Sir, I was not surprised to read of the increase in the operation of age bars in job advertisements ('Jobseekers over the hill at 45', March 15). Employers faced with a large pool of potential labour will invariably use some method to reduce the cost of recruitment. An age bar is one of the cheapest mechanisms that influences supply to the firm.

On grounds of efficiency employer behaviour may thus be seen as rational (and to be forgiven). In terms of equity, however, employers can be criticised for disallowing certain age groups equal access to the competition for jobs.

My own research shows that employers' perceptions of age-related performance are based on inaccurate stereotypes. For example, contrary to the prevailing stereotype, older people tend to have lower turnover rates, less frequent absence for sickness, higher commitment and better time-keeping than younger people. Thus, employers' belief that younger people are a 'better bet' may be ill-founded and their behaviour may actually be inefficient.

My advice to the European Commission would be that if they want to 'hold on to employees for several years' they may find it less costly and more efficient to employ an older person.

Marc Thompson,

research fellow,

Institute of Manpower Studies,

University of Sussex,

Brighton BN1 9RF

We are riding the crest of one of those waves of national hysteria which periodically affect the nation when, with gleeful prodding from parts of the old print medium (slowly but inexorably giving way before the competitive edge of the new electronic mass media which work faster and wider, though without the depth of print) people turn angrily on television - the thing on which the British population now spends more of its time than anything except working and sleeping - and blame it for the violence which has characterised mankind since the dawn of history. Unfair? Television is only to blame for an intensification of violence or a statistical increase? We shall come to that.

Consider first a small but telling example from last weekend's Independent on Sunday. The lead letter was headed 'To see the influence of TV violence, visit a playground' and it began: 'As a teacher I come across many children from happy homes who have television in their bedrooms and watch until closedown. These children watch an unadulterated diet of violence, sex, rape and torture, and the next morning act it out in the playground'. Leaving aside the fact that there is no such thing as closedown since ITV transmissions continue round the clock, this teacher is either a non viewer, a liar, or so consumed by the national hysteria that he (or she, let's say he) honestly

believes that British television transmits violence, sex, rape and torture unadulterated. Consider last night's schedules.

BBC1 offered Neighbours, The News, the travel programme Holiday, EastEnders, Carla Lane's new 'comedy' series Luv, A Question Of Sport, The News, and Budget Broadcast which took us up to 9.40 when a repeat of Smith And Jones, began. That comedy may have contained some Tom And Jerry style violence, it often does, and there may have been more in Harry Enfield's Television Programme which followed. The most likely candidate for a true taste of the teacher's 'unadulterated diet' was the American television drama Glitz which began at 10.40, since it claimed to be about a 'hard nosed Miami policeman' confronting a 'seedy underworld'.

BBC2, ITV and Channel 4 offered similar mixtures with comedy, wildlife, foreign reports, news and the arts all in evidence and few slots where violence might crop up, so is that letter not truly an example of hysteria? What other explanations are there? Teachers being what they are these days, perhaps this one simply does not know what 'unadulterated' means, or maybe he is thinking about the material available on satellite and cable services, though the overwhelming bulk of their material, at least on the non-pay channels, is similar to that on the terrestrial channels. If older.

Of course it is possible in 1993, if you are determined to do so, to find yourself the sort of diet that the teacher describes. If you are willing to go to the cinema, hire videos, or cough up for pay-TV movie channels via satellite or cable (the penetration in Britain is still slight and the number of children with pay-TV in their bedrooms must be minuscule) then you can, indeed, find plenty of the material discussed by our film critic, Nigel Andrews, in last Saturday's Weekend FT. But anyone who dedicates his life to monitoring the output of British television knows that there is less violence on the small screen today than there was 15 or 20 years ago. Were you to make today many of the episodes of The Sweeney, Starsky And Hutch, Target or The Professionals that were made in the mid-1970s, they would not be accepted for screening.

So far as I can make out (and I would no more choose to watch Silence Of The Lambs than stick my head down the lavatory) Hollywood and the video industry are turning out more and more material in which violence is the chief ingredient, and present for its own sake rather than a means to an end as in Westerns or war movies. The trouble is that, thanks to the national hysteria, television is being blamed for the nastiness of the film and video industries.

Television is a part of the world in which we live. In news and current affairs programmes it shows us more violence in a year than most Britons in previous generations saw in a lifetime. Nor are the pictures limited to factual programmes. The last episode in BBC1's recent run of its mass-appeal Saturday evening drama Casualty became famous for showing a band of young thugs invading the hospital's casualty department and finally burning it down. As with most Casualty episodes this was well acted and vividly staged, though the activities of the violent youths did seem worryingly motiveless. Perhaps that was the point. On Sunday, Channel 4 showed the 1990 movie The Krays which included several scenes of explicit violence involving fists and even

swords, shot in pretty revolting

closeup.

So which way round is the 'copycat' effect working? We know that the Kray twins and their nasty exploits are a ghastly reality. Perhaps their behaviour in real life resulted from reading too many American horror comics, one of the favourite culprits before television . . . but then how did Cain come to kill Abel, too many violent papyri? We know that Britain has suffered some appalling inner city riots in recent years, as in every century of recorded history. These dramas are telling us about some of the facts of life around us.

But are they also 'de-sensitising' viewers and inducing them to copy such violent exploits? We know that the effect upon some is precisely the opposite: the more violence they watch, the more hostile to it they become. We know this because they are forever telling us so. In their roles as public guardians people such as Lord Rees-Mogg and Mary Whitehouse watch even more violent television than most of us, yet the more they watch the more they loathe it. It seems that any causal connection is not straightforward.

This should be pointed out each time they trot out the old 'television sells butter so it must sell violence' routine. Doubtless they themselves eat butter yet are not violent, so what kind of 'proof' is this? Television commercials sell things that people are known to want by using jokes, jingles, pictures and endorsements which the advertisers know the viewers are predisposed to approve. So far as violence goes, television can clearly demonstrate technique, whether in rocking and turning a car to form a barricade or smashing a beer glass to use as a weapon. But can it make you want to do these things? It never has that effect upon Lord Rees-Mogg, Mary Whitehouse or me - what about you?

Perhaps it is just a small minority of suggestible youths with no war to fight who are turned on to violence by television? But Geoffrey Pearson's book Hooligan shows with extensive documentation that fears about the growing lawlessness of young men, and the absurd leniency of the laws, have been expressed by every generation back through the Victorians, who were worried by the new phenomenon of 'hooligans', to ancient Rome and Greece where gangs of 'Greens' and 'Blues' at opposite ends of the chariot racing stadiums would cause mayhem.

Surely in the end we must rely upon common sense. In a country where mothers in the street habitually smack their toddlers to induce obedience, where children in fee-paying schools are beaten with sticks to make them do what they are told, a country which has for centuries sent out its young men with guns and bayonets to settle matters of international disagreement, does it really seem likely that 50-year-old television is largely to blame if some teenagers conclude that violence is the way to get what you want?

The one success among the Met's new productions this season is almost naughtily sure. Ariadne auf Naxos is wholly about giving the audience what it wants: the unseen proprietor - the Viennese grandee for whom the stage entertainment is supposedly being prepared and enacted - is in reality each spectator in his or her seat. We ask to be amused, touched, stirred, charmed, lulled, and Strauss does it all. So it is perfectly appropriate that this New York version should be directed unashamedly at the musical and dramatic pleasure centres.

Ion Marin sustains the sweet nostalgia of the orchestral part, and balances it well to achieve a combination of richness and delicacy; there is the right sense that what we are hearing is something precious and slightly too small, a marvellous chamber arrangement of a symphonic score. The opening-night cast, American except for Ragnar Ulfung as the Major Domo, could hardly have been more suitable.

Jessye Norman had only to play herself as operatic grande dame: swift, with what was for her an unusual incisiveness, in the prologue; statuesque and magnificent, rolling out the long phrases without any pretence of real suffering, as Ariadne. Ruth Ann Swenson had all the brilliance and agility needed to complement her as Zerbinetta, but also the strength and fullness to come somewhere near matching her. As Bacchus, it was a nice touch that we should have a surprise, since Thomas Moser has hitherto made his career largely in Europe and as a Mozart tenor: he proved to have all the stature and stamina needed for this part, while maintaining a brightness and care for tone and phrasing. Thomas Stewart, too, was neatly chosen to elicit affection as the Music Master.

Susanne Mentzer was the Composer, and I suppose in an ideal world her voice would be a notch bigger and descend with confidence a semitone or two further. But one asks too much: this was a glorious performance, and strikingly different from the Octavian she had been presenting in this theatre until less than a week before. In Rosenkavalier there was always a smile and a bounce in her singing; in Ariadne she showed a different kind of youthfulness - ardour, directed energy, clear focus - and the difference was there as much in her voice as in her stage personality. She caught the steel of ambition that would make an apprentice artist capitulate to occasion.

But it was the production, by Elijah Moshinsky in designs by Michael Yeargan, that seemed most conspicuously to want to please the audience, with an aptness that would have seemed distastefully cynical in the performance of a work by any other composer. The first act takes place in a huge architectural cross-section to out-Zeffirelli the Met's Tosca: one sees part of a grand stairway, the back stage of the private theatre, and the below-stairs arrangements of the artists. There is plenty of bustle with supernumaries. People are having trouble hoisting up a backdrop for the performance in the theatre; the Major Domo has a swim of servants after him; the pantomime troupe is expanded to include a rubber-limbed, juggling Pierrot and several children as miniature Harlequins and Zerbinettas. It is the sight of a boy Harlequin that, in a pretty moment, first hints to the Composer that something is amiss.

No subterfuge is used to suggest that the second part of the piece takes place in the theatre we have seen being readied in the first. Instead of a cloth backdrop, we are treated to sliding panels, by means of which a night sky, with the constellations figured as on an old star map, can part to reveal a cloudscape or, for the finale, a screamingly vulgar sunset. The nymphs glide on to the set and off again atop high built-up costumes: they look like candles, and turn the production's irony towards campness. Ariadne is swathed in black-purple to leave the full accent on her facial profile. But why Bacchus should arrive looking like the Flying Dutchman is less easy to explain, unless as a demonstration that by now in this opera nothing matters except the projection of meaningless golden sound.

'Ariadne auf Naxos' will be broadcast live from The Met on Radio 3, Saturday 6.30 pm

Love in the time of - no, not cholera, but AIDS, sex-killings, bulimia and answering machines. That is this play's theme, and the first thing to say is that, remarkably enough, it gives its audience a good time.

It has the suspense of a thriller, some impressive interweaving of different dramaturgical devices, a ready store of ironic humour, and constant seriousness about love between friends. It is also, at the Hampstead Theatre, well performed in this, the Traverse Theatre production that was so successful in Edinburgh last year. I hardly care to add that, nonetheless, the play itself is not particularly good - and I will put off saying why.

Unidentified Human Remains and the True Nature of Love, a 1990 play, is by 34-year-old Canadian playwright Brad Fraser. Set in Edmonton, Alberta, it pivots around two room-mates, David, an actor-cum-waiter, and Candy, a book critic. Though they once had an affair, he is gay and is cynical enough not to be looking for love. She, by contrast, thinks she is looking for it, whether from a handsome bartender or a devoted lesbian admirer. David's world includes hookers, drugs and rough sex. Meanwhile, out there in Edmonton, a rapist is killing women. It is easy for David to hear of these murders, but he prefers not to.

We start to assume that the ripper is among the dramatis personae: which lends a definite whodunnit tension to proceedings. But what makes the play yet more absorbing is that it shows how dangerously touched by misogyny other male characters are too. You see it brewing up, for example, in Candy's bartender lover after she firsts rejects him; and later he hits her. Yet, though this makes her reject him again, she soon finds herself hitting her lesbian admirer. Fraser's play abounds in this kind of irony. Repeatedly, it shows the overlaps between normal and abnormal behaviour.

David's pal Kane asks what he did last night. Drily, David replies, 'Got drunk, fucked some guy in a park, dressed up as a cowboy, and watched some guy beat up Benita.' Of course you laugh at this ludicrous account - the more because you know it to be true. And the irony is compounded by the ways we witnessed it - sometimes hearing him narrate it in the present tense.

Elsewhere other characters, suddenly spotlit, voice his thoughts, as if becoming the complex echoes of his mind. Everything adds up to illustrate David's own dreadful escapism, dreadful not least because he refuses to admit that the one friend to whom he is most loyal, Bernie, may well be the ripper.

Though the opening is too fancy, the play soon proceeds to hold its audience in a light, firm grasp. Ian Brown's staging perfectly realises the way in which Fraser shows us several 'scenes' at once, the way he interleaves first-person soliloquy, third-person narration and straight you-and-me scene-playing. Not all the Canadian accents are flawless - rare is the Brit who can say 'How now brown cow' like a true Canadian - but this never becomes a serious problem. All the performances, notably Dougray Scott's as David, are assured and convincing.

So why do I say this is not a good play? Because the humour, though really funny, is sometimes too cute, too TV-comedy pat. Because the characters seem all to be 'types' from textbooks. Because whatever ought to make them individual, such as the fact that Candy is a book critic, is never fleshed out. Because Edmonton itself is never fleshed out. Because, as is obvious, such characters as Jerri (the lesbian) and Robert (the bartender) are merely plot devices. Because, for that matter, so is everyone else. It is to everyone's credit that these flaws never distract you as you watch.

At the Hampstead Theatre, for a limited run

According to the people who made today's Nature programme on BBC2, Cairo 'is known to her proud inhabitants as 'the mother of the megacities' '. You can imagine the Egyptians, can't you, down on the street corners working the words into every other sentence. What the programme makers mean by the phrase is a city with more than 10m inhabitants, serving as an example of the 'megacities' which they expect to be home for half the world's population by the year 2000. They say that Cairo's crime rate is low, there is no homelessness, and that it is only when western style solutions to urban problems are imposed without thought for the environment that they fail (7.30). Dispatches (9.00 C4) paints a very different urban portrait of Manchester's Moss Side where the unemployment level among young black men is 85 per cent and the availability of heroin, crack and cannabis attracts customers from 50 miles around. Guns can be bought for as little as Pounds 200 and the users may be as young as 14. BBC2's drama Mr Wroe's Virgins about a 19th century religious weirdo moves onto 'Martha's Story' (9.25).

The post-war British singers who proved themselves the equals in recital of any in Europe are gradually handing over to the younger generation. What they achieved looks secure. Students today are often prepared to sing in most of the main European languages and to go and do so throughout Europe, too.

Over the weekend two British mezzos at different points in their careers showed what they can do at the Wigmore Hall. For Sarah Walker the occasion marked 25 years on the London concert platform. She gave two recitals, of which I saw the first on Thursday - a happy evening, if not as frivolous as the programme may have suggested. Its cover showed a cartoon with the singer as a fairy and her expert accompanist, Roger Vignoles, as a pixie sitting on a toadstool.

Not to be outdone by any younger rivals, she sang in Italian, German, French, English and Czech during the course of the evening. Her German, in particular, was scrupulously clear. A substantial group of Schumann songs, which comprised the Mary Stuart Lieder and a few favourites including a sensitive 'Der Nussbaum', was immaculately prepared, but it is difficult to say that they went to the heart.

On either side were a vivid account of Haydn's 'Arianna a Naxos' and some rather camp Poulenc. But the best was Britten's A Charm of Lullabies, for nobody could catch better their sentiment or the malevolent gleam in the nanny's eye for the penultimate song. Wholehearted singing in Dvorak's Gypsy Songs followed. Then came bouquets, a birthday cake topped by an iced prima donna and the encores, including one about fairies at the bottom of the garden. From the programme cover we should have guessed.

On Monday the Wigmore Hall played host to a mezzo at the outset of her career. Sara Fulgoni has already attracted attention in operatic productions at the Royal Northern College of Music and here she was appearing as winner of the 1991 Edward Boyle Music Award. For one so young the voice is remarkable. Like the royal velvet red dress that the tall Miss Fulgoni wore so elegantly, it has a fullness, a richly luminous texture.

The sheer amount of tone, generously produced, was more than Gordon Crosse's Voice from the Tomb called for; the loneliness, the frightening inner silence of Stevie Smith's poetry was largely left unprobed. It was a clever idea, though, to move from these poems about birds and frogs to Poulenc's Le Bestiaire and Chabrier's rosy pigs and big fat turkeys, all done in decent French with some aplomb.

Most promising was Wagner's Wesendonck Lieder, as the voice seems generally happiest singing out in grand style. At first the phrasing was on the short side; but from the third song it started to stretch out with a truly Wagnerian span. Steven Maughan, the singer's otherwise effective accompanist, might have done still more there to keep up with his singer's vocal opulence. That, in itself, says much for Miss Fulgoni's exceptional prowess.

Water, like energy in the 1970s, will probably become the most critical natural resource issue facing most parts of the world by the start of the next century.

That bald and disturbing prediction, based on rising population growth and pollution, comes from the United Nations Environment Programme. It is contained in the survey of the world's environment, released last year.

Nor is UNEP alone in warning that water resources, which tend to be taken for granted, are coming under strain. A recent report for the European Commission argued just that European growth could be constrained by a lack of fresh water caused by industrial and agricultural contamination.

But Tom Garvey, deputy director general of the environment directorate in Brussels, speaking at this week's Financial Times European water conference, stressed that the Commission was also increasingly aware of the high cost of raising water standards further.

As such statements make clear, the economic and political pressures accompanying the growing demand for water are the focus of growing worldwide attention.

UNEP makes a good case that fresh water resources are scarce. The proportion of the planet's water that is fresh rather than salt is tiny: only some 2.6 per cent. Nor is it easy to reach: more than 99 per cent is held as ice or snow at the poles or is underground, and almost half the rest is locked up in living organisms, soil and air vapour. The rest is in rivers and lakes but poorly distributed across the surface of the world - Lake Baikal in Siberia, roughly the size of Belgium, accounts for a fifth.

Meanwhile, demand for fresh water is rising, spurred mainly by population growth in developing countries and by the spread of agriculture. According to UNEP, the world's use of fresh water increased nearly fourfold in the last 50 years to 4,130 cubic kilometres a year.

Agriculture soaked up more than two thirds of the total - the area of irrigated land has increased by more than a third in the last two decades. The growth in Asian demand is the fastest, and by 2000 UNEP expects Asia to use nearly two thirds of the world's water compared with just over half now.

The increase in pollution in many countries is aggravating shortages further. A worldwide monitoring scheme, backed by UNEP and the World Health Organisation among other UN agencies, suggests that as many as 10 per cent of all rivers monitored are polluted.

One of the biggest problems in both industrialised and developing countries is contamination by agricultural chemicals. The nutrients nitrogen and phosphorus lead to algal blooms - such as those that recently disfigured the Venetian and Baltic coasts - which kill river life by stripping oxygen out of the water. Organochlorine pesticides are also a concern as they accumulate in the food chain; UN agencies report that rivers in some developing countries such as Colombia, Malaysia and Tanzania show higher levels than in European rivers.

Poorly managed irrigation can also lead to salinisation and degradation of agricultural soils, and irrigation remains notoriously inefficient, with around half of the water lost by seepage or evaporation before it reaches the fields.

Industrialised countries have the additional problems of high levels of poisonous heavy metals such as mercury - the rivers Rhine and Meuse are considered to be two of the most polluted in Europe.

While signatories to last year's treaties on marine pollution and dumping were divided about the deep seas' ability to absorb pollution, there is more agreement that the world's fresh water cannot adequately dilute these levels of pollution, and pollution control is needed to meet future demand for water.

Despite these strains, some standards have improved. During the 1980s, the number of people without clean water has declined from 1.8bn to 1.3bn in the 1980s out of the total population of some 5bn. Two-thirds of people living in towns now have access to sanitation compared with 56 per cent in 1980.

A big worldwide dam-building programme has helped to increase supplies: the world's rivers and lakes now feed into 36,000 large dams, half in China, compared with just over 5,200 dams 40 years ago, of which eight were in China. However, high population growth has held back the improvement in sub-Saharan Africa, while conditions in parts of Latin America are also critical, where little urban domestic waste is treated.

Pollution control in industrialised countries has also shown some success: the Rhine and Meuse have seen concentrations of lead and zinc, arsenic, copper and mercury fall in the past 10 years. However, Garvey said that 'in spite of the efforts over the past two decades, it is disappointing that the state of the aquatic environment in the Community has not improved to the extent expected'.

There are signs in some regions that pressure on fresh water supplies is beginning to hold back development. The UN, which estimates that water use is now growing at less than 1 per cent a year compared with 2.3 per cent in the mid 1970s, attributes the slowdown to shortages of water suitable for irrigation as well as to recession.

It is also becoming clear that the cost of cleaning up and avoiding shortages is much higher than some early estimates decades ago suggested. The UK water industry has embarked on a decade-long programme of improvements which may eventually cost more than Pounds 45bn in 1990 prices. Around half of that is driven by European Community environmental directives; water companies and ministers across Europe now ask whether some of those standards are unnecessarily high.

The Commission's environment directorate said on Monday that it would review almost all of its water directives this year in response to the charge that some were set more by environmental enthusiasm than by science.

However, even extensive dam building and pollution control - if it can be afforded - will not solve all resource problems. Many regions pursue water policies that are inefficient or could prove hard to sustain - such as Israeli exports of citrus fruit, or rice-growing in southern California - purely for social or economic reasons like earning hard currency, preserving a traditional industry or preventing migration from the countryside to the town.

In other regions, political tensions are likely to grow over the control of water supplies, even if ways are found to increase supplies. Nearly half the world's land is fed by water basins that cross national borders and well over 200 countries share important rivers and lakes.

Natasha Beschorner, in an illuminating pamphlet last year entitled 'Water and Instability in the Middle East' for the International Institute for Strategic Studies, comments: 'Water is a useful reminder of dependency.' She adds: 'Israel, Turkey and Egypt . . . have little incentive to concede what they regard as a strategic asset, namely priority usage,' although she argues that water resources, overshadowed by the region's other political problems, can be overstated as a source of tension.

Many have also forecast future political instability in the Central Asian republics of the former Soviet Union. The five countries Uzbekistan, Tajikistan, Turkmenistan, Kazakhstan and Kirgizstan share two rivers, the Amu Darya and the Syr Darya, and the Aral sea, once the earth's fourth largest inland body of water. The sea has lost nearly two thirds of its volume in the past three decades as the rivers that feed it are drained for growing cotton, which is sold overseas to raise hard currency.

Beschorner is right that prophesies of crisis from water shortages are easily and too frequently made. However, the complexity of the problems across both the developed and developing world supports UNEP's belief that the question of where clean water will come from next - and how much it will cost - will remain high on the international agenda.

The series will continue next week by examining water supply in the United States.

More accurate instruments for measuring air pollution, which often give higher readings than expected, are troubling many companies which may have to spend more than anticipated on controlling emissions.

This is especially true in the chemicals and petrochemicals sectors, which are under pressure to reduce air pollution levels (mainly volatile organic compounds). VOCs are the vapours given off by chemicals used in industry such as solvents and petrol. These collect in the atmosphere and react with sunlight to form photochemical smog and low-level ozone.

'The new measuring techniques enable businesses to assess realistically what their losses of high-cost products are, whereas they only had estimates before,' says Peter Woods, head of environment standards at the UK's National Physical laboratory.

It is this precise knowledge - in some cases much higher than traditional estimates - that is worrying refinery owners and bulk chemical manufacturers. Governments are attempting to meet UN targets for cuts in air pollution and these companies have to be seen to act on new information about the extent of their emissions. However, there are often insufficient funds to pay for the necessary improvements to factories and plants.

'The business has to make a decision about the cost of losing its products versus the cost of saving them. If you are losing Pounds 1m a year in product, but it is going to cost Pounds 20m to save it, then you are probably going to wait until after the recession before you start spending,' says Woods.

The pressure is growing because the UK government is thinking of specifying the instruments as part of a legal obligation in the Environmental Protection Act. This says companies must control pollution by using the 'best available techniques not entailing excessive cost'.

Joe Draper, health, safety and environment manager for Shell Chemicals UK, says there is some scepticism about the accuracy of new instruments. 'Some of the readings are above our conventional estimates, but others are below or about the same. There is still a great deal of investigation needed before we can come to any definitive statement about their accuracy.'

There are four main techniques for measuring pollution and product losses.

Simple accounting - measuring what goes in and what comes out of a process.

Point monitoring - measurements on emissions or output from specific points in the process, such as the chimney.

Ambient measuring - catching gases in tubes and analysing them.

Remote monitoring - measuring certain gases from a distance.

Significant advances are being made in remote techniques. One of the most important is a system called Dial, developed by the National Physical Laboratory with funding from government and industry. Dial, a laser-based system, measures gas concentrations up to 3km away. The system is useful in locating unknown leaks.

'Certain storage tanks, for example, that industry thought were sound, are now found to be leaking,' says Mike Woodfield, business centre manager at the Warren Spring Laboratory.

This type of news worries managers who find it difficult to raise funds to invest in a broad range of expected environmental improvements and do not appreciate surprise information from new instruments. But Draper says if the new instruments are right and more product is being lost, this makes it easier to justify the cost of reducing emissions.

Woods agrees there is some scepticism, but other companies see the instruments becoming a necessary part of their armoury to demonstrate their levels of emissions.

A country mansion in Warwickshire might seem an unlikely setting for some timely good news about British manufacturing. But Cawston House, the base of T&N Technology, is a world away from the sort of isolated rural establishment once so beloved of UK corporate research and development departments. This utilitarian, market-driven unit has been central to T&N's successful drive for a growing share of the global motor component business.

Technological innovation is especially vital to T&N's competitiveness because the company specialises in components which are critical to a vehicle manufacturer's ability to make changes in the design of its engines and braking systems. 'Our customers insist on suppliers having a particular level of R&D activity and technical reputation, before they even allow them to bid for contracts,' says Bill Everitt, the T&N board director responsible for technology.

But it is not so much the level of this spend - examined on this page last Friday - as its effectiveness that has helped T&N buck the miserable competitive trend suffered by manufacturers in so many British industries.

But why does T&N do a sizeable part of its R&D centrally, rather than making each of its three divisions, or the 11 product groups beneath them, responsible for all their own R&D? Everitt replies unequivocally: 'Because it's more efficient and productive to do it that way in terms of people, knowledge, skills, equipment and - most important - speed.'

Unlike many other companies which claim spurious internal synergy, T&N's product groups really do share technology. They need similar or identical expertise in materials, design processes, manufacturing techniques and measurement processes - all of which are moving fast but expensively, thanks to the quest for lighter, cheaper and reliable products.

In materials surface technology, for instance, 'virtually all our products move against something else - they mate with it', says Alec Parker, managing director of T&N Technology. 'So we can read our advancing knowledge about materials, lubrication and so forth across the various businesses.'

Together with the 15 per cent of Cawston's current Pounds 7m annual spend which goes on research, this work on what T&N calls 'enabling technologies' generates about 60 patents a year. The rest of T&N's Pounds 34m R&D spend goes on applications engineering, testing and other activities in the businesses.

The close commercial relevance of Cawston's work is guaranteed by a series of mechanisms. First, virtually all the work is funded on an individual project basis by the product groups around Britain and the rest of the world, rather than by T&N's head office.

Second is the method of project selection. Each project is determined in detail at an annual meeting by a mixture of specific input from a product group's sales engineers and managing director and Cawston's knowledge of market trends, gained via its direct meetings with leading T&N customers.

The third mechanism is detailed project control. The basic document for this is a one-page 'why sheet' on which the first item gives the commercial 'why?' of the project. Technical objectives and quantified target benefits are also summarised, together with costs, responsibilities and a timescale for checking the project's progress throughout the year.

Contact between Cawston and the product groups is more or less constant. Small teams from each group are always visiting Cawston, which is also used as a training ground for engineers to move into the businesses.

Although some of the projects are scheduled to last two to three years, they are not just reviewed in detail each quarter, but re-justified every year. Parker touches on every general manager's nightmare about R&D when he says: 'We dislike projects which go on forever with no conclusion.' Everitt puts it more forcefully: 'Alec's people have to do their work within the timescale and cost that they said they would.'

This control process was in operation six years ago in some of the group's businesses, 'but not all of them believed in the quarterly business reviews', says Everitt. 'It's been a question of persuading everyone to do it.'

On the productivity of development work, T&N's main measure is 'the rate per unit cost at which new products, processes and services are generated that enhance the prospects of the company relative to the competition'. These loose bones are given somewhat firmer flesh every year by a detailed analysis of the rate and cost of innovation, broken into different types of project.

Cost-benefit analyses of Cawston's work are done frequently, and generally show a return of about twice the expenditure on it. Controversially, however, full investment analysis on individual projects is done rarely.

Everitt says there is little point in doing so, since discounted cash-flow analyses are so prone to error, depending on the subjective assumptions that are fed into it. Of payback calculations, he says, 'we don't believe the numbers'.

Instead T&N takes what he calls 'a judgmental view' of the likely benefit to the customer. This reflects acute awareness throughout T&N of a principle which many UK manufacturers used to ignore, at the expense of much necessary investment: that a heavy 'opportunity cost' can be incurred by not going ahead with a particular project. In addition to losing a particular sale and valuable market share, the company may harm its hard-won innovative reputation with an important customer, says Everitt.

'A lot of all this is to do with creating technical reputation and the ability to collapse lead time,' he continues. 'It's the opportunity cost of staying in business.'

A final article will examine the impact of R&D on one of T&N's operating companies.

Here is a novel idea for public sector railway managers. Tired of complaints about unreliable trains? Easy: take Pounds 30m of taxpayers' money, give it to an independent contractor and leave the private sector to put things right.

That, at least, seems to be the thrust of the unprecedented deal struck by London's Docklands Light Railway last week in appointing Brown & Root, the US engineering group, as its prime contractor.

Brown & Root will not take over the day-to-day running of the railway. But over the next three years it will manage the remaining stages of an Pounds 800m expansion and improvement programme. At the end of that time it must deliver a railway that works. Its Pounds 30m fee is geared directly to results.

The significance of the deal is that it is wholly uncharacteristic of the railway industry. Railwaymen fervently oppose the notion that anyone should come between them and their trains. They insist on controlling every aspect of building and running the system, with the private sector's role limited to that of sub-contractor and supplier.

But the Docklands Light Railway's managers are not railwaymen. Since November 1991, they have been a team of defence procurement experts drafted in from the Ministry of Defence. Their chairman, Sir Peter Levene, is former head of defence procurement at the MoD. He also heads the prime minister's efficiency unit.

When Sir Peter and his team arrived, the Docklands Light Railway was in such disarray that the government had seized control of it from London Transport and passed it to the London Docklands Development Corporation.

Its poor performance can be partly blamed on the fact that it was built on a shoestring budget of Pounds 77m at a time when the government's ambitions for Docklands were modest. When Olympia & York, the Canadian property developer, proposed transforming Canary Wharf into London's third commercial centre, the toy-town railway had to be improved.

When the government responded by authorising an Pounds 800m expansion and upgrading of the line, the immediate effect was to make matters worse. Already incapable of meeting the demands being made on it, the system had to cope with being rebuilt while trains were still running. Consequently, services deteriorated to the point of chaos.

But was there more to its poor performance than this? Today, the railway is running 98 per cent of scheduled train mileage compared with a low of 67 per cent before the management changeover. What caused such a drastic turnround?

Sir Peter says some simple manAgement actions produced quick results. For example, his team discovered that the computer controlling the train operations was overloaded. That was rectified through the seemingly obvious action of trimming the train service.

Another step was getting to grips with the contractors responsible for supplying track, trains and so on.

'Some of contractors were performing extremely badly,' says Sir Peter. 'The DLR people said: 'We've written to them and asked them to do better, but they're just not doing that.' I said: 'Well, let's stop paying them.' They said: 'You can't do that - they'll sue.' So I said: 'Let them'.'

The result? 'Some sharp words were exchanged, but the performance of those contractors changed overnight.'

To be fair to London Transport, it could be argued that the improvements in the railway's performance might have happened without the change in management. Conceivably, Sir Peter's team simply enjoyed the fruits of action initiated by the previous incumbents.

London Transport, however, acknowledges Sir Peter and his colleagues wrought changes. One advantage they enjoyed was the freedom to act without constant reference to headquarters. Another was their reputation for tough dealing with contractors such as GEC while at the defence ministry. Indeed, that was one of the main reasons for bringing them in.

It was a logical extension of this last point that led to the decision to appoint a prime contractor. The team is now applying the techniques of defence contracting to railway projects, says Sir Peter. If the defence ministry wants to order a new fighter aircraft, it does not deal with dozens of contractors making all the sub-systems. It defines the performance it wants, signs a contract for delivery with a single company such as British Aerospace and leaves it to the prime contractor to deliver the aircraft it wants.

As in the defence industry, so in transport. Sir Peter's team will no longer deal with dozen contractors involved in the extension of the railway to Beckton, the installation of a new control system and the supply of new trains. That - and the integration of these parts into a smoothly-running whole - will be Brown & Root's job.

Is this the way of the future for other railway projects? Possibly. One worrying factor, however, must be cost. Theoretically, a private-sector contractor motivated by a performance-related fee will do a better job at project management than a flabby public-sector body. But the Docklands Light Railway only brings in Pounds 3m a year in ticket sales. Seen in that light, Pounds 30m seems an awful lot to pay.

The cynical view might be that the government is prepared to nod the deal through, hoping it will better prepare the railway for its planned privatisation. So it might; but that, says Sir Peter, is not the point.

'The question is whether it represents good value for money. Everyone's been satisfied that's the case, and now we are going ahead. I think we would be criticised for spoiling the ship for a ha'p'orth of tar if, having spent Pounds 800m on the railway, we had not spent another Pounds 30m in getting it to work.'

Macmillan, the UK publisher, has appointed a new group managing director to take responsibility for book publishing operations in the UK.

Iain Burns, who has been a non-executive director there for the past three years, has been involved in publishing for nearly 20 years having joined Collins in 1973. He has also worked for International Thomson and Octopus. After Reed International's takeover of Octopus in 1987, Burns became chief executive of Abaco Investments.

Nicholas Byam Shaw remains executive chairman of Macmillan.

*****

Derek Hunt, the director of finance at Thames Television since 1985, has decided to leave the company in June 'to devote more time to his other interests'. He will be succeeded by Nick Humby, the present financial controller. Humby, 35, who qualified as a chartered accountant with Price Waterhouse, has been appointed deputy director of finance and joins the board as director of finance on July 1.

*****

Bruce Hewett, formerly group director of current affairs at Southern Water, has been appointed director of technical affairs at SOUTH WEST WATER; he succeeds Bill Dickens who retired last autumn.

*****

John Hogan, chief operating officer of LASMO, has been appointed to the board.

Ross Group, the acquisitive consumer electronics and packaging company which lost its high-profile chairman Roger Shute last June, has hired former ITT executive Neil Sutherland as its group managing director.

When Shute stepped down because of ill-health from his non-executive position, managing director Noel Hayes took on the additional role of chairman while a replacement was found. Hayes remains executive chairman.

'Roger's departure was merely a catalyst. We had almost decided to bring on another senior executive anyway,' claims Hayes, pointing out how the group has grown since he joined in October 1989, with turnover last year at Pounds 50m, compared with Pounds 6m then.

The company was also loathe to look for a non-executive chairman - 'some City dignitary who would charge Pounds 10,000 and arrive for six free lunches a year'.

Instead it hopes it has found in 53-year-old Sutherland someone who both subscribes to the company's philosophy - success by working 'longer and harder' than the competition - and who complements existing skills on the board. Hayes, 36, came from the City, with a short stint as senior sales director of Kleinwort Benson Securities, preceded by positions at Citicorp Scrimgeour Vickers. Finance director Anthony Schofield has a traditional accountancy background.

Sutherland, by contrast, has spent most of his life in big company manufacturing, largely concerned with consumer electronics. An engineering graduate from Edinburgh University, he started out with Nuclear Enterprises, before moving to Plessey.

In 1982, he joined Dubilier, working in the US as well as the UK. Three years later he moved to ITT, where he spent eight years as managing director of the ITT Cannon Group, supplying components and systems to telecommun-ications, auto, consumer and industrial electronics markets.

Ross has still to dispel completely what Hayes himself has termed 'the Roger Shute effect' whereby the share price dived following Shute's exit. It has only partially recovered, trading in the 30p-33p range in the last couple of months. 'I am very happy to be judged by our results,' says Hayes.

The company reports on April 8.

*****

BM Group, another company once chaired by Roger Shute, has taken steps to strengthen its board. The construction equipment and engineering concern has appointed Richard Miles, former chief executive of Steetley, as a non-executive director.

It will be the most demanding role Miles has taken on since Steetley lost out to a hostile Pounds 613m takeover bid by rival building materials group Redland a year ago. His other activities include the non-executive chairmanship of Bucknall Group, a construction consultancy.

Following a collapse in its performance, BM had been looking for another experienced non-executive to support a root-and-branch review being carried out under its new chairman Moger Woolley.

Michael Kettle at APPLEYARD GROUP.

Neil O'Donoghue has resigned from COMMUNITY HOSPITALS GROUP.

Brian Young, recently retired md of BTR's distribution group, at The WHOLESALE FITTINGS.

Panton Corbett, a director of Singer & Friedlander, at HAYNES PUBLISHING GROUP.

Arnold Taylor has resigned from PLATEAU MINING.

Peter Grant, a former vice-chairman of Lazards and chairman of Sun Life Assurance Society, as chairman of HIGHLANDS AND ISLANDS AIRPORTS.

Wendy Luscombe, a member of The Commission for New Towns and a director of Aldrich, Eastman and Waltch in Boston, at The BERKELEY GROUP.

Tobias Cepelowicz has resigned from BRAZILIAN INVESTMENT TRUST.

Peter Norris has resigned from CHINA AND EASTERN INVESTMENT Co.

John Bullock, former joint senior partner of Coopers & Lybrand UK, at KINGFISHER.

Malcolm Parkinson, chief executive of Woolworths, at JAMES LATHAM.

Karel Vuursteen, deputy chairman of the executive board of Heineken NV, at WHITBREAD; Gerard van Schaik has retired.

Further signs that US securities house Paine Webber is building up its international bond capability come with the arrival of Tony Baron in the London office as international fixed income strategist.

Baron, 42, had spent two years as chief economist of Sakura Finance International (previously Mitsui Taiyo Kobe). Before that, he had been with Chase as head of economics and portfolio strategy at the investment bank in London, and earlier partner and chief economist at Laurie Milbank, the stockbrokers purchased by Chase in 1986.

He says that while Maury Harris, chief economist of Paine Webber in New York, is 'exceptionally good' on the US, he is there to bring the international dimension. The idea of being 'in at the beginning of a build-up operation' appeals to him and he hopes he will be 'used more intensively' than he was at Sakura.

One of the few Laurie partners to see out the full four years of his contract at Chase, Baron contrasts the 'very good atmosphere' at Paine Webber with the 'pain of living through Chase's retreat from the securities business'. He adds he likes the fact that energies appear to be focused on building business 'not building personal empires' - a preference which might surprise former colleagues who describe him as an intensely political animal. 'I prefer not to fight,' Baron rejoins, 'but if the alternative is watching your team die, than your get off your butt and get your hands dirty trying to fix things.'

'STOP them making that noise,' ordered the Jobs column's wife, elbowing it out of sleep in the early hours. Unable to hear anything - it was before we had children - I asked which noise she meant. Her reply was my first introduction to the experience of a haunting mystery.

'They're playing that tune Oldham on the tins,' she said.

She then lapsed into coma, leaving me lying there twitching. After all, my failure to hear any untimely music-makers might have been simply because I was too deeply asleep. Nor was the momentary quiet any guarantee that they wouldn't strike up again as soon as I nodded off.

So deciding street rowdies must be responsible, since all of our neighbours were old, I went and got a bucket of water and put it by the window. Their next number was going to be 'Stormy weather', I vowed . . . until the mystery took me in its grip.

What bugged me was not the unconventional instruments they had reputedly been playing - a scaled-down steel band, perhaps - but that I couldn't remember how the tune called 'Oldham' went. As it was named after a town, I reasoned, it must be a hymn-tune on a par with 'Aberystwyth' ('Jesu, lover of my soul . . .'). And I was just pondering whether it would be Christian to pour cold water on people performing sacred music even at an ungodly hour, when sleep supervened.

Although next morning the tins-players had gone without trace, I was soon at the church consulting hymnals. But neither then nor since have I managed to come any nearer to my quarry than 'Warrington' ('O son of God, eternal love . . .'). Hence the mystery of the tune called 'Oldham' continues, and all the more hauntingly because it has now been joined by the equally bewildering quest for the book called 'The New Geo-Economics'.

Once again there is a clue. The Times Literary Supplement recently named not just the book, but the author at the foot of an article he'd written. He is Edward H. Luttwak of the Center for Strategic and International Studies in Washington. But there was no mention of the book's publishers which, wanting to read it, I needed to know. Nor was there any reference to it in the FT's compendious database, and the Literary Supplement was unable to help since the article had come in by fax and the publishers' name had apparently fallen off the bottom.

I therefore telephoned the Washington Center, which referred me to another number. When I called it, an answering machine referred me to a further number. It turned out to be a second answering machine which referred me to a third. And all it would say was that Dr Luttwak 'is out of town until May' which comes across as barely plausible, sounding a bit like 'he's in the bath until a week on Saturday'.

So here I am stranded, not even as near as the equivalent of Warrington, which is a pity because his article suggested that his elusive book sheds light on a problem now bedevilling a great many young people. While by no means confined to Britain, it was graphically depicted by one Sha Wylie of Southampton who, after graduating last year and applying for many jobs only to receive rejections, has suffered the final indignity of having a request for an application form rejected.

Understandably angry, Sha Wylie - like a lot of others similarly jobless - puts the blame squarely on the current British government's handling of the economy. My suspicion, however, is that the problem is rooted much farther back, with today's unemployed graduates hit by the cumulative effects of successive governments' neglect of a question which should have been cleared up 30 years ago. Worse, if I twig Edward Luttwak aright, standard economic measures are not going to provide an effective answer.

Now, unlike 'Oldham', the long neglected question will strike enduring readers as an all too familiar tune, having last been on the order of service only five weeks ago. The question is how an education system increasingly focused on getting youngsters through academic-type tests and exams is going to arrest economic decline, let alone generate Britain's renewed prosperity.

The point was glossed over by the committee of inquiry headed by the late Lord Robbins which in 1963 recommended the first post-war expansion of higher education. It was apparently just assumed that enriching the workforce with a larger share of folk educated to what is deemed a higher level, would somehow of itself make the nation more productive as well as civilised.

That assumption can hardly be said to have been justified by events, which have rather borne out doubts voiced at the time by a few dissenters. They argued that increased concentration on academic pursuits would lead youngsters with at best middling talent for them to continue with scholarly studies in preference to practical training more suited to their mix of abilities.

The result would be twofold. Fewer and fewer teenagers would join the workforce motivated to learn to do skilled jobs. More and more graduates would join it at the age of 20-plus, believing that their degrees entitled them to enter at a higher level even though all that most of them were practically equipped for was clerical and administrative work.

True, that may have been sustainable as long as such work was plentiful. But things have changed - which brings Edward Luttwak back into the act.

To judge by his article, his thesis is that while conventional macroeconomic theories might work perfectly well in a world run by economically rational people, the rationality of those who actually run same is less economic than political. Hence in their urge for power, those in the developed world have as their goal 'not the highest possible standard of living for a country's population, but rather the conquest or protection of desirable roles in the world economy.'

'The winners will have those highly rewarding and controlling roles,' he adds, 'while the losers will only have the retail business and assembly lines - if their home markets are large enough, or if fully assembled imports are kept out by trade barriers. We have already seen that when 'transplants' replace domestic production, the local employment of manual and semi-skilled labour may continue, but finance and all higher management, as well as much research and development and design, are transferred back to the country of origin.'

At which point, if he's right, it is not only the Sha Wylies of Britain who will rudely awaken to their own sad role in the drama. The same may well apply to older Brits whose executive-type jobs have disappeared to places with earnings enough to pay numerous managerial pipers.

Moreover, if it is true such jobs are plentiful only in the countries of origin of important productive enterprise, then supplies are unlikely to return to Britain until it has a workforce with the practical skills to do the originating. So it would seem time for the politicians to stop vesting more costly hope in the failed academic experiment, and re-engineer the education system from top to bottom.

Failing that, all I can suggest is that fellow-Brits join me in a hymn - named not after a town, but for St Anne - which goes: 'O God our help in ages past . . .'

A SHARP DROP in receipts from value added tax contributed to a deterioration in public-sector finances last month.

The public-sector borrowing requirement in February was Pounds 5.4bn, Pounds 1bn higher than the market expected. The figure took the PSBR for the first 11 months of this financial year to Pounds 27bn compared with Pounds 7.4bn in the same period last year.

The large monthly shortfall compares with a modest borrowing requirement of Pounds 963m in February last year.

The increase in the PSBR could be explained partly by lower VAT receipts than in the previous two months, when a new collecting system brought receipts previously paid in February forward to January.

Central Statistical Office figures showed that VAT receipts last month were Pounds 2.9bn compared with Pounds 4.3bn last February. In January receipts amounted to Pounds 3.34bn, contributing about Pounds 1bn to January's Pounds 3.83bn government surplus. Excluding privatisation proceeds - mainly the final call on British Telecommunications stock - the PSBR last month was Pounds 5.8bn.

High government cash outlays also contributed to February's large borrowing requirement. Although central government spending of Pounds 20bn was slightly less than in January, it was Pounds 2.7bn higher than in February last year. The statistical office said that in the first 11 months of this financial year total cash outlays were 13.5 per cent higher than in the previous year.

Income tax receipts were also lower, underlining the continuing impact of the recession. The government collected Pounds 3.8bn in income tax last month compared with Pounds 4.25bn last February. Corporation tax of Pounds 329m was little changed from February last year. Social security contributions amounted to Pounds 2.87bn, unchanged on last year. The statistical office said Inland Revenue receipts for the first 11 months of the year were 4.5 per cent lower than in the same 11 months of 1991-92. Social security contributions were 3 per cent higher.

LOCAL calls cost more in the UK than in any other large country in Europe, north America or Australasia according to a survey of international telecommunications prices. But the UK's international calls are the cheapest of the 10 countries surveyed, and its trunk calls the second cheapest.

The survey, published by National Utility Services, a consultancy group, shows that for a three-minute local call at average rate UK consumers pay at least twice more than those in Canada, the US, Sweden, the Netherlands and Italy.

Canadians pay an unusually high exchange line charge, equivalent to Pounds 38.78 a month. However, at Pounds 10.28 British Telecom's monthly charge is found to be higher than those in Australia (Pounds 10.21), France (Pounds 9.57), the US (Pounds 8.62), Italy (Pounds 7.70), the Netherlands (Pounds 7.62) and Belgium (Pounds 6.76).

The survey shows UK consumers fare better in long-distance and international calls. They pay less for international calls - Pounds 1.24 for three minutes at average rate - than those in any of the other nine countries, and barely half the going rate in Italy (Pounds 4.41), Italy (Pounds 2.44) and Sweden (Pounds 2.42).

At 27p for three minutes at average rate for trunk calls, UK customers pay less than in all nine other countries except the Netherlands (21p). Germany and France are highest at 80p and 77p respectively.

Mr Andrew Johns, National Utility Services director, said: 'Having finally won approval from industry watchdog Oftel to rebalance its costs and increase exchange line rentals, it is surprising that BT has not lowered local charges other than through volume discount schemes.'

Telecoms Price Survey, NUS Ltd, Carolyn House, Dingwall Rd, Croydon CR9 3LX. Pounds 25.

--------------------------------- HOW UK RATES COMPARE --------------------------------- UK 11.5p Australia 11.3p Belgium 9.9p Germany 9.3p France 7.3p Italy 5.7p Netherlands 5.4p Sweden 5.4p US 5.2p Canada nil --------------------------------- Prices as at end-1992 prices and exchange rates. Call of 3 minutes duration, average of different time rates. --------------------------------- Source: NUS. ---------------------------------

THE short-term liquidity position of Britain's large companies deteriorated in the final quarter of last year as falling interest rates encouraged companies to boost borrowings and run down their bank deposits.

The Central Statistical Office reported that the seasonally adjusted liquidity ratio for large UK industrial and commercial companies fell to an estimated 111 per cent at the end of last year from 119 per cent at the end of the third quarter and 121 per cent at the end of 1991. The ratio, measuring current assets maturing in less than a year as a share of liabilities that have to be repaid in less than a year, was the lowest since the first quarter of 1991.

The liquidity ratio for large manufacturing companies fell to 100 per cent from 109 per cent in the previous quarter and 118 per cent at the end of 1991. The ratio for large non-UK manufacturing companies fell to 125 per cent from 132 per cent in the quarter, but was still higher than the 123 per cent at the end of 1991. City economists were untroubled by the apparent deterioration of UK companies' short-term finances. Mr Leo Doyle, UK economist of Kleinwort Benson Securities, said the figure reflected balance-sheet restructuring as interest rates fell. It should not impinge on companies' ability to invest using retained earnings.

Non-seasonally adjusted figures from the CSO showed that companies ran down their short term deposits with UK banks to Pounds 22.3bn in the fourth quarter from Pounds 24.5bn at mid-year while increasing their overseas assets.

SIR BRIAN UNWIN has just two weeks to switch between two of the most significant public-service jobs in the European Community: from head of UK Customs and Excise during the implementation of the single European market to head of the European Investment Bank.

He seems fully prepared for the transition. 'What I do now have is this extraordinary privilege,' he says, sitting in his office overlooking the river Thames. 'Having broken down the borders I now have a chance to go inside them and help make it all work.'

Sir Brian, who was at Customs for four years, argues that his greatest challenge was removing the borders for traders as part of the single European market and motivating his staff to back the reforms. His team had to cope with withdrawing 1,600 staff from the frontiers.

In place of the old arrangements is a system based around greater intelligence-gathering and the targeting of smugglers. 'There is tremendous tradition and loyalty in Customs,' he says. 'That is a strength, but can also be a weakness. It made it more difficult to move staff away from the baggage benches and convince them that they can still catch baddies without deploying everyone at the frontiers. For centuries they were there with their cutlasses stopping things coming in.'

One of his biggest battles was to persuade people within Customs that the removal of border controls would take place. 'It posed a threat to people's jobs and their way of working. There was a tendency four years ago to just wish it away.'

'I said to the staff that it is jolly uncomfortable and extraordinarily difficult, but we have got to face up to it. Unless we plan now, we won't have any control and we will be faced with an imposed solution which will be less in your and the UK's interests.'

In general, Sir Brian is pleased with the results to date on the single-market initiative. 'We have delivered the government what it wanted by removing the borders without threatening our security.'

He believes the UK played an important role in changing the shape of the single European market, blocking mandatory harmonisation of value added tax throughout the EC and keeping the requirements for paperwork to a minimum.

Sir Brian says Customs was used as a model for the government's executive agency reforms, which are now being mirrored by the Inland Revenue.

But he sees an important continuing role for central control. 'I've developed our own model with 30 executive units. We have wide executive functions with a central policy role and report to the chancellor.'

He believes he has made considerable progress in changing the way Customs operates and lays particular emphasis on promoting equal opportunities - especially the promotion of women, such as Mrs Valerie Strachan, his deputy. She has now taken over his post.

'After working in the Treasury and the Cabinet Office, Customs seemed very male-dominated to me,' he says. 'It still is, but things are starting to change.'

He says the main challenge in his new job at the world's biggest international lender will be to consolidate the institution and reflect the new impetus it received at the Edinburgh summit. 'We are under tremendous pressure to increase the volume of lending,' he says. 'But we must also maintain rigorous criteria to sustain quality.'

LOCAL calls cost more in the UK than in any other large country in Europe, north America or Australasia according to a survey of international telecommunications prices. But the UK's international calls are the cheapest of the 10 countries surveyed, and its trunk calls the second cheapest.

The survey, published by National Utility Services, a consultancy group, shows that for a three-minute local call at average rate UK consumers pay at least twice more than those in Canada, the US, Sweden, the Netherlands and Italy.

At December 31 1992 rates of exchange, the comparable prices were 11.5p in the UK against nil in Canada, 5.2p in the US, 5.4p in Sweden and the Netherlands and 5.7p in Italy. After the UK, Australia imposed the next highest local charges (11.3p).

To compensate, Canadians pay an unusually high exchange line charge, equivalent to Pounds 38.78 a month. However, at Pounds 10.28 British Telecom's monthly charge is found to be higher than those in Australia (Pounds 10.21), France (Pounds 9.57), the US (Pounds 8.62), Italy (Pounds 7.70), the Netherlands (Pounds 7.62) and Belgium (Pounds 6.76).

The survey shows UK consumers fare better in long-distance and international calls. They pay less for international calls - Pounds 1.24 for three minutes at average rate - than those in any of the other nine countries, and barely half the going rate in Italy (Pounds 4.41), Italy (Pounds 2.44) and Sweden (Pounds 2.42).

At 27p for three minutes at average rate for trunk calls, BT customers pay less than in all nine other countries except the Netherlands (21p). Germany and France impose the highest charges, 80p and 77p respectively.

Mr Andrew Johns, National Utility Services director, said: 'Having finally won approval from industry watchdog Oftel to rebalance its costs and increase exchange line rentals, it is surprising that BT has not lowered local charges other than through volume discount schemes.'

'Should BT be allowed to maintain its policy of lower prices for volume users, it will no longer be economical for emerging suppliers - especially cable companies - to compete,' he added.

Sweden, included in the annual survey for the first time, is shown to have among the highest charges of the 10 countries surveyed.

Its trunk call and exchange line rental charges are the second highest, and its international calls the third most expensive.

The survey says the fastest evolving telecoms market is Australia's.

Telecoms Price Survey, NUS Ltd, Carolyn House, Dingwall Rd, Croydon CR9 3LX. Pounds 25.

LEADERS OF the Fire Brigades Union are due to meet Mr Kenneth Clarke, the home secretary, this morning to discuss the future of the pay formula that has decided the wages of their 49,000 members for 14 years.

Under the formula drawn up by the last Labour government to end the first national firefighters' strike, their pay is linked to the upper quartile of all male manual workers' earnings.

Last November the firemen secured a 4.9 per cent pay rise as a result of wage comparability, but their union fears the government intends to scrap the pay formula. Fire officers receive between Pounds 12,720 and Pounds 16,626 a year.

'The formula has kept industrial peace for 14 years,' Mr Ken Cameron, the FBU's general secretary, said yesterday. He added that the union would warn Mr Clarke that he faced the threat of another national strike if the pay formula was scrapped.

The pay formula has been suspended since last November under the government's current 1.5 per cent public-sector pay limit.

Mr Cameron says the formula has already 'been unilaterally ditched' as a result of the government's public-sector incomes policy.

FOREMEN at Ford plants in Southampton and at Dagenham, east London, went on strike yesterday in protest at the company's threat of compulsory redundancies.

White-collar unions at Ford are due to meet the management next Tuesday to discuss the situation following a ballot vote in support of industrial action by the company's staff.

But a union official said yesterday that his members were 'chomping at the bit' to strike over the compulsory redundancy issue.

Last week Ford backed down and agreed not to press ahead with any compulsory redundancies among its blue-collar labour force as a result of improved demand and adjustments to production targets.

But to the anger of staff, the company has so far refused to withdraw the threat of compulsory redundancies for its white-collar employees.

Management pointed out yesterday it had announced last December that it wanted 2,200 staff jobs to go by the end of this month and it is now only 157 short of that figure. The company said it hoped to achieve the cut in white-collar staff it required without any need for compulsory redundancies.

THE DEPARTMENT of Trade and Industry yesterday issued a warning to potential borrowers to be cautious about banking documents called Prime Bank Notes.

The warning follows a High Court order winding up a company called Funding Sources International Ltd, made on a petition presented by the DTI's Companies Investigation Board. The company was registered in Cheltenham but had been involved in activities connected to PBNs from a private address in north Devon.

Funding Sources International Ltd is believed to be one of several companies investigated by the DTI after they told clients of their purported ability to raise loans, often running into millions of US dollars. Its director, Mr Howard Curtis, appeared before a magistrates' court in Barnstaple, Devon, last week charged with having failed between May 20 1992 and May 23 1992 to file adequate accounts and provide further information under the Companies Act. Proceedings were adjourned until September 8.

PBNs are purportedly traded as collateral bank documents, against which loans can be secured. DTI investigators found that Funding Sources International had been requiring its clients to pay substantial fees in advance of the purchase of the PBNs. Although advance fees were paid, no loans were made. The DTI said: 'We urge any potential borrower thinking of entering into financing arrangements involving PBNs to satisfy themselves about the legitimacy of all the parties involved and that there is real substance to any loan offer before parting with any money.'

OFFER, the electricity indus-try regulator, has indicated to regional companies in the sector that it plans a less rigid price controls system than some in had feared.

Professor Stephen Littlechild, director-general of Offer, has also signalled that, as part of a shake-up of supply price controls, it will allow recs more flexibility in their dealings with large companies.

Offer's latest thinking is outlined in a memorandum to the regional electricity companies as a review of electricity supply controls gets under way in readiness for change in April next year.

It will be welcomed by most regional companies, which will argue that Offer's approach will enable them to tailor contracts more to customers' requirements - for example, by providing long-term contracts at higher prices to the benefit of some buyers.

Large customers, some of which have faced steep price rises since privatisation of the electricity industry three years ago, will be concerned it could lead to further increases.

In the memorandum to regional companies, Offer says it attaches great importance to putting pressure for efficient purchasing on them. It believes 'this can best be achieved by restricting the scope of price control to the franchise market'. The franchise market, where regional companies have a monopoly in the areas they distribute electricity, is restricted to customers who use less than 1MW of electricity in any half-hour period. From April 1994 the threshold will fall to 100kw. Offer says regional companies would be exposed to the 'full pressure of competition in the non-franchise market without the inevitable complications which price control brings'.

For the franchise market, Offer proposes a yardstick approach under which a measure would be made of average costs of units supplied in England and Wales, excluding those covered by coal contracts signed in current negotiations.

The franchise market yardstick would 'both provide a published source of information and act as a trigger for further inquiry on economic purchasing should an individual rec's (regional company) costs exceed the yardstick by a certain amount'.

This suggests that contracts for gas between regional companies and the independent power projects, in which many have equity stakes, will be scrutinised further in spite of the regulator's recent endorsement of the 'dash for gas'.

Nevertheless, the yardstick approach outlined by Offer is considerably less formal than other possibilities though to be under consideration. Under present rules, the price of electricity supplied to all customers can rise only by the level of inflation.

WORKING time lost in Britain through disputes and stoppages has fallen sharply, according to figures from the EC's statistical office in Luxembourg. Only 34 days were lost per 1,000 employees in 1991 compared with 83 in 1990 and 1,278 in 1984.

REPRESENTATIVES of London bus workers who will hold their second 24-hour stoppage today - will meet later this week to discuss future options.

The bus workers are protesting at management's attempt to buy out existing terms and conditions.

MORE than 5,000 electricity workers employed by National Grid have been offered a 3.95 per cent pay rise backdated to February 1, plus one-off payments of between Pounds 700 and Pounds 900 linked to a deal on working practices.

The offer is substantially more than the government's 1.5 per cent pay limit for the public sector and twice the rate of inflation.

It is also more than the PowerGen offer of a 2.5 per cent pay rise plus lump-sum payments of between Pounds 250 and Pounds 550, and last October's National Power deal of 3.9 per cent over 15 months.

LEADERS OF the Fire Brigades Union are due to meet Mr Kenneth Clarke, the home secretary, today to discuss the future of the pay formula that has decided the wages of their 49,000 members for 14 years.

Under the formula drawn up by the last Labour government to end the first national firefighters' strike, their pay is linked to the upper quartile of all male manual workers' earnings.

Last November the firefighters secured a 4.9 per cent pay rise as a result of wage comparability, but their union fears the government intends to scrap the pay formula.

FOREMEN at Ford plants in Southampton and at Dagenham, east London, went on strike yesterday in protest at the company's threat of compulsory redundancies, Robert Taylor writes.

White-collar unions at Ford are due to meet the management next Tuesday following a ballot vote in support of industrial action.

A union official said yesterday that his members were 'champing at the bit' to strike over the compulsory redundancy issue.

Last week Ford agreed not to press ahead with compulsory redundancies among its blue-collar workers thanks to improved demand and adjustments to production targets. But the company has refused to withdraw the threat of compulsory redundancies for white-collar employees.

THE government has told the 14 electricity companies in England and Wales to resolve by Friday outstanding problems on tentative contracts with British Coal in preparation for a white paper next week, Michael Smith writes.

Its exhortation on proposed deals for 40m tonnes next year and 30m in each of the following years will increase speculation that its coal review will save only a handful of the 31 threatened pits.

National Power and PowerGen, the two generators for England and Wales, have heard nothing substantial from the government for more than two weeks on additional tonnages. This suggests the government wants a tonnage closer to the 40m over five years which the generators have indicated they are comfortable with, rather than the 65.5m the government originally wanted them to take.

At most an additional 40m tonnes would save eight pits and possibly less.

In spite of the electricity companies' expectations, it is possible that the government's timetable has slipped further in the past few days, and the white paper, originally promised for February, will be published next month.

The cabinet is not due to discuss coal tomorrow and it will almost certainly be required to give its approval to any plans following revelations that many ministers were kept in the dark before the original closure decisions last October.

INDUSTRY may face much higher charges for discharging polluted water into rivers, Mr David Maclean, environment minister, said yesterday.

He told the second day of the Financial Times European Water Conference that higher charges for companies abstracting water from rivers were also on the cards.

'A charge based on the amount and type of pollutants discharged to water would give a direct financial incentive for cleaner effluent,' he said. 'Those who polluted least would pay the lowest charge.'

A government report is being prepared giving the options for using financial instruments to curb water pollution.

Present licences for discharging and abstraction, which are issued by the National Rivers Authority, charge in proportion to pollution, but it is allowed only to recover its monitoring costs. The NRA expects to receive Pounds 44m for discharges and Pounds 79m for abstraction in the year to March 1994, but new charges are likely to be much higher.

Mr Guy Liardet of the Chemical Industries Association said yesterday: 'We are very keen to improve our performance and we are keen to play along with government policy provided it is rational, achieves its aims and does not destroy UK industry's competitiveness. We just ask that the chemical industry's pollution is considered in the context of everyone else's pollution, particularly farm waste.

Mr Maclean also said that the government would urge the European Commission, which is reviewing all its water quality directives this year, to accommodate more subsidiarity - allowing countries to decide some of their water standards themselves. 'The Community should exercise a certain humility,' he said.

Water companies should also look at charging households special high tariffs for using water at peak times, according to Mr Chris Mellor of Anglian Water, which covers the region likely to have the greatest shortages of water. The supply of water at peak times was nearly double the average daily level, he said, and supplying the peak demand could account for half of a water company's costs.

Peak-time charges could be applied only to houses fitted with water meters. Anglian, which has introduced compulsory metering to help cut future demand, now has 160,000 metered customers. The present installation charges of Pounds 145 to Pounds 185 could fall as more customers were metered, he said.

Exports of ice cubes are expected to rise, after the water used by a producer in north-west England passed stringent hygiene tests.

The Packaged Ice Company of Fleetwood uses ordinary north-west drinking water in quantities of up to 60 tonnes a day. Its cubes are being sold by the Belgian-owned Multi-Frost chain of frozen food stores.

Further expansion into continental Europe can take place following certification of water quality by the health authorities of France and the Netherlands.

The ice-making company is a subsidiary of the 85-year-old Fylde Ice and Cold Storage Company. The parent diversified into bulk ice cubes in 1986.

LORD Mackay, the Lord Chancellor, has again postponed a final decision on whether barristers employed by the Crown Prosecution Service and in the Government Legal Service should be given the right to appear as advocates in the higher courts.

Last October the Lord Chancellor (pictured right) and the four senior judges who decide such issues indicated they were not opposed in principle to barristers in the two services having rights of audience in the higher courts, but concluded that the CPS in particular needed more time to overcome initial operating difficulties before taking on the extra responsibility.

As a result the judges decided not to approve permanently a Bar Council rule that bans all employed barristers, including those in the CPS and GLS, from appearing in the higher courts.

They asked the Bar to consider applying this rule only until the end of 1994 so that the issue could be kept under review.

The Bar called on Mrs Barbara Mills QC, director of public prosecutions, and Mr Gerald Hosker QC, the Treasury solicitor, to withdraw their applications for rights of audience for CPS and GLS barristers.

The DPP and the Treasury solicitor urged the Lord Chancellor and the four judges to disapprove the Bar's rule on the basis of an undertaking that they would not seek to exercise wider rights of audience for a period of six months.

The Lord Chancellor and the judges have now decided to postpone a final decision until they are in a position to consider barristers' rights together with the Law Society's application for wider rights of audience for solicitors.

The Law Society applied to the advisory committee last November on behalf of all solicitors including those employed by the CPS and GLS. The Committee is not expected to advise Lord Mackay on the application until later this year.

The Bar welcomed yesterday's announcement. 'The Bar remains opposed on principle to the employment of state prosecutors,' said Mr John Rowe QC, chairman.

WORKING time lost in Britain through disputes and stoppages has fallen sharply, according to figures from the EC's statistical office in Luxembourg.

Only 34 days were lost per 1,000 employees in 1991 compared with 83 in 1990 and 1,278 in 1984.

Days lost between 1987-91 average 126 per 1,000 employees - a 70 per cent drop compared with the period from 1982 to 86 when Britain had one of the worst records for strikes in the Community.

REPRESENTATIVES of London bus workers who will be holding their second 24-hour stoppage today - will meet later this week to discuss future options.

The bus workers are protesting at management's attempt to buy out existing terms and conditions. Staff claim that new contracts, introduced ahead of privatisation, will mean cuts of Pounds 30 to Pounds 60 a week on the current average earnings of Pounds 280 and a working week up to five hours longer.

Two thirds of London's buses were off the road last Wednesday because of the first stoppage.

THE INLAND Revenue wrote off nearly Pounds 900m in unpaid taxes in 1991 - an increase of 55 per cent over the previous year, David Owen writes.

The disclosure, covering the latest year for which figures are available, came in a written Commons answer from Mr Stephen Dorrell, financial secretary to the Treasury.

The sum written off in 1990 totalled nearly Pounds 569m, he indicated in reply to Mr Archie Kirkwood, the Liberal Democrat MP for Roxburgh and Berwickshire.

In a separate answer, Mr Dorrell disclosed the findings of an independent survey suggesting that one in three employed taxpayers were dissatisfied with the service received from the Inland Revenue.

A survey conducted by Research International, a market research group in June 1992 found that only 65 per cent of employed and self-employed taxpayers were satisfied.

Mr Dorrell said the Inland Revenue planned to survey other taxpaying groups to establish their present satisfaction levels and service preferences, and to repeat the surveys at 'appropriate intervals'.

China's Henan province has signed a memorandum of understanding with Wing-Merrill International of the US to develop three coal-fired power plants, Andrew Baxter writes.

Two of the plants, each with a capacity of 1,400MW, will be sited near the provincial capital of Zhengzhou and will be built, owned and operated by a joint venture company to be established under the agreement. The third station will be built near Henan's northern border. Members of the consortium include Bechtel, Westinghouse and Riley Stoker from the US.

The Czech and Slovak republics yesterday signed new accession protocols that will enable the newly separated countries to rejoin the General Agreement on Tariffs and Trade, Frances Williams writes in Geneva.

They ceased to be Gatt members when the former Czechoslovakia, a Gatt founder member in 1948, was dissolved at the end of last year.

Siemens, the German electrical engineering group, claimed yesterday that its share in a US order for 350 diesel-electric locomotives provided a firm base for further expansion in the American railways market, Christopher Parkes writes from Frankfurt.

The DM1bn (Pounds 400m) order from Burlington Northern Railroad, one of the biggest rail freight carriers in the US, was the largest single investment in the history of US railways, Siemens said.

The lead contractor will be General Motors' locomotive division, EMD, which will build the engines. The Stuttgart-based group will earn around DM170m, excluding income from licences granted to EMD, from the supply of three-phase alternating current motors. The first eight 4,500 horsepower locomotives will be delivered this year.

OMAN and India have reached preliminary agreement to build an undersea gas pipeline capable of delivering 50m cubic metres of Omani gas a day to industries on India's west coast, writes Mark Nicholson in Cairo. Gulf oil executives say the deal will be worth around Dollars 4.5bn and could be completed within four years.

The two states have also agreed to build two 120,000 b/d oil refineries in India, with the Omani government partnering India's Hindustan Petroleum and Baharat Oil.

The Oman Oil Company, an arm of the country's oil and finance ministries, is to conduct a feasibility study on the 900km pipeline, which would have to pass over the continental shelf off Iran and Pakistan.

Oil industry officials said a substantial part of the deal was likely to be financed by export credits. Oman has reportedly proposed a 40-year gas supply contract.

AS President Bill Clinton's trade officials today begin their first important negotiation - over side deals for the North American Free Trade Agreement - they will be walking a fine line between their trading partners' sensitivities and the stiff demands from some members of their own party.

In meetings in Washington with the Mexican and Canadian chief negotiators - Mr Herminio Blanco Mendoz and Mr John Weekes - deputy trade representative Rufus Yerxa will search for a formula to persuade the US Congress that Nafta will not lure US companies south of the border with the promise of cheap labour and weak enforcement of environmental rules.

The negotiators must, at the same time, devise an enforcement mechanism that does not infringe on Mexican sovereignty or, even worse in US eyes, cede to Mexico a part of US sovereignty. Many labour activists believe the US wants no complaints filed in its courts about treatment of migrant Mexican workers by companies or growers north of the border.

Mr Mickey Kantor, US trade representative, hopes to send Nafta to Congress this summer in time to have it implemented as scheduled next January 1. The deal is widely supported by Republicans, but to win over enough Democrats for passage, the president will have to persuade them that it will raise living standards and clean up pollution on the whole continent.

Still, there will be many Democrats such as Mr Craig Merrilees, director of the California Fair Trade Campaign, who supported President Clinton in the election but opposes the Nafta. He believes it is impossible to 'fix' the pact because the administration is unwilling to confront two central dilemmas of the negotiations.

These are the wage differential and the environment. The wage difference between Mexico and its northern neighbours is what Mr Merrilees calls 'the main reason that Nafta exists in the first place'. If the administration attempts to close that wage gap through, for example, strong enforcement of labour right rules, support for the agreement will erode among corporations. The Mexican government will also oppose raising wages because it wants to be as attractive as possible to foreign investors.

'Mexican citizens don't have the right to petition their government,' said Mr Merrilees. 'They don't have due process. Their constitution is regularly violated by a regime that has been in power for 65 years.' In his view, the question is how such a government can be trusted to uphold enforcement promises.

The support of Mr Richard Gephardt, House majority leader, is the most crucial to the Nafta's passage. Just back from a trip to Mexico with Mr Merrilees and other congressmen, he related several environmental horror stories to the House Ways and Means committee last week, including one involving cows, whose milk is sold in Tijuana, dying from lead poisoning.

'The current Nafta will do nothing to stem the tide of pollution that endangers the health, safety and welfare of citizens on both sides of our borders,' he said. 'Nor will it stem the haemorrhage of jobs to Mexico or help recreate the link between productivity and wages by empowering the workers through their unions and their political system.'

The Clinton solution, as defined last week by Mr Kantor would be two trilateral councils on environment and labour, which may have the power to investigate environmental and labour violations.

Last week Mr Kantor was suggesting that public pressure serve in place of a formal enforcement mechanism. But, by yesterday, testifying before a Senate committee, he was promising that the side pacts would have 'teeth at the end of this process'. Pushed to describe how environmental clean-up would be paid for, he talked vaguely in terms of a fund, perhaps capitalised by government and business, or paid for through 'fees'.

If that does not convince sceptics, he has another idea, borrowed from the intellectual property rights section of the current Nafta text. It would require Mexico to change its law, so that citizens could appeal in Mexican courts against decisions from administrative agencies.

The Clinton administration is also considering the possibility of using trade sanctions as an enforcement tool. The use of sanctions - even if Mexico and Canada agree - will not satisfy Mr Merrilees and his colleagues in the labour and environmental movements. However, it may help bring Mr Gephardt on board if Nafta is presented with a strong job retraining programme and a funding mechanism, such as cross-border tax on imports, dedicated to environmental clean-up.

OMAN and India have reached preliminary agreement to build an undersea gas pipeline capable of delivering 50m cubic metres of Omani gas a day to industries on India's west coast. Gulf oil executives say the deal will be worth around Dollars 4.5bn and could be completed within four years.

The two states have also agreed to build two 120,000 b/d oil refineries in India, with the Omani government partnering India's Hindustan Petroleum and Baharat Oil.

The Oman Oil Company, an arm of the country's oil and finance ministries, is to conduct a feasibility study on the 900km pipeline, which would have to pass over the continental shelf off Iran and Pakistan.

Oil industry officials said a substantial part of the deal was likely to be financed by export credits. Oman has reportedly proposed a 40-year gas supply contract.

The Oman Oil Company has also signed a deal to link Kazakhstan's biggest oilfield with a coastal terminal. Both deals are part of Oman's attempts to diversify and broaden its hydrocarbons industry.

The gas deal with India would give Oman a reliable local market for its gas, proven reserves of which have doubled in the last two years to 490bn cu m. Oman will also supply crude oil for the two refineries to be built in India.

AN advisory body to Japan's Ministry of International Trade and Industry has accused European and US companies of violating restrictions on exporting sensitive technologies to China.

The Centre for Information on Strategic Technology, comprising industry representatives, said investigations of Chinese factories had identified a range of sophisticated machine tools, exports of which were prohibited by the Co-ordinating Committee for Multilateral Export Controls (Cocom).

In recent years, Japanese technology producers have admitted exporting equipment illegally to the former Soviet Union and Iran, but the industry is angry that Japanese companies should be thought less ready than others to respect Cocom regulations.

The confidential Cistec report describes results of visits to factories in Chinese cities by member companies, which claim to have found banned equipment apparently from US and European producers.

Miti has supported an easing of technology export restrictions, but officials in the Foreign Ministry are concerned that some equipment could be used to help the Chinese army in its ambitious plans to develop high-tech weaponry. This is a view shared by Washington.

SIR Leon Brittan, the European Community commissioner for external economic affairs, yesterday intervened to defuse the growing EC-US dispute over government procurement and telecommunications.

Sir Leon announced that the EC was ready to sponsor jointly with the US an independent study to establish 'objective criteria' for the parallel opening of the US and EC procurement markets. The decision to publicise the EC offer was viewed in Brussels as offering Mr Mickey Kantor, the US trade representative, a face-saving compromise so that he can withdraw his threat to bar EC companies from certain federal contracts, starting next Monday.

EC officials said the offer to sponsor an independent report on restrictions to competition created by Buy American and Buy European legislation would have been tabled during talks scheduled this week. But Mr Kantor's unexpected decision to call off the negotiations thwarted the EC initiative.

Sir Leon repeated yesterday his earlier proposal to waive Article 29 of the EC utilities directive which offers a 3 per cent price preference to European companies, on condition that the US makes reciprocal moves to open the US market in transport, power generation and telecommunications. The US is understood to be pressing for a suspension of this article.

A US trade official in Washington said the offer of the study was 'very vague at this point' so Sir Leon has been asked to put the proposal on paper.

However, it is unlikely that the study - even if it is agreed - will stop the imposition of sanctions on schedule. 'There are all sorts of studies already,' the official said. But the 'discrimination' against US suppliers has persisted.

But the British commissioner also warned, that if the US goes ahead with its threat, the EC would view such actions as 'unilateral' and 'unacceptable' and would follow up with appropriate responses.

The EC offer came two days before talks Mr Jacques Delors, European Commission president, is due to hold with President Bill Clinton in Washington.

Tomorrow's meeting offers a chance to defuse the escalation in EC-US trade tensions on steel subsidies, the stalled Gatt Uruguay Round and the procurement dispute as well as to cement a working relationship between the two leaders.

EC officials pointed out that if Mr Kantor proceeds with his threat to bar certain European companies from federal contracts it would be interpreted as a slap in the face to Mr Delors.

THE restructuring of Brazil's commercial debt moved a step nearer yesterday, with financial institutions owed more than 95 per cent of the country's medium-term bank debt agreeing the proposed accord.

The achievement of this 'critical mass' will trigger payment of about Dollars 150m of interest owed to banks from the first half of last year. Mr William Rhodes, vice-chairman of Citibank, which heads the Brazilian bank steering committee, said the accord was 'doing very well'.

About 800 financial institutions, accounting for almost 97 per cent of the Dollars 44bn of commercial debt, had assented to the restructuring agreement, which allows banks the choice from six options, he said.

Bankers said two issues now had to be tackled:the so-called balance of the deal, and Brazil's relations with the International Monetary Fund.

Demanding balance, Brazil has reserved its right to reopen negotiations if too many banks concentrate on the option that would prove most costly to Brazil, the so-called par bond. Mr Pedro Malan, Brazil's chief debt negotiator said: 'We feel that the demand for par bonds has been a bit excessive.'

Bankers said the deal would need 'rebalancing' but that this process would be easier than in the recent Argentine agreement. Citibank and some other banks had chosen to make some new loans.

The biggest problem remains Brazil's lack of progress with the IMF. A fund delegation yesterday met Mr Eliseu Resende, the new finance minister.

An old IMF agreement is in place until August, and although the government has failed repeatedly to meet its targets, this would formally satisfy the requirements of the commercial debt accord. However, a new fund agreement would release money from the IMF, World Bank and the InterAmerican Development Bank to provide some of the Dollars 3.2bn that Brazil needs for guarantees on instruments to be issued under the accord.

The country could use foreign exchange reserves - a healthy Dollars 20bn - to provide a bridge until new funds from the multilateral institutions arrive.

This is one issue the banks and government are likely to discuss in the weeks ahead.

PRESIDENT Bill Clinton is being urged to plan a second attack on the budget deficit after his current four-year reduction plan, in an attempt to restore competitiveness.

The Competitiveness Policy Council, set up by Congress in 1990, yesterday called for elimination of the federal budget deficit by the year 2000 - or, even better, creation of a budget surplus - as an essential step towards freeing enough savings to finance an expansion in US investment.

Mr Fred Bergsten, director of the Washington-based Institute for International Economics and the council's chairman, welcomed Mr Clinton's economic programme as a first bite at the problem; indeed, the Clinton plan draws in several areas on the council's work. 'We are saying he should have in mind that the first four-year tranche may not be enough.'

In its second annual report, presented to Congress yesterday, the council, which groups leaders from business, labour, government and academia, calls for a central national goal of nearly tripling productivity growth, to at least 2 per cent a year, by the end of the century.

That would require 'increasing national investment by at least 4-6 per cent of GDP, or about Dollars 300bn annually at current prices,' the report says, adding that 'most of the expansion must come from the private sector.'

If this is to be financed internally, instead of by continuing to depend on foreign capital, the council argues, the national savings rate will have to rise by 5-7 per cent.

'Those are ambitious goals, but we think they are doable,' Mr Bergsten said.

As some of the policies advocated by the council would involve increased spending, the report lists options for a future round of spending cuts and tax increases. The US current account deficit climbed back to Dollars 62.4bn last year, with an improved surplus on services partially offsetting a widening merchandise trade deficit and declining income from overseas investments.

PRESIDENT Bill Clinton's proposal to eliminate a vital package of tax incentives for US companies investing in Puerto Rico as part of efforts to cut the US federal deficit has led to deep concern on the island and prompted renewed soul-searching over its political future.

Mr Clinton has proposed the elimination of Section 936 of the federal internal revenue code which allows US companies with manufacturing subsidiaries in the US Caribbean possession to return their profits tax-free to the mainland or to deposit profits in local banks without paying any federal taxes on the earnings.

These deposits of about Dollars 15bn (Pounds 10.5bn) have become a pillar of the island's financial stability and the tax incentives have been seen by many as the main fuel for the rapid expansion of Puerto Rico's economy.

The island's rapid industrialisation over the past four decades has clearly been helped by the incentives which, with lower wages, have encouraged dozens of mainland companies to switch production to the island.

Section 936 has been frequently attacked in Washington and it is not surprising that it has become a target in the deficit-cutting exercise. US Treasury officials have repeatedly claimed that the tax breaks cost the federal budget between Dollars 2bn and Dollars 3bn a year.

The president is suggesting that over a five-year period Section 936 be replaced by a 65 per cent tax credit on wages to companies which operate subsidiaries in Puerto Rico. The proposal for ending the incentives follows recent charges by legislators in Washington that pharmaceutical companies have been using the tax breaks to make excessive profits through overcharging for their products.

Puerto Rico has become one of the world's leading producers of pharmaceuticals, accounting for about half the US market. The island's pharmaceutical sector has not been helped by the debate in the US over the high cost of healthcare.

Mr Clinton's proposals have fuelled party political debate in Puerto Rico over the island's future.

The 3.5m people of the island are US citizens, but cannot vote for a president. The island's representation in Washington is limited to a commissioner who has no vote to influence legislation. Puerto Ricans are to vote later this year to determine whether the island will retain its current freely-associated 'commonwealth' status or become a state of the union.

As a fully fledged American state Puerto Rico would no longer be able to benefit from Section 936 and Mr Clinton's proposals may strengthen the arguments of those who support a change to full statehood, led by the incumbent New Progressive party of Governor Pedro Rossello.

Mr Carlos Romero Barcelo, Puerto Rico's resident commissioner in Washington, also says he favours the phase-out of the special incentives and their replacement with wage credits.

The opposition Popular Democratic party however favours a continuation of the political status quo and Mrs Victoria Munoz Mendoza, the party's leader, argues that elimination of Section 936 would lead to widespread unemployment on the island.

While they await the introduction of Mr Clinton's proposals Puerto Ricans are looking to Caribbean neighbours for help. Previous administrations on the island have committed up to Dollars 100m a year of Section 936 deposits in the form of low-interest loans to business projects in other Caribbean countries. Since 1985 Puerto Rico's neighbours have received a total of Dollars 650m of such loans.

Mr Baltasar Corrada del Rio, Puerto Rico' secretary of state, said he expected strong Caribbean support for the defence of the programme which he said had helped to provide 30,000 jobs in Caribbean countries.

THE National Rifle Association, one of the most effective lobbies in the US, now finds itself in the unaccustomed position of losing some legislative battles over gun control.

On Monday, the New Jersey senate refused to repeal a state law which bans the sale of semi-automatic handguns and gives the 300,000 owners of such assault-style weapons a year in which to sell them out of state, disable them or turn them into the police.

The New Jersey law is among the country's toughest gun control measures. Proposed by Democratic Governor Jim Florio, it was enacted in 1990 by the legislature, then in Democratic hands.

It seemed ripe for repeal when Republicans took over the state's two houses, which repealed the bill last August. Mr Florio vetoed the repeal, but was himself overruled in the lower house. Intensive lobbying by the NRA seemed likely to induce the senate also to override the veto, but in the event it voted 26-0, with 12 abstentions and two absentees, to sustain the governor.

A local NRA official said the fight for repeal would continue in this November's gubernatorial and state elections. He promised to raise Dollars 100 from each of the NRA's 600,000 members in the state and to use the funds in particular against those Republican senators who had 'betrayed' the cause.

Instant post-mortems in Trenton, New Jersey's capital, were that the NRA had overplayed its lobbying hand. Other factors cited included public unease over the current siege outside Waco, Texas, of a heavily-armed religious cult and many other instances of random violence.

Earlier this year, the Virginia legislature passed into law, again over heavy NRA resistance, a measure limiting the purchase of handguns by any individual to one per month, unless special permission to buy more is obtained from the police. Virginia was one of the easiest states in which to purchase guns.

The NRA was also embarrassed last week when it was forced to fire one of its senior lobbyists in Washington for having spread unsubstantiated rumours that Ms Janet Reno, the new attorney general and a staunch advocate of gun control, had been arrested, though never charged, on suspicion of drunken driving.

Interviewed on television, Mr Wayne La Pierre of the NRA's national headquarters, advanced his organisation's standard line that gun control was not the way to attack crime in the country either at state or federal level. He argued against the pending Brady handgun control bill favoured by President Bill Clinton and soon to be considered again by Congress, and in favour of building more prisons and tougher jail sentences.

He was particularly critical of the provision of the New Jersey law requiring existing owners of assault weapons to disable them or turn them in. This, he said, meant that 300,000 citizens of New Jersey had been branded de jure 'criminals.'

ATTEMPTS by Brazil's former President Fernando Collor to recover his rights to stand as a candidate in next year's elections are being thwarted by a flood of fortune-seeking books by his vengeful younger brother and former aides about the torrid world of drugs, adultery and black magic that allegedly marked his presidency.

With the Supreme Court due to decide within two weeks whether to proceed with criminal charges against the former president, removed in impeachment proceedings over corruption charges, Mr Collor's last shreds of honour are being stripped away by the revelations now rocking Brazil in the latest episode in the Cain and Abel saga between the two Collor brothers.

Mr Collor has pleaded for people to ignore the damning extracts being published in the Jornal do Brasil from a book by his brother Pedro whose denunciations last year led to the president's downfall.

A handwritten letter from Mr Collor to the media accused his brother of being 'sick in body and soul,' adding: 'Isn't it enough that they have taken away my political rights, my happiness, my peace. . . for the love of God, stop this]'

There is very little that Pedro does not accuse his brother of in his book which he says 'will make the whole world question how such a person could become president of Brazil.' In the first two extracts alone he claims that while in office the president and his wife Rosane were cheating on each other - both with men - and that Rosane blackmailed Mr Collor by threatening to reveal his alleged cocaine addiction and wife-battering tendencies.

Pedro goes on to detail black magic sessions by the first couple and Rosane's mother in which they jabbed pins into models of their enemies. Pedro also claims the presidential couple sacrificed goats and chickens and danced round them in daily ceremonies to try to ward off impeachment.

Pedro's book is not the only one doing the rounds. In 'A Thousand Days of Solitude' by Mr Claudio Humberto, Mr Collor's loyal ex-spokesman, Pedro is the mentally imbalanced villain who shoots at the refrigerator when he cannot find the cheese.

Although Pedro is not regarded as the most credible source, any hope of Mr Collor's imminent return to public life is likely to be dashed by the revelations which have led news items throughout Latin America.

HONG KONG'S governor Chris Patten came under vituperative attack yesterday in the People's Daily, newspaper of the Chinese Communist party.

Singling out Mr Patten's observation that it 'takes two to tango' in reference to stalled negotiations on Hong Kong's future, the party newspaper charged that 'tango dancing has made Chris Patten's head dizzy and speech incoherent'.

'Just as Hong Kong was going on a road of peaceful transition, God knows how, there comes a Chris Patten,' the paper said. 'We'd like to warn this shameless politician to stop his clumsy show. Mr Patten, the tango dancer, come back to your senses.'

Beijing has been infuriated by Mr Patten's gazetting last Friday of proposed legislation aimed at extending Hong Kong's democratic reforms. It has charged that this marks a betrayal of earlier agreements reached with Britain on a smooth transition to Chinese rule in 1997.

British officials in Beijing said they were waiting for the dust to settle on almost constant attacks levelled against Mr Patten since last Friday before making judgments about possible diplomatic moves to quieten the tempest.

In Hong Kong a senior official of Bank of China warned that the colony's economy would suffer from 'the instability' Mr Patten's reforms would bring to Hong Kong. Mr Lin Gunagzhao, the bank's deputy director, said Hong Kong's real growth rate could be cut by up to 1 percentage point this year from the 5.5 per cent the Hong Kong government forecast in its budget.

Mr Lin said he feared the stock and property markets would be affected by the current political uncertainty. 'The knock-on effects caused by the influence on the property sector will spread to even wider areas.'

Mr Patten was, however, unbowed yesterday. After a meeting of his Executive Council, or quasi-cabinet, he said the government planned to continue working for the interests of ordinary people in Hong Kong. He said he would continue to discuss the future of Hong Kong 'positively and constructively'.

In an implicit criticism of Mr Li Peng, China's prime minister, who on Monday launched a vehement attack on the government, Mr Patten said: 'I don't intend to use the sort of language which is very often being used about Hong Kong by others.'

The stock market has seen steep falls in share prices over recent days as investors took fright at China's criticism of Mr Patten's reforms. Stock market analysts said that in the absence of these attacks there would probably have been a rise in share prices.

Yesterday the market recovered some of the losses sustained in trading last Friday and on Monday. The Hang Seng Index rose 125.43 points, or more than 2 per cent, to end at 5,980.04.

Government figures also showed a strong rebound in property market transactions in February when turnover rose 105.6 per cent from January's exceptionally low level. Property transactions in the first two months of 1993 were 5.3 per cent up on that same period last year.

SOUTH KOREAN defence officials said yesterday they had not detected any unusual military activity in North Korea in spite of the country being placed on a 'semi-war' footing last week.

Pyongyang took the step in response to the large US-South Korean Team Spirit military exercise, while also withdrawing from the nuclear non-proliferation treaty.

The Seoul officials said military movements in North Korea were consistent with battle mobilisation measures taken in reaction to previous Team Spirit exercises, which have been held since 1976.

Mr Kwon Young-hae, South Korean defence minister, told the National Assembly that Seoul had consulted Washington on the possibility of some of the US troops taking part in Team Spirit staying in South Korea after the exercise ends tomorrow. But defence officials said if North Korean military activity remained normal, this request was unlikely to be made. The US military command in South Korea said there was no change so far in plans to take the 55,000 US troops mobilised for Team Spirit from the country.

The exercise tests US ability to reinforce its 38,000 troops in South Korea in the case of war.

North Korea has routinely condemned such exercises as a threat to its security and by putting troops on increased alert. Pyongyang has also used the exercises as a pretext to break off previous negotiations with Seoul about nuclear inspections.

The Team Spirit exercise this year coincided with the International Atomic Energy Agency's demand that North Korea let it inspect two suspected nuclear facilities by March 25 or face possible economic sanctions by the UN.

JAPAN'S Supreme Court has ended a 31-year dispute by ruling that the Ministry of Education has the right to change textbooks to ensure that a 'standardised' version of history is taught in schools.

The ruling ends a legal challenge by a former Tokyo professor whose text, A New Japanese History, was rejected in 1962 by the ministry, essentially because it contained a blunt assessment of Japan's military aggression in Asia during the 1930s and 1940s.

China and South Korea have complained that the education ministry's control over textbooks and its use of euphemism to describe wartime brutality have left Japanese ignorant of the past.

Mr Saburo Ienaga, 79, a former professor at the Tokyo University of Education, said the rejection of his case against the ministry violates the Japanese constitution by allowing the government unrestricted power to censor school texts. 'This decision makes me very angry. I think it is very disappointing for Japan,' said Mr Ienaga, who was appealing against a lower court decision to dismiss a Y1.9m (Pounds 11,000) suit filed by him against the ministry.

Passages of the high school text rejected by the ministry include a description of the Japanese army's advance as 'reckless', and comments that 'the war was glamorised'.

The Supreme Court ruled that the ministry had the right to recommend changes or disqualify texts from school lists as long as its decisions are 'reasonable', and that its reservations about Mr Ienaga's history book were reasonable. However, the court warned the ministry that its power to alter texts should be used selectively.

Ms Mayumi Moriyama, the education minister, said the court's ruling was welcome because the ministry should retain the right to determine the content of school texts and standardise history lessons, though this power must be used 'appropriately'.

In a 1974 ruling, the Tokyo District Court awarded Mr Ienaga Y100,000 after judging that 19 of the ministry's 200 objections to his work were unfair. But in 1986 the Tokyo High Court overturned that ruling.

ISRAELI troops shot dead two Palestinians and wounded more than 70 yesterday, as intensified violence in the occupied territories cast a deeper shadow over the prospects for a resumption of Middle East peace negotiations.

The mood in the occupied territories and Israel itself contrasts strongly with the upbeat assessment of the peace process by President Bill Clinton and Mr Yitzhak Rabin, Israel's prime minister, after more than three hours of talks at the White House on Monday.

A spokesman for Mr Rabin said he would return three days earlier than expected from the US to address the problem of worsening violence.

The clashes yesterday between Palestinian demonstrators and Israeli troops at the Khan Younis refugee camp in Gaza were said to be the worst since the outbursts that followed deportation of 415 Palestinians by Israel to southern Lebanon in December.

Palestinian negotiators insist they will not resume peace talks until Israel makes a public commitment not to resort to further mass deportations.

Hospital officials said that two Palestinian youths, aged 17 and 18, were killed in the Khan Younis refugee camp. Israeli troops opened fire several times on stone-throwing Palestinians who had taken to the streets after the lifting of a curfew on the camp. The latest clashes come against deepening concern in Israel over attacks on Jewish civilians by individual Palestinians.

Mr Mohammed Hussein Nagdi, a prominent figure in the Iranian exiled opposition, was shot dead in Rome yesterday by two unidentified gunmen, writes Robert Graham.

The killing was denounced by the Iranian opposition as the work of agents of the Tehran government.

A former minister was shot dead as he left his home in suburban Algiers yesterday, AP reports. The official Algerian news agency APS said Mr Djilali Liabes, 45, was shot at his home in Ben Omar in south-east Algiers by three gunmen who fled. Ben Omar is a stronghold of Moslem fundamentalists, who have faced a government crackdown for more than a year.

A BOMB explosion damaged seven empty tour buses parked yards away from the Egyptian Museum in Cairo's busiest square yesterday, one of a series of attacks a week after Egyptian security forces launched a tough crackdown on suspected Islamic militants, writes Mark Nicholson in Cairo. Tourists had left the buses for the Egyptian Museum, , just 100 yards away. No one claimed responsibility. It appeared a defiant gesture from Islamic militants who have waged sporadic attacks on tourist targets for much of the past year.

ONE Palestinian was killed and more than 60 suffered bullet wounds in Gaza yesterday as intensified violence in the occupied territories cast a deeper shadow over prospects for a resumption of Middle East peace negotiations.

The mood in the occupied territories and Israel itself contrasts strongly with the upbeat assessment of the peace process provided by President Bill Clinton and Mr Yitzhak Rabin, Israel's prime minister, after more than three hours of talks at the White House on Monday.

A spokesman for Mr Rabin said he would be returning three days earlier than expected from the US in order to address the problem of worsening violence.

The clashes yesterday between Palestinian demonstrators and Israeli troops at the Khan Younis refugee camp in Gaza were said to be the worst since the outbursts which followed the deportation of 415 Palestinians by Israel to southern Lebanon in December.

Palestinian negotiators insist they will not resume peace talks until Israel makes a public commitment not to resort to mass deportations.

Mr Clinton said on Monday that the deportation issue had already been dealt with and had not featured in his talks with Mr Rabin. This further angered the Palestinians and Mrs Hanan Ashrawi, the spokeswoman for the negotiating team, said it was a mistake for the US and Israel to think they could just push the issue to one side.

In Gaza, doctors said that a 17-year-old boy died after being shot in the chest.

At least 10 Israelis and 58 Palestinians have been killed since the upsurge in violence provoked by the expulsion of the 415 Palestinians.

CHINA'S budget deficit would reach Yuan 84.4bn (Dollars 14.7bn) for 1993, a slight decrease on the actual deficit recorded last year, Mr Liu Zhongli, finance minister, announced yesterday. He also pledged an increase in defence spending of 12.4 per cent to Dollars 7.5bn.

Speaking on the second day of China's National People's Congress, or parliament, Mr Liu said mismanagement and waste in state-run organisations and a shortfall in tax revenues had contributed to 'great financial difficulties.'

Some two-thirds of China's state-owned industries, which account for about 50 per cent of industrial production, racked up huge losses last year, adding to burdens on the exchequer. Last year's deficit reached Yuan 90.49 (Dollars 15.7bn), or about five per cent of GNP. The 1992 deficit represented an increase of 24.6 per cent on the previous year.

Mr Li said total revenues this year were expected to reach Yuan 452.23bn (Dollars 78.6bn), an increase of eight per cent over 1992. Expenditures were projected at Yuan 472.7bn (Dollars 82.2bn), up 6.8 per cent.

This year's boost to defence spending will mark the fourth year in a row that the military will receive a substantial increase; however, published expenditures for the services account for only a relatively small proportion of the actual cost of maintaining China's offensive capability.

Mr Liu also announced increased spending of about 9.8 per cent on education and 10.8 per cent on science and technology.

Investment in agriculture will increase by 9.3 per cent.

Chinese officials also outlined planning targets for the coming year based on anticipated growth in gross national product of 8 per cent.

Mr Zou Jiahua, the vice premier in charge of the state planning commission, said these estimates were conservative and it was 'expected they would be exceeded in implementation.'

Mr Zou said the demands of new investment would continue to drive the economy in 1993. He predicted that activity would continue to be 'rather brisk.' China registered economic growth last year of 12.8 per cent.

Mr Zou reported that in 1992 committed foreign investment in China doubled compared with the previous year. China absorbed Dollars 11bn of foreign funds, and approved 47,000 foreign-funded enterprises in 1992, more than the total of the previous dozen years.

On Monday, Mr Li Peng, the premier, forecast growth in the remaining years of the 1991-95 five-year plan of 8-9 per cent. This would enable China to achieve its goal with time to spare of quadrupling GNP between 1980-2000.

Ministers yesterday also revealed more details of a comprehensive restructuring of ministries and government departments to reduce duplication and waste. A number of ministries will either go or be merged, and staff slashed across the board.

The NPC, which will meet for the next two weeks, will endorse constitutional changes, and approve the appointment of new personnel, including a head of state and several vice premiers.

A BOMB explosion damaged seven empty tour buses parked yards away from the Egyptian Museum in Cairo's busiest square yesterday, one of a series of attacks a week after Egyptian security forces launched a tough crackdown on suspected Islamic militants.

Tourists had left the buses for the Egyptian Museum, one of Cairo's most popular attractions, just 100 yards away. No one claimed responsibility. But it appeared a defiant gesture from Islamic militants who have waged sporadic attacks on tourist targets for much of the past year - considerably hurting Egypt's precious tourism earnings.

The explosion took place during the midday rush in Tahrir Square, scene last month of a coffee-shop bombing which killed three. It came in the teeth of tightened security at all Egypt's tourist centres and intensified operations against suspected members of the Gama'a al-Islamiyya, the underground Islamic group behind most recent attacks. Bus drivers in Tahrir Square said their vehicles had been searched for bombs just 30 minutes before the blast.

An explosive device was also defused in a building housing 'foreign experts' in a Cairo suburb, according to the semi-official al-Ahram news agency.

The US embassy on Monday called in around 40 members of the US business community to discuss security, following a threat earlier this month by Gama'a al-Islamiyya to attack foreign investments. The embassy stressed only that businesses should step up routine precautions.

MR Derek Keys, an accomplished bridge player and a self-acknowledged 'deal-maker', will be hard pressed to pull any tricks from the dog-eared fiscal hand he has been dealt when presenting South Africa's budget to parliament this afternoon.

Expectations of the country's finance minister are high. It is a measure of the importance of today's budget that it has managed to overshadow, in recent days, the country's normal political preoccupations.

And while taxation changes will enjoy the normal close scrutiny, the focus of attention will be on the bigger picture. Observers are hoping Mr Keys's first budget, and probably the National party's last, will mark a new era in the management of government finances.

In this sense, it is the second instalment in a two-part package. Last week saw the long awaited release of the government's economic restructuring plan - a 305-page document which details the dramatic changes required if South Africa is to achieve the sort of economic growth necessary to finance the developmental challenges it faces.

Mr Keys, former chairman of the mining house Gencor, needs to breathe some life into an economy moribund after four years of recession, and start the long-term task of economic restructuring.

The past months, however, have seen the minister also place considerable stress on two other goals - reducing the deficit and stimulating growth - which are not only in conflict with each other but, at least in the case of stimulating growth, clash with the longer-term restructuring aims.

Reconciling these goals, stimulatory against contractionary, would be difficult at the best of times. These, however, are not the best of times and Mr Keys faces constraints which will severely limit his room for manoeuvre. Chief among these are the weak state of the economy - showing no signs of an upturn after four years of recession - and a budget deficit for fiscal 1992-93 likely to be in the order of 9 per cent of gross domestic product.

Perhaps the best that Mr Keys can hope for is that he presents a budget which enjoys credibility. First, and most obvious, he will have to come up with a credible set of numbers. Revenue and spending estimates made by the government in recent years have been woefully inept. The challenge this time will be to produce a deficit reduction plan which is not premised on heroic and unachievable cuts in government spending, and pie-in-the-sky estimates of economic growth.

Best estimates suggest the budget deficit target is likely to be R25bn (Pounds 5.6bn), or 6.5 per cent of GDP. Less than that would not only stretch the credulity of the bond markets, but would also risk aggravating the current recession. The reduction is most likely to be achieved through a real decline in government spending - cert-ainly in the consumption component - and an increase in the VAT rate, probably to 13 per cent from 10 per cent now.

Second, he will be required to prove the government's commitment to restructuring, as outlined last week, by making a serious attempt to implement these goals. A good start has already been made with the government standing firm in its refusal to offer civil servants - whose wage bill is more than half of all state spending - a wage increase of more than 5 per cent.

Finally, and perhaps most important, his budget will have to enjoy credibility with the African National Congress, the main black political grouping, and its trade union ally Cosatu. Without their support - or, at least, the absence of outright opposition - sane economic management in South Africa is impossible. Mr Keys has acknowledged this, so it can be expected that he will go to some lengths to put a 'human face' on the budget, stressing its developmental as well as its growth features.

With unsurprising rhetoric, both the ANC and Cosatu have branded the budget an 'apartheid budget'. But they have come closer to putting their finger on a matter of real public concern in focusing on the expenditure side of the budget. To a large extent Mr Keys has been a supply-side minister, his efforts devoted to improving the growth capacity of the economy. In recent months, however, a flood of revelations about government corruption and maladministration have given South Africans the impression of a 'gravy train' for those in state service.

Most businessmen and taxpayers would endorse the ANC's calls for performance auditing and greater transparency in the spending of public money. The public mood demands that Mr Keys try to show that the government is getting value for money from its spending.

For business and consumers, while he will not shirk delivering some tough messages, he will also be doing his utmost to stimulate confidence. Finding this trump card, though, will test even Mr Keys's ingenuity.

SOUTH KOREAN defence officials said yesterday they had not detected any unusual military activity in North Korea in spite of the country being placed on a 'semi-war' footing last week.

Pyongyang took the step in response to the large US-South Korean Team Spirit military exercise, while also withdrawing from the nuclear non-proliferation treaty.

The Seoul officials said current military movements in North Korea were consistent with battle mobilisation measures taken in reaction to previous Team Spirit exercises, which have been held since 1976.

Mr Kwon Young-hae, South Korean defence minister, told the National Assembly that Seoul had consulted Washington on the possibility of some of the US troops taking part in Team Spirit staying in South Korea after the exercise ends tomorrow.

But defence officials said if North Korean military activity remained normal, this request was unlikely to be made.

The US military command in South Korea said there was no change so far in plans to take the 55,000 US troops mobilised for Team Spirit from the country.

The exercise tests US ability to reinforce its 38,000 troops in South Korea in the case of war.

North Korea has routinely condemned such exercises as a threat to its security and by putting troops on increased alert. Pyongyang has also used the exercises as a pretext to break off previous negotiations with Seoul about nuclear inspections.

The Team Spirit exercise this year coincided with the International Atomic Energy Agency's demand that North Korea let it inspect two suspected nuclear facilities by March 25 or face possible economic sanctions by the UN Security Council.

The decision to place North Korea on a 'semi-war' footing on March 9, the day Team Spirit began, was made by Mr Kim Jong-il, son of President Kim Il-sung and his designated successor, according to Naewoe, the South Korean agency that monitors North Korean news.

Mr Li Chol, North Korean ambassador at the UN in Geneva, said his country might reverse its decision on withdrawing from the nuclear non-proliferation treaty if the US permanently suspended Team Spirit, according to Japan's Kyodo News Service.

He also said the IAEA should 'stop obeying the only superpower', meaning the US, and that it should operate in an impartial manner.

He suggested that the IAEA had made its demand for a special inspection of the North Korean nuclear facilities on US orders.

THE Japanese government will announce a second emergency package to stimulate the depressed economy before Mr Kiichi Miyazawa, the prime minister, visits Washington in mid-April for talks with President Bill Clinton.

Leaders of the ruling Liberal Democratic party confirmed the plan to outline a supplementary budget before the visit. The move, which follows a Y10,700bn (Pounds 62.5bn) emergency package of public works spending announced last autumn, reflects the mounting domestic and international pressure on Japan to stimulate its economy.

The Japanese economy grew by only 1.5 per cent last year, according to official figures last week. Most companies are expecting a third year of falling profits for the financial year to the end of this month.

Meanwhile, the US is likely to intensify pressure on Japan to boost demand for imports to cut its ballooning trade surplus, which last month grew by 3.7 per cent from the year before to stand at Dollars 10.55bn (Pounds 7.4bn), according to government figures published yesterday.

Although a further stimulus has been widely foreshadowed, details of the plan are far from agreed.

Mr Seiroku Kajiyama, the LDP's secretary general, said the package would have to be worth more than last year's Y10,700bn. LDP leaders feel a higher figure will be needed to meet foreign demands and head off mounting US pressure over trade issues.

The finance ministry opposes such a large package. It is thought to favour a more limited stimulus of between Y6,000bn and Y8,000bn.

The contents of the package are also far from agreed. Support for an income tax cut, which was strongly backed by retailers, has waned over the past few weeks.

Instead the package is likely to focus on tax cuts for housing and small business investment, combined with higher spending on social infrastructure projects such as hospitals and schools. Universities and schools budgets to buy computers will be expanded, in part to help the ailing electronics industry.

Different wings of the LDP and several ministries are fighting over plans for government investment to upgrade the telecommunications infrastructure. Competing plans are being put forward by the ministries of posts, trade and industry, construction and transport. The Finance Ministry opposes government subsidies for telecommunications investment, arguing that such measures should be funded by NTT, the privatised telecommunications group.

The rise in Japan's trade surplus for February was mainly caused by a sharp drop in the value of imports, which fell by 2.8 per cent, while exports fell by 0.5 per cent mainly because exports to Europe were 14.4 per cent down on the same month last year.

MR MOHAMMED Hussein Nagdi, a prominent figure in the Iranian exiled opposition, was shot dead in Rome yesterday by two unidentified gunmen, writes Robert Graham.

The killing was denounced by the Iranian opposition as the work of agents of the Tehran government. The murder was condemned by the Italian foreign ministry and members of parliament, who pointed out the Iranian opposition not been as active in Italy as in France, the UK and Germany.

Before the Iranian revolution, Mr Nagdi worked in the Rome embassy.

A FORMER minister was shot dead as he left his home in suburban Algiers yesterday, AP reports.

The official Algerian news agency APS said Mr Djilali Liabes, 45, was shot at his home in Ben Omar by three gunmen who fled. Ben Omar is in south-east Algiers near Kouba, a stronghold of Moslem fundamentalists, who have faced a tough government crackdown for more than a year.

Mr Liabes was recently named head of the 'Group of Experts 2015', to draw up a study on Algeria's future.

IF THERE is one overwhelming reason why France's Socialist ministers seem certain to lose their jobs in this month's parliamentary election, it is the country's unemployment rate, standing at 10.5 per cent in January and expected to go higher.

This issue has occupied more broadcast airtime and filled more newspaper column inches than any other in the campaign. All the more so because the mainstream parties are not united within themselves on the best prescription for unemployment - although, broadly, the right wants to cut labour costs while the left prefers work-sharing.

Only on the extremes are simple solutions offered. Mr Georges Marchais, the Communist party leader, plugs on for a reduction in the working week from 39 to 35 hours with no cuts in pay, while Mr Jean-Marie Le Pen, the National Front leader, blames immigrants for displacing French workers.

France's unemployment rate is no worse than Britain's or Italy's, and better than Spain's, despite some calculations by the opposition. The latter claims the true number of jobless is nearly double the 2,992,600 recorded in January. To arrive at a total of 5m-6m French citizens 'excluded' from the labour market, they include not only young people in government short-term work schemes but everyone drawing welfare payments.

Yet France has special problems. One is that its unemployment rate seems to rise just as fast as other countries' in bad economic times, but to fall far less during good times. Its jobless rate hit 10.5 per cent in 1987, but in the three following boom years, it fell only 1.5 percentage points, compared to a 3-point drop in (western) Germany and a 5-point fall in Britain.

Predictably, this puts a high share (30 per cent at present) of people into the category of the long-term unemployed, defined as those without a job for more than a year. When he took office last April, Prime Minister Pierre Beregovoy made a bold, not to say rash, promise to take all long-term unemployed (some 900,000 at the time) off the dole queues within six months.

Virtually all the long-term jobless were given in-depth interviews. Some found a place in the labour market and many others were put in training schemes. But it was like trying to keep the Atlantic out with a mop. By November, for every person taken off the dole, someone else had fallen into their 13th month of unemployment.

Another black spot is youth unemployment. Of those under 25, one in five is without a job. Part of the blame lies with France's generally excellent school system, which reserves technical and vocational training for those who have passed its all-round educational tests. Hence, tailoring a more specific apprenticeship system to France's unemployment as well as industrial needs has been a big theme of the campaign.

A study published by the Paribas bank yesterday claims that the country's guaranteed minimum wage, known as the SMIC, is in large part responsible for pricing the least qualified workers out of the job market. It notes that the SMIC has doubled in real terms over the past 20 years, rising far faster than average pay.

When he was finance minister, Mr Beregovoy suggested a lower SMIC for young workers. But he got no support from fellow Socialists, and even the opposition has steered away from altering the minimum wage.

But the opposition has attacked the French system of loading most of the cost of the welfare system not on general income tax but on company payrolls. These 'social charges' can add an extra 40 per cent to the cost for an employer of taking on a new worker. The opposition's general thrust has been to call for these charges to be gradually transferred to the national budget and financed out of general taxation. But, in the short term, the RPR Gaullists and centre-right UDF disagree over precisely how to do this without increasing the already swollen budget deficit.

Virtually the only new Socialist theme during the campaign has been work-sharing, the idea of spreading available work around more people. Mr Jacques Chirac, the RPR leader, has ridiculed this as unfeasible because those in existing jobs will not accept less pay for less work. Most Socialists, including Mr Chirac's expected presidential challenger in 1995, former prime minister Mr Michel Rocard, have conceded that work-sharing would mean pay cuts. But others point out that extra productivity can both maintain pay rates and increase employment.

One result of the debate about unemployment has been initiatives by employers, such as that by the AXA insurance company in suggesting employment for life in return for flexible work patterns and lifetime training.

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MR Radovan Karadzic, the Bosnian Serb leader, yesterday gave an undertaking to the United Nations High Commissioner for Refugees that blocked relief convoys would be allowed to pass through Serb lines to besieged Moslem towns in eastern Bosnia.

The UN High Commissioner, Mrs Sadako Ogata, yesterday received an assurance to this effect from Mr Karadzic, whom she had telephoned from Geneva.

The Bosnian Serb leader, it was reported, was speaking in the presence of President Slobodan Milosevic of Serbia.

UNHCR spokeswoman Lyndall Sachs said that Mr Karadzic had also promised that aid workers would be allowed to enter the besieged town of Srebrenica and that the sick and wounded could be evacuated.

Combatants would also be allowed to leave, on condition that they surrendered their arms.

However, the UNHCR had earlier said that it would not allow any convoys to proceed to Srebrenica, after the Serbs had refused to allow them to have a military escort or radio communications.

According to UNHCR officials, some 60,000 people were cut off in Srebrenica, which UN relief convoys have failed to reach in 11 months of fighting and where dozens of people a day are dying of hunger, starvation, disease and war wounds.

In addition, thousands of refugees from neighbouring Moslem townships captured by Serb militias have swollen the population of Srebrenica and many are sleeping in the open air and suffering from exposure.

Mr Karadzic was due to fly to New York yesterday for peace talks with leaders of the other warring parties, under the chairmanship of Mr Cyrus Vance and Lord David Owen.

President Alija Izetbegovic of Bosnia, the Moslem leader, was also reported to have left for New York from Sarajevo to attend the peace negotiations.

Ms Sachs said that General Philippe Morillon, the UN military commander in Bosnia, who has set up temporary headquarters in Srebrenica in an attempt to make the Serbs let in aid, was due to have more talks later with Bosnian Serb army commanders.

France, which has expressed full support for General Morillon, said yesterday that getting international aid into Srebrenica was a test of Serb will to contribute to the peace process in Bosnia.

A French Foreign Ministry spokesman said that continued obstacles to the delivery of humanitarian aid to Srebrenica would be a serious blow to the UN Protection Force in the former Yugoslavia.

FOREIGN exchange markets need a fast-track move by Europe's strong currency countries towards closer monetary co-operation to convince them of the feasibility of economic and monetary union (Emu), a group of senior French economists said yesterday.

The group, assembled by the Commissariat du Plan, the French government think-tank, issued a report calling for 'an informal Emu among the hard-core countries' of the present European Monetary System.

This could start once the Maastricht treaty was ratified, and take the form of 'semi-institutional' agreements by the hard-core countries to stabilise their currency parities, the study said.

Mr Jean-Michel Charpin, senior economist at the BNP bank who presided over the group study, said last September's monetary crisis had sown serious doubts in the markets about Emu's feasibility. These doubts could only be removed by a new initiative, he said. Creating a network of specially close monetary co-operation between some EC states would not be contrary to the Maastricht treaty, and could be achieved within the framework of the European Monetary Institute to be set up under the treaty, the report claimed.

The report reflects similar sentiments inside the French presidency and in the opposition, which has pledged to give autonomous status to the Banque de France soon after its expected election victory this month. But, in contrast to the economists, most French politicians do not want to say anything in public which could jeopardise ratification of the Maastricht pact in Denmark and Britain.

SENIOR Russian officials have cautioned east European countries not to form closer political and military ties with Ukraine, according to officials in Kiev and western diplomats.

A senior official in the Ukrainian foreign ministry warned that in the past few weeks conservatives had taken over Russian foreign policy making, and had now launched a campaign to bring Ukraine back under Russian hegemony.

The change in Russian attitudes towards Ukraine comes at a time when hardliners in Moscow have been winning political showdowns with President Boris Yeltsin, forcing him to take a less conciliatory line to neighbouring states than he might otherwise adopt.

This month, for example, Mr Yeltsin called on the United Nations to give Russia special authority to police disputes in the former Soviet Union, eliciting protests from independent-minded republics such as Ukraine and Moldova.

'Russia's attitude toward its neighbours can now be compared to Germany's in 1939,' the Ukrainian official said. 'This is a crucial moment when the west must realise that the consequences of a policy of appeasement are as dangerous as they were in 1939.'

Western diplomats in Ukraine say they are concerned about the new trend. One said Russian officials were warning east European countries 'not to bother building large embassies in Kiev because within 18 months they will be downgraded to consular sections.'

Mr Sergei Stankevich, a political adviser to Mr Yeltsin, recently warned Poland to limit growing political and military ties with Ukraine. Speaking in Warsaw last month, Mr Stankevich said Ukraine and Belarus fell within Russia's sphere of influence and Russia was opposed to the increasingly cosy relationship between Ukraine and Poland in foreign and military policy.

In the past three months four Polish ministers, including the prime minister and minister of defence, have visited Ukraine. A year ago Poland was the first country to recognise Ukraine and it has signed a number of military and political agreements with its neighbour.

Ties are also growing with Hungary, where Ukrainian president Leonid Kravchuk travelled this month.

SPAIN'S year-on-year inflation rate has fallen to 4.7 per cent, its lowest level since June 1988, the consumer price index for January published yesterday showed, Tom Burns reports from Madrid. February figures, to be published next week, are expected to bring the 12-month inflation rate down to below 4.5 per cent.

The lower inflation has fuelled hopes of a cut in the official intervention rate early next week at the Bank of Spain's repurchase tender for its certificates of deposit.

CONCERN about safety and environmental protection measures in the German chemical industry intensified yesterday as parliament announced an emergency debate on a series of accidents at plants operated by Hoechst.

At the same time, the federal Ministry of Environment ordered a government commission to investigate Monday's chemical explosion at a Hoechst plant near Frankfurt, which left one worker dead and another suffering from third-degree burns.

Mr Klaus Topfer, the environment minister, called for tougher application of the safety controls enforced by the state-run Technical Inspection Agency, TUV. He said: 'We have to bring in external expertise, for example by sending in the TUV to these plants to review safety precautions.'

The German Chemical Industry Association rejected stricter controls, saying that chemical enterprises were already making all necessary safety checks in their plants. 'I do not think that safety standards could be increased by external expertise,' Mr Wilfried Sahm, chairman of the association, said.

But the explosion, following a series of accidents at Hoechst plants, amounts to a severe public relations setback for the chemical industry, which came under attack both in the press and among politicians yesterday. Less than a month ago, an accident at Hoechst released 10 tonnes of chemicals into the sky over a Frankfurt suburb. Last Friday 100 litres of a potentially poisonous solution were discharged into the Rhine.

Mr Michael Muller, environment spokesman for the opposition Social Democrats, said yesterday that 11 accidents in the space of a few weeks must produce some response from legislators. 'Clearly, the current security measures are not adequate to reduce the potential danger of chemical production,' he said. 'It is a worrying sign that Hoechst cannot give precise information about the dangers from the emissions.'

The environmental group Greenpeace yesterday blockaded the main Hoechst plant near Frankfurt after the company refused to allow it to take samples of water and earth from the site.

SPAIN'S year-on-year inflation rate has fallen to 4.7 per cent, its lowest level since June 1988, the consumer price index for January published yesterday showed.

The January statistics, which were held over for a month while the index's weighting was overhauled, showed a CPI rise of just 0.9 per cent. Figures for February, which will be published next week, are expected to bring the 12-month inflation rate down to below 4.5 per cent.

Domestic inflation began to peak in the third quarter of last year: Spain's GDP registered a negative growth over the last three months of 1992, - 0.2 per cent, and the CPI ended last year with a rise of 5.4 per cent that was marginally down on the December 1991 figure. The markets had expected the recession to be reflected by a fast fall in the inflation rate at the start of this year.

Underlying inflation, which does not include the more volatile prices of non-processed foods and energy, fell by slightly less than the headline rate, to come down from 6.9 per cent at the end of December to 6.5 per cent in January.

The lower inflation rate, which is a direct result of the slump in domestic demand, has fuelled hopes for a cut in the official intervention rate early next week at the Bank of Spain's routine repurchase tender for its certificates of deposit. Such expectations will be all the higher should the Bundesbank ease interest rates tomorrow.

PORTUGAL'S financial markets, disoriented by contradictory signals from the government and the central bank, lapsed yesterday into a crisis of confidence after the resignation last Thursday of the bank's deputy governor in an apparent policy rift with the government.

The Bank of Portugal said it had again had to intervene to defend the escudo from speculation as the currency opened at a low Es93 to the D-mark. Heavy central bank buying through the day drove it back up to Es92.63, dealers said. Immediately after the resignation of Mr Antonio Borges the escudo fell to a record low of Es94.

The crisis stems from government ambiguity about whether it intends to maintain a policy of a strong escudo and high interest rates or it is preparing to relax exchange-rate and monetary policy to foster faster growth.

'The government has left the market perplexed about whether its is preparing an about-turn in economic policy or it plans to maintain its tough stance,' said Mr Jose Tavares Moreira, a former governor of the Bank of Portugal.

The crisis seems almost unreal. Until now, the centre-right Social Democratic government and the central bank have worked closely together in pursuing a strong escudo and tight monetary policy as the key weapons against Portuguese inflation, which fell from 11.4 per cent in 1991 to 8.9 per cent in 1992.

But not everybody is celebrating. Expensive money and high export prices caused by the strength of the escudo are taking a heavy toll in agriculture and traditional industries such as textiles, garments and footwear. Protests from industry are constant and farmers have tipped wine and potatoes they are unable to market on the steps of government offices.

'These are difficulties of the transition of the Portuguese economy that were foreseeable as soon as we joined the EC in 1986,' says Mr Miguel Namorado Rosa, chief economist with Banco Comercial Portugues. Mr Borges at the central bank had also often warned of the casualties that Portugal would face when it came to transferring resources from non-competitive to competitive sectors. He was respected for his firm line and professional competence and appeared to have full government backing.

But doubts were raised about the government's commitment to the fight against inflation in a speech last Thursday by Mr Jorge Braga de Macedo, finance minister. He called the central bank to task for not listening to the needs of the real economy and for not lowering interest rates faster.

The immediate result was Mr Borges's resignation and deep concern in the financial markets. Was the government now going for growth at the expense of inflation? Mr Anibal Cavaco Silva, the prime minister, had just fueled market suspicions by announcing an Es270bn (Pounds 1.22bn) housing programme to wipe out shanty towns and slum dwellings that would boost the construction industry. He admitted the programme would worsen the budget deficit.

But the Bank of Portugal already enjoys considerable independence and it seems clear that Mr Borges was expected to ignore the finance minister's remarks. There are important local elections in Portugal in December and the minister may, analysts believe, simply have been trying to make the right noises.

The government, though, is in a bind of its own making. With the elections in view, it cannot openly reverse its calls for lower interest rates but it badly needs to repair the damage it has done to the escudo.

'The finance minister's speech was for consumption by worried industrialists, farmers and commercial companies,' says Mr Namorado Rosa. 'The aim is to give the impression that the government wants to be more flexible but in reality nothing is going to change.'

Supporting this view is the fact that Mr Miguel Beleza, governor of the Bank of Portugal, has stayed at his post. The central bank has even edged up its intervention rates slightly.

THE German steel employers association meets tomorrow to decide its next step after the breakdown of arbitration talks with IG Metall, the country's giant engineering union, over a wage settlement for the east German steel industry.

The fifth round of talks unexpectedly broke down in Berlin after IG Metall rejected a 9 per cent pay offer by the employers association. IG Metall said yesterday it would continue to insist on a 20 per cent increase, agreed under a programme of equalising pay between western and eastern German workers by April 1994.

The union said it expected the employers to follow Gesamtmetall, the metal and electrical employers association, in revoking the March 1991 contract when it meets tomorrow. The union said if that happened it would respond with warning strikes, followed by a ballot on a full strike if IG Metall's 20,000 members in east Germany did not receive the 20 per cent pay rise on April 1.

Rank-and-file support for such action is uncertain. Since Gesamtmetall revoked earlier this month the contract guaranteeing east German metal and electrical workers a 26 per cent wage increase, several factory managers in the region have started negotiating separate pay deals with the unions.

A foreign manager of a company which has invested heavily in eastern Germany, said yesterday he was prepared to offer a 15 per cent increase. 'This is realistic in view of the fact that our productivity is 65 per cent of west German levels,' he said.

IG Metall yesterday shrugged off moves towards separate wage agreements, saying that warning strikes would reveal whether its members were prepared to continue to pay west German prices while earning east German wages.

THE Socialist group in the European Parliament called yesterday for a 20 per cent cut in EC carbon dioxide emissions by the year 2005 - a much steeper reduction than the target the Community is already struggling to meet.

The ambitious target is part of a list of 55 environmental measures the Socialists are advancing as a programme the EC should now take up with the same vigour the Community demonstrated in creating the single European market, which came into force this year.

The EC is committed to stabilising CO emissions at 1990 levels by 2000, although Germany and Denmark have set themselves the 20 per cent cuts the Socialists are calling for by 2005, and Belgium and the Netherlands are aiming at 5 per cent cuts by 2000.

The 199 Socialists MEPs are the largest bloc in the European Parliament, and one of their number, Mr Ken Collins, Labour Euro-MP for Strathclyde East in Britain, chairs its environment committee, which has had significant influence in shaping EC 'green' standards.

The committee is one of the most heavily-lobbied bodies in the EC, especially by industry.

The programme calls for early agreement on the controversial energy tax proposed by the European Commission to cut CO emissions and combat global warming, and mandatory energy efficiency standards on a wide range of appliances such as boilers, washing machines and cars.

It would also introduce a general duty for manufacturers to take back and recycle 'end-of-life' products, move towards a comprehensive system of environmental liability, and strictly enforce environmental impact assessment on construction projects and all EC-funded programmes, in and outside Europe.

EC environmental impact assessment rules have been an area of consistent friction between Brussels and all member states, particularly the UK, although the Commission has been backing away from legal action for fear of further upset in the tortuous ratification of the Maastricht treaty.

Under Maastricht, the European Parliament will get 'co-decision,' or a legislative voice equal to the Council of Ministers of the 12 in setting framework programmes for the environment. But it will still be consulted only on measures with fiscal, land use, water resources or choice of energy resources implications. Under EC rules only the commission can propose such changes.

Mr Collins, presenting the 55-point programme in Paris yesterday, said: 'It is now eight years since the White Paper on the completion of the internal market, and the project is all but complete. We must now plan for the next decade and the big idea must be the environment.'

LAST weekend's solidarity agreement between the German government and opposition was a positive development, but not a reason in itself for easing interest rates, Mr Otmar Issing, a member of the Bundesbank's directorate said yesterday.

Monetary developments remained the main basis for such decisions, he told a conference in Wolfsburg. But Mr Issing welcomed the pact because it spelt an end to political uncertainty.

The central bank council would carefully examine its implications for public sector debt and taxation levels at its meeting tomorrow. 'We have to analyse what the result means in concrete terms for the economy,' he told reporters.

While the weekend package has been widely welcomed for its political implications, analysts suggest that it will lead to increased government deficits in the near-term, and point out that the direct and indirect tax increases run counter to the Bundesbank's declared preference for spending cuts rather than higher taxation.

Mr Issing's caution was in distinct contrast to an upbeat claim from Mr Theo Waigel, finance minister, that circumstances for further interest rate cuts had been improved.

Now that money supply was on course, conditions were more favourable, he said.

Mr Waigel added, however, that he did not want to predict if, when and to what extent rates would fall, because he did not want to speculate.

Many analysts say a cut of at least 0.25 per cent in the 8 per cent discount and 9 per cent Lombard rates is likely tomorrow, although they agree that last weekend's political developments will have at best a neutral impact on the bank council's thinking.

According to Mr Issing, monetary policy was not part of the solidarity pact, nor was it a slave to other political circumstances.

He was not sure if February's money supply figures would be available for tomorrow's meeting of the bank's central council, but inflation was still too high, he noted.

However, growth in the M3 measure of money supply is widely believed to be shrinking under the pressure of recession. Inflation, 4.2 per cent at the last reckoning, is tending to fall. While wholesale prices rose 0.2 per cent between January and February, they were still 1.8 per cent lower than a year earlier, the federal statistics office reported yesterday.

In January, M3 contracted at an annualised rate of 2.4 per cent, revised from a preliminary 2.3 per cent, in contrast to the bank's target range of 4.5 per cent to 6.5 per cent annual growth. Preliminary figures are usually available around the 20th of each month.

Meanwhile, the Bundesbank held to the lower rates at which it supplies wholesale funds to the money market with the announcement of a fixed rate tender for securities repurchase funds at 8.25 per cent.

Despite apparent tightness in the market - call money rates rose towards 8.75 per cent yesterday after 8.40-8.45 per cent on Monday - the central bank said it believed that there was enough liquidity in the markets.

Mr Johann Gaddum, a directorate member, said that the fresh 'repo' allocation was expected to ease some of the 'unjustified' concern in the markets.

The bank surprised markets earlier this month when it lowered the repo rate by almost a quarter of a point to 8.25 per cent. This was seen at the time as a signal that the discount and Lombard rates were likely to be cut at this week's meeting.

FROM Sakhalin Island near Japan to Murmansk near Norway, Russia's regions are weighing up the consequences of the political crisis in Moscow with less trepidation than President Boris Yeltsin.

As Mr Sergei Shakhrai, Mr Yeltsin's chief legal adviser, met the heads of local emergency committees, local officials interviewed in a straw poll yesterday were sceptical about the need or likelihood of extraordinary measures.

While the legislative and executive branches battle it out in Moscow, Russia's 89 constituent republics and regions are demanding more freedom to run their affairs as promised in a federation treaty signed by all parties last year.

Under threat from a Congress of People's Deputies, Mr Yeltsin has argued that only a strong presidency can push through radical economic reforms and keep together a country spanning 14 time zones.

But Ms Zoya Kornilova, both a deputy and the official representative in Moscow of Sakha, the autonomous republic which produces most of Russia's diamonds, said the Congress had spared President Yeltsin a humiliating defeat by banning the referendum he wants. 'He has enough powers. He just has not used them effectively,' she said, adding that Sakha, better known as Yakutia, could not guarantee that a referendum would obtain a quorum.

Mr Ivan Shabunin, head of the regional administration of Volgograd in southern Russia which has forged ahead with economic reforms, dismissed a statement by President Yeltsin's spokesman that the Congress was trying to restore communism.

'We just need to work,' he said, supporting a statement by regional chiefs calling for a moratorium on all elections and referendums this year and next. 'Let those who started reforms carry them through and take responsibility for them.'

Dr Vyacheslav Silin, deputy chief of the Murmansk regional administration, was alone among those surveyed in sharing the president's fears: he pointed out that if radical reforms were not allowed to succeed, regions would try to fend for themselves and accelerate a break-up of Russia.

But he said he doubted Mr Yeltsin could count on sufficient support from structures like the army to introduce presidential rule. With most Russians disillusioned with politics, many regional chiefs feared that a referendum turnout would be low.

Many are looking for change from the government of Mr Viktor Chernomyrdin, who has pledged tough financial policies combined with the removal of special tax privileges for individual regions and enterprises.

Mr Grigory Shamin, head of the regional council of Tomsk in Siberia, complained that last year the federal government had allowed regions only 19 per cent of revenues, but that individual regions, including Tomsk, had been able to keep 50 per cent after lobbying Moscow.

'Why don't they just give us all 40 per cent?' he asked.

Mr Viktor Sirenko, deputy governor of Sakhalin Island, said Moscow had to stop treating the regions 'like slaves'.

THE European Commission is expected next week to clear the way for talks on Norway's application to join the European Community, Commission officials said yesterday, Reuters reports from Brussels.

Adoption of an EC report at the Commission's weekly meeting next Wednesday will mean talks can open with Oslo during a formal ceremony at the April 5 meeting of EC foreign ministers in Luxembourg.

The ceremony will be televised just as were the opening of talks with Austria, Finland and Sweden on February 1.

Once talks are launched they should be brought quickly up to speed so they can proceed in parallel with the other three applicants, which have already held two rounds of talks.

Income tax: Basic and higher rates unchanged. Freeze on allowances. Width of 20p band to increase by Pounds 500 to Pounds 2,500 on April 1 and further Pounds 500 next year. Self-assessment offered to 8m taxpayers from 1996-97. Self-employed to pay tax on current year profits.

VAT: No extension of VAT base beyond domestic fuel and power which will be rated at 8% from April 1994 and 17.5% from 1995. Small business threshold raised to Pounds 37,600.

National insurance: No change this year.

Company cars: Scale charges up 8%, fuel scale charges up 20%. High business miles discount abolished.

Fuel: Duties up 10% - 12p a gallon on unleaded petrol and diesel and 15p on leaded. Road tax rises Pounds 15 to Pounds 125.

Petroleum revenue: Tax rate on existing fields cut from 75% to 50% from July 1. PRT abolished for new fields.

Drinks: Most duties rise 5%. Beer up 1.5p a pint, wine 5.5p a bottle. Spirits unchanged. Overall tobacco duty up 6.5% - 10p on 20 cigarettes.

Corporation tax: Advance tax down from 25% to 22.5% this year and 20% in 1994-95. Tax credit for shareholders receiving dividend to be cut from 25% to 20% in 1993-94.

Mortgage relief: Rate restricted to 20% from April 1994.

Stamp duty: Threshold doubled to Pounds 60,000.

National Lottery: Tickets taxed at 12% for first year: winnings untaxed.

Gaming machines: Duty rises 20%.

Employment: Community action programme for 60,000 long-term unemployed to work part time. Full-time vocational courses for 30,000. Business start-up scheme expanded.

Transport: Heathrow-Paddington and Channel Tunnel-St Pancras rail links agreed.

------------------------------------------------------- STOCK MARKET INDICES ------------------------------------------------------- FT-SE 100: 2919.3 (-3.1) Yield 4.14 FT-SE Eurotrack 100 1151.53 (-2.09) FT-A All-Share 1424.79 (-0.0%) FT-A World Index 146.64 (+0.2%) Nikkei 17,968.30(-117.88) New York: Dow Jones Ind Ave 3442.95 (+0.54) S&P Composite 451.37 (-0.06) ------------------------------------------------------- US CLOSING RATES ------------------------------------------------------- Federal Funds: 2% (3 1/8%) 3-mo Treas Bills: Yld 3.024% (3.033%) Long Bond 103 5/32 (102 7/8) Yield 6.872% (6.894%) ------------------------------------------------------- LONDON MONEY ------------------------------------------------------- 3-mo Interbank 6% (Same) Liffe long gilt future: Jun 105 15/32 (Jun 106 7/8) ------------------------------------------------------- NORTH SEA OIL (Argus) ------------------------------------------------------- Brent 15-day (May) Dollars 18.68 (18.75) ------------------------------------------------------- Gold ------------------------------------------------------- New York Comex (April) Dollars 329.8 (same) London Dollars 328.75 (328.65) ------------------------------------------------------- STERLING -------------------------------------------------------

New York: Dollars 1.4485 (1.43475) London: Dollars 1.445 (1.4345) DM 2.4025 (2.3825) FFr 8.1675 (8.1025) SFr 2.2 (2.1825) Y 168.75 (170.0) Pounds Index 77.7 (77.2) ------------------------------------------------------- DOLLAR ------------------------------------------------------- New York: DM 1.6646 (1.6623) FFr 5.6555 (5.6335) SFr 1.5255 (1.52285) Y 117.05 (118.605) London: DM 1.663 (1.6615) FFr 5.6525 (5.6475) SFr 1.522 (Same) Y 116.8 (118.5) Dollars Index 66.5 (66.8) Tokyo opens Y 116.9 -------------------------------------------------------

THE CITY gave a lukewarm reaction to the Budget, with some fund managers and brokers predicting that share prices would open sharply lower this morning.

The chancellor's forecast that the public sector borrowing requirement will be Pounds 50bn next year caused concern. Mr Graeme Knox, managing director of Scottish Amicable's investment managers, said: 'Mr Lamont's Pounds 50bn PSBR forecast is horrific.'

Mr Keith Percy, head of fund management at Morgan Grenfell, the merchant bank, said: 'The stock market will go down tomorrow. It is likely to be 50 points lower by 10am.'

The forecast budget deficit prompted a fall yesterday of 1 1/4 points in the price of long-dated gilt-edged stock. However, sterling rose against the D-Mark, as currency dealers interpreted the chancellor's remarks as signalling there would not be interest rate cuts in the short term.

Banks said they had no plans to increase their purchases of gilts in spite of the chancellor's decision to allow bank and building society purchases of gilt-edged stock to count towards the funding of the public sector deficit.

Both Barclays and NatWest said that they had no plans to increase their purchases of gilts.

Forecasts that share prices would fall today were prompted by the chancellor's decision to cut the tax levied on dividends, called advance corporation tax, from 25 per cent to 20 per cent.

Because pension funds can reclaim this tax from the government, the effect on them of the tax cut is to reduce their income from holding shares, so some said that they might switch into gilts.

On the basis of the new tax rate, the stock market's average gross dividend yield would have been 3.88 per cent last night, compared with the actual rate of 4.14 per cent.

Analysts said that the stock market might also be depressed by the separate Budget proposal to classify dividends paid out of UK companies' overseas profits as 'foreign income dividends'.

No tax credits would be available on these dividends, causing a further reduction in pension funds' income.

MR NORMAN LAMONT took a calculated gamble with Britain's finances yesterday by leaving the economy to grow out of recession in 1993-94, postponing the pain of big tax increases until April 1994 and beyond.

But the chancellor unnerved the City by forecasting a Pounds 50.1bn public sector borrowing requirement for 1993-94, some Pounds 5bn higher than expectations. This led to a sharp 1 point fall in prices for government gilt-edged securities.

Presenting his third Budget, and the last of the traditional spring revenue-raising Budgets, the chancellor announced:

A series of measures to help industry and small businesses.

A Pounds 230m package to provide opportunities for the long-term unemployed.

A modest extension in the range of value added tax to domestic fuel and power, to take effect from April 1994.

Moves to increase the importance of the 20 per cent income tax band introduced last year.

A boost to the housing market by cutting stamp duty.

A relaxation of the 'full funding' rule so that bank and building society purchases of gilts will count towards financing the PSBR.

Increased National Insurance contributions from 1994-95.

The Budget envisages a net increase in taxation of only Pounds 490m in the coming financial year - well below the Pounds 2.25bn tax rise expected in financial markets.

Although his long and complex speech failed to excite Tory backbenchers seeking a revival in the government's battered fortunes and drew withering scorn from the opposition, the chancellor spoke as a man who intended to stay in his job for some years to come.

Following the recent example of US president Bill Clinton, Mr Lamont announced substantial tax rises for later years. He declared his intention to enact as many as possible into law by August when discussion of the finance bill must be completed. The measures announced yesterday will raise Pounds 6.73bn in extra taxes in 1994-95 and Pounds 10.3bn in 1995-96.

Mr Lamont said that Britain would grow faster than its European Community partners this year. He forecast that the economy would expand by 1.25 per cent in 1993 and at an annual rate of 3 per cent in the first half of 1994. He made clear that the government believes bank base rates, at 6 per cent, are appropriate to current economic conditions.

Although Mr Lamont did not mention it, yesterday's Budget marked a significant dilution of the government's earlier policy of balancing the Budget over the economic cycle.

The Treasury 'Red Book', issued after the chancellor sat down, showed that it was the government's objective to reduce the PSBR to Pounds 39bn by 1995-96 and Pounds 30bn by 1997-98. In five years, Britain will have a deficit of 3 3/4 per cent of gross domestic product - more than the level specified as appropriate in the Maastricht treaty - compared with 8 per cent in the coming financial year.

Mr Lamont said his Budget was one for 'sustained recovery' and for jobs 'not just for this year and for next year, but right through the decade'.

The Budget bore the hallmarks of having paid close attention to the pleas of big industry and small businesses alike, by announcing a two-stage reduction in advance corporation tax rates and more flexibility in the handling of penalties for late value added tax returns and misdeclarations.

Many of the tax increases announced yesterday were designed with more than one objective in mind. They also sought to interfere as little as possible with the supply side of the economy.

Where he 'gave away' taxes in the coming financial year, the chancellor made sure that there would be even bigger income flows for the government in future years.

The chancellor, for example, used environmental arguments to justify higher taxes on domestic fuel and petrol. He announced plans to levy VAT on domestic fuel and power from April 1994 - initially at 8 per cent and after a year at the full standard rate of 17.5 per cent - and to raise duties on petrol and other road fuels by at least 3 per cent in real terms in future budgets after a rise of 10 per cent in 1993-94.

These measures would help the UK to meet two-thirds of its target for reducing carbon dioxide emissions under the United Nations Convention on Climatic Change, he said. As expected, Mr Lamont froze income tax allowances and thresholds for 1993-94, raising some Pounds 660m in the process, and left income tax rates unchanged at 20 per cent, 25 per cent and 40 per cent. He took modest steps to strengthen the role of the 20 per cent tax rate in the income tax system.

The 20 per cent band will be extended by more than indexation to Pounds 2,500 in 1993-94 and by a further Pounds 500 in 1994-95 as a step towards turning it into the basic rate of income tax.

The chancellor also reduced the tax credit on dividends from 25 per cent to 20 per cent in 1993-94 and plans to restrict the tax relief on married couples to 20 per cent from April next year.

In moves designed to give a short-term boost to the housing market, he doubled the stamp duty threshold for transactions on houses, land and property to Pounds 60,000 immediately - at a cost of Pounds 220m in 1993-94 and Pounds 270m the following year.

But from April 1994, tax relief on mortgage interest payments will be restricted to 20 per cent of the Pounds 30,000 limit compared with 25 per cent at present. This will yield an estimated Pounds 820m in 1994-95, rising to Pounds 870m the following financial year and cost households Pounds 10 a month.

Smokers, drinkers and car drivers will feel the impact of the Budget immediately. Alcohol duties, other than spirits, rose by 5 per cent last night, putting 1 1/2 pence on a pint of beer and 5 1/2 pence on a bottle of wine.

Tobacco duties increased by 6.5 per cent, adding 10 pence to the price of a packet of cigarettes.

National Insurance contributions for employees and the self-employed will rise from 1994-95 onwards, increasing government income in that year by Pounds 1.79bn and by Pounds 2.22bn in 1995-96.

Among measures to deal with some of Britain's 3m jobless, Mr Lamont announced plans for four pilot schemes that would subsidise employers to create jobs for the long-term unemployed.

He also announced a number of projects to boost investment in infrastructure with private finance. These include the Heathrow Express rail link to Paddington Station, which will go ahead as a joint venture between British Rail and BAA, and the Channel tunnel rail link, which is to proceed as a joint venture between the public and private sectors by the end of the decade.

The Budget set aside more funds to help exporters to fast-growing markets. The need for such a measure was emphasised by the Treasury forecast that the current account balance of payments deficit would rise this year to Pounds 17.5bn from Pounds 12bn in 1992.

Lex, Page 18

THE much-feared increase in value added tax on Britain's wide range of zero-rated items was limited to a delayed increase in household power bills.

VAT will be introduced on domestic fuel and power at an 8 per cent rate from April 1994 and at the full 17.5 per cent from April 1995.

Mr Norman Lamont used environmental arguments to justify the new levy but was bitterly attacked for doing so by the opposition, consumer and poverty action groups.

The change takes the UK into line with other European countries, all of which, except Ireland, levy VAT on fuel bills.

Mr David Blunkett, shadow health secretary, accused Mr Lamont of 'endangering the lives of many elderly people'.

British Gas, which has cut domestic gas prices by 20 per cent since it was privatised in 1986, said its customers would be 'disappointed' at the VAT burden. But it had schemes which could help people with difficulty paying their bills, it said.

Mr Lamont said levying VAT on domestic fuel bills would encourage greater energy efficiency in every household, helping the UK to achieve targets set in the world environmental conference in Rio de Janeiro last year.

Electricity and gas industry analysts, however, said that the changes would have only a limited impact on company profits because demand for household fuel and power, seen as a basic necessity, is relatively inelastic. Energy shares might fall, nevertheless, on sentiment, they said.

The measure would raise Pounds 950m in 1994-95, Pounds 2.3bn in 1995-96 and Pounds 3bn a year thereafter. Social security benefits would rise automatically to reflect the price effect of this change, the chancellor said. The government recognised that the change would cause difficulties for those on low incomes and would take this into account when income-related benefits rose next year.

The average household spends about Pounds 300 on electricity and Pounds 300 on gas. Help the Aged said the average single-household elderly person spent Pounds 8.50 a week on fuel and this would rise by Pounds 1.50. State pension and income support should rise in line, it said.

The Gas Consumers' Council said the imposition of VAT on fuel bills was a 'punitive tax'. It said it wanted the government to make grants available for energy efficiency improvements to help offset the burden of higher fuel costs.

THE TOUGHEST budget for more than a decade was last night greeted by the government's supporters at Westminster with a mixture of weary resignation and dutiful applause.

Backing among Conservative MPs for Mr Norman Lamont's decision to tackle the soaring budget deficit was matched by deep concern over the scale of the task facing the government in restoring its battered political authority.

Cabinet colleagues said the chancellor's tough package - albeit with most of the pain deferred until next year - was designed to demonstrate that the Treasury had restored a grip on economic policy after last year's sterling debacle.

But a scathing Commons attack by Mr John Smith, the Labour leader, dispelled any illusions that it would bring short-term popularity. Mr Smith's comment that it was a 'shameful budget from a cynical party' was followed by the private admission of one minister that Mr Lamont had offered no more or less than an 'acknowledgement of the depressing reality'.

As Conservative MPs digested the implications of a Pounds 1bn-a-week budget deficit and the blatant reversal of their election tax pledges, one instant judgment was that Mr Lamont had strengthened his hold on the chancellorship.

With much of the content of the second budget in November pre-empted by yesterday's package, the consensus was that the pressure on the prime minister to reshuffle his cabinet in July had diminished.

Mr Lamont chose also to underline his support among his party's Euro-sceptics with two deliberate references in his speech to his determination to keep Britain's social and tax policies out of the hands of Brussels.

But Mr John Major's associates insisted that no decisions had been taken on the prospect or otherwise of cabinet changes, leaving the chancellor's fate dependent on the pace of economic recovery.

Strong support for the measures in the Budget to help industry and the unemployed was coupled with relief on the Tory

backbenches at the decision not to risk the fragile economic recovery by deferring tax increases until next year.

Most thought the chancellor has struck the right balance between promoting economic growth now and persuading the financial markets that the government has a credible medium term programme to reduce the budget deficit.

But enthusiasm for the decision to defer the extension of valued added tax, the increase in National Insurance contributions and the reduction in mortgage interest relief was tempered by concern over the medium term outlook. As ministers and Tory MPs studied the fine print they were hit by the realisation that two years of substantial tax increases will still leave a budget deficit of Pounds 30bn by the time of the next general election in 1997.

Senior Whitehall officials sought to counter that by stressing that by putting large tax increases in place now the chancellor had left open the possibility of modest cuts in income tax in the approach to the election.

THE CHANCELLOR announ-ced three measures yesterday to counteract tax saving by UK companies. All three measures will have immediate effect.

The first is to bring within the UK tax net more overseas subsidiaries situated in low tax countries, the so-called controlled foreign companies.

Under present arrangements, overseas companies will become subject to UK corporation tax if they pay local tax at less than half the UK rate. The chancellor proposes that this limit should be raised to three-quarters.

As a result, many UK subsidiaries operating in such places as Hong Kong will now become subject to UK tax. The tax burden of the UK holding company will therefore rise.

Measures are also proposed to tax interest received by UK companies from their overseas associated companies on an accounts basis.

Previously the interest may have been taxed when it was received, and provided an opportunity for a group to benefit from a tax deferral on the interest received in the UK. At the same time, the paying company was receiving overseas tax relief when the interest was charged to its own accounts. The proposals will reduce the attractiveness of such arrangements.

Finally, the chancellor has moved to prevent groups of companies from benefiting from the use of capital losses in companies they have purchased from outside the group. The Inland Revenue had previously announced that it would not object to the purchase and use of these capital loss companies, but the loss of tax revenue to the exchequer from the use of such companies to reduce groups' tax liabilities has clearly caused a rethink.

The author is a partner at Coopers & Lybrand

SOME 700,000 drivers face increases in their company car tax benefit bills, in a few cases of about a half, compared with currently when the new business car taxation structure takes effect from April 6 1994.

However, the remainder of the UK's 2m company car driver population can expect to see their bills fall by up to a third compared with the current tax year.

The new structure, which disregards some of the key elements in outline proposals for reform put out by the Inland Revenue last year, will give fresh incentive to companies to examine cash alternatives to the company car - at least for some categories of user.

Hardest hit will be senior executives with cars currently costing about Pounds 19,000 and covering fewer than 2,500 business miles annually. Typical beneficiaries will be junior executives, driving cheaper cars for more than 2,500 business miles.

This outcome is the result of a revised taxation structure under which, to the relief of accountants, fleet managers and most car makers, the current awkward system of scale charges - arrived at through engine capacity and price banding - is scrapped.

In its place will come one based on a simple 35 per cent of all cars' list prices. This level was marginally higher than proposed by the Revenue. Drivers covering 2,500-18,000 business miles will have a discount of a third on their assessment; drivers covering more than 18,000 a discount of two-thirds.

This of itself might not please individual taxpayers.

But in also rejecting the Revenue's proposal to retain banding, albeit based only on price and with a dozen bands, Mr Lamont has certainly pleased much of the motor industry.

It should end 'tax break specials' and other market-distorting factors which have been criticised by, among others, the Monopolies and Mergers Commission and which have arisen from price 'breakpoints', at Pounds 19,250 and Pounds 29,000, above which the assessed tax benefit rises sharply.

It is also self-adjusting, ending much of the sales-depressing market uncertainty that in the past has always surrounded Budget time, as company car makers, dealers and buyers have waited to see what the latest scale charge increases would be.

Under the new system, the increase in taxation will automatically be determined by inflation - as new car prices rise, the assessed tax benefit will rise in proportion. In terms of the new system's long-term effects, one important 'unknown' for the vehicle industry will not be clarified until it has been operative for some time. Will it lead to a general company car 'downsizing' as a result of company car drivers having more flexibility in choosing the size of their tax bill?

Should it do so on any significant scale, vehicle makers may yet come to regret their current support for the changes. Makers of luxury cars such as Rolls-Royce will be hurt by the lack of a 'cap' on the list price formula. Currently, the tax charge on a Pounds 100,000 Rolls-Royce is the same as on a Pounds 35,000 Jaguar.

When the scheme arrives, increases for company car drivers will be less draconian than they might appear, because of the 8 per cent increase in the scale charges under the current system announced for the 1993-94 tax year.

But Mr Lamont is stepping firmly on the least defensible company car 'perk' - free fuel for private motoring. The scale charge for that shoots up by 20 per cent, and out goes the 50 per cent reduction in the scale charge for high business mileage users. Both are well above inflation, and their introduction will mean the government then will regard company car users as fairly taxed relative to private motorists.

This is well above current inflation, and when it comes in next month will mean the Government then regarding company car users as fairly taxed relative to private motorists.

Despite the uneven impact of the new regime in 1994, it is not intended to tighten the screw of company car taxation, in real terms, any further.

There will, however, be some disappointment that the business mileage bands were not adjusted.

Under next year's scheme, clear 'perk' car users, those covering fewer than 2,500 business miles a year, will pay tax at their marginal rate on the full 35 per cent of a car's list price. The main problem comes with the middle band, representing around 1.35m of the total, covering 2,500-18,000 business miles a year.

What then becomes self-defeating in terms of business costs and efficiency, and even for the environment, is that there is then a strong temptation for such employees to invent unnecessary business trips solely to reach the 18,000 mile threshold.

----------------------------------------------------------------------- Company car taxation changes ----------------------------------------------------------------------- Car Jaguar XJ12 Cylinder capacity 6,000cc Typical driver Company chairman Marginal rate of tax paid 40% Annual buiness mileage Less than 2,500 List price pounds 46,000 Scale charge Actual tax paid Current pounds 13,950 pounds 5,580 New (1993/4) pounds 15,066 pounds 6,026 New (1994/5) pounds 16,100 pounds 6,440 ----------------------------------------------------------------------- Car Mercedes 280E Cylinder capacity 2,800cc Typical driver Managing director Marginal rate of tax paid 40% Annual buiness mileage 2,500-18,000 List price pounds 28,600 Scale charge Actual tax paid Current pounds 5,750 pounds 2,300 New (1993/4) pounds 6,210 pounds 2,484 New (1994/5) pounds 6,673 pounds 2,670 ----------------------------------------------------------------------- Car Rover 820 Vitesse Cylinder capacity 2,000cc Typical driver Manager Marginal rate of tax paid 25% Annual buiness mileage 2,500-18,000 List price pounds 19,695 Scale charge Actual tax paid Current pounds 2,770 pounds 693 New (1993/4) pounds 2,992 pounds 748 New (1994/5) pounds 4,596 pounds 1,149 ----------------------------------------------------------------------- Car Metro 1.1 Cylinder capacity 1,100cc Typical driver District nurse Marginal rate of tax paid 25% Annual buiness mileage Over 18,000 List price pounds 6,670 Scale charge Actual tax paid Current pounds 1,070 pounds 268 New (1993/4) pounds 1,156 pounds 289 New (1994/5) pounds 778 pounds 195 -----------------------------------------------------------------------

A CLEVER budget showing an understanding of the issues of concern to small businesses, was the near unanimous reaction of organisations representing small companies to the most wide ranging of small business budget packages in recent memory.

For a sector of the business community which has been particularly hard hit by recession, the chancellor's combination of tax changes, reductions in red tape, and adjustments to business support schemes came as a welcome relief.

Mr Norman Lamont's measures showed a fine feel for the detail of the problems which confront the small business owner within a framework which acknowledged the importance of their contribution to the economy.

The measures covered the full spread of the small business community from tax simplification for the self employed through to an easing of the capital gains tax burden on successful entrepreneurs selling their businesses.

The Loan Guarantee Scheme changes took in the struggling young business unable to match the bank manager's normal loan criteria. Cuts in export credit insurance premiums will help the medium-sized company trying to establish itself in overseas markets.

But set against the wide range of measures tailored for the small business, or intended to have the greatest impact in that sector, were a number of general measures which will have an adverse affect on small firms and the self employed.

Increases in petrol duties and the promise of steadily rising fuel prices in the years ahead were most unwelcome while the 1 percentage point rise in Class 4 National Insurance contributions by the self employed from 1994 were also met with dismay.

Turning to the chancellor's specific proposals, the steps announced to reduce red tape were widely welcomed.

The proposed simplification of the tax system for the self employed and the shift towards self-assessment hold out the promise of fewer night shifts spent making the tax books balance. The small business community has developed a wariness about the impact of attempts to deregulate so will wait to see how the changes work out in practice.

The announcement of a consultation paper on the subject of the small firms audit was also welcomed but the small firms audit has been debated for more than a decade and the banks, the Inland Revenue and at least one accountancy organisation still have considerable reservations.

If there is an issue which raises blood pressure among small firms even more rapidly than the administration of the tax system it is the penalties which are imposed when the business owner gets it wrong.

The announcement from the chancellor that the scope of the serious misdeclaration penalty is to be reduced and only the larger, persistent offenders will be pursued was particularly welcome.

The decision to give customs officers discretion to mitigate VAT penalties depending on individual circumstances was a significant easing of what has been widely seen as a draconian penalty system.

The decision to 'free' entrepreneurs locked into businesses which they could not sell without incurring sizeable capital gains tax liabilities will be welcomed by many ambitious business owners as well as by the venture capital industry.

Providing rollover relief to entrepreneurs who reinvest the proceeds of a sale in another unquoted business, should encourage the 'serial entrepreneur,' the businessman who goes on to found a second and even a third business.

Perhaps the most controversial move by the chancellor was to ease the conditions of the government's Loan Guarantee Scheme. He has moved to reduce the cost of scheme but his proposed changes will do nothing to reduce the dependence of the scheme on the willingness of the banks to take part.

An improved loan guarantee scheme is still only a half-way house towards a subsidised small business loan fund which the small firms lobbyists have been calling for for several years. There is still no real replacement in sight for the Business Expansion Scheme which expires at the end of the year.

Pleased though they are with budget measures announced yesterday, the small business groups are hoping for further action in this area in the November budget.

half of them self-employed, the others taxpayers such as directors of companies - will from 1997 be able to calculate their own tax liabilities.

If they opt for self assessment, they will make their own calculation, then send off a cheque to the Inland Revenue, based on how much they owe.

The Revenue will not check all these returns, but if they do, they will charge penalties and interest on those that are found to be incorrect.

This system will not affect the basic PAYE system for people who receive income from employment. But it will apply to all those who earn money in other ways, and currently fill in a Schedule D and investment income tax return. It will not affect people who claim repayment of tax on bank and building society interest.

People who opt to have the Inland Revenue work out their tax bill, as at present, will have to submit their tax returns six months earlier than those who opt for self assessment.

The Treasury has been talking about introducing this system for some time, and it has spent much of the past two years in consultations. The idea is one that is already in use in a number of other countries, particularly the United States.

One big change, however, that became clear yesterday, will alter the basic tax system in order to make it simple enough for the new self assessment approach to be workable. There will be two big changes:

All of a taxpayer's income will now be brought together on one tax form, whether it comes from employment, freelance earnings or investment. This means that a taxpayer will now only be dealing with one tax office.

The 'prior-year' basis currently used for self-employed income will now be abolished, and all income will be taxed on a current year basis. This means that tax will be paid on income from self-employment in the year in which it is earned, rather than a year later, as at present.

There will be transitional arrangements, which will leave some people as winners and some as losers. One year will drop out of the tax calculations, and whether you are a winner or a loser will depend on what sort of year falls out.

One complaint that emerged from the consultation process was that the Inland Revenue was not proposing to allow enough time for taxpayers to prepare for the shift to the new system. As a result, the start date has been deferred by another year until April 1997. Further consultation is proposed with representative bodies and employers on the details of the new system.

The author is a partner at Coopers & Lybrand.

YESTERDAY'S decision to modify the taxation of insurance reserves marks the successful conclusion of a long campaign by both Lloyd's of London and the UK's insurance companies. It was warmly welcomed by the industry.

New arrangements should improve the industry's ability to insure infrequent but severe catastrophe losses.

The most important change concerns the troubled Lloyd's insurance market. Under new rules, Names - the individuals whose assets support underwriting - will be allowed to establish more generous tax deductible reserves to meet future losses.

Mr David Rowland, chairman, said the industry had for some time 'been urging the government for equality of treatment with their continental competitors' by a change in the fiscal regime. 'The better-targeted reserve would increase Lloyd's ability to deal with the type of risk in which we specialise.'

A new tax deductible reserve will replace the special reserve fund, which allows Names to set aside up to Pounds 7,000 each year against higher-rate income tax. The level of the reserve has not been changed since 1955.

According to the arrangements which come into effect to cover the 1992 underwriting year, a Name will be able to transfer up to 50 per cent of profits to the new reserve each year, provided that the maximum value of the funds in the reserve does not exceed 50 per cent of the Name's overall premium income limit - the limit they can accept.

Amounts withdrawn will be made to fund losses or cash calls. Amounts withdrawn that are not used to meet losses will attract tax.

The chancellor also conceded that there 'may be a case' for allowing tax relief on certain types of 'equalisation' reserve, potentially extending a similar benefit for insurance companies. Most European insurers are allowed to establish such reserves. A consultative paper will outline options.

Mr Mike Jones, chief executive, of the Association of British Insurers, the trade association, said: 'It is obviously a step in the right direction. They have accepted the principle of change.'

Lloyd's has also welcomed the simplification of other aspects of Names' tax treatment; the most important concerns rules for the taxation of gains accruing from the capital appreciation of premium trust funds made up of premiums earned by underwriters. The chancellor proposes to tax such gains as income rather than capital, bringing Lloyd's into line with insurance companies.

THE CHANCELLOR'S limitation of mortgage interest tax relief to 20 per cent from next year, and his attempt to stimulate house sales by doubling the threshold for stamp duty, are unlikely to have a dramatic effect on the housing market.

There had been some fear among mortgage lenders that Mr Lamont would try to enhance his reputation as a tax-reforming chancellor by taking more decisive steps to end the subsidy to homeowners represented by mortgage tax relief.

They feared that would stifle the nascent slight recovery in the housing market, expected by analysts in the coming year. The number of house price transactions is only expected to rise about 20 per cent from 1992.

Building societies were relieved that Mr Lamont made a relatively cautious adjustment to mortgage tax relief, and tried to balance it in the short-term with a measure to stimulate activity among first-time buyers.

The chancellor will raise Pounds 900m in 1994-95 by restricting the interest relief to 20 per cent. Individual borrowers will face a relatively slight increase in payments. Those with loans above Pounds 30,000 will pay about Pounds 10 more tax a month.

Some lenders believe that, combined with the end of tax relief at higher rates in the last budget, represents a signal that mortgage tax relief will eventually be phased out. The length of time that would take has reassured some.

The stamp duty adjustment was trickier measure about which to convince borrowers and lenders. That is because the temporary abolition of stamp duty on properties worth up to Pounds 250,000 at the end of 1991 was judged a failure.

It did little to stimulate the housing market until close to the deadline last year, and then the fall in transactions following the deadline was greater than the stimulus before, causing much discontent among lenders.

Mr Lamont avoided the trap of another temporary adjustment. Instead he tried to concentrate stamp duty reform on first-time buyers, doubling the threshold to Pounds 60,000. That is intended to provide a steadier stimulus to the market.

He also implemented a solution to the 'negative equity' problem affecting people who own properties worth less than the purchase price. They will now be able to transfer tax relief to a new property on the old loan.

Mr John Wriglesworth, analyst at UBS Phillips & Drew, said the net effect of the measures would be 'nothing'. He believed the measures would not affect the likely small upward movement in house transactions this year.

The debt mountain is getting steeper. By setting his borrowing target for the next financial year at Pounds 50bn, some Pounds 6bn more than his implied forecast last November, and towards the top of the range of expectation in the gilt-edged market, Mr Norman Lamont has increased the danger that financial turbulence will develop over the next couple of years. Certainly the medium term outlook for public finance looks troubled.

In pulling his punches on tax in the near term - with a neutral overall impact on revenues in 1993-94 - the chancellor has followed the line of six of his seven Wise Men. At least as influential, however, may have been the smoothness with which the funding task has been accomplished so far. The jump in the PSBR from Pounds 14bn in 1991-92 to Pounds 35bn in the financial year now ending has been financed without crisis and at progressively lower interest rates.

But already the influence of the global bond markets has become slightly less benign in the past week or so, with the US long Treasury bond yield flicking up slightly from its recent 20-year low. As for UK government securities, there was inevitably a setback last night, with falls of just over a point at the long end.

First, however, the positive news for gilts. The widely expected relaxation of the full funding rule duly appeared, with the introduction of a new provision that gilts sold to banks and building societies will count towards funding.

This appears to fall a little short of a more comprehensive concession that all purchases of public sector debt, including for instance Treasury Bills, would count as funding. However, it is theoretically possible that the UK banking system, which at present has only about 3 per cent of its assets invested in the public sector, could absorb a substantial proportion of the coming year's gilt issues - between Pounds 10bn and Pounds 20bn, say.

As part of the flexible funding policy the market would have also liked to see a formal target range set for the broad money supply, M4. The woolliness and inconsistency of monetary policy therefore remains a worry.

Second, Mr Lamont has uttered an Augustinian vow that virtue will be achieved in the medium term. He has proposed 'wedges' of new taxation for 1994-95 and later years, and on the basis that the economy picks up speed through the mid and late 1990s the Treasury's computer has been able to crank out some declining, although still substantial, numbers for borrowing.

If growth continues to be disappointing, of course, the problem will not fade away as outlined. And even if all goes according to plan the burden of debt will rise substantially: from around 40 per cent of national income at present, public sector indebtedness is likely to climb to at least 60 per cent in another four years.

In itself that would be no worse a position that in the late 1970s and early 1980s. But in the past it has taken several episodes of double-digit inflation, and a ruinous credit-based boom which pushed the public sector into temporary surplus, to control the debt burden. This time, if the government delivers its promise of low inflation, the real cost will be much higher.

Yesterday Mr Lamont promised inflation of 2 1/2 per cent or less (in the bottom half of the 1 to 4 per cent target range) by the end of the present Parliament. But borrowing at the long end of the conventional gilts market at present costs 8.3 per cent. The implied real rate of almost 6 per cent will impose a heavy burden on future taxpayers.

What is the tactical room for manoeuvre? First of all, the government can now look to the banking sector. Already the banks and building societies have bought Pounds 5 1/2 bn of gilts in the first eleven months of the current financial year, although under the previous rule this has had to be duplicated by funding elsewhere.

Now the authorities are in a position to pursue active selling to the banks. But they will not normally, the Treasury says, sell gilts of shorter maturity than 3 years. Nor will banks typically wish to buy gilts further out than five years because the capital risk becomes considerable.

The banks will buy only if they are offered a worthwhile yield incentive and are confident that money market rates will stay low. It is on this basis that banks in the US have bought vast quantities of public sector debt.

In the UK, however, the yield curve is all wrong at the short end. There is no margin between 6 per cent money market rates and the redemption yield on three-year gilts. Either base rates must go down to 5 per cent or less, or the authorities must pump out new short gilt issues on a 7 per cent yield basis, which would disrupt the market. So we must wait for serious action, perhaps until a significant drop in German interest rates allows sterling rates to be cut too. But serious action there must be, and soon.

Who else will take up gilts? The life assurance companies have been active buyers, but pension funds were again net sellers last year, for the sixth year in a row. In all, investment institutions have an annual cash flow of about Pounds 38bn a year, but that is unlikely to grow significantly, and in the past they have never put more than about 50 per cent of new cash into gilts.

Note, however, the attack on pension fund equity holdings through the cut in reclaimable income tax. Is this the start of an attempt to tilt the tax playing-field in favour of gilts? The temptation will grow for this and future chancellors if the deficit problems prove as bad as they are now outlined.

The other possibility is to sell debt to foreigners. Since last August overseas investors have turned their noses up at gilts, but they might become interested again should sterling strengthen convincingly against the Continental currencies. Then there is the possibility of borrowing in foreign currencies. This year the balance of payments deficit is forecast at Pounds 17.5bn, which the chancellor claimed yesterday would be 'easily financeable': soon his agents at the Bank of England will have a chance to demonstrate just how facile a process it can be.

Gimmicks such as tax-free gilt plans for private investors have rightly been shunned. The chancellor is relying on the arithmetical approach, that whatever the size of the deficit there must be balancing surpluses somewhere that can be tapped. But the bigger the deficit the less the likelihood that the financing can be done without periodic crises. The higher you climb up the debt mountain the harder you may fall.

Changes in the treatment of advance corporation tax (ACT) may sound esoteric, but they are among the most important reforms in the budget. This is partly because anomalies in the current system greatly distort corporate investment decisions. For many of Britain's larger companies which have substantial tax liabilities in foreign countries as well as in the UK, the impact of ACT incorporates a powerful incentive to incur high costs overseas and to generate high profits in the UK. One result of this quirk, which British multinationals have frequently brought to the Treasury's attention, is that there is a temptation to move knowledge-intensive activities such as research and development to foreign subsidiaries.

But Mr Lamont has used the opportunity presented by this problem for a more fundamental reform of the tax credit arrangements that apply to companies and shareholders. This will have implications both for the stock market, and for the income of institutional investors and higher rate tax payers.

The ACT problem began when Britain shifted from a 'classical' corporation tax to an 'imputation' system under the Heath government in 1973. In the classical system, the company pays corporation tax on its profits. Then, when it pays a dividend, the shareholder pays income tax on the receipt. The disadvantage of this system is that the owner's profit is taxed twice - once in the hands of the company, then in the hands of the shareholder when distributed.

Under an imputation system this double taxation is eliminated. Today British companies pay corporation tax at 33 per cent on profits. They then deduct 25 per cent of the gross dividends paid out, in what amounts to an advance collection of income tax. But the deduction is called advance corporation tax and can be offset against the mainstream corporation tax liability of 33 per cent on overall profits.

The problem of unrelieved, or surplus, ACT arises where company dividends are larger than the mainstream corporation tax bill in the UK. In the present recession, companies that are paying dividends out of reserves fall into this category. But the more important group consists of companies that earn most of their profit overseas. Since their UK tax liability is usually reduced by the amount of foreign taxes they pay, they can find themselves with inadequate mainstream tax against which to offset the ACT. So their foreign profits are taxed twice, abroad and at home.

Such companies will be pleased that the Chancellor has responded to their complaints. He proposes that dividends paid out of overseas profits should be separately classified as 'foreign income dividends'; companies would be entitled to a refund if the dividend payment gave rise to surplus ACT. But no tax credit would be available to shareholders on the dividend, which raises a question about whether dividend-conscious institutional investors might find such shares less attractive.

The more fundamental reform suggested by Mr Lamont is a reduction in advance corporation tax for all companies in two stages, from 25 per cent to 22 1/2 per cent in 1993-4, and 22 1/2 per cent to 20 per cent in 1994-5. At the same time the chancellor proposed to reduce the tax credit granted to shareholders in one go from 25 per cent to 20 per cent in 1993-4.

This is bad news for pension funds, which are exempt from tax on dividends. Until now, as owners of companies, they have been taxed at 33 per cent on a company's retained profit and 8 per cent - the difference between the tax credit of 25 per cent and the corporation tax of 33 per cent - on profit paid out as dividends. Henceforth, they will pay 13 per cent rather than 8 per cent on distributed profit. They will yield Pounds 1bn a year to the exchequer as a result of the change.

In theory, the pension funds will benefit, in the sense that the companies they own are expected to enjoy a cash flow benefit of Pounds 2bn from the changes over the next two years. The capitalised value of the potential tax relief to companies with surplus ACT problems should also, in theory, increase the value of the shares. But actuaries value pension fund assets on the basis of their income. And this will be reduced by the changes, implying, other things being equal, a lower yield on equities for the biggest group of share owners.

This could help the government's funding problems by slightly altering the relative attractions of gilts against equities. It could equally be seen as a backdoor way of reducing the cost of the tax reliefs granted on pension contributions. But then the Treasury has long been keen to find a way of clawing back some of this tax break.

The other possible losers could be bankers and brokers in the City. Finding UK acquisitions for companies with surplus ACT problems has produced a steady stream of lucrative fees for mergers and acquisitions specialists.

It is not so much a Budget, more Mr John Major's second election manifesto in a year. Rather like President Clinton in the US, the prime minister and his chancellor have collected every marketable proposal that a posse of policy wonks could think up and put the resulting list of items forward as a strategy for growth without inflation, a deficit-reduction plan that causes no obvious or at any rate immediate outstanding pain (except, marginally, to high earners), a road map for the coming three years. Running down its centre is a broad highway. The direction arrow contains the simple words 'general election 1996'.

Taken as a whole it will do what all manifestos do. It will initially befuddle the electorate. There was so much unnecessary detail in Mr Norman Lamont's inordinately long and at times soporific speech in the Commons yesterday that only the prime minister, whose personality this Treasury-driven peroration suited to a T, could possibly have enjoyed the occasion. I except the one good joke, at the expense of my trade, which was when Mr Lamont expressed doubt as to whether 'sewerage and newspapers' were 'clearly among the most basic necessities of life'. Touche.

Considered in bits the Budget he read out should satisfy several constituencies. There is plenty of material for Mr Major to draw upon whether or not he actually remounts his election soapbox when he asks his backbenchers, his party and the country to accept for a second time that he is the prime minister of their choice. For although he does not have to face the polls for another three or four years, he badly needs to regain his authority before that.

The government's offering to the City is 'grip' - a stated and barely credible determination to reduce the public sector borrowing requirement in stages over the coming few years. In this Mr Major has an advantage over President Clinton. His chancellor can put forward a finance bill this year that will provide for all the increases in taxation promised for next year and the year after and be reasonably sure that the bill will be passed. In the US, where a new energy tax is central to the administration's plans, there can be no such certainty.

Just a minute. Mr Major himself cannot be sure that his chancellor's extension of VAT to domestic fuel and power will be well received by the Commons. During the coming few weeks the Tory coal lobby will be asked to swallow its disappointment at the number of pits to be saved. It may be a bit tricky to get it to accept an impost that will discourage the use of all fuels after April 1994. Perhaps that is why one of the government's little birds whispered to me the other day that the prime minister had asked the cabinet to go easy on the Maastricht rebels. Their votes would be needed, Birdie said then, for coal closures and for any Budget measures that might prove awkward.

We must, however, wish the chancellor well on this. It is, a decent offering to the green lobby, and one for which all who value the environment should be grateful. Mr Major's commitment at the Rio conference last year to reductions of CO by the turn of the century is being three-quarters met. Mr Lamont will have known that such would be his master's wish. The only spoiler is that VAT on insulation materials was not simultaneously zero-rated.

The chancellor will be hoping for other kind comments today. Safe. Fiscally prudent. Stimulating. A Budget for the little people. A Budget for jobs. A Budget for small businesses, for the regeneration of industry, for the reduction of the deficit, for the greater glory of Britain. Good old Norman. He played to the Europhobic gallery. The cheers following the few passages in which he attacked the European Community must have been music to the chancellor's ears last night. But will they still love him in the morning?

This depends upon events beyond the government's control. Mr Lamont set out a list of measures designed to help the long-term unemployed. The total expenditure - Pounds 230m - and the total number of expected beneficiaries - 100,000 - is derisory even at first sight. The number of people out of work is 3m and rising. The long-term contingent is a third of that. This is seed money, little scatterings here and there. It is reminiscent of Mr Clinton's packages for the inner cities. It shows good intent, but will in itself do little to alleviate the fear in the hearts of many families that one of theirs will lose a job, or fail to find one.

The business measures should be welcome to those they benefit - small entrepreneurs, house builders, companies hurt by advance corporation tax, exporters. They too are, mostly, little alleviations, helpful in themselves, but as nothing to the effect of, say, a return to an annual rate of growth in gross national product of 2 to 3 per cent. There is nothing particularly strong or unexpected in the changes in excise duty. Even the 10 per cent increase in the price of petrol, coupled with a pledge to keep up the pressure in later years, should provoke only ritual howls of outrage from the motorists' organisations. We all know that we should use our cars less, or, at least buy fuel-efficient models. The changes in company car taxation will encourage this.

Some of the extra taxes announced yesterday may reasonably enough be derided by Labour as betrayals, in the spirit if not the letter, of promises made during last April's election campaign. The increase in national insurance contributions is an outstanding example. Mr Major showed during question time yesterday that he knows he will have to trade punches on this with the leader of the Labour party. More to the point, the prime minister has an ace up his chancellor's sleeve: a promise of an annual widening of the 20 per cent tax band. This gives verisimilitude to the Tories' commitment to bring the basic rate of personal income tax down to that level.

That pledge is one the government in general and the prime minister in particular take very seriously. As Mr Lamont came to the paragraph about the 20 per cent band yesterday my mind flashed back to last year's campaign, in which Mr Major spread his hands ever wider to demonstrate that that was what the government intended to do. It is clearly a marker for the next election. Cutting taxes for all lower-paid workers is still regarded as an election winner, even though the new bands add peanuts to their incomes, and take a larger number of peanuts away through non-indexation of allowances and the increases in national insurance.

In short, the Budget is a campaign manager's handbook. It enables Mr Major to engage the electorate in a fresh dialogue, in the manner of Mr Clinton. Mr Lamont may attempt the same exercise. Over the coming weeks, he plainly intends to. This is understandable. He would like to keep his job. His speech yesterday sewed up the November Budget and most of the following two. But Mr Lamont's tenure on his office depends upon forthcoming speeches - upon how he performs during Mr Major's summer campaign for the reassertion of the prime minister's own leadership. They could both be saved, if the economy revives and floats them out of danger. But that is up to fate, a force greater than any Budget.

In previous articles I have urged the case for a Budget along the lines of St. Augustine's plea: 'Please God make me chaste, but not yet.' The Budget contains measures which will raise revenue by Pounds 6.7bn in 1994-95 and by Pounds 10.3bn in 1995-96, on an indexed basis. But they will yield less than Pounds 0.5bn - virtually nothing - in the coming financial year. The revenue-raising measures are to be enacted in the coming Finance Bill; so they are not in the category of so many American presidential promises to do better in later years.

Moreover, most of the tax measures are sensible reforms in their own right - with the exception of the lower-tier tax band. So if relaxations turn out to be required, because of the state of the economy a change in the Budgetary outlook or - a change in fiscal fashion, it would be very easy to reduce tax rates without going back on the present Budget. The revenue is mostly raised by removals or restrictions of reliefs, or abolition of exemptions. The two most important revenue raisers are the extension of VAT to domestic fuel and power and the increase in employee National Insurance contributions, which is almost the same thing as an increase in the basic rate of 1p in the pound for most taxpayers.

I should, however, break off the macro-economics to say that potentially by far the most important innovation came in a little-noticed paragraph towards the end. Here, Norman Lamont embraced on, an experimental basis to be tried in three or four regions, Professor Denis Snower's proposals to allow the long-term unemployed to transfer their dole money as a wage subsidy to a potential employer. I receive more letters from intelligent readers on the absurdity of paying the unemployed to do nothing rather than something than on almost any other subject. The announcement has the same kind of long-term potential as Nigel Lawson's embrace of 'profit-related pay' in his l986 Budget speech, which is only now beginning to take off.

It would, however, be idle to pretend that either of these measures, or both combined, or the other labour-market measures, will be remotely sufficient if there really is a long-term structural unemployment problem due either to deficient demand or to changes in the labour market detrimental to jobs and pay. The Budget speech did not really discuss these far-ranging issues - either on a British or an international basis. The Budget Red Book does however provide some material on which to reflect.

Nothing will stop financial readers from paying most attention to the projections of the public-sector accounts. These show the usual hump-backed picture. The deficit measured by the public sector borrowing requirement reaches a peak of Pounds 50bn or 8 per cent of GDP in 1993-94. It then gradually declines to Pounds 30bn or 3 3/4 per cent in 1997-98. In fact, the underlying decline is somewhat better, as privatisation proceeds tail off from Pounds 8bn in the year now coming to an end to Pounds 1bn a year in the second half of the 1990s.

What this Budget has really done is to substitute a medium-term fiscal strategy for a medium-term monetary one. This has been achieved by the device christened by the Treasury as the wedge which imposes very small tax increases in the coming year, but which build up to large amounts in the two years following.

The main fault of the Budget speech was that it was much too long and badly needed subbing. The strategic parts could have been highlighted very much more; and much of the detail could have been relegated to press notices or the Finance Bill. The chancellor will have to engage in this kind of subbing when the new unified November Budgets start. For it simply will not be possible to introduce yesterday's degree of tax accountants' detail into a speech which also covers spending.

Having said all this, a closer study of the Red Book reveals a fundamentally disquieting economic outlook. If one takes the Treasury's central projection, it is not until 1994-95 that growth, outside the North Sea, catches up with the present best-official guess of the growth of productive capacity, namely 2 1/4 per cent a year. Even in the later 1990s growth is only put at 3 per cent, leaving only a moderate and belated taking-up of the slack. As the second table shows, the growth projections are a good deal more pessimistic than those published a year ago. The implication is that unemployment and unused capacity will carry on rising, at least until 1995.

Not only have growth forecasts been revised downwards, but inflation prospects have been revised upwards. Underlying inflation is still expected to be down to 2 per cent by the later 1990s, but it is expected to remain in the 3 to 4 per cent band - the upper part of the chancellor's range - until well into the middle of the decade.

In a rather interesting innovation the Treasury publishes alternative growth assumptions for the medium term, from 1994-95 onwards. These are only half a percentage point on either side of the central projection. But they make an enormous difference to the PSBR projections. On the optimistic scenario the PSBR drops by 1997-98 to 2 1/4 per cent - within the Maastricht guidelines. On the pessimistic scenario it drops to only 5 1/4 per cent, which most mainstream analysts regard as unsustainably high.

If the more pessimistic growth rate is due to a low underlying rate of productivity increase, then there would be little disagreement that still more public spending curbs and/or tax increases would be required. But suppose low growth is instead due to deficient demand and a slack British or world economy, as is quite possible - although not as probable as most of the businessmen whom I meet seem to think. What would the implications then be? Surely, in such a case, either the deficit should be allowed to run; or retrenchment measures would have to be more than offset by a sufficient loosening of monetary policy.

These issues are entirely dodged by the Treasury documents. Monetary policy will supposedly be influenced by four main indicators - broad and narrow money, asset prices and the exchange rate. But despite the 'monitoring' ranges for the monetary aggregates, we are back to a state where the Treasury flies by the seat of its pants and weights the four in any way it likes, or can get away with.

I am not just making the usual teasing point. Nowadays, one should expect two main features from any monetary strategy. These are some assurance that demand in nominal terms will grow fast enough to avoid a prolonged depression, but also some assurance at the other end of the range that inflation will not be allowed to stray outside the government's own guidelines. Neither is provided; and the reduction of the section on the exchange rate to two brief historical sentences speaks volumes. A monetary strategy has still not been found to replace that of the ERM - which would in any case have had to be supplemented by a monetary strategy for all the core member countries.

----------------------------------------------------------------------- Prospects: the Treasury's view ----------------------------------------------------------------------- Public sector borrowing requirement (pounds bn) 1991-92 1992-93 1993-94 1994-95 ----------------------------------------------------------------------- General government expenditure 236.1 260 280 296 General government receipts 222.2 224 229 251 General government borrowing requirement 14.0 36 51 45 Public corporations' market and overseas borrowing -0.2 -1 -1 -1 ----------------------------------------------------------------------- 1995-96 1996-97 1997-98 ----------------------------------------------------------------------- General government expenditure 314 329 342 General government receipts 275 293 311 General government borrowing requirement 40 36 31 Public corporations' market and overseas borrowing -1 -1 -1 ----------------------------------------------------------------------- 1991-92 1992-93 1993-94 1994-95 ----------------------------------------------------------------------- PSBR 13.8 35 50 44 Money GDP 580.4 599 628 671 PSBR as per cent of money GDP 2.4 5 3/4 8 6 1/2 ----------------------------------------------------------------------- 1995-96 1996-97 1997-98 ----------------------------------------------------------------------- PSBR 39 35 30 Money GDP 716 756 792 PSBR as per cent of money GDP 5 1/2 4 1/2 3 3/4 ----------------------------------------------------------------------- Source: Red Book -----------------------------------------------------------------------

IN THIS, the last British Budget for revenue alone, Mr Norman Lamont's political job was to salvage the reputation of his party and of himself. He had to offer a credible prospect for economic recovery and a tolerable profile for public sector borrowing in the medium term, alongside imaginative ways of raising the money.

The mass of detail, particularly administrative detail, that the chancellor inflicted on his audience inevitably dulled the effect. But this is not the only reason why this Budget could do little to lift the hearts of his party, the nation or, for that matter, investors in government bonds, even though it should bring cheer to the boardrooms. The deplorable state of the public finances made it unavoidably depressing. Mr Lamont might have done better - not merely economically, but even politically - if he had made the best of his plight by being tougher. Nonetheless, he deserves at least one cheer for his efforts.

The central tasks the chancellor set himself were to help recovery and tackle the deficit in the medium term. On the recovery, he has taken three risks. First, by announcing tax increases of Pounds 6.7bn for 1994-95 and Pounds 10.3bn for 1995-96 from an indexed base, he may discourage spending almost as much as if those increases took effect this year. Second, by failing to guarantee anything like a balanced budget in the medium term he may have threatened prospects for still lower long-term interest rates. Finally, by failing to take more decisive fiscal action he may have given himself less room than he could to lower short-term interest rates if needed.

Since the second and third of these risks offset the first, the balance must be a matter of judgment. So far as the immediate recovery is concerned, Mr Lamont may well have judged rightly. Furthermore, even if he believes that 'interest rates at their current level are consistent with the achievement of the government's inflation objectives', Mr Lamont has room for manoeuvre on this most important of all instruments. In addition, by modifying the 'full-funding' rule, the chancellor will allow government borrowing to affect the growth of the money supply. Especially now that he has reinstated a monitoring range for broad money, this must be a sensible, though belated, change.

In his discussion of the ERM - the guiding light of monetary policy only a year ago - he even came close to suggesting that everything was for the best in the best of all possible worlds. The ERM had, it seems, helped to get inflation down when that had to be done and had then spewed sterling out precisely when it was opportune in order to lower rates. For the short term at least, Mr Lamont must be right in this judgment. In the light of the succession of monetary policy disasters, however, the question has to be whether the freedom of manoeuvre the government now enjoys will be used aggressively enough in the short term and wisely enough in the longer term.

Here the chancellor's medium-term fiscal judgment must be doubted. He is to be commended for proposing fiscal changes that will come into effect in 1994-95 and 1995-96. That is precisely what a medium-term strategy should provide for a country in the UK's current plight. The question is whether budget measures that deliver a fiscal adjustment rising from 1 per cent of gross domestic product in 1994-95 to 1.7 per cent in 1997-98 are enough.

Not only does the chancellor forecast a public sector borrowing requirement of 8 per cent of GDP in 1993-94, but it is still 3 3/4 per cent in 1997-98. Moreover, the ratio of net public sector debt to GDP is forecast almost to double, to 50 per cent, by 1998. Yet this, it should be recalled, was a government that promised not long since to balance the budget over the cycle.

The forecasts for growth of non-North Sea GDP that underlie these fiscal projections - 1 1/2 per cent between 1992-93 and 1993-94, followed by 2 1/4 per cent in 1994-95, 2 3/4 per cent in 1995-96 and 3 per cent thereafter - are not particularly optimistic. Nevertheless, much can still go wrong. Just how much is shown by perusal of forecasts made only a year ago - admittedly, just before an election - when the PSBR was supposed to be a mere 4 3/4 per cent of GDP in 1993-94 and 1 per cent in 1996-97.

Once the chancellor had made the bold decision to announce future tax increases now, he should surely have gone further. Increases of 3 per cent of GDP by 1997-98 would have given far more confidence that further tax increases would not be needed. Further action would have been particularly sensible for a British government that enjoys complete monetary policy freedom once more and is headed by a prime minister who mutters about strategies for growth. The chancellor may well find himself raising taxes again.

In its detail, the Budget is very good in some parts, not so good in others. It is a pity that the opportunity was not taken to announce the abolition of mortgage interest relief altogether, which would have done much to raise additional revenue. It is also a pity that the steady transformation of the 20p rate into a new basic rate of tax is making the structure of income tax system more complex. It is a pity too that the increase of one percentage point in employees' national insurance contributions guarantees further life for what is just another - and more regressive - income tax.

First impressions are that the balance of these measures, with large increases in revenue from VAT on domestic fuel and power and national insurance contributions, will be regressive. The chancellor insists they are broadly proportional, however, partly because of the restriction of the married couple's allowance and mortgage interest relief to the 20p rate and the changes in the treatment of advance corporation tax as well.

Unquestionably, there is much here to commend: the package of deregulatory measures for business, for example, and the measures to relieve the burden of surplus ACT. The Budget is cleverly green in its decision to raise the real burden of duties on petrol. Even more important is the chancellor's decision to raise revenue without increasing marginal rates of tax. Here he has done far better than Mr Clinton.

In the end, however, this is a Budget with lots of good little ideas rather than one good big idea. The exception is the decision to announce future tax increases now, the drawback being that this action does not go far enough. This was a competent and professional performance, but the country could have done with something a good deal more dramatic.

This was billed as a Budget for industry, and not without reason. Manufacturers who sat down to listen to Mr Lamont with their shopping lists in front of them will have ended up with more ticks than crosses. There was more help on export credits, business rates and capital gains tax. There was no extension of VAT on food or children's clothes. There was a list of infrastructure projects, from the Heathrow line to the Channel Tunnel link. Above all, there was the remarkable concession on advance corporation tax.

Granted, there was one big omission: the extension of tax breaks on capital investment. Mr Neil Johnson, Director-General of the Engineering Employers' Federation, complained of the 'apparent lack of understanding' of the role of capital allowances in stimulating investment. 'This budget does nothing to bring about the massive switch from consumption to investment which is essential for lasting recovery'.

The same point was raised by the machine tool industry. 'We were disappointed', said the Machine Tool Technologies Association, 'that little emphasis was placed on improving investment in high technology. This Budget fell short of directly encouraging UK companies to invest and to meet the anticipated recovery'.

But this seems rather harsh. In its whole approach, the Budget shows that the government's conversion to the cause of manufacturing goes beyond rhetoric. There are two distinct themes. The emphasis on exports suggests that the decline in the manufacturing trade balance has the government badly rattled. The stress on small business shows it accepts that small and start-up companies are the most reliable source of new jobs.

The clamour for help on export credits would have been dismissed, in the high Thatcherite days, as a plea for competitive subsidy. There was none of that yesterday: instead, the Chancellor went out of his way to assert that the benefits enjoyed by UK exporters would now be as high as the average among the Group of Seven leading industrial nations.

Similarly, the chorus of complaints about advance corporation tax would in more robust days have been waved away. The level of dividends paid by companies to their shareholders, a Thatcherite might say, is a matter for the parties involved. If it leads to surplus ACT, the company is simply paying too much.

But the situation had two awkward consequences for UK investment. UK companies had an incentive to incur their expenditure abroad, as a means of keeping their UK taxable profits as high as possible. Just as important was the effect on foreign companies. Under the old rules, a US corporation running factories in Germany but with its European headquarters in the UK would be penalised, since it would pay surplus UK tax on dividends remitted to the US. Inward investment, it appears, is now too crucial to the UK economy for such an anomaly to be tolerated.

As for small business, the list of measures is as full as the average entrepreneur could realistically have hoped for. The freeze on the much-hated Uniform Business Rate has been continued for another year. There has been an extension of the loan guarantee scheme for small companies. When entrepreneurs sell their companies, they will be able to roll over their capital gains tax liability if they spend the proceeds on starting a new business: and so on.

More generally, there was collective relief in the business community yesterday that the Budget was neutral in its impact: in other words, that the government was not about to take risks with the recovery. As Sir Denys Henderson, chairman of Imperial Chemical Industries, put it: 'it was appropriate not to have increased the overall tax burden until the recovery is confirmed'.

Next year, of course, might be another matter. The hard-line Institute of Directors last night sounded a note of protest: 'we are alarmed that the tax increases from April 1994 will be equivalent fo more than a 5p increase in income tax. This is not sustainable, and business wants to see at least matching reductions in public spending'.

But as the Chancellor will have calculated, a year is a long time in the business cycle. In the meantime, it is hard to see that the government could have done much more without having more hard cash at its disposal. Indeed, in the matter of ACT, it showed considerable ingenuity in finding money to hand to industry by the simple expedient of picking the pockets of the investing institutions.

And above all, it continued to soothe and flatter industrialists. The only way to secure growth in the medium term, Mr Lamont said, was through the supply side of the economy. The greatest threat to recovery in the medium term would be excessive public borrowing. Above all, he said, he would resist job-destroying measures emanating from Brussels. 'That is why this government will never sign the Social Chapter'.

As Lord Keynes remarked, one of the crucial determinants for getting out of recession is the animal spirits of businessmen. How far the Chancellor has raised those spirits will not be immediately apparent. But he could be lucky in his timing; as he said yesterday, the latest survey from the Confederation of British Industry suggested that confidence among manufacturers was recovering already. At any rate, he has given the most concrete proof to date that the government is genuinely concerned about manufacturing. For industrialists with vivid memories of the very different climate of the 1980s, that is quite a lot to be getting on with.

THE chancellor announced two measures which would affect the housing market. Stamp duty threshold on new house purchases will be raised to Pounds 60,000 from Pounds 30,000 with immediate effect, in an effort to stimulate the bottom end of the housing market. The cost of buying homes priced at between Pounds 30,000 and Pounds 60,000 will be reduced by up to Pounds 600.

Mr Lamont announced that the rate at which mortgage interest tax relief at source will be given will be restricted to 20 per cent. That change would not be introduced until April 1994. At 7.99 per cent interest rates, the change will cost Pounds 2.50 a month on a Pounds 10,000 loan and Pounds 9.98 on Pounds 40,000.

Elderly people with life annuity home income plan schemes which allow them to draw down some of the savings invested in their houses will continue to attract relief at 25 per cent.

Mr Ian Darby at John Charcol, mortgage brokers, said his reaction to the proposals for the housing market was mixed.

'Raising the threshold on stamp duty should be beneficial for the first time buyers market but the erosion of Miras, even though at today's interest rates it means no more than a loss of Pounds 10 a month, will take it a step back.'

He was disappointed too that there was no mention of a base rate cut to help the market.

SMALL SHAREHOLDERS may be forgiven for finding themselves bamboozled by the chancellor's reforms to dividends and Advance Corporation Tax.

Fortunately, the reforms will be quite painless for most investors. At present, shareholders are paid a dividend net of basic rate tax. For 25 per cent taxpayers that takes care of their full income tax liability, so there is nothing more to pay.

From now on, however, the tax credit will be reduced to 20p in the pound. That does not mean, however, that they will have to pay more income tax, because the basic rate of tax on dividends will also be reduced to 20 per cent. So basic rate taxpayers will notice no difference in practice. If they currently receive a 7.5p net dividend, they will continue to receive 7.5p.

Higher rate taxpayers will however notice a change. At present, they pay basic rate tax and they later have to pay another 15 per cent to make up their total liability of 40 per cent.

When the change occurs, they will only have paid 20 per cent up front, and will have to find an extra 20 per cent later. The overall bill will have increased.

Non-taxpayers and investing institutions will also suffer. At present, they can claim back the 25 per cent tax credit. When the system is fully in place, they will only be able to claim the lower 20 per cent credit and will consequently lose out.

The change will lower the gross yield on the market and will affect the big institutions. It may diminish their appetite for holding shares and will possibly be reflected by a fall in the stock market.

For companies, the change means that they will pay less in ACT and more in mainstream corporation tax, but for a conventional UK company the total tax burden will not alter.

They will, however, have deferred paying some ACT at the time of dividends until they are due to pay corporation tax later. That will improve UK industry's cash flow by some Pounds 2bn a year.

The chancellor's focus on reviving the business sector meant that this was largely a 'so what?' Budget for the individual. Such measures as were announced were bad for most people - in particular, the introduction of VAT on fuel and power, which will be particularly felt by the poor.

On the direct taxation side, the main impact will be the restriction to 20 per cent of reliefs on mortgage interest, the married couple's allowance and company dividends.

A lot of the other direct tax announcements involved 'no change' - to personal allowances, the higher rate band, the annual capital gains tax allowance and the inheritance tax threshold. Given the steady drag of inflation, this effectively (but surreptitiously) leaves individuals worse off. Apart from fuel, the main indirect tax changes - on petrol, alcohol, tobacco and others - were the sort of clobbering consumers have come to expect from Budgets.

For the personal saver, there was little change, apart from the restriction on BES plans involving loans. The 'dogs that did not bark' included the inclusion of gilts within personal equity plans, a change widely expected in the industry but which the chancellor, despite his need to sell government securities, decided not to deliver.

However, some good news emerged. National Savings is relaunching its First Option Bond, which proved so attractive to savers last year that the building societies bitterly complained. The new bond will pay 6.34 per cent gross, if held for one year. Furthermore, there were increases in the amount of other certificates savers can hold - from Pounds 5,000 to Pounds 10,000 for both the 40th fixed and the 6th index-linked issues.

THE BUDGET'S changes to direct taxation are piffling for most taxpayers.

By expanding the 20 per cent band by another Pounds 500 from its current Pounds 2,000, all those whose annual pay exceeds their annual income tax allowance by Pounds 2,500 or more - a majority of taxpayers - will receive an extra Pounds 25 per year.

Income taxpayers also know that they have another Pounds 25 to look forward to next year, as the band will expand by another Pounds 500.

Much worse news comes from the changes to National Insurance, which will not bite until the 1994-95 tax year. An increase of one percentage point (from 9 to 10 per cent) in the rate at which Class I National Insurance contributions are levied means that those earning Pounds 405 or more per week will be worse off by Pounds 3.51 per week - Pounds 182.52 per year. An extra 1 per cent is also being levied on self-employed contributions.

The 10 per cent band rate of NICs will be levied on any weekly earnings in excess of Pounds 54. No NICs need be paid on earnings in excess of Pounds 405.

This means that those on Pounds 100 per week will be worse off by 46p per week, those on Pounds 200 will lose Pounds 1.46 weekly, and those on Pounds 300 will be down by Pounds 2.46. However, while the limit remains in place, nobody will be worse off by more than Pounds 3.51 weekly.

For the year 1993-94, nobody with two children or more will be worse off, according to the government's figures, with those on Pounds 80 per week set to benefit by 1 per cent per week.

In percentage terms, no one who does not receive child benefit will be better off by more than 0.5 per cent per week. Those on Pounds 450 per week stand to be worse off by 0.2 per cent, while those in higher income brackets will be worse off by 0.1 per cent.

A NEUTRAL Budget for savers and investors was the verdict of the financial advisers too polite to call it a dull Budget.

'Investors are not particularly damaged by this Budget,' said Mr James Higgins of financial advisers Chamberlain de Broe, 'but it did not throw up new opportunities either.' One which had been expected but did not emerge was the extension of personal equity plans to shield gilts - already exempt from capital gains tax - from income tax too.

The chancellor's decision to freeze personal allowances means everyone will effectively be paying a little more tax. However, basic rate taxpayers have fared marginally better than higher rate taxpayers, according to Mr Higgins. Higher rate taxpayers will be paying an extra 20 per cent on their dividend income from shares instead of 15 per cent.

The proposal to restrict the married couple's allowance to lower rate relief of 20 per cent from April 1994 will have the effect of turning it into a tax credit, according to Mr John Cole of Berry Birch & Noble financial advisers. The maximum benefit that can be derived from it will be Pounds 344 rather than the Pounds 688 which it is worth to high rate taxpayers.

The change most likely to make a difference to personal financial planning is the reduction of mortgage interest tax relief (Miras) from 25 per cent to 20 per cent from April 1994, according to Mr Cole.

He said he expected new restrictions on job relocation expenses to hit many people and was surprised that a rise in national insurance contributions was aimed exclusively at employees. Moves towards tax self-assessment from 1996 were welcomed. 'It will make life much simpler, particularly for the self-employed.'

The chancellor delivered two Budgets yesterday. One was a set of tax measures for immediate implementation, described as 'broadly neutral'; the other was a second set which, from 1994-95, will raise substantial sums for the exchequer.

While the measures for immediate implementation have little effect on aggregate tax revenues, they are far from neutral in terms of their effect on the distribution of income. This article, therefore, begins by setting out the distributional effects of those immediate measures on households of different types and at different levels of income. It also offers some preliminary reflections on the likely distributional effects of the longer-term measures.

We examine how the measures the chancellor actually announced compare with a 'do-nothing' Budget which merely increased all tax allowances and thresholds in line with inflation and made no changes to direct tax rates. The analysis includes all the main changes to income tax and excise duties announced for 1993-94 but does not include changes to stamp duty, business taxes or the abolition of car tax previously announced in the autumn statement. The results are obtained by applying the 1993 Budget measures to a representative sample of households drawn from the Family Expenditure Survey using the IFS computer model of the personal tax and benefit system.

The first chart shows the immediate effect of yesterday's Budget on the annual disposable income of households of different types. The bottom line of this chart shows that households as a whole are Pounds 43 per year worse off. It should be remembered that this small net increase in taxation is consistent with the chancellor's claim to have introduced a neutral package for 1993-94 mainly because it does not take into account the cut in car tax which some of this year's tax increases are intended to finance.

While the average effect of the Budget measures is a relatively modest loss of Pounds 43 per year, the chart shows that this effect is by no means uniform across different family types. The smallest losses occur among households where there is nobody in paid employment. As well as the unemployed households who lose up to Pounds 30 per year, this category also includes single parents who lose about Pounds 15 per year and pensioner households who lose up to Pounds 33 per year.

The source of these losses among the non-employed population is primarily the changes to indirect taxes announced yesterday. Though largely unaffected by the changes to income tax, these groups do tend to lose from the above- inflation increases in the excise duty on beer, wine, tobacco and fuel. The only excise duty not to be raised in line with inflation was that on spirits, which is of relatively little importance to these low income groups.

The larger losses are concentrated among households where one or more member is in employment, and in these cases annual losses typically lie in the range Pounds 60 to Pounds 80 per year. In addition to the losses imposed by increases in the rate of indirect taxes, these groups also suffer from the freezing of personal income tax allowances. Nonetheless, the overall impact on these groups taken as a whole is relatively modest, amounting to less than Pounds 2 per week on average.

The effects of the Budget measures for 1993-94 on households at different levels of income is shown in the second chart. This collects the UK household population into 10 groups with the poorest tenth labelled 'Decile 1' and the richest 'Decile 10'. This chart shows clearly the way in which losses from the Budget become substantial only for the highest earners. Only in the top 30 per cent of the population do average losses from the Budget rise above Pounds 52 per year or Pounds 1 per week.

There are a number of reasons why those on the highest incomes suffer the largest cash losses. The first is that they tend to use larger absolute amounts of excisable items such as fuel and so their absolute loss from over-indexation is larger than that for poorer households. Second, the chancellor continued the Conservative tradition of increasing the tax levied on users of company cars, and this will tend to hit high earners hardest. Finally, the chancellor froze the point at which higher rate tax becomes payable. As a result, during the coming year many of those whose incomes are just too low to make them higher-rate taxpayers will drift into the net of higher rate tax.

This increase in the number of higher-rate taxpayers has in fact been an almost unnoticed revolution of Conservative tax policy during the last 14 years. Back in 1979 there were fewer than 700,000 higher rate taxpayers. In the current financial year the total number is more than 1m higher and is set to rise still further in 1993-94. This is the third time in four years that a Conservative chancellor has frozen the threshold at which higher-rate tax becomes payable. It would seem that as well as aiming to increase the width of the reduced rate band the government is also aiming to widen the scope of higher-rate income tax.

One of the few factors which reduces the average losses reflected in the two charts was the chancellor's final announcement that the 20 per cent band will be widened to cover the first Pounds 2,500 of taxable income in the coming financial year. While this move partly offsets the effects of other tax increases, it is however inadequate to prevent the vast majority of taxpayers from being worse off.

Had the chancellor chosen simply to index the 20 per cent band it would have increased from its present width of Pounds 2,000 to Pounds 2,100. Thus the chancellor widened the band by only Pounds 400 more than was necessary to keep pace with inflation. This measure saved a basic rate taxpayer 5 per cent of Pounds 400, or Pounds 20 per year. It was indeed a modest step on the road towards a 20p basic rate for all.

This then is the immediate effect of the measures announced for the coming financial year. The effects on the distribution of income could be said to be relatively minor, with even the richest tenth of the population losing less than Pounds 3 per week. The same cannot be said however of the measures foreshadowed by Mr Lamont for the coming financial years.

Of the measures promised for 1994-95 and beyond, a number will have significant effects on household disposable incomes, and will on average produce far greater losses than the measures for the current year. By far the most significant in terms of its effect on household incomes is the proposed extension of VAT to domestic fuel, first at a rate of 8 per cent in 1994-95 and then at the full 17.5 per cent in 1995-96. Given that fuel forms a significant part of the expenditure of low-income households, this measure taken alone could bear particularly heavily on the poor. In recognition of this fact, the chancellor has indicated that income-related benefits will also be increased, and it seems possible that the groups who lose most will be those relatively low income households just beyond the scope of the income-related benefit system.

Other measures announced by the chancellor will bear rather more heavily on high income households. In a previous Budget, Mr Lamont restricted the value of tax relief on mortgage interest payments so that they were worth the same to higher-rate taxpayers as to basic rate taxpayers. From April 1994, this process will be taken one step further with the value of the relief being restricted to the reduced rate of 20 per cent for all homebuyers. It seems likely that this marks a further important step on the road to the eventual abolition of mortgage interest relief.

A second allowance to be restricted to the reduced rate is that for married couples. This change would have had a particularly large impact on pensioner couples who currently enjoy a higher tax allowance, but the chancellor is also proposing some increases to pensioner allowances so that they suffer no more than married couples below pension age. Again, it is hard to avoid the conclusion that the days of the married couple's allowance are also numbered.

A final direct tax measure proposed for 1994-95 is an increase in the rates of National Insurance Contributions for employees and the self-employed. This will affect only the non-pensioner population (since pensioners are exempt from NICs) and will add further to the already significant increases in taxes planned for the coming years. The losses from the measures to be introduced in 1994-95 will make the losses produced by this year's changes seem trivial by comparison.

Article and charts prepared for the FT by Steven Webb of the Institute for Fiscal Studies

The spring revenue-raising Budget, that symbol of winter's end and harbinger of longer and brighter days, is no more.

Administrative pressures have dictated that the new unified tax and spending Budgets, that will determine the nation's finances from 1994-95 onwards, have to be decided well ahead of the tax year beginning on April 6.

The Treasury has announced that the first of the new unified Budgets 'will be no later than the last week of November' this year.

The finance bill that follows that Budget will be published in January instead of late spring, giving taxpayers and their advisers a clear idea of most tax changes well before the date that they take effect.

Until this year, the legislative changes announced in the Budget were not published until after the start of the tax year.

The new unified Budget will also eliminate one of the two separate income tax coding exercises that take place early each year under the pay-as-you-earn income tax scheme (PAYE).

In future, it should be possible to meld the annual mid-January coding with changes determined in the Budget so that employers have to implement only one set of coding changes in time for the start of the tax year on April 6.

As at present, governments will have to raise some taxes such as excise duties on wines and tobacco overnight after the Budget. It is doubtful whether these increases in the approach to Christmas will add to a government's popularity.

There will be a problem in forecasting the economy for the year ahead and especially in determining the public sector borrowing requirement more than four months ahead of the new financial year.

The Institute for Fiscal Studies has calculated that average PSBR forecasting error could rise to around pounds 5.7bn with November budgets from the pounds 4.7bn average over the past 10 years.

Budget day wil be a bigger challenge for the Chancellor, parliament and the press. The Budget speech will be longer because it will have to include details of the government's spending plans. The record to date is held by William Gladstone, who spoke for four hours and 45 minutes in April 1853.

MR LAMONT'S strategy of postponing tax increases to steer the economy out of recession was given a general welcome by academic and business economists.

Professor Wynne Godley, professor of applied economics at Cambridge University and one of the government's seven independent economic advisers, called the delay in tax rises 'absolutely excellent'.

Prof David Currie, head of economic forecasting at the London Business School, another of the 'seven wise men', called the Budget 'reasonably favourable.'

He added, however: 'It was a bit light on medium-term financial strategy. It didn't really address concern that the low exchange rate could feed through to prices.'

Professor Patrick Minford of Liverpool University, another of the 'wise men' said: 'The Budget contained some unnecessarily depressing arithmetic. The tax rises from 1994-95 on are not needed since the fiscal deficit will come down as recovery takes place.'

Mr Andrew Sentance, economics director of the Confederation of British Industry said: 'I would give Mr Lamont seven marks out of 10. In spelling out a programme of tax increases, he is responding to financial markets' concerns but is running the risk of damaging confidence in the short term.'

Mr Andrew Britton, director of the National Institute of Economic and Social Research, and a member of the government panel, said he was pleased the Budget was 'broadly neutral'.

Mr Britton added, however, that the chancellor should have greatly increased funds targeted to help for the unemployed while aid for industry appeared ill-targeted. 'The funds for the unemployed are much too small. We're going to have an output recovery, but not an employment recovery.'

By contrast, Mr Roger Bootle, chief economist at Midland Bank, said: 'I would have liked Mr Lamont to have been much tougher on tax es in the coming financial year and to have eased monetary policy at the same time.'

Mr Robert Thomas, head of research at the capital markets division in of National Westminster Bank, said: 'On balance the Budget was as good as anyone could have expected. I was worried by the projection of a Pounds 50bn government deficit next year.' Mr Steve Hannah, chief economist at IBJ International in London, described the speech as a 'reforming budget' which the market would take some time to absorb.

Professor Tim Congdon, economic adviser at the Gerrard & National, discount house, and another of the seven wise men, said: 'I welcome the tax increases but the reaction from financial markets would have been much better had they come in straight away. The chancellor has not got the right balance between fiscal and monetary policy.'

THE Treasury has revised down its projections for medium-term growth in the UK after taking into account the effects on industry of the recession and the dim prospects for the world economy.

Officials are projecting average annual growth over the next four years of 2.5 per cent, slightly under 1 percentage point less than the assumption in the Budget a year ago.

They are also assuming that, as a result of weaker economic activity than that expected in the 1992 Budget, tax revenues will stay relatively low for a considerable period. That is likely to keep the fiscal deficit at a high level at least until 1997-98.

Over the next year, the Treasury is predicting a weak recovery in the UK driven largely by increased exports and company activity, rather than any marked increase in consumer spending. It says the international outlook is marred by weakness in Germany but could be helped by signs of a recovery in the US.

In an analysis of economic prospects released with the Budget statement, the Treasury says that, as a result of spare capacity in industry, 'inflation is assumed to fall further in the medium term'.

It warns, however, that after sterling's exit from the European exchange rate mechanism 'there may be little progress (in inflation) over the next two years if the current level of the exchange rate continues'.

The Treasury is forecasting growth of 1.25 per cent in gross domestic product this year, close to the consensus estimates in the City and slightly higher than its forecast released in the November Autumn Statement of 1 per cent.

It is postulating a pick-up in total UK output towards the end of this year, with growth between mid 1993 and the middle of next year of 3 per cent.

Consumer spending is thought likely to expand by just 1.25 per cent this year, picking up only slightly to 1.75 per cent between the first halves of this year and 1994.

Export growth is projected to pick up from an annual rate of 5.5 per cent this year to one of 10.5 per cent by the middle of next year as sterling's devaluation makes UK goods more competitive overseas.

Economists at the Treasury take a more gloomy view about longer-term growth prospects than at the time of last year's Budget, which occurred a month before the general election.

In 1993-94, it is assuming growth of 2 per cent, followed by 2.5 per cent in 1994-95 and 2.75 per cent in each of the two following financial years.

A year ago it assumed gross domestic product would rise by 3.25 per cent in 1993-94, followed by growth of 3.75 per cent, 3.5 per cent and 3.25 per cent in the next three financial years.

Taking into account the tax-raising measures announced yesterday, government revenues are now thought likely to increase from Pounds 229bn in 1993-94 to Pounds 293bn by 1996-97. In last year's Budget the corresponding projections were for Pounds 247bn and Pounds 312bn respectively.

With government spending over the medium term also set to rise faster than projected a year ago, the government deficit is projected in the latest Treasury statement to move from Pounds 50bn in the financial year starting next month to Pounds 35bn in 1996-97 and Pounds 30bn the following year.

In the last Budget, the Treasury theorised that the deficit would come down from Pounds 32bn in 1993-94 to Pounds 19bn in 1995-96 and Pounds 6bn in 1996-97.

Non-oil business investment in the UK is expected to rise modestly by 1 per cent this year, but company profits are likely to move relatively quickly 'as demand rises, firms continue tight control of labour costs and pressure on margins eases'.

The Treasury says that the trough in business investment as a share of gross domestic product is likely to occur in the first half of 1994, at a level 'well above' those seen in the previous recessions in the past 20 years.

The Treasury reckons the UK's volume share of total world trade in manufactured products will rise to about 5.7 per cent by the middle of next year from just under 5.5 per cent last year.

It says that 'while import growth outstripped demand growth' in the UK last year, the degree of import penetration was 'not out of line with its long-term trend'.

------------------------------------------------------------------------ TREASURY'S ECONOMIC PROJECTIONS ------------------------------------------------------------------------ 1992 1993 Latest March 1992** Nov 1992 ------------------------------------------------------------------------ Gross domestic product -0.5 3 1 Non-oil GDP -0.5 3 0.75 Manufacturing output -0.75 3.75 11.5 Consumer spending 0.25 3 1.25 Government consumption -0.25 1.25 0.5 Fixed investment -0.75 3.5 0.25 Exports 2 6.5 5.5 Imports 5.25 8.25 5.75 Current account deficit (Pounds bn) 12 9+++ 15.5 Inflation**** 3.75*** 3.25++?? 3.75*** GDP at current prices (Pounds bn) 599 663 629 Government spending (Pounds bn)* 260 280 n/a Government receipts (Pounds bn) 224 247 n/a Govt. borrowing (Pounds bn) 35 32 c44 ------------------------------------------------------------------------ 1993 1994 Latest Latest** ------------------------------------------------------------------------ Gross domestic product 1.25 3 Non-oil GDP 1 2.25 Manufacturing output 2.75 Consumer spending 1.25 1.75 Government consumption 0.25 1.25 Fixed investment 0.5 2.75 Exports 5.5 10.5 Imports 4.75 9.25 Current account deficit (Pounds bn) 17.5 18.5 Inflation** 3.75*** 3.75++*** GDP at current prices (Pounds bn)??? 628 671 Government spending (Pounds bn)???* 280 296 Government receipts (Pounds bn)??? 229 251 Govt. borrowing (Pounds bn)??? 50 44 ------------------------------------------------------------------------ Notes: all figures are year on year percentage changes, unless otherwise stated. *including privatisation proceeds; ??? financial year; +++ at an annual rate; **** Q4 on Q4 unless stated; ++ Q2 on Q2; *** RPI less mortgage interest payments; ?? RPI; ** year-on-year forecasts to first half of calendar year unless otherwise stated. ------------------------------------------------------------------------ Source: Treasury data from November 1992 Autumn Statement, and March 1992 and March 1993 Budgets ------------------------------------------------------------------------

CROSSRAIL, the Pounds 1.7bn cross-London rail-link, could be delayed following the chancellor's announcement yesterday that it would be a joint venture between the public and private sectors. Work on the London Underground-British Rail link was originally to start in 1995.

Mr Lamont also announced that the Pounds 300m Heathrow Express line (above) and the Pounds 3bn channel tunnel high-speed rail link are to go ahead. The 15-mile Paddington-Heathrow fast link - a joint venture between BR and airport operator BAA - will be started later this year.

EYEBALLS rolled a bit as Mr Lamont rehearsed everything which is right with the UK economy, but four Birmingham businessmen, gathered for a Budget tea party, heard him out in silence.

Guffaws came when the chancellor mentioned sewage and newspapers in the same breathe. They turned into verbal sneers as he extolled the economic benefits of the bloodstock industry.

If they took the Budget quietly it was because Mr Lamont failed to convince them he was doing enough to foster the recovery about which he talked so much. 'It's a Budget for his job,' said Mr Peter Thomas, chairman of Birmingham Deposit Centre, which guards the wealth of the wealthy.

'But then it was a Budget for not damaging the economy. It's what he's not done that matters. It's not going to damage anybody,' rejoined Mr Stuart Neal, chairman of Team Training Services.

'What has he done which will significantly affect anybody?' asked Mr Steve Williams, chairman of LBE Contract Tooling, an engineering company.

'He hasn't made me go out and decide to buy some new machine tools.'

Mr Robert Woolley, chairman of Frederick Woolley, a family engineering company agreed. 'It won't make a lot of difference all round to companies with up to 200 people in Birmingham.'

Certainly there was no feeling that suddenly there is a new dawn in the British economy. 'Lamont's just shuffling the pack,' said Mr Williams dismissively. 'Look at the private individual who's going to do the spending - he hasn't done very much at all,' observed Mr Thomas.

And local issues intruded. 'Bailing out Lloyd's, that's disgusting. What about Leyland Daf - why aren't we bailing them out?' asked Mr Williams, who is a firm proponent of propping up the manufacturing base.

'But it's a balance,' argued Mr Thomas. 'Lloyd's is an important factor in British business. It's taken a real battering.' On specific measures, though, Mr Lamont won a more favourable rating than the general criticism of his Budget might have suggested.

'The ACT measures are very good for companies,' contended Mr Woolley, and, if they look likely to benefit larger rather than smaller companies then, as Mr Williams said, 'All small businesses live off big businesses.'

Although Mr Thomas felt that the steps taken by Mr Lamont on housing were not that significant - 'he's done nothing really to help housebuilding' - he was prepared to agree with Mr Williams that 'Lamont's concentrated his changes in the right area,' that is, the bottom end of the market.

Changes in the taxing system for small business won qualified approval in terms of simplification, but the notion of having to pay tax on the corporate income of the current year, rather than preceding years, was not seen as a good idea. 'It discourages growth steps in the small sector,' suggested Mr Neal. 'It's an easy way of raising a few coppers for his coffers this year,' commented Mr Williams.

Mr Thomas said: 'There was one thing that pleased me - there is an indication about utilising the unemployed. It's long overdue. I like the idea of prospective employers getting a subsidy.'

Mr Williams worried that the system might be exploited by the wrong type of entrepreneur, taking on the long-term unemployed so he did not have to pay any wages. 'On face value, the numbers seem impressive,' rejoined Mr Neal. 'But if you spread it over the country, it becomes very small.'

Celebration of the Budget, in short, did not seem appropriate. 'We're not going to get roaring drunk on it,' said Mr Williams. If he changed his mind, he would have chosen whisky.

THE chancellor yesterday took the oil industry by storm with a large-scale overhaul of North Sea petroleum taxes.

The industry had no inkling that he would propose such sharp reductions in taxes accompanied by a virtual elimination of tax allowances.

The chancellor said he would reduce the petroleum revenue tax rate on existing oilfields from 75 per cent to 50 per cent and eliminate it for new fields.

He also said he would abolish PRT rules that allow expenditure on new exploration and development to be set against profits of existing fields.

Mr Harold Hughes, head of the UK Offshore Operators' Association, an industry group, said the changes would put a 'substantial burden on the industry at a time when it is stretched economically by low oil prices and high costs'.

The chancellor's changes will vastly simplify the tax regime in the North Sea, cutting 300 pages of bureaucratic legislation on PRT and updating the tax rules.

'It will be brilliant,' said Mr Tony Craven-Walker, managing director of Monument Oil and Gas. 'It will make the system so much more simple.'

Large companies such as British Petroleum could gain as much as Pounds 130m from the change, according to some analysts.

But the operators' association believes exploration costs in the North Sea could quadruple. This would hit the smallest companies hardest and cut drilling activity.

The chancellor said existing PRT rules had cost the exchequer Pounds 200m in 1991-92, rather than providing the revenue stream that was intended when PRT was introduced in 1975. He said the changes would bring Pounds 300m into the government's coffers in 1994-95 and Pounds 400m the following year.

The chancellor said PRT had become increasingly anachronistic since its introduction and represented a marginal tax rate of 83 per cent.

THE CHANCELLOR'S proposal to limit tax relief from job relocation packages offered by employers to their employees was unexpected and drew criticism from the Confederation of British Industry.

The CBI said the changes would 'add considerably to employers' costs and seriously affect an employees' willingness to relocate'.

Tax relief for removal expenses and additional housing costs has existed for more than 40 years in Britain.

The Inland Revenue said yesterday the yield from the changes would be nil in 1993-1994 but provide Pounds 200m to the Treasury in 1994-1995, with a Pounds 250m annual yield in the longer term.

Under the chancellor's changes tax relief for removal expenses and benefits will be limited to Pounds 8,000 per move with relief available whether or not employees sell their old property.

Tax relief for additional housing cost payments for moving into a more expensive housing area will be withdrawn.

The proposed changes will apply to employees who begin a new job or move with their existing employer on or after April 6 this year - transitional arrangements will be available for employees already committed to moving.

The Inland Revenue said the chancellor's aim was to put tax relief for removal expenses and benefits on to a statutory basis so that employers could be given 'clarity and certainty about the scope of the relief'.

Relief is available only where it would be unreasonable to expect the employee to work at the new location without moving nearer to it and provided the employee disposes of his or her old home.

The Inland Revenue has also up until now allowed tax exemption for certain payments made by employers to their employees for additional housing costs, such as increased mortgage interest. This relief is only available for a limited time and up to a maximum of Pounds 13,440. It will be withdrawn from April 6 this year.

The Inland Revenue estimates that at present around 175,000 employees may benefit from tax-free removal expenses.

About 30,000 might also be enjoying certain tax exemption from additional housing costs.

It calculates around 100,000 employees will be liable to extra tax as a result of the chancellor's changes, possibly increasing to 150,000 in the 1994-1995 financial year.

INDUSTRY leaders welcomed the chancellor's measures to improve the UK's much-maligned export credit system, helping businesses win contracts abroad in fiercely competitive markets.

Over the past two years, recession-torn manufacturers and contractors have complained about having to compete against foreign rivals able to offer customers better terms - especially in fast-growing markets in developing countries - because their export credit is subsidised.

In his speech Mr Lamont said many British companies are 'sometimes at a disadvantage in seeking business overseas'. The government had negotiated hard over the years, he said, to secure a reduction in the subsidies offered by other countries.

He added that, with the increases in export cover announced yesterday and in the Autumn Statement, the annual cover for some of the fastest-growing and most important markets around the world will have increased by more than 75 per cent in just four years.

The two important moves announced yesterday were:

a further 7.5 per cent reduction in the level of ECGD premiums, following an average 20 per cent cut last year;

additional export credit cover of Pounds 1.3bn over the next three years, on top of the total Pounds 700m increase for this year and next, announced in the Autumn Statement.

The British Chambers of Commerce said the measures would be 'a major boost to exporters'.

Mr Neil Johnson, director general of the Engineering Employers Federation, said the export credit measures, along with the changes to advance corporation tax and business rates, would be seen by its members as 'ticks in the box'.

Commenting on the chancellor's assertion that the average level of premiums paid by British exporters next year would be down to 'around the average' paid by their G7 exporters, Mr Johnson said: 'If what he says is borne out in practice, that is a level playing field. It is good news.'

Other business organisations, including the Confederation of British Industry and the Machine Tool Technologies Association, also welcomed the export credit measures.

THE chancellor's proposals to ease the burden of unrelieved advance corporation tax on companies went further than industrialists had dared hope.

Mr Roger Wood, head of the 100 Group of Finance Directors working party on surplus ACT, said: 'I am delighted with what the chancellor appears to be offering. It makes the UK a more attractive location for international companies both UK- and foreign-owned.'

ACT is paid by companies on dividends and can be offset against UK corporation tax. However, many companies do not pay sufficient UK corporation tax to offset fully the ACT, meaning that they end up paying more tax.

Many had expected that something would be done to help foreign-owned multi-nationals which were being tempted to move their headquarters out of the UK because of the tax regime. Mr Lamont recognised this problem with the promised to establish a special tax regime for such companies from 1994-95.

But his second proposal, to class dividends paid out of overseas profits as a 'foreign income dividend' came as welcome news to those companies which earn substantial proportions of their profits from abroad. Many do not pay enough UK corporation tax to offset the whole of their ACT liability. The scheme is expected to reduce the annual build up of ACT by Pounds 250m.

Companies said they wanted to examine the consultative document which the government issued before commenting in detail.

However, BAT Industries, the tobacco and insurance group which made about 85 per cent of its 1992 profits overseas, said yesterday it welcomed the consultative process. Mr David Allvey, finance director, said 'at least he's picked up the baton and he's going to run with it'.

Mr Neville Bain, chief executive of Coats Viyella, Britain's biggest textiles company, which makes 70 per cent of its profits overseas, said: 'It is a positive recognition of the trap of double taxation.'

Companies said the foreign income dividends would not entitle non-tax paying shareholders, such as pension funds, to a tax credit.

They said such shareholders may demand higher dividends or may sell shares in companies with large overseas profits.

The move to cut the rate of ACT from 25 to 20 per cent was also welcomed, as it will give a cash flow benefit to companies estimated by the chancellor at Pounds 2bn over the next two years.

THE MOTOR industry gave a cautious welcome to the Budget, but car retailers warned of the impact on new car sales of the chancellor's determination to increase the cost of motoring in real terms in every future Budget.

The Automobile Association said the government's motoring tax proposals were 'more highway robbery on Lamont's road to recovery'.

'With one hand the chancellor has taken more from the motorist in excise duty than he needs to replace new car tax; with the other, he has made all motorists subsidise new cars, and done little to benefit the environment or industry.'

The AA said Mr Lamont had delivered 'a blow below the bonnet'. The average motorist would pay an extra Pounds 60 a year which would hit the lower and middle income motorist hardest.

Mr William Ebbert, chairman of Vauxhall, said 'the increase in both fuel tax and vehicle excise duty further increases the cost of motoring, but, on balance, affects the cost of usage more than ownership, which is our preferred option.'

Sir Hal Miller, chief executive of the Society of Motor Manufacturers and Traders, said that the reform of company car taxation was 'extremely welcome'.

'We are delighted that the Treasury's earlier indicated preference for a complicated system of price banding as a way of establishing a charging scale has given way to our representations for a fixed percentage of price.'

The Retail Motor Industry Federation said the company car tax reforms were 'sensible' and would 'produce a fairer and more transparent tax system than previously.'

The motor industry 'could rise to the challenge of developing more fuel efficient vehicles,' said Sir Hal Miller, to compensate motorists in the short-term for the government's plan to raise fuel duties in future by 3 per cent a year in real terms.

There was a limit to what consumers should be asked to pay in the longer-term.

The Freight Transport Association claimed that industry's costs had risen by at least Pounds 230m a year with the 10 per cent increase in the duty on diesel.

'In real terms this increase in fuel duty will mean that the cost of operating a 38 tonne truck will go up by about Pounds 1,000 a year,' said the FTA.

'The unremitting increase in industry's costs from raising fuel duty annually will put us at the top of the EC road transport taxation league and must make it more difficult for us to compete against our European counterparts.'

MOTORISTS were hit yesterday by increases in both fuel duty and vehicle excise duty, while the taxation of the private use of company cars will also rise significantly in the next financial year.

The company car taxation system will be drastically reformed with effect from 1994-95 with the move to a system based on car list prices rather than on engine size.

Some 700,000 drivers will face increases in their company car tax benefit bills under the new system, in a few cases of up to 60 per cent, but the majority of the 2m drivers who pay tax on company cars will benefit from the reform, which will favour cheaper, smaller cars.

The government warned yesterday that the cost of motoring is set to rise in real terms every year. It announced the intention to raise road fuel duties on average by at least 3 per cent a year in real terms in all future Budgets.

Mr Lamont said that this should provide an incentive for motorists to buy smaller more fuel-efficient vehicles.

With immediate effect the price of a gallon of unleaded petrol was raised by 12p to around Pounds 2.29. The price of a gallon of 4-star petrol was up 15p to around Pounds 2.52.

Duties on all road fuels, including diesel, were raised by 10 per cent. At the same time the vehicle excise duty on cars was raised by Pounds 15 to Pounds 125, an increase of 13.6 per cent.

These increases mean that the average cost of motoring, for a driver covering around 10,000 miles a year, will rise by around Pounds 50 a year.

The chancellor said that the latest duty increases - combined with the abolition last year of special car tax - would continue the shift of taxation from car purchase towards taxation of car use.

The government was determined to raise fuel duties every year in real terms in order to encourage fuel economy and to reduce the impact of the car on the environment. The transport sector accounted for the largest contribution to the growth in carbon dioxide emissions, said Mr Lamont.

The size of future increases in fuel duty would also take account of other factors, such as the possible introduction of charges for motorways and urban roads and the overall level of taxes and charges paid by road users.

Company car users face a further 8 per cent increase this year in tax scale charges, which the chancellor claimed would finally raise company car taxation 'to a level which fully reflects the true value of the benefit of a company car.' The average driver of a company Ford Sierra or Vauxhall Cavalier would pay Pounds 1.06 a week more in tax.

More importantly for the long-term the whole system for taxing the private use of a company car will be reformed with effect from 1994/95 with the move to a system that determines taxable benefits by the price of a car rather than the size of its engine.

The annual car benefit will be valued at a fixed percentage of the manufacturer's list price. Company car users will then pay income tax at their marginal rate on that amount.

The benefit level will be set at 35 per cent of the list price with the aim of making the reform neutral in terms of total company car tax revenues.

THE chancellor yesterday took the oil industry by storm with a large-scale overhaul of North Sea petroleum taxes.

The industry had no inkling beforehand that he would be proposing such sharp reductions in taxes accompanied by a virtual elimination of tax allowances.

The chancellor said he would reduce the Petroleum Revenue Tax rate on existing oilfields from 75 per cent to 50 per cent and eliminate it altogether for new fields.

He also said he would abolish PRT rules that allow expenditure on new exploration and development to be set against profits of existing fields.

Mr Harold Hughes, who heads the industry group the UK Offshore Operators' Association, said the tax changes would put a 'substantial burden on the industry at a time when it is stretched economically by low oil prices and high costs'.

The chancellor's changes will vastly simplify the tax regime in the North Sea, cutting 300 pages of bureaucratic legislation on PRT and updating the tax rules.

'It will be brilliant,' said Mr Tony Craven-Walker, managing director of Monument Oil and Gas. 'It will make the system so much more simple.' Monument will not stand to gain from the changes since it is not exposed to PRT.

Large companies such as British Petroleum could gain as much as Pounds 130m from the change according to some analysts. BP said last night that it expected the changes to work favourably for it.

But the operators' association believes exploration costs in the North Sea could quadruple. This would hit the smallest companies hardest and cut drilling activity.

The chancellor said existing PRT rules had cost the exchequer Pounds 200m in 1991-92 rather than providing the revenue stream that was intended when PRT was introduced in 1975. He said the changes would bring Pounds 300m into the government's coffers in 1994-95 and Pounds 400m the following year.

However, Mr Hughes disputed the figures and said they would be much higher.

The chancellor said PRT had become increasingly anachronistic since its introduction and represented a marginal tax rate of 83 per cent.

He said this gave no incentive to companies to keep their costs under control or make the most of their investments.

Oil companies have dreamed up many ways of offsetting PRT over the years and some production assets and even companies have been bought and sold on the basis of the tax shelter they offer.

MR Norman Willis, TUC general-secretary, yesterday said the new package of measures for the jobless was 'derisory'. But Mrs Gillian Shephard, the Employment Secretary, said the schemes focused on individuals, the long-term unemployed and on new ideas.

The package, with a gross cost of Pounds 225m and a net cost of Pounds 125m, contains five main elements.

The measures include:

Tec challenge. Training and Enterprise Councils will be invited to bid for Pounds 25m to develop and run innovative new ways to tackle unemployment. The new fund will be welcomed by Tecs, which are starved of cash, to pilot radical new ideas.

Workstart pilots. Employers will be given a financial incentive of about Pounds 60 a week - part of the benefit of the long-term unemployed person they take on.

Four pilots will be run to test the market, two by Tecs and two by the Employment Service. The pilots will concentrate on those unemployed for two and four years respectively.

Community Action. This scheme, a re-run of the Voluntary Projects Programme set up in 1982, will offer 60,000 places a year to those unemployed for 12 months and more. The scheme will be run by the Employment Service and will provide part-time work on large-scale projects run by voluntary organisations.

The Employment Service will help with job-hunting during the rest of the week. The scheme will offer benefit plus Pounds 10 a week and thus could suffer the same unpopularity as Employment Action, a similar-size scheme, which was run by Tecs and which is to be amalgamated this April with Employment Training.

Learning for work. Some Pounds 67m will provide up to 30,000 places for people unemployed for 12 months plus allow them to pursue full-time vocationally related courses. No alteration has been made to the so-called 21-hour rule which limits part-time study for the jobless.

Business start-up. This scheme, run by Tecs, offers financial incentives to unemployed people wanting to set up their own businesses. An extra Pounds 21m will be provided for 10,000 people.

'It won't harm the recovery, that's the important thing. Iwanted him to do as little as possible, and that's what he did. Not a single adjustment was out of harmony. It will give a lot of confidence to business, especially that the government is starting to tackle the fiscal gap. But he has left me to go on running my business, and that's what I wanted to be able to do.'

Stanley Kalms, chairman of Dixons, The UK's biggest electrical retailer

'Our customers in retailing are no worse off and no better off. As retailers we were particularly pleased with the freezing of the unified business rate for another year. But the biggest problem is still the housing market. I think raising the threshold for stamp duty will have a positive effect on that, but we have got a long way to go. There were not many surprises in it, but I don't think it was lacklustre.

Geoffrey Maitland Smith, chairman, Sears group (including Selfridges, Wallis, Warehouse, Adams, Hornes, Olympus and Dolcis stores)

'This Budget means tax increases this year., tax increases next year and tax increases the year after, a massive betrayal the election pronises.'

Gordon Brown, shadow chancellor

'His proposals for 1993-94 are sensible. But his fiscal stance for 1994/95 makes a rather firm assumption that economic recovery will be under way before it has actually happened.'

Nigel Whittaker, executive director of Kingfisher and chairman of CBI retail trade committee

'This cautious and cold-hearted Budget offers little joy for the jobless and little hope for the homeless.'

Rodney Bickerstaffe, general secretary of Nupe

'The statement is based on the assumption that economic recovery is well under way and can be sustained. But in construction the recovery is still very limited and fragile. It is important, therefore, that the Budget paves the way for a further cut in interest rates as soon as possible.'

Sir Brian Hill, president of Building Employers Confederation

'This Budget does nothing to bring about the massive switch from consumption to investment which is essential for lasting recovery.'

Neil Johnson, director-general of the Engineering Employers Federation.

'This is close to the budget the CBI asked for ..but we would have liked an assurance on the continuation of improved investment allowances, and the Budget comes with a sting in the tail: future tax increases.'

Howard Davies, director-general of the Confederation of British Industry

THE most far-reaching reform of the personal tax system for nearly 50 years was announced by the chancellor yesterday. It is intended to simplify the chore of filling in tax forms and will mean that about 8m taxpayers will be able to assess their own liability to tax.

If the proposals work out as intended taxpayers will normally have to deal with the Inland Revenue once or twice a year when they send in their returns and payments. This should do away with the present system of estimated assessments, appeals, postponements, appeal hearings and revised assessments, the Revenue said.

Legislation will be introduced next year but the changes are not due to take effect until the 1996-97 tax year. The first completed self-assessment returns will be due at the beginning of 1998, a year later than suggested in a consultative paper last November.

Organisations representing small businesses and the self-employed welcomed the change as further proof of the government's serious intent to reduce the burden of red tape. But Mr Richard Brown, policy director at the British Chambers of Commerce, said he remained unconvinced that there would be a real simplification of procedures.

The new system, which is intended to provide taxpayers with just one tax statement and one tax bill for all their income, will affect 4m people who are self-employed or living off investments and a further 4m employees and pensioners who receive tax returns.

For the self-employed there are special rules, under the present system, for assessing the profits of the first three and last three years of the business. The chancellor's proposals are designed to sweep away these complications, the Inland Revenue said.

Under the new system most tax returns will be accepted without further inquiries but the Revenue will have the right to check any return. If taxpayers fail to send in payments, returns or their accounts on time they will face extra charges.

The Revenue believes the new system will lead to substantial savings in time and effort for both taxpayers and itself. But anyone who cannot work out his or her tax bill, or does not wish to do so, can call upon the Revenue to do it for them.

MORTGAGE LENDERS and housebuilders greeted the chancellor's measures to limit mortgage interest tax relief next year, while doubling stamp duty threshold immediately, with cautious approval and relief that changes were not more severe.

Building societies had feared a more decisive move against mortgage interest tax relief, but said they believed the delay in the move to next year would limit any potential to depress transactions in a fragile housing market.

The doubling of the stamp duty threshold to Pounds 60,000 follows a temporary abolition of stamp duty at the end of 1991, which was judged a failure because it led only to a temporary surge in transactions followed by a steep fall.

Halifax Building Society, the largest mortgage lender, said the limitation of tax relief was 'not unexpected'. The delay would allow time to re-adjust to the Pounds 10 increase in most borrowers' monthly payments.

Mr Tim Melville-Ross, chief executive of Nationwide Building Society, said a phased withdrawal of mortgage tax relief would lead to 'a more equitable and rational balance of UK housing subsidies and encourage greater mobility'.

He said the society believed the proposals would 'give short-term encouragement to the housing market and continue the gradual approach to structural reform'.

Mr Roger Boyes, executive director of Leeds Permanent Building Society, said permanent adjustment of stamp duty had been wanted by the industry for a long time.

Mr Joe Dwyer, chief executive of Wimpey, said the measures were 'about the best we could have hoped for. The changes in tax relief system will only have a small impact, and will be more than offset by raising of the threshold.'

Wimpey, the UK's second largest housebuilder, which yesterday announced a Pounds 112.4m pre-tax loss for 1992, said its house sales had risen by a third in the first 10 weeks compared with the corresponding period last year.

Tarmac, Britain's biggest housebuilder, said that there did not appear to be anything in the Budget 'to stand in the way of the first flickers of recovery in the market place'.

The Royal Institution of Chartered Surveyors, which represents 8,000 estate agents, said the raising of the stamp duty threshold would 'boost the housing market, particularly among first-time buyers - who hold the key to revival'.

MOTORISTS were hit yesterday by increases in both fuel duty and vehicle excise duty.

The taxation of the private use of company cars will also rise significantly in the next financial year.

The company car taxation system will be drastically reformed from 1994/95 through a system based on car list prices rather than on engine size. This will mean increases in tax bills for a large minority of drivers but smaller bills for more than half. Thereafter, individuals' own choice of cars will determine the size of their tax liability.

The government warned yesterday that the cost of motoring is set to rise in real terms every year. It intends to raise road fuel duties by at least 3 per cent a year in real terms in all future Budgets as an incentive for motorists to buy more fuel-efficient vehicles.

The price of a gallon of unleaded petrol rose yesterday by 12p to around Pounds 2.29, while that of a gallon of 4-star rose by 15p to around Pounds 2.52.

Duties on all road fuels, including diesel, rose by 10 per cent and the vehicle excise duty on cars was raised by Pounds 15 to Pounds 125.

These raise by Pounds 50 the average cost of motoring for a driver covering 10,000 miles a year.

Company car users face a further 8 per cent increase this year in tax scale charges, which the chancellor claimed would raise company car taxation 'to a level which fully reflects the true value of the benefit of a company car.'

In spite of the increases, the motor industry gave a cautious welcome to the Budget, but car retailers warned of the impact on new car sales of the chancellor's determination to increase the cost of motoring in real terms in every future Budget.

The Automobile Association said the government's motoring tax proposals were 'more highway robbery'.

'With one hand the chancellor has taken more from the motorist in excise duty than he needs to replace new car tax; with the other, he has made all motorists subsidise new cars, and done little to benefit the environment or industry.'

Mr William Ebbert, chairman of Vauxhall, said: 'The increase in both fuel tax and vehicle excise duty further increases the cost of motoring, but, on balance, affects the cost of usage more than ownership, which is our preferred option.'

Sir Hal Miller, chief executive of the Society of Motor Manufacturers and Traders, said that the reform of company car taxation was 'extremely welcome'.

The Retail Motor Industry Federation said the company car tax reforms were 'sensible' and would 'produce a fairer and more transparent tax system than previously'.

The Freight Transport Association claimed that industry's costs had risen by at least Pounds 230m a year with the 10 per cent increase in the duty on diesel. 'In real terms this increase in fuel duty will mean that the cost of operating a 38 tonne truck will go up by about Pounds 1,000 a year,' it said.

------------------------------------------------------------------------ HOW MOTORISTS HAVE BEEN HIT ------------------------------------------------------------------------ GALLON OF UNLEADED PETROL Yesterday Today Extra ------------------------------------------------------------------------ 216.4p 228.9p 12.5p inc duty of 107.5p inc duty of 117.0p Extra 9.5p ------------------------------------------------------------------------ ANNUAL PETROL COST AVERAGE MOTORING 10,000 MILES ------------------------------------------------------------------------ Ford Fiesta LX 1.3 43.4mpg Pounds 498.40 Pounds 527.40 Pounds 29 Vauxhall Astra LS 1.4 39mpg Pounds 552.04 Pounds 583.93 Pounds 31.89 Peugeot 405 GL 1.6 35.6mpg Pounds 607.87 Pounds 642.98 Pounds 35.11 Rover 820 Si 2.0 33.8mpg Pounds 640.24 Pounds 677.22 Pounds 36.9 ------------------------------------------------------------------------ VEHICLE EXCISE DUTY (annual) Pounds 110 Pounds 125 Pounds 15 ------------------------------------------------------------------------

YESTERDAY'S BUDGET gave the go-ahead to plans for the long-awaited Pounds 300m Heathrow Express but triggered deep concern about the outlook for other transport projects.

The chancellor said that the government would be prepared to contribute towards a privately-funded channel tunnel rail link but gave no indication of where the private sector funding was to come from.

He also raised the spectre of long delays for central London's badly-needed Pounds 1.8bn Crossrail scheme by announcing that it would be re-appraised as a candidate for private-sector financing.

Mr Norman Lamont held up all three projects as examples of ways in which his Autumn Statement initiative, aimed at attracting private-sector funding into transport infrastructure projects, had moved forward.

Approval for the Heathrow Express, a joint venture between state-owned British Rail and BAA, the private-sector airport operator, means passengers will be able to travel from London Paddington station to Heathrow airport in 16 minutes when the line opens in 1997.

Specially designed electric trains will travel along existing British Rail tracks for three-quarters of the journey before turning off along a newly-built spur.

The project will cost Pounds 300m, of which Pounds 51m will be equity. BR will contribute Pounds 15m, giving it a 30 per cent stake in the venture, and BAA will contribute Pounds 36m, giving it 70 per cent. The balance will be raised in commercial debt.

Mr Lamont's announcement on the channel tunnel rail link, although presented in positive terms, marked a climb-down from the government's previously-stated intention of getting the line built entirely by the private sector.

He conceded that it would now be necessary for the government to make a financial contribution to the Pounds 2.5bn project to reflect the fact that the line would be used by long-distance commuter trains.

He said Mr John MacGregor, the transport secretary, would invite the private sector to submit bids in the hope that the project would proceed to completion 'around the end of the decade', indicating that there were still no firm funding plans for the project.

He also delivered a slap in the face to Sir Bob Reid, British Rail's chairman, by saying the link would run into London's St Pancras station, not the Pounds 1.4bn terminal BR had hoped to build at King's Cross.

Mr Lamont's plans for Crossrail, a main line railway link between London's Paddington and Liverpool Street, will cause deep concern in the capital because the project had previously figured strongly in the government's spending programme as a public-sector project.

The scheme is by far the biggest public transport project in the pipeline for central London, but re-assessing it now as a scheme for possible private-sector participation will be seen as a way of deferring it into the indefinite future.

Construction companies and investment bankers yesterday expressed disappointment that no fresh projects had been announced by the chancellor.

Mr Joe Dwyer, chief executive of Wimpey, the construction group, said: 'It was well known that the three rail schemes were on the government's wish-list for private finance.

Picture, Page 21

The net result of the changes increase total tax revenues by a modest 0.1 per cent of GDP in 1993-94 to 36 1/2 per cent of GDP. But the delayed effects of the government's tax changes mean that the Budget measures eventually add 1.7 per cent of GDP in tax rises by 1997-98 by which time government revenues will have risen to 39 1/4 per cent of GDP.

PSBR here to stay ..: The PSBR this fiscal year will be Pounds 35.1bn, Pounds 1.9bn lower than the Autumn Statement forecast. But general government expenditures of 44 3/4 per cent of GDP in 1993-94 mean a PSBR of Pounds 50.1bn, 8 per cent of GDP, and Pounds 55.6bn excluding privatisation receipts.

.but maybe not for ever: The government's objective remains 'to bring the PSBR back towards balance over the medium term'. But the government's projections still expect a PSBR of 3 3/4 per cent of GDP in 1997-98 by which time net public debt will have almost doubled since 1990 to 50 per cent of GDP.

Full-funding rule modified: No news on interest rates, but the government relaxed its funding policy. Sales of gilts to bank and building societies will now be counted as a non-inflationary funding source. The government has increased its upper limit for broad money growth next year in part to accommodate the boost to M4 that relaxing its full-fund rule which should allow. The target range for M0 in 1993-94 is widened from 4-8 per cent to 3-9 per cent.

'Budget for sustained growth': The chancellor said that the British economy 'enters the year in a more favourable position than most of our main competitors' having 'won' the battle against inflation over the last two years. Highlights of the recovery include:

Growth accelerates: Economic recovery is expected to start slowly but accelerate next year. GDP grows by 1 1/4 per cent in 1993 but by 3 per cent in the first half of 1994.

Inflation sticky Underlying retail price inflation remains stuck at 3 3/4 per cent until the middle of next year, near the top of the government's 0-4 per cent target range.

Trade deficit grows Rising imports means the current account deficit is expected to rise to Pounds 17 1/2 bn this year and Pounds 18 1/2 bn in the first half of next year, 2 3/4 per cent of GDP, in spite of projected export growth of 10 1/2 per cent next year.

The chancellor announced a package of immediate and future tax increases in an attempt to avoid 'excessive government borrowing over the medium-term' from preventing 'a sustained economic recovery'. His tax package is broadly neutral this year but will boost government revenues by Pounds 6.7bn in 1994-95 and Pounds 10.3bn in 1995-96.

Income tax: No change in the basic rate and no increase in the top rate of tax but the 20 per cent tax band will be widened by Pounds 500 to the first Pounds 2,500 of taxable income from April 1 this year. It will widen to the first Pounds 3,000 in 1994. Personal allowances, the married couples' allowance and the inheritance tax threshold of Pounds 150,000 were frozen this year.

National insurance to rise: The main rate for employees and the self-employed will rise by 1 per cent next year, but there will be no change in employers' contributions.

VAT extended: Extension of the VAT base limited to domestic fuel and power. From April 1994 it will be levied at 8 per cent, rising to 17.5 per cent in April 1995.

Driving penalised: Road fuels will rise by 10 per cent this year to pay for the abolition of car tax last autumn. This adds 2.7p to a litre of unleaded and 3.3p to a litre of leaded petrol. Vehicle excise duty on cars, vans and taxis will rise by Pounds 15 to Pounds 125. Scale charges on company cars will rise by 8 per cent and car fuel scale charges by 20 per cent. The discount on high business mileage will be abolished and from next year, company cars will be taxed according to their list price rather than engine size.

Excise duties rise: The chancellor left the duty on spirits unchanged; other alcohol duties rose by 5 per cent. This added 1 1/2 p to a pint of beer and 5 1/2 p to a bottle of wine. A 6.5 per cent increase in tobacco duty added 10p to a packet of 20 cigarettes and 4 1/2 p to five small cigars.

Housing: The stamp duty threshold for houses, land and property was doubled to Pounds 60,000. But tax relief on mortgage interest will be limited to 20 per cent from April next year.

Small businesses: The Budget introduced wide ranging measures to help small businesses. Business rates will not increase in real terms this year and the threshold above which traders are required to register for VAT will rise from Pounds 36,600 to Pounds 37,600. There will be relief on capital gains tax where entrepreneurs reinvest the gains from the sale of shares in their own business in new unquoted trading companies. Premiums on the loan guarantee scheme will be reduced and traders will also be able to claim VAT relief on bad debts after six months. VAT penalties on late returns and misdeclarations eased.

Industry: The rate of advanced corporation tax will be reduced to 22.5 per cent for this financial year and to 20 per cent from April 1994. The chancellor also announced improvements to export credits.

Long-term unemployed: A new vocational education programme will finance 30,000 unemployed people to take full-time courses. Expansion of business start-up scheme will provide extra 10,000 places for people wishing to start their own businesses.

Infrastructure: The channel tunnel rail link will proceed as a joint venture between the government and the private sector and the Heathrow express will go ahead as a joint venture between British Rail and BAA.

THE most far-reaching reform of the personal tax system for nearly 50 years was announced by the chancellor yesterday. It is intended to simplify the chore of filling in tax forms and will mean that about 8m taxpayers will be able to assess their own liability to tax, if they wish.

If the proposals work out as intended taxpayers will normally have to deal with the Inland Revenue once or twice a year when they send in their returns and payments. This should do away with the present system of estimated assessments, appeals, postponements, appeal hearings and revised assessments, the Revenue said.

Legislation will be introduced next year but the changes are not due to take effect until the 1996-97 tax year. The first completed self-assessment returns will be due at the beginning of 1998, a year later than suggested in a consultative paper last November.

Organisations representing small businesses and the self-employed welcomed the change as further proof of the government's serious intent to reduce the burden of red tape. But Mr Richard Brown, policy director at the British Chambers of Commerce, said he remained unconvinced that there would be a real simplification of procedures.

The new system, which is intended to provide taxpayers with just one tax statement and one tax bill for all their income, will affect 4m people who are self-employed or living off investments and a further 4m employees and pensioners who receive tax returns.

An important effect of the changeover will be for income being taxed in the year in which it is earned. At present people with more than one source of income can be taxed on a combination of previous years and the current year with several different payment dates.

For the self-employed there are special rules, under the present system, for assessing the profits of the first three and last three years of the business. The chancellor's proposals are designed to sweep away these complications, the Inland Revenue said.

Under the new system most tax returns will be accepted without further inquiries but the Revenue will have the right to check any return. If taxpayers fail to send in payments, returns or their accounts on time they will face extra charges.

The Revenue believes the new system will lead to substantial savings in time and effort for both taxpayers and itself. But anyone who cannot work out his or her tax bill, or does not wish to do so, can call upon the Revenue to do it for them.

Further consultations are planned to make sure that the detailed arrangements of the new system work in practice.

MR NORMAN LAMONT yesterday announced a widely expected move to allow purchases of government bonds by banks and building societies to count towards the public sector borrowing requirement. However, the City warned that further significant changes would be needed to the way the PSBR is funded to relieve pressures in the gilts market.

The extent of the government's borrowing needs in the coming financial year became clear as the chancellor announced an expected PSBR of Pounds 50bn. This topped most expectations in the City by at least Pounds 5bn and led to a fall in gilts prices by one percentage point. However, investors and analysts said that more important influences were likely to be borrowing needs in future years and the inflation outlook.

The move away from the so-called 'full-funding' rule to one of 'underfunding' had been urged on the chancellor by the City. This allows gilt sales to banks and building societies to count towards the PSBR target.

By reducing the amount of gilts that need to be sold to other investors, the intention is to ease pressure on the gilts market and prevent long-term interest rates from rising.

Banks and building societies have bought Pounds 5.5bn of gilts in the first 11 months of the current financial year, up from less than Pounds 1bn in the whole of 1991-92. However, most said yesterday that they would be unlikely to increase these holdings unless the Bank of England designed some of its gilt sales to suit the particular needs of credit institutions.

Referring to yesterday's change, Mr Roger Little, director in charge of dealing at Abbey National, said: 'It doesn't give us any more incentive to buy gilts than before.'

A change in policy to issuing more shorter-dated gilts, with maturities of less than five years, would encourage more buying, a number of banks and societies said. This is because banks prefer to hold short-dated bonds for liquidity purposes, and because longer-dated gilts are more vulnerable to changes in inflation and other factors.

Mr Peter Wood, finance director of Barclays Bank, said he anticipated discussions among banks and the Bank of England to ensure the issue of more short-term gilts such as one-year notes which the banks would find attractive.

'I cannot believe the Bank wants to force banks to buy the sort of long-term gilts which they believe are unacceptably risky,' said Mr Wood. He said short-term gilts would be appropriate as a response to a 'short-term problem'.

Also, banks said that the difference between money-market interest rates and short-dated gilt yields would have to widen to make it more attractive for them to buy gilts.

At the moment, money market rates are just below 6 per cent, while five-year gilts yield only around half a percentage point more. This difference would need to rise by at least a percentage point to encourage banks to buy more gilts, said Mr Philip Guy, treasurer of Hill Samuel.

Mr Richard Goeltz, chief financial officer of National Westminster Bank, said British banks would require a more attractive yield on two or three year bills if they were to increase their portfolios substantially. He said the Budget had contained 'nothing that would lead us to start building a portfolio of gilts tomorrow.'

A wider differential in the US bond market between money-market interest rates and short-term bond yields encouraged US banks to take their holdings of government bonds up to nearly Dollars 700bn at the end of 1992, from about Dollars 450bn two years before. This has helped both to fund the government borrowing requirement and guarantee the banks a healthy profit to rebuild capital resources.

The City reacted with disappointment - though little surprise - to Mr Lamont's announcement that stamp duty on share transactions would stay for at least another year, raising an estimated Pounds 1bn. The tax had been scheduled for abolition with the introduction of Taurus, the Stock Exchange's planned paperless settlement system which was scrapped last week.

MR BORIS YELTSIN, the Rus-sian president, yesterday called for immediate and substantial western aid to stave off what he called 'the serious danger of reaction' in Russia.

Mr Yeltsin, speaking at a joint news conference with French president Francois Mitterrand, said: 'There is a very, very serious threat hanging over democracy and reforms.'

He said last week's session of the Congress of People's Deputies, the country's top legislature, showed that communist forces were intent on avenging their defeat in the 1991 coup attempt.

Mr Mitterrand suggested Group of Seven leaders meet as soon as possible after Mr Yeltsin's summit with President Bill Clinton in Vancouver on April 4 to discuss Russia's problems. Mr Yeltsin added: 'We cannot wait for Tokyo in June or July. It may prove too late.'

When asked if the west would continue its support for Mr Yeltsin if he introduced authoritarian measures, Mr Mitterrand said: 'If we must choose between camps in the country, then we will choose the camp which continues democratic and economic reform.' Mr Yeltsin had 'proposals to make to the Russian people and I am certain he will do so in a democratic way', he said.

Mr Yeltsin has said he will hold a plebiscite next month. In doing so, he will directly challenge parliament, which has ruled such a move unconstitutional and has voted itself the powers to strip him of office.

The French president said there were differing views among G7 countries on aid. France and Germany believed in the need for urgent action; Japan, by contrast, had so far refused to take part in a high-level G7 meeting before the heads of state conference in Tokyo in July.

Mr Yeltsin also said there could be several changes in the cabinet of ministers. In the meantime, he has signed a decree expanding his cabinet to include central bank chief Viktor Gerashchenko, who has been accused of undermining economic reform with easy credits. But it was not clear whether this would strengthen Mr Yeltsin's grip on the central bank.

The European Bank for Reconstruction and Development announced it had signed a Dollars 43.8m technical co-operation loan to aid privatisation in Russia.

Moscow power struggle, Page 2

Editorial Comment, Page 17

THE government may privatise London's Docklands Light Railway by paying the private sector to take it over. Government advisers are studying the move as one of the most likely options for getting the loss-making railway into private ownership.

Built in the 1980s for Pounds 77m, the Docklands Light Railway is being extended and upgraded at a cost of Pounds 800m to increase capacity and improve reliability.

Earlier this month, the Department of the Environment appointed the consultancy arm of Ernst & Young, the accountancy firm, to draw up a list of options for privatising the line within the lifetime of this parliament.

The government is keen to press ahead with the plan because it wants the private sector to build a Pounds 130m extension of the Docklands Light Railway across the Thames to Lewisham in south-east London.

A straightforward sale or stock-market flotation of the railway is ruled out by the losses it makes, currently more than five times its Pounds 3m annual revenues. But Ernst & Young believes the private sector could be offered a 'dowry' to take the railway off the government's hands.

This could stir up a controversy similar to the one that accompanied the government's recent disposal of the Property Services Agency's projects division to Tarmac, the construction group, with payments or guarantees worth about Pounds 100m.

Another option would be to franchise the operation of the railway to the company wanting the smallest subsidy to run it. But this could prove less attractive than an outright sale because the government would remain the owner.

The railway's performance, once notoriously unreliable, has improved sharply in the past few months under a new management team headed by Sir Peter Levene, former head of defence procurement at the Ministry of Defence. Last week, Sir Peter announced that the railway was to pay Brown & Root, the US engineering group, Pounds 30m over the next three years to get the railway running smoothly and cut its costs.

Mr Eric Anstey, Ernst & Young's director of privatisation and utilities services, said the railway could become profitable next decade if the property market recovered and the Lewisham extension was built.

Fast track to efficiency, Page 14

MR BORIS YELTSIN, the Rus-sian president, yesterday called for immediate and substantial western aid to stave off what he called 'the serious danger of reaction' in Russia.

Mr Yeltsin, speaking at a joint news conference with French president Francois Mitterrand, said: 'There is a very, very serious threat hanging over democracy and reforms.'

He said last week's session of the Congress of People's Deputies, the country's top legislature, showed that communist forces were intent on avenging their defeat in the 1991 coup.

'I believe the western world and western countries did not understand the reality of revanchism before the eighth Congress,' Mr Yeltsin said in calling urgently for aid. 'We cannot wait for Tokyo in June or July. It may prove too late.'

Mr Mitterrand suggested Group of Seven leaders meet as soon as possible after Mr Yeltsin's summit with President Bill Clinton in Vancouver on April 4 to discuss Russia's problems.

When asked if the west would continue its support for Mr Yeltsin if he introduced authoritarian measures, Mr Mitterrand said: 'If we must choose between camps in the country, then we will choose the camp which continues democratic and economic reform.' Mr Yeltsin had 'proposals to make to the Russian people and I am certain he will do so in a democratic way', he said.

Mr Yeltsin has said he will hold a plebiscite next month. In doing so, he will directly challenge parliament, which has ruled such a move unconstitutional and has voted itself the powers to strip him of office.

Mr Yeltsin said he would not make 'rash decisions' but would decide what to do soon. He and Mr Mitterrand said the crisis would have to be settled in the next few weeks.

The French president made clear there were sharply differing views among G7 countries on the question of aid. France and Germany were leading those who believed in the need for urgent action. Japan, by contrast, had so far refused to take part in a high-level G7 meeting before the scheduled heads of state conference in Tokyo in July.

Mr Mitterrand suggested that, if Japan continued to refuse to take part, the meeting should go ahead outside the formal boundaries of the G7 process. The European Bank for Reconstruction and Development announced it had signed a Dollars 43.8m technical co-operation loan to aid privatisation in Russia.

Moscow power struggle, Page 2 Editorial Comment, Page 17

THE LEADER of Italy's Liberal party resigned yesterday. He is the third party head in a month forced to step down after being implicated in the corruption scandals that have rocked the country.

Mr Renato Altissimo's move came after he was warned on Monday he was under investigation by Milan magistrates for allegedly receiving L50m (Pounds 22,500) in illicit funds from Enel, the national electricity authority.

Mr Altissimo, who denied any wrongdoing, was one of 10 parliamentarians this week advised they were under investigation over Enel payments.

The small Liberal party is a partner in the four-party government coalition led by prime minister Giuliano Amato, but Mr Altissimo's decision is not expected to affect its stability.

Nevertheless, it underlines again the extent to which the corruption scandal is eroding the credibility of the traditional parties and removing well-known figures from public life. Already Mr Bettino Craxi, the Socialist leader, and Mr Giorgio La Malfa of the Republicans have had to step down after being accused of accepting illegal payments.

Mr Amato again came under fierce attack in parliament yesterday. There were chaotic scenes in the Chamber of Deputies, where opposition MPs from the populist Lombard League at one stage dangled a hangman's noose at government benches.

Mr Amato was frequently interrupted by members from the neo-fascist MSI party and the Lombard League as he concluded the debate on how to confront the crisis caused by the wave of corruption being exposed by an increasingly assertive judiciary.

He urged parliament to adopt a bipartisan approach to dealing with corruption. But it was still unclear how the parties would agree on legislation to achieve a political solution to the corruption scandals.

In another development likely to undermine even further the old politico-economic system, Milan magistrates began late yesterday to leak excerpts of a confession by Mr Gabriele Cagliari, the head of Eni, the state energy and chemical company, arrested a week ago.

He is said to have confirmed that Eni made a series of illicit payments to political parties before he took over in 1990 and during his period as chairman. The magistrates have long regarded Eni as the heart of the system of illicit party funding.

The scale of parliamentary involvement in the scandal has also been underlined this week by the fresh action of Milan magistrates and also by magistrates in Naples and Reggio Calabria.

Wimpey's results confirmed that the housebuilding sector remains a kaleidoscope of blue language, red ink and green shoots. On balance, Mr Norman Lamont's Budget seems likely to encourage the incipient revival in the housing market even if it does not immediately help corporate profitability.

Many housebuilders have recently reported a strong rise in demand in response to lower interest rates. Wimpey was typical in announcing a 33 per cent increase in house sales since the start of the year. The slight caution that spread ahead of the Budget will probably now evaporate. For first-time buyers, at least, the increase in the threshold for stamp duty is likely to be a more significant incentive than the reduction in mortgage interest relief proves a deterrent. But a rise in the volume of housing transactions will not necessarily provide an instant stimulus to prices. Housebuilders have had to provide carrots to attract buyers. Negative equity will continue to depress the general market. The new threshold for stamp duty will make it hard for prices to rise above Pounds 60,000 for those houses aimed at first-time buyers. This may not prove too great a problem: last year about two-thirds of new houses were sold below that price.

Nevertheless, housebuilders will continue to face margin pressure. Price increases for a range of building materials will squeeze profits. Land prices now seem set to rise faster than house prices - favouring those companies which can boast long land banks.

The chancellor's decision to exempt spirits from excise duty represents a considerable victory for the Scotch whisky lobby. At one level it marks a step towards redressing the discrimination against spirits in the tax regime for alcohol. At another it is a gesture towards harmonisation of UK duties with the much lower rates applying in Europe. The more lenient attitude of the British government will certainly give the industry some extra credibility in lobbying against possible duty increases elsewhere.

But there may not be much short-run effect on earnings. Though the fall in domestic spirits consumption is expected to slow this year, the market remains soft. Consumption trends are unlikely to be affected by the chancellor's decision to forgo an indexation of duties which would have added only 17p to a bottle of spirits.

For beer and wine, the story is more complicated. The decision to raise duties on these categories by twice the inflation rate will probably make little difference to overall consumption levels, but it will exacerbate the problems caused by personal imports from the continent. This affects the retail trade as much as the brewers. It is particularly unhelpful for brewers like Whitbread whose market is concentrated in the south-east, and which also owns the Threshers off-licence chain.

The chancellor's proposed reform of the advanced corporation tax system looks like a can of worms for UK equities. By lowering the rate of ACT payable by companies on dividends, Mr Lamont will also reduce the credit recoverable by tax-exempt investment institutions from the Inland Revenue. That will reduce pension funds' income from UK equities by Pounds 1bn a year by 1995, when the ACT rate is lowered to 20 per cent.

Since pension funds own a large slice of the UK equity market, lower share prices may result. High yield stocks could be hardest hit because their investment returns will fall the most. Fund managers might equally place a higher value on the gross investment income offered by gilts. There is also the thorny question of valuing the pension funds themselves: actuaries valuing equity holdings on the basis of anticipated dividend income may have little option but to break out the red ink.

Companies which cannot offset ACT against their mainstream corporation tax should be the beneficiaries. BAT Industries, for example, which wrote off Pounds 96m surplus ACT last year, will have the option in future of paying its dividend out of a designated stream of overseas earnings. If a surplus arises, ACT can then be recovered from the Revenue. The snag is that such 'foreign income dividends' will be paid without a tax credit and are therefore worth 20 per cent less to a pension fund. The company could always increase its dividend by 20 per cent to compensate. But that can hardly be the outcome the chancellor intended.

Mr Lamont may have thought he was pleasing voters by refraining from any net tax increases, but his budget does little for financial markets. There has been no interest rate cut; at Pounds 50bn next year's PSBR is considerably larger than expected; and changes to the ACT regime - of which more below - cast a shadow over the equity market. Perhaps the chancellor decided that by making equities less attractive to institutions, he would encourage them to buy gilts. That remains to be seen. What is clear is that, on the basis of yesterday's figures, PSBR problems will dog the recovery for years to come. The deficit will still be Pounds 30bn in 1997-98.

The risk in raising additional revenue in 1993-94 was always that of hitting confidence in the early stages of recovery. But knowing that the pain is simply deferred will do little for consumer spending. Despite unpopular planned measures such as extending VAT to domestic fuel and increased national insurance rates, the PSBR trend may force the government into swingeing spending cuts in November.

The nagging worry is whether it would then have the courage to act. Yesterday's effort again betrays the anxieties of a government afraid to court unpopularity while it has a small majority. It will not do much for the gilts market. Mr Lamont conceded the relaxation of the funding rule, but offered no extra retail incentives nor the steeper yield curve which would encourage banks to buy. The authorities might hope to engineer that with another cut in base rates, but that could be hard to square with concern over the exchange rate, especially since, despite Mr Lamont's insouciance, a large current deficit cannot be financed indefinitely.

NEW HIGHS (91).

BRITISH FUNDS (1) Treas. 2 1/2 pc IL '03, AMERICANS (1) Merrill Lynch, BANKS (2) Bk. Scot. 9 1/4 pc Pf., Do 9 3/4 pc Pf., BREWERS (3) Bulmer, Greene King, Wetherspoon, BLDG MATLS (2) Sheffield Instlns., Wolseley, BUSINESS SERVS (1) Johnson Cleaners, CONGLOMERATES (1) CSR, ELECTRONICS (5) Diploma, Electrocomps., Hoskyns, Kode, Trace Computers, ENG GEN (5) Carclo, Clayhithe, Fairey, SEP, Transfer Tech., FOOD MANUF (1) Cranswick, FOOD RETAILING (1) ASDA, HEALTH & HSEHOLD (2) Assoc. Nursing Servs., Paterson Zochonis, HOTELS & LEIS (2) First Leis., Whitegate, INSCE COMPOSITE (2) Domestic & Gen., Royal, INSCE LIFE (2) Britannic, Transatlantic, INV TRUSTS (16) Alliance Tst., City Merchants High Yld., Dartmoor 6 1/4 pc RPI Db. '05, EFM Japan, Do Wts., Exeter Prfd. Db. '02, First Ireland, Fleming Fledgeling, For. & Colonial PEP, Fulcrum Zero Pf., Merlin Intl. Green, Mid Wynd, Nth. Amer. Gas, Overseas Inv. Wts., River & Merc. Smaller Co, St. Andrews, MEDIA (5) Avesco, CIA, LWT 5.90625p Pf., News Intl., Watmoughs, MTL & MTL FORMING (1) Triplex Lloyd, MISC (4) Black (P), Lincat, Lincoln House, Norbain, MOTORS (4) BBA 6 3/4 pc Cv. Pf., Burndene, Lookers 8pc Cv. Pf., Quicks, OIL & GAS (1) Seafield Res., OTHER FINCL (4) Aitken Hume, Burlington, First Natl. Fin. 7pc Pf., M & G, OTHER INDLS (4) BTR Wts., Do Wts. '94-95, Do Wts. '95-96, Wilshaw, PACKG, PAPER & PRINTG (1) St Ives, PROP (13) Bilton, Bradford, Cap. & Regional, Frogmore Ests., Hambro Countrywide, Land Sec., Letinvest 11 1/4 pc 1st Mtg. Db. '12, Lon. Merchant, Do Defd., Prop. Security, Savills, Slough 6pc Cv. '03, Town Centre, TEXTS (3) Celestion, Dewhirst, Parkland, TRANSPORT (1) Brit. Airways 9 3/4 pc Cv., WATER (1) Mid Kent, MINES (2) Nth. Broken Hill Peko, Sons Gwalia.

NEW LOWS (8).

BLDG MATLS (1) Russell (A), BUSINESS SERVS (1) Reed Executive, ELECTRONICS (1) Standard Platform, ENG GEN (1) BM, HOTELS & LEIS (1) Tomorrows Leis., MISC (1) Stonehill, OIL & GAS (1) Teredo, MINES (1) Niugini.

The announcement that Owners Abroad had successfully fended off the Pounds 290m bid from its rival tour operator Airtours triggered more hectic activity in the shares as investors took stock of the situation as the dust settled on one of the closest takeover battles in recent times.

The early afternoon announcement had been preceded by continued busy activity in Owners shares as BZW, on behalf of Airtours, was said again to have been bidding for stock. It was later announced that Airtours nominees now control 8.21 per cent of Owners ordinary shares.

However, dealers also said that Owners' white knight, travel agency Thomas Cook, owned by German travel group LTU, had also been active in the market. One of the first trades of the day yesterday had been struck at 152 1/2 p - the price Thomas Cook had paid to secure a large chunk of the 8.4 per cent stake it snapped up in Owners on Monday.

The morning's activity - when 4m shares were traded - underpinned the shares of both protaganists. However, the 3.45pm announcement of Owners' victory prompted a roller-coaster ride in both stocks. Owners immediately tumbled 20 to 118p, before rallying to close at 126p, a fall of 12 on the day. Turnover was moderate by recent sessions at 4.9m.

Airtours dropped 19 to 319p, then rallied to end the day 11 adrift at 327p. The company managed to secure 43 per cent of the shares either through nominees or by pledges of support. Sources close to Airtours were blaming a small number of institutions for switching allegiance at the last moment.

Analysts attached more significance to the fact that Owners and Thomas Cook had built up a strategic stake of more than 10 per cent on Monday. However, most remained positive on both stocks in spite of the result. A combined Airtours/Owners would have probably sparked a price war with market leader Thomson and this prospect has now diminished. Both companies have also reported strong bookings during the takeover battle. In addition, Owners and Thomas Cook are now expected to cement their pre-bid plans for closer ties.

OIL ISSUES, little changed ahead of the Budget, rose sharply after news that Petroleum Revenue Tax on existing oil fields is being reduced from 75 per cent to 50 per cent from July 1 and that tax on new fields will be abolished.

The market's knee-jerk reaction was that the oil majors, British Petroleum and Shell Transport, would be the main beneficiaries of the Budget changes, closely followed by the exploration and production stocks. BP had jumped 9 to 295p by the close, with turnover totalling 5m shares. Shell, sold down to 571p early in the session, finished a net 2 higher at 580p.

The exploration and production stocks saw initial sluggish performance transformed into good gains across the board. Enterprise Oil settled 4 ahead at 492p and Lasmo, plagued by worries that the dividend may be cut when the preliminary figures are published later this month, gained 5 on balance at 186p.

An analyst commented: 'Any reduction in the tax-take from the North Sea, on existing and new fields, has got to be seen as good news for the oil companies.' Premier Consolidated, with its raft of small marginal fields in the North Sea, was seen as a big winner from the Budget moves. The shares ended 2 3/4 up at 29 1/2 p.

LONDON'S equity market made a cautious response to the Budget speech, which was still in progress at the official close of share trading last night. Initially, equities followed the government bond sector in turning down sharply when Mr Norman Lamont, the UK chancellor of the exchequer, disclosed a substantially higher estimate of Public Sector Borrowing Requirement for 1993/94 than the City expected.

There was concern that the implications for UK pension funds of the changes in dividend tax credits might force an overall rerating of the equity market. Also disappointing was the chancellor's apparent coolness on prospects for a further cut in domestic base rates at present. Later last night some strategists predicted a setback in equities.

However, UK share prices rallied before the close of trading yesterday as the market took aboard the wider range of Budget taxation proposals and the FT-SE 100 Index ended the session only 3.1 down at 2,919.3.

Among the measures welcomed by the stock market were the chancellor's reduction in North Sea Petroleum Revenue Tax, which brought strong rises in the oil sector in late dealings. But some analysts feared that other energy industry stocks could be hurt by the proposal to impose VAT taxes on domestic fuel bills. Higher taxes on motor fuels, tobacco, betting and beer had been largely expected, but the absence of any increase on spirits duty was well received.

Some traders felt that the chancellor had been discouraging on prospects for an immediate reduction in domestic interest rates. The lowering of the tax rate relief on mortgages had been foreseen and there was little reaction.

Equities were drifting lower in virtually stagnant trading conditions when Mr Lamont stood up in the House of Commons. The PSBR statement brought a swift widening in the loss on the FT-SE 100 Index from around 2 points to 14.1, for a reading of 2,908.3. The recovery in shares came equally quickly but there was very little trading as the market trend changed direction.

Seaq trading volume for the day fell to 492m shares. Unwillingness to take positions in the blue chips was indicated by a sharp increase in the percentage of non-Footsie shares to 85 per cent of the overall volume figure. On Monday, Seaq volume of 578.1m shares had a retail value of Pounds 1.20bn.

The FT-SE Mid 250 Index, which reflects business in a range of non-Footsie stocks, gained ground during the chancellor's speech to close 6.9 ahead at 3,118.9.

Strategy meetings at London's securities firms last night planned for the opening of the market today. At Strauss Turnbull, Mr Ian Harnett said: 'We do not think this Budget will be particularly positive for equities, unless there is an interest rate cut.' Further gains in the North Sea stocks are expected, however.

UK traders will also brace themselves ahead of tomorrow's policy meeting at the Bundesbank, when some strategists expect the reduction in key interest rates foreshadowed by the Bundesbank's recent cuts in money market repurchase rates.

On Friday, the UK retail price index for last month will be disclosed and this may yet set the stage for a cut in UK base rates.

THE ABSENCE from the Budget speech of encouragement for hopes of a cut in UK base rates brought a sudden retreat in the futures, towards the close of a dull and featureless session in the derivatives market, writes Joel Kibazo.

The March contract on the FT-SE started strongly at 2,929, up 8 from its close on Monday, and moved swiftly forward to reach the day's high of 2,935 within half-an-hour of the opening.

There was, however, no fol-low-through buying as both leading institutions and independent traders remained on the sidelines awaiting the outcome of the Budget. This caused March to drift lower to trade around the 2,925 mark for the next few hours.

It was the lack of any signs of a reduction in base rates that led to a sharp decline in March around 20 minutes before the official close, leaving it to test the 2,900 level. It proved to be a resistance point and the contract bounced to finish at 2,909, a 4-point discount to the underlying cash market, with turnover reaching a meagre 6,936 lots.

Further dealings in after-hours' trading, however, saw the contract drop through the 2,900 barrier.

There was very little action in the traded options and volume was only 23,072 contracts. Some 8,406 lots were dealt in the FT-SE 100 option and 2,386 in the Euro FT-SE 100 option. Amstrad was the busiest stock option with 2,001 lots traded.

Wall Street

FOR THE second consecutive day, US stock markets moved in a narrow price range in light trading as investors searched for a new direction, writes Patrick Harverson in New York.

At the close the Dow Jones Industrial Average was up 0.54 at 3,442.95. The more broadly based Standard & Poor's 500 ended 0.06 off at 451.37, while the Nasdaq composite edged forward 0.26 to 695.47. New York SE volume, which on Monday hit its lowest level for the year, was again light by recent standards, at 218m shares.

After the wild fluctuations and heavy volumes of the previous few weeks, equities yesterday appeared to have settled into a temporary pattern of narrow price movements in thin trading. The pattern, said analysts, indicated that in the absence of compelling new economic statistics and a strong lead from Treasury prices, markets are searching for a new direction.

The day's only economic numbers provided little encouragement. The Commerce Department reported that housing starts rose by 2.5 per cent in February, a smaller increase than had been expected. Analysts, however, blamed the weak figures on the bad weather late last month, which is likely to have hit the construction of new homes.

The subdued trading yesterday may also have reflected reluctance among investors and dealers to trade heavily ahead of today's consumer price index report for February. Normally, the markets would not be overly concerned by the CPI number, but after last week's worryingly strong producer prices report - which sparked heavy selling of bonds and, later, equities - and this week's increase in commodities prices, investors have become newly sensitive to any hint that inflationary pressures may be building in the economy.

Drug shares once again took a beating from investors worried about government controls on pharmaceuticals prices. Merck weakened Dollars 7/8 to Dollars 37 3/4 , Pfizer Dollars 2 1/8 to Dollars 60 and Schering-Plough Dollars 1 1/2 to Dollars 58 1/4 .

Banks were firmer. Citicorp rose Dollars 1 to Dollars 29 5/8 in volume of 2.3m shares and Wells Fargo by Dollars 1/4 to Dollars 108 1/4 . Both were lifted by news that analysts at broking house Donaldson Lufkin & Jenrette had raised their earnings estimates for the two banks. Elsewhere in the sector, Chemical put on Dollars 1/2 at Dollars 43 1/4 .

Marion Merill Dow plunged Dollars 4 to Dollars 18 7/8 in volume of 1.8m shares after the company warned that its first-quarter sales would be 'substantially' lower than it recorded at the same stage a year ago.

Another company hit by an unexpected profits warning was Chemical Waste, which tumbled Dollars 2 to Dollars 17 1/4 in volume of 2.5m shares after stating that first-quarter earnings would be flat or lower, compared to a year ago.

Canada

TORONTO finished little changed after busy trading as a rise among forest products issues was offset by a drop in gold shares.

The TSE 300 index eased 5.3 to 3,556.8 and declines led rises by 323 to 296 after volume of 48.4m shares.

Eight of the 14 sub-groups closed higher, with forest products ahead by 1.8 per cent. Slocan Forest advanced CDollars 1 1/4 to CDollars 18 5/8 . The golds group fell 2.3 per cent as further comments by US Secretary of the Interior Bruce Babbitt concerning American Barrick pushed the heavily weighted stock down again, by CDollars 7/8 to CDollars 19 5/8 .

European airlines are facing the prospect of further losses in 1993 following a depressed performance last year. While passenger levels have risen slightly this year, earnings forecasts remain negative.

However, there may be some good news for airlines as the US and, to a lesser extent, the UK economies show signs that they may be emerging from recession.

Mr James Halstead, Swiss Bank's transport analyst, comments that the sector looks as if it is at the bottom of the downward cycle. But he draws a distinction between those carriers flying the transatlantic routes, such as British Airways, and those more dependent on Europe, Lufthansa for instance.

While operators using the transatlantic routes are beginning to see a pick-up in activity, those more dependent on continental European routes will continue to have problems as the recession there begins to deepen, he comments.

Mr Mark McVicar, transport analyst at NatWest Securities, is a little less optimistic and believes that an upturn in the sector will be delayed until 1994. 'This is about the earliest time before supply and demand begin to achieve any sort of balance,' he says.

Lufthansa surprised some observers when it blazed a trail at the beginning of the year under a European Community liberalisation directive allowing cheaper ticket pricing. The shares moved quickly ahead, reaching a year's high of DM122.50 before beginning to slip back. The stock closed yesterday at DM111.

The German carrier had not previously been induced into the pricing war against competitors but a tough couple of years has forced its hand: Mr Halstead comments that Lufthansa found that it had to discount following substantial losses in 1991 and 1992.

However, Mr McVicar observes that Lufthansa, which has made efforts to reduce its cost base, needs to go much further and quicker in that area. 'Lufthansa has said that it intends to break even by 1995/1996,' he says, 'but the equivalent cost-cutting measures were implemented by British Airways in almost half the time.' He adds that the airline faces more difficult industrial obstacles in, for instance, reducing staff levels than the UK operator.

By contrast KLM is seen by many analysts to be in a good position to benefit from any economic upturn, having made concerted efforts to cut its cost base. After a volatile performance since the beginning of the year the shares currently stand some 11 per cent higher.

Although, in the short term, the group's prospects are no better than most competitors, with another net loss in earnings forecast for 1993/94, the longer term scenario appears more secure.

Mr Richard Brakenhoff, transport analyst at Amsterdam brokers Pierson, points to benefits which will accrue from the agreement between the Netherlands and US over routes, the 'open skies' arrangement. Even its commercial links with Northwest Airlines, the troubled US carrier which had exerted a negative effect on KLM's results - the latter said last month it was writing off its 20 per cent stake in Wings, Northwest's holding company - may eventually prove valuable because of the US route network.

However, KLM's route to greater profitability depends a great deal, says Mr Brakenhoff, on whether or not it can reach an agreement with the present members of the 'European Quality Alliance' - SAS, Austrian Airlines and Swissair - on tighter links. At present KLM has a European market share of just above 3 per cent, compared with Lufthansa's 14 per cent, SAS's 9.8 per cent, 4.4 per cent for Swissair and 2 per cent for Austrian.

The outcome of these talks is uncertain, with the chairman of SAS having already said that he does not expect discussions to lead to a merger.

Finally, SAS could benefit from economic recovery, says Mr Torben Sand, analyst at Unibors, having realised the need for very dramatic cost reductions and restructuring which has already resulted in staff numbers being reduced by 3,500. But its long-term prospects are also tied to the future shape of the 'alliance'.

INDUSTRIALS ended 37 lower at 4,445 on caution ahead of today's Budget, but golds advanced 24 to 1,076 in spite of a weaker financial rand and little help from the bullion price. The overall index finished 5 higher at 3,454.

LIGHT profit-taking ahead of the March financial year-end depressed share prices, and the Nikkei average closed below the 18,000 mark after seven consecutive gains, writes Emiko Terazono in Tokyo.

The 225-issue average lost 117.88 at 17,968.30, finishing below 18,000 for the first time in three trading days. The index rose to the day's high of 18,117.09 in the morning, but was pushed down by profit-taking in the afternoon to set a low for the session of 17,945.22.

Volume remained almost unchanged, at 350m shares against 336m. Traders said that yesterday was the last trading day of the year for most corporate investors, who close their books this Friday. Declines led advances by 599 to 407, with 150 issues unchanged. The Topix index of all first section stocks dipped 8.89 to 1,344.71, but in London the ISE/Nikkei 50 index edged up 0.95 to 1,073.73.

Companies with close ties with Japanese railway groups gained ground after JR East, which plans to submit its application for listing next month, held a meeting for stock analysts on Monday. Some investors were encouraged by reports that more analysts had attended the meeting than had been expected.

While details for the listing have yet to be decided, JR East said it expected to target retail investors for its listing, offering a high dividend.

Mr Graeme McDonald, an analyst at James Capel, said future profits for JR East were dependent on its revenue from operations other than its core business, so that most investors would be looking at the level of projected capital expenditure. Nippon Densetsu Kogyo, a core electrical engineering company closely linked to the JR group, advanced Y60 to Y2,250.

Nippon Telegraph and Telephone declined Y1,000 to Y802,000 on profit-taking by dealers. NTT-related shares also lost ground, with Daimei Telecom Engineering, a telecom engineering concern, falling Y22 to Y827 and Kyowa Exeo losing Y23 to Y975.

In Osaka, the OSE average receded 83.72 to 18,992.43 in volume of 66.9m shares. The index declined for the first time in four trading days on small-lot selling in the afternoon. Roundup

THERE WERE some strong performances among the region's markets.

HONG KONG showed some recovery on buying by institutional investors. The Hang Seng index rose 125.43 to 5,980.04 but turnover dropped from HKDollars 5.5bn to HKDollars 3.9bn.

Sentiment remained nervous after China's political attacks, although there were expectations of good results from Cheung Kong and Hutchison Whampoa, which report tomorrow; Cheung Kong climbed 80 cents to HKDollars 21.50 and Hutchison by 40 cents to HKDollars 15.70.

HSBC regained HKDollars 1 at HKDollars 65.50, having reported better than expected 1992 profits after the close on Monday. Hang Seng Bank retrieved HKDollars 2.50 at HKDollars 65.

AUSTRALIA gathered momentum, encouraged by remarks from Mr Paul Keating, the re-elected prime minister, that there was scope for a cut in official interest rates. Some analysts said they were expecting a 1/2 percentage-point reduction in rates.

The All Ordinaries index ended 32.9 up at 1,659.3 in turnover of ADollars 281.1m. Mr Kerry Packer's Nine Network acquisition of 4.98 per cent of John Fairfax Holdings lifted the newspaper group's shares 12 cents to ADollars 1.96.

SINGAPORE closed higher following the government's announcement of changes in the Central Provident Fund's investment rules. The Straits Times Industrial index rallied 18.54 to 1,649.35, with some 124.6m shares traded. The government said on Monday that it would allow CPF members to withdraw more funds to invest in equities and unit trusts.

SEOUL weakened for the first time in four trading sessions on worries about renewed political tension between South and North Korea, caused by Pyongyang's withdrawal from an international nuclear pact. The composite index retreated 7.86 to 637.87 as turnover fell Won200bn to Won300bn.

MANILA lost early gains as investors switched funds to Hong Kong, but the composite index closed 4.13 up at 1,475.78.

NEW ZEALAND recouped Monday's losses, receiving a fillip from rises in Telecom of 8 cents to NZDollars 2.85, a record high, and Goodman Fielder of 9 cents to NZDollars 2.13. The NZSE-40 index gained 17.66 at 1,584.69 in turnover of some NZDollars 30.5m.

BOMBAY advanced for a second day since the market reopened following Friday's series of bombings, in which more than 60 people died at the BSE building. The BSE index added 38.58 at 2,459.85.

Brokers said shares rose on solid support from state-owned financial institutions, with supply limited because trading has been restricted to one hour and tight security had restricted the access of participants.

BOURSES decided that German interest rate prospects could sustain them for only so long, writes Our Markets Staff.

FRANKFURT eased by a fraction, rate cut hopes holding equities relatively firm against a background of disappointing, or inconclusive company news. The DAX index slipped 4.74 to 1,697.83 in turnover down from DM6.2bn to DM6.1bn.

Chemicals were under pressure after the string of accidents at Hoechst, which could trigger a series of government actions to tighten regulations and impose costly new safety controls on the industry.

MAN, the truckmaker and engineer, fell DM8 to DM297.50 on a downgrade and sell recommendation from DB Research, which cut its 1993 earnings estimate from DM23 to DM13 and the dividend in prospect from DM10 to DM7; Deutsche Babcock lost Monday's gains and more, falling DM5.30 to DM156.20 as attention shifted to the deterioration in its prospects for 1992-93.

Among carmakers, Volkswagen moved with the continental clock, rising DM5 to DM290.50 over the official session in reaction to Monday's late news that Mr Ignacio Lopez, VW's erstwhile recruit, would be leaving GM after all - and falling DM2 after hours as dealers waited for the results of a VW press conference, and mused that Mr Lopez, a tough cost cutter in the US, might find German conditions less to his liking.

Meanwhile, Mr Detlev Klug at B Metzler in Frankfurt offered a cautionary word about equity prospects after Thursday's Bundesbank meeting. Relative strength indicators were looking toppy, he said, a limited rate cut from Buba could be seen as solidarity pact window dressing, and the expiry of options contracts on Friday could exaggerate any adverse reaction.

MILAN was battered by a sharp fall in Olivetti which followed Monday's news of a L900bn rights issue. After an early suspension on a 14 per cent drop, the shares closed L377, or 17 per cent lower at L1,825. This was reflected in the Comit index which finished 6.00 weaker at 502.42.

Mr Carlo de Benedetti has said that the capital increase is needed to help the group take advantage of a possible recovery in the European computer market, where it is perceived to have an advantage over IBM and Compaq because of the strength of the dollar.

Some analysts commented that Olivetti had made efforts already to restructure and streamline its business into sector areas with the best growth opportunities, such as telecommunications and computer notebooks. NatWest Securities in London said that the convertible bonds offered as a partial alternative to conventional equity looked attractive: they will be issued at L1,000, and carry a coupon of between 6 and 8 per cent.

Olivetti's parent company, Cir, which announced a loss of L540bn in 1992, also eased on the news, closing down L119 at L1,050 while Cofide, another of Mr De Benedetti's companies, was off L122 at L1,138.

The Olivetti news weighed on other stocks which, observers believe may make a rights issue; Fiat, for instance, lost L225 to L5,560.

PARIS remained depressed with a further fall in the CAC-40 index of 10.78 to 1,975.25 as turnover stayed low at FFr2.3bn.

There was activity in Moulinex, which began the week with a decline of some 6.5 per cent and followed yesterday with another fall of FFr6.80, or 7 per cent to FFr90.70. Some analysts remarked that there had been reports yesterday that the group had clarified its shareholding structure, suggesting that it could proceed with a rights issue. The share price had risen to a year's high of FFr107 on takeover speculation.

MADRID got the better January inflation figures it expected and sold, the general index falling 2.23 to 235.50.

STOCKHOLM staged a modest rally on lower domestic interest rates as the Affarsvarlden general index gained 17.7 to 1,017.8, its first gain in five trading days. Turnover improved to SKr558m from Monday's SKr532m.

Ericsson, the telecommunications group, remained the market's most active issue as the B shares rose SKr5 to SKr240 in turnover of some SKr90m.

ISTANBUL decided that the results of some 40 companies announced yesterday had failed to match expectations, and the market index closed 75.43 lower at 5,716.82.

----------------------------------------------------------------------- FT-SE ACTUARIES SHARE INDICES ----------------------------------------------------------------------- March 16 THE EUROPEAN SERIES ----------------------------------------------------------------------- Hourly changes Open 10.30 11.00 12.00 ----------------------------------------------------------------------- FT-SE Eurotrack 100 1153.85 1152.19 1151.40 1151.50 FT-SE Eurotrack 200 1221.52 1221.41 1221.06 1222.74 ----------------------------------------------------------------------- Hourly changes 13.00 14.00 15.00 Close -----------------------------------------------------------------------

FT-SE Eurotrack 100 1152.12 1151.73 1151.42 1151.53 FT-SE Eurotrack 200 1222.69 1221.92 1222.26 1222.33 ----------------------------------------------------------------------- Mar 15 Mar 12 Mar 11 Mar 10 Mar 9 ----------------------------------------------------------------------- FT-SE Eurotrack 100 1153.62 1145.86 1163.60 1167.52 1164.26 FT-SE Eurotrack 200 1219.52 1212.44 1232.53 1231.98 1230.72 ----------------------------------------------------------------------- Base value 1000 (26/10/90) High/day: 100 - 1153.85; 200 - 1223.43 Low/day: 100 - 1150.91 200 - 1219.93. -----------------------------------------------------------------------

THE POUND gained 2 pfennigs against the D-Mark yesterday as dealers absorbed the message from the UK chancellor that the current level of UK base rates was 'consistent with the achievements of the government's inflation objectives', writes James Blitz.

In the run-up to yesterday's Budget statement, sterling rose against the German currency from around DM2.3900 at 8.30am to DM2.4050 shortly before the chancellor spoke in the House of Commons.

The stronger sentiment towards the pound was based on the correct impression that the chancellor would not ease monetary policy further in his annual budget statement.

His announcement that the projected Public Sector Borrowing Requirement for 1994/95 had been raised to Pounds 50bn triggered a 1/2 pfennig loss for the pound at one stage of the speech.

However, news of the chancellor's measures to tighten fiscal policy over the next few years helped to boost confidence in sterling on both currency and fixed income markets. The pound closed in London at DM2.4025, up 2 pfennigs on the day. At lunchtime in the US, the UK currency was trading higher at DM2.4045.

Mr David Cocker, chief economist at Chemical Bank in London, said yesterday's budget statement would consolidate the favourable sentiment towards sterling seen in recent weeks.

He said there were already signs that the UK economy was recovering, and the chancellor's promise to tighten fiscal policy over the next few years would be a further attraction for investors. But he also felt that the budget proposals themselves were unlikely to push the currency up very far.

In Europe, the immediate outlook for the European exchange rate mechanism remained uncertain. The Bundesbank's decision not to change the interest rate at which it lends short term funds to German commercial banks added to ERM tensions.

Market participants appeared to believe that the Bundesbank would cut its official Lombard and discount rates by 50 basis points at tomorrow's council meeting. However, yesterday's decision to offer a fixed rate repo at the unchanged rate of 8.25 per cent disappointed some dealers.

Mr Gerard Lyons, chief economist at DKB International in London, expressed surprise that the market was so optimistic about an official rate cut following the recent conclusion of the Solidarity Pact talks between the German government and opposition.

'The pact actually revises up the budget deficit forecast for 1995 and there is little reason for the Bundesbank to be optimistic,' he said.

At least one trader said the Bank of France was subtly buying its currency to staunch selling. The franc finished at FFr3.4000 to the D-Mark, having been as low as FFr3.4043 on Monday.

THERE WERE strong expect-ations yesterday that the Bundesbank would cut official rates at its council meeting this week, even though the central bank left the rate at which it offers weekly funds to commercial banks unchanged, writes James Blitz.

The Bundesbank announced that it would be setting a fixed rate repurchase tender at 8.25 per cent, unaltered from the rate set two Fridays ago. The move caused some disappointment in money markets, and the June Euromark contract slipped 2 basis points to finish at 93.22.

However, some dealers suggested that the unchanged repo rate was largely neutral and that there had recently been signs of a willingness among Bundesbank council members to ease policy. The predominance of the bulls in the market was seen by the fact that three-month D-Marks hovered at around 7.75 per cent, some 50 basis points below the current repo rate level.

Whatever the outlook for official policy, conditions in the German money market remained tight as dealers continued to adjust to the recent changes in the Bundesbank's minimum reserve requirements.

Call money was quoted as high as the Lombard rate level of 9 per cent. It came down to about 8.67 per cent in the afternoon following comments from Mr Johann Wilhelm Gaddum, a Bundesbank council member, who said that the German central bank would aim to calm markets via the allocation of its securities repurchase funds today.

In the sterling cash market, three-month money ended unchanged at 5 15/16 per cent after the UK chancellor made no alteration to UK base rates in his budget statement.

Yesterday morning, there was speculation that Mr Lamont would ease UK interest rates. Shortly before Mr Lamont spoke, three-month money was bid down to around 5 7/8 per cent by speculators prepared to take a bet on a cut. The March short sterling contract, which expires today, was also trading at 94.10 shortly before the budget statement.

After the speech, the March contract fell steeply to 93.95, down 12 basis points on the day. The sharp rise in the level of three-month sterling may also have been due to the expectation that there will be large shortages in the discount market later this week.

Prices from Metal Bulletin (last week's in brackets).

ANTIMONY: European free market 99.6 per cent, Dollars per tonne, in warehouse, 1,610-1,680 (1,620-1,680).

*****

BISMUTH: European free market, min. 99.99 per cent, Dollars per lb, tonne lots in warehouse, 2.20-2.40 (same).

*****

CADMIUM: European free market, min. 99.5 per cent, Dollars per lb, in warehouse, 0.35-0.45 (same).

*****

COBALT: European free market, 99.5 per cent, Dollars per lb, in warehouse, 16.00-16.50 (15.85-16.50).

*****

MERCURY: European free market, min. 99.99 per cent, Dollars per 76 lb flask, in warehouse, 120-140 (same).

*****

MOLYBDENUM: European free market, drummed molybdic oxide, Dollars per lb Mo, in warehouse, 2.05-2.15 (2.00-2.10).

*****

SELENIUM: European free market, min 99.5 per cent, Dollars per lb, in warehouse, 4.70-5.40.

*****

TUNGSTEN ORE: European free market, standard min. 65 per cent, Dollars per tonne unit (10 kg) WO, cif, 31-43 (33-44).

*****

VANADIUM: European free market, min. 98 per cent, Dollars a lb VO, cif, 1.60-1.70 (same).

*****

URANIUM: Nuexco exchange value, Dollars per lb, UO, 7.60 (same).

THE ITALIAN agriculture and health authorities were yesterday attempting to limit the scope of restrictions imposed with effect from today by the European Community on the export of live cattle, sheep and pigs as well as processed meats following the discovery of an outbreak of foot and mouth disease.

The outbreak occurred in the southern region of Basilicata but has spread to four other provinces including to important cattle centres in the Veneto. Livestock exports earn little more than L15bn (Pounds 6.5m) a year; but if restrictions on processed meats (hams, salamis etc) are extended beyond the March 31 deadline the damage could being serious as these earn L400bn a year.

The main effect is already being felt in the domestic market. Since the outbreak was first discovered on March 10 3,921 animals have been slaughtered, including 2,000 sheep, 1,121 cattle and 652 pigs. The net loss is put at about L2.5bn.

But at Monday's market at Modena in northern Italy, the most important in the country, there were fears the eventual losses could be high. In particular it was feared that lamb being reared for Easter would be badly affected. Farmers also said they feared the EC would take a tough line and use the outbreak of the disease as an excuse to force Italy to reduce its dairy herd in order to conform to the community's new milk quotas. Italy risks having to kill more than 400,000 head of cattle to conform with the quotas; and one scheme floated was to export this quantity to Albania as aid under an EC grant.

The cause of the outbreak has still not been formally identified. However, magistrates are thought to be investigating purchases of cattle from Croatia. They were shipped via Greece through Italy's southern port of Bari.

BROKEN HILL Proprietary, the Australian steel and resources giant, is stepping up its involvement in China with new explorations ventures in oil and minerals. But its chairman, Mr Brian Loton, says the company is proceeding cautiously in a complex market.

Speaking in Beijing at the weekend, Mr Loton said BHP's approach to China would be 'practical and hard-nosed', but at the same it recognised the growth of new opportunities now that the country was 'opening up'.

The BHP chairman, who has tended to be regarded by company insiders as a 'China-sceptic', was visiting Beijing to assess an expanding range of options for BHP in both the resources and oil and gas sectors. He was received by Vice Premier Zou Jiahua, one of the Chinese leaders responsible for economic management, and officials of the Ministry of Metallurgical Industries.

Mr Loton said that representatives of BHP Petroleum would be visiting China later this month to examine possible involvement in exploration of the vast Tarim basin in the north-west, which has recently been opened to foreign companies and may have reserves to match those of Saudi Arabia. He stressed, however, that BHP on its own did not have the resources necessary to explore China's desert wastes. This indicated that BHP might join forces with an oil major in a Tarim basin venture.

BHP's experiences looking for oil in China had not been encouraging, Mr Loton noted. It had, for example, drilled 23 dry wells in the Yellow Sea and Pearl River delta in a consortium with British Petroleum. He added, nevertheless, that these setbacks had 'not dimmed our enthusiasm,' and that BHP was either actively engaged in exploration or was evaluating opportunities in several offshore areas. These included the Bohai Gulf in northern Chinese waters, the South China Sea and areas off Hainan island in the south. BHP was also expected to bid for blocks in the East China Sea off Shanghai in June.

The company was also spending about ADollars 4m to evaluate a lead/zinc prospect in Sichuan province in China's centre-west. This venture marks something of a first for a foreign company in the strategic minerals and metals area.

China has tended to guard jealously its minerals and onshore oil and gas resources from foreign involvement, but with demands from the leadership for speedier economic development, officials are now beginning actively to seek assistance abroad.

Mr Loton said that his company had no immediate plans for further minerals exploration ventures, but he also noted that China recognised the expertise of companies like BHP in both looking for and exploiting mineral deposits. China has barely scratched the surface of its minerals assets across a vast country. An obsession with gold - in the past two decades about 70 per cent of China's exploration resources were devoted to looking for the metal - has been a serious drag on overall minerals development.

BHP's chairman and his fellow executives were bullish about the company's iron ore sales to China, which they expected would rise by about 10 per cent to some 5m tonnes in 1993. The sales are being driven by the extraordinary growth in the Chinese economy in the past year of 12.8 per cent, well up on revised growth targets of 9 per cent.

China produced 78m tonnes of steel last year, making it the world's number three producer. It is aiming for 100m tonnes a year by 2000, which represents continuing good news for BHP and other Australian iron ore suppliers.

New York raw SUGAR prices were broadly lower by midsession on sentiment that Monday's sharp rise might have been overdone. The market, already poised for an advance after Friday's firm close, soared on news that Cuba's crop and mills might have been damaged by the weekend storm which swept up the eastern US. But analysts said uncertainty about the extent of the damage was paring the gains. New York COFFEE prices were down at mid-day, weighed down by lack of news in the physical market, large consumer stocks and little chance of renewed ICO export quotas. GOLD edged ahead on the London bullion market, but was meeting stiff resistance at Dollars 330 a troy ounce on Comex at midday. London dealers said gold still had to overcome downward pressure from producer sales with the South African rand gold price approaching record levels. Both PLATINUM and PALLADIUM were weighed down in London by Japanese selling as the dollar slumped against the yen. Compiled from Reuters

EVEN AS Canada's timber industry celebrates surging prices for its products, worries are growing that it will soon be caught in the same worldwide squeeze on supplies that has driven lumber prices to record levels.

For the moment the jump in prices is a welcome ray of light in an otherwise gloomy sector. The strong lumber business has helped integrated forestry companies to offset their losses on pulp and newsprint and other types of paper. Specialised lumber producers are basking in record profits.

According to Madison's Canadian Lumber Reporter, an industry newsletter, standard spruce, pine and fir two-by-four planks are selling this week for USDollars 460 per thousand board feet in the US, up from Dollars 305 in mid-January and Dollars 235 a year ago. Prices are also sharply higher in Japan, the biggest market for British Columbia's coastal saw mills.

Returns to Canadian producers have been further boosted by a 12 per cent decline in the Canadian dollar since November 1991.

A recovery in housing starts and other construction has been the traditional signal for a run-up in lumber prices. But the present price explosion owes as much to nervousness about future supplies of timber as to rising consumption. Indeed, some producers fear that prices are now so high that homebuilders and other users may turn to substitutes such as steel, cement and plastics.

Supply concerns in the US are centred on the large tracts of forest in Oregon and Washington that the federal government has withdrawn from logging to protect the northern spotted owl and other threatened species.

Across the Pacific, Japanese buyers have been forced to broaden their horizons as a result of restricted supplies from south-east Asia and disruption of exports from Russia.

The Canadians have rushed to fill the gaps. Canadian lumber exports to the US will jump by 1.2bn board ft this year to a near-record 14.4bn, according to a study published in Madison's by Mr Doug Smyth, research director of the Canadian branch of the International Woodworkers of America union.

One reason for the recent surge in prices, however, is that US buyers can no longer rely on Canada to meet the full shortfall in domestic supplies. Many mills north of the border are more eager these days to widen the market for value-added, finished lumber in Japan and Europe, rather than increase their share of the market for lower-margin, commodity-grade products to the US.

The British Columbia coastal industry, which has the best quality trees but also high transport and cutting costs, is already geared almost entirely for offshore markets, mainly Japan and Europe, but increasingly Taiwan and China. Some producers in the interior of the province, who in the past have shipped almost exclusively to the US, are also becoming more active in the Japanese market.

Mr Brian McCloy, vice-president of the BC Council of Forest Industries, estimates that 10 to 15 per cent of interior lumber is now shipped overseas.

Canadian supplies are starting to be threatened however, by the same environmental pressures that have slashed harvesting in the north-west US.

Mr John Burch, general manager for marketing at Primex Forest Products in Delta, BC, predicts 'one or two major closures' among British Columbian saw mills over the next few years as a result of tightening land-use curbs. Weldwood of Canada last week announced the closure of a saw mill at Williams Lake because of timber supply curbs. Timber shortages have already prevented some interior mills from adding extra shifts to meet growing US demand.

The pressures come from various sources. There are no spotted owls in Canada, but environmentalists are demanding wider protection for the marbled murrelet, a small sea bird that they claim nests in old-growth forests. The murrelet has already been listed as a threatened species in the US.

Forestry companies have also drawn fire for 'clear-cut' logging, which has denuded some of the most scenic parts of the province.

The BC government has pledged to double - from 6 per cent to 12 per cent - the land set aside for parks and wilderness areas. The Committee on Resources and the Environment, headed by a former provincial ombudsman, was set up last year to allocate land for commercial forests and other uses. It has already appointed three land-use committees to draw lines on the map of Vancouver Island, the Cariboo Mts in the east-central part of the province and the West Kootenays in the south-east.

Meanwhile, the timber companies are nervously watching a myriad of lower-profile initiatives, such as proposals to ban logging along river banks and to increase the bio-diversity of existing forests. These proposals threaten not just to put trees out of bounds for commercial logging, but also to push up costs by impeding access of men and machinery to the forests that can be cut.

An official at MacMillan Bloedel, the biggest coastal lumber producer, says 'these things are hurting us even more than the large-scale set-asides'.

Canada's lumber industry senses however, that it has one advantage over its US counterpart in the fight against tightening environmental laws.

About 40 per cent of the trees in Washington and Oregon are owned by the US federal government, but in Canada, forests are mostly under the control of the provinces - 95 per cent, in the case of British Columbia. Industry leaders hope that provincial governments will be more receptive than remote federal bureaucrats to arguments that curbs on logging will lead to heavy job losses and the devastation of some small communities. They note that forestry is the biggest contributor to the British Columbia economy, while it ranks only third in Washington state (after aerospace and farming).

MacMillan Bloedel contends that a 10 per cent reduction in the British Columbian timber harvest would put 50,000 people out of work and add CDollars 750m (USDollars 600m) a year to the provincial budget deficit.

The squeeze on timber harvesting and the resulting surge in lumber prices has added as much as 5 per cent to the cost of building a new home in the US, a development that is only partially offset by falling mortgage rates and rising new home demand, writes Laurie Morse in Chicago.

The rocketing cost of lumber has prompted the influential National Association of Home Builders, a 160,000-member organisation, to ask President Bill Clinton to convene a meeting between US logging and environmental interests. Mr Clinton has asked Vice President Al Gore to organise the meeting.

Mr Michael Carliner, chief economist for the home builders' group, said a 90 per cent rise in lumber prices since October had increased the cost of building a 2,000 square foot home that might sell for Dollars 120,000 by about Dollars 4,500. It takes an estimated 15,000 board feet of lumber to build an average home, with wood products used for flooring and trim as well as framing. The average price for 1,000 board feet of a mixture of lumber grades, as reported by the Random Lengths Lumber service, was Dollars 474 last week, up from Dollars 249 in October.

'The market has probably overshot its mark, with a lot of panic buying,' said Mr Carliner. 'Lumber producers who own their own forest land may be holding product off the market waiting for higher prices.'

Timber sales from the south-eastern US are rising to fill the supply gap, but analysts say the south is also facing restrictions because of the endangered species act and a broader definition of wetlands.

JUTE

C and F Dundee; BTC USDollars 355, BWC USDollars 380, BTD USDollars 320, BWD USDollars 340. C and F Antwerp; BTC USDollars 340, BWC USD340, BTD USDollars 315, BWD USDollars 315.

COTTON

LIVERPOOL- Spot and shipment sales amounted to 40 tonnes for the week ended 12 March, compared with 238 tonnes in the prevoius week. Subdued offtake did not bring many operations. support was forthcoming in certain specialist styles notably in the African range.

METALS MARKETS received a psychological battering yesterday when another huge rise in London Metal Exchange stocks took the total above 3m tonnes for the first time.

Even though most aluminium, lead, nickel, tin and zinc producers were unprofitable at present, metal prices were unlikely to recover substantially with so much highly-visible stock weighing down the market, analysts suggested.

LME stock levels were 'indicative of the situation in the physical markets. Economic recovery in the US is being offset by weakness in Germany and Japan,' said Mr Angus MacMillan, research manager at Billiton-Enthoven Metals, part of the Royal Dutch/Shell group. He recalled that Japan was the second most important consumer of all base metals except for nickel, of which it was the biggest consumer. Germany was the third-largest consumer of all six base metals traded on the LME.

However, Mr Nick Moore, metals analyst at Ord Minnett, the Westpac subsidiary, pointed out that there were now about 325 LME-authorised warehouses world-wide compared with only 16, all in Europe, in 1982. This had encouraged producers and consumers to move their stock on to the LME so not all of the metal was readily available.

Nevertheless, Billiton's Mr MacMillan said that total western world stocks - not just those in LME warehouses - of aluminium and nickel were at 'horrendous' levels and those of tin and zinc were heading fast in that direction. Copper and lead stocks were now 'uncomfortably high'.

Mr MacMillan said: 'We need a return to synchronised growth in the major industrialised economies before there is any sustained recovery in metals demand - and there is not much chance of that before the year end.'

----------------------------------- LME WAREHOUSE STOCKS (As at Monday's close) ----------------------------------- tonnes ----------------------------------- Aluminium +1,950 to 1,701,650 Copper +6,700 to 346,100 Lead -2,150 to 235,150 Nickel +222 to 85,752 Zinc +7,825 to 587,400 Tin +180 to 19,170 -----------------------------------

BOLIVIA'S MINING industry, which has only just begun to recover from the market crash caused by the collapse of the International Tin Council's buffer stock operation in 1985, is bracing itself for a second shock.

Both the private and public sectors have already suffered a depressing opening to the new year. Lithco pulled out of a Dollars 1.5bn deal with the Bolivian government in January. Shortly afterwards Jordex Resources withdrew after selling its majority stake in Minera Tiwanacu. Some private mining concerns, including Britain's RTZ are said to be considering slimming down their presence in Bolivia.

Two existing joint ventures between Comibol, the state mining corporation, Cominesa and a subsidiary of Brazil's Paranapanema are still inoperable because of union opposition. The government's continuing reluctance to tackle the unions means further joint venture contracts are likely to be stalled before the June general elections.

This already fragile situation is complicated by the fall in international prices for zinc, which now tops Bolivia's mining production, and also gold, silver, wolfram and antimony. Bolivian mining minister Mr Alvaro Rejas believes the industry is facing a crisis similar to that caused by the collapse of tin prices in 1985, when some 23,000 state miners were made redundant.

LONG-DATED gilts fell by a point, while the short end of the market dropped half a point, following disappointment over Chancellor Norman Lamont's budget.

The main worry in the gilts market currently is supply, which has increased sharply due to the government's higher funding needs as a result of economic recession.

On this issue, there was nothing to cheer the market. The chancellor announced a public sector borrowing requirement for this year of Pounds 35bn, in line with expectations. But the Pounds 50bn figure given for the financial year 1993-94 was higher than dealers had hoped.

'The market was disappointed by the lack of action on next year's PSBR,' said Mr Simon Briscoe, a gilts analyst at Greenwell Montagu, adding that some traders had been looking for a reduction to around Pounds 45bn.

The other big disappointment was that only a slight change was made to funding rules in the gilts market.

The chancellor announced that banks' and building societies' purchases of gilts will now count towards funding.

These have amounted to an estimated Pounds 4bn to Pounds 6bn this year, but could fall back again, and are not expected to make a substantial impact on gilts funding needs. Some traders had hoped that Treasury bills and foreign currency debt would be included.

An announcement by the Bank of England that the frequency of gilt auctions would be increased to roughly monthly intervals, and the size increased to between Pounds 2bn and Pounds 4bn per auction, was in line with expectations.

The rest of the news in the budget was bypassed by the gilts market. 'There was neither good nor bad news on inflation, and growth forecasts were in line with expectations,' one analyst said.

On Liffe, the June long gilts contract ended more than 1 1/4 points down at 105 9/16 .

ELSEWHERE in Europe, bond markets opened lower as traders pondered the German solidarity package and its implications for German finances, but recovered somewhat to end only slightly lower on the day. German bond prices slipped 1/4 point ahead of tomorrow's Bundesbank meeting, partially reversing gains made earlier in the week, while French bond prices edged down as the franc came under pressure.

US TREASURY issues firmed across the board after a hesitant start yesterday, with prices boosted by a weaker-than-expected housing report, and in the afternoon by the Federal Reserve's outright purchase of coupons.

In late trading, the benchmark 30-year government bond was up 11/32 at 103 1/4 , yielding 6.865 per cent. At the short end of the market, the two-year note was also firmer, up 1/8 at 99 3/4 , to yield 3.997 per cent.

Prices firmed at the short end in early trading after the Commerce Department reported that housing starts gained 2.5 per cent in February.

While shorter-dated prices edged higher, at the long end the market remained flat, with investors reluctant to commit themselves at the long end ahead of today's important consumer prices report for February.

But the long end recovered later in the day after the Fed unexpectedly bought coupons outright to address a seasonal need to add reserves to the banking system.

THE Luxembourg Treasury is studying the possibility of issuing Luxembourg franc government bonds and creating a liquid secondary market in the paper, Reuter reports.

Unlike neighbouring Belgium, Luxembourg does not have a pressing need to issue debt paper as its debt is negligible by European Community standards. But issuing government debt paper, notably a benchmark bond, would enhance the market, the Luxembourg Treasury said.

THERE were few new issues in the international bond market yesterday as investors retreated to the sidelines ahead of the UK budget and the Bundesbank's council meeting tomorrow.

The African Development Bank is expected to launch a Dollars 500m Eurobond issue in the next few days, via Goldman Sachs and Lehman Brothers. Otherwise, syndicate managers said that it was unlikely that there would be many more new issues this week.

Two foreign borrowers, the Bank for Dutch Municipalities, and SNCF, the French railway, tapped the Swiss franc market for SFr150m and SFr300m respectively.

Both issues have a maturity of eight years, which syndicate managers said suited the requirements of the borrowers and met demand from investors for paper in a relatively neglected area of the Swiss yield curve.

They noted that most of the recent Swiss franc issues had been either in the five-year or 10-year area, but that there had not been much in between. Both issues were trading within fees in mid-afternoon.

Meanwhile, KfW International Finance's DM1.5bn 10-year Eurobond issue, launched on Monday, was priced at 99.30 to yield 15 basis points over the 7 1/8 per cent bund due December 2003, in the middle of the indicated range of 14 to 16 basis points.

The spread was broadly unchanged when the bonds were freed to trade.

But, as the market had expected, the yield spread on Denmark's aggressively-priced five-year Eurobond issue widened to around 15 basis points over the series 105 of medium-term German government bonds from 10 basis points at the launch on Monday.

THE Asian Development Bank (ADB) yesterday launched its first yen-denominated bond issue in the so-called 'dragon bond' market which is targeted at non-Japanese investors in Asia.

Daiwa Singapore, lead manager, said the Y30bn five-year issue was priced at 99.55 with a 4 per cent coupon. The bonds were priced to yield 32 basis points above the 106th Japanese government bond, also a five-year issue. The bonds will be listed in Singapore, Taiwan and Hong Kong.

The dragon bond market has been pioneered by the ADB to develop Asia's capital markets.

THE weakness of the Tokyo stock market and the reluctance of Japanese banks to lend have forced Japanese industry to turn to the domestic corporate bond market which, until recently, has been constrained by regulation, restrictive market practices and conservative investors.

The pace of reform has been quickened by the rising number of companies dipping into the corporate bond market, says Mr Masaaki Nogawa, head of Nippon Telegraph and Telephone's finance department.

With redemptions of over Y10,000bn (Dollars 84.7bn) worth of equity-linked bonds expected in the year to March 1994, Y5,000bn is expected to be raised through the straight bond market.

But the surge in corporate bond issues has flushed out inefficiencies in the secondary market. Traders and issuers blame structural barriers. The lack of a centralised settlement system has limited trading, and reporting requirements imposed by the Bank of Japan on borrowing and lending bonds has restricted market-making by securities houses.

The lack of a proper government bond yield curve has given little incentive to use corporate bonds as hedging or arbitrage instruments against government bonds. Mr Nogawa points out that active trading on the government bond market is almost limited to the benchmark bond.

But the barriers also seem to stem from attitudes of market participants. For most institutional investors, corporate bonds are still instruments kept until maturity.

The lack of interest among investors has resulted in a situation where the bid, or buying price, of one securities house would sometimes be placed higher than the offer, or the selling price, at another house.

For many Japanese brokers, which are not used to taking risks on their own capital, market-making is still a new concept. While eight houses - including Morgan Stanley, Goldman Sachs, Nomura Securities, Daiwa Securities, Nikko Securities and Yamaichi Securities - now quote two-way prices through trading screens, sparse investor interest has led to distorted prices.

Some issuers blame the inconsistent offering methods in the primary market for the lack of investor support. Mr Nogawa at NTT says pricing on the primary market is still not transparent.

Traditionally, domestic corporate bonds were issued using the so-called 'proposal' method, under which underwriting is awarded to the securities house with the most competitive bid. Intense competition for underwriting contracts led to unrealistic offering prices. To break from such practices, NTT appointed Morgan Stanley Japan, along with Nomura, as lead managers of its issue. 'We needed innovation,' says Mr Nogawa.

NTT has since led the way in changing the market by gaining approval for trading on the secondary market in the offering period. Former practice required investors to hold bonds until the offering period was over, leaving them vulnerable to market movements.

From April, the ministry of finance will remove other barriers deterring companies from the domestic bond market.

Limits on the amount that can be issued are due to be eliminated. Also, the commission-bank system, under which every issue needs a commercial bank acting as an agent representing investors, will be scaled back. Companies say the ministry's move is a start, but it will probably take further time for the ministry to address other issues.

In April there will also be an initial easing of barriers between the banking and securities industries. Securities houses are bracing themselves for the entrance into the corporate bond market of affiliates of long-term credit banks, such as IBJ. Mr Mikio Fujii, of Nomura's fixed-income department, puts on a brave face, saying the increase of business will activate the market.

But an official at a leading US house is pessimistic. 'If the banks go for market share, as they have in the past, the market could collapse,' he says.

THE Osaka Securities Exchange (OSE) expects to report a Y240m (Dollars 2m) loss for the year ending March, after a Y1m profit a year earlier, Reuter reports from Osaka.

It will be the exchange's first loss in 10 years.

The OSE blamed slow stock futures trading following restrictions and the overall decline in stock markets.

Members' fees, including commissions to the OSE, is expected to fall to Y3.2bn in the six months ending March, from Y4.6bn in the first half of the year.

Revenue from members' fees for the coming year is projected to decline 18.7 per cent to Y6.35bn.

The exchange is also having to face the cost of developing a new trade-weighted average stock futures contract, scheduled to replace the average Nikkei 225 next year.

The development cost for the first year is Y1.33bn in the budget for the next year, which begins on April 1, the OSE said.

GIO Australia, the privatised Australian insurance group, yesterday blamed disappointing investment returns, hurricane claims and rationalisation costs for a disappointing net profit of ADollars 43m (USDollars 30.7m) for the six months to December.

GIO, which was floated by the New South Wales state government in July, said it made an operating profit of ADollars 73m on turnover of ADollars 990m. The group declared an initial interim dividend of 7 cents, fully-franked.

The group gave no comparative figures for last year's first half, when it was in government ownership. It re-ported a ADollars 117m net profit for the 12 months to June, up 23 per cent on the previous year.

Mr Bill Jocelyn, managing director, said losses from Hurricane Andrew, which hit Florida last year, were estimated at between USDollars 15bn and USDollars 18bn, compared with an earlier estimate of USDollars 8bn.

The result includes a loss of ADollars 7m caused by hurricane-related claims against SIO, the Victorian state insurance office, which was acquired by GIO last year. GIO said the full cost of integrating SIO during the half was ADollars 10.3m.

Jennings, the Australian homebuilder, said its bankers would convert ADollars 27m of bank debt into equity, on top of the ADollars 63m converted into a 39 per cent equity stake last August, Reuter reports from Melbourne.

Jennings, 43 per cent owned by Fletcher Challenge, the New Zealand forestry and energy group, said the bankers would receive non-voting preference shares on the additional ADollars 27m.

The company earlier reported attributable losses of ADollars 23.05m for the six months to December 31, compared with losses of ADollars 27.96m a year earlier. Net operating profits totalled ADollars 181,000, down from ADollars 3.73m. The company again paid no dividend.

THEY call him the Bill Gates of Singapore. Mr Sim Wong Hoo started a company called Creative Technology just over 10 years ago. Computer skills, bright ideas and a lot of persistence have made Creative one of the stars of the computer scene, not just in Singapore but also in the US.

In August, Creative was listed on the Nasdaq over-the-counter exchange in the US. While not in the same league as Mr Gates's Microsoft, Mr Sim's company has taken one segment of the computer market by storm.

Creative's shares, offered at USDollars 12, shot up to nearly Dollars 40 at one stage and now trade in the upper Dollars 20s range - valuing Creative at Dollars 1.2bn. In the second half of 1992, Creative reported net income of Dollars 32.6m on revenues of Dollars 129.7m - up from Dollars 9.1m and Dollars 33.3m respectively in the corresponding period in 1991.

Creative's main product is Sound Blaster, a hardware-software package which enables computers to play music, mimic a wide range of sounds, and synthesise the human voice. First marketed in the US in late 1989, nearly 3m Sound Blasters have now been sold.

Creative is run from the seventh floor of an industrial estate block in Singapore. A local workforce of 550 puts together more than 200,000 pieces of computer equipment each month.

Mr Sim, at 37, is a local hero. Singapore is well-known for its technocrats and its managers, but entrepreneurs like Mr Sim are thin on the ground in what is a tightly-regulated and controlled business environment.

'There were times when no one wanted to know us. Getting venture capital was impossible,' he says. All that has changed. A Singapore state company has a 6.5 per cent share in Creative. Mr Sim and two friends who founded the company control 70 per cent.

Mr Sim studied electronics but has no formal computer training. After military service in Singapore, he worked as as assistant electronics engineer for a local oil company and found he enjoyed computer programming and design work.

'By the early 1980s I'd decided to set up my own business. I knew I was good at creating things but didn't really have any focus. I was also very shy, and business did not appeal to me.'

An early foray into computer teaching turned sour when a partner ran off with the money. In 1981, Creative Technology was founded, mainly to carry out various software contracts in Singapore.

'We put an ad in a local newspaper 'We are very hungry - so call us.' Our initial capital was only SDollars 10,000 (USDollars 6,000).' Design work continued. By 1984, Creative had gathered enough expertise to design what was Singapore's first home-grown computer. Mr Sim insists he did not clone products.

'We wanted to make an original. Ours was the first computer which was able to 'talk' in Chinese.' But it was not a success. Sales barely covered costs. Creative had no money for marketing.

The same thing happened to what Mr Sim calls the 'dream machine' - another computer launched in 1986 which had both Chinese and English voices, plus graphics and a sound board.

'We thought the dream machine would sell like hot cakes. It didn't. It was ahead of its time. It had so many features that it took two hours just to do the sales pitch. People would ask us, 'why does your computer talk? or why does it have Chinese?' China might have been interested but then it had no money to buy such products. Locally we had very little support. So we had to start again.'

Mr Sim and his colleagues made some radical decisions. 'We threw away the voice and languages. Music is universal. We started selling computer sound boards - music for the masses. We found we could earn the same margin on a sound board as on a complete PC.' With sounds for computer games, the Game Blaster became a popular product.

In 1988, Mr Sim left for the US. 'That's where the computer market is. I told my family that if I did not sell 20,000 sound boards in the US I would not come back.'

Penetrating the distribution system in the US is crucial. 'I would beg distributors to give me their time. I kept knocking on doors. I was willing to add in all sorts of features or modify the sound boards for them.'

Persistence paid off. At a computer exhibition in Las Vegas in late 1989, Creative was taking a trade order every three minutes. A year later, it was exporting 10,000 sound boards per month from Singapore.

Creative has several rivals, some of which, according to Mr Sim, have cloned Creative's products. Similar operations have started in Singapore. But Creative says it now has 60 per cent of a market which is growing by more than 30 per cent per year.

Creative has introduced other products, some of which it it trying to persuade PC manufacturers to incorporate into their machines, rather than selling them as accessories.

Creative has moved into multi-media computers, which combine pictures, text and high-quality sound. Creative now sells a multi-media package manufactured in conjunction with Matsushita of Japan which incorporates a Sound Blaster, a compact disc player adapted for the computer and software disks.

There is also a Video Blaster which allows a user to watch television on a computer.

Many of these products date back to Mr Sim's 1986 dream machine. That computer's functions, particularly its Chinese/English abilities, are now being resurrected with an eye to the fast-growing China market. Late last year, Creative formed a joint venture with a Beijing company. Creative's Chinese software is already being used in schools in Singapore.

Mr Sim has also moved closer to Mr Gates. Creative is now developing, along with Microsoft, various digital video software.

SANTOS, the Australian energy group, announced a 40 per cent increase in net profit to a record ADollars 163m (USDollars 116m) for the year to the end of December, on turnover up 5 per cent to ADollars 690m.

However, the group said this figure was reduced to ADollars 113m after abnormal losses of ADollars 60m, mainly reflecting a ADollars 27.5m write-down in the carrying value of US oil and gas reserves and a ADollars 23m unrealised foreign exchange loss caused by the depreciation of the Australian dollar against the US dollar.

In the previous year, Santos recorded a net loss of ADollars 111m year after abnormal losses of ADollars 223m, including a ADollars 154m write-down against unsuccessful exploration in permit areas in the Timor Sea, between Australia and Indonesia.

The group increased the final dividend by 1 cent a share to 11 cents, fully-franked, making a total of 21 cents, compared with 19 cents in the previous year. Santos shares closed 13 cents higher at ADollars 3.32 on the Australian Stock Exchange.

Santos attributed the profit improvement to higher production and sales, lower financing costs caused by falling interest rates, higher depreciation charges following increased production, and an increase in the value of oil and gas stocks.

The group said its net operating cash-flow had risen 41 per cent to ADollars 409m, which would enable it 'to continue to capitalise on strategic opportunities which emerge in the Australian and international oil and gas markets'.

In recent months, Santos has announced acquisitions totalling over ADollars 338m, including a 19.9 per cent stake in Sagasco Holdings and the purchase of the upstream oil and gas interests of Australian Gas Light.

Santos said it intended to acquire further shares in Sagasco, with the 'ultimate objective' of obtaining control, subject to a court challenge by the Trade Practices Commission, the competition regulator.

The group said it expected production to increase by 6.1 per cent to a record 36.7m barrels of oil equivalent in the current year, aided by the AGL purchase and development in the Cooper/Eromanga Basin in South Australia.

'Overall, Santos' total oil production from all regions in 1993 is forecast to be 10.7m barrels,' the group said.

SUMITOMO Trust & Banking, the leading Japanese trust bank, plans to apply to set up a subsidiary to deal in securities in the year starting on April 1, Reuter reports from Tokyo.

The bank said the subsidiary would be capitalised at about Y10bn (Dollars 84m) and have some 30 staff.

Financial reforms allowing banks and brokerages to enter each other's business through subsidiaries take effect in April.

The securities businesses that a bank's subsidiaries will be allowed to engage in do not initially include stockbroking. Two Japanese long-term credit banks - the Industrial Bank of Japan and Long-Term Credit Bank of Japan - have already announced that they would apply to the ministry of finance to set up securities subsidiaries soon after the reforms took effect.

The Norinchukin Bank, the central body for agricultural financial institutions, has also said it is considering such a subsidiary.

But Japan's big commercial banks are unlikely to apply in 1993-94, banking analysts say.

COLES MYER, Australia's largest retailer, sees scope for increasing its market share by expanding its operations and through acquisitions, Reuter reports from Melbourne.

Mr Peter Bartels, chief executive, said: 'There are at least a few percentage points to be added to our market shares in the not too distant future.' Coles Myer has 17 per cent of the Australian retail market and has about ADollars 15bn (USDollars 10.7bn) in annual sales.

He said Coles Myer had plenty of scope for closing market gaps with acquisitions and there were many opportunities to open some of its businesses in states in which it was not represented.

The decision two weeks ago to open a chain of toy superstores was the first of the niche market opportunities the group would develop. 'We see plenty of scope for new business initiatives in other areas and we are looking at a range of opportunities,' he said.

Coles Myer would concentrate its business in Australia and he did not want to make promises of offshore expansion. He said growth plans for current businesses included the opening of new stores, refurbishment of existing stores, extending trading hours, development of store brands, reducing unwanted lines and installation of electronic sales systems.

Coles Myer was examining all its operations to see whether the group should be in them and whether their performance could be improved. 'Indeed, I think it is obvious to anyone who knows the company well that a new era is well and truly under way,' Mr Bartels said. There was still work to be done after its half-year result unveiled recently, which showed a 4 per cent rise in net profit to ADollars 236.6m in the 26 weeks to January 24.

Mr Bartels said the K mart discount chain was nowhere near its potential, and he wanted to improve contributions from supermarkets and department stores.

DIGITAL Equipment has seen better days. Apart from superfast microprocessors, the US group, once second only to International Business Machines, leads in hardly any area of the computing business.

Dr Juan Rada, economist, academic and, since May 1992, Digital's head of strategic alliances, explains his company's dilemma: 'Digital has succeeded as a company when it has invented the future. Its people are not good followers; it is difficult to get them enthused when they are not leading.'

The company failed to exploit the industry's two most important developments: the personal computer (PC) and the move to 'open' or industry-standard systems.

In 1992, it lost money for the successive second year; Dollars 2.8bn, or 20 per cent of revenues, proportionally far worse than International Business Machines, whose Dollars 4.9bn loss, an industry record, amounted to only 8 per cent of sales.

Can Digital rekindle the spark that took it to number two among the world's information technology suppliers? Dr Rada believes that Digital's mistakes have presented it with a clean sheet in three important areas: management, organisation and technology.

Management: Mr Robert Palmer took over as chairman from Digital's founder, Mr Kenneth Olsen, last year. He has since named a new senior management team, appointing several top managers from outside the company.

Organisation: the company has been restructured into nine business units, each responsible for its financial performance.

Technology: Digital is pinning its hopes on its Alpha microprocesssor chip, the first to process information 64 bits at a time.

Much will depend on whether Digital can catch industry leaders, such as IBM and Compaq in personal computers. Customers spend more on PCs than on any other computer hardware, but net profit margins are small. Success in PCs means combining high volumes with low prices and excellent distribution.

Digital is starting in PCs with a more or less clean sheet. It failed first time round because senior management did not take PCs seriously; now Mr Palmer has set the company the goal of becoming one of the top five global suppliers by 1995. The aim is to earn about 20 per cent of revenues - perhaps Dollars 2bn to Dollars 3bn - from PCs by that date.

To implement the strategy, Mr Palmer appointed Mr Enrico Pesatori as head of Digital's PC business unit. Mr Pesatori, 52, spent 21 years with Olivetti, Europe's largest PC manufacturer, before two years as chief executive of Zenith Data Systems, the PC arm of Groupe Bull of France.

Digital's PC strategy is a rag-bag of solutions. PCs for Europe are made by Olivetti; Intel builds machines for the US. Notebook PCs and some workstations are supplied by other manufacturers. In addition, Digital designs and manufactures its own PCs.

In spite of this haphazard approach, according to Mr Pesatori, Digital has moved from 22nd to ninth among global PC suppliers in the past 12 months. 'Without a real strategy, but with some sound products, Digital has been able to achieve impressive results,' he says.

His first job is to create a coherent PC strategy: 'My goal is to have taken all the strategic decisions before the beginning of our fiscal year, in July. Implementing the strategy will take a further year.'

That will involve the creation of a single product family, which will mean changes in the arrangements with Olivetti and with Intel. Mr Pesatori insists the relationships will be improved rather than severed: 'We have to move to another level of co-operation to meet what is required today,' he says. He also intends to appoint professional PC managers to oversee the all-important distribution strategy.

It could be argued that Digital has left it too late in PCs, but Mr Pesatori argues that the company's legacy gives it significant advantages.

First, there are its existing customers, which include most of the world's blue-chip companies. Less than 5 per cent use Digital PCs; by comparison, 48 per cent of IBM customers have at least one IBM PC. If Digital's penetration rate were raised to only 20 per cent, it would make a considerable difference.

That large customer base also makes the company attractive to dealers who would see a sales agreement with Digital as a passport to lucrative new business.

Second, the Digital brand name. Mr Pesatori accepts that names like IBM and Compaq can no longer command a premium, but notes that if products are priced sensibly there is advantage in owning a brand synonymous with quality.

Third, the company is an acknowledged technology leader; its Alpha chip will eventually be used in its PCs, giving customers a choice of 64-bit or 32-bit technology.

Digital faces an uphill battle, but Dr Rada believes the industry's turbulent state will be an advantage. He quotes a Spanish proverb: 'When the river is turbulent, the fishermen are the winners.'

CS HOLDING, parent company of the financial group built around Credit Suisse, has confirmed it will go ahead with its SFr1.6bn (Dollars 1.05bn) agreed takeover of Swiss Volksbank.

CS said that by the time of the expiry of its offer yesterday, 93 per cent of Volksbank shares had been tendered.

The takeover will enable CS to surpass Union Bank of Switzerland to become Switzerland's largest financial group in terms of assets.

The all-share offer, announced on January 6, has advanced smoothly. Volksbank, which tumbled into a SFr68m loss last year, had first to win shareholders' approval to convert itself from a co-operative into a joint stock company. In the event, the enabling resolution was passed without a murmur of dissent at an extraordinary general meeting last week.

Under Swiss law, the offer, on the basis of three new CS registered shares for every 10 Volksbank registered shares, must be extended for 10 banking days in order to enable the remaining Volksbank shareholders to take advantage of it.

CS said the new shares would be issued in mid-April.

WANG Laboratories, the US office computer systems company, yesterday filed a wide-ranging reorganisation plan aimed at enabling the company to emerge from Chapter 11 bankruptcy protection.

The plan, jointly sponsored by a committee representing unsecured creditors, would transfer ownership of the company to creditors through an issue of new stock. It also calls for substantial reductions in operations, with the loss of 3,300 jobs.

Secured and priority creditors would be paid in full, or as agreed by the parties. Unsecured creditors would be issued shares in the reorganised company and warrants would be issued to current shareholders. The plan had been endorsed by representatives of equity holders, Wang said.

Wang, an early leader in office computer systems, failed to keep pace with changes in the industry. It filed for bankruptcy protection last August.

'We have truly invented a new Wang,' said Mr Joseph Tucci Wang, president and chief executive.

Wang would emerge from Chapter 11 free of a substantial portion of the structural burden and debt that had impeded the company's efforts to restructure and regain profitability, the company said.

Wang plans to close its manufacturing operations and focus on software and services. Corporate operations would be streamlined and the company would 'dramatically reduce its infrastructure,' Wang said.

'This plan allows Wang to capitalise upon its leadership in integrated imaging and office software and network integration and support services,' said Mr C. Hall Swaim, counsel to the creditor's committee.

The 'new Wang' does not intend to develop or manufacture open systems computers. Instead, it would resell computers manufactured by other companies - including International Business Machines, which formed an alliance with Wang two years ago, and Hewlett-Packard, which reached a joint marketing and development agreement with Wang two weeks ago.

Wang officials said the company expected to return to profitability in fiscal year 1994. For the current fiscal year, it anticipated revenues of around Dollars 1.25bn to Dollars 1.3bn, declining to about Dollars 1bn in 1994.

The job losses involved are higher than expected, however. Wang had more than 13,000 employees before it filed for protection, at which time it said it hoped to preserve 8,000 jobs. Yesterday, however, it announced it would reduce its workforce from 9,300 to 6,000.

MELLON Bank of the US is exploring the sale of three of its information services businesses, AP-DJ reports. The operations provide data processing and management information services for more than 200 banks, trust companies, thrift institutions and mortgage companies in the US.

Together, these businesses generated 1992 revenues of about Dollars 94m and employ about 940 people.

SKF, the world's leading roller bearing manufacturer, is restructuring its European distribution network to increase stock-handling efficiency and improve delivery times, writes Christopher Brown-Humes.

Under a three-year programme, it will cut the number of its European inventory points from 24 to five and build a new central distribution centre for the whole of Europe at Tongeren, in Belgium.

The company says the move will save at least SKr250m (Dollars 31.82m) a year.

BANCO AMBROSIANO Veneto (Ambroveneto), Italy's biggest private sector bank, raised parent bank net profits by 31 per cent to L171.4bn (Dollars 106m) last year, in spite of the recession and the need for write-downs on securities holdings.

The improvement restores the upward trend in earnings which had been upset by the need for substantial write-downs on the book value of two subsidiaries in 1991. However, the dividend remains unchanged at L150 for ordinary shares and L170 for savings shares.

Gross operating income, net of interest on overdue accounts, rose 17.4 per cent to L710bn due to an improved interest margin and a 'significant' contribution from fee income.

Ambroveneto set aside L253bn for loan loss provisions last year, compared with L180bn in 1991. Write-downs on securities and investments amounted to L71bn, against L207bn the previous year, when L170bn was set aside for the newly-acquired Citibank operation.

Deposits rose by 21 per cent to L21,367bn and lending by 21 per cent to L18,836bn.

SHARES in Olivetti, the Italian computers group, dropped by 17.1 per cent yesterday in response to Monday's announcement of a L903bn capital increase and losses of about L650bn (Dollars 404m) for 1992.

Olivetti's ordinary stock slid to L1,825 after the suspension in trading, imposed on Monday morning, was lifted, against L2,202 at Friday's close. The sharp fall reflected brokers' reaction to the highly dilutive rights issue and the poor outlook for the company in the short term.

Mr Corrado Passera, joint managing director, described the fall as 'an automatic event' in the case of a deeply-discounted rights issue. He said the true measure of the transaction's success would be the price at which the shares eventually settle.

Shareholders will be offered six new ordinary shares, priced at a nominal L1,000 each, for every four shares, of whatever category, currently held. Alternatively, they may subscribe to at least half their rights in the form of new shares and the remainder in new six-year convertible bonds, which will be interchangeable with the new shares and pay interest of between 6 per cent and 8 per cent.

The deal received a hostile reaction from most brokers, who criticised the deep discount and dilution. 'It's not often you get a rights issue where shareholders are offered more shares than they already have,' said one.

The transaction has been accompanied by preliminary results from CIR, the listed holding company controlled by Mr Carlo De Benedetti, which in turn controls Olivetti, and by Mr De Benedetti's Cofide holding company.

CIR made a preliminary loss of L540bn in 1992, against a net profit of L49bn the previous year. Around L450bn of the loss stems from extraordinary factors linked to the difficulties at Olivetti and the need for one-off provisions at Cerus, the French holding company controlled by CIR.

The special provisions have been chiefly triggered by credit problems at Banque Dumenil Leble in France, particularly as regards lending to the depressed property sector. At parent company level, CIR's loss rose to L680bn from L469bn in 1991.

CIR's net debt surged to about L440bn from L41bn due to the effects of its losses, the increased lira value of foreign currency borrowing, and changes in the items consolidated in the group's accounts.

The group said almost all its subsidiaries, which include Valeo, the French car components concern, the Italian Sasib engineering group and the Espresso/Repubblica publisher, were expected to report improved results for 1992.

Separately, Cofide said it expected to make a net loss of about L290bn in 1992, against net earnings of L41bn the previous year. The company is to make a L112.7bn rights issue of new ordinary shares, priced at L1,000 each.

MODO, the Swedish forestry group, has cancelled its dividend after swinging to a SKr1.7bn (Dollars 216m) loss in 1992 from a SKr221m profit a year earlier.

The result, which was worse than expected, was hit by SKr700m in foreign exchange losses and start-up costs for a new French mill, but highly competitive market conditions were the main reason for the decline.

Excess of supply for most forest industry products continued during 1992, squeezing prices and capacity utilisation, despite higher demand, said Mr Bernt Lof, the group chief executive.

Losses doubled in the final four months of the year from SKr811m at the eight-month stage, with the weakening of the krona from November coming too late to benefit the group. In 1991, the group paid a SKr7 dividend, which was down from SKr13 in 1990.

Sales fell to SKr15.7bn from SKr17.4bn, and the group saw an operating loss of SKr135m after a SKr1.06bn profit in 1991. This was aggravated by higher financial costs of SKr1.3bn, against SKr841m.

The main lossmaker was MoDo Paper, where operating losses deepened to SKr696m from SKr194m, but profits sank sharply at Holmen Paper to SKr40m from SKr496m.

Mr Lof said the group's rationalisation programme, which resulted in 950 job losses, had saved the company more than SKr500m during the year, and he predicted a further benefit this year.

The group said it expected its capacity utilisation, which fell to 85 per cent in 1992, to rise in 1993, helped by a better supply and demand balance and a successive rise in prices. It also said it would benefit from lower wood prices, a reduced energy tax, and the devaluation of the krona.

SENIOR executives at IRI, Italy's biggest state holding company, facing consolidated debts of over L70,000bn (Dollars 43.61bn), are determined to push through further complex share swaps among subsidiaries, despite severe criticism from the stock market and investors.

The attacks follow weekend leaks that IRI plans to cede to its Stet telecommunications arm for three years the dividend on its 57 per cent stake in the ordinary shares of Banca Commerciale Italiana, the big bank which is a future privatisation candidate.

The transaction will allow Stet, which is highly profitable, to offset tax credits on the dividends against its tax bill and provide a net return of 23 per cent. Meanwhile, IRI, which is facing crippling losses following difficulties at many of its industrial operations, will receive a L340bn payment in return.

Although shifting tax credits within a group to lower its overall tax burden is commonplace in Italy, IRI's plan has produced a barrage of criticism. The attacks on the deal range from claims that it will block BCI's privatisation to suggestions that corporate tax avoidance is immoral.

'I don't know what they're complaining about', said one banker closely associated with the transaction. 'Half of corporate Italy does this; it's the 22nd deal of the kind I've done'.

Financial engineering of dividend payments also reflects the six-year period Italian companies have to wait before they receive tax credits from the government. When eventually paid, the money attracts interest at far below market rates.

IRI has about L3,700bn in tax credits outstanding, implying that it could undertake a large number of similar transactions. However, bankers point out that not all the credits are suitable, and the overall amount that could be in the short term is about L1,000bn, of which L340bn will come from the Stet deal.

IRI has a number of cash-rich subsidiaries which could be used for similar exercises. One obvious candidate is Sirti, the network engineering arm of Stet, which has a cash pool of about L1,000bn.

The public offering of 9.84m shares in David Lloyd Leisure, the tennis and fitness chain run by the former Davis Cup player, was almost seven times over-subscribed.

The shares were priced at 150p each. Robert Fleming, the merchant bank which handled the floatation, said it received applications for almost 67.9m shares.

Investors who applied for 200 shares will receive a full allotment. Larger applications will receive a proportion ranging from 50 per cent for applications covering 500 shares to 10 per cent for applications for between 20,000 and 70,000 shares.

Dealings in the shares are due to begin on Friday.

Alliance Trust, which maintains a substantial overseas equity exposure, reported net asset value per share up from Pounds 15.39 to Pounds 17.79 in the year ended January 31.

After-tax revenue rose from Pounds 22m to Pounds 23.1m, giving earnings per share of 45.7p (43.5p).

The final dividend is increased to 31p for a total of 45p (43p).

Bolton Group, the property investor, suffered a fall in profits from Pounds 51,000 to Pounds 21,000 over the six months to October 31.

The Langho Nursing Centre, acquired during the period, incurred a loss of Pounds 157,000, but directors believed the project should be profitable in the next few months.

Turnover totalled Pounds 915,000 (Pounds 918,000). Earnings per share emerged at 0.23p (0.56p).

Courtaulds has sold its 40 per cent interest in Wrightcel to Gadsden Rheem, the Melbourne-based packaging subsidiary of SA Brewing Holdings.

Wrightcel was set up in December 1990 as a result of a management buy-out of Courtaulds Packaging Australia.

Former CPA management holds 20 per cent and the remaining 40 per cent is held by AIDC. Wrightcel's turnover in the year ended March 31 1992 was ADollars 55.4m (Pounds 27.1m).

Swiss Bank Corporation is attempting to raise Dollars 50m (Pounds 35.2m) for a Jersey-based, but London-listed closed-end fund.

The Environmental Investment Company will buy shares in companies which are expected to benefit from increased spending on the environment.

The minimum investment in the fund is Dollars 10,000 in units of Dollars 50, comprising five shares with a warrant attached.

The fund has a 10 year life and the management fee is 1.25 per cent of net assets plus 3.5 per cent of any increase in net asset value each year.

Associated Nursing Services, the nursing homes specialist, is placing 800,000 new ordinary shares at 195p each to raise Pounds 1.5m.

ANS is considering making a cash offer for Broadwater Homes for which it will use the proceeds.

ANS already owns 20.86 per cent of the Broadwater equity and manages its two nursing homes.

INCREASED LOSSES were incurred by Cala, the housebuilding and commercial property developer, for the half year to December 31.

At the pre-tax level, the loss jumped from Pounds 1.57m to Pounds 2.85m on turnover Pounds 6.8m lower at Pounds 20.6m.

However, Mr Geoff Ball, chairman, took an optimistic view of the remainder of the year.

He said that following a buoyant start to the second half, the closing six months will produce near to 70 per cent of full year sales.

Losses per share for the first six months amounted to 5.39p (2.98p).

An interim dividend of 0.75p (1.15p) is declared but a maintained total of 2.3p is forecast.

INCHCAPE, the motor and business services group, has acquired control of Switzerland's exclusive distributor of Daihatsu, Maserati and Lotus vehicles, in a Pounds 19.2m deal.

It has bought a 90 per cent stake in Reverberi for Pounds 9.4m and will also assume responsibility for the private company's borrowings of Pounds 9.8m.

Reverberi, which will be managed by TKM, Inchcape's motors subsidiary, is based near Sion and has represented Daihatsu in Switzerland since 1976. Last year it sold 1,000 Daihatsus, and about 40 Maserati and Lotus vehicles.

Mr Reg Heath, chief executive of TKM and an Inchcape director, said this was the eighth new import and distribution business Inchcape had acquired since it bought TKM for Pounds 382m a year ago.

He said: 'Inchcape is already the exclusive importer and distributor of Daihatsu vehicles in the UK, Belgium and the Irish Republic, and this acquisition marks a significant strengthening of our relationship with this manufacturer.'

LIONHEART, the Cheshire-based paint brushes and home improvements group which returned to the dividend list only last year, yesterday reported a pre-tax loss of Pounds 870,000 for 1992, and passed its final distribution. The loss compared with a profit of Pounds 2.39m.

Mr Paul Lever, executive chairman, blamed recession for depressing sales volumes by 19 per cent and forcing price cuts that reduced margins by 3 percentage points. After shedding a fifth of the workforce to save Pounds 2m, he said Lionheart was now back in profit.

All 1991 figures have been restated under accounting standard FRS 3.

Turnover was up nearly 23 per cent at Pounds 43.6m (Pounds 35.5m) but cost of sales rose 25 per cent to Pounds 27.5m (Pounds 21.9m) and net operating expenses by 54 per cent to Pounds 15.9m (Pounds 10.4m).

This reduced operating profit to only Pounds 207,000 against a previous Pounds 3.21m. Exceptional debits, made up of abortive acquisition costs and a loss on disposal of discontinued operations, were Pounds 372,000. Interest charges rose from Pounds 543,000 to Pounds 705,000.

After two years of reconstruction under Mr Lever, Lionheart returned to the dividend list with a 0.3p final a year ago. It then paid an interim dividend of 0.2p. Mr Lever said: 'After consultations in the City we decided it was better to be prudent and preserve resources. We could have paid a 0.1p final and still have headroom, but with the uncertainty about the economy we felt it better to be careful.'

The company, in which Newell, the US paint brush manufacturer, increased its stake from 13.4 per cent to 20 per cent during the year, has reduced gearing from 37 per cent to 12.7 per cent by the sale and leaseback of its Wellingborough factory.

Mr Lever said profitability returned in the fourth quarter, although an expected Christmas pick-up in sales of shower curtains and bathroom accessories had not materialised.

HALL Engineering (Holdings), the steel stockholding, construction products and automotive engineering group, yesterday announced a Pounds 21m 'breakthrough' order in Gerany and virtually unchanged profits for 1992, before exceptionals, of Pounds 5.6m.

However, a Pounds 1.84m exceptional item for rationalisation at Hall & Pickles and British Reinforced Concrete Engineering left the pre-tax line at Pounds 3.73m (Pounds 5.07m). Group turnover fell 8 per cent to Pounds 135.7m.

Mr Richard Hall, chairman, said conditions remained depressed, causing worsening results from steel reinforcement and metal stockholding where profits fell by Pounds 800,000 and Pounds 1m respectively.

Profits from associated companies improved from Pounds 5m to Pounds 6.8m. In particular, Mr Hall said the 50 per cent-owned Singapore reinforcing steel, roofing and cladding businesses were 'going like a rocket.'

Engineering profits dropped by Pounds 1.3m, with fewer automation contracts at Stadco being completed. But Mr Hall said he was delighted to announce that Stadco's automation division had won a Pounds 21m contract from Audi in Germany.

The order is a record for Stadco. It furthers its ambitions to move to 'a slightly higher rung' in the automotive manufacturing equipment sector according to Mr Brian Hinkins, group managing director. The continuing predominance of profit from overseas led to a further build-up of ACT in the UK - and the ACT write-off of Pounds 1.8m is higher than previously expected. The effective tax rate last year was 74 per cent, but Hall estimates the rate this year will be 37.5 per cent.

A total tax charge of Pounds 2.76m, and a Pounds 1.37m extraordinary charge due mainly to the decision to close steelmaking operations in South Africa, produced a net loss for the year of Pounds 408,000 (Pounds 3.56m).

Earnings per share dipped from 11.34p to 3.05p, while the dividend is maintained at 8.64p with a same-again final of 5.34p.

Mr Hall said the current year has had a much better start than last year. Increases in steel prices, rationalisation at Hall and the current round of capacity cuts in the reinforcement industry left him 'more optimistic than I have been for some time for the future performance of the group.'

Triplex Lloyd rights issue has been taken up in respect of 12.2m new shares, representing 95.1 per cent of offer.

LAW Debenture Corporation increased net asset value by 21 per cent to 514p at the end of 1992, against 426.3p a year earlier.

After-tax revenue rose by 6.3 per cent from Pounds 4.3m to Pounds 4.57m in the year, representing earnings per share of 20.07p (18.92p). The final dividend is raised to 12p making a total of 18.25p (17.5p).

A geographical split of the portfolio shows UK investments lower at 63.8 per cent (66.3 per cent), while elsewhere there were increases in the US to 23.8 per cent (23 per cent); Europe 7 per cent (6 per cent); Japan and Far East 3.9 per cent (3.5 per cent) and Australia 1.5 per cent (1.2 per cent).

MR Tahsin Karan, the long suffering chairman and chief executive of Vestel Elektronik, Polly Peck International's Istanbul-based consumer electronics subsidiary, is to step down at tomorrow's annual meeting.

His departure is a further blow to creditors and administrators of the failed British fruit and electronics group built up by Mr Asil Nadir. The eventual sale of Vestel is one of the few hopes the 23,000 creditors have of recouping even a small fraction of their money.

Already in the throes of a corporate restructuring, and facing an anti-dumping investigation by the European Community, Vestel is losing the marketing brains and man who, more than any other, was responsible for Vestel's emergence as an important force in Turkish electronics.

The search for a replacement has been painstakingly slow. 'The company has been in a sort of limbo,' complains Mr Karan, describing the 27 months since the administrators were appointed. 'Without solid ownership, it has been impossible to take aggressive positions.'

For all the tensions, the administrator can have few grumbles about Vestel's management, which has provided a welcome degree of co-operation, something which cannot be said of PPI's other Turkish subsidiaries.

Vestel is considered PPI's strongest Turkish asset. Started in 1985 the company quickly established itself as Turkey's leading exporter of colour televisions, while carving out a respectable slice of the local market. Vestel successfully floated a minority stake on the Istanbul exchange in June 1990. Its present market capitalisation is Dollars 53m (Pounds 37.3m).

Tomorrow it is expected to report 1992 pre-tax profits of TL161bn (Pounds 13.4m) on sales of about TL2,150bn against TL74bn on TL1,400bn a year earlier and TL167bn on TL851bn in 1990.

Vestel's strategy has been to sell its own branded televisions, audio products and other brown and white goods under marketing deals in Spain and Portugal and most recently a joint manufacturing venture in Romania. The bulk of the export production, though, is made to the design and specification of a foreign purchaser, under original equipment manufacturing agreements.

In 1992, Vestel generated Dollars 70m in export sales, with brown goods accounting for 80 per cent. But export prospects to EC markets are clouded by the anti-dumping inquiry.

Under Turkey's Association Agreement with the EC, Turkish electronics can enter the community duty free. The investigation involves imports of colour televisions which community officials contend rely on cheap components from the Far East and therefore should incur extra duties.

Turkey is now the largest supplier of medium size televisions to the EC. Vestel relies on television shipments for 80 per cent of its export revenues. If the charges stick, Mr Karan anticipates Vestel's exports to the community could fall by as much as a third.

The export uncertainty and prospect of more import competition in Turkey have not made it any easier for the administrators to find a buyer for Vestel.

The first option of floating the company on the Istanbul exchange was quickly ruled out. 'It was probably always going to be difficult to float any company associated with PPI,' said an Istanbul banker.

A quest was then launched for a minority partner to help Vestel expand its product range in the European market. If the company was to attract a foreign buyer, the administrators argued, it was also necessary to split the business. Unlike Europe and the US, Turkey's electronics groups are still engaged in both white and brown goods.

In June, the company sold 25 per cent of its white goods activity to Merloni Elettrodomestici, the Italian group. The Dollars 8.5m proceeds bolstered the balance sheet rather than being remitted to PPI in London.

The link up had an obvious logic, given that in its home market Vestel was already distributing the Philco range, 50 per cent owned by Merloni. In turn Merloni has the licence for the Philco brand name in Europe, providing what Mr Karan sees as a 'guarantee for our exports'.

Merloni has also provided a strategic platform to export household and white goods to north Africa, and the central Asian states.

Capacity is to double at the refrigerator line, where half of production is for export. Merloni is expected to take up its option to become the 51 per cent majority shareholder.

The future for the brown goods arm, Vestel's main operation, remains unresolved. The administrators are in negotiations with a variety of interested parties, including Singer, the US electronics concern.

Paradoxically, the decision to demerge the white goods business means any buyer of the brown goods operation may find it more difficult to maintain share in the domestic market, where traditionally Turkish retailers like to handle the whole range of consumer electronic goods.

Recent rights issue of 10.26m new shares taken up as to 9.49m shares (92.5 per cent). Mr David Blechner, a director, took up his rights and is now interested in 3.17m shares (6 per cent).

The following proposals are not to be referred to the Monopolies and Mergers Commission: the acquisition by McLeod Russel Holdings of Wheway and the acquisition by Calor Group of certain assets of BP Oil comprising part of its liquid petroleum gas business.

Shareholders of the company, which is in liquidation, have resolved to wind up Falcon plc and, accordingly, the scheme of reconstruction approved by shareholders at a separate meeting has been carried into effect.

CROWN BUSINESS Communications: Heads of agreement have been signed for a management buy-out of the company. The deal is backed and financed by the Bank of Scotland.

Recent Pounds 33.6m rights taken up in respect of 10.4m shares, representing 96.1 per cent of issue.

JOHNSON Group Cleaners, the UK's largest dry cleaning company, yesterday offered cold comfort to green shoot economists, saying it had seen no signs of recovery either here or in the US.

'We are being very cautious until we see some tangible sign of uplift,' said Mr Terry Greer, chairman. And just when that will happen, he said, 'well, your guess is as good as mine.'

Mr Greer said Johnson had been adversely affected by the exceptionally cold weather in the US, as well as by the continued severity of recession. 'We are reading about signs of recovery there, but we haven't seen any,' he said.

The statements came as the group reported a slight decline in pre-tax profits from Pounds 16m to Pounds 15.8m for the 12 months to December 26, on sales 2 per cent lower at Pounds 150.8m.

The decline at the pre-tax level was due to a Pounds 148,000 deficit on property, against a profit of Pounds 130,000 last time, following a Pounds 638,000 write-down on the value of a factory.

Excluding property, Johnson reported a slight increase from Pounds 15.9m to Pounds 16m.

The most significant factor affecting profits was a Pounds 1.4m decline in interest payments to Pounds 1.6m. Gearing fell from 39 per cent to 23 per cent.

The strongest performance came from the group's growing workwear rental business, supplying uniforms and sundries to small and medium-sized businesses.

Operating profits in this division were Pounds 270,000 lower at Pounds 8.7m, on sales 7 per cent down to Pounds 41m. The decline in turnover reflected the sale of a business in the US.

In the UK, where Johnson claims some 10 per cent of the workwear market, operating profits and sales were slightly ahead, Mr Greer said.

The dry cleaning market on both side of the Atlantic continued to be depressed. Margins and sales fell, with operating profit Pounds 1m lower at Pounds 8.8m on turnover down from Pounds 110.3m to Pounds 109.8m.

Losses in Johnson's US franchise operation had increased from last year's Dollars 250,000 (Pounds 176,000), in spite of efforts to control costs. Mr Greer said there was little more that could be done, without economic recovery.

The final dividend is maintained for the third consecutive year at 18.7p, for an unchanged total of 25.7p.

Fully diluted earnings per share rose from 48.7p to 49.12p.

COMMENT

Johnson's larger competitors might take heed of the company's softly softly approach to workwear rental. By focusing on smaller to medium-sized customers, and avoiding the volatile catering and leisure sectors, Johnson has managed to keep its bucket of business topped up and at margins (reportedly as high as 20 per cent) which are only dreamed of by others. Now Johnson intends to tackle larger customers on a national basis - although in its usual cautious manner, says Mr Greer - while its rivals are moving down the scale. Although Mr Greer traditionally downplays the outlook, analysts are more enthusiastic and count on some recovery to begin this year. Forecasts are for about Pounds 17.5m pre-tax, excluding property gains, for a prospective p/e of about 16 times. Although this seems to be up with events in the short-term, Johnson's mid-cycle prospects and solid record might lead some to tuck this away for the upturn.

BBA, the engineering group, yesterday sold its 57 per cent stake in Pacific BBA, the Australian industrial and automotive manufacturer, for ADollars 122.5m (Pounds 58m). The shares were placed with institutions.

The sale reduces BBA's net debt, which stood at Pounds 227.5m in December, bringing down gearing from 61 per cent to 44 per cent on a year-end basis. Mr Peter Clappison, finance director, said this was about the group's 'comfort level' for gearing.

BBA's share price gained 7p to close at 171p.

The group said it was concentrating on developing its core operations in Europe and North America. It has a policy of disposing of non-core activities 'depending on their performance and the interest among potential buyers'.

The diversified group, which has automotive, industrial and aviation divisions, defines a core business as having a strong international market share, technological leadership and where barriers are high to the entry of competitors.

In terms of acquisition priorities, Mr Clappison said the most likely area would be the industrial division. This was the biggest contributor to the group's Pounds 47.4m pre-tax profit, on sales of Pounds 1.32bn, announced last week.

Pacific BBA had been operating as a separate entity within the group, particularly since it gained a listing on the Australian stock exchange in November 1989.

Mr Peter Cottrell, Pacific BBA chairman, said it was 'pleasing to be able to reverse the trend of overseas acquisitions of Australian assets'. The company's priorities lay with expanding in the Asia Pacific region.

Earlier this month Pacific BBA announced a rise in after-tax profit to ADollars 9.78m (ADollars 7.51m) for 1992 on sales of ADollars 291m. Its contribution to BBA's profits after tax and the minority deduction was Pounds 2.7m.

Pacific BBA shares closed 14 cents higher at ADollars 2.90 on the Australian stock exchange.

AVON RUBBER, the UK tyre and automotive components concern, has agreed to a joint venture with a group of Middle Eastern investors to build a Dollars 200m (Pounds 141m) tyre factory in Saudi Arabia.

Avon will invest Pounds 2m and will provide technology for the plant in return for a 5 per cent stake in the factory. The rest of the funding is to be provided by a group of Saudi investors.

The factory is expected to come on stream in 1995, with initial production targeted at 650,000 tyres a year. It is expected that after five years the plant will produce some 1m tyres - about 20 per cent of overall Saudi demand.

In December, Avon announced a 36 per cent rise in annual pre-tax profits to Pounds 9.15m. The group is heavily dependent on the US market where more than 25 per cent of its business is based.

ATTWOODS, the waste management company, yesterday reported an 11.6 per cent increase in profits to Pounds 15.5m, but was held back by its US metal recycling business.

Pre-tax profits in the six months to end-January rose from Pounds 13.9m to Pounds 15.5m, using the new FRS 3 and Fred 3 accounting principles, on sales up 16 per cent at Pounds 195.3m.

Earnings per share fell from 4.36p to 3.7p, after last year's dilutive debt-reducing rights issue. The interim dividend is maintained at 1.75p.

Mr Ken Foreman, chairman, said he was 'overall cautiously optimistic for the year'.

The main hit at the operating level came in the US from Mindis, the metal recycling business. The company, which is largely dependent on world metal prices, swung from an operating profit of Pounds 900,000 to a loss of Pounds 2.8m on sales of Dollars 54m (Pounds 38m) in the first half.

Profits would have been flat without the benefit of exchange translations from the dollar and D-Mark.

Exchange translation also affected net borrowings, with net debt up Pounds 50.6m from the year-end at Pounds 125.9m. This gave gearing of 52.2 per cent, up from 36.4 per cent. Interest cover fell to 10 times.

At constant exchange rates, debt would have risen by Pounds 25m, in line with Attwoods' expectations.

Operationally, the Florida waste operation performed well and reaped a net gain from the aftermath of Hurricane Andrew.

In continental Europe, an anticipated reduction in margins from the planned expansion of the waste management division, was worse than expected due to the downturn in the German economy.

Germany accounted for 16 per cent of group sales and was less likely to suffer from the economic downturn as much of its business was related to construction and environmental services in the eastern part of the country, the company said.

Hi-Tec Sports, the sports shoe and leisure wear company, has announced the resignation of its two non-executive directors, only weeks after the two men joined.

Hi-Tec said Sir Michael Edwardes, former chairman of British Leyland, and Mr Richard Fenhalls, chief executive of Henry Ansbacher, were resigning immediately. No reason for their departure was given, and neither could be reached for comment.

However, it is understood they disagreed with the way Hi-Tec was being managed, especially since the company announced an interim loss of Pounds 2.84m last October. Mr Frank van Wezel, chairman, was unavailable for comment.

SCHOLES, the electrical installation materials group, lifted pre-tax profits by 45 per cent on almost flat turnover of Pounds 29.7m in the half year ended December 1992.

The group said it had achieved the improvement to Pounds 1.33m (Pounds 916,000) through a reduction in operating costs and working capital. Operating profits improved to Pounds 1.63m (Pounds 1.25m) and margins rose to 5.49 per cent (4.23 per cent).

The results were calculated in accordance with accounting standard FRS 3 with 1991 results restated.

The interim dividend is maintained at 1.6p. Earnings per share rose 36 per cent to 2.37p (1.74p).

Net borrowings fell to Pounds 2.25m (Pounds 5.07m) and gearing dropped to 9 per cent (22 per cent).

The group said borrowings had fallen mainly because it had reduced the number of weeks it carries stocks, but also because of scrutiny of capital spending.

Mr Bill Riches, chairman, said: 'We have not put a squeeze on capital expenditure, but we are scrutinising applications from the companies very carefully.'

BRABANT Resources, the USM-quoted oil and gas explorer which has been fighting a paper bid from fellow resource company Aberdeen Petroleum, yesterday threw itself into the arms of a North American white knight in a last ditch effort to avoid a hostile takeover.

The board has recommended a 58p per share cash offer from Houston-based Energy Development Corporation, a subsidiary of a New Jersey public utility, valuing Brabant at Pounds 9.6m.

The price compares with Brabant's flotation price of 155p in October 1990. If the EDC offer succeeds, Brabant will withdraw from the USM.

Aberdeen, which itself is battling a hostile bid from Pittencrieff, the natural resources and telecommunications group, indicated yesterday that it intended to take up the EDC offer. Mr David Hooker, Aberdeen's managing director, said the company would make a Pounds 500,000 profit after 'transaction-related expenses'.

The EDC deal was agreed late Monday night as it became apparent that shareholders representing more than 40 per cent of Brabant were not supportive.

Mr Nicholas Gay, finance director, said that as recently as Wednesday, Brabant had been confident of victory in its battle against Aberdeen. However on Thursday, a New York arbitrage firm had managed to buy some 12.5 per cent of Brabant's shares from small shareholders.

Towards the end of the week it was also discovered that one of Brabant's largest institutional investors was anxious to dispose of its stake.

Mr Gay said that after these events - and taking into account the 21 per cent either held by or pledged to Aberdeen it became apparent that Brabant would be very vulnerable even if Aberdeen's bid failed.

EDC, which is being advised by Charterhouse, said it had received irrevocable undertakings to accept the offer representing 18.94 per cent of Brabant.

SIMON Engineering, overshadowed by dividend worries for more than a year, yesterday passed its final after announcing a steep fall in profits.

Pre-tax profits fell from Pounds 18.3m to Pounds 5.32m in the year to December 31, mainly due to recession and losses on an important paper engineering contract. The figures, which were below market expectations, were described as 'extremely poor' by Mr Roy Roberts, chairman. Mr Roberts announced he would retire at the end of this year.

The shares, which collapsed last year from 301p to a low of 70p, were down 21p early yesterday, but rallied to close 1p up on the day at 114p.

Turnover fell slightly to Pounds 487.6m (Pounds 514.5m), mainly because of reduced sales in process engineering. The paper contract, at Jacksonville, Florida, led to a Pounds 5m loss for the year and a Pounds 3.3m write back of profits taken in 1991.

The powered access equipment division was affected by falling sales and margins and trading profits fell from Pounds 5m to Pounds 3.1m. Mr Brian Kemp, chief executive, said there were signs of improvement in the US, but the UK remained weak.

Simon sold most of its environmental division earlier this year, leading to a Pounds 5.39m extraordinary charge. The company did not apply FRS 3 because it said the sale of the division was non-recurring.

A fall in advance receipts from process engineering, and an increase in US borrowings because of exchange translations, meant net debt increased from Pounds 37m to Pounds 101.2m. Gearing more than doubled to 87 per cent. However, the sale of the environmental division has reduced gearing since the year-end to about 65 per cent.

Earnings fell to 2.6p (12.5p) per share. Following the extraordinary charge, and an interim dividend of 5p - last year's total distribution was 15.7p including a final of 10.7p - there was a transfer from reserves of Pounds 7.83m (Pounds 11.1m).

COMMENT

Simon's shareholders must be wondering if anything else can go wrong. After being assured by the chairman 12 months ago that this year's dividend would be covered, yesterday's cut suggests over-optimism or misjudgement of the company's markets. The severity of recession is only a partial excuse, accounting for the downturns in the construction and offshore sectors, while the loss on the Jacksonville contract is harder to justify and could scarcely have come at a worse time. Simon remains cautious about this year and is not forecasting any growth in its markets. Although access sales in the US should pick up, Simon needs its process engineering advance receipts to improve and reduce borrowings. Forecast profits this year of Pounds 12m put the shares on more than 18 times. Probably the only prop under the shares at this level is the group's perceived vulnerability to takeover.

WIMPEY, one of Britain's biggest construction groups revealed yesterday how sharp falls in UK and US interest rates had undermined carefully laid plans to restrict the cost of borrowings in the 1990s.

The group, like many large businesses, had entered into a series of hedging deals to limit rises in borrowing charges if international interest rates increased.

In fact UK and US interest rates have fallen and yesterday Wimpey announced provisions of Pounds 25.5m to cover the cost of unwinding those banking agreements.

Mr Roger Wood, finance director, said: 'The company in the late 1980s was concerned it would be squeezed between falling house prices and sales in the UK and US and rising international interest rates and entered into a series of hedging deals. '

In the three years from 1988 to 1990, these saved Wimpey about Pounds 11m. By last year interest rates had moved against the group costing it an additional Pounds 7m in interest charges in 1992.

The mechanisms used by Wimpey to protect itself from rising interest rates involved a a complex package of interest rate caps, swaps and collars.

These firstly put a ceiling on interest charges by requiring banks to pay any excess above an agreed fixed interest rate. In the case of the company's sterling debt the cap was fixed at about an average of 12 per cent. For dollar debt the cap was triggered at about 10.5 per cent.

Wimpey also entered into swaps and collars to fix rates at an average 11.4 per cent in sterling and 8.7 per cent in dollars. This meant that Wimpey would have to fund the difference if interest rates dropped below those levels.

Commercial interest rates currently are about 6 per cent in the UK and 3.25 per cent in the US, said Wimpey which under the hedging arrangements has been unable to benefit from lower interest charges.

Mr Wood who joined Wimpey in 1991 said that the group is now negotiating a new series of agreements to offset the impact of previous deals.

These involve capping sterling and dollar borrowings at much lower rates as well as protecting the company in case interest rates fall even further. The new arrangements will affect up to 40 per cent of the group's borrowings.

The provisions are to cover the difference between the cost of the new safety net and the original hedging arrangements.

The group estimates that it will save Pounds 8m in interest charges in the current year and Pounds 5m in 1994 as a result of its provisions on the former hedging arrangements.

GRASEBY, the environmental monitoring and medical equipment company, yesterday said it will float its environmental business in the US on Nasdaq, raising about Dollars 25m (Pounds 17m) but retaining control.

The move is designed to strengthen the balance sheet by reducing debt, which will allow the group to finance further growth of its environmental and product monitoring and its medical businesses.

The company also announced yesterday a sharp drop in profits before tax from Pounds 7.5m to Pounds 1m for 1992, but the dividend is held at 10.9p, with a final of 7.6p.

The company said that further development had been hampered not only by high debt, but also by the level of the above average dividend pay-out, a hangover from the days when Cambridge Electronics - Graseby before the name change - was rated as a yield stock.

The newly floated company, Graseby Andersen, will not pay a dividend, putting some pressure on the parent to meet its dividend bill.

Earnings per share fell from 8.7p to 1.3p, after an above - the - line Pounds 1.5m profit on the sale of properties and a loss of Pounds 5.8m on sale and disclosure of discontinued operations. This was in line with the new FRS 3 standard.

Sales fell from Pounds 109.1m to Pounds 102.6m, and operating profit on continuing operations was Pounds 9.5m (Pounds 12.4m). Operationally the medical, instruments and environmental businesses performed well, but defence profits fell from Pounds 6m to Pounds 300,000.

Graseby Andersen had sales of Dollars 39m and operating profits of Dollars 4.7m in 1992. It will be floated with Graseby Specac, the optical company.

Mr John Jackson, Graseby chairman, said the flotation would solve the balance sheet problems and would also increase motivation for the US management.

Graseby Andersen should benefit from changes to the US environmental programme once the Clinton administration settles down.

Because of a lack of distributable reserves in the US, the former Tace businesses - broadly the Graseby Andersen business being floated - was not paying dividends to the group.

GEORGE WIMPEY, Britain's second largest housebuilder, yesterday announced a Pounds 112.4m pre-tax loss, the worst result in its 100-year history.

The loss, taken after an exceptional provision of Pounds 113.8m, underlines the depth of the recession in the UK housing and construction markets. It follows a Pounds 16.1m pre-tax loss in 1991.

Mr Joe Dwyer, chief executive, however claimed that the worst may now be over - particularly in the UK housing market where Wimpey's sales had risen 33 per cent since the New Year against the first 10 weeks of last year.

'There are clear signs that the market is strengthening. I believe this trend will continue provided measures in the Budget do not undermine fragile returning confidence,' said Mr Dwyer.

The company's shares rose almost 8 per cent to 136p following Wimpey's upbeat comments on UK house sales and on reports that group borrowings had reduced further than expected.

Net debt, benefiting from disposals and a strong cashflow from construction, fell last year from Pounds 206m to Pounds 136m reducing the company's gearing from 35 per cent to 30 per cent, its lowest for a decade. The group raised more than Pounds 300m from selling commercial properties and peripheral businesses since 1989.

Provisions, mostly against the group's UK and US housing and commercial property operations, included Pounds 25.5m for unwinding interest-rate hedging deals.

Arrangements agreed in the late 1980s to protect Wimpey against rising interest rates had worked against the group as borrowing costs had fallen, said Mr Dwyer. These added about Pounds 7m to interest charges which last year fell Pounds 29.1m to Pounds 19.4m.

Mr Dwyer said: 'We believe that our 1992 results represent a low point in our profitability. I expect trading overall to remain difficult during 1993. However there are now positive signs emerging that the business cycle is beginning to turn both in the UK and US.'

The company, in spite of losses per share after exceptional and extraordinary provisions of 41.31p (compared with 11.13p loss per share in 1991), is paying a final dividend of 3.25p (down from 6.5p) making a total for 1992 of 5.25p (against 10.5p)

Lex, Page 18; Hedging details, Page 42

--------------------------------- Companies in this issue --------------------------------- UK --------------------------------- Aberdeen Petroleum 42 Airtours 60,41 Alliance Trust 44 Associated Nursing 44 Attwoods 43 Avon Rubber 43 BBA 43 BM Group 13 BT 9 Baring Securities 41 Bolton 44 Brabant Resources 42 British Petroleum 60 Cala 44 Canning 44 Courtaulds 44 David Lloyd Leisure 44 Graseby 42 Hall Engineering 44 Hi-Tec Sports 42 Highland Dist 60 Inchcape 44

Johnson Cleaners 43 Law Debenture 43 Lionheart 44 Macmillan 13 National Power 8 Owners Abroad 60,41 Paterson Zochonis 42 Polly Peck Intl 43 PowerGen 8 Ross Group 13 Scapa 44 Scholes 42 Shell Transport 60 Simon Engineering 42 Southern Electric 60 Spirax-Sarco Eng 44 T&N 14 Thames TV 13 Thomas Cook 41 Thorn EMI 60 Triplex Lloyd 43 Unitech 44 Wimpey (George) 42,41 --------------------------------- Overseas --------------------------------- Banco Ambrosiano 45 CS Holding 46

Capital Cities/ABC 46 Coles Myer 48 Creative Technology 48 Digital Equipment 46 Dow Chemical 46 Energy Development 42 Fox 46 GE 45 GIO Australia 48 General Electric 41 IRI 45 Mellon Bank 46 MoDo 45 Olivetti 45 Pacific BBA 43 Rautaruukki 45 SKF 45 Santos 48 Sumitomo Tst & Bank 48 Tungsram 41,45 Volksbank 46 Volkswagen 41 Wang Laboratories 46 Wolters Kluwer 46 ---------------------------------

Five years ago, Mr Christopher Heath was a stockbroker who had it all. He was reputedly the UK's highest paid man, earning several millions pounds a year - and the Asian securities firm he had founded, Baring Securities, had received establishment approval with a Queen's Award for Export Achievement (in 1991 it won a second Queen's Award).

On Monday, he appeared as mortal as the hundreds of other City of London brokers who have lost their jobs in the past few years. He resigned as chairman of Baring Securities and all his other directorships in the firm's parent company, Barings Plc, having had a disagreement over strategy with the parent company's deputy chairman, Mr Andrew Tuckey.

If the spoils for Mr Heath have been rich, they have not been insubstantial for the merchant banking group Barings - though the precise level of its earnings from Baring Securities have been obscured in its traditionally opaque accounts.

In the early 1980s, Barings had been a staid and somewhat sleepy merchant bank - a pale shadow of the family business described by the Duc de Richelieu in 1818 as the sixth great power in Europe (though Barings is probably today better known for being at the heart of the City of London's greatest financial crisis of the last century, the 1890 Baring crisis).

In 1984, Barings made one of its most astute investments when it bought the Asian stockbroking business set up by Mr Heath. The core of this securities business was the purchase and sale of Japanese equities to non-Japanese investment institutions.

Foreign interest in Japanese shares reached a peak in the mid-1980s - and Baring Securities was one of the main beneficiaries. It became the most profitable UK-owned broker of Japanese shares - and one of the most profitable Asian securities firms in the world (though its profits were a fraction of domestic Japanese firms).

The success of Baring Securities seemed to give a new impetus to Barings' traditional activities - though much of the credit for this revival was because of a reorganisation by Mr Tuckey.

Barings' fund management business has grown rapidly and today has more than Pounds 22bn under management. But perhaps more important has been the revival in the traditional heart of Barings, its corporate finance department which provides advice to UK and international companies. Its return to the first division of UK corporate finance was confirmed last year when it was chosen by Lloyds Bank as its adviser in the battle with Hongkong Bank for control of Midland Bank.

'The success of Baring Securities was helpful to the group as a whole,' Mr Tuckey said yesterday. 'But the success of the bank (in corporate finance) and of asset management would have happened in any event.'

The culmination of his expansionist strategy came at the end of 1991 when Barings bought a 40 per cent stake in one of Wall Street's investment banks, Dillon Read. In the table, the return to profit of Barings' US business is predominantly attributable to Dillon Read.

But last year Mr Heath's magic goose stopped laying golden eggs. As Japanese share prices have fallen dramatically over the past three years, foreign investors' interest in Japan has wained.

Almost 40 per cent of Baring Securities' revenues are still linked to Japanese securities trading, even though it has over the past five years built up highly profitable businesses in other Asian and South American markets.

As a result, Baring Securities incurred a loss of nearly Pounds 20m last year, in part due to the costs of cutting more than 100 staff in September and making provisions for the costs of surplus office space. Because Baring Securities is headquartered in London, its loss contributed to the fall in its parent's UK profits from Pounds 32.1m to Pounds 2m in 1992 as shown in the table.

The disagreement between Mr Heath and Mr Tuckey, which reached a climax at the weekend, was over measures to return Baring Securities to profit. Mr Heath wanted Barings to allocate more of its capital to Baring Securities, so that the securities firm could carry out more proprietary trading, which is the business of trading securities and derivative instruments for its own account - several US securities houses, such as Salomon Brothers, have adopted such a strategy in Japan. However, Mr Tuckey believed this would make the group too exposed to the performance of the securities business. His aim is to create a group of equally important divisions, so that a poor performance by one business can be offset by profits from another.

He believes the way to boost Baring Securities' profits is to encourage it to work more closely with the corporate finance department, so that it can win an increasing number of mandates to issue new securities for companies in Asia and South America.

The other part of his strategy, which will be carried out by Baring Securities' new chairman, Mr Miles Rivett-Carnac, is for Baring Securities to concentrate on emerging markets, such as those in South America, Singapore, Korea, Indonesia, Taiwan and Malaysia, where dealing commissions are far wider than in developed markets.

But Mr Tuckey insisted there were no plans to prune the Japanese business any further. He also denied market speculation that there would be cuts in the 100 staff employed in trading derivatives. Indeed he said that the securities business had proved to be remarkably resilient, following the reorganisation last autumn. 'We have maintained our market share in all major markets,' he said. Baring Securities is back in profit.

As for Mr Heath, he is staying at Barings as a consultant. However, his friends say he is still 'very hungry', for all his millions. Baring Securities could one day face competition from a new Heath-led broker.

------------------------------------------------------------------- BARINGS: PRE-TAX PROFIT (POUNDS 000S) ------------------------------------------------------------------- 1992 1991 ------------------------------------------------------------------- UK 2,018 32,125 Other Europe 3,596 1,044 North America 5,123 (3,015) Asia/Pacific 26,684 21,286 Rest of world (608) (86) Interest and exceptional costs (15,549) (8,873) ------------------------------------------------------------------- Total 21,264 42,481 -------------------------------------------------------------------

OWNERS Abroad, the UK's second largest holiday tour operator, yesterday narrowly fought off the hostile Pounds 290m bid from rival Airtours after one of the closest takeover battles the City has seen in recent years.

The outcome was only decided yesterday after Gartmore, a 7.6 per cent shareholder in Owners Abroad and a strong early supporter of the Airtours bid, switched its allegiance to the defender at the last moment.

Thomas Cook, the German-controlled travel agency which will now forge a commercial tie-up with Owners Abroad, also proved decisive. Yesterday, Thomas Cook increased its stake to 8.37 per cent.

At 1pm when the offer closed, Airtours had received acceptances from shareholders representing 35.18 per cent of Owners' shares. Airtours continued to buy shares yesterday morning, taking its stake in Owners Abroad to 8.2 per cent. Thomas Cook is expected to end up with a 17.8 per cent stake in Owners Abroad. Last week Thomas Cook said it would tender for up to 12.5 per cent of Owners' shares at 150p. Owners' shares fell yesterday from 138p to 126p. Owners Abroad's share register will also include Mercury Asset Management, the 15 per cent shareholder that supported Airtours' bid.

Owners' defence of its independence was welcomed by many in the holiday industry who were angry when the Secretary of State for industry did not refer the bid to the Monopolies and Mergers Commission. 'The market has done the job that the Secretary of State failed to do,' said Mr Noel Josephides, chairman of the Association of Independent Tour Operators. The small operators had warned they could be forced out of business by a price war that Thomson, the market leader in the UK, would have launched had Airtours won.

Mr David Crossland, Airtours chairman, said he was disappointed Thomas Cook's 'spoiling action' had carried the day. Some 43 per cent of Owners' shareholders had sold to Airtours or accepted the offers, he said.

'As the largest independent customer of Air 2000 (Owners charter airline) and now one of the largest shareholders in Owners Abroad, we shall be watching developments at the company closely,' Mr Crossland said.

Lex, Page 18

VOLKSWAGEN, Germany's stricken motor industry group, yesterday slashed its dividend and shook out its management board in the wake of an 86 per cent profits collapse last year.

The key new appointment was that of Mr Jose Ignacio Lopez de Arriortua, snatched from arch-rival General Motors in an unseemly tug-of-war over the weekend.

Net group earnings tumbled to DM147m (Pounds 62m) from DM1.1bn in 1991, and the payout was cut to DM2 on both ordinary and preference shares, compared with DM11 and DM12 respectively, the company said yesterday.

Turnover on the delivery of a record 3.52m vehicles last year rose to DM85.4bn from DM76bn, adding weight to the popular view that the more cars VW sells, the less profit it makes.

Mr Lopez was named as director in charge of production and purchasing with immediate effect. His was the only outside face to appear in the new management team picked by Mr Ferdinand Piech, who has been group chairman since January 1.

Mr Lopez replaces Mr Gunter Hartwich, who is to leave the company and will function as an adviser, the company said.

As expected, Mr Dieter Ullsperger, finance director, has lost his job. His place will be filled immediately by Mr Werner Schmidt, a hitherto low-profile director formerly in charge of overseas operations and distribution strategy.

Mr Ulrich Seiffert, the research and development chief, lost his place on the parent board, but he retains his place as R&D director at the Volkswagen brand subsidiary. His research responsibilities will be taken on by Mr Gunnar Larsson, promoted last month from the group's Audi subsidiary.

More detailed information on the group's performance and prospects will be given at Mr Piech's first annual press conference on March 31.

Mr Piech, an Austrian promoted from the leadership of Audi, warned recently that the German car industry faced its worst crisis since 1945.

The company has already announced plans to shed 36,000 workers to regain competitiveness. This job-cutting programme is likely to be stepped up and run in parallel with a squeeze on suppliers masterminded by Mr Lopez.

SHARES in Nike climbed more than 5 per cent yesterday after the company posted record third-quarter earnings. The shares advanced Dollars 4 1/2 to close at Dollars 76 3/8.

Although the results were in line with expectations, investors were encouraged by a jump in 'futures' orders and news that Nike's US footwear business had its strongest quarter in two years.

The company, based in Beaverton, Oregon, said orders for footwear and apparel scheduled for delivery between March and July climbed 21 per cent to Dollars 1.65bn. It warned that these orders were not necessarily indicative of total revenues for successive periods.

Nike's net income for the quarter to February rose 8.5 per cent to Dollars 89.5m, or Dollars 1.16 a share, from Dollars 82.5m, or Dollars 1.08. Revenues advanced 12.1 per cent to Dollars 972m, against Dollars 867m.

For the first nine months, Nike's net earnings advanced 11.5 per cent to Dollars 288.1m, or Dollars 3.74, from Dollars 258.5m, or Dollars 3.38. Revenues grew 15.2 per cent to Dollars 2.95bn from Dollars 2.56bn.

US sales rose 14 per cent in the quarter to Dollars 655.7m, while

international sales were 4 per cent higher at Dollars 265.2m.

SHARES in Nike climbed more than 5 per cent yesterday morningafter the company posted record third-quarter earnings. The shares advanced Dollars 3 7/8 to Dollars 75 3/4 at mid-day.

Although the results were in line with expectations, investors were encouraged by a jump in 'futures' orders and news that Nike's US footwear business had its strongest quarter in two years.

The company, based in Beaverton, Oregon, said orders for footwear and apparel scheduled for deliver between March and July climbed 21 per cent to Dollars 1.65bn. The company warned that these orders were not necessarily indicative of total revenues for successive periods.

Nike's net income for the three months to February 28 rose 8.5 per cent to Dollars 89.5m, or Dollars 1.16 a share, from Dollars 82.5m, or Dollars 1.08. Revenues were 12.1 per cent higher at Dollars 972m, against Dollars 867m.

For the first nine months, Nike's net earnings advanced 11.5 per cent to Dollars 288.1m, or Dollars 3.74, from Dollars 258.5m, or Dollars 3.38. Revenues grew 15.2 per cent to Dollars 2.95bn from Dollars 2.56bn.

In the US, sales rose 14 per cent in the quarter to Dollars 655.7m, with growth led by footwear revenues, which were 15 per cent higher at Dollars 548.2m.

The company's total international sales were 4 per cent higher at Dollars 265.2m. The company said international revenues would have been 11 per cent higher had dollar exchange rates remained constant. Although international footwear sales slid 1 per cent to Dollars 204.1m in the quarter, apparel sales rose 25 per cent to Dollars 61.1m.

In Europe, Nike said it was investing aggressively in the Nike brand. The company expects its fully-integrated automated information systems to come on line this month. This should provide greater communication and co-ordination between European countries.

VONTOBEL, the Zurich private banking group, reported that consolidated net profit rose 9.9 per cent in calendar 1992 to SFr24.5m (Dollars 15.9m).

Operating income was up 7.6 per cent at SFr168.9m, with trading income jumping 30 per cent to SFr32.4m and net interest income rising 25.2 per cent to SFr29.3m. Net commission income was down 3.1 per cent to SFr93m.

The directors of Vontobel Holding, the group's quoted parent company, said they would propose an increase in dividends for its year to March 31 1993, but the amount had not yet been decided.

ELI LILLY, the large US pharmaceuticals company, yesterday said its first-quarter earnings per share could fall as much as 20.5 per cent before accounting changes, reflecting slower sales of several important drugs.

Mr James Cornelius, Lilly's chief financial officer, said the company expected first-quarter earnings, excluding accounting changes, to fall in a range of Dollars 1.20 to Dollars 1.30 a share, compared with Dollars 1.51 a year earlier. In the 1992 quarter, Lilly's results benefited significantly from the sale of its capsule business.

Mr Cornelius blamed the disappointing outlook on slow sales of anti-infectives because of a relatively mild flu season and increased competition in the US and western Europe. The company's medical devices and diagnostics division has also seen sales slide.

Mr Viren Mehta, partner at analysts Mehta & Isaly in New York said: 'Until recently, it was unheard of to see earnings declines in the pharmaceuticals industry but we are seeing significant changes in the industry now.'

In addition to concern about drug pricing which has plagued the industry in recent months, Lilly's performance has been hurt by pressure on sales of its leading Prozac anti-depressant and the absence of important new drugs in the pipeline.

On Wall Street, shares in Lilly closed down Dollars 3/8 at Dollars 51 3/8 . The announcement came after the close in New York.

General Mills, the US consumer foods producer and restaurant chain operator which reported record earnings in the third quarter, expects full-year 1993 to bring record sales, earnings and earnings per share, Reuter reports from Minneapolis.

In the third quarter ending February 28, General Mills had net income of Dollars 140.9m, or 86 cents a share, against Dollars 132.1m, or 80 cents, a year earlier. Sales rose to Dollars 2.01bn from Dollars 1.90bn.

Sir David Nicolson is resigning from SOUTHERN WATER.

CHARLES BENNETT organises children's parties on his 50-hectare (120-acre) farm between Oxford and Thame. The entertainment includes pony rides, looking at lambs, collecting eggs from nest boxes under the free range hens, treasure hunts around the farmyard and tractor trailer rides around the fields, all culminating with tea in the hay barn.

The children, who are between three and ten years old - 'they get too difficult to control after that', says Mr Bennett - love the temporary freedom of the farm and getting dirty. Parents are only too happy to pay him for providing the facility. And incidentally, in case any Food Safety Official begins to worry about Mr Bennett's ability to provide food to the high standards they require, he insists that the parents provide a picnic. All he does is to allow the children to eat it in his barn.

This activity comes under the general heading of diversification, which farmers have been encouraged to explore in recent years as the government has sought to divert resources from the production of food perceived to be in surplus. But the truth is that farmers who enjoy having people around the farm, like Mr Bennett, or who became bored with planting seeds and then waiting long months for harvest, or, even more likely, needed to increase their incomes, have been diversifying for years.

Mr Bennett, for instance, has a long record of holding farm open days on bank holidays and weekends. He also has a farm shop selling produce from the farm at retail rather than wholesale prices. With only 120 acres from which to try to derive a living he needs extra income from alternative sources and I wish him every success with his efforts. But the history of such initiatives is littered with failures

The classic diversification is farmhouse holidays. Farmers in beautiful scenic areas, which are, almost by definition, the most difficult in which to make a living, long ago realised that they had to earn more cash from somewhere. Some decided to offer bed and breakfast for passing travellers and signs appeared at farm gates in the hills and moorlands of Britain.

Charges were modest and country-loving guests could not believe the value for money compared with hotels. Comfortable beds and slap-up farm breakfasts combined to create a demand for such accommodation and more and more farmers joined the bandwagon. The number of beds increased, the standard of bedroom offered rose, in many cases to include en suite bathrooms, the costs of providing the services rocketed and charges had to go up. In many of those areas expensive uprated bedrooms now stand empty for most of the year.

It is a classic case of a good idea that has been overdone and it shows how fragile is the balance between success and failure when diverting resources from the farmer's basic task of producing food to exploiting a niche market, which is necessarily more limited in potential.

Another concept that became popular a few years ago but now seems to have run out of steam is pick-your-own. Fruit-growing is inescapably labour-intensive. You cannot mechanise the picking of strawberries and expect them to be of sufficient quality to grace the tea table (although it is now possible to pick them by machine if they are destined for the jam pot). And getting the quantity and quality of labour when it is needed has become increasingly difficult over the years.

Someone, I don't know who, had the brilliant idea that if you could persuade the public to pick their own you could charge less for it and if they picked sub-standard produce they would only have themselves to blame.

All through the 1970s and early 1980s the idea spread like wildfire across the country. But just like b & b it has been overdone, with too many PYO farms chasing too few customers.

Some PYO farms are still doing well. But many more are closing for lack of punters, who prefer, it appears, to pay inflated supermarkets prices for the convenience of having their produce pre-packed.

I should not pretend, however, that I am immune to the temptation to diversify. Even as I write, the farm men are converting a range of redundant farm buildings into horse stables in the hope that the local riding fraternity will want to pay us money to keep their animals in them. Having seen how easy it is to get it wrong I have no illusions about the dangers. We are therefore controlling the costs of the investment rigidly.

The one certainty about agricultural diversification is that it will cost money; but it is by no means certain that it will make money. Even if a feasibility study suggests that there is potential for a farm to divert some of its activity in a certain direction there is little doubt that it will be copied by other farmers and overdone within a few years. Such is the nature of farmers.

Even the Ministry of Agriculture seems to have got that message at last. Five years ago the minister launched a scheme to grant aid for diversification on farms. The money was specifically directed towards feasibility studies and marketing and 1,500 farmers have so far received Pounds 8m. There are a further 750 diversifying farmers in the pipeline whose schemes have been approved but who have not yet had the cash.

But a few weeks ago the prospect of more such grants was withdrawn. For the fact is that too many farmers try to diversify from financial weakness rather than strength in the vain hope that it will solve all their problems.

It is said, moreover, that the banks are increasingly warning farmers against such activities because many of the clients from under whom they are now having to pull the rug are the ones who have spent big money on diversification.

SHARES IN FII were suspended at 488p yesterday as Britain's second largest shoe manufacturer announced it was in takeover talks with a company identified as its private UK rival, C&J Clark.

The quoted company, with a market value of about Pounds 70m, is believed to have tabled an offer comprising cash or shares valuing Clark at between Pounds 100m and Pounds 150m.

FII, which claims about 6 per cent of the UK shoe manufacturing market and is a major supplier to Marks and Spencer, has been interested in a deal with the family-held company for some five years. If its bid succeeds, FII is expected to retain Clark's retailing operation - K Shoes and Ravel.

Meanwhile, Berisford dampened speculation that it was a front runner in the bidding for Clark. The property and commodities company said it was exploring the possibility of an offer and no final decision had been taken.

A minority group of Clark's board members, who sought to unseat the chairman last year, are almost certain to oppose a sale unless the price is at least 200p a share, or Pounds 154m. They are believed to be unwilling to see the company - which is 70 per cent held by more than 500 Clark family members - pass out of family control.

BMW Rolls-Royce, the joint venture formed two years ago, has won its second important order for the BR710 aero-engine it is developing for business and regional jets.

The joint venture's BR710 engine has been chosen by the Canadian Bombardier group to power its Canadair global express business aircraft.

No value has been placed on the deal but Bombardier has won 37 firm orders for its long range twin engine business jet. This could represent about Dollars 75m worth of business.

The aircraft, which can fly 6,500 nautical miles non-stop at a maximum operating altitude of 51,000 ft, is due to make its first flight in 1996 with the first customer deliveries starting late 1997.

BMW Rolls-Royce is developing the BR710 family of engines at a new plant outside Berlin. The joint venture won its first order last September when Gulfstream of the US ordered 200 BR710 engines worth Dollars 500m to power its Gulfstream V corporate jet.

GENERAL Motors' global buying chief, Mr J. Ignacio Lopez de Arriortua, is, after all, leaving the US carmaker, it was revealed late yesterday.

His departure was announced at a GM press conference, but it was not clear where Mr Lopez would be moving to.

Earlier in the day, Volkswagen's shares had fallen on the Frankfurt stock exchange as it appeared that the German carmaker had failed in its attempt to poach Mr Lopez.

VW shares slipped DM7.30 to DM285.50 after the weekend's surprise announcement that Mr Lopez was to stay in Detroit.

An expected fall in VW profits and a cut in the dividend from DM11 to DM5 or less, due to be confirmed at a meeting of the VW supervisory board today, had been widely discounted.

GM had been expected to announce at yesterday's conference in Detroit that Mr Lopez was being promoted to executive vice-president, with much greater responsibility for the group's North American manufacturing operations.

Volkswagen yesterday repeated that although the company and Mr Lopez had both signed a contract for him to join the German group within weeks, it would not come into effect 'for the time being'.

The company refused to comment on speculation that Mr Lopez had been 'persuaded' to stay by a further promotion within GM or the US group's insistence on his respecting a clause in his contract preventing him from moving directly to a competitor.

However, Mr Ferdinand Piech, VW's chief executive, made plain on Sunday that Mr Lopez had come under pressure through 'persistent interventions' from within GM.

This pressure followed a statement last Thursday from Mr John Smith, GM president, in which he tacitly accepted that he had lost the battle to hold on to one of his most valuable executives. Mr Lopez's most important contribution had been 'the organisation of a strategy, a team and a process to achieve cost-reduction benefits throughout the corporation', he said.

These are precisely the contributions Mr Piech urgently needs to restructure VW's cost-base and revive profitability.

OLIVETTI, the Italian computers and office equipment group, yesterday announced a L903bn (Pounds 411m) rights issue and said it would report a sharply increased net loss of about L650bn for 1992.

The cash, to be raised through new shares and convertible bonds, will be used for expansion, notably in the increasingly linked areas of information technology and telecommunications.

'In the short term, the money will be used to bring debt down to zero,' said Mr Carlo De Benedetti, Olivetti's chairman, whose listed CIR holding company controls the group.

'But we want to use the funds to accelerate Olivetti's development into new areas,' he added yesterday. Last week, Olivetti took a stake in EO, a Silicon Valley start-up company marketing 'personal communicators' - pocket telephones with inbuilt fax and computing capabilities.

Olivetti's 1992 loss, to be announced officially in May, will be nearly 50 per cent larger than the L460bn lost in 1991. Sales fell 6.8 per cent to L8,020bn and operating losses surged to L230bn from L28bn. But Olivetti's more aggressive price cutting on personal computers had triggered a 35 per cent rise in sales in the final quarter, he added.

At the year-end, Olivetti's net debt stood at L960bn. The dividend will be omitted again, Mr De Benedetti said.

He added that Olivetti faced further heavy restructuring costs of up to L250bn this year, as it planned to shed a further 3,500 workers. The amount set aside for restructuring charges fell to L260bn in 1992 from L338bn in 1991, but the actual figure spent was L170bn higher, as it included money provided for in 1991, Mr De Benedetti said.

He said the rights issue, priced at the shares' nominal value of L1,000, indicated Olivetti's determination to survive. CIR would subscribe its full quota, costing about L300bn.

Shareholders will be offered six ordinary shares for every four shares, of whatever category, now held. Shareholders may subscribe to at least half their entitlement in the form of new equity, and the remainder as six-year convertible bonds which will pay interest of between 6 per cent and 8 per cent, and be interchangeable with the new ordinary shares.

Lex, Page 22

THE EC is studying all options - including retaliation - in response to the likely US decision on March 22 to bar European companies from winning certain federal contracts in telecommunications and power generation, the European Commission said yesterday.

The Commission said Sir Leon Brittan, EC commissioner for external affairs, had yet to choose how to respond to the Clinton administration's unexpected withdrawal from talks on the procurement dispute due to open yesterday. But in response to threats of sanctions by Mr Mickey Kantor, US trade representative, an EC official said: 'We take him at his word.'

Mr Kantor's abrupt decision to call off talks has escalated tensions already inflamed by EC-US disagreements on commercial aircraft subsidies, steel subsidies and the stalled Gatt Uruguay Round. It also has embarrassed Sir Leon, who had claimed that a recent trip to Washington had cemented relations with Mr Kantor.

EC officials admitted yesterday that Mr Kantor had failed to make a courtesy call to Sir Leon ahead of last Friday's announcement. One Brussels official described Mr Kantor as 'unpredictable', while others said the unilateral withdrawal amounted to a spur-of-the-moment decision which had surprised the US negotiating team.

Mr Kantor broke off negotiations after learning that the EC would not waive Article 29 in the EC utilities directive, which gives European companies a 3 per cent price preference over foreign bidders, while also giving favoured treatment to EC bidders offering more than 50 per cent local content.

The EC is ready to waive Article 29, but only if the US agrees to waive buy-American provisions on federal and state contracts in water, gas, electrical and telecoms contracts.

US demands that the Community waive the clause before yesterday's talks were tantamount to 'getting us to walk naked into the negotiating room', the EC said.

Mr Kantor is due to visit Brussels for talks with Sir Leon on March 29, but the latest row had 'rewritten the agenda', an EC official said.

Recent turbulence in the European monetary system has resulted in a sounder, more realistic exchange rate structure, Mr Helmut Schlesinger, president of the Bundesbank claimed yesterday, Christopher Parkes writes from Frankfurt. It was a mistake to interpret events of the past few months as a dramatic setback for the EMS, he added.

It was also wrong to expect hard currency countries to direct their interest rate policies primarily towards maintaining exchange rate stability. That could lead the EMS into an 'inflationary cul de sac', he said in a lecture in Milan. He also spoke out against changing the rules of the exchange rate mechanism.

RHEINMETALL Berlin is taking a 63 per cent stake in Preh-Werke, the electronics group, for an undisclosed sum, Reuter reports from Dusseldorf.

Rheinmetall said the acquisition, which was subject to approval by the federal cartel office, would take effect retroactively from January 1.

Preh had sales of some DM220m (Dollars 132.5m) last year. It would complement Rheinmetall's automobile technology business led by Pierburg.

Correction (published 18th March 1993) appended to this article.

DEUTSCHE BABCOCK, the plant and engineering group, posted a 22 per cent increase in sales in the five months to the end of February but warned that overall profits for the year would be lower than expected.

Sales in the five months rose to DM2.5bn (Dollars 1.5bn), with the order backlog standing at DM8.8bn, a 22.3 per cent rise over the same period the previous year.

But Mr Heyo Schmiedeknecht, chief executive, warned that profit forecasts for the current year, which ends on September 30, would have to be 'revised downward'. He said profits would be 'closer to DM30m'. Earlier forecasts said profits could be as high as DM60m.

Mr Schmiedeknecht blamed the general recession in the industrial machines sector. He also said that core businesses in environmental technology continued to be in the red.

Net profits for the group for the 1992 fiscal year stood at DM76m however, up from DM32m the previous year. Sales for the same period reached DM7.6bn against DM7.3bn the year before.

Outstanding orders were higher than the previous year, standing at DM7.1bn against DM6.6bn. The company said it had won a contract worth DM240m to build a coal-fired plant in China.

The company said it still planned to float three subsidiaries on the German stock market this year. The plan was announced last year but had to be delayed because of the stock market turmoil, a company spokesman said.

The three subsidiaries are Balcke-Durr, Babcock-BGH and Schumag, specialists in mechanical engineering, plant and industrial technology.

The company will also pay a preferred dividend this year, but will omit to pay on common shares. Holders of preferred stock will receive DM9 a share, or three times the DM3 a share which was last paid out in 1988.

The company said it intended to turn 1.2m preferred shares into common stock this year and expected to pay a DM10 dividend for the fiscal year ending September 30 1994. The plans will be proposed to its shareholders' meeting on April 5.

CORRECTION

The Financial Times last Tuesday incorrectly reported the forecast dividend of Deutsche Babcock. The company expects to pay a dividend of DM5 (Dollars 3) on common stock for the fiscal year ending September 30 1994.

Correction (published 18th March 1993) appended to this article.

THE URGENT economic problems facing Italy are being shunted to one side as a result of the political turmoil.

The greatest burden is the extremely high level of government debt. Italy's debt mountain currently accounts for around 107 per cent of the country's gross domestic product, and the government's deficit forecast of L155,000bn (Pounds 67.6bn) in 1993 is believed to be on the conservative side.

Even if the referendum on electoral reform on April 18 paves the way for a more stable government, the reform process is likely to take several months. Meanwhile, hopes generated by the deficit reduction package agreed last autumn have faded, as the political storm clouds have cast doubt over its implementation.

Italy is trapped in a vicious circle: its problem is not only the size of its debt, but the enormous burden of interest payments, due to high interest rates.

Unlike the UK, Italy has not benefited from withdrawal from the European exchange rate mechanism by cutting interest rates because, without high interest rates, it will not be able to fund its government deficit. However, unless interest rates fall, servicing of the public debt will continue to eat up a large part of government revenues.

'If you took away the cost of servicing the debt mountain, Italy would actually be running a surplus,' said Mr Andrew Roberts, Italian bond analyst at UBS Phillips & Drew.

In 1990 10-year Italian government bonds yielded 4 percentage points more than German government bonds, the same margin as existed between the inflation rates of both economies, so real returns were comparable.

Currently, 10-year Italian bonds are yielding 12.85 per cent gross, 6.3 percentage points more than comparable German bond yields, despite the fact that inflation in Germany and Italy is now running at the same rate.

As a result of the political turmoil, Italian bonds have largely failed to benefit from the recent rally in European bond prices, even underperforming bond markets such as Spain, which is also suffering from economic problems.

'If interest rates were close to where they are in Germany, that would cut the total deficit of L160,000bn by about 50 per cent,' estimates Mr Steve Major, a bond analyst at Credit Lyonnais Securities. 'A 1 per cent cut in interest rates is worth about L15,000bn a year, while 1 per cent economic growth is worth about L10,000bn.'

Of course, while interest rates remain high, the prospects of economy recovery will also be depressed.

Italy's debt financing costs have been increased further by the fall in its credit ratings from the top level of triple-A to double A by Standard & Poor's and double-A 3 by Moody's, which is considering a further downgrade. Although these ratings apply only to the country's foreign currency debt, the impact of repeated downgradings has helped push up Italy's financing costs across the board.

Even though the cost of foreign borrowing has increased, the Italian government is likely to continue to borrow in foreign currencies, with lower interest rates, when such financing is available. Most recently, Italy raised DM5bn (Pounds 2.1bn) in the Eurobond market. However, the appetite of international investors for Italian paper will remain limited during the political upheaval. Meanwhile, a recent Ecu8bn (Pounds 6.6bn) loan by the European Community provides little more than temporary respite.

CORRECTION

STANDARD & Poor's has asked us to point out that it has never accorded a triple-A rating to Italy, as was implied in a report on March 16, 'Debt mountain still unclimbed amid turmoil'. It rated Italy double-A plus until March 2 1983, when the rating was lowered to double-A.

UNION Bank of Finland, the banking arm of Unitas, may incur up to FM150m (Dollars 24.6m) in credit losses if the debt restructuring of Polar-Yhtyma fails, Reuter reports from Helsinki.

RODAMCO Property, the investment fund, said its 1992-93 dividend would probably be slightly higher than its net per share earnings of Fl 3.19, Reuter reports from Rotterdam.

The company expects the dividend to be higher than the 1991/92 dividend of Fl 3.40.

FOKKER, the Dutch aircraft maker, said it was deferring publication of its 1992 results until April 2, pending official confirmation that the takeover by Deutsche Aerospace is going ahead, Reuter reports from Amsterdam.

Fokker had originally slated results for March 18.

The company, hard hit by the slump in orders for new airliners, is expected to announce in the next week or so a big cutback in production and jobs.

PIZZA HUT International has formed a 50-50 joint venture in France with the pizza delivery business Spizza 30, Reuter reports from Paris.

Pizza Hut said the venture, which is subject to French government approval, would cover more than 70 outlets and represent annual turnover of FFr350m (Dollars 62.27m). Pizza Hut International has 17 wholly-owned restaurants in France.

HAVING emerged from seven decades of communism, Mongolia has sent a group of parliamentarians to Tokyo to study whether the scandal-prone Japanese political system should be copied by a country whose voters are mostly nomadic herders.

The timing of the Mongolians' study tour has let its 10 members witness the indictment for tax evasion of Mr Shin Kanemaru, fallen from grace as the all-powerful fixer of Japanese politics and now in a Tokyo detention centre.

Mr Kanemaru's plight and the durability of the ruling Liberal Democratic party have fascinated officials from the Mongolian People's Revolutionary party, which recently renounced its communist past and likes to see itself as Mongolia's LDP. Playing to a pastoral audience during a recent election campaign, the MPRP promised '104 calves for every 100 cows'.

'We are very interested in the contradictions that created such widespread corruption,' said Mr Batsuuri, the party secretary. 'We are also very interested in the cleansing process that allows the Japanese political machine to go on working.'

Mongolian officials have taken note of the US political system and are interested in British and German traditions of democracy, but Mr Batsuuri said that Japan holds special appeal because it is an economic and democratic success story in an Asian setting.

The Revolutionary party describes itself as a 'social democratic' party and is one of 'nine or ten parties' in Mongolia: the number has fluctuated with short-lived coalitions and even shorter-lived parties sprouting each month since the country's democratisation began three years ago.

Mr Hulan, international secretary of the Mongolian National Democratic party, the largest opposition group in the Great Khural, the Mongolian parliament, said the delegation wants to examine privatisation methods and the Japanese tax system. The interest in tax has more to do with sliding scales than the alleged evasion of Mr Kanemaru. 'We have found Japanese politicians and bureaucrats to be very open about their problems,' Mr Hulan said.

The Mongolians are intrigued by the LDP's factions but amused that their disputes have nothing much to do with ideology. According to Mr Batsuuri, the Revolutionary party has factions but they have 'an ideological base' whereas, in Japan, 'factions are more tied to political personalities'.

Mr Batsuuri said that the Japanese experience does show the advantage of 'consensus-style politics'. The English word 'consensus' has recently entered the Mongolian vocabulary, as there was not much need for the concept after the country's communist revolution in 1921.

THE European Commission is considering fresh measures to stimulate growth because the response from EC member states remains inadequate, Mr Henning Christophersen, economics commissioner, said yesterday.

Mr Christophersen said after a meeting of EC finance ministers in Brussels that the Commission may put forward new ideas on promoting investment and job creation at the EC summit in Copenhagen in June. 'More needs to be done,' he said.

The Danish presidency of the EC has called for a 'jumbo' meeting of finance ministers from the Twelve and the six members of the European Free Trade Area on April 19 in Luxembourg. The aim is to hitch a pan-European effort to the US recovery in an effort to stem rising unemployment which is undermining public confidence in the EC.

But only five states - Spain, Germany, Ireland, Portugal, and Denmark - have put plans to the Commission to bolster the growth package. EC officials said yesterday that they looked forward to the UK contribution in today's budget.

At the meeting in Brussels, finance ministers hailed the long-awaited solidarity pact between the central government and Lander to finance German unification. 'It will pave the way for lower interest rates not just in Germany but also in the rest of the EC,' said Mr Christophersen. Lower German interest rates are vital if the EC is to attain the 3 per cent growth needed to halt unemployment, expected to rise to 17m in the EC this year.

The EC growth initiative combines a modest Community effort to promote lending to small and medium-sized companies through a new European investment fund and greater flexibility in European Investment Bank lending for infrastructure. But the main burden lies in supply-side measures by member states.

Separately, EC member states approved an ambitious convergence programme put forward by the Greek government.

Two 20kg bombs were defused in Bombay as India's commercial capital went back to work three days after a series of blasts killed 250 people.

THE WIFE of French president Francois Mitterrand, Mrs Danielle Mitterrand, said yesterday at least six Kurdish civilians were killed when Iranian aircraft bombed a French-run hospital on the Iran-Iraq border at the weekend, Reuter reports from Paris. Mrs Mitterrand, head of a privately-funded human rights group said more bodies were being sought at Raniya after air raids on Saturday and Sunday.

NORTH KOREA, facing strong international condemnation over its abrupt withdrawal from the nuclear Non-Proliferation Treaty, heightened the tension yesterday by declaring that war could break out 'at any time'.

However, the new South Korean government of President Kim Young-sam appeared to warn western allies not to react rashly to North Korea's decision to pull out of the NPT and drive Pyongyang into deeper isolation, which could provoke a military response.

Mr Ri Tcheul, North Korean ambassador to the United Nations in Geneva, said Pyongyang had ceased to grant visas to foreigners. He claimed that in the current US-South Korean 'Team Spirit' military exercises, bullets and shells were being fired 'towards our side'.

'If we respond to it, it will mean a war and this war cannot but be an all-out war,' Mr Ri said. 'That is why we are stressing that a hair-trigger situation has been created which could lead to an outbreak of war at any time.'

In Seoul, President Kim said: 'We never want North Korea to be isolated internationally nor do we want to inflict suffering on them.' He emphasised that a diplomatic solution should be found.

Foreign Minister Han Sung-joo told the National Assembly: 'We must prevent an armed conflict on the Korean peninsula at all costs. . . We don't want the situation to go to extremes because of the North Korean step.'

Mr Han said South Korea was seeking the help of China, which retains links with North Korea, to persuade Pyongyang to reverse its decision before the issue reaches the UN Security Council. Beijing has indicated it is displeased by the North Korean action.

In Washington, President Bill Clinton said he was disturbed by North Korea's withdrawal from the nuclear treaty, but hoped it would 'reconsider its position'.

The International Atomic Energy Agency in Vienna will hold an emergency meeting on Thursday to discuss North Korea's refusal to allow inspections of two sites suspected of being military nuclear facilities.

THE peacekeeping operation in Somalia that the United Nations is proposing to begin on May 1, replacing most of the US troops there, will cost Dollars 1.55bn (Pounds 1.1bn) in the initial 12-month period, according to an estimate given to the Security Council yesterday.

This is more than the official estimate of Dollars 1.41bn for Cambodia, now the most expensive such UN enterprise. However, the final Cambodian bill is expected to be nearer Dollars 2bn.

Mr Boutros Boutros Ghali, the UN secretary general, based the figures for Somalia on a military force of 20,000 with 8,000 additional logistical support staff, plus about 2,800 civilian personnel.

In his report he proposed that the General Assembly, which would have to approve the budget, declares this to be an expense of the entire organisation shared by all 180 member states, with the US the biggest contributor.

The cost of the military component of the operation was placed at Dollars 836m, with an additional Dollars 180m for air operations.

It would bring UN peacekeeping expenses for 13 operations this year to a total of Dollars 4.205bn, about four times the regular budget.

Somalia's feuding factions, clan elders, and religious leaders began yesterday what has been billed as a 'last chance' to salvage their wrecked nation, Reuter adds from Addis Ababa.

India's parliamentary opposition party, the Hindu nationalist Bharatiya Janata Party (BJP), yesterday accused Mr PV Narasimha Rao, prime minister, of a cover-up over a spate of bomb blasts in Bombay which killed 250 people and demanded his resignation, Reuter reports from New Delhi.

The African National Congress called yesterday for an immediate investigation into the deaths of detainees in South African police custody after another suspect was found dead, the ninth this year, Reuter reports from Johannesburg.

The suspected robber was found dead in a cell on Sunday after being arrested following a beating by security guards at a shopping centre near Johannesburg, police said.

Saudi Arabia has arrested the head of a radical Islamic group and three of his aides while they were in the kingdom on a Moslem pilgrimage, according to an Islamic Jihad official, Reuter reports from Amman.

Sheikh As'ad Bayyud al-Tamimi, leader of Islamic Jihad (Jerusalem), said Saudi security agents seized Mr Fayez al-Asswad, the leader of another Islamic Jihad splinter group called the Islamic Jihad Movement for the Liberation of Palestine (al-Aqsa Battalions), and three of his aides in Jeddah last week.

THE WIFE of French president Francois Mitterrand, Mrs Danielle Mitterrand, said yesterday at least six Kurdish civilians were killed and many hurt when Iranian aircraft bombed a French-run hospital on the Iran-Iraq border at the weekend, Reuter reports from Paris.

Mrs Mitterrand, head of the privately-funded human rights group France-Libertes, added that searches were under way for more bodies in the debris of the hospital at Raniya after air raids on Saturday and Sunday.

She said the hospital was on Iraqi soil, in an area controlled by the rebel Democratic Party of Iranian Kurdistan (PDKI) and inside the Western allies' air exclusion zone set up to protect Iraqi Kurds.

UNITED NATIONS troops preparing to take over command from the departing US Marines in Somalia in May face a near-impossible task.

With most of the country still at the mercy of warring clans and armed bandits, the 28,000-strong multinational force will be required to impose law and order in a political vacuum.

This is uncharted territory for the UN. The mandate of the new operation, code-named Unosom II, will have to go beyond the first small 400-strong task force, sent to monitor a non-existent ceasefire in Mogadishu, and even beyond the US-led military intervention in December, which secured a short breathing space for aid agencies to reach starving Somalis outside the capital.

Commanders of Unosom II are pressing to be given active rules of engagement to disarm warlords and bandits, who continue to loot and pillage with impunity. However, they are aware that military intervention is not a panacea for the inability of Somalis to start the painful process of national reconciliation after the traumas of dictatorship and a two-year civil war.

'If you pulled out the foreign troops and tanks, this place would fall apart,' says Gen Imtiaz Shaheen, the departing commander of Unosom I. 'Unless the Somalis begin to address their political and social problems, UN intervention will lead to a new form of colonisation.'

The absence of a Somali government has already created a de facto administration run by the UN and US task forces and the international aid agencies. A 'cabinet' meets every morning at 8am at the fortified Unosom compound in Mogadishu to discuss the security situation and plan relief work.

The collapse of the economy has also transformed the aid agencies into the country's main employers and benefactors. The UN's World Food Programme estimates that more than 2m Somalis, one third of the population, are dependent on relief agencies for food, water, health care, seeds for planting, and agricultural tools.

And while the presence of the US-led joint task force afforded military protection for immediate famine relief work, it has also created a new security problem for aid agencies. They have become soft targets for bandits who used to be employed in the protection racket business before the US Marines put an end to this lucrative source of income.

'Before the US Marines landed,' says Mr Rhodri Wynn-Pope, relief co-ordinator for southern Somalia with the international agency Care, 'we were being absolutely ripped off'. Care was paying Dollars 150,000 (Pounds 106,000) a month to security gangs to guard its food stocks at the port. Other 'contractors' had to be paid to guard food convoys, to negotiate road blocks, and to prevent food from being looted at its destination.

Military intervention broke the cycle of extortion, but created an underworld of armed thieves who have murdered three foreign aid workers in the past two months.

'We feel less secure now,' says Mr Ian MacLeod at Unicef. 'Aid agencies were not targets last year.' Aid workers, he explains, cannot venture outside their compounds without armed escorts. All agencies have imposed a 6pm curfew.

Aid agencies believe that Unosom II's mandate is doomed unless it tackles the problem of disarmament and rehabilitation simultaneously. 'The banditry and lawlessness in Somalia is a social problem,' says Mr Wynn-Pope. 'Warlords can talk their men back to the barracks, but bandits need to be given productive jobs to give up their guns.'

With Somalia's famine emergency over, the UN and aid agencies are beginning to concentrate on the daunting task of resettling almost 2.5m Somalis displaced by the civil war. Of these, 1m people are sitting in refugee camps outside Somalia. Neither the military nor the humanitarian agencies of the UN have ever undertaken a logistical task of this size.

Relief agencies, critical of the UN's performance in Somalia before the arrival of the US-led task force, fear that the country will slide back into anarchy with the pull-out of US troops.

'The US armed forces have a cohesive administrative and logistical command chain that the UN finds difficult to match,' says Mr Wynn-Pope, himself a former British army officer. 'US troops were seen as the tough guys with big guns, whereas the UN has little credibility with the Somalis.'

Mr Jamie McGoldrick, deputy field director of Save the Children Fund UK, goes further: 'The UN does not understand the scale or the complexity of the Somali problem. They think it is a six-month job, whereas it may take 10 to 15 years to restore peace to Somalia.'

AUSTRALIA'S re-elected Labor prime minister, Mr Paul Keating, yesterday ruled out a referendum on the abolition of the monarchy until after the next election, due in mid-1996.

Mr Keating said Labor remained convinced that Australians would not be 'masters of our own destiny' until the 205-year-old link with the British crown had been broken.

However, constitutional change would require a long period of public debate and negotiations with state governments, which would inevitably take several years.

Mr Keating hoped the process could be completed by 2001, the centenary of the federation of the continent's six British colonies, which many Australians regard as the foundation of modern Australia.

The prime minister's comments are in line with Labor's 12-year-old commitment to gradual progress towards the abolition of the monarchy, which was confirmed by the party's policymaking conference in 1991.

Mr Keating announced last month that Labor would appoint a committee to draw up plans for the transition to a republic, but the party did not seek to make the future of the monarchy an election issue.

Confirmation of the timetable for constitutional change will disappoint the republican movement, which gained strength last year after British criticism of Mr Keating's handling of a visit by the Queen.

Republicans will also criticise Mr Keating for backing down on a promise to remove the British union flag from the Australian flag. The prime minister said a change of flag would have to await the establishment of the republic.

In his first post-election press conference, Mr Keating moved to patch up relations with Britain. He said Mr John Major, the British prime minister, had congratulated him on Labor's election victory.

THE STATUE of Lenin still stands tall in central Hanoi. A few blocks away you can go jogging around the lake in what is still called Lenin Park, or sit on a bench and read stories in the Vietnamese Communist Party newspaper about fraternal visits by fellow-communists from neighbouring Laos.

Political scientists have noted with surprise how third world communist regimes, such as the one in Vietnam, have survived the collapse of their erstwhile patrons in the Soviet Union and eastern Europe.

Beneath the surface, however, Vietnamese politics is undergoing a change so profound that Vietnamese and foreign observers believe the ruling party will be obliged to abandon Marxism-Leninism, transform itself into a broad-based 'nationalist' front, and perhaps even permit opposition parties - all within a few years.

Party leaders, under Mr Do Muoi, their 76-year-old general secretary, nowadays barely mention communism or socialism in their speeches. The 2m-strong party, undermined by the collapse of international communism, finds it hard to recruit new members or to persuade existing members to attend meetings.

Since the late 1980s, Vietnam has in any case vigorously pursued a policy of doi moi or 'renovation', a code word for replacing socialist economics with capitalism, foreign investment and the tenets of the free market.

"When the Communist Party declared its acceptance of the free market economy, it meant that this party is not truly a communist party; they have dropped the communist system,' says Mr Phan Dinh Dieu, a mathematician in Hanoi whose views are tolerated by the party and who is regarded by foreign diplomats as a sort of licensed dissident. 'The result is that the party is transformed from a communist party into a party of power.'

Although it is widely accepted that few Vietnamese, even party members, still believe in communist ideology, the party has tried to smooth the way for traditionalists by suggesting lamely that sharp changes of direction can be explained by the addition of the thoughts of Ho Chi Minh (the communist father of Vietnamese independence in the 20th century) to the policy of standard Marxism.

'Our slogan is: 'Let the people become rich',' says Mr Tran Kien, deputy editor of the orthodox party newspaper Nhan Dan (The People). 'Now we carry out the market economy but regulated by socialism. It means we don't give up Marxism-Leninism but continue to carry out this ideology including Ho Chi Minh's teachings.'

The crucial question for Vietnam is whether the ruling party can manage a peaceful transformation of the political system by steering a path between resentful communist hardliners and Vietnamese liberals - especially those living in the US - who demand the rapid creation of a multi-party democracy.

Vietnam's economic performance is certainly helping the transition. Revised figures for gross national product show the economy grew by a 8.3 per cent last year, and the country's 70m inhabitants, although still desperately poor, are becoming visibly more prosperous.

Vietnamese officials say that Russia and other eastern European states made grave errors by implementing democratisation before economic reform, a mistake which they believe led to anarchy and a consequent inability to pursue any economic reform at all: it is hard to find diplomats in Hanoi who disagree with that analysis.

The flexibility of the Vietnamese Communist party, its genuine nationalist credentials (in contrast to some of the Moscow-installed parties of eastern Europe) and the absence of any organised opposition to the cautious liberalisation it is pursuing, also work in favour of peaceful political development. To counter the threat of opposition from Buddhist monks, the party is even said to have spread rumours that Mr Muoi is secretly a Buddhist himself and has been seen in a pagoda.

'They (the Communist party) know it's over, and they are even discussing among themselves the possibility of changing the name,' says one Ho Chi Minh City businessman who used to work for the US-backed South Vietnam government before the communist victory in 1975.

'They know and the people know it's over, but the idea of a collapse scares people. They are afraid of bloodshed and chaos, so even the most anti-communist people want slow change.'

But the party's attempts to manage a peaceful transition to a post-communist system will probably not go unchallenged. Unemployment, estimated at about 3.5m in urban areas, and widespread corruption in national and local government are both breeding resentment. Already Vietnamese who must now pay school fees can be heard complaining that the good aspects of communism - free education, for example - are being thrown out with the bad.

Party spokesmen are evasive when asked about the future, pointing to the fact that the 1992 constitution enshrines the party as 'the force leading the state and society', and falling back on the official policy of 'democratisation within the one-party system'.

Others are more forthright about the imminent demise of the dictatorship of the single party. Mr Dieu, the free-talking mathematician, believes that the possibility of alternative political parties could arise in as little as two or three years. A diplomat in Hanoi says bluntly: 'In five years the (Communist) party will be nationalist or social democrat.'

A member of the party, a retired senior civil servant, explains how the party allowed a discussion on political pluralism a year ago. 'Now it's finished; it was decided that it was not a good idea for Vietnam,' he says. 'But it's not forgotten.'

MR LI PENG, China's prime minister, yesterday demanded even quicker reform of the Chinese economy, which grew by almost 13 per cent last year, prompting concerns about the danger of overheating.

Speaking at the opening session of the National People's Congress, China's parliament, Mr Li outlined a sweeping programme of economic change aimed at strengthening market reforms and re-structuring the country's bloated state sector.

But in a clear reference to concerns about bottlenecks in the economy due to extremely rapid growth in the past year, he also urged that a 'basic balance' be struck between supply and demand.

China's economic planners fear renewed inflationary pressures such as those that undermined reforms in the 1980s. Indications of pressure on prices have already begun appearing in urban centres where double-digit inflation is being recorded.

Mr Li's remarks about the economy, which accounted for about one-fifth of a two-hour speech, amounted to a careful endorsement of reforms initiated by Mr Deng Xiaoping, China's supreme leader, who was not present at the NPC, even though he is a delegate.

Mr Li has tended to be identified with conservatives who have not shown boundless enthusiasm for Mr Deng's market-oriented reforms.

Mr Li also said that:

The economy, which surged 12.8 per cent last year, would continue to grow at 8 or 9 per cent annually, for the rest of the 1991-95 five-year plan. Growth had averaged 7.9 per cent for the past five years.

Continued growth of 8 per cent to 9 per cent would ensure that China achieved well ahead of schedule its target of quadrupling Gross National Product between 1980 and the year 2000.

China planned to slash its giant bureaucracy by about 25 per cent, and sharply reduce the number of government departments. Little detail was provided as to how this would be achieved.

China would give particular attention in the next five years to strengthening infrastructure, service industries and agriculture.

Mr Li, a cautious 64-year-old Soviet-trained technocrat who seems certain to be endorsed for another five-year term as premier, was unrepentant about the 1989 Tiananmen massacre in which hundreds of pro-democracy activists were shot by soldiers called in to quell the protests in and around the city's central square.

'Domestically, in late spring and early summer of 1989, a counter-revolutionary rebellion caused turmoil in Beijing,' he declared, adding that China had overcome 'numerous diff-iculties' in maintaining social and political stability and promoting economic and social development.

'Our great socialist motherland will stand firm as a rock in the east forever,' said Mr Li who is blamed by many Chinese for ordering the bloody crackdown on the pro-democracy protesters.

China's NPC will run for about two weeks and, apart from endorsing revised economic growth targets, will also approve the election of new leadership personnel, including the appointment of a president or head of state - a post expected to be filled by party boss, Mr Jiang Zeming.

THE New York Post yesterday filed for bankruptcy protection and failed to publish amid a newsroom mutiny over plans to sack about 270 people by the paper's latest potential publisher, Mr Abraham Hirschfeld.

According to a spokesman for Mr Peter Kalikow, the Post's current owner, yesterday's Chapter 11 joint filing was part of Mr Hirschfeld's acquisition agreement. The bankruptcy petition would freeze the Post's debts and help the paper continue operating.

Property investor Mr Hirschfeld was quoted as saying that he was more interested in the Post's Manhattan building than the paper itself.

BUSINESSES, commuters and home-owners along the eastern US seaboard struggled to return to normality yesterday after a winter storm left a trail of devastation in its wake and cost up to 115 lives.

In Florida, hard-hit by Hurricane Andrew last August, the storm system spawned about 50 tornadoes; in the New Jersey, Connecticut and New York state region around 300,000 homes were left without electricity and up to 17ins of snow were recorded.

In New York hundreds of motorists spent yesterday morning digging parked cars out from mountainous snow-drifts, many created by the weekend's snow-ploughs.

East Coast airports were crowded with people trying to get away after being stranded through the weekend, when the nation's air transport system suffered one of its worst-ever disruptions.

Major motorways were reopening yesterday, but many smaller roads remained blocked, with some travellers still snowbound.

Yesterday afternoon, A M Best, the US rating agency which specialises in the insurance sector, estimated that the storm produced about Dollars 800m in insured damages. However, some companies said it was too soon to attach a precise number to claims.

'We just don't know at this stage,' said Allstate, the large Illinois-based insurer. The American Insurance Association, whose property-claims division provides industry-wide estimates of catastrophe losses, also said it was only just beginning to receive reports from member firms.

A M Best suggested the bulk of damage would come in the southeastern states and central Florida. It estimated that the storm which hit the Northeast in December was probably more damaging to that region. The December storm caused more widespread flooding and coastal damage, and resulted in around Dollars 650m of insured claims.

The latest disaster comes after a run of heavy catastrophe losses for big US property-casualty insurers and will exasperate the financial pressures on the industry. The bomb blast under New York's World Trade Centre complex this month is estimated to have caused over Dollars 1bn in insured damages, while Hurricane Andrew produced a record-breaking Dollars 16bn-worth of claims.

In Florida, high winds battered grapefruit and orange crops, and frosts on Sunday and yesterday caused scattered damage to the fragile flowers that form next year's harvest, according to Mr Bobby McKown, of Florida Citrus Mutual, the state's largest growers' organisation. The damage was 'minor' in comparison to storms and freezes that devastated Florida citrus in the 1980s, he said.

Storms lift sugar price, Commodities Page

SELL-OFF dates and minimum prices for two state companies have been announced by Brazil's President Itamar Franco in a clear sign that the privatisation programme is to resume after a four-month delay.

Poliolefinas, a petrochemicals company, will be auctioned on Friday at the minimum price of Dollars 86.1m (Pounds 60.6m). The sale of the National Steel Company has been scheduled for April 2 with a minimum price of Dollars 1.6bn, despite complaints by its president that it has been undervalued.

The decision to go ahead with the sales represents a policy turnaround for Mr Franco, who suspended the programme in December after making frequent criticisms.

Only two weeks ago Mr Antonio Barros de Castro, who as head of the National Development Bank was responsible for the programme, resigned, accusing the president of deliberately blocking the process.

Last week Mr Eliseu Resende, the new finance minister, announced a 'deepening and acceleration' of the programme as one of his central policies. Ministry officials are even discussing with Mr Franco the sale of assets such as Vale do Rio Doce, the state mining company, and Telebras, the telecommunications company.

Mr Franco's change of heart was apparently motivated by the discovery of the privileges and high salaries enjoyed by the state sector and the considerable costs to the government. This year the state sector will cost Brazil an estimated Dollars 19bn and pay back a maximum of Dollars 10bn in taxes.

Mr Fernando Antonio Habda, a member of the economic policy team, said: 'The President wants to boost government credibility and raise money for social programmes and buying back debt. He now realises that the only option is privatisation.'

It is not yet clear what rules will govern the forthcoming sales to meet Mr Franco's concerns over issues such as the currency used in the auctions. Only 1 per cent of the Dollars 4bn raised in sell-offs by the former government was in cash, the rest mainly consisting of domestic debt swapped at par.

CANADA'S governing Conservatives, seeking to reinvigorate themselves before this year's general election, are shedding almost an entire generation of political veterans.

Since Prime Minister Brian Mulroney announced on February 24 he was resigning as party leader, a string of senior cabinet ministers have declined to enter the race to succeed him.

Several have also said they will retire from politics at the election, expected in September or October. The rash of departures is partly a recognition by the old guard that the Progressive Conservative party needs fresh faces at the top if it is to overcome deep voter hostility. They also reflect the commanding lead built up by Ms Kim Campbell, defence minister.

The latest Mulroney veterans to pull out of contention for the leadership are Mrs Barbara McDougall (external affairs), who is quitting politics, and Mr Bernard Valcourt (employment and immigration).

Other ministers who have dropped out of the race include Mr Don Mazankowski (deputy prime minister and finance), Mr Michael Wilson (trade and industry), and Mr Benoit Bouchard (health).

Mr Joe Clark, prime minister briefly in 1979-80 and who most recently spearheaded efforts to draw up a new constitution, also plans to leave politics.

Mr Mulroney's successor will be chosen at a convention in Ottawa on June 13. Senior party officials, including Mr Mulroney, are quietly encouraging members of the Tory caucus to throw their names into the ring, partly to generate public interest and partly to deflect unremitting scrutiny of Ms Campbell.

So far, only Mr Patrick Boyer, a respected but little-known backbencher, has formally announced his candidacy.

Two youthful cabinet ministers, Mr Perrin Beatty, who holds the communications portfolio, and Mr Jean Charest, the environment minister, are still expected to enter the race.

BRITISH PETROLEUM has agreed with Venezuela's state oil company PDVSA to bring the Pedernales oilfield in the Orinoco delta back into production. The field has been shut since 1985. BP believes it can bring it back into production soon with output rising to 20,000 b/d by 1997.

The agreement marks the first upstream involvement of a foreign oil company in Venezuela since 1976.

BRIERLEY Investments, the New Zealand-based hotels and investment group, is selling its 18.6 per cent stake in La Quinta Motor Inns, a US motel group, for NZDollars 112.5m (USDollars 59m).

Brierley paid NZDollars 82m for the stake. The sale is part of the investment group's strategy to withdraw from the US and reorientate itself on Asia, Australian and New Zealand.

SAO PAULO Alpargatas, Brazil's largest footwear and clothing manufacturer, suffered a loss of Dollars 83.2m last year, compared with a deficit of Dollars 37.7m the previous year.

Last year's sales of Dollars 479.2m were down by 11 per cent, with exports accounting for Dollars 33.3m.

'The loss was principally due to lower sales volumes and tighter margins, exacerbated by the adjustment of stocks to lower market values and costs related to company restructuring,' said Mr Diego J. Bush, Alpargatas chairman, in a stockholder statement.

Embratel, the state-controlled long-distance telecommunications company, announced profits of Dollars 240m in 1992, up from Dollars 153.3m in 1991.

The company invested Dollars 528m, 80 per cent of which was funded without borrowing. It plans Dollars 700m of new investment this year, including the laying of optic fibre transmission lines between some of Brazil's major cities. Usiminas, the steel producer privatised in 1991, announced profits of Dollars 123.4m in its first full year as a privately-owned company. The result was up by 95 per cent from 1991.

Olivetti's rights issue has the look of a company sticking its finger in the dyke. The L900bn raised has to be set against a declared loss last year of L650bn and provisions for restructuring over the last three years of L700bn. While the issue will wipe out net debt, computer prices are still falling, so further cost-cutting will surely be necessary. Even Olivetti has tacitly accepted that investors may not be keen by pitching the issue at the deepest discount legally allowed.

Larger and more august companies than Olivetti have been humbled by the collapse in computer manufacturing margins. While further price falls may be limited as worldwide capacity is cut, it is hard to see European companies becoming the lowest cost producers against Far Eastern competition. And with most of the value being added at the chip level by US firms, assemblers such as Olivetti will struggle. The future of European production is thus far from certain. Even Olivetti's alliance with DEC may not give it much muscle in the expanding Risc chip market. DEC, meanwhile, can contemplate its purchase of a 4 per cent stake last summer at L8,000 per share, which it can now add to by taking up its rights at L1,000 each.

STRONG SALES of Vimto, the fruit and herb drink, helped JN Nichols report an 8 per cent increase to Pounds 8.36m in pre-tax profits for 1992, on sales virtually unchanged at Pounds 47m.

The campaign to widen the appeal of Vimto, traditionally the favourite soft drink of Northern non-drinkers, and an increased contribution from Nichols Foods helped to offset a decline in contract canning and export sales.

The company said the Pounds 1m decline in exports, a significant proportion of which are targeted at the Middle Eastern market where Vimto is often used to break the Ramadan fast, had been due to the timing of deliveries. Ramadan had fallen later than the previous year.

The group's main export markets continued to grow, however.

In the UK, bad weather last summer had had an adverse affect on sales in the latter half of the year. Nevertheless, Vimto showed a strong improvement and the can vending business helped to increase sales.

The final dividend is increased by 10 per cent to 8.5p, for a total 1.3p higher at 13.6p. Earnings were ahead from 32.6p to 35.4p.