though his obsessive political correctness makes us groan. It will be interesting to see whether his own adaptation of his own book, Stark, is as funny as his stand-up act. Elton himself stars as an English writer in Australia at a time when the earth is being asphyxiated by industrial pollution (9.25 BBC2).

Elsewhere the schedules are dominated by state terrorism. Salman Rushdie introduces Shooting The Writer. Six of Algeria's intelligentsia have been assassinated this year, and Islamic terrorists have now issued an ultimatum to the 100,000 foreigners in the country: leave or become targets (8.00 BBC2). In Human Rights, Human Wrongs Rushdie describes the way hundreds of thousands of families have been destroyed in Bosnia-Herzegovina in 'ethnic cleansing' (8.50 BBC2).

In his BBC1 series States Of Terror, Peter Taylor investigates US reactions to the suicide attacks on Americans in Beirut in the early 1980s (9.30).

It was Diaghilev who brought Picasso to the ballet stage, as he did so many more of the best painters of his time. No dance company today can boast such acumen. Only in France - with the visual wit and adventurousness of Roland Petit's troupes, and the proud record of Jean-Albert Cartier in finding artists to decorate works for his companies - has there been a readiness to let the painter's eye (rather than the designer's) show us something about ballet. The tried, the true, the predictably winsome and the sullenly grungey, make our dance-stages a dreary sight.

How good, then, to see such performances as the Paris Opera Ballet's current Picasso et la danse, in which the eye is ravished, stimulated. Picasso made three great designs for Diaghilev (Parade, Le Tricorne, Pulcinella), married one of Diaghilev's dancers, and drew dancers for many years. His later involvement with ballet amounted to the provision of decorative accessories, beginning in 1924 with the two racing women who thunder across the painting La Course, which Diaghilev borrowed as a front-cloth for Le Train bleu, and including Picasso's suggestion that one of his war-time paintings (Candle and Mask) would serve well as a front-cloth for Roland Petit's Le Rendezvous of 1945.

The Opera Ballet's Picasso tribute has been revived after its successful showing last season. It offers a reconstruction of Le Train bleu, with Nijinska's dances evoked as much as restored; a very fine staging of Le Rendezvous; and the sun-lit Andalucia of Tricorne. Le Train bleu, alas, stopped running years ago, and this capriccio about gaiety on a 1920s plage (it must be Eden Roc) is vivaciously dull. The central role of Le beau gosse was, in 1924, a picture of the beauty and physical daring of Anton Dolin. No-one today can capture the verve Dolin retained in even his late performances as a dancer. Without such central allure the staging is dutiful, spectral, unlikely.

Yet Roland Petit's Le Rendezvous, which is quite as much a period-piece with its war's-end melancholy and existential disillusion, is tremendously alive. A Young Man finds death in the arms of the Most Beautiful Girl in the World, guided to her by the terrifying figure of destiny (a macabre top-hatted being, stupendously taken by Cyril Atanassoff). The setting is Brassai's photographs of Paris streets. The dance is as theatrically urgent as when we saw it in 1945, and last week-end's performers (Patrick Dupond as the Young Man; Marie-Claude Pietragalla as the Girl; Atanassoff as Destiny) were grandly alert to the choreography's dramatic pulse. It was an ideal revival.

Tricorne is the only Spanish ballet in my experience that is authentically a ballet and authentically about Spain. It is well done at the Opera, and rather more alert in manner than last year. The designs and the de Falla score do a lot of the work nowadays - there is a tendency for companies to treat the piece as a glorious dress parade to a great score - but in Kader Belarbi the role of the Miller has a bold interpreter. He has both the youth and the vivid presence to make every moment count. The programme contains a photograph taken of the young Massine - he was 24 when he created the part - which tells everything of the dance's taut outlines. Belarbi, like last year's dazzling debutant in the role, Jose Martinez, gives it the right edge of sexual pride and rhythmic clarity.

Throughout this programme the Opera's dancers were on best form. We have in the Palais Garnier a dance-house for Europe, and in its resident company a peerless troupe. Visiting the new Richelieu wing of the Grand Louvre - which is a triumph of design and restoration - the Barnes Collection at the Musee d'Orsay, and the Opera Bastille, I was struck again by the seriousness and generosity of France's patronage of the arts, and depressed even more by the mean-spirited inadequacies of our own national response.

Gremlins in the machinery removed a paragraph from my Nutcracker notice in Friday's paper of the Perm Ballet's British debut in Northampton at the Derngate Theatre. With apologies to any puzzled readers, and to the Perm Ballet, the missing sentences are herewith restored.

'No less than six different stagings of The Nutcracker are threatened this year: the first outbreak, and I'd venture the most intriguing, is that on view at Northampton's Derngate Theatre. Derngate, lively in its programming, had scheduled a production from the Lille-based Ballet du Nord. That fell through, and with a nice turn of speed, the theatre engaged a Russian troupe, the Perm Ballet, never seen here before, albeit known and admired from European tours. Perm was Diaghilev's birthplace. More significantly, the Kirov Ballet was evacuated there when Leningrad was threatened with siege in 1941, and the Kirov's influence on the Perm troupe and school was to be profound and lasting.

This first visit (until December 11 at the Derngate, Northampton) is welcome, and I hope a prelude to a more extended showing in future. The troupe - something after the size of Birmingham's Royal Ballet - is well mannered in technique, with a style that speaks clearly of Kirov example.'

The usual formula for a visiting orchestra is to bring a showpiece as an advertisement for its virtuosity and a short work by a living composer back home to display its patriotism. On Saturday the Boston Symphony Orchestra reached London on its European tour with a rather more enterprising programme.

By accident, this became a Berlioz weekend. While the Barbican was embarking on its long-awaited series of concert performances of Les Troyens, offering the two parts of that epic opera on consecutive days before putting them together next Sunday, the Royal Festival Hall found itself in a position to counter with another two-part Berlioz rarity - the Symphonie fantastique performed with its sequel, Lelio.

The symphony is a favourite of the Boston orchestra and its Music Director, Seiji Ozawa. They made a showpiece of it, as the occasion demanded. (Years of working with Ozawa have clarified every inner part in this complex score, allowing countless details in the wind and brass to come through.) But it was also a performance that gave full rein to Berlioz's fevered imagination, culminating in an eerie and violent dance at the witches' sabbath.

That last movement brings many a visiting orchestra's concert to an exciting close. By putting the symphony in the first half and following it with the strange Lelio, as the composer did, Ozawa allowed the focus of the evening to be turned away from the orchestra and on to Berlioz himself. The stage lights went down and a spotlight picked out Lambert Wilson, who was to speak his words in this uniquely personal monologue with music.

Unlike most composers, Berlioz felt the need to express himself in writing. His diaries show an inspired and original mind at work, but I am less sure about the stream of artistic self-pity that pours out of Lelio. Berlioz may come across as a more sensitive person than Richard Strauss does in his appallingly arrogant self-portrait in Ein Heldenleben, but at least Strauss composed a cogent musical defence. The score of Lelio comprises half-a-dozen short and unconnected pieces, for which one suspects Berlioz wanted to find a home.

At this concert the unlikely melange worked, thanks to the high standard of the performance all-round. Vinson Cole was marvellously poetic in the tenor's 'Song of bliss'. Francois Le Roux, the idiomatic baritone, made a lively brigand. The Brighton Festival Chorus excelled itself in the closing Fantasia on Shakespeare's 'The Tempest'. Above all, Ozawa and the Boston musicians created marvels of orchestral delicacy and refinement, enough perhaps to make Lelio a showpiece as well.

Boston Symphony Orchestra tour sponsored by NEC

Any actress worth her salt must have a longing to play Mother Courage: it is one of the most testing parts in European drama. And the first comment on Ellie Haddington's performance in the new production of Bertholt Brecht's play at the Cottesloe is that she passes the test summa cum laude.

Ms Haddington is magnificent. She never flags. She keeps her boots on till the end. Sometimes she is exuberant and looks as if she should be playing in Cabaret. For a woman condemned to the road, she goes through some remarkable changes of dress: always peasant-like, but never quite the same. Her facial expressions are wonderful. The highest compliment one can pay her is to wonder occasionally if she is not too good for the piece.

Directors, too, must enjoy keeping the cart on the road. Mother Courage and Her Children is, after all, one of the great epic plays. If you want theatre about war, this is it. The trouble is that like the 30 years conflict that it covers, Mother Courage is rather a relentless work. There are limits to how many times one wants to see it: perhaps every five years at the most. For the play does not easily lend itself to re-interpretation: it is simply about Mother Courage ploughing on through the futility of war. The challenge lies in how well it is done.

The previous mainstream London production was at the Mermaid four years ago with Glenda Jackson playing the leading role. Ms Jackson took a hands-on approach, pulling the cart about herself. At the Cottesloe, the cart seldom moves, though it is switched from one side of the stage to the other during the interval. Only at the very end does Ms Haddington give a pull of her own volition, and that is when she is left without her offspring.

People come to the cart for its brandy, warmth and company rather than the cart going out to find people. I think that the Cottesloe approach is more effective, but that is an entirely personal judgment and perhaps the Cottesloe had no choice since it has a smaller stage.

The new factor since Ms Jackson played the part is the break-up of Yugoslavia. This is where Anthony Clark's direction at the Cottesloe deserves the greatest praise. It resists the temptation to impose comparisons between what is happening in Bosnia now and the 30 years' war in the 17th-century. It lets the play speak for itself. Sometimes the best prizes go to those who exercise discretion. Here is one of them. Clark allows the audience to draw its own conclusions. Would that there were more directors like him.

One final compliment. I did not realise till the end that the piece is played with a cast of only eight. This is a remarkable achievement over such a time-span and such a range of characters.

If one sounds slightly jaundiced about the play, spare a thought for the critic who has seen the most intense of Strindberg (The Great Highway at the Gate) and the most intense of Brecht on almost successive nights. Tomorrow is off to fresh fields and pastures new with a little known play by Oliver Goldsmith called The Good Natured Man at the Orange Tree in Richmond.

In repertory, Cottesloe, (071) 928 2252. Sponsored by BP

One really enjoyable series can be all it takes to banish boredom with television. To Play The King is currently serving this function and brightening up everything remarkably. Some have complained that it is more far-fetched than the original series, House Of Cards, and accused it of 'going over the top' which is a bit like complaining that The Bill is preoccupied with police procedure. Of course it goes over the top, that is its purpose and its charm. But since it was in House Of Cards that Ian Richardson's diamond-hard schemer of a politician established his habit of delivering Shakespearian asides, and in that same series that he shoved his young mistress off the roof of the House of Commons, it is difficult to sustain the argument that a story which began staid and sober has now become ludicrous.

Its strength comes from the fact that, although its comedy is achieved by exaggeration in the manner of a caricature, it is not all that far removed from reality. When you remember such recent stories as the cabinet minister parading before his mistress in Chelsea strip, the princess cavorting topless with her financial advisor, and the prince on the telephone musing on the desirability of being his lady friend's tampon . . . well, parody becomes problematical. As for the po-faced protests that this television drama damages the royal family, the reverse seems true. The king, whose identity cannot be in doubt once you see how Michael Kitchen has captured Charles' nose-stroking mannerism, is just as clearly the hero as Francis Urquhart is the villain. Surely only those with a defective sense of humour or an exaggerated idea of the fragility of the British constitution could take such complaints seriously. It is a splendid romp combining in the modern idiom the healthy ridicule of Rowlandson with the political shenanigans of Trollope.

It is difficult to imagine such a series being made by the new ITV. The days of larger than life characters such as Lew Grade and Sidney Bernstein at the helm of the ITV companies have gone. Those men were fascinated by the business of creating programmes, but their successors seem to be obsessed with a programme for creating business. Given that many of these new chaps, unlike the ITV knights of old, actually rose from the ranks of programme makers, this is a little ironic.

In British television today there seems to be a fixation on the idea of creating broadcasting companies big enough to compete in the international market place. Everybody is asking 'If LWT bids for Yorkshire, what happens to Tyne Tees?' or 'When Carlton takes over Central what will happen to the share price?' We are even being urged to think about scrapping the licence fee (one of the best bargains in Britain) and turning the BBC over to commercial operation because that would create a world-class player on the broadcasting stage. What nobody bothers to ask is 'What would this concentration on size and commerce mean in programme terms for the British audience?' Presumably the reason they do not ask is because the answer is obvious: programmes would get worse. ITV programmes have already got worse as a result of the Thatcherite licensing revolution, and there is not much doubt that even more Thatcherism would mean even worse programmes. In this context 'worse' is used in the same sense as in the sentence 'Hamburgers and tabloid newspapers though popular are worse than what they replaced'.

What we shall probably come to expect from ITV are series such as A Woman's Guide To Adultery with a come-on title and a cast that will attract foreign buyers: Amanda Donohoe, Theresa Russell, even Sean Bean. If you point out that the acting from people who have previously proved themselves more than competent is consistently poor here, and that this suggests weakness in the direction, and you add that the whole thing looks like a 60-minute commercial for Gold Blend, you must expect sneers from the new ITV mandarins. Why all this elitist whining, they will ask, what is wrong with the sort of drama that ordinary people like? And they will quote the ratings at you as proof that everything is all right. Point out that ITV used to make drama such as Jewel In The Crown and The Naked Civil Servant, Brideshead Revisited and Muck And Brass which between them managed to win high ratings and a high degree of respect, and they will smile contemptuously and refer to cloud cuckoo land.

The use of the word 'woman's' in a title which refers to sex is no mere flash in the pan. Another of ITV's new series is Hollywood Women which last week showed us 'Glitz And Glamour', and tomorrow promises 'Sex And Success'. Episode 1 proved in one respect to be better than the advance publicity might have suggested: in its second half it offered a re-run of the familiar old plaint about Tinseltown's love of eternal youth. We had another look at the results of plastic surgery so memorably covered previously in programmes such as Whicker's World. In other respects, however, the programme was even worse than expected, notably the hysterical rapidity with which cuts occurred: it appeared to be determined to establish not a 3-minute but a 30-second culture.

Sex was also the subject of last week's 40 Minutes on BBC2, an astonishing programme which you might have thought would cause a national furore. After boasting about how many women they had laid (though they used the 'f' word) and in precisely what manner, one male chauvinist pig said to the other 'My woman's going to be faithful when I get married, otherwise I'll get a cleaver and cut off her tits while she's asleep and make her eat them'. Is that vile and disgusting or what? There is one deliberate error in this report, however: it was actually two women boasting about their conquests, and one said to the other 'My man's going to be faithful when I get married, otherwise I'll get a cleaver and cut off his dick while he's asleep and make him eat it'. So that is OK, isn't it? No need for a furore.

The same goes for comedian Jo Brand. Hers is the sort of comedy, we are told, which is simply the feminist equivalent of the anti-female material dished out for years by people such as Bernard Manning and Benny Hill. But that is rubbish. Manning and Hill told jokes about mothers-in-law and landladies, but they were about relationships or callings whereas Brand's material is just malice directed at men. It would be considered wholly unacceptable on television if this was Joe Brand and he was directing similar hate-filled stuff ('Men should be allowed to carry shotguns and shoot women when they like') at women.

But perhaps the reasons are becoming clear. Three weeks ago on Have I Got News For You Jo Brand told us that she used to work as a nurse in a mental hospital. Two weeks ago in Notes And Queries she made the claim again. Then she repeated it on last week's South Bank Show and reiterated it on this week's. Apparently this is something she sees as deeply significant. Maybe her previous work has given her a very odd view of life and the human race, but the main point remains: if this was a man spitting out such loathing for the opposite sex he would promptly be excluded from television.

Ian Gibb, who has commanded Sea Princess, Royal Princess, Island Princess and Canberra, has been appointed the first Captain of P&O's new liner, Oriana.

Sara Stilliard, formerly marketing manager at Sage, has been appointed marketing director of Crosby Kitchens, part of NORCROS.

David Hindson, formerly business systems and logistics planning director of GrandMet, has been appointed director of information services at NFC.

John Szymkiw, formerly finance director, has been appointed md of FOGARTY, the mbo from Coloroll.

Ingrid Jones has been promoted to md of IHT Distributors in succession to Yves Bonneaud who is joining Hachette in January.

Roger Turner, formerly finance director of Evans Medical, has been appointed finance director of the London, Tilbury and Southend division of NETWORK SOUTHEAST. Richard Norton has been appointed director of finance at BR Telecommunications in succession to Simon Gunn who has moved to Gatwick Express.

Richard Case, md of Westland Helicopters, and Chris Gustar, md of Westland Aerospace, have been appointed to the board of WESTLAND GROUP.

Bob Smith, 45, is to join the main board of BRAMMER, the industrial services group. He is currently managing director of BSL, Brammer's UK distributor of ball-bearings and power transmission products. He will also become chairman of the group's precision engineering businesses, BSL Engineering and Brammer Mecanique.

Roy Thornhill, 58, will retire in May, having served more than 28 years with Brammer. He has relinquished the role of executive director responsible for European distribution, but will remain on the board. He will continue to advise on Brammer's distribution businesses until his retirement.

Freshfields, the international law firm that invited Sir John Nott on to its partnership council in 1991, has persuaded Herbert Jacobi, chairman of the managing partners of investment bank Trinkaus & Burkhardt in Dusseldorf, to become its second non-executive member, thereby adding an extra European perspective to the deliberations of the strategy forum.

The introduction came via Peter Opitz, a partner in Freshfields' Frankfurt office. Opitz knew Jacobi from the 1970s when both had been managing partners of BHF Bank, the merchant bank. A Frenchman, the managing partner of Freshfields' Paris office, its largest overseas operation, already sits on the council.

John Grieves, Freshfields' senior partner, found Jacobi 'awfully likeable and very experienced'. He says the presence of outsiders 'helps us to dilute our insularity'. Few law firms have such an arrangement, and Grieves remembers the concerns voiced in his own stable before Nott joined. 'We were initially worried that the presence of non-executive members might alter the whole nature of the debate. We also wondered whether the job would actually be sufficiently interesting for them.'

Freshfields has been after Jacobi for a long time; talks were suspended when HSBC Holdings acquired Midland, which owns 70 per cent of T&B, causing Jacobi to be more than thoroughly occupied bedding down the new relationship. The council meets for a whole day four times a year.

A native American who is half German, he worked with Chase Manhattan Bank before joining BHF. As well as being president of the Dusseldorf stock exchange, he is a non-executive director of Gillette, of Braun, its German subsidiary, and of Amtrol.

Given a choice between helping the environment and making money, most members of the financial community would choose the latter.

But they are being forced to take more notice of the world around them as environmental issues move from the fringes of the investment world to the centre. The proponents of greener decision-making argue that it is in the financial sector's interests to take more notice of such issues, thus reducing environmental risk in their own transactions and helping to preserve the environment.

Those urging change cite US government research showing that a company's share price drops by an average of 0.43 per cent - small but noticeable - in the week after the announcement of an environmental violation. More severely, insurance companies have felt the impact of global warming, blamed for much of the windstorm damage which has cost them Dollars 44bn (Pounds 29bn) since 1987.

The pressure for change in the financial arena comes from several directions. In Europe, there are moves to make investors and lenders responsible for some of the environmental liabilities of their clients. The biggest worry centres on extended legal liability for environmental damage.

Alarm at the huge but unquantifiable risks this might bring is motivating some business and financial groups to push for a new approach. Among these are: the government's Advisory Committee on Business and the Environment (ACBE); Business in the Environment, backed by Prince Charles; and the Geneva-based Business Council for Sustainable Development (which represented world business at the Rio Summit).

Further pressure comes from several influential pension funds - especially in the US but increasingly in the UK - which are starting to question the environmental performance of companies in which they invest. Environmental campaigners, from single-issue groups to influential organisations such as Greenpeace, are also beginning to turn their attention to financial managers.

Fisons of the UK stopped extracting peat from areas of scientific interest after a campaign by environmentalists. Three months ago, UK fund managers received an environmental analysis from groups criticising a flotation by Barito Pacific, an Indonesian timber company.

Stimulating environmentalists' interest in the financial sector is their belief that their organisations can influence those obtaining loans, investments and insurance. Many in the financial community, however, reject accusations that they ignore the environment.

'We take the environment very seriously. After all, the UK insurance industry is on line for thousands of millions of dollars of liability,' says Francis de Zulueta, chairman of the Financial Institutions Environment Liability Development Group, linking UK insurers.

'These issues are now taken incredibly seriously and there is a much greater awareness of the risks and costs,' says Derek Wanless, group chief executive of National Westminster bank and chairman of ACBE. But while banks and insurers might be aware of the potential liabilities, especially from past pollution incidents and contaminated land, investors are less convinced by arguments that they should be more choosy about which companies they select.

'There is certainly a feeling that because there are lots of costs and risks related to the environment, those businesses who understand it will benefit,' adds Wanless. 'But investors feel there is little direct evidence that environmental attitudes work through to give clear business benefits.'

'We are willing to take environmental issues seriously, but the risks and rewards can take years to appear and can be difficult to measure,' says Eleanor Burton of Mercury Asset Management. Moreover, even if investment managers wanted to include a bigger range of green issues in their decision-making, they do not have the tools and information (see accompanying feature). Companies have few obligations to report on their environmental liabilities and the emerging practice of reporting on environmental performance (such as reductions in plant emissions) has yet to produce evidence that markets can use.

This could change if governments made companies report in a standard, comparable format or investors made similar requests; both seem unlikely. There is, however, evidence that financial auditors are beginning to shift away from a purely historical perspective towards one of viability.

But change is slow in accountancy. Although environmental reporting is the subject of voluntary initiatives in Europe and the US, the results are unlikely to be immediately useful to the financial community.

'The EC's fifth action plan on the environment talks about changing the whole basis of accounting, but nobody appears to be doing anything about it and there is a profound reluctance, especially in the UK, to take it on board,' says Rob Gray, professor of accounting at Dundee University and author of The Greening of Accountancy.

But the financial sector has clearly acknowledged that its risks have been increased by bad or inadequate environmental performance. This realisation has been largely driven by the threat of extended legal liability.

The insurance industry, nursing huge losses from US pollution claims, has also reacted. Gradual pollution is now excluded from public liability policies. 'And most direct insurers now have a hefty exclusion for pollution liability from their re-insurers,' says de Zulueta.

But this reflects a purely negative response and the financial sector has yet to do anything positive to create change. 'The insurance industry is certainly in a strong position to influence clients and the businesses it invests in,' says de Zulueta. 'But it would lose competitive advantage if it was to select investments purely on environmental grounds.'

Jeremy Leggett, a climate change and insurance specialist at Greenpeace, agrees that this would cause difficulties, but says it remains the ultimate aim. Many campaigners say selective investment is too complex and could be counter-productive. They feel a valuable first step is for investors to impress upon managements of the companies in which they invest the need for a sound environmental performance.

The financial markets have frequently been accused of ignoring the environment. The accusation comes mainly from those who think bankers and investors should play a more positive role in promoting environmental values.

Is there any truth in the charge, and if so what should be done about it? It is certainly the case that environmental factors make little impact on the price of either credit or equity.

That much was admitted earlier this year when a group of financiers appointed by the UK government to advise it on environmental issues reported: 'Institutional investors have yet to focus fully on the value of environmental data in assessing companies' prospects.'

But it would be wrong to say that the financial markets ignore the environment completely. They have all suffered shocks of various kinds: pollution disasters, green litigation, and the tidal wave of environmental regulation which has swamped the corporate world. The point, however, is that all these effects have been negative.

So far as the financial markets are concerned, the environment is all about expense and annoyance. The more 'green' a company is, the more it is likely to be loaded with environmental compliance costs.

Many companies claim their green investment gives them a competitive edge in a world where regulation and public opinion favour environmentally sound business. But the markets tend to ignore this 'upside' while doing everything they can to avoid the downside. The green funds are a force pushing in the opposite direction, but their goals are far from united, and their impact is questionable.

The markets cannot be blamed for behaving as they do. They have no moral obligation to support environmental values if they cannot perceive them. This may be due to their short-sightedness, as many critics claim. But hurling this charge at them will not convince them that greenery is good.

However, if markets are doing the natural thing in viewing the environment largely in terms of risk, there is one important aspect in which they still act against their own best interests. This is in failing to distinguish between different levels of environmental risk.

The attitude is one of all or nothing. A company is able to secure pollution insurance one day, only to find that owing to a new pollution law or some environmental disaster, the market clams up the next. The same is true of banks: the fear of environmental liability led thousands of US banks to shut their doors to sensitive sectors like chemicals and petrol stations.

This is uncharacteristic of financial markets, where the ability to grade risk is one of the driving forces behind prices. One of the main problems is lack of information: it is hard for markets to make sophisticated judgments when the information is absent or inconsistent, and when so much depends on the vagaries of the law courts, regulators and consumers.

Some progress is being made through eco-auditing and the growing practice of publishing environmental company reports. Attempts have also been made to rate companies by how 'green' or environmentally benevolent they are. But these ratings are of little use to the mainstream markets which only want to know whether a company's environmental liabilities will cost them money.

What the markets really need is a clear yardstick against which to measure environmental risk and rate companies according to the danger of environment-related loss. Such a scheme can be envisaged. It would have to address two basic questions about the company being rated.

The first is, how large are its environmental liabilities? This would be answered by combining the growing body of publicly available information (pollution registers, court actions, eco-audits etc.) with a judgment about the quality of a company's environmental controls.

The second is how well placed is the company to absorb environment-related losses? This would be answered by reference to the overall strength of the company. Thus a company with large environmental liabilities but a strong balance sheet might earn a high rating - which would upset environmentalists but provide the financial markets with the information they needed.

Some people will doubtless dismiss such a scheme as superfluous because the markets would automatically discount these risks - if analysts and credit rating agencies were doing a proper job.

Not necessarily. The point about the environment is that it represents a body of pressures - regulatory, legal, political - based on a common set of values which move independently from normal economic forces: an economic recovery could be accompanied by a regulatory crackdown on pollution, for example.

There are enormous technical obstacles in creating such a scheme, not least who would operate it and pay for it. It will also strike many as a negative way of addressing an issue which is essentially about 'good' values. But the obstacles are not insuperable, and if the scheme identified environmentally risky companies more clearly and priced them accordingly, it follows that sound companies would benefit.

This article is extracted from Rating Environmental Risk, published by the Centre for the Study of Financial Innovation, 18 Curzon Street, London W1Y 7AD. Tel 071-493 0173. Pounds 25/Dollars 40.

Sophie Chambers and Joanna Sorrell have been appointed to the board of BRADSTOCK Hamilton.

Simon Edwards has been appointed underwriting director and Anthony Young, formerly md of CI de Rougement & Co, a director of PIERI (UNDERWRITING AGENCIES).

Janice Hook and Simon Kenney have been appointed directors of ASHLEY PALMER & HATHAWAY; they join from the Archer and Wellington Groups, respectively.

David Bellamy is appointed operations director, Lionel Davis, director - north, John Newman, director - south, and Trefor Parry, finance director, all on the main board of J. ROTHSCHILD ASSURANCE.

Michael Dixon has been appointed finance director of Gibbs Hartley Cooper, a part of HSBC HOLDINGS; he moves from Price Waterhouse.

Dunlop Stewart formerly head of direct sales, UK Life for Norwich Union, has been appointed assistant general manager marketing (direct sales) for STANDARD LIFE.

Susan Howard has been appointed a director of Berkeley Burke (Northern), John Potter a director of Burke Ford Insurance Brokers, Kevin McNeilly appointed a director and Michael Boyle finance director of Burke Ford Insurance Brokers, all part of the BURKE FORD REED Insurance Management Group.

Dick Micklem has been appointed financial director of SOREMA (UK); he moves from Ernst and Young.

Jay Cogswell has been appointed a director of BAIN CLARKSON's international division.

Wrigglesworth has been appointed a director of BOWRING Aviation; John Hitchcock and David Plymen have been appointed directors of the marine and energy division of Bowring Marine; Tim Haynes and Mark Hardinge have been appointed directors of CT Bowring Space Projects.

Anthony Passmore has resigned from JOS HOLDINGS.

Barry Walker has resigned from DIPLOMA.

Sir David Plastow, who took over as chairman of Inchcape in September 1992, has decided to reduce his range of outside directorships and will step down as a non-executive director of Cable and Wireless at the end of the month.

Sir David, who is also deputy chairman of Guinness, the TSB and BUPA as well as being chairman of the Medical Research Council, joined the board of Cable and Wireless in 1991. Some six months later he was asked to take over the chairmanship of Inchcape following the death of Sir George Turnbull.

Inchcape, an international services group, operates in over 80 countries and Sir David's job entails a great deal of overseas travel - which explains his decision to resign the directorship of Cable and Wireless. He stepped down from the board of Tenneco, the US conglomerate, last year.

His seat on the Cable and Wireless board is being taken by a former colleague - Sir Ralph Robins, chairman of Rolls-Royce (above). Both Sir David and Sir Ralph started their business careers in different parts of the Rolls-Royce empire in the mid-1950s. Sir David came up through Rolls-Royce Motors and Sir Ralph made his name on the aero engine side of the business. After Rolls-Royce was bailed out by the government in the 1970s, their careers diverged.

Although they both remain good friends and are of the same age, Cable and Wireless stressed that the appointment of Robins was a coincidence. Sir Ralph, 61, had been vetted by Cable and Wireless's nominations committee and he had been interviewed by all the non-executive directors. He will join the board next April.

Managements in the UK last week were given the sharpest of nudges to look hard at their sick pay policies. The prompt came in the Budget announcement that the government plans to abolish the 80 per cent reimbursement of large employers' statutory sick pay costs from next April.

While some companies may choose to cut their sick pay benefits, most will probably do as the chancellor suggested and use the removal of SSP as an incentive to improve their management of sick leave and to take greater interest in the health of their employees.

At present employers pay SSP for up to 28 weeks to employees who are sick for at least four days in a row. Two rates are payable. Employees earning Pounds 195 a week or more are paid at a weekly rate of Pounds 52.50. Employees earning between Pounds 56 and Pounds 195 are paid Pounds 46.95 a week.

These payments will from next April be borne entirely from the company's own resources, although overall the reductions in employers' national insurance contributions should more than absorb this cost.

Smaller companies got a better deal in the Budget. In regulations to be laid after the passage of the Statutory Sick Pay bill, companies with annual National Insurance contributions of less than Pounds 20,000 will be able to recover 100 per cent of statutory sick pay after four weeks of an employee's illness.

In practice most big companies top up statutory sick pay. Some have schemes which pay three months' full pay and three months' half pay. Better schemes tend to give six months' full pay and six months' half pay.

Some companies have introduced incentive and bonus schemes to try to cut absenteeism from sickness, which cost UK business Pounds 13bn in 1992 according to a report published in May. The report, 'Too Much Time Out?' by the CBI in association with consultants Percom, said each worker lost an average of eight working days because of sickness in 1992, representing 3.5 per cent of working time. The absence rate was higher among full-time manual workers, who lost twice as much time as full-time non-manual workers.

This discrepancy has led to difficulties in harmonising sick pay schemes at some companies. Traditionally, clerical staff receive full pay from day one when they take time off for sickness but unless companies have a top-up scheme, blue-collar workers are not compensated for the first three days of absence before they can draw statutory sick pay.

British Gypsum, which harmonised its schemes in 1989, saw absentee rates rise from 4 1/2 per cent among manual workers to 14 per cent at some sites.

The company reverted to two schemes. But it introduced an incentive element to allow manual workers to cross over to the clerical scheme after a five-month qualification period. If they are absent for no more than two periods totalling two days each they will automatically be taken on to the staff scheme. 'The idea is that we are working towards full harmonisation but it has been better to do it gradually,' says the company. Now overall absence rates are down to 3 1/2 per cent.

Vauxhall, the UK car maker, has reduced its sickness absenteeism from 8.8 per cent in 1986 to 4.5 per cent today. This was after the company introduced a negotiated incentive scheme which saved employees about Pounds 4 a week in contributions to the company sick pay scheme if average levels of sick leave could be kept at or below 5 per cent.

Iveco Ford in Slough introduced an incentive scheme two years ago after sickness absence levels among hourly paid workers had reached 7 per cent. The company set targets for reducing rates across the workforce which would trigger the introduction of sickness payments for the third, second and finally the first day of sickness.

'For the five months up to the end of November the rate has been 2.8 per cent so it is looking like we might make the target at the end of December when the rate is reviewed,' says John Eskdale, personnel manager of the company's industrial operations. 'The big test will come when we start paying day one.'

Many personnel experts believe that discriminating between hourly paid blue-collar workers and salaried staff is increasingly difficult to justify.

One of the best ways of producing immediate improvements, according to Angela Baron, a policy adviser at the Institute of Personnel Management, is for middle managers to monitor absenteeism. 'The experience of companies that have started monitoring sickness absence is that the very fact that they have started paying attention to it is enough to reduce the absence rates in their companies,' she says.

Experts believe fear of unemployment has contributed to declines in absenteeism in the UK, but there is strong evidence that management action can deliver results. An Audit Commission study of 10 London councils in 1990 found sickness absence was averaging more than two and a half times the national norm. A follow-up report earlier this year found that by monitoring and managing absenteeism the councils had succeeded in cutting days off from an annual average of 16.7 days per employee in 1990 to 11.5 days in 1991-92.

Many factors underlie improved absence records, but whether it is knowing that someone in management cares or fearing that they are watching, both approaches seem more effective than the alternative of managerial neglect.

Judging by the Swedish experience, government action can also be a powerful stimulus. Removal of state sick pay for the first two weeks of absence in Sweden this year led to shortages of flu vaccine as companies clamoured to instigate vaccination programmes in order to keep down costs. Driven partly by the rapid growth in unemployment Sweden's absenteeism has fallen in three years from levels where three out of 10 workers were on sick leave at any one time to less than one in 10 today.

Howard Davies, director-general of the Confederation of British Industry, and his television producer wife, Prudence Keely, are happy ditkies (double income, two kids). Other couples might be ground down by the demands of big jobs and tiny tots, but these two find them rewarding and rejuvenating.

So much so that they have written a curiously positive foreword to The Workplace Revolution*, a book which chronicles the woes of dual-career couples. The opening anecdote tells of a chance meeting between Davies's small son and his much-loved former nanny in a supermarket. The child was unmoved, but the nanny burst into tears. This is meant to show that preconceptions about childcare can be wide of the mark. Instead it leaves the impression that Davies, Keely and family, unlike the other examples in

the book, are having it all and loving it.

The contention of the authors, Cary Cooper and Suzan Lewis, is that the way in which people work has changed forever. More women work full time in areas once dominated by men, and more return to work after having children. Men no longer have full-time wives providing domestic support, and so are under pressure to help at home.

Yet this is not another book about the problems for working mothers. The wants and needs of both men and women are changing, yet most companies expect their workers to behave as before. The result is conflict for all sides.

Cooper and Lewis have interviewed 400 dual-career couples to find out where the main areas of friction lie. These turn out to be many and various: the working day is too long, and the macho work ethic too entrenched. Couples find their schedules are inflexible. They find the cares of work are spilling over into home time, and domestic concerns are getting in the way of work.

When children arrive the problems get worse. Women find themselves missing out on promotion and feeling constant guilt. Every time the child gets ill or something goes wrong, the load of guilt increases.

The book bristles with examples of each of these well-known problems. Sally works in a big department store where staff need written permission from two managers in order to leave early. She lives in constant terror of being unable to respond quickly should her child fall ill.

While the problems sound all too common, what is less familiar is the variety of ways in which couples cope. The book contains many examples of new men - rather more than one meets in real life - ensuring that the strains are shared equally. One London-based small business- woman persuaded her husband not to accept a job in Scotland on the understanding that next time it would be her turn to be flexible. Another couple, Lynda and John, share a job as social workers and take it in turns to look after the children.

Despite these examples, the authors do not pretend that everyone should be like Lynda and John. Indeed they believe that there is no right way to handle the pressures. They argue that unless organisations change their ways, these problems will not go away, no matter how many new men there are.

They have drawn up a shopping list of corporate policies which would help. Companies should conduct stress audits and discourage workaholic behaviour. More important, they should recognise the value of giving people increased control over the number of hours they work, which means they should place greater trust in their employees. Companies should offer more training in time management, assertiveness and stress management. They should accept that family decisions are a part of career planning.

Above all, what is needed is a rethink of what constitutes the ideal employee and the ideal career pattern. All change in attitudes takes time, yet the authors are optimistic that change is possible, indeed inevitable.

Cooper and Lewis put forward the standard argument that it is in an employer's economic interests to have an unstressed workforce. Yet they seem to assume that the list can be bought for nothing. A more persuasive argument for change may be needed, especially at a time in which companies are loading extra demands on their workers.

*Kogan Page. pp184. Pounds 9.99

This is the first in a regular review of management books.

Gorblimey] Can it be that a British government has at last decided that a sacred cow of 30 years' standing is largely bull? The protean creature concerned is degree-level education which has grown to absorb almost 10 per cent of the Pounds 32.3bn yearly public cost of education as a whole.

What return taxpayers receive on their Pounds 3bn outlays for degree studies is another question. It has rarely been asked, let alone answered, by the country's leaders since the growth policy was first recommended by the Robbins Committee, 30 days before President Kennedy died in Dallas.

The committee itself evidently just assumed that producing more graduates would automatically improve Britain's economic performance, besides making for a more civilised society in general. And the non-appearance of the said benefits did not deter a succession of governments from continuing the growth, albeit irregularly, so that the number of full-time students today stands at a million in the round.

Then suddenly last week the policy was thrown into reverse by the budget, which ordains that the intake of new undergraduates must be cut by 3.5 per cent next year. Whether that means John Major and company have tired of waiting for the promised benefits and are preparing the beast for protracted slaughter, who but themselves can tell? The issue is so potentially explosive that no ambitious politician would admit having any such intention, whatever the truth of the matter might be.

Either way, universities are resisting the change with protests, and not only because it's a poor reward to them for raising staff productivity by 30 per cent in four years. The cut is senseless when white-collar jobs are scarce, they say, since it means that no fewer than 10,000 people who could otherwise have been admitted to degree studies, will now have to be turned away.

With due respect to the universities, however, their readiness to quote figures on student admissions contrasts sharply with their statistical shyness on an allied question. It is: how many of the undergraduates who start their courses, quit them without obtaining a degree?

While the existence of drop-outs is now at least acknowledged in an annual report, it presents the data in a way far from user-friendly to taxpayers. Indeed, the figures are at once both so re-stricted and so complicated that the number of students who fail to complete their courses can only be estimated, not least because the document neglects to state how many started out. Moreover the information applies solely to the 40-odd older universities, so the former polytechnics lately elevated to the same title are left out of account.

Even so, drop-out rates are surely important enough for approximations to be better than no indications at all. Hence the table below which refers to students who ended their undergraduate courses, either with or without gaining a degree, during the three years 1990-92. Each university's name is followed by the estimated total of such students, and next by the actual number who were successful, which is given in the report.

Then comes a double complication. Not only does the mix of subjects taught vary from one campus to another, but different kinds of studies present differing levels of difficulty to the students taking them. Among the 20 separate groups of subjects listed in the data, the country-wide success rates range from 81 per cent for architecture and suchlike to 91 per cent for business and administration. But neither the campus-to-campus variances nor the difficulty differences are allowed for in the figures headed 'drop-out rate' which accordingly, as well as being estimates, are an unfair measure to judge any individual university by.

A better yardstick is the plus or minus score that follows, which does allow for the variances. It is arrived at by giving each campus a 'target' consisting of the number of drop-outs it would have if its students had conformed to the national averages for the particular groups of subjects they studied. The target is then compared with the estimated number of drop-outs, which I feel confident is in no case badly astray. For example, the estimate for Cambridge is 241 - 861 or 78 per cent better than its target of 1,102. Salford is the opposite with a target of 588, and an estimate 77 per cent worse at 1,043.

But in the light of government policy, individual differences are less salient than the overall figures. There, the gap between the actual successes and the estimated total is 31,676 - three times as many drop-outs just from the older universities as the number of new entrants the whole lot of institutions are complaining they will collectively have to turn away.

---------------------------------------------------------------------- Estimated Drop-out % better(+) total u/g Number rate or worse(-) University students successful % than target ---------------------------------------------------------------------- 1 Cambridge 8,400 8,159 3 +78 2 Oxford 9,075 8,625 5 +60 3 Durham 4,410 4,111 7 +47 4 Warwick 5,692 5,195 9 +33 5 Bristol 5,674 5,185 9 +33 6 Southampton 5,256 4,764 9 +30 7 Nottingham 5,850 5,279 10 +24 8 Leeds 8,402 7,550 10 +22 9 Loughborough 4,455 3,954 11 +21 10 Aberdeen 3,571 3,216 10 +20 11 Hull 4,695 4,425 6 +19 12 Lancaster 4,360 3,930 10 +18 13 York 3,364 3,015 10 +17 14 Birmingham 6,750 5,996 11 +14

15 Exeter 4,453 3,958 11 +12 16 Belfast 5,600 4,959 11 +11 17 Sheffield 6,542 5,722 13 +5 18 Manchester 8,654 7,568 13 +4 19 Leicester 4,122 3,622 12 +3 20 Bath 3,070 2,653 14 +2 21 Wales 17,277 15,184 12 +2 22 Sussex 3,657 3,210 12 +1 23 Kent 3,819 3,351 12 -1 24 East Anglia 3,634 3,192 12 -1 25 Ulster 6,039 5,250 13 -6 26 Essex 2,824 2,458 13 -6 27 Stirling 2,131 1,873 12 -8 28 UMIST 3,688 3,089 16 -10 29 Edinburgh 6,147 5,309 14 -10 30 Surrey 2,779 2,351 15 -12 31 Strathclyde 5,908 4,974 16 -12 32 Aston 2,985 2,555 14 -13 33 St Andrews 2,484 2,143 14 -15 34 Reading 5,452 4,646 15 -17 35 Keele 2,492 2,106 16 -20

36 Bradford 3,596 3,040 16 -21 37 Newcastle 6,332 5,279 17 -24 38 Glasgow 6,770 5,626 17 -25 39 Liverpool 6,674 5,527 17 -33 40 London 26,833 22,109 18 -38 41 Heriot-Watt 2,859 2,278 20 -38 42 Brunel 2,179 1,722 21 -42 43 Dundee 2,074 1,714 17 -43 44 City 2,485 2,008 19 -48 45 Salford 3,989 2,946 26 -77 ---------------------------------------------------------------------- Overall 247,502 215,826 13 same ----------------------------------------------------------------------

Ms Sarah Locker has won a Pounds 32,000 settlement from the Metropolitan Police in an out-of-court settlement. Ms Locker, a police officer since 1980, brought industrial tribunal proceedings complaining of racial and sexual discrimination over her application for a CID post and of victimisation.

A divorced father who is being asked for extra money by the Child Support Agency failed yesterday to overturn a 'clean break' divorce settlement under which he gave up his share of the family home on the understanding that he would not pay maintenance.

Mr Gary Crozier, of Gretna Green, Dumfriesshire, had asked the High Court to set aside the divorce settlement and give him his share from the sale of the home.

Health authority budgets in England are to rise by an average of 5.33 per cent next year, Mrs Virginia Bottomley, health secretary, announced yesterday.

All 14 health regions will receive a real-terms increase but they will range from more than 2 per cent to as low as 0.7 per cent, particularly in London areas of falling population.

Doctors in the north-west will get an increase of more than 10 per cent in real terms while those in East Anglia, Wessex, South Western and North-West Thames will be given a standstill budget.

Ms Valerie Amos, chief executive of the Equal Opportunity Commission, is leaving her job a year before the end of her contract to pursue other interests.

Ms Amos, who came to the job four years ago from local government, succeeded in putting the commission on a more structured footing with stronger management and making it more accessible to grassroots organisations and ethnic minorities.

She is understood, however, to have some difficulty developing a strong personal relationship with Ms Kamlesh Bahl who took over the commission's chair in June.

Ms Amos resigned the post almost a month ago. No announcement was made, although a short briefing was prepared in the event of possible press inquiries.

Ms Bahl, who worked as a lawyer in industry before tasking up her appointment, said in the briefing that Ms Amos had worked with 'great dedication and loyalty to bring about many changes for the EOC'.

Ms Amos was yesterday anxious to play down suggestions that a personality clash had been a key factor in her decision to leave. 'That kind of thing is always said when there is a new chair. Kamlesh and I have worked very well together. I wouldn't describe our working relationship as a difficult one.'

British exporters are having to wait longer for payment from customers on the Continent, the Association of British Factors and Discounters said yesterday. Many settlements were taking more than four months, an association survey revealed.

The survey showed that Italian companies have replaced the French as the slowest European payers, settling invoices in an average of 130 days compared with 95 days a year ago. Normal payment terms in Italy are 60 to 90 days.

French companies paid on average after 121 days, six days more slowly than they did last year.

The study lends support to the frequently cited theory that recession encourages late payment. The record of German companies, which are normally considered prompt payers but are suffering from recession, also deteriorated. They settled on average after 55 days compared with 50 days last year.

By contrast UK companies are paying more quickly as the economic recovery gathers pace. Payments were received by the ABFD's members in an average 59 days compared with 62 days last year.

Mr Ben Allen, chairman of the ABFD, said: 'It is ironic that just as the picture starts to improve for British companies at home their struggle to get paid abroad gets tougher.'

The study is compiled by a group of leading European factoring companies which advance cash to companies against unpaid invoices.

Italy, France and Spain emerge as the European countries with the worst bad-debt record. Italy had bad debts equal to 4 per cent of sales in 1993, France 3 per cent and Spain 2.5 per cent.

Dutch companies were the promptest payers, settling after 50 days compared with 45 days a year ago with normal payment terms of 30 days.

The lowest bad-debt rates were in Switzerland and the UK. These two countries were the least bad payers after the Netherlands.

The smallest companies appear to be worst hit. The association said: 'Profit margins are being squeezed because many European customers are now offering payment on time only if their suppliers accept sizeable discounts.'

Abbey National, the UK's second-largest mortgage lender, yesterday cut its mortgage rates by 0.25 percentage points to a range between 7.54 and 7.74 per cent.

It said that the reduction - less than that announced by Halifax Building Society on Monday - reflected the fact that falling interest rates were bad news for savers.

Alliance & Leicester, the fourth-largest society, followed Halifax, the largest, by announcing a cut of 0.35 percentage points to 7.64 per cent in its variable rate.

Other main lenders joining Abbey in the smaller cut of 0.25 points were Leeds Permanent, the fifth-largest society, and Midland Bank. The series of cuts has been triggered by a pre-Budget 0.5 percentage point reduction in base rates.

The new rates will be available immediately to new borrowers, and to existing borrowers from January.

Mr Chris Chadwick, Leeds executive director, echoed the warning from other societies that if the government subsidised its savings products to attract investors, then societies might not be able to pass on to borrowers further cuts in interest rates. He said: 'Over-aggressive pricing on national savings will impact on lenders' ability to maintain current rates or reduce them any further.'

Many mortgage lenders have not announced new rates for savers, but are likely to do so before the end of the month.

The abolition of the London weighting allowances paid to civil servants comes after a period in which most businesses have frozen the additional payments they make to staff working in the capital.

The fall in demand for staff in the recession has put an end to the boom in London allowances, paid to workers such as nurses, police officers, bank and West End shop staff. In the 1980s allowances reached Pounds 3,000 or more a year for some London staff, to meet recruitment and retention needs.

Allowances in most of the clearing banks have not increased since 1989 or 1990. The civil service has frozen allowances for most of its staff since 1988. BT has not reviewed allowances since 1991 and will not again until next year.

Many employers are freezing or abolishing additional supplements brought in during the boom years. Businesses have increasingly taken a more targeted approach, paying premiums to attract workers to new locations such as Bristol.

This is the approach which the civil service intends to follow with its new recruitment and retention allowance, aimed at specific groups in offices with recruitment difficulties.

London First, the private-sector lobby group set up to promote the capital, is among the growing band of organisations that believe London allowances, which can add an extra Pounds 3,000 to an individual's annual pay, should be abolished. A report from its economic development team said in October: 'Institutionalised 'London weighting' payments provide a disincentive to retain jobs in the capital.' British Telecommunications is considering moving thousands of office jobs out of central London over the next few years. The relocation could save the company up to Pounds 44m in London weighting.

Mr Alastair Hatchett of Incomes Data Services, the independent research organisation, said much of current practice on London allowances dated from the 1974 Pay Board report for civil servants.

The board recommended London weighting allowances to ensure comparability of real earnings for people working in London and those working elsewhere.

Following a survey of living costs, the board recommended a Pounds 400 allowance for an inner London zone extending up to four miles from Charing Cross and a Pounds 200 allowance for an outer zone covering the remaining London boroughs.

The allowances were to be reviewed each year in line with indices published by the Department of Employment, which monitored relative changes to the cost of living in London. Mr Hatchett said these covered housing, travel, wear and tear and other costs.

Publication of these figures ended in 1982, with the government arguing that an employer's ability to pay and not cost compensation should be the main determinant of geographical pay relativities. Since then private-sector employers and the government have made their own calculations.

Employers still justify the need for the payments in terms of labour-market needs. BT said: 'BT sees London weighting as a market supplement to attract and retain staff and it has not increased the allowance recently as it has had no problems recruiting.'

Bifu, the banking union, said employers felt they had a justification not to increase rates when they did not have recruitment problems.

As to the future? Mr Hatchett said: 'I can see there is likely to be downward pressure on the market-related part of the allowance but compensating people for either the cost of living in London or travelling in to work is clearly still important to many workers.'

-------------------------------------------------- THE HIGHER COST OF LONDON -------------------------------------------------- Fuel, light & power 105.1 Food 102.1 Alcoholic drink 94.3 Tobacco 100.9 Clothing & footwear 100.9 Household goods 101.4 Household services 110.0 Personal goods & services 100.9 Motoring expenditure 100.6 Fares & other travel costs 100.6 Leisure goods 100.9 Leisure services 110.0 Miscellaneous 102.7 Housing 129.7 -------------------------------------------------- TOTAL* 107.3 -------------------------------------------------- *Weighted according to expenditure of Londoners -------------------------------------------------- Source: London First --------------------------------------------------

Mr Michael Heseltine, the trade and industry secretary, yesterday announced a number of initiatives to help industry and small businesses.

He used his speech in the final day of the Budget debate in the Commons to announce an increase from Pounds 14m to Pounds 17m in start-up funding for Business Link outlets.

The outlets are designed to bring together under one roof most of the services provided by training and enterprise councils, chambers of commerce, local authorities, enterprise agencies, and other private-sector organisations.

The first of a planned national network have opened in Birmingham, Leicester, and Congleton in Cheshire. Mr Heseltine said Tecs - which deliver government training schemes in England and Wales - 'have a key strategic role in organising the provision of business support services'.

Tecs' budgets for services to small businesses - most of which will be taken into Business Link outlets - is to increase slightly to Pounds 33m.

Mr Heseltine also announced an environmental technology best-practice programme, worth Pounds 16m, and a new Link programme on surface engineering.

Mr Robin Cook, shadow trade and industry secretary, said spending by Mr Heseltine's department would drop by some 12 per cent in real terms in the next three years, and this reflected the falling investment in Britain's manufacturing industry.

'Out of 18 spending departments, the DTI is 17th,' said Mr Cook. 'Britain provides less support to industry than any other European country.'

Tenants of the Smithfield meat market were defeated yesterday in elections for the Corporation of London's general council.

In nine wards which held competitive elections, they were out-voted, while a further election was ordered for next year on procedural grounds in the Bassishaw ward, where Smithfield tenants had appeared certain to win at least two seats.

At the 'ward mote' last Friday, where candidates announce their intention to stand for election, the Smithfield candidates for the Bassishaw ward were deemed to have made multiple applications for different wards.

The corporation said that their withdrawals from other wards had not been properly conducted.

The Smithfield tenants had run as part of a campaign against what they say are unfairly high rents being charged by the corporation to pay for the Pounds 60m refurbishment of the market required by new European Union regulations.

The Smithfield losses lessen the chances of change to the franchise. This is restricted to the City's few residents, partnerships and sole traders and is hence vulnerable to abuse from single-issue campaigns, particularly in those wards that have less than 100 voters.

Insurance companies were urged yesterday not to require people to disclose the results of genetic tests until the UK has an agreed national policy on the use of genetic information.

But the Association of British Insurers said the proposed moratorium was unnecessary because companies did not use genetic screening for life insurance.

Launching Britain's first in-depth report on the ethics of genetic screening, the Nuffield Council on Bioethics called on the government, health professionals, employers and insurers to agree measures to protect people 'against the potentially adverse effects of screening, including the misuse of confidential information, the risk of social stigma and the possibilities of eugenic abuse in the future'.

Action is urgent, the report says, because medical researchers are rapidly developing simple genetic tests for inherited diseases ranging from cystic fibrosis to some forms of cancer.

'It will soon be possible to screen for hundreds of diseases,' said Dr Peter Harper, professor of medical genetics at the University of Wales, Cardiff, and a member of the Nuffield committee - a group of scientists, doctors, legal and ethical specialists.

Insurers already have a policy not to require applicants for life or health policies to undergo special genetic tests. But the council wants companies to go further and 'accept a temporary moratorium' on asking people to disclose existing genetic information. Under the present policy, genetic test results have to be declared.

Insurers say that in practice they do not make use of genetic information acquired in screening programmes. And they are coming to appreciate that genetic tests need to be treated differently from other medical information.

'The industry is still living down the myth that even a negative HIV test makes it more difficult to obtain life insurance,' said Dr Mary Reynolds, medical adviser to Canada Life Assurance. 'Life insurance should never be a deterrent to genetic testing.'

Genetic Screening: Ethical Issues. Nuffield Foundation, 28 Bedford Sq, WC1B 3EG. Pounds 6.

Financial service regulators are issuing guidance notes to member firms in an attempt to prevent investors from being misled about high-income products, especially where the 'income' may partly consist of the return of capital.

High-income products have become popular in the past year as falling interest rates have led investors to seek ways to replace income they previously received from building societies. Some will not repay capital in full unless conditions - such as stock market growth - are met.

Fimbra, the regulator for financial intermediaries, issued a guidance note yesterday pointing out that 'if a rate of 'income' is offered which is significantly higher than can be obtained by way of dividend or deposit income, it will normally be the case that the higher return is obtained at some risk to capital or at the expense of capital growth'. The regulator said it was concerned that these risks were not being described to investors in a manner which was 'clear, fair, and not misleading'.

The Sunday trading bill was supposed to be one of the most contentious pieces of legislation to come before the Commons in the current session. Tempers were expected to run so high that the government, bruised by a successful backbench revolt on the issue in 1986, allowed a free vote.

It has not happened. The bill passed its second reading by a huge majority after a polite debate last week and has almost disappeared from view, buried by controversy over the Budget and the Ulster peace talks.

That may change today when MPs debate the core of the bill - three options put forward by retailing and religious pressure groups to reform the widely ignored 1950 Shops Act. The options are:

Complete de-regulation, bringing England and Wales into line with Scotland, favoured by the Conservative right and backed by the prime minister, the home secretary and a majority of the cabinet.

Unrestricted trading for small shops, with a six-hour limit on larger stores. This was drafted by the Shopping Hours Reform Council, which represents big chains such as Tesco that already open on Sundays, in defiance of the law. Unregulated opening for most small shops, DIY stores and garden centres, and unregulated opening for four Sundays before Christmas. This is backed by the Keep Sunday Special (KSS) campaign, an alliance of small retailers and sabbatarians, and some big stores, including Marks and Spencer and John Lewis.

There is broad agreement that the 1950 act is well past its sell-by date. For example, fish and chips may be sold at a take-away outlet other than a fish and chip shop, while fish and chip shops can sell any takeaway food other than fish and chips.

But there is no consensus on which option, if any, will win. The least likely outcome is de-regulation, which is opposed by a big majority on the opposition benches. It would have to attract the votes of virtually all Conservative MPs to succeed.

That is unlikely because of the strength of support among traditionalist Conservatives for the KSS option. The KSS group is worried, however, by the defection of Usdaw, the shopworkers' union, once a strong supporter but now backing the six-hours option.

The union's decision has split its 12 sponsored Labour MPs, some of whom will stand by KSS. But many Labour MPs are likely to follow the union into the six-hour lobby, which also has the support of the TGWU, the other union representing shopworkers.

Both sides claim the support of a majority of MPs. But the first option to attract a majority of votes cast will win, which means that the decision might hinge on the order in which the speaker calls the options.

The provisional order - de-regulation, KSS, six-hours - appears to favour the last option, if only because MPs are likely to want to resolve the issue if the other two options have been defeated.

Further complicating the issue, Sir Peter Emery, a Conservative backbencher, has tabled a series of amendments which would prevent trading on Sunday mornings. The government says it is neutral on this approach.

It is possible that no option will win a majority. If that happens the government will probably bring the least unpopular option back to the Commons after giving MPs a few weeks to mull over the chaos they will have caused. But it is a scenario which gives ministers nightmares.

The Commons is expected to give the formal go-ahead tonight for a fundamental change in the rules governing independent television.

Labour will try to block an order implementing the government's overhaul of the licensing regime, but there is no realistic prospect of a Conservative rebellion.

The order will facilitate two takeover offers tabled since the government's plans were announced last week by Mr Peter Brooke, the national heritage secretary.

Carlton Communications, the London broadcaster, has agreed a merger with Central, the Midlands company, and Granada, covering the north-west of England, has made a Pounds 600m hostile bid for London Weekend Television.

Ms Marjorie Mowlam, Labour's national heritage spokesman, will call for a 12-month extension to the existing moratorium on mergers.

She said the government's plans would make Britain the only European country where foreign companies would be allowed to buy 100 per cent of regional broadcasters.

The Central Statistical Office's shorter leading index of economic activity has risen again, pointing to a favourable outlook for the economy.

The index, which is supposed to indicate economic turning points in activity about five months in advance, was buoyed by increases in share prices and new-car registrations.

Britain's economic recovery could pause in the spring when tax increases announced in last week's Budget take effect, Mr Alan Budd, the Treasury's chief economic adviser, said yesterday.

However, he told the Commons Treasury and civil service committee that the Budget, which will add Pounds 1.68bn to Pounds 6.73bn of tax rises already planned for 1994-95, was not intended to be deflationary.

Mr Kenneth Clarke, the chancellor, decided to tighten fiscal policy to ensure that the recovery continued, Mr Budd said. While there was uncertainty over consumers' reaction to tax increases next April, the Budget could have a positive effect on confidence. In addition, the 'very considerable' fall in interest rates since September 1992 was having a powerful effect on demand.

Mr Budd pointed out that consumer demand continued to grow after the announcement of tax increases in Mr Norman Lamont's March Budget.

Nevertheless, he agreed with Mr Giles Radice, a Labour committee member, that the tax increases announced in this year's two Budgets would have a cumulative impact of Pounds 15bn to Pounds 17bn in 1996-97.

In forecasting growth of 2.5 per cent next year, rising to 3 per cent a year by 1996-97, the Treasury expected investment and exports would play a bigger role in supporting activity in later years, Mr Budd said.

MPs were told by Mr Paul Gray of the Treasury's monetary group that in spite of the tax increases, the net funding requirement for the budget deficit would be in the 'high 30s' of billions of pounds in 1994-95.

They also heard Mr Christopher Kelly, head of the Treasury's general expenditure policy division, express only cautious optimism that the reduced contingency reserve of Pounds 3.5bn in the spending plans for 1994-95 would be adequate. The flow of orders to the west Midlands engineering industry has slowed in the past three months, Paul Cheeseright writes.

The latest survey of business trends, conducted by the Engineering Employers Federation West Midlands, shows that the proportion of companies experiencing an increase in domestic orders fell to 37 per cent in November from 46 per cent in May.

The flow of orders to the west Midlands engineering industry from both home and overseas has slowed down in the past three months and a declining proportion of companies expect order books to grow in the next three months.

The latest survey of business trends, conducted by the Engineering Employers Federation West Midlands just before the Budget and covering 494 companies, demonstrates the shallowness of economic recovery and offers an antidote to optimism.

Recent regional surveys had suggested that the west Midlands, with its dependence on manufacturing, would be one of the regions to emerge from recession most quickly.

Engineering employers reported yesterday that the proportion of companies experiencing an increase in domestic orders fell to 37 per cent in November from 46 per cent in May. Those experiencing a rise in export orders fell to 22 per cent from 27 per cent.

Twenty one per cent of companies expect a fall in capacity utilisation over the next three months.

The first giant piles for the Canary Wharf Underground station on London's Isle of Dogs are due to be sunk today, signalling the start of an enterprise which will take more than four years to complete and provide employment for 22,000 workers.

Two days later, British and French contractors will take part in another ceremony - to mark the handover of the Channel tunnel from the construction companies to Eurotunnel, which will operate it when it finally opens next spring.

London Underground will be hoping that it will not repeat Eurotunnel's experience. The Channel tunnel is due to open almost a year later than planned and will cost more than double its 1987 estimate of Pounds 4.7bn, after interest payments.

The 10-mile Jubilee line extension, with 7 3/4 miles in twin single-track tunnels, is a much smaller project than the 31-mile Channel tunnel. However, it will still involve the disposal of 1.4m cubic metres of clay, sand and gravel compared with more than 6m cu m removed from under the Channel.

Contractors are expected to use 22,500 precast concrete tunnel and shaft linings, 8,000 iron linings, 500,000 cu m of concrete, 53,000 tonnes of steel reinforcement, 4,900 tonnes of rail track and 57,000 rail sleepers.

Building materials and spoil will have to be moved through one of the world's busiest capitals. Barges will transport much of the goods and up to 60 per cent of the spoil along the Thames.

Mr Hugh Doherty, project director on the Jubilee line extension, says lessons have been learnt from other large railway tunnelling jobs including the Channel tunnel and the Hong Kong and Singapore mass transit railways.

Most of the contracts for the Underground extension, signalling and rolling stock, have been let to consortia containing companies from Britain, Japan, Germany, France, the US and Canada. London Underground, however, says that 60 per cent of civil engineering and more than 80 per cent of mechanical and electrical contracts have gone to UK companies.

The work has been divided into smaller packages, says Mr Doherty, 'partly because different engineering skills were required for different aspects, but also because it made overall management sense'.

It was important that contractors should have sufficient financial strength to carry out their task without their balance sheets becoming over-stretched. It was also important that London Underground could not be held to ransom by a powerful single group of contractors.

The deep recession in UK and continental European construction markets made it easy for the client to impose tougher conditions and prices.

Construction companies have complained bitterly about the imposition of 'on-demand' performance bonds which would allow Jubilee line managers to demand up to 10 per cent of the value of a contract without having to prove that the contractors were in default.

Conciliation procedures have been established to resolve any differences should changes to agreed design specifications be needed.

The long delays in agreeing finance for the project allowed London Underground time to prepare designs and complete ground-condition studies which should reduce the need for contract vari-ations.

The mix of clays, sands and gravels through which the track passes - up to 100 feet below the surface - will demand a variety of tunnelling techniques on different parts of the line.

London clay, impervious to water, is very good for tunnelling whereas tunnels passing through Thanet sands can become waterlogged very quickly. Thames Water almost lost a tunnel-boring machine worth several million pounds when it unexpectedly broke through clay into Thanet sand while digging the London ring main in the late 1980s. The surrounding land had to be frozen so that the machine could be dug out.

To prevent settlement, engineers will pump a cement grout, often mixed with bentonite, into the ground above and ahead of where the tunnel is being dug. Surveys of more than 3,000 buildings are being undertaken to make sure the right construction techniques are used and that properties will not be damaged.

Some Pounds 200m has been spent even before construction starts this week. London Underground will hope its preparations bring peace of mind.

The gateway to the Jubilee line extension, the flagship transport project for the London Docklands, is marked by a pile of rubble in one of the capital's poorest areas.

The hoarding around the site - derelict for eight years - gives no clue that by the turn of the century this will be Bermondsey Underground station, capable of handling 4,000 passengers an hour. There are no planning notices or developers' advertisements, just graffiti urging residents to 'Vote BNP'.

This is the boundary between Bermondsey and the 5,000 acres controlled by the London Docklands Development Corporation.

To the east, six further stations are planned - Canada Water, Canary Wharf, North Greenwich, Canning Town, West Ham and Stratford - as part of the Pounds 1.8bn project to rejuvenate the area by providing a fast link to London's West End.

A journey along the route reveals that although funding has been approved for the link, enthusiasm in Thames-side communities has been tempered by the realisation that benefits will not emerge until well into the next century.

In Bermondsey Mr George Dunk, councillor for the Riverside ward which includes the station site, says that beyond injecting confidence and creating work for construction workers, the best that can be hoped is that more tenants will exercise the right to buy and shopkeepers will extend their leases.

But there is optimism that at the next two stations - Canada Water (the interchange planned with the East London line) and Canary Wharf - the Jubilee extension will fulfil its promise of rejuvenation.

That optimism is based on expansion plans for developments such as the Surrey Quays shopping centre and the Greenland Dock residential development. At Canada Water, the LDDC is preparing to release for development 20 acres of land which had been held back pending the Jubilee line decision. At Canary Wharf, Mirror Group Newspapers and London Underground have announced plans to move in, taking total occupancy levels to 50 per cent.

Any rejuvenation will not take place overnight. Mr Roger Squire, assistant chief executive at the LDDC, warns that the area still has a lot of empty office property 'so the benefits will take some time to feed through'. In residential property, 'significant price movements will not come about until the line is almost open'.

According to chartered surveyors Knight Frank & Rutley, there is still 5m sq ft of vacant office space in the LDDC area, enough to accommodate 25,000 workers.

Mr Roger Parsons, partner at the surveyors' Docklands office, also warns that the escalating costs of the project - up almost 80 per cent since 1989 - could mean some stations might not be built.

North Greenwich, the stop after Canary Wharf, is in doubt, he says. British Gas, which owns the site on the Blackwall peninsula, is still negotiating with London Underground about the estimated Pounds 30m construction costs.

From Canning Town, Jubilee line trains will run on the surface next to British Rail tracks. But one local employer, who asked not to be named, says bringing Canning Town and West Ham within 20 minutes of the West End will have little effect on the area. 'We really needed help 10 years ago. It seems to me they are creating a commuter zone for the Docklands but I don't see it helping business much.'

The view from West Ham station is a bleak one. Canada Tower, the showpiece of Canary Wharf, is visible across acres of derelict land punctuated only by electricity pylons and vacant industrial units.

Mr Parsons expects Stratford to develop as a business location for the Docklands. 'Before the Jubilee announcement this was going to be another Croydon, a satellite with cheap accommodation,' he says. 'The extension and the revitalisation of Canary Wharf have pulled Docklands from the brink of possible obscurity. But it will take a long time.'

Nearly half of 286 personnel officers surveyed by Personnel Magazine said their companies had increased the use of temporary staff in the past 12 months, with only 14 per cent saying they had reduced it.

Meeting fluctuations in demand was the most common reason given, followed by the argument that flexible working reduced labour costs.

The contracts between the companies which take over railways from British Rail must be flexible but will need to be set in a legal framework, Mr John Swift, the new rail regulator, said yesterday.

Mr Roger Salmon, the railways franchising director, has expressed a wish to establish a 'no-fault' system of agreements, with companies regulating dealings by commercial contracts rather than the law.

The UK and US governments yesterday started a new round of talks in London to try to resolve their dispute over transatlantic air services, Paul Betts writes.

The UK has already warned Washington it would limit US airline services to London's Heathrow Airport if the Washington administration sought to curtail the rights of British Airways in the US.

Mr Lawrence Nagin, an executive vice-president of United Airlines, one of the big three US carriers, said that a trade war between the two countries would ultimately hit the consumer hardest because of the risk of fewer transatlantic services.

The US will be pressing the UK government to grant US carriers more access into Heathrow airport. The UK is seeking an easing in US regulations on foreign ownership of US carriers.

Schools in England and Wales will have to publish details of the number of hours spent teaching each day, after the first annual report of Ofsted, the school inspection service, called for an urgent inquiry into the length of the school day.

The Department for Education made clear that it was planning action on the length of school days after a 20 per cent variation in the total time schools spend teaching was revealed. Mr John Patten, education secretary, said the variation was 'unacceptably wide'. He added: 'Parents must wonder how one school can offer up to a day a week more teaching than another, and what effect this has. I certainly do.'

The report said bullying was a problem in every school inspected, and found 'an urgent need for improvement of educational management and leadership, especially in matching resources to priorities'.

Mr John Major, the prime minister, announced the plan to add more information to the league tables published on schools each year.

Professor Stewart Sutherland, chief inspector of schools, said the variation, from more than 25 hours tuition each week to less than 20 hours, was equivalent to a whole year's extra teaching at some schools over five years.

Teachers' unions reacted with alarm. Mr Nigel de Gruchy, general secretary of the NASUWT union, said the report was an 'implicit suggestion that the school day should be lengthened'. It would meet 'outright opposition from teachers faced with increased workload and a possible pay freeze'.

The report found that in all schools most lessons were at least satisfactory. However, 30 per cent of lessons for children between eight and 11 were unsatisfactory while only 15 per cent of classes for post-16-year-olds were unsatisfactory.

Ofsted added that there was a 'stubborn percentage of unsatisfactory teaching' and a 'small proportion' which was 'downright poor'.

Good teaching standards had a 'direct correlation' with successful academic results, but there was evidence that poor teaching was concentrated in inner cities.

Prof Sutherland said: 'Sadly, the incidence of such teaching is often greater in schools serving pupils and parents in urban areas with high levels of social and economic disadvantage. We cannot be satisfied until we record improvements for all children, regardless of back-ground.'

Ofsted is also to start a full investigation of the sharp drop in popularity of mathematics and science courses compared with arts subjects. Prof Sutherland said: 'There is no doubt about the trend - the overall number of students taking A-levels is increasing while the proportion taking science and mathematics is declining.'

He said there was a growing trend for teachers to have to teach areas of science and mathematics with which they were not familiar, but would not speculate further on the reasons behind the trend.

The Ministry of Defence is paying suppliers between Pounds 25m and Pounds 30m a year more than necessary by failing to follow its own guidelines for inflation-adjusted contracts, a National Audit Office report says.

The public spending watchdog says arrangements to deal with the effect of inflation on long-term defence contracts have 'not worked as intended'. It finds that the ministry often departs from its own ground rules, laid out in conjunction with the Treasury almost 20 years ago.

In one case - the procurement of EH101 helicopters for the Royal Navy - the result is an estimated extra cost of Pounds 72m over 10 years. This is about 4.5 per cent of the value of the contract, awarded in 1991 to IBM of the US as project manager. The helicopters are made jointly by Westland and the Italian company Agusta.

The audit office says the question of variation of price arrangements arose late in negotiations, when there was pressure to get a contract signed quickly.

Under the guidelines at least 10 per cent of a contract should be non-variable. In the case of the EH101 the figure agreed was only 1 per cent. The average for large contracts examined by the audit office was 5.45 per cent.

The guidelines also require a deduction to be made for productivity improvements, but this was not done in most of the cases examined.

In many cases, the audit office says in its report, the ministry accepted 'without discussion' contractors' proposals as to which indices should be used to calculate inflation.

About Pounds 200m is paid out each year under variation of price arrangements. The contracts involved account for about 20 per cent of the ministry's Pounds 9bn annual procurement budget. The MoD said yesterday it had accepted less stringent terms to gain better basic prices. But revised guidance had been issued and new arrangements would be discussed.

Meanwhile, defence officials denied that shell fuses bought four years ago were defective, even though they could not be used in rain, hail or snow. The fuses, made by Fratelli Borletti, were being phased out.

Experts said that in rain there was a risk that a shell might explode 150m from the gun. This did not pose a danger to soldiers since the fragments would be projected forwards. 'It would dim their outlook, though,' they added.

The RAF is to scrap advanced jet training at Chivenor in Devon and mothball the base. The training will be based at RAF Valley on Anglesey in north Wales. The government said 119 civilian and 779 service posts would be affected.

Accounting for Inflation in Defence Procurement, Comptroller and Auditor General. HMSO. Pounds 7.40.

Another rise in the Central Statistical Office's shorter leading index of economic activity points to a favourable outlook for the economy.

The index, which is supposed to indicate economic turning points in activity about five months in advance, was buoyed by increases in share prices and new-car registrations.

There has been a slow-down in the fall of the longer leading index, reflecting increases in housebuilding starts in recent months. The coincident index, which tracks the business cycle, has maintained steady increases since the second quarter of last year.

A divorced father who is being asked for extra money by the Child Support Agency failed yesterday to overturn a 'clean break' divorce settlement under which he gave up his share of the family home on the understanding that he would not pay maintenance.

Mr Gary Crozier, of Gretna Green, Dumfriesshire, had asked the High Court to set aside the divorce settlement and give him his share from the sale of the home.

Mrs Justice Booth said the settlement contained provision for nominal maintenance of 5p a year. This reflected the legal principle that the clean break formula had never applied to the on-going responsibility of parents to a child.

Moslems underperform in English and Welsh state schools, the self-styled Moslem Parliament of Great Britain said yesterday.

Using the government's school performance tables for GCSE exams, published last month, it said Moslem children were in schools which 'have some of the worst results nationally and locally'.

The group said the government's decision to reduce the weight given to ethnicity in the formula used to distribute grants to local education authorities, announced last week, would diminish investment for schools in Moslem areas.

It alleged discrimination against Moslems in the school system, and said the figures had been hidden by 'the general myth that Asian children are doing well in education'.

Mr Kenneth Clarke, the chancellor, yesterday said the Budget had provided the government with a 'firm grip' on public spending and it had set Britain back on the road to recovery.

Winding up the five-day Commons debate on the Budget Mr Clarke told MPs that future generations would have paid a heavy price in increased taxes if he had not tackled Britain's public-sector deficit.

'What has been clear is that the public outside . . . have responded favourably to a Budget setting out frankly and candidly how we are going to tackle the country's problems.

'We are making progress towards getting on top of the PSBR, which if it was not tackled would lead to increased taxation for later generations as the interest piled up, and short term pressure on interest rates.'

At the end of the debate a government motion to implement the Budget was approved by 326 votes to 291, a majority of 35.

Earlier in the day Mr Michael Heseltine, the trade and industry secretary, praised the principal aim of the Budget to reduce the deficit.

'Nothing would have been more calculated to throw away the competitive edge we now enjoy than a failure to take the difficult decisions about the deficit, and to take them now,' he said.

He also used his speech in the debate to announced initiatives to help industry and small businesses. These included an increase from Pounds 14m to Pounds 17m in start-up funding for Business Link outlets.

The outlets are designed to bring together most of the services provided by training and enterprise councils, chambers of commerce, local authorities, enterprise agencies and other private-sector organisations.

The first outlets have opened in Birmingham, Leicester and in Congleton in Cheshire. Mr Heseltine said Tecs - which deliver government training schemes in England and Wales - 'have a key strategic role in organising the provision of business support services'.

Tecs' budgets for services to small businesses - most of which will be taken into Business Link outlets - are to increase slightly to Pounds 33m.

Mr Heseltine also announced an environmental technology best-practice programme, worth Pounds 16m.

Mr Robin Cook, shadow trade and industry secretary, said spending by Mr Heseltine's department would fall about 12 per cent in real terms in the next three years.

'Out of 18 spending departments, the DTI is 17th,' said Mr Cook.

Names on the worst Gooda Walker syndicates were still waiting to hear full details of how the Lloyd's settlement would affect them, but were suspicious of the sums being offered, Andrew Jack writes.

Mrs Valerie Baker, who with her husband has Pounds 2m outstanding in calls from Lloyd's, said: 'All I can say is it is an admission on Lloyd's part that they haven't been running the shop right. We haven't had any personal details yet. But it would have to be a pretty high-level offer for us to accept.'

Some Names had already heard the decision by their action groups to reject the settlement and were resolving to support this view. Ms Fernanda Herford said: 'I gather it's 'no'. I didn't expect much. It's business as usual, except some of us are very depressed. Hope springs eternal, I suppose.'

Mr Norbert Mallet said: 'We are going to court and we are going to win, so why accept a compromise?

If Names reject yesterday's offer, many of the agencies which have managed their affairs at the market will face a spate of legal actions over the next few years

First big case will start in April next year, involving 3,000 Names who were members of Gooda Walker syndicates 164, 290, 298 and 299 between 1988 and 1990. Names allege negligent underwriting and seek damages of more than Pounds 550m from 71 Lloyd's members' agencies.

In October Mr Justice Saville will hear a case brought by 1,650 Names who were members of Feltrim syndicates 540/542 and 847 between 1988 and 1989. Feltrim Names also suing for negligent underwriting, targeting 60 agencies - of which 59 are members' agencies - in effort to recover up to Pounds 600m in losses.

Third large case could come to court early in 1995. Some 2,000 Names on Merrett syndicate 418 are taking legal action against 130 members' agents, the Merrett managing agency, the syndicate's auditors, Ernst & Whinney, and Mr Stephen Merrett, the syndicate's underwriter, over losses registered in the 1985 year. The claim is estimated at about Pounds 350m.

Smaller case involving more than 320 Names on Pulbrook syndicate 334 in the 1985 year had been expected to come to court in December this year. The Names face losses of at least Pounds 80m.

The leader of the nationalist Social Democratic and Labour party has warned against setting up a Northern Ireland select committee, saying it could endanger the Northern Ireland talks process.

Mr John Hume delivered the warning in a letter to Sir Peter Emery, Tory chairman of the Commons procedure committee. A decision by ministers to press ahead with a select committee for the province would be seen as reinforcing the government's commitment to its unionist majority.

Sir Patrick Mayhew, the Northern Ireland secretary, offered encouragement to select committee supporters in the Commons just six days ago by acknowledging - in response to a question from Mr Hume - that the idea could have 'some value'.

Confirmation of Mr Hume's letter emerged as British and Irish officials continued concerted efforts to bridge differences between London and Dublin over their planned joint declaration aimed at securing peace in Northern Ireland.

Officials are striving to narrow the gap between the two sides ahead of the next scheduled meeting between Mr John Major, the prime minister, and Mr Albert Reynolds, his Irish counterpart, in Brussels on Friday or Saturday.

Questioned in the Dublin parliament yesterday, Mr Reynolds was upbeat about the pace of progress while admitting that 'a number of important outstanding issues' had still to be resolved.

In a fresh attempt to reassure unionists, the Irish premier declared for the first time in the Dail that Dublin was prepared to make a written pledge to hold a referendum on its territorial claim over Northern Ireland. Speaking as Mr Peter Robinson, deputy leader of the hardline Democratic Unionist party, warned he would 'never accept' any further dilution of the unionist position, Mr Reynolds said Dublin was relying on Mr Major to keep unionists informed about the peace process.

Mr Hume is understood to believe any discussions about a select committee should involve the province's non-violent political parties. An agreement reached elsewhere would amount to a private deal. Adria, the Ulster textile company, is creating 400 jobs in two projects in the north-west of the province.

Some 250 jobs will arise from the expansion of Adria's Campsie factory, near Londonderry. The others will be at a new factory at Strabane.

Mr Don Cruickshank, the telecommunications regulator, yesterday served notice on British Telecommunications that the regulatory structure would not be altered in its favour.

He warned BT that any video-on-demand service it tried to offer in competition with entertainment services provided by cable TV companies had to correspond to the 'limited nature' of existing regulatory approval.

Mr Cruickshank, making his first policy speech as director-general of Oftel to the FT's international telecommunications conference, dismissed BT's claims that it was held back by unfair regulation.

He said that, in spite of the 10-year ban imposed in 1991 on BT providing entertainment services over its network, it could have bid for a 'significant number' of cable franchises and 'could have integrated them with its local network'.

Indicating that he would not support any review of the essentials of the current regime, Mr Cruickshank added: 'I defend the present carefully-framed regulatory structure and hope we can move the debate away from the myth.'

Mr Cruickshank's remarks brought his first public clash with Mr Iain Vallance, BT chairman. Mr Vallance condemned over-regulation and warned that BT faced a 'utility trap' threatening its ability to compete internationally.

He stressed the case for improvements to the competitive environment in the UK, in particular the need for 'greater transparency on the relationship between costs and charges'.

He said Oftel would publish plans in the new year for a phased introduction of a new interconnection structure between BT and competitors. The phasing is believed likely to take place over four years, and could involve the introduction of tariffs for specific services required by competitors.

Companies partly responsible for their own loss from a breach of contract should have their damages reduced accordingly, the Law Commission, the government's law reform body, said yesterday.

It called for a change in the law to allow courts to apportion damages for breach of contract where both parties were at fault.

Groups that have pressed for reform include the 1989 Jack Committee on Banking Services Law, the Auditors Study Team on Professional Liability and the Auditing Practices Board, the commission said.

Such groups are concerned that under present law, where one party is in breach of contract and the other is also to blame, the winner takes all. Contract law contrasts with the law of negligence where contributory negligence results in a reduction of damages.

The commission says the present law is fair where a defendant is subject to a 'strict' contractual duty, such as the obligation on a shopkeeper to supply goods of 'merchantable quality' and that therefore a particular outcome is guaranteed, regardless of fault. But it says where a defendant has agreed only to take reasonable care it is unfair to assume he has undertaken to compensate the injured party where he has contributed to his own loss.

It recommends a change in the law to enable courts to apportion damages for breach of a contractual duty to take reasonable care, or exercise reasonable skill, where the plaintiff has failed to take reasonable care of his interests.

It accepts, however, that parties should still be able to contract to apportion risk, and so be free to exclude the apportionment rule. This will safeguard the ability of businesses to allocate risk with certainty, it says.

Contributory Negligence as a Defence in Contract, Law Com No. 219. HMSO. Pounds 9.95.

A Roman Catholic man was shot dead on the doorstep of his east Belfast home last night.

The man, in his late 30s, answered a knock at the door of his home and was shot at close range by a lone gunman, the RUC said.

The attacker made off on foot through the predominantly protestant area. The victim was taken to hospital but died soon after admission.

There was no immediate claim of responsibility although the police said it bore the hallmarks of a loyalist sectarian attack.

Stress at work is increasing sharply and should be recognised officially as a health and safety issue, a report urged yesterday.

Professor Tom Cox of Nottingham University, who prepared the report for the Health and Safety Executive, said the problem needed government recognition if employers were to tackle it effectively.

The report, published ahead of HSE guidelines due out next year to help employers manage stress at work, recommended further research into the problem, along with training for employers. Recent Manchester University research showed that 90m working days a year were being lost in the UK through stress.

The recommendations come as growing numbers of employees are seeking compensation from their companies for stress-related illnesses. Several test cases are due before the courts. In one, a former City worker alleges that her 10- to 15-hour day caused a mental breakdown. Another employee claims stress through overwork led to a gynaecological disorder, while a production manager says staff shortages led to illness through overwork.

According to one of Britain's leading stress counsellors, the problem is growing more acute as companies emerge from recession with smaller workforces and leaner managements.

Mr Alistair Anderson, managing director of Personal Performance Consultants UK, said he had noticed a disturbing number of suicides involving work pressures.

'A Rubik's cube with a seventh side' was how Mr Peter Middleton, chief executive of Lloyd's of London, described yesterday's settlement offer to loss-making Names - the individuals whose assets have traditionally supported the insurance market.

Lloyd's is offering Pounds 900m to meet claims of more than Pounds 3bn from 17,000 Names organised in 38 action groups. But each Name will receive an individual offer tailored to reflect chances of success of legal actions and other factors.

Names on the worst performing syndicates could receive payments of up to 66p in the pound, although the overwhelming majority of the 21,000 Names benefiting from the deal stand to receive less than 40p in the pound.

Lloyd's said that more than 100 Names stood to receive between Pounds 500,000 and Pounds 750,000, while a further 40 Names could get between Pounds 750,000 and Pounds 1m. The bulk of Names would receive less than Pounds 100,000.

Underpinning the complex arithmetic are the conclusions of two working parties set up by Lloyd's in the summer.

Sir Michael Kerr, a former Lord Justice of Appeal, headed a legal panel which has examined the legal merits of the action group cases. Sir Jeremy Morse, former chairman of Lloyds Bank, examined the financial resources available for a deal. Sir Michael ranked the cases of Names on 30 syndicates according to their chances of success, evaluating them as strong, medium, weak and hopeless.

His assessment favours Names on syndicates participating in so-called 'spiral' or LMX reinsurance, where Lloyd's syndicates and companies reinsured each other's high-level catastrophe exposures.

Most of the claims against agents by Names on catastrophe syndicates managed by agencies such as Gooda Walker, Feltrim, Bromley, Rose Thomson Young and Devonshire, are rated as 'strong' by the panel.

Sir Michael regarded the legal claims of Names on so-called long-tail syndicates - which specialise in US liability business in which claims can emerge many years after the inception of a policy - less favourably. One exception is his assessment of one of the main claims against Merrett syndicate 418/417, which for the 1983, 1984 and 1985 years are regarded as 'strong'.

Further loadings have been introduced reflecting the progress of legal action, membership of action groups and Names' exposure to more than one 'spiral' syndicate.

Names who were plaintiffs on writs issued by eight syndicates - Feltrim 540/542 and 847; Gooda Walker (164, 290, 298, 299); Merrett (418/417); and Pulbrook 334 (whose legal cases are most advanced) - stand to receive 20 per cent more than would otherwise be offered.

Names who were action group members when claims were submitted to the Kerr panel can get an extra 50 per cent if they agree to the deal.

Names who have multiple exposure to 'spiral' and stop loss syndicates receive an extra 10 per cent for each spiral syndicate participation after the first.

Lloyd's has introduced an overall ceiling so that no Name will receive more than two-thirds of total losses on the relevant syndicates.

Although claims of Pounds 3.15bn were submitted by Names, the legal panel ruled that only Pounds 2.67bn could be assessed as damages, had the cases succeeded in court. After taking into account its weighting of the legal prospects of each claim, the amount of damages expected falls to Pounds 1.58bn.

Sir Jeremy's panel identified errors and omissions insurers, which cover agents against legal awards for negligence, as the biggest source of potential funds for the settlement.

The exposure of E&O insurers - most of which are Lloyd's syndicates - was estimated at between Pounds 820m and Pounds 1,085m. No details about the contributions of the E&O insurers are contained in the offer document but this is understood to amount to Pounds 400m.

Lloyd's agents, who are targeted in the actions, have net assets of Pounds 80m. Agents as a whole have agreed to pay up to Pounds 50m in 'voluntary contributions'.

The Lloyd's central fund, which pays claims when Names are unable to meet obligations, will match these contributions with a payment of about Pounds 450m.

This amount is not likely to lead to any outflow of funds from Lloyd's, since between Pounds 700m and Pounds 750m of the Pounds 1,100m in the fund is already earmarked to pay claims.

It is expected that a payment of Pounds 450m will allow Lloyd's to reduce these allocations accordingly.

Senior management at the Lloyd's insurance market will be hard-pressed to persuade Names to accept yesterday's settlement offer, judging by reaction from the leaders of Names' action group leaders.

Copies of the 200-page offer document will reach 21,000 Names in the next few days and they will have just more than six weeks to consider its implications.

Lloyd's said yesterday that a 'substantial majority' of Names would need to vote for the deal for it to go ahead. It is understood that this would need acceptance by Names whose claims represent more than 70 per cent by value of those considered in the offer.

Early indications are against this. Names on syndicates specialising in liability business, which have been hit hard by claims from asbestosis and pollution, get least out of the offer and were predictably negative.

About 4,000 Names on Merrett syndicate 418 have been offered only Pounds 44.1m against losses of nearly Pounds 170m - even though part of their case against agents was adjudged in the offer document to have a strong chance in court.

Mr John Mays, deputy chairman of the Merrett 418 action group, said: 'We may well recommend they reject it.' He was particularly worried by the absence of any cap on future claims still arising on the syndicate's 1985 accounts.

One prominent member of another long-tail syndicate - Pulbrook syndicate 334 - which has been offered about Pounds 2.5m compensation for losses of about Pounds 80m, said: 'They have irritated the long-tail groups by tilting the settlement offer in favour of the spiral Names. I fear they've blown it.'

More worrying for Lloyd's is the tough response yesterday from both Mr Michael Deeny, chairman of the Gooda Walker Action Group, and Mr Colin Hook, chairman of the Feltrim Names Association, whose members have most to gain from the deal.

Both men successfully persuaded Lloyd's to load the settlement in favour of their action groups, and in statements yesterday refrained from outright condemnation. Even so it appears that the final offer - between 30p and 40p in the pound for most Gooda Names, for example - falls short of their expectations.

Mr Deeny said: 'There has been an effort to mitigate the position of the Gooda Names. Our solicitors are considering the offer but I doubt very much whether we will be able to recommend it.'

Mr Deeny is critical of the form in which awards will be made. Lloyd's will issue special credits, two months after the offer becomes unconditional, which would be used to discharge debts to the central fund, or be paid into balances for the Names to pass the 1993 solvency test this month.

The credits would also be used to offset payments already made to Names by stop-loss underwriters.

Mr Deeny was one of five Names' representatives, including two alternate members, who did not sign the report of the financial panel. Mr Hook, Mr Christopher Stockwell, the chairman of the Lloyd's Names Associations Working Party, Mr Neil Shaw, chairman of the Association of Lloyd's Members, and Sir Adam Ridley were the others.

Mr Hook said he was satisfied that the legal panel recognised that Feltrim had a strong case in law. Like Mr Deeny, however, he said the potential deterioration of the syndicates' results in future years was not considered. The deal gave protection to errors and omissions insurers but 'will not provide our members with a commensurate benefit'.

In the end much may depend on the results of general meetings of both groups next month.

Because of the constitutions of both Feltrim and Gooda Walker, the results of these could bind more than 5,000 of the worst-hit lossmaking Names to either accept or reject the deal. The omens are not auspicious.

Police numbers are to be frozen for the second year running, the Home Office said yesterday. It expected efficiency savings to allow more officers to be put on the beat.

Thousands of homeowners are likely to remain trapped until the next century in properties worth less than the money borrowed to buy them, according to a study published today by Legal & General insurance group.

Mr David Shaw, investment strategy director, said: 'No one should invest in housing in the 1990s if they want competitive high returns and capital growth. Equities, bonds, commercial property and, perhaps, even cash will remain far more attractive.'

Early introduction of competition in the mainly residential gas market would not lead to a sudden collapse of British Gas's market share, a group of 12 independent gas companies said yesterday.

The companies, including gas subsidiaries of some electricity supply companies, said that the independent sector would capture about 5 per cent of the small tariff market in each of the first four years after the end of the British Gas monopoly.

Rover Group would not have been able to introduce widespread changes to working practices as swiftly as it did without trade unions, according to Mr George Simpson, its chairman.

Mr Simpson, who was giving evidence to the Commons employment committee inquiry into the future of trade unions, said: 'If unions can do what they have done at Rover in terms of helping to develop best practice then they ought to have a secure future.'

Tenants of the Smithfield meat market were defeated yesterday in elections for the Corporation of London's general council.

In nine wards which held competitive elections they were out-voted, while a further election was ordered for next year on procedural grounds in the Bassishaw ward, where Smithfield tenants had appeared certain to win at least two seats.

At the 'ward mote' last Friday, where candidates announced their intention to stand for election, the Smithfield candidates for the Bassishaw ward were deemed to have made multiple applications for different wards.

The corporation said that their withdrawals from other wards had not been properly conducted.

The Smithfield tenants had run as part of a campaign against what they say are unfairly high rents being charged by the corporation to pay for the Pounds 60m refurbishment of the market required by new European Union regulations.

Frustrated by francs or dismayed by dimes weighing you down after a holiday or business trip? Travelex, the bureau de change group, believes the answer lies with its new multi-currency coin exchange machines which have just gone into operation at Heathrow and Gatwick airports, Alison Smith writes.

Travelex hopes to recycle the coins through its bureaux de change, but expects that some will have to be 'physically repatriated'. The cost of handling coins is reflected in the exchange rates offered at the machines.

Yesterday, for example, putting Dollars 10 in coins into the machine would have produced Pounds 5, compared with the Pounds 6.25 Travelex would have paid for a Dollars 10 bill. Two DM5 coins would have realised Pounds 2.96, against Pounds 3.70 for a DM10 banknote.

The machine in Terminal 4 at Heathrow changes US and Australian dollars, Dutch guilders and French francs, while the one at Gatwick South covers a different mix of currencies, including pesetas and D-Marks.

A Conservative MP yesterday accused British Coal of 'deliberate wrecking action' when it removed new equipment from the last pit in the Durham coalfield, diminishing its chances sale to the private sector.

Mr Peter Atkinson, MP for Hexham, attacked the dismantling and removal of shearing machinery and pit props from Wearmouth colliery ahead of its official closure on Friday.

British Coal confirmed it was taking out equipment with a written down value of Pounds 8.3m from Wearmouth, where it has spent Pounds 24m in the last four years opening up new reserves, but insisted the items were required at other pits.

It said it had undertaken to maintain the fabric of the colliery, which has not yet been advertised, while the licensing and leasing process took place.

Mr Colin MacLeod, chairman and owner of Caledonian Mining, a contracting company interested in acquiring the Sunderland pit, warned that the removal of machinery 'could make it so costly we couldn't go in'.

Mr MacLeod said he wrote to British Coal last month on the day it announced Wearmouth's closure saying his company was 'extremely interested' in the pit but had received no response. British Coal should have talked to potential customers before remov-ing machinery, he said.

'It's of most value if it can keep that mine open and keep men in jobs,' he said.

His plans would mean employing between 600 and 700 at Wearmouth, he said. Most of the 670 presently employed there will lose their jobs this month, in an area where alternative work prospects are poor.

'Whatever they get from us for it, it will be worth it to the people who originally paid for it - not British Coal but the taxpayer,' said Mr MacLeod. He added that he understood that British Coal had 'yards full of gear and pit tops full of supports'.

Wearmouth is the only one of 31 pits that were named for closure in October 1992 that Caledonian Mining wishes to acquire, although it has expressed interest in British Coal's privatisa-tion.

Mr Atkinson suggested equipment removal might be an attempt by British Coal managers who were interested in a management buy-out and wanted to prevent private sector competition. British Coal rejected this, pointing out that 20 pits were being offered to the private sector at the moment.

Sunderland Labour MPs Mr Billy Etherington and Mr Chris Mullin are also pressing British Coal to retain machinery at Wearmouth. Mining unions have pledged support for a private takeover in the interests of saving jobs.

Names on the worst Gooda Walker syndicates were still waiting to hear full details of how the Lloyd's settlement would affect them, but were suspicious of the sums being offered.

Mrs Valerie Baker, who with her husband has Pounds 2m outstanding in calls from Lloyd's, said: 'All I can say is it is an admission on Lloyd's part that they haven't been running the shop right. We haven't had any personal details yet. But it would have to be a pretty high-level offer for us to accept.'

Some Names had already heard the decision by their action groups to reject the settlement and were resolving to support this view. Ms Fernanda Herford said: 'I gather it's 'no'. I didn't expect much. It's business as usual, except some of us are very depressed. Hope springs eternal, I suppose.'

Mr Norbert Mallet said: 'I don't feel this is reasonable. We were happy to pay legitimate claims but there is no way we are going to pay illegitimate claims. We are going to court and we are going to win, so why accept a compromise?

'The fact that Lloyd's has put up an offer shows they are going to lose. Why should we accept less than 100 per cent? It's just not on.'

Mr Hugh Taylor said: 'It doesn't seem very brilliant. It is most unlikely I will accept. I consider I've been dealt with dishonestly and dishonourably and I am entitled to an apology and some compensation for the stress I have suffered. I could not have been worse treated by Lloyd's. My feeling is let them all rot in hell.'

The Local Government Network, a new satellite television service, was launched yesterday with a lively discussion on the impact of the budget on local government.

The service, transmitted by BT, plans to have 25 live two-hour television programmes a year. It will be provided every fortnight to local authorities and councils throughout England and Wales.

Valerie Amos, chief executive of the Equal Opportunity Commission is leaving her job a year before the end of her contract to pursue other interests.

Ms Amos, who came to the job four years ago from local government, put the commission on a more structured footing and made it more accessible to grassroots organisations and ethnic minorities. She is understood to have had difficulty developing a strong personal relationship with Ms Kamlesh Bahl who took over commission's chair in June.

Health authority budgets in England are to rise by an average of 5.33 per cent next year, Virginia Bottomley, health secretary, announced yesterday.

All 14 health regions will receive a real-terms increase but they will range from more than 2 per cent to as low as 0.7 per cent, particularly in areas of falling population.

Adria, the Ulster textile company, yesterday announced the creation of 400 jobs in two projects in the north-west of the province, our Belfast correspondent writes.

A total of 250 jobs will be provided by the expansion and refurbishing of Adria's Campsie factory, near Londonderry, to design and make lingerie. The other 150 jobs will be created in a new 50,000 sq ft factory at Strabane. The projects are expected to be fully operating by 1996. The Pounds 8.5m investment is backed by the Industrial Development Board.

The danger of shrinkage in the Uruguay Round of global trade reform was raised in Geneva yesterday as Japanese negotiators warned they might modify their tariff-cutting offers.

Their move came as a US-European Union market access deal took shape in Brussels.

Japanese negotiators are threatening to pull back from conditional commitments to cut to zero all tariffs on non-ferrous metal imports, following signals that the EU is calling for special treatment on aluminium. Similarly, EU demands that tariffs on wood and paper products be phased out over a 10-year period, rather than five years as previously discussed, have triggered threats of back-tracking.

Japan is refusing to discuss opening up its market for leather products unless the EU tables a 'satisfactory' offer to cut tariffs on electronic products and semiconductors. South-east Asian governments are also seeking better access to Europe's electronics market before offering to open any further their financial services markets.

It was unclear last night how far the latest bilateral US-EU deal on cutting electronics tariffs had gone.

The EU is understood to have offered to cut to zero tariffs on certain semiconductor equipment, but cuts for semiconductors as a whole may leave average tariffs of about 3 per cent. Large parts of the electronics sector - in particular the consumer electronics area of keen interest to Japanese exporters - may remain largely unaffected.

In the non-ferrous area, considerable momentum towards a global compromise was reached at the recent Asia Pacific Economic Co-operation summit in Seattle. Japan and other Asian importers agreed to a US-Canadian proposal to cut tariffs across the sector to between zero and 3 per cent. The proposal was finely balanced, matching US concessions in zinc with Japanese tariff cuts in copper. The deal was conditional on the EU making similar concessions in its own aluminium sector.

However, fierce French defence of the interests of Pechiney's new aluminium smelter in Dunkirk has tied EU negotiators' hands. The present tariff-cutting offer leaves average duties on aluminium pellets at 6 per cent, and average duties on finished aluminium products at 7.5 per cent. Only duties on semi-processed aluminium products are currently on the table, with modest cuts from 10.5 per cent to 7 per cent on offer.

Canada and Australia seek gains for their non-ferrous metal exporters as part of the balance for cutting tariffs in their own sensitive areas.

It is a familiar Brussels tale. European support for a Gatt world trade agreement will depend less upon grand political calculations but rather on behind-the-scenes deals aimed at appeasing aggrieved parties, of whom the most powerful remains France.

As foreign ministers yesterday debated the merits of the US-European Union trade pact, now within an ace of completion, it became clear that at least four or five member states sought 'compensation'. Thus Portugal is looking for special aid to restructure its ailing textile industry; Greece wants compensation for potential losses to its maritime shipping industry; Spain is worried about Mediterranean fruit; and Ireland is concerned about its farmers.

Paris is leading the pack, using all-or-nothing tactics.

As a veteran EU diplomat put it, with both distaste and admiration: 'The French have realised they have squeezed as much as they can expect out of the Americans, now they are looking to do the same with their European partners.'

Late on Monday night, Mr Alain Juppe, French foreign minister, insisted that France was still unsatisfied on agriculture; industrial tariffs, particularly on textile imports to the US; films and broadcasting; and new global trade rules.

First, Paris wants a guarantee from its EU partners that French farmers will not suffer any more loss of production under the revised EU-US Blair House accord than it has already agreed under the May 1992 reform of the Common Agricultural Policy.

Second, France is pressing for tougher European trade weapons such as anti-dumping measures to match American measures. This would include a 'market opening' instrument similar to US Section 301 legislation. 'They want a nuclear balance,' said one German diplomat.

By far the most serious problem centres on agriculture. France's demands put her at odds with her traditional ally, Germany. If French pressure translates into lower prices to compensate for Blair House curbs on production, this would allow its comparatively efficient cereal producers to capture market share in Germany at the expense of German farmers.

French pressure for financial compensation is a potential EU budget-buster. Several diplomats doubted yesterday whether spare cash existed within the seven-year Delors II budget package, agreed last December at the Edinburgh summit, mainly because a 'weasel' provision allowing 'appropriate steps' to meet exchange rate turbulence had been exhausted.

Germany is in a weak position. Traditionally a supporter of budget restraint, Bonn makes an exception with its farmers. Hence its insistence that the so-called 'switchover' mechanism to protect German farmers from D-Mark revaluations remains intact - a demand which has grown louder after the collapse of the ERM last August and the decision to float all currencies within a 15 per cent band.

In better times, Chancellor Helmut Kohl would have slipped into his familiar role as the reluctant paymaster. But with a steep budget deficit and sliding popularity, Mr Kohl no longer has the same margin of manoeuvre.

The assumption yesterday was that the internal wrangle would have to be resolved at the European summit on Friday. The billion Ecu question is whether Mr Kohl will cough up, once again, for his French ally.

France has now opened a second front in the Gatt negotiations by demanding from its European Union partners compensation for concessions EU negotiators have failed to wring from the US.

The question is whether it is prepared to go as close to the brink with its partners as it has been with the US, and in the process risk scuppering the whole Gatt deal.

France's demands for guarantees that its farmers will not have to take 'one single extra hectare' out of production as a result of a Gatt deal, and its insistence that Europe arm itself with 'the same instruments of commercial defence' as the US may have come as a shock to some EU partners. But they should not be a surprise, Mr Alain Juppe, the French foreign minister, said yesterday.

'As far back as April,' when the Balladur government came into power, 'we have been sending memos' to Brussels on the need to reinforce EU anti-dumping and retaliatory powers and to ensure any Gatt farm deal involved no greater 'set-aside' than the EU's existing reforms, he said.

Now, 'our partners have got the message' France is 'ready to give a Gatt farm deal the green light only if there are simultaneous changes in the common agricultural policy,' Mr Jean Puech, the agriculture minister said yesterday.

Paris' appetite for brinkmanship seemed yesterday only to have been whetted by what Mr Juppe admitted yesterday were very significant gains on agriculture. Mr Juppe should, by virtue of being also secretary general of the RPR Gaullist party, have a very good idea of what the Balladur government needs to satisfy its backbenchers.

But he and other ministers almost seemed to relish the fact that for them the negotiations were only just beginning. In the intra-EU negotiations to come they can play a direct part, instead of being sidelined in talks with the US by the European Union system which delegates the bargaining on foreign trade to Brussels commissioners.

So, Mr Juppe blasted away at 'total US intransigence' on audiovisual broadcasting and other issues still to be sorted out by Sir Leon Brittan, the chief EU negotiator in Geneva, and gave the impression that his energies in the next few days would be devoted to squeezing France's EU partners for new money and measures.

But this could be a brink too far, one French farmers' leader suggested last night. 'We should not get into the compensation game,' said Mr Pierre Cormoreche, president of France's chambers of agriculture, 'because other (EU) countries have their interests to defend'. He expressed doubt that the EU farm budget would stand the strain, an issue not addressed by French ministers yesterday.

Japan's prime minister indicated yesterday that his government was ready to accept a compromise on opening its rice market to imports.

Mr Morihiro Hosokawa said Japan, which benefited from the world's free trade system, needed to bear a proportional burden. His comments increased the tensions within his seven-party coalition, which includes the Social Democratic party which depends heavily on the farming vote, which wants to keep import restrictions.

Mr Tomiichi Murayama, chairman of the SDP, reaffirmed the party's opposition to the partial lifting of the rice ban. Some hardliners within the party have been threatening to leave the coalition if the import ban is lifted. The SDP, the largest member of the coalition, will officially decide its policy tomorrow, before the Japanese government's formal announcement on Friday.

Mr Hosokawa's remarks yesterday were in response to a draft proposal by Gatt's market access negotiators.

It allows a six-year grace period on tarification of rice imports, on condition Japan allows minimum access of 4 to 8 per cent of domestic consumption during the period.

Whether the special treatment will be continued after the moratorium period is subject to negotiation a year before the period ends.

In spite of the outcry from farmers' associations, the business community, which faces constant overseas pressure over Japan's mounting trade surplus, applauded the decision to lift the symbolic trade barrier. Farmers and students fought riot police in the South Korean capital yesterday as tens of thousands protested against a government U-turn which would allow rice imports, Reuter reports from Seoul.

Some protesters attacked police lines with sticks and iron bars while shouting slogans against talks in Geneva between South Korean and US officials which are expected to lead to liberalisation of the rice trade.

Cathay Pacific is to buy six long-haul Airbus A340-300 aircraft, costing USDollars 800m, Louise Lucas writes in Hong Kong.

Cathay said the aircraft - which can carry 233 or 260 passengers - will enable it to increase profits on traditionally less profitable long-haul routes, such as those between Hong Kong and Amsterdam, Paris, Rome and Zurich. The decision to buy Airbus, rather than Boeing, was based on product suitability. The new aircraft will come on line in 1996-1997. Meanwhile, Cathay is to lease four A340-200s.

The joint venture between Deutsche Telekom and France Telecom unveiled yesterday presents the European Commission with a regulatory conundrum.

The companies have already been talking informally to Brussels and will now present formal proposals for a joint venture to the competition authorities. Their hope is that they will receive clearance from the Commission before the end of the first quarter of next year.

The companies believe the Ecu1bn partnership - to offer advanced telecoms services to business customers - should be examined in the context of a rapidly developing global market. They are also eager to stress that it amounts to the best chance Europe has of gaining a strong strategic foothold in that market.

By linking up, 'we are contributing to the pan-European fusion of cultures and markets, and we are helping to create jobs in a fascinating industry and to secure Europe's position within global industrial competition,' Mr Helmut Ricke, Deutsche Telekom's chairman, said yesterday.

If the Commission accepts that the Franco-German alliance should be judged against the largest telecoms companies in the world - particularly from the US - then it is unlikely to block the deal on anti-trust grounds. Even judged by more restrictive standards, the two companies claim only 10 per cent of the European market for advanced services, although they admit the figure is based on guesswork.

As Mr Marcel Roulet, France Telecom's chairman, said yesterday: 'We think that the Brussels authorities are aware that it would be somewhat paradoxical if their rules led them to block a partnership between large European players, while approving partnerships between players from different continents.'

First, however, the Commission will have to decide whether the Franco-German deal falls under its jurisdiction. In September, the Commission decided it could not examine the proposed joint venture between British Telecom and the US operator, MCI, under its 1990 merger regulations - which allow for a fast-track procedure lasting less than six months - because the deal was too small. Instead, it has decided to look at the alliance under wider European anti-trust rules, and that investigation is continuing.

BT is already concerned about its joint venture being confused in regulatory terms with the Franco-German alliance. The British company argues that a joint venture between two state-owned companies - which are simultaneously resisting any acceleration of the European liberalisation process - cannot be compared with its free-market joint venture.

However, the coincidence of the two inquiries would also allow the Commission to develop its policy towards such mergers at a stroke. Deutsche Telekom and France Telecom hope for a reasonably flexible interpretation of the rules. They stressed yesterday that their alliance - at least at this stage - covers only those areas which have already been opened to wider European competition.

The alliance sends a mixed signal to telecoms ministers, who were meeting in Brussels yesterday to discuss the ground rules for the liberalisation of the European industry. The French and German governments have thrown their weight behind the deal. But other ministers may oppose a strong new joint venture, which would challenge the ability of their own state-owned telecoms groups to compete on the liberalised market.

However, a flexible interpretation of European competition rules would chime with the Commission's overall vision - contained in its White Paper on growth, competitiveness and employment - of a new 'information society,' serviced by strong telecoms and information technology companies.

See Editorial Comment

Mr Edouard Balladur, France's prime minister, saw the Gatt negotiations as 'a trap between international isolation and a domestic political crisis' for himself and France.

He brought the world trade talks to the brink of collapse to win an agreement with the US, particularly on agriculture, which may yet provoke the wrath of his backbenchers and the farm lobby. But Mr Balladur may be in the process of wriggling out of his trap.

His ministers, however, were yesterday saying that France was still not satisfied on several aspects of the Gatt negotiations.

Mr Balladur's moment of truth will not come until the French parliament pronounces probably next week on what the talks in Brussels and Geneva produce. The opposition parties - Socialists, Communists and National Front - were yesterday quick to denounce the tentative trade agreement.

But it is hard to believe that Mr Balladur will go before the National Assembly without first squaring the ruling coalition parties.

In this task, he is getting a helping hand from President Francois Mitterrand, a Socialist. Mr Mitterrand was last night consulting leaders including Mr Balladur's fellow gaullist Mr Jacques Chirac, whose cultivation of the farm vote in his bid for the presidency has worried the prime minister. Mr Mitterrand is due to see farmers' leaders today before he and Mr Balladur set off for the EU summit in Brussels on Friday.

In Brussels, the French leaders will drive home their country's demands that the Gatt deal will not force French farmers to take any more land out of production, or leave Europe without the same instruments of commercial defence against dumping or unfair trade as the US has.

By throwing these intra-EU demands into Europe's negotiations with the US, the French government has irritated its partners but also, in Paris' view, widened the scope for trade-offs, allowing France to get compensation from Brussels for concessions it could not wring from Washington.

But underlying all this has been the way that Mr Balladur has sought to use his political weakness over Gatt as his strongest bargaining card. It is, after all, conceivable that an unsatisfactory Gatt deal could topple him from power.

In the agricultural area, Mr Balladur has at least staved off the sharpest cuts in French subsidised farm exports until the later 1990s. This would postpone any pain until after the 1995 presidential election, on which he still has his options open.

It is a mercy that the 50-minute flight from Brussels to Geneva is too short to screen films. They would without doubt be American, and for bleary-eyed US and European Union negotiators who yesterday headed for the headquarters of the General Agreement on Tariffs and Trade after inconclusive all-night negotiations, they would have rubbed salt in already deep wounds.

As officials briefed Mr Peter Sutherland, director general of Gatt, and other international trade negotiators, on why they remained at loggerheads over bilateral trade reforms, the issue of US film-makers' rights in Europe's audio-visual market appears to be at the heart of their outstanding problems.

Before leaving for Geneva, Mr Mickey Kantor, US Trade Representative, said: 'We can see the outlines of a truly historic agreement involving 110 nations ..We were not, however, able to conclude agreement in the audio-visual sector because the EU was unwilling to provide foreign companies fair access to the revenues that are their due as owners of intellectual property rights.'

The irony is that both Mr Kantor, and Sir Leon Brittan, his EU counterpart, arrived in Geneva with 99 per cent of an immensely ambitious market-opening package already settled. Mr Kantor talked yesterday of a package that would involve EU tariff cuts for US goods of 50 per cent, with zero-for-zero cuts alone being worth over Dollars 5bn.

The EU has won similar cuts from the US. The agreement paves the way to a global tariff-cutting deal that is expected to add more than Dollars 230bn a year to trade by the year 2003. Why then has a dispute over copyright and royalty payments to US performing artists - worth tens of millions of dollars at most - put so much in jeopardy?

Inevitably, part of the answer lies in irrationality: US negotiators who have bowed twice in the past 12 months to strident EU pressure to amend Uruguay Round plans to liberalise farm trade - at immense political cost at home - have focused on the audio-visual issue as one on which a stand must be made. A powerful and noisy lobby at home, headed by Mr Jack Valenti, president of the American Motion Pictures Association, has kept US negotiators under pressure.

The sector is of immense importance to the US. Sales to Europe of films, music and television programmes amounted to Dollars 3.6bn last year. Only the aerospace sector earned more. In spite of an EU broadcasting directive which is supposed to reserve at least half of broadcasting time to European-made programmes, US productions accounted in 1991 for 81 per cent of European cinema screenings, more than 70 per cent of box-office takings, and 54 per cent of dramas and comedies on television.

Europeans - particularly the French - are demanding protection for their audio-visual sector on cultural grounds. They have insisted this must include future technologies, like satellite and cable television, multimedia, and pay-for-view films, despite knowing that it will be virtually impossible to police such protection.

While scoffing at such claims as protectionism in disguise, the US has bowed to most EU demands. Mr Kantor said yesterday: 'We have fully respected the cultural identity of Europe, and agreed to their cultural specificity language.'

The residual dispute hinges on French and German levies on blank audio and video tapes which are used to subsidise the arts locally, and provide funds for local copyright holders. The US says American performers and producers have a right to a share of these levies, since the tapes are largely used to record US-made films or music.

The EU retorts that there is no obligation under the Gatt to treat foreign and local performing artists equally. They also complain that since the US has no such levy, there is no reciprocal opportunity to raise funds in the US for European artists. There is no exact estimate of the sums involved, but the tens of millions discussed pale into insignificance alongside the billions at stake in the Uruguay Round.

Angry exchanges over this issue are also distracting attention from the immense ground covered by US-EU negotiators in recent days in agreeing a far-reaching tariff-cutting package. This is understood to include:

Tariffs on wood and paper products cut to zero.

'Very substantial' tariff cuts across the electronics sector, averaging 70 per cent, with some cuts to zero.

Tariffs on steel cut to zero.

Tariffs on some non-ferrous metals cut to zero.

Some 80-85 per cent of US tariff peaks cut on glass, ceramics and textiles.

The introduction of ocean shipping to Gatt disciplines.

Completing a procurement deal.

The package also agrees a new, more gentle, regime for reducing Europe's subsidised food exports. This bows to French demands and allows EU farmers to export in total an extra 8m tonnes of wheat over the coming six years. US farm exporters will reap similar gains.

Mr Shaul Eisenberg, the Israeli billionaire, has concluded a series of deals to expand his investments in China following the normalisation of Israeli-Chinese relations.

Many of the deals, involving the opening of Burger King fast-food restaurants, expansion of oil refineries and construction of a highway, were concluded during the recent visit to Israel by the governor of Jiangsu province, Mr Wu Guanzheng. The governor was a guest of Mr Eisenberg.

Under the Burger King deal, signed this week in Tel Aviv between Mr Eisenberg and Mr James Adamson, president of Burger King International, the Israeli financier has won the franchise to open at least 10 restaurants in China.

The first 500-seat restaurant will be in Beijing. Mr Eisenberg's Panama-registered United Development Incorporated (UDI) will carry out the project in co-operation with Chinese partners.

During the visit of Jiangsu's governor, Mr Eisenberg also signed agreements to expand the province's oil refineries and construct a toll-highway from Nanjing to Shanghai.

In addition, Mr Eisenberg is taking a stake in a new joint venture with Italian and local partners to produce industrial sewing machines. UDI is joining with Rimoldi, an Italian manufacturer, and Tianjin Tiangong, a local Chinese company. At full capacity, the new venture will produce 25,000 sewing machines a year.

The majority stake will be held by the Chinese partner, while Rimoldi will have 23 per cent and UDI about 18 per cent.

Mr Yasushi Mieno, governor of the Bank of Japan, called yesterday for further deregulation of Japan's financial markets, to help Japanese banks write off their non-performing loans.

Pointing to the sluggish economy, Mr Mieno noted that further bad debt write-offs by the banks were necessary before the economy could pick up. A key to Japan's economic recovery was to create an environment for banks to write off their bad loans, thereby improving their balance sheets, he said.

In particular, it was worth considering whether the financial markets could play a role by providing a means for banks to securitise their non-performing loans, the central bank governor said. 'The many functions of the financial markets, particularly the transfer of risk, played a major part in the recovery of US corporations. We must examine if there is room to use those functions in Japan's financial system.'

But in order to do so, Mr Mieno said, Japan's financial system, including regulations, tax, and settlement and accounting procedures, would need to be revamped. Under present rules, the securitisation of bad loans is highly restricted, with no secondary market in Japan to trade such securities.

'Financial institutions should make their own best judgments' about how to write off their bad loans, but it was the responsibility of the authorities to 'remove all obstacles in their way, creating an environment that will allow them to do so,' Mr Mieno added. His call for greater market deregulation contrasts with the stance of Japan's Finance Ministry, which has been cautious about loosening its reins on the country's financial institutions.

In addition to returning the financial institutions' balance sheets to health, Japanese companies still had to complete the adjustment of stocks and their balance sheets after the excesses of asset inflation in the late-1980s. 'Unless the economy goes through these adjustments, it cannot proceed to the next stage.

'Our stance is to carefully watch over the situation,' Mr Mieno said.

Concerning prospects of another cut in the official discount rate, he believed interest rates were already low enough to support capital investment by Japanese corporations once such activity picked up.

His remarks came amid growing unhappiness with the government's handling of the economy.

A survey by the Nihon Keizai Shimbun, Japan's economic daily, found nearly 49 per cent of the 3,000 people polled were critical of the economic policy of Prime minister Morihiro Hosokawa, against 44 per cent who viewed the government's measures positively. Over half wanted economic measures to take precedence, compared with 38 per cent who thought political reform more important.

The Democratic Alliance of Burma, a hard-pressed grouping of ethnic fighters, political exiles and students which has been the focus of opposition to the Rangoon regime, is willing to enter into peace talks to end four decades of armed struggle against the military government, it said yesterday.

Dr Em Marta, spokesman for the Karen insurgents and a member of the alliance, said the DAB was willing to send a delegation to Rangoon to prepare the ground for substantive talks. 'We can go to Rangoon to see what they have to offer, to test their sincerity,' he declared.

The alliance has until now said it would engage only in comprehensive round-table talks, outside Burma, after the release of all political prisoners. The heroine of the democracy movement, Nobel Peace Prize winner Aung San Suu Kyi, is now in her fifth year of house arrest in Rangoon.

The Karen rebels who dominate what is left of the alliance have found themselves isolated because of Rangoon's policy of making ceasefire deals with elements of the grouping.

The 3,000 Karen soldiers and the 2,000 fighters of the Karennis and Mon ethnic insurgencies who remain are now vulnerable to the Burmese army's best troops. But Dr Marta insisted Rangoon would have to negotiate with the DAB, and not keep on trying to pick off opposition groups one by one.

Mr Shimon Peres, Israel's foreign minister, said yesterday Syria was ready to renew peace talks after successful shuttle diplomacy by Mr Warren Christopher, US secretary of state.

The claim came as Syria said it had rejected an Israeli proposal to withdraw in four phases from the occupied Golan Heights in return for immediate peace.

Mr Christopher is expected to announce the resumption of Middle East peace talks in Washington in January after a break of seven months when he returns to Damascus tomorrow for a second round of talks with President Hafez al-Assad.

In Bonn Mr Yassir Arafat, Palestine Liberation Organisation chairman, renewed his demand that Israel stick to a deadline five days away for starting to withdraw Israeli troops from the Gaza Strip and West Bank area of Jericho.

Mr Arafat said the December 13 date was sacred and if it was not met 'it would reflect negatively on the credibility of the peace process'. In Israel officials reiterated that the deadline could not be met although some symbolic gesture might be made.

A meeting between Mr Arafat and Mr Yitzhak Rabin, Israeli prime minister, is one option being considered. Mr Arafat is due to meet Mr Peres in Spain tomorrow.

Palestinian and Israeli negotiators remain deeply divided on a number of economic and security issues. In Cairo, where talks are being held on military and security issues the two sides have yet to agree the size of the Jericho area, who will control border crossings and the number of Israeli troops who will remain in Gaza-Jericho to protect Israeli settlers.

Mr Nabil Shaath, chief PLO negotiator, said however that the two sides would exchange draft agreements today which would be subject to further negotiations.

Some progress has been made in Paris, where the two sides are negotiating future economic relations. Mr Yacob Tsur, Israeli agriculture minister, said yesterday agreement had been reached on a phased entry of Palestinian agricultural produce into Israel starting with 70,000 tonnes of vegetables and 100m eggs in the first year.

Mr Tsur also said the Palestinians had agreed to prohibit import of produce from third countries currently prohibited in Israel.

Officials also said the two sides had largely agreed on money and banking for the Palestinian economy. Disagreement remains over an Israeli proposal for a customs union with harmonisation of taxes and duties.

Meanwhile, Israeli settlers all across Israel demonstrated, blocked roads and shouted anti-government slogans protesting against Monday's killing of two Jewish settlers in an ambush by extremist Palestinians in Hebron. Thousands took part in the funeral procession from Bnei Brak through Jerusalem to Hebron.

Cradling an infant, Mrs Orit Struck, a 33-year-old pregnant mother of six, talks softly about the fears of Jewish settlers in Hebron, a hotbed of zionist militancy and a flashpoint of current Arab-Jewish violence.

'Every time I take my children to school I have to try hard to smile at them because I know that by noon I may not see them ever again,' she says the morning after Palestinian gunmen ambushed and shot dead a settler and his son in Hebron. 'That is the most awful thing for a mother.'

Of the Arabs, she says: 'We know they hate us and are our enemies. They tell us openly as soon as the army leaves they will come and kill us all with guns and knives. But the worse thing is that there are Jews in the government standing behind them and giving them encouragement. We are betrayed.'

So why does she stay in her small apartment complex, surrounded by soldiers, gun-toting Israeli settlers, wire fences and watchtowers in an Arab town? Like many orthodox Jews, Mrs Struck, who carries a gun, believes that God gave the Jews all the land in the West Bank - which they call by the Old Testament name of Judea and Samaria.

'The places in Judea and Samaria are the roots of Jewish life. It is like a tree and here are the roots, especially Hebron. Here Abraham brought land for his sons and King David started his royalty. We are like vanguard soldiers of the Jewish people. To leave would be like deserting a soldier's post. Most people, like me, are becoming more stubborn.'

Outside soldiers patrolled the deserted roads of the usually bustling Arab market town enforcing a strict curfew after Monday's killings which, in turn, came after Jewish settlers shot into crowds of Palestinians last week and killed one.

At the scene of Monday's ambush a group of Jewish students erected a memorial to the two dead settlers out of stones stained with dried blood. Behind them lay an overturned Arab car and smouldering tyres set alight when settlers rioted after the killings.

Since the Israeli-Palestinian peace accord was signed in September, the 120,000 Jewish settlers have been increasingly vocal against the agreement which they fear, ultimately, will mean giving up their homes.

Violence on the settler side has been matched by Islamic fundamentalists who are also opposed to peace, leaving at least 18 Israelis and 34 Palestinians dead since September. Yesterday the fundamentalist Hamas movement claimed responsibility for Monday's killings and said it was changing tactics from attacking soldiers to attacking settlers.

The settlers, acting under the umbrella of the Yesha Council, have formed a security organisation called Hashomer - an armed security force of settlers. They have also threatened a nation-wide campaign of civil disobedience.

Some government ministers have branded Yesha Council 'a subversive organisation' and the violence 'Jewish terrorism'. One warned that the government might consider taking away the right of settlers to carry weapons.

All of this has divided the country and raised the prospect of an upsurge in conflict.

'We have always said the peace agreement is a recipe for civil war between Jews and Palestinians,' said Mr Elyakim Ha'Etzni, a right-wing settler leader. 'The whole country is going to be consumed by civil war and it will end up with tens of thousands of victims, and hundreds of thousands of Arabs will be evicted. This is now inevitable. It will be just like Sarajevo.'

In a briefing to the incoming New Zealand government, the Treasury lifted its estimates of gross domestic product growth rate this year to between 3.5 and 4.5 per cent, Terry Hall reports from Wellington. In a forecast issued before the election, Treasury estimated GDP would grow by 2.9 per cent.

President Hastings Banda resumed executive power in Malawi yesterday, in an apparent move to restore order after an army crackdown on Malawi Young Pioneers, the armed wing of the ruling Congress party, Nick Young writes from Lilongwe.

Government and party premises were attacked during the crackdown. Opposition leaders doubt Dr Banda's ability to govern after a brain operation and a two-month convalescence, during which power passed to a Congress party triumvirate.

The World Bank has declared Zaire in default after the central African nation failed to pay Dollars 23.8m (Pounds 16m) in interest and payment due on its outstanding loans, George Graham writes from Washington.

Zaire owes Dollars 84m to the World Bank and Dollars 1.24bn to the International Development Association, the Bank's concessional loan affiliate.

With President Mobutu Sese Seko clinging to power, Zaire is in political and economic chaos. The World Bank suspended disbursements on loans to Zaire in July.

President Felix Houphouet-Boigny of the Ivory Coast, Africa's longest serving leader, died yesterday at the age of 88. He was the only leader the country had known since independence from France in 1960.

The speaker of parliament, Mr Henri Konan Bedie, subsequently announced that he had become president, sparking a struggle for the succession with the prime minister, Mr Alassane Ouattara.

Whether out of vanity or superstition, Mr Houphouet-Boigny had refused to groom an heir. 'An African chief never names his successor,' he once said, and the subject became taboo.

In the past few days a succession crisis had developed. Mr Konan Bedie's constitutional claim to the presidency, as parliamentary speaker, was strongly contested by supporters of the prime minister, and by opposition leaders.

Ivorians had been expecting the death of the president, who was stricken by prostate cancer and had not been seen in public after he flew home from Europe in a hospital aircraft on November 19. He stayed in his palace in the town of Yamoussoukro, his birthplace.

The succession row centred on Article 11 of the constitution, which states that the parliamentary speaker takes over at the president's death, ruling until the next elections. But Mr Ouattara's supporters have been campaigning for round-table talks to agree an interim authority until elections.

Although Mr Konan Bedie, a career politician from the president's Baoule tribe, has the strongest claim to the presidency, Mr Ouattara, a former director of the International Monetary Fund, enjoys a more solid reputation. Mr Ouattara is nominally in charge of a government that has drifted for most of this year.

Under Mr Houphouet-Boigny, Ivory Coast became the world's leading cocoa producer and third coffee exporter. But it was too dependent on fluctuating commodity prices and recent years have seen unemployment, crime and corruption soar.

Policies that could arrest the Ivory Coast's economic decline have not been forthcoming. France, which has paid the country's annual Dollars 350m (Pounds 250m) debt-servicing bill to the World Bank since 1992, is threatening to withdraw its support at the end of the year. The country cannot service its Dollars 17.3bn foreign debt by itself.

The collapse of commodity prices has impoverished the country. The World Bank estimates per capita incomes have plunged by 25 per cent since 1987.

'It is a decline comparable only to the hardships suffered in the Soviet Union,' says a World Bank economist, 'without safety nets or programmes for the poor.'

In the minds of many Ivorians, the country's economic malaise became fused with the president's declining health.

Ivorians fear there is no one of Houphouet-Boigny's stature to rein in ethnic and social tensions which threaten West Africa's most stable regime.

'Houphouet's legacy is crumbling,' says Mr Laurent Gbagbo, leader of the largest opposition party, the Front Populaire Ivoirien. 'The ruling party is tearing itself apart in the leadership struggle; the government is bankrupt; civil servants are on strike. Our task today is to rebuild this crumbling edifice together.'

So far, Mr Gbagbo's message has fallen on deaf ears. Racist overtones have crept into the fray. Newspapers backing Mr Konan Bedie denounce Mr Ouattara as a 'foreigner' because he was educated in Burkina Faso and the US. Newspapers behind the prime minister attack the Konan Bedie camp as 'fascists'.

Underlying the concerns of many diplomats is the fear that if the politicians cannot agree among themselves, the military will take over.

Mr Konan Bedie, 59, enjoys the backing of France, and the US, where he served as a young ambassador after independence. His only career setback was in 1977 when he was removed from overall charge of the Ivorian economy and sent into exile as an adviser to the World Bank in Washington.

At the time, Mr Konan Bedie had presided for 11 years over an economy that enjoyed steady growth. Mr Houphouet-Boigny sacked him and other ministers after financial scandals. But in 1980 he was back, elected as parliamentary speaker.

White rule ended formally in South Africa yesterday when a multi-racial Transitional Executive Council took office in Cape Town, in a ceremony marking the end of decades of anti-apartheid struggle.

Its first substantive act was to approve a government application to the International Monetary Fund for a loan of Dollars 850m (Pounds 570.4m) from its compensatory and contingency financing facility, to counteract balance-of-payments problems caused by last year's drought. It was the first time Pretoria had sought the sanction of black South Africans for its actions, and represents the first concrete step toward black rule.

'We have done it. We have achieved the seemingly impossible. Now for the miracle of a completely free and fair election,' Mr Joe Slovo, Communist party chairman and a former guerrilla leader who was for years Pretoria's most hated adversary, told the first meeting of the TEC.

The ceremony, curiously muted, took place in the chamber of the Good Hope building, in the shadow of Table Mountain. It was marred by the absence of seven of the the 26 parties which originally took part in multi-party talks on a new constitution.

Chief among these were the Inkatha Freedom party and the white-supremacist Conservative party, whose decision to boycott the TEC, and possibly next year's elections, threatens transition to democracy.

On Monday night, talks between the right-wing parties, known as the Freedom Alliance, the African National Congress and the government broke down after the ANC issued an ultimatum: the Freedom Alliance must agree to take part in the TEC and other transitional bodies, and in the elections, before further talks can take place on constitutional amendments to meet the alliance's demands for stronger federal powers for regions.

The government has released a proposed amendment on regional powers, making cosmetic changes to the constitution agreed last month. In a symbolic act of protest at the installation of the TEC, about 30 armed white rightists occupied Fort Schanskop outside Pretoria. The government and the ANC continued to dispute the actual extent of the TEC's powers, with Mr Cyril Ramaphosa, ANC chief negotiator, urging delegates to ensure it is not a 'toy telephone'.

President Hastings Banda resumed executive power in Malawi yesterday, in an apparent move to restore order after an army crackdown on Malawi Young Pioneers, the armed wing of the ruling Congress party.

Government and party premises were attacked during the crackdown, believed to have been instigated by middle-ranking army officers, in which about 30 people died. Opposition leaders doubt Dr Banda's ability to govern after a brain operation and a two-month convalescence, during which power passed to a Congress party triumvirate.

An opposition-dominated National Consultative Council has urged the triumvirate's resignation and the sacking of Maj Gen Isaac Yohane, army chief of staff. Dr Banda's return meets these demands halfway, but the opposition wants an interim president appointed, pending elections.

While most leaders are judged by their achievements, a cruel twist of fate granted Felix Houphouet-Boigny such exceptional longevity that he was forced to live through the decline of his greatest creation: the Ivory Coast.

The loss of 'le Vieux', the father of the nation, has given Ivorians the chance of a fresh start 33 years to the day after independence from France.

They must now decide who is to succeed him and how - a question Houphouet-Boigny refused to discuss during his lifetime - and confront the economic and social malaise ushered by the collapse of cocoa and coffee prices in the early 1980s.

As Houphouet-Boigny advanced in years, his pre-occupation with eternity became more pressing than the day-to-day running of his country.

Like the pious monarchs of medieval Europe, Houphouet-Boigny paid lavishly for a place in heaven. He often boasted that the Basilica of Our Lady of Peace in Yamoussoukro, his Dollars 150m gift to the Vatican, was financed from his personal fortune. The Basilica in the jungle, only a fraction smaller than St Peter's, stands as a testament to his devout Catholicism - and the delusions of grandeur common to dictators.

Born before the French took possession of his native village, Felix Houphouet, a doctor trained in Dakar, made his first impression on the colonial administration of the 1930s by campaigning for higher cocoa prices for African farmers.

He added Boigny ('the ram' or 'irresistible force') to his surname after being elected to the French constituent assembly in 1946, where he promoted a law which abolished forced labour in France's African colonies. He went on to serve six terms of office as a minister in the governments of two French republics.

He did not fight for the Ivory Coast's independence. Rather, it was his way of escaping plans for a Federation of West Africa advocated by fellow Africans like Leopold Senghor of Senegal and Ahmed Sekou Toure of Guinea. He was the odd-man-out among Africa's emerging leaders in many respects. Ideals of pan-Africanism filled him with profound scepticism. He favoured close ties with France, and a capitalist model of development. Africa, he was quoted as saying, 'must be an extension of Europe'.

At the first summit of the Organisation of African Unity 30 years ago, he was the lone voice opposed to sanctions against South Africa.

With French investment and thousands of French advisers in government, however, Houphouet-Boigny's Ivory Coast came to be seen as a model post-colonial state. He managed to combine a polished international reputation and the outlook of an African chief.

Until 1990, the Ivory Coast was a one-party state, but a benevolent one. Political opponents were occasionally locked up. More often, they were co-opted into government with generous offers of ministerial posts. There was no death penalty during his rule, and the Ivory Coast enjoyed a better human rights record than most post-independence African states.

Above all, there was stability.

Every five years Houphouet-Boigny was re-elected, unopposed, to the presidency with 100 per cent of the vote. He created an economy based on cocoa and coffee, and borrowed heavily against the commodity boom of the 1970s to transform Abidjan into a showcase of African development. The Ivory Coast was, for a while, the richest country in Francophone Africa.

Then the world price for cocoa started to fall, attempts to protect Ivorian growers with guaranteed prices ran up huge budget deficits, and the nation slid suddenly towards hunger and crime. When social unrest forced the advent of multi-party democracy in 1990, Houphouet-Boigny conceded 18 per cent of the vote to his rival, Laurent Gbagbo, in a contest marred by fraud.

By then, Houphouet-Boigny was well into his 80s and spending more and more time convalescing from various ailments in Europe. The fact that there were no coup attempts during his prolonged absences was a tribute to his unquestioned authority.

His greatest mistake was to postpone the inevitable day of reckoning, when the Ivory Coast would have to learn to live without him. The succession became a taboo subject.

The animist traditions of his Baoule tribe, he once told visiting choir boys, say that if you die a chief, you will remain a chief in the after life. Die a servant, and you will forever be a servant. Houphouet-Boigny, who retained the services of a witch-doctor as well as the top cancer specialists of Switzerland, made sure he would die a chief.

The US admitted yesterday it had concealed more than 200 nuclear tests since 1945 for fear of giving information to the Soviet Union.

Mrs Hazel O'Leary, the energy secretary, said yesterday the US had conducted 925 nuclear tests between 1945 and 1990, including 204 previously undisclosed.

Mrs O'Leary said the announcement was 'a foot in the tub' for the energy department's plan to release far more information about its activities and restore public trust in the agency for the important debate about where and how to store nuclear waste.

'We were shrouded and clouded in an atmosphere of secrecy. And I would even take a step further - I would call it repression,' Mrs O'Leary said yesterday.

Among the information emerging yesterday on the nuclear programme, Mrs O'Leary said the US had used 98 tons of plutonium in weapons production between 1945 and 1988, and that plutonium inventories at US nuclear weapons production sites now totalled 33.5 tons.

'This informs everyone as we begin to grapple with the problem in a very public way of the ultimate disposition of plutonium in the United States,' Mrs O'Leary said.

The energy department also declassified much of its information surrounding inertial confinement fusion research, as well as data on mercury releases at the Oakridge plant in Tennessee.

Mrs O'Leary said the department was reviewing 32m pages for possible release. The secrecy dates from the Manhattan Project, during which scientists built the atom bomb that devastated the Japanese cities of Hiroshima and Nagasaki at the end of World War Two.

Mr Christopher Paine, a nuclear weapons expert at the private Natural Resources Defence Council, said the number of previously secret weapons tests was larger than had been estimated by specialists.

The government said 36 of the secret tests accidentally sent small quantities of radioactive gas into the atmosphere, but there was 'no lasting environmental impact, even in the immediate areas of the tests'.

About 1,600 pounds (725 kg) of radioactive plutonium missing from the Rocky Flats nuclear weapons plant in Colorado has been found buried at a federal site in eastern Idaho, a Seattle newspaper reported, Reuter adds from Seattle.

The Department of Energy acknowledged 'a discrepancy in records' accounting for the missing plutonium, the Seattle Post-Intelligencer said.

Idaho Governor Cecil Andrus said he is 'gravely concerned' about the plutonium, buried over several acres at the Idaho National Engineering Laboratory.

The buried plutonium is in particles, on contaminated tools and clothing and in sludge form, the newspaper said.

Department of Energy officials in Washington say that despite the accounting mistake there was never any danger that the plutonium could have found its way into the wrong hands.

The US is to change its military planning, equipment and intelligence to deal with the likelihood that, even after the demise of the Warsaw Pact, its future enemies are likely to possess some form of chemical, biological or nuclear weapon.

Mr Les Aspin, the secretary of defence, said new measures were needed because 'a policy of prevention through denial won't be enough to cope with the potential of tomorrow's proliferators'.

The military services have been asked to examine their equipment programmes and shift money toward better ways of tracking mobile missile launchers, improving bomb penetration to attack buried weapons sites and developing detectors and suits to guard against chemical or biological attack. Theatre missile defence systems will also be a priority.

These new counter-proliferation measures could cost hundreds of millions of dollars, and a senior defence official said budget realities meant that money would have to come from other defence programmes.

At the same time, US intelligence efforts will be shifted to gather more information that the armed forces might need to help protect themselves against weapons of mass destruction in future regional wars. The number of military personnel in the Central Intelligence Agency's non-proliferation centre will be tripled.

While US forces have always been prepared for a Warsaw Pact enemy in Europe who possessed both nuclear and chemical weapons, military planning for smaller regional conflicts has largely ignored such weapons of mass destruction.

Brazil yesterday announced a package of measures, including eventual introduction of a new currency, to tackle the country's soaring inflation rate of about 2,000 per cent a year.

The package, the seventh stabilisation attempt since 1986, will be introduced gradually and will probably not take full effect until after the government's term runs out next year.

It won cautious backing from the government's coalition partners and economists because the measures first tackle Brazil's budget deficit, seen as the main cause of inflation, and do not include 'shock' measures like price freezes which have failed in the past, even if initially successful.

But several of the measures still need approval from Congress, which has been paralysed by a corruption scandal tainting many of its members.

Proposed cuts in transfers to states and municipalities will also antagonise Brazil's powerful state governors.

The government admits approval of the package may be difficult but hopes that by explaining the measures in advance the country will realise the severity of the problems.

It fears that, without the package, inflation will accelerate ahead of next year's presidential and congressional elections. 'Economic policy will then have to be either highly recessionary and politically unsustainable, or you will have hyperinflation,' according to Mr Winston Fritsch, economic policy secretary.

The first stage of the package, announced in general terms last week, is built into next year's budget and calls for spending cuts and revenue-raising measures to wipe out a projected deficit of Dollars 22.2bn.

The cuts include a set-aside of 15 per cent of the transfers made from the central government to states and municipalities, to save Dollars 5.6bn. There is also a 5 per cent increase in all federal taxes, to take the top income tax rate from 25 per cent to 26.25 per cent, to raise Dollars 3.7bn.

Congress has to approve the budget and several constitutional amendments to cover areas such as the 15 per cent set-aside, as well as longer-term measures to solve a deficit in the social security system.

Mr Fernando Henrique Cardoso, finance minister, also announced he would support a number of measures designed to 'modernise the economy'. These included the ending of the state monopoly on telecommunications and the cancellation of a ban on the involvement of foreign controlled companies in mineral extraction.

These areas are politically sensitive, and can only be approved through a constitutional revision which is under way. Mr Cardoso was less specific about the even more sensitive monopoly enjoyed by state oil company Petrobras.

If the first stage of the package is approved, a new index to measure inflation daily will be introduced. Almost all government revenues and many private sector prices are at present adjusted in line with past inflation measures, which often adds to inflationary expectations.

The new index could eventually be linked to the US dollar or a basket of currencies and adjusted daily, as happens with the central bank adjusting the exchange rate. The index would then become a new currency unit, backed by Brazil's foreign currency reserves of over Dollars 20bn and the central bank would be given more autonomy over monetary emission.

The new index, called the Unidade Real de Valor or unit of real value, is partly designed to erase inflationary expectations which have dogged previous currencies.

By shortening the period of price indexation and making index-linked contracts forward-looking, past inflation would no longer contaminate the new currency, the government hopes.

One of the most bitter labour disputes in recent US history appeared to have been resolved last night as coal industry management and unions announced that they had tentatively agreed a formula for ending a seven-month-old coal strike.

The agreement, details of which have not been released, will be put to a vote among union members on December 14.

If they vote to accept, their decision will end a strike that has involved 17,700 workers across seven coal-producing states and had hit about 10 per cent of US coal production.

A resolution of the dispute will be particularly welcome to Hanson, the UK industrial conglomerate which owns Peabody Coal, the biggest US coal company involved in the dispute. The strike had been costing Peabody about Pounds 1m a day and was a significant factor in the profits downturn reported by Hanson last week.

The strike began after a labour contract between the United Mine Workers of America and the Bituminous Coal Operators Association expired in May. A key issue in the dispute over the renewal was the coal industry's insistence on its right to set up non-union subsidiaries.

The union sought assurances that its members would have rights to jobs at these non-union operations when the mines they were currently working at were closed. Without that assurance, it said, its memebers would be 'mining themselves out of a job.'

The closure threat was exacerbated because most of the affected mines produce high-sulphur coal, a commodity already under pressure because of the environmental pressures created by the US Clean Air Act.

The coal operators had responded to the union demands by proposing a complicated formula for awarding some new jobs to union workers and some to non-union labour.

Mr Richard Trumka, president of the United Mine Workers of America, last night refused to give details of the agreement before it had been presented to his members, but said the union had won a contract that guaranteed better wages and pensions for miners while protecting their health care and working conditions.

In a statement confirming that the two sides reached a tentative agreement, the Bituminous Coal Operators' Association said yesterday its member companies planned to return to normal working conditions as soon as possible.

The US is to change its military planning, equipment and intelligence to deal with the likelihood that, even after the demise of the Warsaw Pact, its future enemies are likely to possess some form of chemical, biological or nuclear weapon.

Mr Les Aspin, the secretary of defence, said new measures were needed because 'a policy of prevention through denial won't be enough to cope with the potential of tomorrow's proliferators'.

The military services have been asked to examine their equipment programmes and shift money toward better ways of tracking mobile missile launchers, improving bomb penetration to attack buried weapons sites and developing detectors and suits to guard against chemical or biological attack. Theatre missile defence systems will also be a priority.

These new counter-proliferation measures could cost hundreds of millions of dollars, and a senior defence official said budget realities meant that money would have to come from other defence programmes.

At the same time, US intelligence efforts will be shifted to gather more information that the armed forces might need to help protect themselves against weapons of mass destruction in future regional wars. The number of military personnel in the Central Intelligence Agency's non-proliferation centre will be tripled.

While US forces have always been prepared for a Warsaw Pact enemy in Europe who possessed both nuclear and chemical weapons, military planning for smaller regional conflicts has largely ignored such weapons of mass destruction.

But Pentagon officials say that Iraq possessed chemical weapons, even if it did not use them against the US and its allies in Desert Storm, and that virtually every other country that might be a likely enemy in the near future is at least dabbling in such programmes.

A senior defence official said yesterday:'They are one of the few things that could stand in the way of the successful application of our conventional military force.'

The US preference, he said, was not to respond to another country's weapons of mass destruction by using its own special weapons.

Two out of every five Latin American city-dwellers are poor, while three in five of the rural population live in poverty, according to a UN study published recently, David Pilling writes from Santiago.

Throughout the 1980s income distribution worsened significantly as countries adjusted to the effects of the debt crisis, according to the Social Panorama report produced by the Economic Commission for Latin America and the Caribbean (Cepal).

'This did not only affect homes on low incomes, deepening their poverty, but also hit the middle classes who lost out relatively in terms of income distribution.' The task of restoring middle class living standards is 'more difficult and lengthy' than that of eradicating extreme poverty, according to Cepal, since it requires much greater resources.

In the short term, Cepal says, governments need to tackle three areas: restoring salaries in the formal sector to pre-1980s levels, raising productivity and conditions in the informal sector and strengthening inadequate social security and pension provisions.

'By different means and with varying intensity, Latin American governments have made advances on all three fronts, although much remains to be done,' the report says.

In the medium term, governments must develop 'human resources' through fairer access to education, tackling youth unemployment and expanding resources in rural areas.

A clearer European identity in defence policy and a European economic recovery would do much to ease strains in relationships with the US, Spain's premier Felipe Gonzalez said yesterday.

Speaking after a White House session with President Bill Clinton on Monday, he identified the Nato summit in Brussels next month and the extra steps to European monetary union due to take effect on January 1 as important markers in this process.

'We are still unsure if co-ordinated policies can lower European interest rates,' he said. 'But lowering them, together with a Gatt agreement, is of most interest to the US because a European economic recovery is in the American interest.'

Mr Gonzalez thought Mr Warren Christopher, US secretary of state, had 'exaggerated' last week in warning of the deleterious effects on Nato of a failure to reach a Gatt agreement. But he conceded that it was proving difficult to define policies to deal with what he called 'the new world disorder'.

From La Pintana, a desperately poor municipality in south Santiago, the Chilean economic miracle seems worlds away. Most of La Pintana's inhabitants, many forcibly relocated from more prosperous neighbourhoods during the military regime, live in rows of cramped, squalid government housing, often looking out on unlit, unpaved streets plagued with crime.

La Pintana's 170,000 inhabitants have no hospital and only one secondary school. More than half live below the poverty line. According to the mayor, Mr Jaime Pavez, residents are four times less likely to have regular work than their fellow Chileans. They are nearly 200 times less likely to own a telephone.

In spite of a decade of exceptional national growth, a third of Chileans still find themselves below the poverty threshold, while nearly one in 10 lives in extreme poverty.

Huge discrepancies between rich and poor, long existent in Chile, are becoming more obvious in a country whose rapid growth has delivered the trappings of a consumerist, western lifestyle to large sections of the population. So much so that both left and right-wing candidates in the presidential election this weekend have put the issue of Chile's poor at the top of their agenda.

Mr Eduardo Frei, the Concertacion coalition candidate widely expected to win the presidency, has pledged to eradicate poverty within six years. Although there is much to be done, Mr Frei says, the centre-left coalition has made considerable inroads during its four-year term. According to official figures, by November 1992 the percentage of people living in poverty had shrunk to 32.7 from 40.1 two years earlier and 44.4 in 1987.

Given current growth rates, that figure should drop further to about 29 per cent by next March, according to Mr Alejandro Foxley, finance minister. 'Essentially, in 1987 you had 5.5m living below the poverty line and by the end of this administration it will be 3.8m. I think that's pretty impressive.'

Mr Foxley also cites data showing that people in abject poverty - defined as those unable to afford basic food requirements - fell to 9 per cent in 1990 from 13.8 per cent two years earlier, and 16.8 per cent in 1987.

Such progress, Mr Foxley says, has been the result of economic expansion (which has averaged 6.3 per cent over four years), the rapid creation of jobs, as well as specific policies to target Chile's poorest. Since 1990, the government has raised the minimum wage by '30 per cent in real terms', while family allowances have seen a 'big expansion'.

Mr Gert Rosenthal, executive secretary of the UN's Economic Commission for Latin America and the Caribbean, agrees that there have been significant improvements. 'The recuperation that you are seeing now in part reflects the fact that, when this economy grows, you can pull people out of poverty in a relatively short time,' he says.

'In other countries you can pour a lot of money in, but you are unlikely to see results for a generation. The type of poverty you have here is qualitatively different from that found, for example, in Peru or Bolivia. The levels of education, infant mortality, health and so forth are quite different.

'In Chile the workforce is sufficiently skilled to take up opportunities as they arise. They are trainable. In many other Latin American countries, there comes a point where this is not true.' The creation of jobs is thus the over-riding factor, he says.

Official figures show unemployment continuing to fall sharply. The number of jobless is 4.5 per cent, against 6.5 per cent in 1990 and 20 per cent in 1982. Although some observers question the accuracy of government jobs statistics, few disagree with Mr Rosenthal's belief that unemployment has 'clearly come down terrifically', nor with his assessment that wages at the lower end of the scale have risen markedly.

According to Prealc, the world employment programme, Chile has bucked the regional trend by creating not only more, but 'better quality' jobs. Since 1985, the proportion of Chileans with low-paid, unstable work has steadily declined. Only 50 per cent of Chileans are self-employed or work for small businesses against 56 per cent in Mexico and 60 per cent in Colombia.

'Real salaries in Chile have shown a sustained recuperation since 1988,' Prealc's report says. 'Despite this, minimum wages are still below those of 1980.' The group estimates real minimum wages at 83.4 per cent of 1980 levels, up from 63.4 per cent in 1985.

Mr Rosenthal says the government has struck the right balance between specific measures aimed at tackling poverty and policies intended to stimulate economic growth and job creation generally. 'If we were asked to grade the government in this area we would give them high marks. They seem to have got it about right.'

From La Pintana, it is less easy to be sanguine. Mr Pavez feels the government has not done enough to help 'marginalised communities'. He is particularly aggrieved at the allocation of local taxes which, he says, favours wealthier municipalities.

'For example, in Las Condes (one of Santiago's richest districts) you have well-equipped public health facilities even though most people go to private clinics. Here, where there is much greater need, we don't even have a hospital.'

Government housing too, he says, often fails to meet basic standards. He recently refused to attend a ceremony in his municipality intended to welcome residents to their new homes. 'Some houses didn't even have floors or staircases,' he says. 'I didn't go because I couldn't say 'welcome' - it would have been false.'

Mr Pavez says districts such as La Pintana need what he calls 'discriminatory decentralisation', the channeling of funds from wealthier districts to poorer ones.

In the absence of the necessary resources, he says, it will prove almost impossible to 'cut the vicious cycle of poverty. Without this we won't be able to incorporate our people into the world outside - the world of the Chilean miracle.'

The Russian government yesterday announced a significant fall in the inflation rate, giving a boost to Russia's Choice, the electoral alliance set up by radical ministers, in the run-up to Sunday's parliamentary elections.

Inflation, the main gauge of success of unpopular financial austerity measures, was reported to be down to 11.3 per cent in November from 20 per cent in October. Mr Sergei Vasiliev, head of the government's economic reform centre, said it was a triumph for a much-criticised tightening of fiscal and monetary policy over the past six months.

Mr Boris Fyodorov, the finance minister, who says his campaigning for Russia's Choice consists of keeping a close watch on the country's financial health, promised that 1994 would be 'a year of investment and restructuring'.

In the charged week before the elections, any economic developments are being exploited to the full by Russian politicians.

By the same token, the deputy prime minister, Mr Alexander Shokhin, who is responsible for foreign economic relations but running for a different party, confirmed that President Boris Yeltsin would fly to Brussels today to sign a political declaration with European Union leaders. The political declaration, which puts Russia on the same footing as the US and Japan as a political partner for the EU, also sets out the principles of a more concrete partnership agreement to be signed next year.

Denying that the trip would serve as a public relations boost for Mr Yeltsin before the elections, Mr Shokhin said that 'on the contrary it would help strengthen the image of Europe' which had taken a long time to recognise the progress made by Russia towards a market economy. But he admitted that Russia and the EU were still at loggerheads over restrictions imposed by President Yeltsin on western banks to win support for Russia's Choice from powerful Russian banks.

Meanwhile, Mr Yeltsin's drive for a yes vote in the referendum on the draft constitution received support from an unexpected quarter yesterday when he prevailed upon leaders in the ethnically divided North Caucasus to endorse the constitution publicly.

The Czech and Slovak republics have re-adjusted their currencies under their Ecu-based clearing agreement, leading to an effective 8 per cent devaluation of the Slovak crown against the Czech currency for trade between the two countries.

The adjustment does not affect the value of the two crowns against other currencies but the change is important for domestic and international companies operating in both halves of the now divided former Czechoslovakia.

Over the first nine months of the year Czech exports to Slovakia were CzK54.37bn (Pounds 1.2bn) while Slovakia exported goods worth CzK47.54bn to the Czech republic.

The change was made necessary by the rise in the Czech Republic's surplus in the clearing balance to Ecu110m (Pounds 83.8m), close to an agreed limit of Ecu130m, Mr Martin Svehla, spokesman for the Czech national bank said yesterday.

In practice it means the Slovak crown, which was devalued by 10 per cent against all currencies in July, has lost 18 per cent of its value against the Czech crown since the start of the year. The move is expected to slow Czech exports to Slovakia and boost Slovak exports to the Czech Republic.

The Slovak state secretary of privatisation, Mr Ivan Lexa, has been charged with defaming the presidency, a government official said yesterday, Reuter reports from Bratislava.

Mr Lexa, an ally of the prime minister, Mr Vladimir Meciar, suggested in November that aides close to the president were involved in illicit business, said Mr Jaroslav Ivor, an interior ministry official.

Mr Lexa could face two years in prison for the remarks.

General Motors Europe is expected to reach final agreement next week to begin assembling cars in Poland.

GM is planning to form a joint venture with FSO, the Polish state-owned carmaker, to assemble the Opel Astra small family car in part of the FSO plant in Warsaw.

In the first stage of the project GM is aiming to assemble annually up to 10,000 four-door Opel Astras from SKD (semi knocked-down) kits supplied from its plants in west Europe.

GM will send painted car bodies from its assembly plant in Antwerp, Belgium, for final trim and assembly in Warsaw.

Main components such as engines and transmissions will be supplied from its plant in Bochum, Germany. Production is expected to start in the autumn of next year.

In this initial stage of the venture GM is expected to invest about Dollars 25m (Pounds 16.7m). It will take a stake of around 70 per cent in the venture, which is likely to have a workforce of around 250.

Under its terms, which have been under negotiation for more than two years, GM envisages moving later to a more ambitious second stage in which cars would be assembled from CKD (completely knocked down) kits, which would require body welding and painting to be carried out in Poland. Output for the second stage could be increased to 35,000 cars a year on three shifts with a workforce of around 1,000. The second stage would increase total investment in the project to around Dollars 60m.

As part of the planned co-operation GM would aim to take part in developing the automotive components supply industry in Poland.

The company announced yesterday that ACG, the GM group's automotive components subsidiary, had signed a memorandum of understanding with FSO and its affiliate ZEM-ELK to set up a feasibility study into the establishment of ventures in such component areas such as wiring harnesses, lighting, metal and plastic components.

The following gloomy prediction is not the pre-election bombast of the communists, but the prophecy of Mr Boris Nemtsov, one of Russia's ground-breaking economic reformers and a candidate in this weekend's parliamentary elections. 'Unfortunately the next year in Russia will be a year of tremendous inflation, unemployment, strikes, factory closures and very acute political conflicts. I see nothing good in the future.'

Mr Nemtsov is the 35-year-old governor of the Nizhny Novgorod region, about 400km east of Moscow. His reformist credentials are impeccable. Until two years ago, under its Soviet name of Gorky, the region was a closed centre for the defence industry and the bleak site of Dr Andrei Sakharov's exile. Under Mr Nemtsov's leadership, it has become a flagship for economic reform.

'Mr Nemtsov's record speaks for itself,' says Mr Anthony Doran, manager of the European division of the International Finance Corporation, the private sector arm of the World Bank. The region's 100 per cent backing for reform was what led the IFC to pilot its small-scale privatisation programme in Nizhny Novgorod. Since then, the region has privatised between 65 and 70 per cent of its small businesses, auctioned off 1,000 trucks, and 'created a demonstration effect for all of Russia', says Mr Doran.

Last month, Nizhny Novgorod launched a project to privatise land, a contentious issue in Russia where even in Tsarist times most agricultural land was farmed communally. Its first privatised farm is now receiving an average of 30 visitors a day from all over the former Soviet Union who are eager to duplicate the process.

Thus, Mr Nemtsov's acerbic attack on President Boris Yeltsin's economic policies - together with his criticism of the president's draft constitution for concentrating too much power in the hands of one man and his distress at the way in which Mr Yeltsin handled the confrontation with parliament in October - indicates an election more complex than a stand-off between reformers and conservatives.

Instead, a contest is taking shape between different brands of reform, in which regional leaders, with their hands-on experience, are advocating policies at odds with those of Moscow's free marketeers.

Mr Nemtsov is highly critical of Mr Yegor Gaidar, the intellectual force behind the Russian government's tight fiscal and monetary policies, and the leader of Russia's Choice, the most reform-minded of the 13 parties competing for seats in this weekend's elections.

'Let's write a letter to Gaidar and tell him what a cretin he is - he is killing Russian business,' Mr Nemtsov says, sitting behind a desk on which a photograph of the governor together with former British Prime Minister Margaret Thatcher is wedged between a computer and recent issues of The Economist.

The burden of Mr Nemtsov's discontent is his belief that, while privatisation should be pushed forward, the government's macro-economic policy of restricting credits to the country's inefficient heavy industries threatens to destroy Russia's economy.

Mr Nemtsov cites the local example of GAZ, one of Russia's leading automobile manufacturers, which employs a quarter of Nizhny Novgorod's working population. Tight credits have pushed GAZ to the brink of bankruptcy, but instead of restructuring, the plant is on a four-day week and threatening to lay off 20,000 workers - a move which in one fell swoop could erode the strong public support for reforms in the region.

It could also send Mr Nemtsov plummeting from his current 78 per cent approval rating in opinion polls.

'(Boris) Fyodorov (the minister of finance) and Gaidar's tight fiscal policy is doomed,' says Mr Nemtsov, a former theoretical physicist whose conversation is peppered with references to 'the idiot Gaidar'. 'They (Fyodorov and Gaidar) think that if we stop giving the large factories soft credits they will begin structural reforms. In fact, the contrary is occurring - factories are raising prices and decreasing their production,' Mr Nemtsov explains. 'They are not doing so because they are evil communists, but because they are monopoly producers.'

Mr Nemtsov, whose views are shared by some other reformist regional leaders, believes his disagreement with Mr Gaidar is not purely ideological. Instead, he contends that Mr Gaidar has been 'bought off by Moscow bankers', who are profiting from the very policies which are hurting heavy industry, and cites the recent restrictions on foreign banks as evidence of Mr Gaidar's dependence upon the financial lobby.