THE GOVERNMENT could allow people to 'contract out' of the basic state pension without breaking its manifesto pledges, the free-market Adam Smith Institute says today, Ralph Atkins writes.

Setting out plans for extending the government's privatisation programme, the institute says the state pension is poor value for many people.

It also calls for greater choice when council services are privatised. The institute says, as an example, that contracts for refuse collection could be given to two companies - with each paid according to how many local people chose their service.

Citizens, not just local authorities, would then be making decisions about services, the think tank argues.

The report comes as the government embarks on its wide-ranging review of public spending. Mr Peter Lilley, social security secretary, has said no areas are sacred, but has promised to honour 1992 election pledges.

On pensions the Tory manifesto said: 'The basic state retirement pension will remain the foundation for retirement.' But the institute says the basic state pension could remain for those who did not want to provide their own, so its proposals would 'in no way contradict the government's manifesto pledge'.

THE CHIEF executive of Mirror Group Newspapers, Mr David Montgomery, last night faced a storm of criticism from Labour MPs following this week's resignation from the Daily Mirror of Mr Alastair Campbell, its political editor.

Mr Neil Kinnock and Mr Roy Hattersley, the former leader and deputy leader of the party, tabled a Commons motion deploring the actions which 'forced' his departure.

As senior Labour officials voiced fears that Mr Montgomery was set on abandoning MGN's traditional support for Labour, more than 150 of the party's MPs signed the motion.

Noting that other changes instituted by Mr Montgomery had jeopardised the newspaper's 'traditionally high standards of journalism' and 'its independence from Conservative politics', the MPs said they had no confidence in him as chief executive.

Mr Montgomery insisted that the paper had no plans to change its traditional allegiance to Labour.

But officials close to Mr John Smith, the Labour leader, said that there were now severe strains between Mr Montgomery and Lord Hollick, the Labour peer and MGN board member behind his orginal appointment last October.

THE government's policy of increasing the involvement of private finance in public projects is a long-term supply-side reform and not 'creative accounting', Mr Stephen Dorrell, financial secretary to the Treasury, said yesterday.

He told the Commons Treasury and Civil Service committee that the plans were a part of a long-term policy shift which aimed to see the government as an enabler, motivator and purchaser - rather than supplier - of services. Involving the private sector more in public projects was motivated by a wish to bring private-sector management skills and capital to the public sector.

He rejected suggestions from MPs that the scheme was intended primarily to ease the public sector borrowing requirement, which the government has forecast will reach Pounds 37bn in 1992-93.

Mr Dorrell said the new policy should increase overall infrastructure investment because investment by the private sector in public projects would no longer lead to corresponding reductions in government spending plans.

The minister said Mr Kingsley Jones, a Treasury official, has been appointed to co-ordinate the initiative and said companies with questions about the scheme should contact him at the Treasury.

Mr Dorrell also announced revised guidance procedures to increase the amount of contracting out of energy management by the public sector.

A 'FACT-FINDING' mission to Northern Ireland by a US representative would be acceptable to the government, Downing Street has indicated, ahead of Mr John Major's meeting with President Bill Clinton next week. But ministers remain opposed to a 'peace envoy' as suggested by Mr Clinton.

THE FINAL chapter in the parliamentary saga of Mr Norman Lamont's legal bill was written yesterday as the Commons public accounts committee called for a review of government rules on using public funds for ministers' personal expenses.

The cross-party spending watchdog regretted that the Treasury had not highlighted in its accounts the decision to pay Pounds 4,700 towards the Pounds 22,000 costs of evicting an unwanted tenant from the chancellor's private home.

Treasury officials said in evidence to the committee that the decision was so clearly within the rules that there was no particular need to raise it.

But, drawing on officials' own words, the committee said: 'The fact that the decision was given 'exceptionally rigorous high-level consideration', and the fact that Sir Terence Burns (the Treasury permanent secretary) acknowledged that others may have made a different decision, suggests that to follow Treasury guidance to err on the side of notation rather than of omission would have been the wiser course of action'.

The MPs recommend that the review of the rules should produce clear guidance to officials and ministers about the use and disclosure of public resources for ministers' non-official expenses, and emphasise the presumption against using public funds.

While the committee makes clear that it is not concerned with Mr Lamont's conduct, it notes in the report that it 'remains for ministers to decide whether or not to allow such payments to be made'.

The report comes the day after Mr John Gummer, the agriculture minister, was rebuked by another Commons committee for not declaring work on his garden that was paid by a food company.

PRESIDENT Bill Clinton has had to execute an embarrassing climbdown in his claim that foreign-owned companies could be made to pay billions of dollars more in US taxes.

In his campaign manifesto, Mr Clinton said that making foreign companies pay their fair share of taxes by stricter enforcement of the transfer pricing rules that govern transactions between subsidiaries and their parents would bring in Dollars 45bn in four years from 1993 to 1996 - the second largest source of savings identified in the document.

This number was less extravagant than the estimate of Dollars 30bn a year that commonly circulates in congressional subcommittees, but it was still widely ridiculed.

Last night's economic package, more modestly, estimates only Dollars 1.8bn over the same 1993-96 period, or a total of Dollars 3.8bn over a longer six-year period from an initiative to enhance penalties on transfer pricing abuses. Even this estimate appears to involve a good deal of guesswork; this line contains far the roundest numbers in the entire Treasury document detailing the new tax increases.

A Treasury official said the tighter enforcement would involve penalties that may be levied when a company is found to have cheated on transfer pricing arrangements. Companies must have contemporaneous documents justifying their pricing structure, instead of being able to construct post hoc justifications.

At the same time, the Treasury plans to increase compliance with transfer pricing rules by spending Dollars 38m on more tax inspectors and doubling the frequency with which foreign companies are audited, and an official said the additional revenue from this enforcement drive, while as yet uncalculated, would be large.

A second measure in the Clinton package will also affect some foreign companies: earnings stripping rules, designed to prevent companies from converting taxable dividends into tax deductible debt repayments by lending money to their subsidiaries for capital, will be tightened to cover bank loans guaranteed by the parent company. The administration estimates this could bring in Dollars 579m over the 1993-98 period.

More significant revenue, however, could come from measures aimed at US multinationals with foreign subsidiaries. By reforming the foreign tax credit for oil multinationals, including royalties in the passive basket of the foreign tax credit, and stopping deferral for excessive accumulated foreign earnings, the Treasury hopes to reap Dollars 4.3bn in the 1993-98 period.

A PROMINENT feature of President Clinton's economic plan was a set of 'burden' tables showing that affluent families will bear the lion's share of tax increases.

Families with taxable incomes of Dollars 140,000 or more will face a new top income tax rate of 36 per cent, against 31 per cent under President Bush. A 10 per cent surcharge will be applied to taxable incomes in excess of Dollars 250,000, resulting in an effective top marginal rate of almost 40 per cent.

These measures are expected to raise an extra Dollars 27.7bn in fiscal 1994 (which begins this September) and a total of Dollars 126.3bn by fiscal 1998.

Officials said the new 36 per cent band would apply only to the top 1-2 per cent of taxpayers; 85 per cent of those affected by the surcharge would have assets in excess of Dollars 1m, making it effectively a levy on millionaires.

Affluent families will be hit by a range of other 'fairness' measures. Employee and employer contributions towards Medicare, the federal scheme for the elderly, will be levied on all earnings, rather than only earnings up to a limit of Dollars 135,000 a year. This will raise Dollars 2.7bn next fiscal year and a total of Dollars 29.2bn by fiscal 1998.

Executive pay in excess of Dollars 1m a year will no longer be tax deductible. And only 50 per cent, rather than 80 per cent of the cost of business meals and entertainment, will be tax deductible under the plan. These measures will raise nearly Dollars 17bn by fiscal 1998.

The affluent elderly will also have to pay higher taxes on their social security (federal pension) benefits.

If enacted such measures will have a significant impact on the distribution of the US tax burden. For families with annual incomes of Dollars 200,000 or more federal taxes as a percentage of pre-tax incomes will rise 2.9 percentage points to 23.8 per cent. For families with incomes of Dollars 100,000 a year or more, the ratio will rise 0.9 points to 21.8 per cent.

For the poorest families, with incomes of Dollars 10,000 or less, federal taxes will decline 0.2 percentage points as a percentage of pre-tax incomes to 7.6 per cent. Increases for families with incomes of Dollars 30,000 or less will be negligible.

If the impact of spending changes, which favour low- income groups, is taken into account the plan is skewed even more decisively in favour of poor families. If nothing else Mr Clinton could yesterday claim to have delivered on his campaign promise to reverse the fiscal policies of the 1980s which had favoured affluent Americans.

WHEN the Brazilian President Itamar Franco assumed office last year one of his first complaints was that the use of an elephant to symbolise the state in the campaign for privatisation was 'derogatory' to such a valiant sector. Not only did he suspend the elephant but the entire privatisation programme.

Mr Franco's rose-tinted view has since been clouded by the discovery of the sector's drain on the exchequer. The state sector now holds almost as much debt as Brazil's entire foreign debt. Its arrears on taxes and social security contributions amount to Dollars 8.7bn (Pounds 6.1bn) - more than the government is struggling to raise through its proposed fiscal reform. Already this year the central bank has provided Dollars 400m to enable state companies to keep up payments to international creditors.

Saying he feels 'betrayed' by state companies and 'their intolerable privileges', this week Mr Franco ordered an investigation into their activities and slashed salaries of directors by as much as half. Legislation is awaiting Senate approval to allow parastatals to be declared bankrupt and Mr Franco says he may review the monopoly status of some.

As a result of an intensive state-led development programme begun in the 1950s to make the country self-sufficient, Brazil has 159 state companies involved in everything from gold-mining, oil, aerospace and shipping to manufacturing of computers, steel and fertilisers, and employing 730,000 workers.

This year state companies are projected to lose Dollars 5bn through waste and inefficiency, spend Dollars 6bn servicing debt of Dollars 93.3bn, and take out of the budget Dollars 8bn for investment. In return they will pay back Dollars 10bn in taxes, leaving a net drain of Dollars 9bn. Mr Joel Korn, president of Bank of America in Brazil, says 'this is the real cause of inflation'.

While Mr Franco may have ideological objections to selling off these companies, he wants to stop them bleeding the economy. To the alarm of the company presidents, he is refusing to authorise the traditional monthly inflation-plus adjustments in tariffs without cost plans. Even Petrobras, the usually sacrosanct state oil company, is to undergo an audit.

Unravelling the finances of state companies is not an easy task. Not only are their costs often a mystery but a huge web has been created of interlinking debts.

According to Economy Ministry figures, the champion debtor is the electrical sector. Eletrobras, the holding company with assets of Dollars 36bn, owes Dollars 59.2bn including the debt on Itaipu, the world's largest hydroelectric project, and has arrears of Dollars 12.4bn against projected profits this year of just Dollars 100m-Dollars 500m.

More than half the state sector debt is in foreign and domestic bank loans and multilateral financing. A further Dollars 18.9bn is in debentures issued over the last decade to capitalise holdings. Another Dollars 2.9bn is owed to suppliers and construction groups.

Many state companies would have been declared bankrupt long ago had they been in private hands and, if the new legislation is approved, several may not be long for this world. Favourite candidates are Cosipa, a steel mill, which has overdue debt of Dollars 1.1bn - equal to its yearly revenue and needs Dollars 300m to pay suppliers, and Lloyd, the paralysed state shipping company, which retains 1,100 workers for just two ships and last year lost Dollars 65m.

Seven out of 10 parastatals are inefficient, according to Mr Jose Manoel Goncalves de Oliveira who recently co-ordinated a 1,400-page study on Brazil's infrastructure for the Electrical Association. In the energy sector, for example, Brazil needs five times as many people as Canada to produce three times less energy.

The telephone service, it says, is 'falling from third to fourth world levels' with 24 out of 100 calls not connecting. Brazilian ports are the least efficient in the world with costs of Dollars 15 to load a tonne of soya compared to Dollars 2 in the US and Dollars 4 in neighbouring Argentina. 'How can a country think about being competitive internationally with these conditions?' asks Mr Goncalves.

However, state companies' directors claim that, had they not been state-run, they would not be in this situation. They point out that successive governments have kept public sector tariffs artificially low to suppress inflation and have constantly meddled with directors for political or even corrupt ends.

Petrobras has had seven presidents in the last three years. Directors of the National Steel Company complain that the bureaucratic straitjacket of the state has denied them the flexibility to compete with recently privatised Usiminas. The government cash crisis has also blocked desperately needed investment.

Privatisation would seem the obvious answer, but for Mr Franco's belief that there is something inherently wrong with selling off state assets. His decree on privatisation issued last month gave him imperial powers over the process and investors have not been optimistic that the programme will restart as promised next month.

However, there are signs Mr Franco may be changing his mind. He said this week: 'The concept of a state enterprise that I defend is one that serves the interests of the state and not of interest groups.'

He left little doubt on which category he thinks Brazilian parastatals belong to.

CANADIAN economists have warned that foreign investors are nearing the limit of their willingness to satisfy increasingly heavy borrowing by the federal government and 10 provinces.

In one of the biggest recent borrowing onslaughts, Ottawa and the provinces have flooded domestic and international markets with new debt issues to finance soaring budget deficits.

Growing Canadian public-sector debt has been reflected in a widening gap between Canadian and US interest rates, and bond yields, in the last six months and, more recently, in increased volatility of the Canadian dollar.

The risks were outlined in a report by the CD Howe Institute of Toronto, a leading economic think-tank, following a recent seminar attended by 20 economists, most of them employed by banks and securities firms.

Mr Ed Neufeld, chief economist of the Royal Bank of Canada, said that finance ministers should distinguish between short-term cyclical budget deficits and 'structural issues'.

The economists urged measures to improve fiscal imbalances, ranging from deep cuts in transfer payments to the provinces to the elimination of overlapping government services. However, they had little enthusiasm for large tax increases.

The warning coincides with growing political awareness of the risks posed by fast-growing budget deficits, especially in the provinces. Tax increases and public-spending cuts are expected to be a feature of the spring budget season.

The provinces raised more than CDollars 10bn (Pounds 5.6bn) in debt in January, including a CDollars 3bn global Euromarkets issue by Ontario. Quebec earlier this week raised CDollars 1.4bn in its first global offering. The recession has badly dented tax revenues at all levels of government and put heavier demands on Canada's generous social security system.

Mr Donald Mazankowksi, finance minister, last December revised the federal government's 1992-1993 budget deficit upwards from CDollars 27.5bn to CDollars 34.4bn. Ontario's shortfall is now projected at almost CDollars 11bn, three times the level two years ago.

The combined debt of Ottawa and the provinces has soared from CDollars 50bn, or 29 per cent of gross domestic product, in 1975, to CDollars 665bn, or 96 per cent of GDP. Canada's foreign debt-service burden relative to the size of its economy is now higher than that of Chile and Venezuela, and approaching the levels of Brazil and Mexico.

Mr Peter Nicholson, of Bank of Nova Scotia, said: 'There is a limit for tolerance of even greater Canadian debt in foreign markets. This limit is likely to be reached suddenly and without a lot of warning.' Other participants at the seminar said the federal election later this year or political uncertainty in Quebec might reduce appetite for Canadian loans.

But a government-finance specialist at one Toronto securities firm said yesterday that there was no sign yet of foreigners shunning Canadian government debt issues.

Mr Lou Guttman, chairman of the New York Mercantile Exchange, and his former partner, Mr Harold Magid, were named yesterday in an administrative complaint by the enforcement division of the Commodity Futures Trading Commission, the futures industry regulator, writes Laurie Morse in Chicago.

The charges are associated with allegedly pre-arranged sugar options trades made on the New York Coffee, Sugar and Cocoa Exchange in 1989.

Mr Guttman stepped down from Nymex chairmanship in July when the CFTC notified him civil charges were pending. When no action had been taken by December, he resumed his post. He is campaigning for a third term.

US HOUSING starts fell 7.2 per cent in January to the lowest level in six months, the government said yesterday, AP reports from Washington.

Analysts attributed the decline in part to bad weather, but most agreed that housing growth was likely to slow from last year's pace. Construction advanced 18.4 per cent in 1992.

Starts rose only in the south in January. The Commerce Department said construction of new single-family homes and apartments totalled 1.19m at a seasonally adjusted annual rate in January, down from 1.29m a month earlier.

A NEW energy tax levied on the thermal content of fuels will raise net revenues estimated at Dollars 22bn a year once it is fully in force, US Treasury officials said yesterday.

The tax will be imposed at a rate of 25.7 cents per million British thermal units on coal, nuclear energy and gas, and at a much steeper rate of 59.9 cents per million BTUs on oil.

The administration plans to phase in the tax in three stages, charging one third of the full rate from July 1, 1994, two thirds a year later, and the full rate from July 1, 1996.

When fully phased in, the tax is expected to add 7.5 cents to the price of a gallon of petrol, 26.25 cents to a thousand cubic feet of natural gas, and Dollars 2.25 to the monthly electricity bill of an average household.

Environmentalist groups greeted the details of the new tax with cautious approval. While many groups have favoured much heavier taxes, or a tax based directly on carbon content, to discourage consumption of polluting fuels, some analysts noted that a BTU tax has an advantage over an ad valorem tax in environmental terms because it hits coal, which is cheaper per BTU than other fossil fuels, more than some cleaner fuels.

At the same time, by imposing a higher rate on oil President Bill Clinton could have some effect on fuel consumption in motor vehicles.

The new tax, which will be collected at the pipeline, mine or refinery, is expected to raise the price of natural gas by 13.5 per cent, of coal by 18 per cent and of oil by 23.6 per cent.

Renewable energy sources will for the most part be excluded from the tax, although hydroelectric power will be taxed at the average cost of the fossil fuels used by power generators.

Some groups have argued against the energy tax on the grounds that it hurts lower income families, but the administration has tried to offset the impact of the energy tax with increased spending on food stamps and a programme to subsidise heating bills for low income families, as well as by an expanded earned income tax credit, again for low income families.

Officials calculate that without these offsets, a family with an income of Dollars 25,000 a year would spend Dollars 105 a year more for its energy bills, while a family earning Dollars 40,000 would pay Dollars 118 and a family earning Dollars 60,000 would pay Dollars 133.

One senior administration official said this would only be a modest burden on the average American, contrasting the extra cost of around Dollars 10 a month with the cut in interest rates that has taken place since the election. That has already yielded savings of Dollars 60 a month on a Dollars 100,000 mortgage.

Mr Clinton's decision to impose a broad energy tax could have international implications. Last year, there was some discussion of an international agreement to levy a carbon tax, but the EC, Japan and the US were unwilling to commit themselves alone for fear of creating a competitive disadvantage for their economies.

But Sir Leon Brittan, EC trade commissioner, said yesterday the US decision would make it easier for EC member states to adopt an energy tax.

SPENDING has become a dirty word in Washington. Investment, however, carries far more positive connotations, especially for a new administration convinced that one of the worst US structural defects is the investment gap, as measured against the record of its main foreign competitors.

Matched against that, the administration has sought to come up with credible attempts to cut spending. The principal targets outlined yesterday are four-year savings of Dollars 91bn on 'entitlements' (social programmes), Dollars 76bn on defence and about Dollars 50bn on other discretionary budgetary items.

President Bill Clinton's proposals divide investment into the short term, to help create an additional 500,000 permanent and temporary jobs, and the longer haul, intended to ensure that the human capital in society gets its due.

Just over Dollars 16bn in extra spending is planned for the current year, mostly on the public works side. Included, for example, are an extra Dollars 3bn in road building and another Dollars 1bn on other forms of transport, Dollars 2.5bn in block grants to local communities, Dollars 1bn in summer youth employment programmes, Dollars 3bn in federal loan authority, Dollars 300m for the mass immunisation programme, and Dollars 845m for waste water clean-up.

All these proposals build on existing programmes and, according to senior officials, fall within the discretionary spending totals for the budget of the current fiscal year, ending in September.

The four-year Dollars 160bn investment plan is much more ambitious in scope and in its potential demands on the public purse, assuming it meets congressional approval.

Some Dollars 48bn is earmarked for infrastructural development, including Dollars 17bn on technology, involving more funding for the National Science Foundation and assorted government research and development programmes, Dollars 9.6bn for housing and community initiatives such as enterprise zones, Dollars 8.4bn on transport, embracing high speed rail and new investments in mass transit, and Dollars 8bn on the environment.

What is known as 'lifelong learning' is to get Dollars 37.8bn over the four years, with principal sums going to education reform, worker training, Mr Clinton's youth national service programmes and continued and full funding of the Head Start programme for disadvantaged children.

Another Dollars 25bn is destined for 'rewarding work', mostly concerning the government safety net such as the earned income tax credit and extended unemployment compensation, but also including extra funds to combat crime.

A further Dollars 26bn is planned for expansion of existing health care programmes, though this sum is separate from whatever recommendations emerge from the task force on health care reforms being chaired by Mrs Hillary Clinton.

Finally, Dollars 24bn is targeted for investment incentives that increase productivity and jobs. Most of this sum is made up of assorted capital gains tax relief, and extended investment tax credits.

Many of the above causes are dear to Democrat hearts, though the great emphasis on private sector investment more reflects President Clinton's thinking. However, there must be a heavy probability that the mix of investment plans proposed by the administration will change as Congress goes to work.

One of the most controversial measures is a proposal to cancel the ambitious Freedom space station to clear the way for a smaller and cheaper station.

Freedom was first proposed 10 years ago as an Dollars 8bn project; its cost is now estimated at Dollars 30bn, but many critics charge that its real lifetime cost could be as much as Dollars 180bn. While many scientists believe the station has little scientific use, the National Aeronautics and Space Administration has spread the project's construction work around a great many congressional districts.

Because of termination costs, Mr Clinton will save little money in the short term, but could achieve significant savings in the longer term.

THE RESCUE of the New York Post, the smallest and most sensational of New York's three big tabloids, could be in jeopardy following a legal victory by the Securities and Exchange Commission (SEC) against a company con-trolled by Mr Steve Hoffenberg, the newspaper's prospective buyer.

Towers Financial, Mr Hoffenberg's debt collection and factoring business, has consented to the SEC's demand for control over the company; it has agreed to the appointment of a trustee and to limits on expenditures as requested in a lawsuit by the SEC.

The SEC alleged that Mr Hoffenberg's company had fraudulently sold Dollars 215m (Pounds 151.4m) of notes and overstated its assets by more than double. Towers Financial was described by the SEC as insolvent.

Mr Enrique Iglesias, president of the Inter-American Development Bank, has been re-elected by the board of governors for a second five-year term, Nancy Dunne writes from Washington. Mr Iglesias, who is widely respected, is presiding over a Dollars 22.5bn (Pounds 15.8bn) lending programme for 1990-1993 and record levels of bank lending.

Venezuela has used troops and police to put down rioting and looting in two of its provincial capitals, writes Joseph Mann from Caracas.

Crowds took to the streets in the eastern city of Cumana and in Barinas, in western Venezuela, on Tuesday. They were provoked by a Supreme Court decision to suspend 'temporarily' a repeat of gubernatorial elections, scheduled for March 14. The results of the original elections, on December 6 last year, were inconclusive.

The army, national guard, and marines took control of the two cities, where one person was reported killed, scores injured and several hundred arrested. Clashes continued in Cumana yesterday.

A new element of volatility has entered Canadian politics in the run-up to this year's general election with a rapid erosion of support for the once fast-growing Reform party, writes Bernard Simon.

Reform's populist, right-of-centre policies had been expected to drain considerable support from the ruling Progressive Conservative party, especially in the western provinces of Alberta and British Columbia.

Many political observers had predicted that the most likely outcome of the election, expected in early autumn, would be a minority Conservative government supported by as many as 30 Reform MPs. Reform currently has only one MP.

But according to the latest Angus Reid/Southam poll, support for Reform in Alberta, its stronghold, has halved in the past year to 21 per cent, with a five-point decline in January.

An Angus Reid official said yesterday that many voters, nervous at the prospect of a hung parliament, appear to be returning to the three traditional parties - the Conservatives, Liberals and New Democratic party. The Liberals, the main opposition party, remain well ahead, with 46 per head of the decided vote, against 18 per cent for the Conservatives.

JAPAN'S ruling Liberal Democratic Party yesterday strongly hinted that an income tax cut would not be included in a special package to stimulate the economy, expected to be announced this spring.

Mr Hiroshi Mitsuzuka, chairman of the LDP's policy affairs research council who is co-ordinating the party's plans, said an income tax cut would be discussed only after a package of stimulative measures has been agreed.

Mr Mitzusuka said the LDP would push ahead with plans for housing-related tax concessions which would be designed to maintain the momentum of the rally in house building which has recently shown signs of running out of steam.

The party would also consider proposals for one-off tax rebates, rather than cuts in tax rates, Mr Mitsuzuka said. He indicated that the outlines of a special economic package would be announced as early as April 1, immediately after the 1993 budget is due to be formally agreed.

Mr Mitsuzuka's comments are the clearest sign yet that the LDP may be backing away from plans for a straight income tax cut, which is strongly opposed by the powerful ministry of finance.

The finance ministry believes a tax cut would deliver only a negligible boost to consumption, while at the same time risking starting a long-term deterioration in the country's public finances.

The timing of further moves to stimulate Japan's flagging economy has been complicated because the Y10,700bn (Pounds 62bn) special package announced last year is still working its way into the country's economy. However, a recent official survey found that only 5 per cent of companies had felt any benefits from the package.

About a third of the public works projects including in last year's packages are unlikely to be started until later this year.

Japan's industrial production fell 1.3 per cent in December from the previous month, according to revised figures issued by the ministry of trade and industry. The original figures reported a 1 per cent fall.

LAST week British Petroleum, Caltex and the local Singapore Petroleum Company announced a SDollars 1.3bn (Dollars 850m) refinery project in Singapore. This is significant, not just in dollar terms, since the centre of the world oil market is gravitating towards Asia.

The project was the latest in a long list of petroleum-related investments by Shell, Mobil, Exxon and others in Singapore. Even at a time when its balance sheet is dipping into the red, BP is investing about SDollars 380m in this new facility.

In the west, oil refining and related activities are either stagnating or declining. In Asia, and particularly in Singapore, they are growing rapidly.

Singapore has become the world's third-biggest refining centre after Rotterdam and Houston. It now has a refining capacity of slightly over 1m b/d, supplying almost 40 per cent of Asia's imports of refined products. Singapore has also become - along with London and New York - one of the world's three main oil trading centres.

Singapore's geographical position, at the centre of the supply chain from the Middle East to Asia's main markets in Japan and South Korea, is one reason for its growth as a petroleum centre but it also benefits from the rapidly developing economies of southeast Asia.

Oil consumption in the Asia region is now rising by nearly 4 per cent per year compared with a world average growth of about 0.5 per cent.

While Asia's own oil resources have been developed, the region's demand far outstrips supply. Only about 44 per cent of Asia's oil needs come from the region: the rest is imported, mainly from the Middle East.

New oil fields being developed in the region are unlikely to alter this trend. By the end of the decade, oil analysts estimate that the Asia region will be consuming nearly 20m b/d compared with 13.8m b/d at present.

China and Indonesia, both big regional producers, expect to become net importers by the end of the decade. The Gulf war, as well as Asia's fast economic growth, encouraged the expansion and upgrading programme in Singapore.

Kuwait had been supplying large amounts of refined products, particularly gas oil and naphtha, to Asia. Suddenly there were shortages. The war underlined the fact that Asia had not been investing enough in refineries.

Policies quickly changed: Japan brought mothballed refineries back into production, increasing refining capacity to nearly 5m b/d, and South Korea plans to double its refining capacity to 1.6m b/d.

But other less financially endowed countries baulk at the idea of spending precious financial resources on refineries. A relatively unsophisticated facility with a capacity of 100,000 b/d now costs between Dollars 1bn and Dollars 1.5bn.

In 1989 Indonesia announced plans to build nine more oil refineries. So far only one new refinery is under construction: expansion and upgrading work at existing plants was recently put on hold due to the introduction of tight government borrowing policies.

Singapore is in the fortunate position of having an established refining industry: it is far cheaper to expand and upgrade existing plants than build new ones. The oil majors have all been refining in Singapore for several years. Shell now has its largest refinery world-wide on the island.

While the upgrading process has been heavily capital intensive, it has led to cost efficiencies: Singapore is now regarded as among the world's most efficient refining centres and is attracting business from producer countries, most recently Kuwait and Bahrain.

A petrochemical industry has developed alongside Singapore's refining sector. Du Pont, Mobil, GE plastics and others are investing more than SDollars 2bn in a variety of projects. A landfill project is planned which will unite five islands off the main island of Singapore into a SDollars 4bn petrochemical complex.

Singapore interests have teamed up with Indonesian concerns to build what will be one of the world's biggest oil storage depots on the Indonesian island of Karimum, nearby to Singapore.

In time both Japan and China could become refining competitors of Singapore. But Japan's refining costs are still more than 10 per cent above those of Singapore, while China's domestic demand for refined products is likely to blunt any growth in exports. Thailand, which has embarked on a large refinery building programme, could provide some additional competition. But for now Singapore is sitting pretty.

THE OPENING of the beef market has put more meat on Japanese tables, but an estimated 57 per cent of consumers are concerned about the safety standards of foreign producers, according to a study by the Economic Planning Agency.

When a strict quota system was relaxed in April 1991, after several years of difficult negotiations between Washington and Tokyo, there was a presumption in both countries that the lower prices of the imported product would encourage Japanese to eat more beef.

But the EPA's survey found that only 23 per cent of Japanese reckon that they consume more imported beef than before liberalisation and 12 per cent now eat less imported beef, even though it is 20 to 30 per cent cheaper than comparable domestic cuts.

The reason for the reluctance to buy more imported beef, most of which comes from Australia and the US, appears to be the success of campaigns run by Japanese farmers' groups to discredit the safety of imported meat.

From a video showing a family becoming ill after consuming imported meat to a flood of leaflets on food safety, the farmers' groups and affiliated consumer groups have created significant public concern about the use of growth hormones and additives.

Only 6 per cent of those surveyed considered that imported beef is tastier than the home grown version, while 48 per cent concluded politely that the foreign meat 'does not compare unfavourably.'

However, 15.4 per cent said 'it looks bad' and a mere 1.7 per cent suggested that it is very tasty.

There was a striking difference in the place of purchase, which reflects the difficulty foreign products have in penetrating the country's small, specialist stores.

About 21 per cent of consumers said they bought their Japanese beef at specialist stores, while only 5.6 per cent used the same stores for imported beef.

However, 42 per cent bought the imported meat at large supermarkets, which tend to carry a broader range of products and are less bound by traditional distribution relationships. About 27 per cent of consumers bought their Japanese beef at large supermarkets.

The findings also highlight the success of Japanese producers in cornering the top end of the beef market, leaving the US and Australian suppliers to fight it out for market share in hamburger beef and cheaper cuts.

About 59 per cent of respondents said Japanese beef costs too much, while only 4 per cent thought foreign beef was overly expensive.

SOUTH KOREA'S president-elect, Mr Kim Young-sam, yesterday appointed a group of reformists as his senior advisers in the Blue House, the executive mansion.

The appointments indicate that Mr Kim will pursue economic and political changes promised in last year's presidential election.

There has been considerable speculation in Seoul about whether Mr Kim would pursue reforms since his power base in the ruling Democratic Liberal Party is weak.

Mr Kim did not join the DLP until 1990, when he merged his opposition party with the government of President Roh Tae-woo.

The new presidential aides, some of whom have criticised Mr Roh's policies, will play a key role, since Mr Kim appears determined to re-assert the power of the Blue House over the bureaucracy.

The Blue House, which strictly ruled the country under the former military dictatorship, has seen its power diluted under Mr Roh, who promoted bureaucratic decentralisation as part of his democratisation programme.

Mr Kim, however, believes that the bureaucracy is hindering political and economic reforms.

Mr Park Kwan-yong was appointed as chief presidential secretary, the most influential post in the Blue House.

Mr Park is a close confidant of Mr Kim and holds a parliamentary seat in Pusan, the new president's home town.

He joined the DLP in 1990 after being an opposition MP and began his political career by serving as an aide to Mr Li Ki-taek, who now heads the main opposition Democratic Party. He has criticised the National Security Law, which has been used to punish domestic dissidents, and has promoted inter-Korean relations.

Mr Park Jae-yoon was appointed as the president's economic adviser. A former director of the Korea Institute of Finance and professor at Seoul National University, he has advocated financial deregulation to improve the country's economic performance.

Mr Choo Don-shik, who has argued for political reform as an editorial writer for Chosun Ilbo, the country's largest newspaper, will the adviser for political affairs.

PRIME MINISTER Paul Keating of Australia yesterday stepped up efforts to win the support of voters in marginal seats by offering ADollars 600m (Pounds 285.7m) in federal funds to assist a financially embarrassed state Labor government.

Mr Keating said federal financial support was essential to help the state of South Australia recover from a ADollars 3bn loss incurred by the government-owned state bank.

The offer was widely seen as an attempt to shore up Labor support in South Australia, where the government is defending four marginal seats in the federal election, due on March 13.

Labor trails the conservative Liberal/National Party coalition by up to 12 points in the opinion polls. The coalition needs a swing of 0.9 per cent to take power. Mr Keating's offer was accepted by Mr Lynn Arnold, leader of South Australia's minority Labor government. He said the bank would be privatised to reduce the state's ADollars 7bn debt burden.

The privatisation, which was expected, is likely to take place next year. Analysts said the sale would probably return about ADollars 1bn to the state government. Mr Keating's offer follows claims by the South Australian conservative opposition that the federal coalition would provide ADollars 400m to the state over 10 years if it wins the election.

Mr Keating said he was not worried the offer would be regarded as an electoral bribe.

The government and opposition are also locked in a bidding war for the support of voters in seven marginal seats in the Queensland and northern New South Wales sugar belt.

CHINA yesterday released the last two student activist leaders rounded up after the 1989 pro-democracy protests that led to hundreds of deaths in Beijing's central Tiananmen square after the army fired on protesters.

The early release of Wang Dan, who topped the most-wanted list, and fellow-student Guo Haifeng is a further indication that China is anxious to cool criticism of its human rights record. Several other dissidents have been released recently.

The New China News Agency said the freeing of Wang and Guo meant that 'all the students who violated the criminal law during the anti-government disturbances in 1989. . . have been released'.

The freeing of the students, several months before their terms expired, comes on the eve of delicate trade talks with visiting US officials, the first high-level team from the Clinton administration to visit Beijing.

At the talks, China's huge trade surplus with the US will be discussed.

The dissidents' release also coincides with the presentation this week to International Oympic Committee members of documents supporting Beijing's bid to stage the Olympic Games in the year 2000.

Human rights groups have been opposing Beijing's candidacy in protest at China's continued imprisonment of political activists.

The release of the two students by no means closes the chapter on the Tiananmen square episode, however.

A number of 'non-student' dissidents rounded up after the incident remain in prison.

In another gesture yesterday, China also freed a 76-year-old Roman Catholic bishop, who had been sentenced to 15 years' imprisonment.

Bishop Zhu Hongsheng's continued detention had prompted protests internationally.

THE African National Congress yesterday failed to ratify a power-sharing plan agreed in principle last week with the government, damping hopes of rapid progress toward a constitutional settlement in South Africa.

ANC officials said the organisation's policy-making national executive committee had decided to defer ratification until its members had been consulted. This could take weeks or months, and delay the planned timetable for transition to democracy, which calls for the first multi-racial elections early next year.

Multi-party constitutional talks, due to begin later this month, could open on schedule, but progress will be frustrated unless the ANC gains rapid endorsement of the power-sharing plan from its members at regional level, who tend to be far more radical than the national leadership.

If regional leaders reject the the plan, which calls for multi-racial power-sharing until the end of the century, the government had made clear it would consider putting the deal to a national multi-racial referendum, over the heads of the ANC, to try to break the logjam, the officials said.

ANC negotiators, who agreed the principles of power-sharing with the government last week, remain confident they will be able to persuade the wider membership to endorse the deal, though yesterday's decision represents an embarrassment for them, and possibly a serious defeat.

Hard-line national executive members are understood to have criticised the deal in Tuesday's meeting, even booing members of the organisation's negotiating team. The radicals believe power should be shared with the ruling National Party only during a nine-month period, while a post-apartheid constitution is written, and not for the five-year period agreed in negotiations with the government.

The ANC faction which supports the deal hopes endorsement from the regions can be gained within a fortnight, posing no serious obstacle to progress in negotiations. Much will depend on whether the ANC decides to canvass membership opinion exhaustively, or through regional executive structures which can be rapidly sounded out.

The executive's failure to ratify the deal shows the ANC's constant dilemma in negotiations: whether to conclude deals secretly and present members with a fait accompli, or try to gain support from the organisation's diverse and fractious membership at every stage. The role of ANC leader Nelson Mandela will be crucial. If he backs a power-sharing deal, it seems unlikely the executive would oppose him.

PRESIDENT Suharto of Indonesia has named a new head of the politically powerful armed forces three weeks before presidential elections in which he is expected to stand for a sixth five-year term of office.

Gen Edi Sudrajat, at present army commander, will replace Gen Try Sutrisno as armed forces chief, overseeing the army, navy and airforce, in a move which will leave Gen Sutrisno free to stand as vice-president in March.

Gen Sudrajat's appointment is a further step in a wide-ranging reshuffle of top military personnel which began last July.

Favourite to fill Gen Sudrajat's post of army commander is Major-Gen Wismoyo Arismunandar, a brother-in-law to President Suharto and currently deputy army chief of staff.

A CAMPAIGN launched yesterday for the release of Ms Aung San Suu Kyi, the detained Burmese opposition leader, has rekindled a fierce debate in Asia about human rights and the merits of Asian countries intervening in their neighbours' affairs.

Eight Nobel Peace Prize winners, after being refused entry to Burma, came to neighbouring Thailand to start the campaign for their fellow laureate. Ms Suu Kyi won the prize in 1991 and has been held under house arrest for over three years by Rangoon's military junta.

The campaign has won support from the Clinton administration and prizewinners unable to come to Thailand, such as Mother Teresa and Mr Mikhail Gorbachev, former Soviet president. But China issued two warnings to Thailand in an unsuccessful attempt to prevent the Dalai Lama, the exiled Tibetan spiritual leader, from taking part. China invaded Tibet in 1950.

The campaign to release Ms Suu Kyi marks a break from the traditional South-East Asian policy of 'constructive engagement' with Burma. Thailand's armed forces, enjoying lucrative logging concessions there, have criticised the Thai government for hosting a visit they fear will damage Bangkok's relations with both Beijing and Rangoon.

Gen Vimol Wongwanich, army commander, said such campaigns should be held in the US, not Thailand. 'It's like inviting the battle into our house,' he said. The Thai army banned the screening of an interview with the Dalai Lama on one of the TV stations it controls.

Previous Thai governments have bowed to Chinese pressure over the Dalai Lama, refusing him a visa in 1987 and 1990. But Mr Chuan Leekpai, the civilian prime minister elected on a liberal ticket last year, has allowed all the Nobel laureates into the country. Both he and King Bhumipol are scheduled to meet them.

In Bangkok yesterday, the Dalai Lama avoided overt criticism of China or Thailand, but implicitly chided them for supplying weapons and aid to the Burmese junta and suggested an arms embargo would be a good idea.

'In Thailand and everywhere, the value of human rights and of democracy is increasing,' he declared. 'In a new era, everyone is concerned about democracy, human rights and freedom.'

The visiting laureates, including Archbishop Desmond Tutu of South Africa, northern Ireland peace campaigners Ms Betty Williams and Ms Mairead Maguire, and an Amnesty International representative, are to meet Burmese refugees today.

At the weekend some of them will go to Geneva to make a submission to the UN Human Rights Commission.

THE Indian government has announced a partial deregulation of the domestic fuels market as part of a pre-budget package which also includes a steep increase in sugar and coal prices.

New Delhi is keen to show that its economic reforms package is regaining momentum after last year's setback of the destruction by Hindu extremists of the mosque at Ayodhya.

To this end, it has liberalised the import of kerosene and liquefied petroleum gas (LPG) and has also allowed the private sector, both domestic and foreign, to enter the tightly controlled domestic fuels market.

A dual pricing system will make domestic fuels, at present in short supply, more expensive, but freely available on the open market.

The government will continue to retail kerosene oil through its public distribution system at subsidised rates, staining it blue to distinguish it from the open market kerosene.

Users of LPG cylinders will not be entitled to subsidised kerosene on ration cards as they are at present.

Opposition parties have criticised the government's 20 per cent increase in the price of sugar and the dual pricing policy of domestic fuels, even before the budget is presented on February 28.

The government yesterday announced an additional rise in the regulated price of coal, amounting to an increase of 11.8-12.8 per cent for different grades.

Soft coke, used for domestic purposes, has been spared.

HARDLINE Islamic groups in northern Afghanistan are holding refugees from chaotic fighting over the border with Tajikistan against their will, a senior UN official said, Reuter reports from Kabul.

Tajikistan has protested to Afghanistan, demanding Afghan guerrillas stay on their side of the border. Moscow's Itar-Tass news agency said the protest notes that attacks on border patrols have now become frequent.

LITTLE IS likely to induce a deeper sense of deja vu in the Middle East than the arrival in the region of a new American secretary of state on yet another fact-finding mission.

There is equally little to suggest that Mr Warren Christopher is going to learn much during the next few days about the peace process that he has not already gleaned from his experienced state department advisers and from his conversations in the past two weeks with the leading players.

This may be the inevitable price to be paid for a change of US administration.

But it could be a costly exercise at a moment when events and time are pressing ever more heavily on those in the Middle East most committed to negotiations.

Nearly 16 months and eight rounds of talks have passed since the opening ceremony in Madrid.

But with each succeeding week the initial optimism of Madrid is being eroded and the risk is increasing of events making it impossible for one or more of the participants to continue negotiations.

US officials rightly point out that the fundamental reasons which brought the representatives of Israel, the Palestinians, Syria, Jordan and Lebanon to the talks are still valid.

To a greater or lesser extent all of them accept the need for a negotiated settlement to the conflict that has blighted the world for more than four decades.

However, since the autumn of 1991 nothing has been done to build popular support for that stance. No delegation wishes to abort the process but the Palestinians in particular are finding it ever more difficult to continue.

The immediate crisis stems from Israel's decision on December 17 to expel 415 Palestinians from the West Bank and Gaza solely on suspicion of being active in Hamas and Islamic Jihad, two radical organisations opposed to the peace process.

Under intense US pressure and under the unprecedented threat of United Nations sanctions, Israel last week agreed to re-admit 100 and halve by one year the expulsion period for the remainder.

Mr Christopher and Mr Yitzhak Rabin, Israel's prime minister, hoped that last Friday's UN statement welcoming the concession as a step in the right direction would allow peace talks to resume. Their hopes were premature.

Mr Rabin's extreme reaction to the worsening violence in the occupied territories was designed in large part to placate Israeli public opinion.

The response by the Palestine Liberation Organisation and its negotiators is no less dependent on the mood in the West Bank and Gaza.

There, the harshness of the deportations, the increase in the killing of young people by Israeli troops and the arbitrary destruction of homes is working to increase the support for Hamas.

And it is cutting the ground from under the feet of the Palestinian negotiators who live in the occupied territories.

These events have to be seen against the hopes raised by Labour's victory in the Israeli elections last summer, won on a platform of reaching a swift agreement with the Palestinians, and on an American policy which, under the guidance of Mr James Baker, then secretary of state, had appeared to Arabs more even-handed than for many years.

The haste with which Mr Christopher welcomed Mr Rabin's offer to take back 100 of the deportees as a virtual end to the issue suggested to some that the US was tilting back more emphatically in Israel's favour.

If Mr Christopher wishes to reverse this impression, persuade the Palestinians to resume negotiations and bring the parties back to the substance of the peace process, he will, like so many of his predecessors, eventually come to the core of the issue which is the US-Israeli relationship.

Although Russia is the co-sponsor of the peace process, responsibility for it is essentially American.

The US continues to give more than Dollars 3bn annually in military and civil aid to Israel and is additionally providing loan guarantees for a further Dollars 2bn a year.

Both governments officially refuse to acknowledge that these huge sums offer scope for diplomatic leverage.

But a middle-class America which is being asked to pay higher taxes could well come to a different conclusion if Israel is deemed to be unhelpful in building on what President Clinton described on Tuesday as an 'historic moment' in the Middle East.

Mr Christopher says he wants to listen rather than to talk during his week in the region.

If he then concludes that what is most required is a clear and emphatic American response, his trip will not have been wasted.

The lesson learned by President Jimmy Carter, the last Democrat to inhabit the White House, remains valid. Israelis and Arabs cannot make peace on their own.

LIKE much conventional wisdom, the belief that gold never earns interest is wrong. You can earn as much as 8 per cent annually and add 80 grammes to each 1kg bar every year; but to achieve this, you have to take the gold to Phnom Penh and deposit it in a small Cambodian bank called Canadia Gold and Trust Corporation.

Asked how he can pay 8 per cent interest on gold deposits, Mr Pung Kheav Se, the general manager, gives a banker's answer: he lends out the gold at 18 per cent. 'Gold,' he says, 'is accepted by everybody.'

The unusually high status of gold as a medium of exchange in Cambodia is the result of more than two decades of war and financial chaos. Cambodians know that the riel, the local currency, has a tendency to plummet in value, and they remember that the guerrillas of the Khmer Rouge, who seized power in 1975, abolished money during their reign of terror.

Mr Pung, a Cambodian of Chinese ethnic origin, was a businessman in Phnom Penh when the Khmer Rouge took over and force-marched the inhabitants of the capital into the countryside. After three years of working in the rice paddies and hiding his bourgeois origins, he took refuge in Thailand, eventually emigrating to Canada (hence the bank's name).

Canadia Gold and Trust, a joint venture in which Mr Pung's family holds a 70 per cent stake and the central bank the remaining 30 per cent, was established in 1991.

Mr Pung imports 25kg boxes of gold from Swiss Bank Corporation in Hong Kong, puts it through a mill and, with the authority of the central bank, issues gold bars in the traditional Cambodian weights.

Jewellers in Phnom Penh's busy central market display the bars alongside the watches and gold necklaces worn as a form of security by a people unable to shake off the fear they may one day have to flee at a moment's notice.

Gold, its price in dollars and in fast-devaluing riels set daily by a group of ethnic Chinese traders, is routinely used for the purchase of property in Cambodia and for transactions involving local products such as tobacco or beans, although it has lost out to the US dollar as a means of paying for imports.

'Cambodian property-owners don't worry about the US dollar,' says Mr Pung. 'They compare gold and riels. . . so they always think they are making money.'

Mr Pung says Canadia has issued Dollars 80m (Pounds 56m) worth of gold since December 1991 (there was a surge in demand at the peak of the property boom last year), but the actual amount that has come into Cambodia is much greater. Hundreds of kilogrammes are flown in tax-free every month and smuggled into neighbouring Thailand and Vietnam to avoid import duties in those countries.

Inside Cambodia, soldiers serving with the United Nations peacekeeping forces, particularly from the Indian sub-continent where there are curbs on gold imports, are as eager as the Cambodians to buy gold. Some of them have it made up into chunky bracelets so they can take it home unhindered.

The overall effect of the UN presence, however, has been to undermine the gold market by flooding Phnom Penh with cash dollars; dollars are more liquid and more convenient to carry than gold, even if they are easier to counterfeit.

When Mr Pung opened Canadia in 1991, half his business was in gold and half in dollars. Now dollars account for about 75 per cent of turnover, gold for 22 per cent and riels for 3 per cent. (Canadia pays a remarkably high 8.5 per cent interest on dollar deposits, lending dollars at a much higher rate to local property developers).

But Cambodia's chronic instability, and the departure of most of the 22,000 UN soldiers and civilians after elections in May, may secure a place for gold in the country's domestic business dealings.

'The gold market will continue in the future unless the government issues a law not to allow the circulation of gold,' says Mr Pung. 'I don't think they will do that.'

Toyota's Thai joint venture, Toyota Motor Thailand, will invest about 9bn baht (pounds 250m) over the next four years to increase car production capacity and set up a training centre for service technicians, the parent company said, Reuter reports from Tokyo.

THE Clinton administration is reviewing a number of US trade positions, including the Airbus agreement reached with the EC last summer to limit government support, Mr Mickey Kantor, the US trade representative, said yesterday.

'It is a new day and a new administration,' he said. The administration would be assessing whether or not to proceed on the path set by its predecessors or to 'change course'. On many issues it is likely to change.

Last week President Bill Clinton raised the issue of Airbus when answering a question in a televised 'town hall meeting' in Seattle. 'The Europeans are going to have to quit subsidising Airbus,' he said. 'I'm not going to roll over and play dead.'

Mr Kantor said both sides had the option to withdraw from the Airbus agreement. It was supposed to have been 'multilateralised' by summer.

On other issues, Mr Kantor said the US and EC might hold meetings with Japan as a way to get the Uruguay Round international trade talks moving and that US, Mexican and Canadian trade officials would meet during the week of March 15 to discuss side agreements to the North American Free Trade Agreement.

This was agreed in talks yesterday between Mr Kantor and Mr Jaime Serra Puche, his Mexican counterpart. During the meeting Mr Kantor put intense pressure on the Mexican government to withdraw from a fund which was advertising its intent to attract US businesses to Mexico.

National Financiers (Nafinsa), a Mexican development bank, was one of the limited partners in the AmeriMex Fund, which has issued a brochure advertising its intention to buy US companies and then move 'a portion or all of the manufacturing operations . . . to Mexico to take advantage of savings in the cost of labour'.

Mr Serra told Mr Kantor he knew nothing about the brochure. Shortly after they met he called the trade representative to say Nafinsa would withdraw its investment from the fund.

The fund had drawn fire from Mr Richard Gephardt, the House majority leader, who wrote to Mexico's President Carlos Salinas de Gortari saying such funds should not be allowed to operate.

Mr Kantor praised the swift Mexican action, saying he was 'impressed by it and pleased'.

The side agreements are to deal with labour, the environment and import surges. Mr Kantor said the development of enforcement mechanisms was vital, as was finding a way to address labour standards so that businesses did not flee south of the border to evade US rules.

ISRAEL Aircraft Industries, flagship of Israel's troubled state-owned defence sector, has received a welcome shot in the arm by winning a Dollars 240m contract from the US Defence Department for 56 unmanned aircraft in partnership with San Diego-based TRW.

IAI will make the so-called drones - increasingly used by armed forces to probe behind enemy lines without exposing the lives of pilots - their payloads and ground stations in Israel. TRW will manage the project and carry out testing and training.

Earlier this month, the government agreed to provide a Dollars 280m restructuring package for IAI, the country's biggest company, to help it overcome a slump in sales which will result in a Dollars 50m-Dollars 60m loss when its 1992 results are reported. Now set to lay off 1,500 of its 17,400 workforce, IAI is struggling to stay competitive with its international rivals and increase its sales of civilian products.

Ironically, last year it was the cancellation or postponement of several civilian aircraft contracts which knocked its annual overseas sales of Dollars 1.25bn back by Dollars 100m. IAI accounts for some 17 per cent of all Israel's industrial exports.

One of its successes has been its leading world role in producing unmanned aircraft, used chiefly in military reconnaissance work. IAI drones were used by the US armed forces during the Gulf war to oust Iraqi forces from Kuwait.

AGGRESSIVE enforcement of national labour laws in Mexico and a Dollars 3bn (Pounds 2.1bn) environmental clean-up fund are called for in an assessment of the North American Free Trade Agreement released yesterday by the influential Washington-based Institute for International Economics.

The recommendations address fierce criticism of Nafta, particularly from US labour and environmental interests which have been lobbying the Clinton administration for amendments to the regional trade agreement.

Nafta was signed late last year by President George Bush, Mexico's President Carlos Salinas de Gortari, and Mr Brian Mulroney, Canada's prime minister. It is to be put to Congress for ratification later this year.

President Bill Clinton has committed the new administration to amendments to the text, taking account of these pressures.

The IIE assessment - giving an overall B+ grade to the 2,000-page agreement - is intended to provide signposts to the policies he could adopt. It gives clear support for the administration's call for supplementary agreements to Nafta on labour and the environment, and recommends a Dollars 3bn 'Nafta fund' in preference to a proposal from Democratic senator Max Baucus for a special Nafta transaction tax.

The Nafta fund would finance the environmental clean-up on the US-Mexican border and would help to underwrite work by the Environmental Protection Commission, already suggested by Mr Clinton, in sponsoring broad assessments of environmental conditions in each country. The IIE calls on the three Nafta signatories to earmark for the fund Dollars 300m a year each for five years, from 1994.

The Environmental Commission should also set up procedures to encourage harmonisation of environmental standards, and set fines, or 'green fees', for countries distorting trade inside the region because of poor environmental standards.

The study predicts that Nafta would create a net 171,000 new jobs in the US, with US surpluses in its trade with Mexico varying between Dollars 7bn and Dollars 9bn a year up to 1995.

'Ross Perot got it wrong,' said Mr Fred Bergsten, director of the IIE. 'There has been a huge sucking sound, as Perot described, but it has been due to US exports and the creation of American jobs.' Mr Perot last year predicted Nafta would create the 'sucking sound' of US jobs lost to Mexico.

Mr Bergsten noted a Dollars 13bn swing in favour of the US in trade with Mexico since 1989, a shift which he estimates has already created 200,000-300,000 jobs in the US.

While 316,000 jobs would be created by Nafta, the IIE report forecasts that 145,000 jobs would be 'dislocated' - a bare 2 per cent of the 8.9m jobs lost in the US in the five years to 1990 because of plant closures, bankruptcies and lay-offs. It calls for Dollars 335m a year to be spent from existing tariff revenues for adjustment programmes linked with Nafta job losses, but calls for this to be part of a wider national worker training programme.

Mr Gary Hufbauer and Mr Jeffrey Schott, the authors of the report, recommend new negotiations to establish Mexican commitment to 'aggressive enforcement of national labour laws and regulations'. They call for a trinational commission to enforce labour standards, and authorise sanctions if governments fail to halt abuses.

However, they insist the ultimate value of Nafta is in its boost to the competitiveness of regional industries, rather than in job creation.

'Efficiency benefits and growth stimulus could exceed Dollars 15bn annually. This figure, rather than jobs gained or lost, is the true measure of the economic gain from the Nafta agreement,' which they see as one aspect of a wider US strategy aimed at improving competitiveness and productivity.

The assessment confirms, but is more optimistic than, the findings of a study just released by the US International Trade Commission on the potential impact of Nafta.

This predicts the trade pact would provide a lift of up to 0.5 per cent of real GNP in Canada and the US, with a potential increase of 11.4 per cent in Mexico.

The ITC says US exports to Mexico could be boosted from 5.2 per cent to 27 per cent by the agreement, with Mexico's exports to the US jumping by between 3.4 per cent and 15 per cent. It predicts aggregate employment gains in the US of 'less than 1 per cent' of a workforce that currently totals 117m.

The commission says industries which will see greatest benefit will be machine tools, bearings, industrial machinery, steel mill products, pharmaceuticals, textiles, grains and oilseeds, cotton, wood products and motor parts. Industries likely to suffer will be the motor industry, garments, flat glass, glassware, household appliances, shrimps, peanuts, and vegetables.

It points to 'an almost discernible effect on US wage rates for both low-skilled and high-skilled workers' - a conclusion shared by the IIE study.

The studies coincide with signals from labour groups that they may be poised to moderate claims that Nafta will be a catastrophe for workers and consumers.

As leaders of the influential AFL-CIO trade union grouping held their first executive council meeting since the presidential election, they hinted that US workers must come to terms with closer integration in Mexico, pressing for higher minimum wages in Mexico instead of opposing Nafta itself.

------------------------------------------------ The Nafta scorecard ------------------------------------------------ Nafta provisions Grade ------------------------------------------------ MARKET ACCESS BY SECTOR Energy C+ Automobiles B Textiles and apparel B+ Agriculture A Financial services B+ Transportation A Telecommunications B+ TRADE RULES Rules of origin B+ Safeguards C Subsidies and dumping B Dispute settlement A Government procurement B+ NEW ISSUES Investment A+ Intellectual property B Environment B Labour adjustment A Maquiladoras* B AVERAGE GRADE B+ ------------------------------------------------ * Border factories with tariff advantages ------------------------------------------------ Source: IIE, Washington DC ------------------------------------------------

EUROPEAN business leaders yesterday added their voice to a growing chorus of discontent with Japan's burgeoning trade surplus and called on the Japanese government to take a more affirmative and managed approach to the problem.

The Council of the European Business Community said cultural factors were in part to blame for Japan's growing trade surplus and suggested a more managed approach would go further in dealing with a problem that natural market forces had failed to solve.

The views expressed by the council, which represented European interests at the Fourth Import Board - an international forum of foreign businessmen and Japanese government officials held in Tokyo yesterday - are similar to those of an increasingly popular school of thought in the US. This says that, because of unique cultural factors, trade with Japan cannot be left to ordinary free market forces.

'The natural market forces are not sufficient to bring, in the short term, a new situation in which imports have a share commensurate with their relative price and quality,' the council said. Since normal market forces have not been effective in changing the situation, 'we are deeply convinced that the sectoral approach would be the most efficient means to reach improvements'.

European representatives at the forum also called on the Japanese government to introduce succeeding supplementary budgets with firm funds directly allocated to government purchases of imported products. 'What we are asking for is a special programme of imports for use by government agencies,' Mr Henri Martre, honorary president of Aerospatiale, said.

Japan also needed to make bidding procedures for government procurement more open and fair and to ensure purchase decisions are not politically motivated but based on commercial considerations.

It was difficult to understand why Airbus, which has 30 per cent of the world market, had just 10 per cent of Japan's market, he said.

The council recommended that the Japanese government try to quantify the benefits of any programmes to boost imports and that it seek to match the best practice of the most liberalised countries in the EC rather than align itself with the minimum level of liberalisation.

In spite of the Japanese government's efforts, Japan had a trade surplus with the EC last year amounting to Dollars 32bn (Pounds 22bn). Imports into Japan from the EC fell 1.6 per cent while exports to the EC increased 14 per cent.

FEARS that talks between Italian political parties on broadening the ruling coalition could undermine Prime Minister Giuliano Amato's eight-month-old government yesterday pushed the lira to a record low of L950 to the D-Mark.

The parties are discussing a broader coalition to provide greater authority for reform of Italy's unmanageable system of proportional representation.

A parliamentary commission has proposed a new first-past-the-post system for electing the majority of the two houses. But big differences remain on the details and a strong government is needed to cope with the question of whether to go along with calls for a referendum on the reform.

The coalition, of Christian Democrats, Socialists, Social Democrats and Liberals, has only a narrow parliamentary majority, and increasingly lacks legitimacy as Italy's political class falls foul of the ever-widening corruption scandals.

The proposals for widening the coalition centre on bringing in the former communist Party of the Democratic Left (PDS), the small Republican Party and the populist Lombard League.

The PDS is making tough demands, urging a softening of the austerity budget to halt rising unemployment, while Mr Umberto Bossi's the Lombard League wants a commitment to early elections.

Both parties, and the Republicans, would also prefer to join a government with a new prime minister.

Magistrates yesterday told Mr Gianni De Michelis, former foreign minister and currently deputy head of the Socialist party, that he was under investigation over two incidents on top of the allegations of kickbacks in the Veneto region for which he is being investigated, writes Haig Simonian in Milan.

The new allegations concern Italy's aid programme to developing countries and the investigation into alleged political corruption in Milan.

FRANCE'S centre-right coalition is on course for a crushing victory against the ruling Socialists in next month's parliamentary elections, according to the latest opinion poll. This suggests the coalition could win four-fifths of the National Assembly's 555 mainland seats,

The Sofres poll suggested that 40 per cent of French voters favour the conservative RPR and UDF alliance, with 21 per cent backing the Socialists. This would give the conservatives 453 seats and the Socialists 80, compared with their present tally of 247.

Support for the ecologists, who pushed the Socialists into third place in recent polls, has slipped to 15 per cent.

President Francois Mitterrand, who has hitherto stayed aloof from the fray, will tonight stage the first of two live television programmes in which he will answer questions from voters. The Socialists hope the programmes will be as successful as his TV debate before September's Maastricht referendum.

Prime Minister Pierre Beregovoy, however, is still hampered by the row over the FFr1m (Pounds 120,000) interest-free loan he received from Mr Roger-Patrice Pelat, a financier later charged with insider trading. The justice ministry on Tuesday rejected a judge's request to investigate the loan. But Liberation, the centre-left newspaper, yesterday published a stinging editorial, criticising Mr Beregovoy for accepting it.

FURTHER cuts in short-term interest rates could lead to a 'stop-go' policy for the German economy, risking higher long-term rates and endangering jobs, the Bundesbank warns in its latest monthly report.

There was no sense in making counter-cyclical cuts in rates in an attempt to revive the economy, the report adds.

The weakening of the western German economy became clearer towards the end of last year. Gross domestic product in the final quarter fell by an adjusted 1.5 per cent from the previous three months and by 0.5 per cent against the last quarter of 1991.

In manufacturing the seasonally adjusted production figure for the fourth quarter was 5.5 per cent down on the comparable period in 1991. Separately, the German Institute for Economic Research (DIW) in Berlin said yesterday that west German GDP was likely to fall by a real 1 per cent in the first quarter this year against the last quarter of 1992.

But the Bundesbank said there was no cause for undue pessimism. Manufacturing industries were not representative of the economy as a whole: construction and services in general were doing better than those sectors hard hit by falling exports.

It said that in contrast to many other countries Germany was not suffering the delayed effects of overheating in the late 1980s.

Shares and property prices had not collapsed in Germany, nor were there problems in the financial system.

Long-term interest rates were far more important for German industry than the short-term rates set with reference to the Lombard and discount rate which the Bundesbank cut two weeks ago today. The discount rate was cut by 25 basis points to 8 per cent and the Lombard rate by 50 basis points to 9 per cent.

Over 80 per cent of bank credits in Germany were provided on a long-term basis, the Bundesbank pointed out. These rates had fallen 'extraordinarily sharply,' dropping 1.5 per cent to under 7 per cent since September, the Bundesbank said.

This fall reflected the markets' confidence that the German central bank would ultimately be successful in its battle against inflation, which reached an annual rate of 4.4 per cent in January.

BRIGITTA Strater has seen better days. 'Before the Wall fell, I was selling 450 white loaves and 600 mixed loaves a day. Now I am selling about 20 white, and 90 mixed loaves.

'People aren't buying that much any more. Its not because my prices are too high. Its because of the unemployment.'

Her small, brightly lit bakery is in Kopenick, once the pulse of east Berlin's industrial heartland. Before 1989, more than 25,000 men and women worked in the region's six biggest factories. Today, fewer than 5,000 have secure jobs.

The customers, who in the space of half an hour passed through her shop on a bitterly cold and snowy morning, were all unemployed, except for Heinz.

'I have a job, over the road with BICC,' he said pointing across to the large 19th century cable factory which the British-based BICC bought earlier this year.

'I am lucky. The managers know what they are doing. They said they will make the plant competitive with other big German firms. There's some hope for me.'

Heinz, an electrical engineer, earns DM1,800 (Pounds 762) a month, low by western German standards, but high by eastern ones.

He says he can get by. 'I know everyone is complaining about the price rises, especially for housing. You know we are losing all our subsidies. I now pay DM600 for my flat, a rise of DM350. And the flat hasn't even got hot water. But I think I would settle for jobs rather than a higher income at the moment.'

His remarks provoked a lively discussion in the bakery. 'Are you crazy?' shouted Andreas. 'The unions said we could get the same wages as the Wessies (the term used for west Germans).'

Andreas used to work in a small tool shop, close to the cable factory. 'The shop closed down last year. No one would buy any of our stuff. The unions said we would get 26 per cent more this year. We need the money.'

'And then what will happen?' said Heinz. 'There will be even more unemployment. We have to make compromises, at least for a short time. We are talking about getting our country off the ground.' Frau Strater, dressed in her big, white baker's apron, said it was time for everyone to make compromises. 'The old structures are dead. We have to start all over again.'

She added that I G Metall, Germany's giant engineering union which is holding arbitration talks with the employers' federation in the five east German states in order to secure a 26 per cent rise for its members, would have to settle for less. 'The people want to work. Jobs will come here eventually. But we can't keep asking for more and more.'

'I am not asking for more. I only want my job back,' said Irmgard, a 26-year-old with a three-year-old daughter. After maternity leave, which was generous under the former communists in east Germany, Irmgard returned to the Berlin Plastikwerke, her employers, last March.

'They said my place was no longer guaranteed. I now have DM600 a month to live on. I am angry. I'm not looking for the higher wages. I am looking for work.' Every day, Irmgard comes into the bakery and flicks through the Berliner Zeitung. 'Something has to turn up,' she said.

In a nearby smoke-filled pub, young men were downing litres of beer by eight o'clock in the morning.

Henry, 22, a truck driver, kept criticising the unions. 'They should get us more money,' he said. His drinking colleagues said they didn't really care about the unions. 'I'm telling you. We are finished if we lose our jobs,' said Gerhard, 43, a driver for Coca-Cola.

Out in the streets, which three years ago were full of activity, Cornelia was hurrying to work - across the River Spree to west Berlin. Until last year, Cornelia, 49, had worked as a nurse in an old people's home in east Berlin.

'I could have stayed there. But the money is better in the west. I now earn DM3,000 a month. I consider myself lucky on one level. But also I got up and did something about my situation. We can't keep moaning. We can't keep demanding higher wages if we are not producing anything.

'Eventually, things will get better here, and in the rest of Germany. We have to make it work,' she said.

THE European Commission has approved the merger between British Airways and Dan-Air, arguing that it does not significantly affect services between Belgium and Britain.

The presence of BA, Sabena, the Belgian flag carrier, and British Midland meant there were three large competitors on the rapidly growing Brussels-London route.

The three airlines between them fly 23 times a day from Heathrow to Brussels: BA has seven, Sabena eight and British Midland eight. BA gained four flights as a result of acquiring Dan-Air's low-cost operations at Gatwick last year. But Sabena acquired two extra slots at Heathrow last month.

The Belgian government complained in November about the possible anti-competitive impact of the deal. This followed calls from the heads of Air France, the French flag carrier, and Sabena for the Commission to take a more critical view of BA's expansion plans in Europe.

Air France, which has a stake in Sabena, also complained about the original Commission decision not to launch a full-scale anti-trust inquiry into BA's acquisition of Dan-Air for a nominal Pounds 1, plus assumption of the ailing airline's liabilities.

Belgium resorted to a previously unused clause in the EC's merger rules which allows the Commission's anti-trust authorities to investigate the impact on competition on their national territory.

But the Commission said the effects of the BA/Dan-Air merger applied only to the Gatwick-Brussels route. BA's acquisition 'neither creates nor reinforces a dominant position' in Belgium.

THE European Commission yesterday dropped hints that the deeper-than-expected recession in Europe may require a retreat from the strict economic performance targets required for European monetary union.

Mr Henning Christophersen, EC economics commissioner, said cyclical economic factors and their impact on budget deficits may have to be considered in 1996 - the earliest date when a majority of EC states could vote to join Emu.

He stressed the performance targets themselves could not be changed because they were in the Maastricht treaty. But he cited the example of a member state with a budget deficit of 3.5 per cent of national output, just above the 3 per cent target set down in the Maastricht treaty. If it could show its deficit was heading clearly downward to, say, 2.5 per cent of GDP, it would be well placed to qualify for Emu.

Mr Christophersen's comments reflect a widely held view in Brussels that the poor prospects for growth make more likely a generous interpretation of the Emu 'convergence' criteria on inflation, budget deficits, and government debt.

'There is room for judgment,' he said, stressing that EC states at Maastricht rejected 'purely mechanistic' criteria for Emu. But in the same breath he said all countries that fulfilled the criteria in 1996 had not just 'a duty but an obligation' to apply for Emu.

Under Maastricht, the Commission will present a report in 1996 on member states' economic performance in the run-up to Emu. But the final arbiters of who qualifies for the Emu club will be the member states themselves in the Council of Ministers.

THE POLISH parliament's approval last week of a tight 1993 budget has paved the way for agreement on a new Dollars 660m (Pounds 456m) IMF standby loan at the next executive board meeting of the International Monetary Fund in early March, a senior IMF official said yesterday.

Mr Daniel Kaeser, the executive director for Poland, said the vote restraining the budget deficit to around 81,000bn zlotys(Pounds 3.4bn), or 5 per cent of GDP, opened the way to board approval. It also underlined the Fund's assessment that 'the reform process in Poland is becoming a success story with economic growth picking up,' he added.

Approval of a new loan to replace an earlier Dollars 1.7bn facility aborted by earlier government instability and above-budget spending, is expected to unlock a series of significant financial agreements and encourage private investment.

IMF approval for the Polish government's letter of intent will lead to a 20 per cent reduction in Poland's Dollars 32bn official government debt. This is the second and final stage of the 50 per cent total official debt reduction agreed by the Paris club of official creditors in March 1991.

An IMF agreement is also required for completion of Poland's negotiations with the London Club for a similar reduction in Warsaw's Dollars 12.1bn debt to commercial banks. The first round of commercial debt negotiations took place in Vienna last week following the recent appointment of Mr Krzysztof Krowacki as Poland's chief debt negotiator.

A green light from the IMF is also expected to be followed by World bank board approval of more than Dollars 1bn of new loans for the energy sector, industrial restructuring and farm modernisation. Loans in the pipeline include a Dollars 450m facility to help finance bank debt restructuring prior to privatisation.

Several government credit agencies, including the UK government's ECGD, are also expected to resume export credit cover for Polish business once the above official debt agreements are in place.

SUPPORTERS of President Boris Yeltsin of Russia yesterday proposed a constitutional 'compromise' which would effectively neutralise the Russian parliament led by Mr Ruslan Khasbulatov, his arch-rival.

Mr Sergei Shakhrai, a deputy prime minister, said last night that parliament should refrain from exercising its rights to 'interfere' with the government's economic programme until a constitution was adopted. He said they should also not have a say in adopting a new constitution spelling out the division of power between the executive, parliament and the government.

He said that for the Congress of Peoples' deputies - the full parliament - to adopt a constitution is 'like the situation when a man is the judge of his own case.'

Mr Shakhrai said the constitution, drafts of which are now being prepared and exchanged by teams representing the president and parliament, should be agreed by a constituent assembly or alternatively by a referendum. Mr Shakhrai is a member of the president's team in the talks.

Mr Yeltsin, he said, should also refrain from interference with the government. The government, however, is mainly at odds with parliament.

It was clear in Mr Shakhrai's account of the president's strategy that Mr Yeltsin is prepared to confront Mr Khasbulatov on the economy. The main issue is the lack of agreement between the government and the central bank on the issuing of credits. Mr Shakhrai said the government should end the 'abnormal situation' in which it has no power over the bank's credit policy.

Over the next few days, the joint presidential-parliamentary commission is due to thrash out a constitutional agreement which must then be ratified by a one-day extraordinary Congress of Peoples' Deputies in early March.

Mr Shakhrai stressed that if agreement could not be reached, a referendum set for April 11 on the constitution would proceed.

He warned of chaos and dictatorship if agreement could not be found, saying that in that case a constitution would be beside the point because 'there would be no elections for 30 or 40 years.'

Mr Alexander Shokhin, the deputy prime minister for foreign economic relations, warned last night that if foreign creditors forced Russia to pay more than Dollars 2.5bn this year towards the interest due on the Dollars 80bn debt it inherited from the Soviet Union it would do so, but the result would be 'catastrophe,' particularly for the other former Soviet republics which would be deprived of cheap oil because Russia would sell more oil for hard currency.

THE German government yesterday approved a reform plan for the country's entire loss-making railway system, designed to relieve a DM70bn (Pounds 30bn) debt burden and pave the way for its privatisation.

The west German Bundesbahn and east German Reichsbahn will be turned into a joint stock company from January 1 next year, but with its shares remaining in government ownership for the next 10 years.

The entire plan requires the support of the opposition Social Democrats in order to gain the two-thirds majority needed in the federal parliament to change the constitution.

Mr Klaus Daubertshauser, SPD parliamentary leader in charge of transport, said parliament would have to make sure the reforms did not jeopardise loss-making rail routes.

The creation of a joint-stock company, called Deutsche Bahn AG, aims to free the railways' management from red tape and the vested interests of politicians.

At the moment, any investment above DM5m requires the approval of the finance ministry.

The reform will also remove the special status of many employees who, as public servants, have jobs for life and enjoy special benefits.

The German Industry Federation, in a statement in support of the reform plans, said yesterday the railways could not operate if it remained subject to state-owned companies' regulations.

But the change in employees' status might bring the government into deeper conflict with the Social Democrats and the unions, who want to protect the jobs and benefits of the railways' employees.

The means of financing the rail reform is likely to create further political conflict.

Last week, the government's three coalition parties agreed to levy a yearly fee on users of motorways and to transfer the revenues to the railways.

But the proposal was denounced by Greens and politicians from all sides.

Equally controversial is the possibility of raising a petrol tax to finance the railway reforms.

A government working group is due to come up with a report on both issues on March 10.

The loss-making railways will have debts of DM70bn by the end of this year and interest payments of DM12bn.

Mr Gunther Krause, the transport minister, said that without reform the railways' debt would climb to DM569bn by 2003.

The reform package should reduce this to DM139bn, he said.

THE European Commission yesterday warned EC steelmakers they would have to close even more plants than originally envisaged if they wanted commercial and financial support from the Community.

The call for more cuts came as the Commission unveiled a rescue package to help protect the industry, which is suffering from overcapacity, competition from cheap non-EC imports and the worsening recession. The EC would provide Ecu900m (Pounds 740m) of financial support for closure costs, but only if member states match funding promised by the Commission

The Commission refused to estimate how many jobs might be lost in the EC industry as a result of capacity cuts, but an internal Brussels report has suggested that the original, more modest closure programme could lead to at least 50,000 redundancies. A German steel industry spokesman yesterday warned that it alone might have to shed 35,000 to 40,000 jobs under the new proposals.

In their original forecasts, steel producers suggested they could reduce production of crude steel by up to 25.8m tonnes over the next three years, and rolled products by 17.9m tonnes. Mr Bangemann said yesterday that this was 'not sufficient', and steelmakers would have to cut a further 4m or 5m tonnes of capacity. Altogether, the Commission is looking for cuts of up to 30m tonnes in crude steel, and about 19m tonnes in rolled steel.

Mr Martin Bangemann, the EC industry commissioner, and Mr Karel Van Miert, responsible for competition, said they hoped the plan would receive the political backing of industry ministers at a special meeting next week. However, they will not ask member states to take a formal decision on the package before May.

Mr Fernand Braun, the EC's 'steel envoy', is to renew contacts with 70 steelmakers in the hope that they can offer more capacity cuts to satisfy the Commission before the May meeting. The producers will be asked to commit themselves to a binding closure programme by the end of September, and to carry it out by the end of 1995.

The draft programme approved yesterday includes controversial plans to reduce alleged unfair competition from cheap steel imports from eastern Europe.

German steel talks, Page 2

UP TO one-quarter of the workforce has experienced unemployment since it started rising in early 1990 and almost exactly half the unemployed are now homeowners, according to a Financial Times analysis of government data.

These, and other figures, illustrate why unemployment is taking a far heavier toll of economic confidence than in previous recessions, and why the government is urgently considering a package of measures aimed at the 'white collar' jobless to accompany the March 16 Budget.

The government will today announce that the raw unemployment total, not adjusted for seasonal variation, has breached the 3m barrier for the second time in a decade.

The seasonally adjusted figure will remain just below the 3m mark but today will still be marked by nationwide demonstrations and a lobby of Parliament organised by the Trades Union Congress.

The FT analysis has found that 49 per cent of the unemployed own or are still buying their homes compared with 50 per cent who live in rented accommodation - the corresponding figures in 1984 were 42 per cent and 57 per cent.

The increase in unemployment among mortgage holders is also illustrated by the government's figures for income support, the main benefit for the unemployed, which covers mortgage interest payments. In 1990 income support was paying out Pounds 544m for mortgage interest. This rose in 1991 to Pounds 949m, almost 10 per cent of the Pounds 10bn which income support spends on the unemployed.

Manufacturing continued to lose a far higher proportion of jobs than the service sector between 1989 and 1992 - minus 14 per cent compared with minus 1.5 per cent. But in previous recessions the same 10 to 15 per cent of the workforce moved in and out of employment, whereas unemployment has this time extended much further occupationally and regionally.

About 11.3m have joined the unemployment count since April 1990, but up to half of them will have been counted more than once. This still means that around one-quarter of the workforce have been affected and polls show that half of all households fear that a member could become unemployed.

The increase in unemployment in the south is also shown by the fact that 35 per cent of the long-term unemployed live there compared with 58 per cent in the north. In 1984 the corresponding figures were 29 per cent and 67 per cent. Nationwide, about 1.5m people have been unemployed for more than six months but one quarter find a job within one month.

The white-collar and qualified component of the unemployed has increased since 1984 when 50 per cent of the unemployed had no qualifications - that figure was down to 35 per cent by 1992.

UK unemployment: two-page special, Pages 8-9

Samuel Brittan, Page 20

--------------------------------------------------- STOCK MARKET INDICES --------------------------------------------------- FT-SE 100: 2,814.0 (+1.8) Yield 4.28 FT-SE Eurotrack 100 1,121.77 (-1.37) FT-A All-Share 1,374.5 (+0.1%) FT-A World Index 141.01 (-0.1%) Nikkei 17,009.63 (+93.31) New York: Dow Jones Ind Ave 3,312.19 (+2.7) S&P Composite 433.3 (-0.61) --------------------------------------------------- US RATES --------------------------------------------------- Federal Funds: 3% (3 5/8%) 3-mo Treas Bills: Yld 2.962% (2.971%) Long Bond 100 5/16 (99 25/32) Yield 7.095% (7.138%) --------------------------------------------------- LONDON MONEY --------------------------------------------------- 3-mo Interbank 6 1/4% (same) Liffe long gilt future: Mar 103 1/32 (same) --------------------------------------------------- NORTH SEA OIL (Argus) --------------------------------------------------- Brent 15-day (Apr) dollars 17.72 (18.11) Gold New York Comex (Feb) dollars 331.0 (333.0) London dollars 330.15 (331.85) --------------------------------------------------- STERLING --------------------------------------------------- New York: dollars 1.4455 (1.4485) London: dollars 1.444 (1.4475) DM 2.35 (2.3625) FFr 7.9675 (8.0) SFr 2.1725 (2.18) Y 172.5 (173.25) pounds Index 76.5 (76.9) --------------------------------------------------- DOLLAR

--------------------------------------------------- New York: DM 1.62355 (1.628) FFr 5.509 (5.304) SFr 1.499 (1.504) Y 119.65 (119.965) London: DM 1.628 (1.6315) FFr 5.5175 (5.5275) SFr 1.505 (1.5065) Y 119.4 (119.65) dollars Index 66.4 (same) Tokyo open Y 119.685 ---------------------------------------------------

PRESIDENT Bill Clinton last night launched a four-year Dollars 500bn package of tax increases and spending cuts designed to cut the annual US budget deficit by Dollars 140bn to Dollars 206.5bn in 1997.

The programme combines long-term tax increases and spending cuts with a short-term boost to the economy, involving expanded infrastructure spending and a short-term investment tax credit.

'Unless we have the courage to start building our future and stop borrowing from it, we are condemning ourselves to years of stagnation, interrupted only by recession,' President Clinton said in his State of the Union address to Congress in which he outlined his programme.

But Mr Robert Michel, the Republican leader in the House of Representatives, immediately attacked the Clinton plan.

'When you hear a Democrat call for taxes, do not ask for whom the tax rises - it will rise for you,' Mr Michel said, adding that the 500,000 jobs Mr Clinton says his plan will create this year would cost the taxpayer Dollars 55,000 apiece.

Before Mr Clinton's speech administration officials mounted a spirited defence of the programme after Tuesday's sharp fall on Wall Street. Mr Roger Altman, deputy treasury secretary, described as 'exaggerated' reports that middle-class Americans were going to pay a lot more.

Mr Lloyd Bentsen, treasury secretary, Mr Robert Reich, labour secretary, and Mr Leon Panetta, director of the Office of Management and Budget, also made efforts to soothe market fears.

Before the speech, stock markets remained relatively calm, with the Dow Jones Industrial Average closing 2.7 higher at 3,312.19.

Bond prices rose sharply on hopes that the measures would have a realistic chance of passing through Congress. The benchmark 30-year Treasury bond climbed 1/2 point to 100 5/16 , pushing the yield down to 7.095 per cent, its lowest level for more than six years.

In Tokyo, shortly before the address, the dollar opened steady against the yen and a fraction firmer against the D-Mark. There was heavy buying of US government bonds, with prices rising steadily.

The tax package includes:

A new top-income tax rate of 36 per cent for couples earning more than Dollars 140,000 in taxable income.

A 10 per cent surtax on taxpayers earning more than Dollars 250,000.

A rise in the corporate tax rate from 34 per cent to 36 per cent.

A new energy tax levied on the thermal content of fuels.

An expanded earned income tax credit for low-income taxpayers.

Income tax levied on 85 per cent of social security retirement payments, instead of 50 per cent.

At the same time, Mr Clinton plans a short-term Dollars 30bn stimulus package to create the 500,000 jobs by 1994 through a temporary investment tax credit and an accelerated programme of public spending on infrastructure, housing, education and the environment.

Over the long term, Mr Clinton wants to reduce government spending on wasteful programmes and excessive administration, cutting the number of federal jobs by 100,000, or almost 5 per cent, by 1995.

He also wants to cut more than Dollars 125bn from the five-year defence budget outlined by the former president, Mr George Bush, and save Dollars 60bn over the same period by controlling health costs.

The impact of the new taxes will only be felt in later years: this year, new revenues of Dollars 2.9bn will be more than offset by a temporary incremental tax credit for large businesses and a permanent investment tax credit for smaller businesses. The energy tax, which will be phased in in three stages starting in July 1994, will be levied at a rate of 25.7 cents per million British thermal units on coal, gas and nuclear energy, but at a higher rate of 59.9 cents on oil. The tax is eventually expected to cost the average family with an income of Dollars 40,000 a year an extra Dollars 118, and will bring more than Dollars 22bn a year into the Treasury.

One important potential source of new revenue included in Mr Clinton's campaign documents has been greatly scaled back: the administration now expects to raise an additional Dollars 3.8bn over a six-year period from new rules governing transfer pricing by foreign and US multinationals, not the Dollars 45bn in four years Mr Clinton estimated during the campaign.

However, Treasury officials said they planned to spend Dollars 38m on hiring more tax inspectors and doubling the rate of audits on foreign-owned subsidiaries, in the hope that this would yield significant extra revenues.

Mr Clinton, who promised voters last year to lower taxes for the middle class, is taking a calculated risk by presenting an economic package that requires immediate pain in the interests of a long-term improvement in the health of the US economy.

While components of the programme are expected to arouse fierce opposition from affected interest groups, many members of Congress believe that their voters want them to give the new president a chance.

The House of Representatives, where the Democrats have an 80 seat majority, may swallow the Clinton plan as a package. In the Senate, where party discipline is often weaker, some Democrats believe the president's best chance of success will come if he can enlist the support of Senator Bob Dole, the Republican leader.

Americans to pay more for energy, Page 6 Worst of friends, Page 20 Editorial Comment, Page 21 Bonds, Page 29 Currencies, Page 35 US stocks, Page 41

BETTER than expected retail sales statistics yesterday lifted hopes for an end to the recession and re-opened the debate about whether the government should raise taxes this year.

Retail sales volumes increased by 1.6 per cent last month compared with December, and by 2.3 per cent on the previous January in the biggest annual rise for nearly four years.

The latest figures were released as it emerged that Mr Norman Lamont, the chancellor, is coming under conflicting pressures over raising taxes to cut the government's growing budget deficit.

Mr Lamont will be cautioned by cabinet colleagues this morning not to risk aborting economic recovery by introducing large tax increases in his March 16 budget.

But it also emerged that the Treasury is coming under pressure from officials at the Washington-based International Monetary Fund to raise taxes in order to cut the rising gap between government receipts and spending. The public sector borrowing requirement is expected to rise to about Pounds 37bn in 1992-93 from Pounds 13.7bn in 1991-92.

The Treasury indicated last night that the deficit would be reduced as the economy recovered, and noted that underlying inflation was within the target range of 1 per cent to 4 per cent.

However, the cabinet's traditional review of the background to the budget will see the chancellor warn that the sharp deterioration in public finances may force some increase in taxation in one of his two budgets this year.

That view is thought to be shared by a number of leading cabinet figures including Mr Kenneth Clarke, the home secretary. Many are convinced that Mr Lamont will have no alternative but to extend VAT to goods and services which are at present zero-rated.

But a majority of senior ministers are thought to favour delaying significant changes until the second budget in December even if Mr Lamont decides to 'flag' them next month.

Despite the relatively upbeat tone of the latest retail figures, sterling fell last night to a new closing low in London against the D-Mark.

The pound slipped against the German currency on the back of expectations about a further cut in UK interest rates, even though Mr Lamont told journalists he had no reductions in mind.

Sterling dropped 1 1/4 pfennigs against a stronger D-Mark to a London close of DM2.35 and eased to DM2.3489 in New York. Against the dollar, the pound slipped by a third of a cent to Dollars 1.4440, but gained to Dollars 1.4455 in New York.

Mr Lamont welcomed the retail sales figures as 'extremely encouraging' and said interest rates were 'at a suitable level' to keep inflation down and were also consistent with recovery.

The seasonally adjusted retail figures from the Central Statistical Office indicate that retailers, helped by heavy discounting, have bounced back in recent weeks after a disappointing December in which sales volumes dropped a revised 1 per cent on the previous month.

In the three months to the end of January, sales volumes were up 1.4 per cent on the same period a year previously.

But underlining the patchy nature of the recent trends in the sector, sales volumes in the three months to January 31 were up by a modest 0.2 per cent compared with the previous three months, significantly less than the quarterly rises seen around the middle of last year.

In the three months to January 31 compared with the previous three months, food retailers saw sales volumes rise by 1.7 per cent while shops selling a mixture of food and other goods reported a 2.2 per cent rise. Stores selling clothes, shoes and household goods experienced sales drops of 2.5 per cent and 0.7 per cent respectively over the same period.

Inflation target may be breached, Page 11 Lex, Page 22 Currencies, Page 35 London stocks, Page 20

In World Cup qualifying soccer matches England beat San Marino 6-0, Scotland defeated Malta 3-0 and Northern Ireland won 2-1 against Albania. In a friendly international the Republic of Ireland beat Wales 2-1.

Howards End, a film from the novel by E. M. Forster, received nine Academy Award Oscar nominations, including best actress for Britain's Emma Thompson. Clint Eastwood's western Unforgiven also got nine nominations.

Gemma Gibson will remain in council care until next week while social workers question her actress mother Yasmin, 31, who was freed on police bail after being questioned about allegations that she abandoned Gemma to go on holiday to Spain.

Five prisoners being tried in connection with the 1990 Strangeways jail riot escaped from a Manchester court. One was free for the second time since the riot.

A youth being questioned about the murder of two-year-old James Bulger, abducted from a shopping centre in Bootle, Merseyside, was released and eliminated from the inquiry. Two other youths were released earlier.

MR Michael Heseltine, trade and industry secretary, is likely to visit Brussels next week to present draft plans to the European Commission for keeping open some of the UK's threatened coal mines. Mr Karel Van Miert, the EC competition commissioner, will insist that subsidies to pits should be scaled down after 1995.

Report, Page 10

THE European Commission yesterday warned EC steelmakers they would have to close even more plants than originally envisaged if they wanted commercial and financial support from the Community.

The call for more cuts came as the Commission unveiled a rescue package to help protect the industry, which is suffering from overcapacity, competition from cheap non-EC imports and the worsening recession. The EC would provide Ecu900m (Pounds 740m) of financial support for closure costs, but only if member states match funding promised by the Commission

The Commission refused to estimate how many jobs might be lost in the EC industry as a result of capacity cuts, but an internal Brussels report has suggested that the original, more modest closure programme could lead to at least 50,000 redundancies. A German steel industry spokesman yesterday warned that it alone might have to shed 35,000-40,000 jobs under the new proposals.

In their original forecasts, steel producers suggested they could reduce production of crude steel by up to 25.8m tonnes over the next three years, and rolled products by 17.9m tonnes. Mr Bangemann said yesterday that this was 'not sufficient', and steelmakers would have to cut a further 4m or 5m tonnes of capacity. Altogether, the Commission is looking for cuts of up to 30m tonnes in crude steel, and about 19m tonnes in rolled steel.

Mr Martin Bangemann, the EC industry commissioner, and Mr Karel Van Miert, responsible for competition, said they hoped the plan would receive the political backing of industry ministers at a special meeting next week. However, in an indication of the political sensitivity of the issue, they will not ask member states to take a formal decision on the rescue package before May.

Mr Fernand Braun, the EC's 'steel envoy', is to renew contacts with 70 steelmakers in the hope that they can offer more capacity cuts to satisfy the Commission before the May meeting. The producers will be asked to commit themselves to a binding closure programme by the end of September, and to carry it out by the end of 1995.

The draft programme approved yesterday includes controversial plans to reduce alleged unfair competition from cheap steel imports from eastern Europe. Mr Bangemann said the EC will ask the Czech and Slovak republics, Hungary and Poland to impose minimum prices on steel exports to the EC over the next three years - or face anti-dumping duties. He denied the Community was backtracking on its commitment to encourage fair and free trade with eastern Europe.

Demands for greater cuts by the industry will go down particularly badly in Spain, which has still not received EC approval for controversial plans to subsidise new steel-making capacity, in exchange for cuts elsewhere. Mr Van Miert said yesterday he hoped the Spanish would recognise that other countries' industries were also expected to make sacrifices as part of an overall programme.

Mr Van Miert warned member states to avoid the temptation to 'renationalise' the steel sector, through subsidies.

German steel talks, Page 2

Two-thirds of the members of Iran's parliament backed a call from the country's supreme leader, Ayatollah Ali Khamenei, for the killing of Salman Rushdie, author of The Satanic Verses which many Moslems consider blasphemous.

IN 1984 Mr David Tweedie, then technical partner with accountants Peat Marwick Mitchell, identified 'an odd scheme' by which a client company was attempting to prevent a substantial liability appearing on its balance sheet.

Nearly a decade later, he has finally been able to respond to the problem of off-balance-sheet finance in his role as chairman of the Accounting Standards Board (ASB).

In the intervening years, a growing number of companies have taken advantage of an expanding range of obscure, rule-bending devices which allow them to conceal their full liabilities from readers of their accounts. 'It's impossible to generalise,' says Mr Tweedie. 'Every scheme I have looked at is different.'

The old Accounting Standards Committee, the ASB's predecessor, initially refused to act. It was cajoled into action by pressure - partly from the Bank of England - after the collapse of Burnett & Hallamshire, which used off-balance sheet financing on US property activities.

Even after the ASC released ED 49, one of its final exposure drafts on the subject during the organisation's death throes in 1988, long delays followed before the ASB was ready to go public.

Part of the delay reflects fierce resistance by companies to the proposals. Banks in particular were concerned that they would breach the EC's capital adequacy requirements if they were forced to include securitised assets such as mortgages on their balance sheets.

The ASB backed down with an elegant compromise last year - banks should disclose the gross assets and liabilities incurred by securitisations, and then show a net figure after deducting the amount which is genuinely non-recourse.

But that still requires companies to be able to calculate the full extent of the risk retained by them. The banks argue that this will be impossible for credit card receivables - an item which several are presently considering securitising.

They say that their computer systems are not sufficiently sophisticated to assess fully the outstanding risk on credit cards. If so, the ADB proposals would require them to show these risks on the balance sheet.

Fred 4, the new draft, draws heavily on the ASB's statement of principles - where companies enjoy the principal benefits or are exposed to the principal risks of transaction, and it can be measured, it should be put on the balance sheet.

Fred 4 will affect many off-balance sheet devices presently in use by a wide range of companies. These include sale-and-repurchase agreements, factoring and loan transfers.

One classic example is shown in the 1990 accounts of Queens Moat Hotels - not on the balance sheet but buried in note 22 - in a series of sale and leaseback transactions for five hotels and two office properties.

'As soon as this standard comes out, there will be people in the banks with wet towels around their heads working all night to find ways round it,' says Mr Tweedie.

His response has been to weave examples into the draft standard, which is more likely to ensure the general principles in the text could be defended against legal attack.

THE GOVERNMENT'S response to the collapse of Daf, the Dutch truckmaker, came under fierce attack in the Commons yesterday, with Labour claiming it highlighted its lack of an industrial strategy, David Owen writes.

Mr Robin Cook, shadow trade and industry secretary, said the government's approach contrasted with that of its Belgian and Dutch counterparts, which were intervening to save local jobs.

Predicting that thousands of jobs would be lost if the British-based Leyland Daf went down, Mr Cook asked why, as of last week, there had been no 'ministerial contact from Britain' with the Dutch finance minister while a rescue package was being worked on.

'If you will not even talk to the Dutch government, you are making it more likely that the cuts will fall on British jobs,' Mr Cook said.

Flanders offer, Page 26

THE SALVATION Army said yesterday it had become the victim of an Dollars 8.8m (Pounds 6.19m) fraud.

A writ issued in the High Court alleges that Tilen Securities Inc, Mr Stuart Christopher Ford of Birmingham, its owner, and Mr Gamil Naguib conspired to defraud the Salvation Army of the money. The Salvation Army refused to give details of its relationship with the three defendants. It said that in spite of repeated requests for money owed to it, only Dollars 500,000 had been repaid.

Mr John Larsson, the head of the charity in the UK, said it had no alternative but to take legal action to seek recovery of the restof the money.

The High Court action follows proceedings initiated by the charity in Luxembourg last month, when bank accounts containing about Dollars 520,000 were frozen. The legal action has the support of the Charity Commission. The Salvation Army has asked Coopers & Lybrand, the accountancy firm, to investigate.

The charity, which is the largest provider of social services after the government, last year had an income of almost Pounds 80m, of which Pounds 12m came from public donations.

Mr Larsson said: 'I firmly believe that the public will see that we are acting decisively and will continue to give us the magnificent support for which we have always been so grateful.'

None of those named on the writ could be contacted for comment last night.

MR Boutros Boutros Ghali, the United Nations secretary-general, yesterday asked Japan to play a bigger part in world peacekeeping, saying this would help counter complaints that the UN was dominated by the US, Reuter reports from Tokyo.

But Prime Minister Kiichi Miyazawa, facing strong domestic opposition to a wider role for the Japanese army, responded cautiously in a meeting with the visiting UN chief.

He said Japan would not hurry to expand its participation in UN peacekeeping activities, which began last year when a contingent went to Cambodia.

Mr Boutros Ghali specifically asked Mr Miyazawa to send troops to Mozambique, after earlier suggesting in a Japanese television interview that it commit troops to Somalia also.

'I think the situation in Mozambique meets your country's condition (for sending troops),' Mr Boutros Ghali told Mr Miyazawa. 'There is a solid ceasefire agreement and operations are under way for rehabilitation of refugees.'

So far only 100 UN peacekeepers are overseeing the formerly Marxist country's transition to democracy. The force will eventually number more than 7,000. The government and Renamo rebels signed a peace pact last October.

Earlier, Mr Boutros Ghali suggested Japan commit troops to Somalia, where he envisages a new type of peacekeeping operation.

Mr Boutros Ghali has suggested that conventional peacekeeping operations be upgraded to 'peace-enforcing operations' which would allow the UN to act without the consent of warring factions.

Mr Boutros Ghali and Mr Miyazawa did not discuss the question of sending Japanese troops to Somalia.

The UN chief said the world body was undergoing a crisis of confidence because some member states have accused it of coming under the sway of a lone superpower.

'That is why we need the participation of countries like Germany, Japan and Brazil in these and other United Nations operations,' he said.

Mr Miyazawa said post-war Japan had vowed never again to become a key military power and should not rapidly expand its participation in peacekeeping operations.

Japan's peacekeeping law, enacted last year after 20 months of wrangling in parliament, forbids troops from taking part in United Nations combat duties.

RISING unemployment, increasing foreign debt and lower private consumption will characterise the Finnish economy in 1993, the finance ministry said yesterday. It predicted flat GDP this year, overturning a forecast 2 per cent growth made last October. But it expects the economy to grow 3 per cent next year. Private consumption will fall 4 per cent in 1993 and unemployment peak at 450,000 (20 per cent of the workforce). Foreign debt is predicted to rise to FM250bn (Dollars 42bn), with net interest payments on it amounting to FM27bn this year.

State borrowing requirement for the year is put at almost FM80bn (nearly 50 per cent of GDP) against 16.5 per cent at the end of 1991. Exports are predicted to rise 11 per cent this year. The banking sector's combined credit losses will be about FM20bn this year against FM21bn in 1992.

The UN relief operation in Bosnia yesterday remained deadlocked over the Serb blockade of besieged Moslem enclaves, writes Laura Silber in Belgrade.

For the third day, Serb commanders refused to allow the passage of emergency aid across Serb lines to Cerska, a Moslem stronghold in eastern Bosnia.

The British government condemned the Bosnian Serbs for their continued blockade and called on Serbian President Slobodan Milosevic to exert pressure on them to allow the free passage of aid.

In a sharply worded protest, British diplomats in Belgrade, the Serbian capital, reminded Mr Milosevic of his pledges to let aid through to Moslem enclaves.

The UN yesterday accused the Bosnian government of playing political games with their boycott as warehouses reached full capacity in Sarajevo.

UNITED NATIONS and European Community mediators have advised representatives of the Krajina Serbs to drop demands for independence from Croatia if they want to reach a durable peace settlement with Croatia at talks which began at the UN yesterday.

Instead, the mediators are pushing for a solution under which the Krajina Serbs, like the Albanian majority in Kosovo, would be given a large measure of autonomy within Croatia, in the first case, and Serbia in the second.

There could be no question of a change in national borders unless they were agreed by all parties involved, a conference spokesman said.

Krajina Serbs, represented by Mr Goran Hadzic and Mr Mile Paspalj, respectively self-styled president of the assembly and foreign minister, began the presentation of their case to Mr Cyrus Vance and Lord David Owen yesterday before Croatian representatives join the negotiations tonight or on Thursday.

The international mediators, already heavily involved in the search for a solution of the Bosnian conflict, have been asked by Mr Boutros Boutros Ghali, the UN secretary-general, also to broker an agreement between the Croats and the Krajina Serbs as a basis for a long-term renewal of the UN protection force's mandate in Croatia.

Pending such an agreement, Mr Boutros Ghali has proposed an interim extension of the Unprofor mandate, due to expire on February 21, until March 31.

Last week Mr Boutros Ghali indicated that the failure to implement the original UN peacekeeping plan of January 2, 1992, and to negotiate a settlement of the conflict between Croatia and the Serb populations living in UN protected areas and Serb-controlled so-called 'pink zones,' were at the root of the problem. They were among the main causes of the recent Croat offensive in Krajina.

Reuter adds: Mr Vance is expected to quit the peace talks once the New York stage of negotiations is completed, diplomats said last night.

THE CZECH government is preparing to revise the country's bankruptcy law to protect companies facing serious financial difficulties. Unamended, the existing law could force hundreds of companies out of business.

The law was approved by the former Czechoslovak parliament last year, and ministers are expected to discuss draft amendments today. The government wants the revised law in place by April 20, when current provisions expire, Mr Karel Dyba, minister for the economy, said in an interview with the Financial Times.

The need to amend the law is highlighted by a recent spate of calls by large companies for urgent financial help from the government.

Many companies are locked in a circle of bad debt caused by unpaid bills from customers. Some of the biggest Czech companies whose main markets were in the former Soviet Union and other communist countries have been particularly badly hit by the collapse of these markets. They cannot pay their bills to suppliers who threaten to cut off essential supplies.

Officials fear that many other companies could be affected if major companies, which have called on the government for urgent financial help, are allowed to go bankrupt.

'We want to avoid a chain reaction, but a little more pressure on a non-paying company is needed. It's a question of how big a dose of medicine needs to be given,' Mr Dyba said.

He rejected suggestions that thousands of companies are near bankruptcy.

'That's rubbish. Nobody has the data. People talk about inter-enterprise debt as too high, but it's quite normal in a market economy. One should not worry too much about its increase. The real problem is bad debts of some enterprises to banks. That's what we must solve.'

The government wants the law to allow out-of-court settlements. 'The (revised) law will force interested parties to act and give them time to reach out-of-court settlements.'

The courts were overburdened with thousands of bad debt cases, and had neither the capacity nor the ability to solve all these problems, he said.

The revised law may allow companies initially to pay back only part of their debt. The government wants the National Property Fund, responsible for privatisations and a big shareholder in many companies, and the Consolidation Bank, set up to deal with state-owned companies' bad debts, to help by taking equity in companies threatened by bankruptcy or by providing finance.

The government may intervene directly if there was a clear company commitment to resolve its financial situation. 'But there will be no bailing-out without guarantees,' said Mr Dyba, adding that the government's role would be that of a catalyst.

Government intervention would be limited to at most 12 big companies.

A solution would have to involve 'sharing the burden among workers, managers, owners or would-be owners, the banks and the government.'

Ministers from the Organisation of Petroleum Exporting Countries said they had agreed to cut oil output by around 1.4m barrels of oil per day in an attempt to rescue weak petroleum prices. Current output is estimated near 25 million bpd.

The deal, which came after four days of bargaining, also brought Kuwait back into the group's system of production quotas, from which the emirate had been exempt as it rebuilt from the 1991 Gulf War. Earlier story, Page 20

Sir, Andrew Taylor's story ('Builders 'forced to bid 10 per cent below cost'', February 9) pinpoints exactly the untenable situation that subcontractors in the construction industry have been suffering for many years. The present recessionary times only make the pain more intense.

It is the case that construction companies 'Dutch-auction' their offers for tender to specialist engineering contractors such as members of our association, in order to gain work at a sub-economic price. They then use the subcontractors' money to fund their own deficits.

From the Dutch auction process they follow up by forcing through onerous contract clauses, including 'pay-when-paid' terms, late overall payment, withholding of retention money and many other abuses. A recent survey of our members showed that just 257 companies are currently owed Pounds 48m in retention money alone. It is certainly time that these issues were more fully presented to a wider audience rather than the situation that has existed hitherto, where the main players have largely been talking to themselves.

It is to be hoped that the government's construction industry inquiry, long germinating, will finally begin its work and, in consultation with all parties, put an end to these practices.

John W Clarke,

HVCA,

Esca House,

34 Palace Court,

Bayswater, London W2 4JG

Sir, In his excellent article 'A disarming achievement' (February 12), David White comments: 'Surplus armoured vehicles, artillery weapons and aircraft covered by the terms of CFE have to be destroyed in the next three years.' This is correct, but hides the fact that Nato is using every means at its disposal to minimise the numbers of weapons to be destroyed. Under the policy known as 'Cascade', Nato countries whose forces exceed the CFE treaty-limited equipment (TLE) quotas pass on, free of charge, their surplus weapons to Nato countries with sub-TLE forces. The beneficiaries of this policy have thus far been Greece and Turkey: 916 tanks, 150 armoured combat vehicles, 72 artillery systems and 100 mortar systems cascading into Greece; and 1,057 tanks, 600 armoured combat vehicles and 71 artillery systems cascading into Turkey. This represents a massive modernisation of these nations' forces at the time when every thoughtful analyst fears they may be dragged into war with each other over Macedonia and Kosovo.

Responding to these fears, the UK defence secretary, Malcolm Rifkind wrote, in a letter to Basic: 'I do not see that the tragic events in the former Yugoslavia provide a reason to change the rationale for the programme.' These words may well come back to haunt him.

Cascade, however, is indicative rather than exceptional. Germany is assisting in a rearmament of Hungary. No one in NATO seems to believe these policies are problematic, though concern is voiced when the former Soviet Union states do the same thing.

The scale of these Nato-blessed arms transfers far outweighs, and flatly contradicts, any tentative positive steps towards peace-keeping recently made by the alliance.

Dan Plesch,

director,

The British American Security Information Council,

8 John Adam Street,

London WC2N 6EZ

There was one memorable phrase in Mr Jacques Delors' speech to the European Parliament last week. Unfortunately, it was embedded in a passage of classic Euro-speak.

After proclaiming that 'democracy, subsidiarity and transparency were the European Commission's watchwords', Mr Delors went on to say: 'With an eye to the next institutional reform, scheduled for January 1996, I feel obliged to point out that, had the 1991 intergovernmental conference accepted the Commission's idea of a hierarchy of norms, the subsidiarity principle could have been applied more rationally.' If that sentence is transparent, my name's Norman Tebbit.

But in the next sentence came the memorable phrase. The Commission, said Mr Delors, 'intends to conduct this crusade for democracy'. Although the word 'crusade' was perhaps ill-chosen, given the unfavourable connotations it has for Europe's Moslem inhabitants, something like a 'crusade for democracy' is desperately needed.

Yet the Commission is ill-placed, and Mr Delors himself ill-qualified, to lead such a crusade. I do not question his democratic convictions, but his language, his public image and his past career are essentially those of a technocrat. He rose to political office in France via the civil service and a series of 'technical adviser' roles. Not coincidentally, this was also the preferred role of the EC's founding father, Jean Monnet. Throughout its history the EC has been a brilliant conspiracy of Europe's governing elites. Each step forward in its history has been the work of an intergovernmental conference (IGC), at which national governments negotiated a treaty. Each successive treaty has amended or enlarged the preceding one.

The result is a text of ever-growing complexity, largely incomprehensible to ordinary people. That in itself should not matter. Most acts of national parliaments are no easier for the layman to follow without expert guidance. But we accept them as the work of people we have elected to legislate for us, and who do at least debate the acts in public.

In IGCs, by contrast, the work is done at best by ministers, more often by officials, following the conventions of diplomatic negotiation, not parliamentary debate. They meet behind closed doors. Yet the texts emanating from these bodies are much more important than most acts of national parliaments; indeed, they define ground rules within which national parliaments are obliged to operate ever after, unless they take the extreme step of withdrawing from the EC altogether.

These texts do, of course, require national ratification. But the fact that national ratification of the latest one - the Maastricht treaty - is proving so difficult shows that the limit of public tolerance has now been reached. It is pure self-delusion to imagine that things would be better if only the last IGC had accepted 'a hierarchy of norms'. From here on a different approach is needed.

Mr Delors mentioned 'the next institutional reform, scheduled for January 1996'. Actually the Maastricht treaty (article N2) says nothing about January. But it does say that 'a conference of representatives of the governments of the member states shall be convened in 1996 to examine those provisions of this treaty for which revision is provided'. In other words, yet another IGC.

Revision of the Maastricht treaty will certainly be needed, in 1996 if not before, because whole chunks of it will be unworkable even with 12 member states, let alone the 16 the Community will probably have by 1996. What is actually required is a constitution: that is, a rule book for the European union - something all Europeans could understand, and to which they could appeal when any of the union's governing bodies appeared to exceed its lawful powers.

Many states, including most of the EC's member states, have such a document to regulate their internal affairs. How did they get it? By electing a special assembly, called a constituent assembly, to draft it for them, and in most cases by ratifying the result in a referendum.

So that's what we need in 1996, not another IGC but a European constituent assembly, empowered to revise the treaty and present the results to member states for ratification. One way to get it would be to agree in advance that the next European Parliament will have such powers - but that may not be possible, because it would mean getting agreement before the next European elections, which are little more than a year away.

Either way, we shall not get such an assembly without the agreement of national governments, since only the member states could endow it with the necessary powers. This means we shall not get it unless there is a widespread and intensive public campaign for it throughout Europe, one so big that national governments dare not ignore it. A crusade, if you insist.

National governments will fight hard and dirty to avoid this surrender of power, equating - as always - their own power with national sovereignty, and depicting the proposed assembly as a federalist monster. But the answer to that is simple. The decisions of the assembly would not be binding on any member state until it had ratified them. I suggest this should be done by holding a national referendum in every member state on the same day; but if some states insist on using a parliamentary procedure, so be it. The important point is that democracy and transparency would have been part of the process from the start, instead of being dragged in as a half-hearted afterthought, which is what has happened with Maastricht.

There is no time to lose. The crusade should start now.

Sir, I have just come across your leader of February 8 congratulating John Smith, the opposition leader, for learning lessons from President Clinton about being in tune with 'the aspirations of ordinary people'. And about time, too. Hurrah] etc.

But the aspiration of most of us ordinary people is to be free riders if we can get away with it. To have a first-rate health service and run it on peanuts. To pay the non-ordinary unemployable homeless enough to keep them from begging on the streets and turning our parks into shanty-towns, but not out of our own pockets.

Democratic politics used to be thought to be about using persuasion to change other people's aspirations so as to bring them more in line with (a) one's own perception of reality and (b) one's own values.

Take current aspirations as given, as your leader does, and politics is either about clever public relations deception, or about the spendthrift piling-up of American or Italian-style fiscal deficits.

Is that the sort of democracy we really want?

Ronald Dore,

Centre for Economic Performance,

London School of Economics,

Houghton Street,

London WC2A 2AE

Your feature, 'Optimistic state of the unions' (February 15), suggested 'Come A Little Bit Closer' by Fleetwood Mac as an alternative to its 'Don't Stop Thinking About Tomorrow'.

Perhaps more appropriate would have been their recording 'Tell Me Sweet Little Lies'. Or, with the ominous changes we may see in President Clinton's state of the union address to the guarantees offered prior to election, could we see the Democrats adopting as their theme tune 'Promised You A Miracle' by Simple Minds]

Mark Tracey,

technical adviser,

The Currency Programme,

77 London Wall,

London EC2M 5ND

It took the ruling National party in South Africa more than 40 years to come to its senses about apartheid, and it was the economic failure of the policy - not its moral repugnance - which finally tipped the balance.

Now, with the National party on the point of abandoning its hegemony and entering government with the African National Congress, it is keen to put behind it the peculiarly South African form of state socialism which bolstered apartheid. It fears that the ANC might otherwise decide to ape this policy, using the state to further African interests at the expense of the Afrikaner.

So at the last moment, the National party has been converted to economic discipline, to the kind of free-market policies without which post-apartheid South Africa cannot flourish. Faced with an economy which can only employ just over half of the available labour force, where productivity is low and real wages high by international standards, and where the civil service is large and inefficient, there is no alternative to economic reform.

That has been true for years, and it has not previously stopped Pretoria from denying reality. But the country's finance minister, Mr Derek Keys, finally seems to have removed the blinkers from both government and opposition eyes. With a clever slide show demonstrating the depths of the economic crisis, which he has presented to everyone from the cabinet to the leaders of the ANC, Mr Keys has concentrated the minds of politicians on the need for a rapid political settlement. More than anything else, this has driven progress in the constitutional talks between the National party and the ANC which last week yielded an outline agreement on power-sharing.

Mr Keys, with his commitment to tight fiscal policies, is a powerful ally for Mr Chris Stals, governor of the Reserve Bank, the country's central bank. Mr Stals has fought for years to instil monetary discipline. Last year, he managed to restrict money supply growth, as defined by the broad measure of M3, to within a tight target of 7 to 10 per cent.

The finance minister, who took office last May after a successful career as executive chairman at Gencor, the country's second-largest mining company, says South Africa has now entered a 'sane economic era' which can lay the basis for future growth. The credit for that must be shared between Mr Keys and Mr Stals, whose uncompromising monetary policy has helped push inflation to a 15-year low. Consumer prices rose at an annual rate of just under 10 per cent in December (see chart.) There are also signs that inflationary expectations are also beginning to fall. Fund managers, for example, are expressing renewed interest in fixed-interest securities.

But Mr Keys' achievement in promoting economics to the centre of the political debate should not be underestimated. Through force of intellect and personality, he has frightened the politicians out of their previous leisurely approach to negotiations, while maintaining good relations with both sides.

More technocrat than politician (probably the main reason for his success), Mr Keys has gained the respect of the ANC. But more important, he has won over the president, Mr F W de Klerk, who alone can authorise the painful economic restructuring now being planned.

Pretoria has yet to release details of the restructuring programme, but Mr Keys has made clear that stimulating investment is the centrepiece. That can only be achieved by reducing government consumption expenditure so as to channel more of national income into private fixed investment, and by restoring investors' confidence after years of political uncertainty and high inflation.

Mr Keys has taken his reform message to every forum that will listen. He mourns the fact that gross domestic fixed investment has fallen from 26 per cent of national income in 1983 to 16 per cent now - only 1 per cent more than is needed simply to replace worn-out and obsolete capacity. That, he says, is the most important element restraining economic growth, which has been negative for each of the past three years. A modest recovery, to real growth of between 0.5 and 2 per cent, is expected this year.

Government expenditure is the obvious target to free more funds for investment. Mr Keys points out that government consumption spending has risen from about 10 per cent of national income in the 1960s to more than double that now. Over the same period, Japanese government consumption spending was held to 9 per cent of national income.

But politically, there could hardly be a worse time to restrain government expenditure. Many blacks expect a multi-racial government to make up for the deprivations of apartheid overnight. Scope for cuts is also limited, although Mr de Klerk (under Mr Keys' influence) has said that civil servants must take a large pay cut in real terms, of perhaps 3 to 5 per cent, in the coming fiscal year. Taxes will also be increased, while civil service personnel should be cut by 5 per cent by the end of March.

Nonetheless, the budget deficit, which is expected to end the financial year at more than 8 per cent of gross domestic product, will probably remain high at 6 or 7 per cent of GDP in fiscal 1993-94. Finance department officials say that to cut the deficit to 5 per cent of GDP would require drastic action, the equivalent of a 7 percentage point rise in value-added tax (now 10 per cent).

Despite the deficit, finance ministry officials point out that spending targets were largely achieved this year. They say that the deficit resulted from a revenue shortfall due to recession and severe drought, and they predict spending will show only a very modest real increase next year.

Mr Stals says he believes 1993 will set the tone for the new South Africa. If Mr Keys proves to have the courage of his convictions on curbing government spending - and crucially, if the ANC and the trade unions resist public protests against such measures - then the central bank governor predicts this 'can easily become a decisive year in which the foundations will be laid for future economic development'.

With the labour force shrinking by 2 per cent in 1991 and 3 per cent in the first half of 1992 - adding to the 40 per cent of the economically active population already without formal employment - something must be done to revive growth.

But nobody believes anything can be done quickly. Indeed, many economic commentators are sceptical that inflation will remain in single figures, as the finance minister has promised, and that economic growth will resume.

But with Mr Keys at the Finance Ministry and Mr Stals at the central bank - posts both could retain in an interim government - South Africa has the best chance in years of breaking out of what Mr Keys calls 'the down-and-out trap'. And unless economic success can be achieved, South African democracy will rest on fragile foundations.

Sir, Just imagine the reaction of Barclays Bank to a property company's request for an overdraft to support a five-year rent-free period given to a tenant granted a 25-five year lease] Imry Group, Barclays' own property company, evidently see this formula for a Mayfair property as inspired thinking ('Rent-free offer', February 12). How many property companies could have been saved if Barclays had supported such a formula?

Gordon L McNally,

Kingsbrook Consultancy,

2nd and 3rd floors,

22 Robertson Street,

Hastings, East Sussex

Sir, I read with interest your article, 'Road network sell-off proposed' (February 12). My experience of the motorway network suggests that, on the rare occasions when the traffic is actually flowing, so fragile is this phenomenon that the tip vortices from a passing butterfly are sufficient to produce a 10-mile tailback. One toll booth would bring the whole of the country to a standstill. Has the refugee from the land of the cerebrally challenged who thought up this one ever driven round the M25?

I have an idea of how the government could raise the Pounds 2bn it requires. Charge an annual levy on every road user; Pounds 100 a year from 20m of them should just about do it. The government could call it a road fund licence and supply little round stickers to put in your windscreen as proof of payment. If it wished to charge according to usage it could (revolutionary, this one) impose a tax on fuel. About 6p a litre should raise the same amount.

B W Barton,

35 Sandyleaze,

Westbury-on-Trym,

Bristol BS9 3PZ

Watching Joe Orton's Entertaining Mr Sloane, which will be 30 years old next year, it is easy to feel that it is a modern classic. Since it has been absent from the London stage for over 10 years, 10 years in which Orton's legend has grown, this Greenwich revival is well timed. This is still the blackest of black comedies. The themes of youthful criminality, manipulation, bisexuality, misogyny and murder still prompt an audience to appalled laughter at regular intervals. At Greenwich, however, no-one as yet falls off his or her seat with laughter. Orton, even 29 years on, should be funnier.

That the director has comic gifts is not in question. He is Jeremy Sams, who is also one of our theatre's leading translators and musical arrangers. His very successful directorial debut, with Schippel the Plumber, occurred less than a year ago, in this same theatre. Very occasionally in that, and quite often in the rhymes of his translations, he has liked to nudge along a comedy with extra clevernesses of his own. In Entertaining Mr Sloane, however, he resists that. In this respect he shows a new kind of maturity. He also makes us feel something quite surprising: that Orton is not far from Pinter - and that Entertaining Mr Sloane is the flip side of The Servant.

It could be that, within another week of performances, the laughter will quadruple. (At present the violent scenes are so choreographed that you can almost hear the counts.) That the comedy sometimes hangs fire as yet is largely to do with Sams's handling of Mr Sloane himself and his landlady Kath. Ben Daniels has the right kind of promising late-adolescent musculature and body-language; the way he turns over on the settee as he refers to Eddie doing 'a bit of servicing' says volumes. But he lacks Sloane's hilariously alarming mystery. He even tries to make us understand his thuggish, panicking, nervous system. Nice work, but wrong play.

Janet Dale, as Kath, is funny from the first minute - from the moment she explains that the room should have the summer curtains, which 'are more of a chintz.' And her beady-eyed, squashy, puglike face is a hoot - until you notice how sometimes she pulls it into consciously 'funny' expressions. That she does not possess the buxom figure her lines suggest need not be a problem. But she seems not to imagine she is voluptuous; and she characterises Kath so sharply as a slatternly lower-class dowd that she misses her hypocritical pretensions to gentility and 'ideas of morality.' (And 'My teeth, since you mentioned the subject, Mr Sloane, are in the kitchen in Stergene' should raise a louder guffaw.)

Remembering the first-rate performances Dale has given with such directors as Trevor Nunn (Nicholas Nickleby) and Nicholas Hytner (The Madness of George III), I imagine that another director would have elicited a more rounded and suggestive performance from her. But, as her brother Ed (whom Orton himself felt should be 'the central pivot of the play'), Ian Gelder is perfect. Early on, as he finds himself encouraging Sloane to wear leather trousers without pants, he tries to laugh; the laugh becomes a choke, he goes red in the face, and there in a jiffy he shows you the whole character - bent, horny, closeted and apoplectic.

There are one or two puzzles. Sams runs Acts 2 and 3 together. Though this spoils Orton's suspense, it makes dramatic sense. But why make a momentary blackout between them? And why stress Sloane's terror, rather than his manipulation? Earlier on, preparing for her seduction of Sloane, Kath puts on some easy-listening music; and only when Act 1 ends on their sex does the record get stuck in a silent groove. But Orton's stage direction is funnier. Kath has hardly put the music on than 'the needle jumps a groove, slides across record. Automatic change switches record off.' God (said Blake) is in the detail; and so is Orton.

At the Greenwich Theatre, until March 20

A populist night on the box tonight. Rowan Atkinson's character Mr Bean, a cross between Chaplin and Mr Magoo, has proved tremendously successful and there will be a vast audience for his latest misadventure, Mr Bean in Room 426, on ITV at 8pm tonight.

That is followed by The Brit Awards, the record industry's annual prize giving. Much has been made of the fact that many of the nominees, especially Elton, Eric and Phil, are pushing 50, and hardly represent the future, while others, like Kate Bush, have not made a new record in years. However, the ceremony serves to draw attention to British pop music, which is currently going through a bad patch and needs all the publicity it can get.

A much more competitive musical event goes out at 7.20pm on BBC 2, the final of The Choir of the Year competition. The keen rivalry of the participants is only matched by the sporting behaviour of the six choirs singing it out for the two titles. Perhaps the fact that there is no money involved ensures the wonderful atmosphere.

What a terrible lot we must have been in the 1960s: bold, brash, relatively affluent and up to the ears in sex. The late Bill Naughton's Alfie, set in London 1963, now looks like a period piece from an age when men referred to women as birds, the women did not object, and southern audiences were delighted by such northern frankness. The play is not as funny, nor as outrageous, as it used to be, but it still has tricks up the sleeve.

Alfie is an out-and-out womaniser, full of male vanity. Yet he is not wholly an exploiter. Most of the women are at least as eager as he is. A few of them, like Ruby - the owner of a small chain of hairdressers and a fur coat to boot - come out on top. Occasionally he even feels remorse; the suggestion is that he is at heart a sentimental fellow who just cannot keep his eyes off skirts, or indeed off Alfie. He is remarkably well-groomed and dressed: women want to cook for him, press his clothes, iron his shirts and even wash his floor.

In 1993 the obvious question is whether Britain really was like that 30 years ago. How does he find the money to buy his smart blazers and sports jackets, let alone own a car, when he appears to have no fixed job? At most, he is a part-time hired driver. He spends one act of the play in hospital under what must have been an excellent national health service: the nurses go to bed with him.

The questions are not answered: perhaps in those far-off days no-one thought of raising them. Even the funds for an abortion are found quite easily: Pounds 30 at 1963 prices, bargainable down to Pounds 21. This must be one of the last British plays to pretend that social and economic problems did not exist. It was acclaimed as a breath of fresh air: with hindsight it looks like pure fantasy.

Alfie, originally played by the classical actor John Neville, is now taken over by Adam Faith, a survivor not so much from the 1960s as the 1950s. Faith looks as young as ever, as though nothing has changed. He also has great charm and there is the odd good twist in the text. Some very strong supporting performances include notably Sara Richardson who triples as the doctor and two of Alfie's girl-friends. Faith directs himself; whether he realises that this ought to be a museum piece is open to doubt.

Richmond Theatre until Saturday. (081) 940 0220

'Would you trust the dancing?' This was the question George Balanchine asked a TV director when discussions were under way about recording some of his ballets. Balanchine was concerned with preserving his choreography's identity for television, and 'trusting the dancing' is a central problem for anyone who transfers stage work to the screen. The cases are all too numerous of choreographer's intentions traduced by oh-so-clever camera work.

A variety of dance programmes on television during recent months - some recordings; some work specially conceived for the medium - have shown that TV often does not trust dance. (That it perpetuates a great deal of mediocre choreography and feeble performance is another, equally serious, matter.) Two fine directors of TV dance - Derek Bailey, Colin Nears - invariably provide scrupulous accounts of the choreography with which they are entrusted. Bailey's skill was very welcome in his recording of MacMillan's Winter Dreams on BBC2 at Christmas. Faced with a stage text which was a web of incident linking actuality and memory, he collaborated with MacMillan, and succeeded in preserving the poignant moods we knew from stage performance well and good.

But to 'trust the dancing' is also to respect it in the context of history and of society, and the American series Dancing, which is currently clogging BBC 2 on Sunday evenings, is a horrid example of how not to present and explain dance on television. Dancing has such obvious and worthy intentions - its message, oh dear, concerns 'the importance of dance in world culture' - that adverse comment seems like mocking the afflicted. Afflicted the series sadly is: by uncertain vision, by tedious disquisitions from chattering heads, by historical inadequacy, and by a strand of what I take to be 'political correctness', so that the duller and more inconsiderable its social and ethnic concerns, the more unquestioning its acceptance of the material. (It is possible to know too much about shimmying posteriors in the Cook Islands, and about West African ritual.) Even to my willing gaze, the programmes are prodigiously earnest; to the less-than-dedicated, they must seem a festival of tedium.

There have been visually exciting and informative sequences. The Japanese material was strong: impossible not to enjoy the hieratic splendour of the Gagaku ceremony, or the great Kabuki performers Tamasaburo and Ennosuke. Their art responds to the camera - the close study of Tamasaburo's onnagata playing, femininity concentrated to its most potent essence, was magnificent - and they spoke revealingly about their craft. Fascinating, too, a section in the first programme about young Indian men in Birmingham who have revived bhangra dance, and have discovered in it cultural roots and the means of joyous wedding celebration. But we must set against these the footage - the mileage - about Brazilian and African dance, infinitely worthy, and flatter than Holland. How can movement so vivid in life, and so responsive to life, be made so dreary in the cause of information?

With a certain naivete the programme-makers decided to define 'dancing' on their own arbitrary and sometimes questionable terms. Military ceremonial was 'choreography', as was a religious procession. Historical antecedents were sketchily evoked: comment about the court ballet of the 17th century was less than serious; discussion about the Christian religious dance tradition would have been better excised, so feeble was it. Faced with a subject vastly too large even for an eight-part series - and for what must have been a massive budget - the makers opted for something between the Readers' Digest and a bluffers' guide to ethnology.

Dancing fails because it has no single controlling idea of what is meant by its title, no central and inspiring spokesman. The golden example of an extended arts series is Kenneth Clark's Civilisation. It remains a memorably valuable display of popular education because of Lord Clark himself. He persuaded us of the passion he felt for art in many forms, and his scholarship, so lightly worn, was a delight shared with his viewers. Enthusiasm is contagious on the small screen. Today, obsessive gardeners, manic cooks, are the Ancient Mariners of the box, holding us with a glittering eye.

There have been moments in dancing when a voice, clear and authoritative, has won through: I thought Sheila Walker, an anthropologist from Texas, spoke with exemplary directness about American/African culture. But for the most part the commentary, read by Miranda Richardson, is a laundry-list of pieties. Scripts are carefully crafted from safe remarks - there seems neither desire nor time to be anything other than bland - interspersed with babble from 'authorities'. Too often their views have rung with special pleading; on occasion they have been inexact enough to make an aficionado wince.

The programmes have lacked style as well as intellectual rigour. There have been too many of those generalisations which, by their need to inform on basic terms, tie history in granny-knots. (Relics of my former mess-deck vocabulary surfaced when we were told that Aurora in The Sleeping Beauty is 16. Petipa, whose creation she was, gave her age as 20). In a programme which offered an uneasy juxtaposition between classical ballet and Kabuki drama, the statement that ballet had 'retained an essential character for 300 years' set the jaw agape. One could equally question beliefs that were voiced on the value of a young dancer in the role of Aurora because 'it helps the character'. It takes a ballerina much of her career to learn how to dance the part. The linking of Petersburg classicism with Kabuki seemed gratuitous, and exasperatingly clever in the closing sequence which zipped with fine insensitivity between Beauty and Tokyo while the band played Tchaikovsky-ishly on.

As the weeks have gone by, the series has taken on the air of being assembled in committee by anthropologists and sociologists. Editorial choices have looked odd, at times wilful, and fatally quaint. There is little point in showing newly-fashioned Baroque dances - they lack historical credibility - or in stressing the work of Katherine Dunham, interesting as it was in its time, while ignoring much of Spanish dance, and whisking through twentieth century ballet as if on the big dipper.

The programme on American modern dance matched good spoken sense - Twyla Tharp, haranguing the camera, had vigorous opinions that should have made viewers realise that dancing is a lively art - with revealing film. But this was a rarity. On March 7, the final programme, introduced by the opera director Peter Sellars - hair by Stan Laurel - will be devoted to the 1990 Pacific Rim festival of 'Dancing in one World'. I find it the apotheosis of everything that is well-intentioned, woolly-minded and depressing about this series, as cohorts of dancers hop, skip and jump in the cause of ethnic bonhomie.

That television can excite the viewer by exploring the communicative power of dancing was seen in a brave programme last summer. In The Far End of the Garden for BBC 2, Ross McGibbon, a Royal Ballet dancer turned director, looked at the choreographer Jonathan Burrows. McGibbon provided a sharp-eyed portrait of Burrows and his awkward, heart-tearing movement. He trusted the dance, and we understood its nature. Dancing, alas, has merely clouded the issue.

The BBC relay of Verdi's Stiffelio from Covent Garden a couple of weeks ago will hopefully have won new friends for this important, neglected opera. On television the production's wide-screen views of life in the Protestant communities of Montana looked marvellous and the opera's concentration on the intimate issue of marital fidelity will have been brought home with extra force.

In the theatre, the Royal Opera has shown that it works just as well. The censorship that was forced upon the opera in the 19th century - the plot concerns a Protestant minister and his adulterous wife, which would have been contentious enough, if the story did not also reach its climax at a church service depicted on stage - meant that Stiffelio was soon forgotten. There is no tradition of performance. Few singers have it in their repertoire today.

For that reason it is worth noting that the Royal Opera fielded a second tenor in the all-important title-role on Monday. Following Jose Carreras as Stiffelio came Giorgio Lamberti for the last two performances of the run. Looking suitably grave, a man of the church respected and even revered, he caught well the studied outward control that is an integral part of Stiffelio the man.

As the evening continued, however, it started to look as though this was as much a sign of his own nervousness as an intended feature of the character. It is always difficult to step into a role when everybody else in the cast is well rehearsed; doubly so, no doubt, when the opera is a rare one. But Lamberti sounded unsure of himself, husbanding his resources, lifting the voice up to notes, gingerly approaching climaxes which were asking for unfettered passion.

Fortunately the power of the opera was only marginally diminished. The other singers, notably Catherine Malfitano in full, confident voice as the wife, had their roles well within their grasp. In the pit Edward Downes built up formidable dramatic tension, even if early Verdi ideally asks to burn on a shorter fuse. I note that Placido Domingo is due to take on Stiffelio in New York. The Royal Opera should consider a revival of this production for him, if it has not already done so.

Final performance February 18 (Box Office 071-240 1066)

Off the south-west coast of tropical Java lies the 1,000-hectare Deli island. Indonesia has more than 13,000 islands but Deli is unique because of its indigenous population - 10,000 Macaca fascicularis monkeys.

The island is under a 25-year lease to CV Primates (Indonesia), an exporter of monkeys for use in medical research. The first shipment of 100 animals was made last December to the US. Primates aims to export a further 500 this year to the US, Japan and Europe.

By 1995, exports from Deli could total 3,000 monkeys or 15 per cent of current world demand for Macaca fascicularis, which account for at least 85 per cent of laboratory monkeys.

Paul Houghton, foreign partner of Primates, says the Deli island project should appease environmentalists. As the island comes on stream, the company will run down its trade in wild monkeys, which have historically provided the bulk of laboratory animals.

And Primates will consider breeding a different species of macaque, Macaca nemistrina, if tests confirm it as a suitable model for Aids research.

This would reduce the use of chimpanzees, an endangered species but currently judged the only suitable model for Aids research.

The monkey population on Deli is free-ranging and Houghton accepts that, other than supplementary feeding and veterinary care, there is little difference between a wild monkey and a Deli monkey.

'It's a grey area. Somehow this business is always in the shade,' he says. But he hopes Deli island will make the business more respectable and, potentially, more profitable.

With the island as a captive breeding centre, Primates will screen the monkeys for diseases - and disease resistance - which would make them unsuitable for medical programmes.

An unscreened monkey fetches between Dollars 200-Dollars 300, while a screened animal can fetch six times that price.

Perhaps unintentionally, therefore, the campaign against trapping wild animals has created an opening for Primates - value-added monkeys. 'Within this decade the average price of these animals will be Dollars 2,000,' estimates Houghton.

Animal sympathisers might take heart in knowing that captive-bred, screened, monkeys should reduce the overall number required by laboratories for research. Deli island may also be used to replenish the wild population in areas where hunting and destruction of habitat have taken their toll.

Houghton dismisses talk that using monkeys in laboratories is immoral and insists vaccine-research into diseases such as Aids, hepatitis, malaria, dengue and arterial sclerosis requires their use. He hopes the Deli island project will be a first step to attracting more medical research to Indonesia.

He also believes the project is essential if a wedge is to be driven into an emerging monkey trade cartel.

Four companies, excluding Primates, currently dominate the trade in monkeys: Siconbrec and AT Viri of the Philippines, Bioculture of Mauritius and CV Primaco of Indonesia.

Of these, Siconbrec, Bioculture and Primaco have an exclusive contract with Bausch and Lomb of the US which, in addition to manufacturing Ray-Ban sunglasses and alcohol-free mouthwash, also controls up to 70 per cent of the world monkey trade, says Houghton. Within the European Community, Houghton estimates Bausch and Lomb hold a 90 per cent market share.

Primates hopes to break this stranglehold but is currently restricted by an EC ban on the import of monkeys from Indonesia on the grounds of alleged violations of the international treaty on trade in endangered species.

Houghton believes some members of the EC regulatory body are simply against research and stresses the damage that restricting monkey imports could do to the European pharmaceutical industry.

'Those who control the monkeys control the drugs which come out on the markets,' he explains.

Sir Marcus Fox (above), Conservative MP for Shipley and chairman of the 1922 Committee, at ILLINGWORTH MORRIS.

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Martin Boase, chairman of Omnicom, and Michael Garner, finance director of TI and a member of the Accounting Standards Board, at TAUNTON CIDER. Jeremy Gough has resigned.

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Peter Johnson, about to retire as chairman of Brooke Bond Foods, at NURDIN & PEACOCK.

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Philip Chappell has resigned from FISONS because of ill health.

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Arthur Kent, finance director of Leigh Interests, at REALWOOD.

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David Sebire, currently deputy chairman, as chairman of BRIDPORT-GUNDREY when Pat Darley retires later this year; as a consequence he has resigned from ML HOLDINGS.

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Olivier Mas, general manager, Credit Lyonnais, London, at WOODCHESTER INVESTMENTS in place of Jean Claude Goubet who has resigned.

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William Hulton, former head of corporate finance at Hoare Govett, at NATIONAL HOME LOANS HOLDINGS.

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Giorgio Rossi has resigned from BROWN SHIPLEY.

Lloyds Chemists, Britain's second largest chemists' chain after Boots, has split the role of chairman and chief executive.

Allen Lloyd (above left) will remain executive chairman of the highly acquisitive group while his younger brother, Peter Lloyd (above right), who is currently director of retail operations, takes over as chief executive.

Separately Sir Eric Pountain, non-executive chairman of Tarmac, the construction group, IMI and James Beattie, was named as Lloyds' third non-executive director.

The boardroom changes, which had been foreshadowed in recent comments made by Allen Lloyd, mean that the structure of the board now follows the Cadbury recommendations.

Institutional investors are understood to have commented on the desirability of strengthening the board and splitting the chairman and chief executive's roles in the wake of Lloyds Chemists' recent rapid growth.

Last March Lloyds overtook its rival Macarthy.

Commenting on the changes, Allen Lloyd said: 'After 20 years building the business, I believe now is the appropriate time to strengthen the board and split the roles of chairman and chief executive.'

Peter Lloyd joined the group in 1978 as financial controller and was appointed to the board in 1979. For the past two years he has assumed much of the work of chief executive, leaving his brother to concentrate on broad strategic issues.

Sir Eric will join Lloyds Chemists' two existing non-executive directors, Tim Brooks and Paul Byrne, on the board and will also be a member of the audit and remuneration committees.

Insurers, including underwriters at the Lloyd's market in London, have welcomed the judgment by a California appeals court in the Shell Rocky Mountain Arsenal case, one of the biggest disputes about insurance coverage for environmental pollution in the US. Insurers' confidence over the judgment, though, could be at best premature and at worst entirely misplaced.

At the centre of the Rocky Mountain Arsenal case is a 27-square mile site near Denver, Colorado. Its owners, the US Army, made chemical weapons there - including nerve and mustard gas - from 1942 until 1969, leasing part of the site to Shell Oil, the US subsidiary of Royal Dutch Shell, which made a range of pesticides and herbicides there - and deposited waste products - between 1952 and 1969.

Current estimates of the total clean-up costs range between Dollars 1bn-Dollars 2bn. Shell has agreed with the army to pay 50 per cent of the first Dollars 500m in costs, 35 per cent of the next Dollars 200m and 20 per cent of any remaining cost.

Impartial observers believe that verdict, handed down on 21 January by Judge Ming Chen, encourages both sides. 'There is enough in this for both sides to claim victory,' suggests Chris Clarke, environmental specialist with the fortnightly newsletter, World Insurance Report.

And while Shell and its lawyers are understandably cautious, policyholder lawyers have been heartened by the verdict. Randolph Fields, a lawyer who acts on behalf of policyholders in similar cases, says the result is a 'a terrible defeat for Lloyd's'.

Last month's legal ruling is the latest stage in litigation about who should pay. Shell originally notified potential claims on several hundred comprehensive general liability insurance policies from February 1982, resorting to legal action when its insurers refused to pay.

In the judgment, the California court ruled Shell could not collect on policies which it had bought after 1969, when insurers introduced a clause which limited coverage to pollution caused by a 'sudden and accidental' release of pollutant.

That part of the verdict produced a triumphant response from insurance lawyers, who say it means Shell is unable to claim on approximately two-thirds of the policies potentially triggered by the claim.

'In terms of financial impact it's very significant for London. We got more out of it than the policyholder,' says Barry Bunshoft, a San Francisco-based attorney with Hancock Robert and Bunshoft, which represented Lloyd's underwriters in the case.

However, Shell and its lawyers are placing equal emphasis on a second part of the judgment.

When the case was first in court in 1988 the jury found that Shell could not collect on insurance policies because the pollution it had caused at Rocky Mountain had been 'expected and intended' and therefore was not covered by the wordings on policies bought by Shell between 1952 and 1969.

Last month the appeals court ruled that in 1988 the jury had been improperly instructed to determine whether Shell knew or should have known that it was contaminating the site.

Instead, the court ruled jurors should have been asked to determine only whether Shell actually expected or intended the pollution. That part of the case will now be heard again by a lower court, opening up the possibility that Shell can claim on its older policies.

Bunshoft, the Lloyd's lawyer, said the judge's view on this issue amounted to 'nit-picking'.

Shell, though, insists that insurers could still be liable for a significant portion of the clean-up cost. At the very least the legal battle seems set to continue for some time. Clarke says: 'The reality is that more stages of judicial argument lie ahead before final resolution of this enormous case.'

Bowater's acquisition of Specialty Coatings International has prompted chairman Norman Ireland to bring forward the announcement of his retirement after six years in the job. He will be succeeded by Michael Woodhouse, a director since 1989 and former deputy chairman of Courtaulds.

Ireland had planned to announce the step with the company's preliminary results in March, having completed two three-year terms, but will now make way for the new chairman at the annual meeting in May. He remains a director of BTR, the industrial holding group of which he was formerly finance director.

Woodhouse, 65, and David Lyon, Bowater's chief executive, go back a long way. Woodhouse was Lyon's first boss when he was at Courtaulds between 1959 and 1970 and taught him much about industry. Lyon then went on via Rank Organisation and Redland to become the well-regarded chief executive of Bowater.

Woodhouse, educated at Lancing College and Queen's College Oxford, is an industrialist, unlike Ireland who is a finance man, and has spent his whole career at Courtaulds. He started there in 1951, rose to become a director in 1976 and was deputy chairman from 1986 until his retirement in 1991. He has been a non-executive director of Bowater since 1988 and is also on the Prince's Trust for Volunteers.

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Michael Steyaert, a 51-year-old Belgian, has been appointed managing director of GEC Avery, the weighing equipment subsidiary of the General Electric Company. He succeeds David Scahill, who has become md of GEC Meters.

Steyaert has many years of experience managing GEC companies in mainland Europe. He will be responsible for combining the operations of Avery and Maatshappij van Berkel's Patent (Berkel) into the world's second largest integrated weighing and food processing equipment company. GEC bought a majority stake in the struggling Dutch company in 1990 and is now acquiring the remaining shares. Steyaert will remain Berkel's president.

Jonathan Fry (right), managing director of Burmah Castrol and chief executive of Castrol, will succeed Lawrence Urquhart as Burmah Castrol's chief executive on June 1. Urquhart, 57, will continue as chairman of the lubricants, chemicals and fuels group, on a non-executive basis.

Tim Stevenson, 44, currently chief executive of Burmah Castrol Fuels group, will join the main board in March and take over from Fry, 55, as chief executive of Castrol in August.

Analysts say Fry's step-up had been expected, as he had recently been taking an increasingly high-profile role. He joined the group in 1978 as planning director and won his spurs as chief executive of the chemicals group by integrating acquisitions.

He has been chief executive of Castrol since 1987, a period which has seen the lubricants business build on its strong brand identity.

Splitting the role of chairman and chief executive does accord with recommended practice in the City, but Burmah Castrol says this development had been under consideration since the group was reorganised in 1990 - before the Cadbury report was published.

Stevenson, described as 'one of the group's best strategic thinkers', has been chief executive of Burmah Castrol Fuels since 1990, having previously been chief executive of Burmah Castrol Chemicals' sealants division.

The body was found in a curled position, as if the Iron Age man had been seeking protection from the harsh Humberside winds. Scattered around him were the flint tools he had used more than 2,000 years ago and fragments of pottery which once held offerings left by grieving relatives.

The skeleton might have remained undisturbed for another 2,000 years, had not Kelt Energy, the UK-quoted independent, set upon the Humberside wolds for its latest onshore gas venture. The Caythorpe field, which produces the first onshore gas to be sold to an independent marketing company, was opened by Kelt and its partner, DSM Energy, last month.

The opening was accompanied by an exhibition of artefacts - ranging from a brightly enamelled Roman brooch to a crude 4,000-year-old flint saw - discovered in an eight-week excavation sponsored by Kelt.

The archaeological dig was less the result of Kelt's philanthropic tendencies, than a preventive measure to ensure the smooth passage of planning permission for its 4.5m pipeline. Following Department of the Environment guidelines issued in 1990, planning committees are increasingly likely to consider heritage concerns to be as important as other environmental issues. This has placed new strains on many companies such as Kelt.

The Caythorpe region is a minefield for any developer. 'This area has one of the densest concentrations of archaeological sites in the country,' says Peter Cardwell, a partner of Northern Archaeological Associates.

However, Kelt sought to pre-empt planning objections by hiring the archaeological consultancy at an early stage of Caythorpe's development. The pipeline's route was determined only after aerial photographs and in-depth research had pinpointed the main archaeological sites to avoid. The route was then subjected to magnetic soundings. More sites were discovered, and Kelt duly altered the initial pipeline path.

The company then decided to fund the excavation of sites which it could not avoid. The guidelines are vague as to who has to foot the bill; however, the local council can force a developer to find financing for both the excavation and subsequent analysis of the finds. Kelt took the view that it would be quicker - and, in the end, cheaper - to fund the research itself.

'The excavation added about Pounds 50,000 to our costs,' says Paddy Spinks, a director, somewhat ruefully. Post-excavation research brings the total spent to Pounds 120,000, about 2 per cent of the total production budget for Caythorpe. But for that price, the company had roughly halved the time it might have taken to gain planning permission and won the council's support.

'Our relationship with Kelt has been very good,' says John Crook, senior planning officer with Humberside County Council. 'The work they did before submitting the planning application did help to ensure a relatively smooth passage.'

For the region's archaeologists, development was offset by the enticement of funding. 'It was almost certainly the largest excavation in the area in the past year,' says Cardwell. Sites were discovered which would otherwise have gone unnoticed or unfunded.

A study prepared for the official opening of Caythorpe cites the most important findings: a previously unidentified Roman settlement, dating from between 100 AD and 410 AD; the fact that this particular site was continuously occupied through the Anglo-Saxon period, to about 600 AD, set academic hearts aflutter. Until that discovery, there had been no evidence of such continuous occupation in the region.

Kelt may have had to sacrifice time and money to get Caythorpe going. However, the unexpectedly good finds, combined with the site's encouraging output - at the top end of forecasts for between 5m and 10m cubic feet a day - is already making such concerns less material.

'Reform in this House proceeds exceeding slow. It makes a snail look like Nigel Mansell.'

Sir Peter Emery, Conservative MP and Commons procedure committee chairman.

Management consultants have infiltrated the gates of Whitehall, as government reform of civil service working practices bears witness. But the barbarians have yet to penetrate the Palace of Westminster. MPs jealously continue to guard the right to decide how business in the engine room of Britain's democracy is conducted. The result is that little ever changes.

But what might such a team of unelected executive mercenaries come up with if unleashed on the green leather benches of the House of Commons debating chamber? How would they suggest that business might be ordered more efficiently? Here is an idea of what Messrs Rag, Tag and Bobtail might propose.

First the good news: the Commons scores full marks for effort.

While ritualistic trappings give proceedings a leisurely and anachronistic air, the chamber sits for longer than any comparable legislature. MPs work on average a punishing 62-hour week - though increasingly outside the debating chamber. Even critics of current practice, such as John Garrett - Labour MP for Norwich South and, incidentally, a management consultant - admit parliament 'processes thousands of pages of legislation, produces hundreds of reports and airs countless grievances at remarkably little cost'.*

But when it comes to organising this time there is room for improvement:

Hours. The Commons needs a comprehensive time-management study. Delaying the start of sittings four days a week until 2.30pm was fine before 1911 when MPs were unpaid and of necessity part time. But it means the Commons frequently rises well after midnight. With most MPs on the go from 9am or earlier, such a schedule is an inducement to work absurdly long hours and scarcely conducive to effective debate.

On Fridays, when MPs are keen to return early to their constituencies, business starts at 9.30am. So there seems little reason why the current timetable should not simply be brought forward five hours from Tuesday to Thursday.

No fewer than 83 per cent of MPs responding to a questionnaire prepared by a cross-party committee examining possible reforms in 1991 favoured reducing the number of late sittings.

When it reported last year, the committee's recommendations advocated merely one extra morning sitting per week, along with some Fridays off and greater efforts to wind up at 10pm.

Committee stage of bills. The development process in the Commons for Westminster's core product line - legislation - could do with an overhaul.

Currently, effective scrutiny of a bill is too often subordinate to party political skirmishing. This means the care with which a bill's contents are examined and amendments considered, frequently bears little relation to the measure's intrinsic qualities.

One way of correcting this imbalance and ensuring all clauses of a bill receive equal scrutiny would be to provide for automatic time-tabling from the outset of the committee stage of detailed consideration.

This innovation would also save time in the chamber by making debates on time-tabling motions to limit debate redundant.

Summer recess. The Commons' holiday arrangements should correspond better with the need to subject the government to year-round scrutiny.

As Labour's Harry Barnes and Jeff Rooker have argued, parliament's three-month summer recess deprives MPs of the ability to tackle ministers with written and verbal questions to which they must publicly respond. It also strips MPs of the protection against libel which the parliamentary privilege applied to everything uttered in the chamber provides.

The system championed by Joan Walley, Labour MP for Stoke-on-Trent North, providing for a five-week cycle of four weeks at Westminster and one week away, would be a sensible improvement.

Votes. There can be few spheres in which Bulgaria has anything to teach Britain on productivity. But voting in the national parliament is one of them. The wizardry of their electronic voting system means Bulgarian MPs can conduct a vote in a twinkling of an eye compared with their British counterparts, conserving valuable parliamentary time for other matters. For example, the two cliff-hanging votes in November which secured Maastricht's return to the Commons took a total of 31 minutes.

Installing an electronic voting system would represent a big step forward in updating British parliamentary practice. But there is little chance of the government agreeing to it. As the Maastricht debacle demonstrated, there is nothing like having MPs queueing up to troop through the lobbies to make the government whips' task of dissuading backbench rebels that much easier.

Prime Minister's Questions. Since MPs have only about 30 minutes per week in which to question publicly the prime minister, it is bizarre to waste vital seconds in pro forma inquiries about his engagements. This happens because verbal questions must be submitted some two weeks ahead of time. It is difficult then for the questioner to frame a topical question; so most fall back on the formula, revealing their real interest only in follow-up questions. The required innovation - abolishing the notice-period - is self-evident.

*Westminster - Does Parliament Work? By John Garrett. Published by Victor Gollancz. Price: Pounds 17.99.

The dispersion of shares among thousands of very small investors has been highlighted by critics of eastern Europe's mass privatisation programme (MPP). They say this approach militates against the emergence of powerful new owners with enough clout to impose their will on management.

Viktor Kozeny, an American-educated Czech financial whiz-kid whose Harvard Capital and Consulting company (HC and C) is widely credited with breathing unexpected life into the Czechoslovak MPP last year, is out to prove them wrong.

After five rounds of competitive bidding spread over almost a year, nearly 50 per cent of the coupons representing shares in around 1,500 newly privatised Czech and Slovak companies are held by a small group of nine investment funds. They intend to use their concentrated power to exert effective control over the companies in their portfolios.

The unexpected concentration of shares in only nine out of the 400 funds which blossomed last year follows Kozeny's success in persuading millions of sceptical and inexperienced Czechs and Slovaks to take up the government's voucher offer. He did this by promising to buy the Kcs 1,000 (Pounds 24) privatisation vouchers for Kcs 10,000 12 months after the government converts them into shares in the newly privatised companies. This is now expected to happen early in 1994.

The offer turned what many potential investors had originally perceived as a dubious bargain into an apparent sure-fire money spinner. Interest in the coupons soared, and eventually 8.5m Czechs and Slovaks took advantage of the government offer and subscribed the equivalent of an average week's wages for their coupon books. Only 28 per cent of the vouchers were retained by individuals. The bulk were entrusted for management to the 400 or so funds, with Kozeny's and eight others run by banks and insurance companies taking the lion's share.

The majority of coupon holders had only the vaguest notions about the potential value, or even the identity, of the state-owned enterprises whose shares they were invited to bid their coupons for during the first wave of the MPP. Kozeny's HC and C, the first fund which offered to manage the coupons on behalf of their new owners, is one of the biggest.

Unlike most of his imitators among the new funds, who scattered their delegated coupons among the enterprises on offer, Kozeny limited his purchases to 50 companies which his research identified as the 'vertebral column' of the Czech and Slovak economies.

With the political divorce in view, MC and C created two Slovak funds, denominated in Slovak crowns, and six Czech funds which hold 85 per cent of the assets under management. Most Slovaks opted to invest the bulk of their coupons in Czech enterprises, but they will not be able to participate in the second wave of Czech coupon privatisation.

The laser-beam approach to portfolio-building has left the funds managed by HC and C with stakes in key Czech and Slovak enterprises which are sufficiently large to give the fund managers, Kozeny in particular, effective proprietorial rights in strategic sectors of the economy.

The list includes two of the leading banks, Komercni Bank where the fund's 17.5 per cent holding translates into 40 per cent control over an institution with assets of around Dollars 10bn (Pounds 7bn), and 13 per cent of voting shares, again equivalent to 40 per cent control, in Ceska Spositana, the savings bank.

Other key holdings built up by Kozeny's funds include strategic stakes in CEZ, the main Czech hydro-electric company, Slovnaft, the Bratislava refinery, and minority stakes in companies such as Tabak, now controlled by Philip Morris, and Cokoladny, controlled by Nestle.

The latter offers both income growth and a sop to national feeling by ensuring Czech investors retain a stake in what many see as 'family silver' companies. More to the point, given Kozeny's pledge to redeem the coupons entrusted to the fund at 10 times their nominal value, shares in companies with large foreign shareholders are perceived as more liquid and more easily marketable than the bulk of new shares whose market value will only be definable once they are exchanged for coupons and become tradeable.

With an eye on the most successful Czech export sectors, Kozeny's funds have also acquired significant stakes in breweries, paper and pulp companies, a dozen brick and cement companies and four out of the five biggest construction companies. 'One of the brick companies in southern Bohemia is selling bricks costing 80 pfennigs for DM5.80 (Pounds 2.52) apiece in Munich,' he says, underlining the profit potential for low-cost Czech companies able to benefit from the Bonn-financed reconstruction of former east Germany and the high-wage west German economy.

By contrast, Kozeny adds: 'We have not invested a single coupon in the iron and steel industry or engineering.' These sectors, he adds, are saddled with over-capacity, low productivity and high environmental liabilities.

Kozeny's selective approach has given HC and C funds 15-20 per cent stakes and one or two board seats in 37 companies, and 7-8 per cent stakes in 13 others. This gives the funds run by Kozeny, who founded HC and C with Dollars 3,000 and retains 100 per cent ownership, a management voice in assets with a book value of around Dollars 1bn or an estimated Dollars 1.5bn at current prices.

Making these newly acquired assets profitable, though, will require some drastic surgery. If Kozeny has his way 'up to 60,000 or 70,000 people in the enterprises we now help manage, roughly 25 per cent of the present work force will have to go'. That includes the banks which are in the midst of a heavy investment programme in new computers and equipment.

The ability of Young Turks such as Kozeny to influence enterprise management depends on the willingness of millions of inexperienced small investors to resist the temptation to liquidate their shares at the earliest opportunity. If investors take the long view, the new funds, or at least the handful which have built up strategic stakes, should retain the concentration of ownership required to exercise ownership rights. If not, some of the funds could be swept away by liquidity pressures. These are nervous times for those involved in the boldest mass privatisation programme to date in the former communist bloc.

'YOU wouldn't expect a managerial revolution to start in Scandinavia, but this could be it,' the Jobs column remarked to its partner Bill Hall. He just went on tapping his keyboard and peering at his screen. But I wasn't to be deterred.

'You've surely seen the story about Denmark's new premier training his cabinet by making them read Yes, Minister scripts?' I persisted . . . and seemingly got through. 'Printed it two weeks back,' said Bill, best known for his Observer column on the FT's centre pages, then he added with scarcely a pause:

'What I want to know is why your announcement says your chief executive left amicably when the buzz is he's taken the cash reserves with him, not to mention the chairman's wife' - or some such words, which took me aback until I saw what had happened. In the brief interval, he had put on his telephone headset and begun talking over his tapping to someone else afar off.

His feat at first reminded me of the northern machinist's retort when work-study experts ordered him to operate with both hands at once: 'Aye, and if you stick yon broom-handle up my backside, I'll sweep t'floor as well.' My second thought was to give up the struggle of internal communications and beg the ears of you readers instead. After all, it's external communications that are the nub of the managerial revolution which Scandinavian developments might spark.

While it is admittedly hard to credit that a Dane would take lessons from a Swede, such would appear to have occurred. For the Danish Social Democrat premier Poul Nyrup Rasmussen is not the first Nordic eminence to twig that the Yes, Minister television series - whose manipulations of elected leaders by cunning bureaucrats are usually just laughed at as satirical comedy - is underpinned by something serious indeed.

The same fact was seen beforehand by Sweden's Nils Brunsson, professor of management at the Stockholm School of Economics. What awakened him to the point, though, was not just watching the telly, but the findings of rigorous research.

Accordingly, while he would agree that top bosses can learn much from Yes, Minister scripts, he'd go farther. In his view, the dangers of being manipulated from below are such that it takes exceptional humility as well as intelligence on the bosses' part to pick out the right lessons, even though they are noted in his book The Organisation of Hypocrisy*, discussed in this corner of the FT in September 1991.

For the benefit of readers not around then, however, I'd better repeat that he thinks the said dangers are rooted in the growing need for the heads of companies, let alone countries, to pay heed to external communications. And oddly enough, an illustration arose the other day when partner Hall kindly invited me to a post-toil hobnob with colleagues who cover stock market events.

During the chat, up came the Queens Moat company which, several of us agreed, is certainly no less good than the rival group Forte when it comes to managing hotels. So why, someone asked, have Queens Moat's shares failed *John Wiley, Pounds 17.95.

to stand up on the market as well as those of its bigger competitor. One reason put forward was that, in contrast to Queens Moat, Forte puts much high-level energy into its relations with investment interests, not least in gently preparing them for glitches.

Even so, keeping the share market sweet is merely a small part of the multiplying demand on companies of appreciable size to woo the approval of influential outsiders. Others include a welter of variegated pressure groups together with local, national and yea supranational bureaucracies such as the European Community.

Hence, Professor Brunsson says, jollying along influence-wielders is increasingly becoming a full-time job which, of its nature, must largely be done by high-ranked people. Moreover, besides being potentially at least as decisive, the work involved in external communications differs from that of internally managing an organisation.

Dealing successfully with the outside bodies mainly falls into the realm of politics, which means that upper-rank jobs call more and more for political skills in handling the mechanics of human interests, ambitions and alliances, and the multitudinous concatenations of same. Although political skills are also useful in managing internally, it takes a markedly different ability to handle the mechanics of making, marketing and delivering goods and services which people will think it worthwhile to buy.

The result is a division of skills between the externally focused top tiers of management and the internally centred ranks lower down. True, by comparison with heads of government, chiefs of companies are usually more closely acquainted with what they're supposed to run. But thanks to fast changing technologies and markets, they are hard-pressed to keep up with developments in the methods by which their outfit's living is earned.

Nils Brunsson therefore argues that the division of skills is likely to widen, with the chiefs of large organisations ever less capable of knowing what can, let alone what should be done below. The dilemma is that the selfsame chiefs are viewed as responsible for said doings by the equally decisive external interests. So what, if anything, can be done about it?

Where answers are concerned, the Jobs column's suspicion is that the Swedish professor will part company with the Danish premier. For it looks as though Mr Rasmussen's aim in making his colleagues study Yes, Minister scripts is that they'll thereby become knowledgeable enough about Machiavellian mandarins' tactics to outsmart them at their own games, so ensuring they do the government's bidding.

Alas it is an aim which, in Nils Brunsson's view, is doomed to fail. In any complex organisation, he says, it's as good as impossible for people whose jobs depend on fostering external relations to gain sufficient knowledge of internal realities simply to impose their will on the more technically expert staff below. So chiefs of that sort do better to accept their limitations . . . which is where the need for humility as well as intelligence comes in.

Certainly such chiefs must take decisions - that's what the outside stake-holders see as their job. But chiefs should recognise that what they decide will not necessarily or even usually be put into effect, and still more so that attempts to force strict obedience are apt to spawn damaging resistance.

After all, their best ally in their external dealings is a set of technically expert supporters concentrating on keeping the organisation doing what it's best at. So the chiefs should ensure the decisions they take are supportive of that same end. One example Professor Brunsson cites is decisions to do something already being done.

Most importantly, externally focused chiefs should never become involved in the detailed implementation of what they decide, and still less show their approval or the opposite by rewarding or punishing those held responsible. The reason is that, if they do, their most expert underlings will stop concentrating on productive work and start playing internal politics.

MR GORDON BROWN will today take the Labour party another step along the road towards a pragmatic economic strategy by dismissing as irrelevant traditional internal debates on the respective roles of the state and the market.

In the second of a series of speeches designed to map out a new approach to the economy the shadow chancellor will argue that ideological arguments about the private and public sectors distract from the core of Labour's argument.

He will stress instead that the enhancement by government of individual opportunity - using both the public and private sectors - is the prerequisite for a successful economy.

Last month Mr Brown dropped Labour's pre-election proposals to impose significant tax increases on the middle classes to pay for new social welfare commitments.

That was followed by a commitment in the first of the present series of speeches to position Labour as the party which represents the interests of individual consumers against the entrenched and often monopolistic power of producers.

Building on Mr John Smith's recent attempt to portray Labour as the party in tune with the aspirations of ordinary people, the shadow chancellor will argue today that it now regards individual and national economic success as interchangeable.

His speech adds: 'Our argument is that people become better off learning more, earning more and contributing to the economy by producing more. In this way self interest equates with the national interest and, as individuals succeed, companies and the country succeed also'.

Mr Brown blames what he calls a 'failure of ideology' by the Conservatives - the assumption that economic prosperity will follow automatically if the government withdraws from the market-place - for the present ills afflicting the economy, highlighting the trade deficit, mounting public borrowing and unemployment heading above 3m.

The shadow chancellor will set out instead Labour's alternative to use 'the power of government' to advance industrial potential and individual skills.

That would go far beyond the training budget to fiscal, industrial, regional, technology and social security policies.

MR John Gummer, the agriculture minister, was told yesterday by a Westminster committee to declare in the register of MPs' interests landscaping work on a garden pond in his garden.

Following a complaint brought by Mr Dale Campbell-Savours, Labour MP for Workington, the cross-party committee of MPs interests reprimanded Mr Gummer, saying that he should have registered the Pounds 2,000-plus worth of work paid for by Hillsdown Holdings, the food group.

The work was carried out in connection with an informal meeting of EC agriculture ministers in September last year, after Mr Gummer had allowed his Suffolk home to be used to entertain visiting ministers and stage an agricultural show.

The programme was sponsored by 100 companies including Tesco and Allied-Lyons in order, Mr Gummer said, to ensure that there was no particular obligation to a single company.

The report from the committee on MPs' interests emphasised the need for ministers to keep to the rules for MPs about gifts, and not to rely just on separate government rules.

The MPs made the same point in their inquiry last month into the failure of Mr Norman Lamont, the chancellor, to declare an anonymous payment of some Pounds 18,000 towards his legal bill for evicting an unwelcome tenant from his London home, though they gave Mr Lamont the benefit of the doubt.

They said yesterday that strict observance of the Commons rules for MPs about declaring business interests was an important way for ministers to minimise the risks from any activity 'which overlaps the border between their public duties and private interests'.

In his defence, Mr Gummer wrote at length to the committee, explaining that he had been left out of pocket by having to carry out other work for the occasion and clear up after it.

He had allowed his home to be used for the show, he said, in order 'to bring British agriculture of all types to our guests' and strengthen the UK's negotiating hand on issues as diverse as bananas and conservation.

He noted that 'even the cleaned out pond and the planting which is accounted a plus is not done in the way we would have chosen'.

Mr Gummer wrote to the committee yesterday saying that he would register the work. He also welcomed the committee's acceptance that he had not intended to conceal the work or the fact that it was sponsored.

MR DAVID BLUNKETT, shadow health secretary, reacted angrily in the Commons yesterday to Mrs Virginia Bottomley's statement on the future of London's hospitals.

He told the health secretary that the commercialisation of the NHS and the introduction of the internal market had turned the capital's health care problem into a 'crisis'.

Mr Blunkett accused Mrs Bottomley of capitulating to Treasury demands for cash to pay for the government's 'economic incompetence'.

Existing hospitals would be allowed to 'wither on the vine' while adequate resources were not being made available to put in place the health care needed, he said.

Mrs Bottomley said Mr Blunkett had made 'a populist, knee-jerk, unreconstructed, destructive reaction'. It also reflected the fact that he was sponsored by the health union Cohse, which always put jobs before patients.

She stressed that the Pounds 170m additional money being made available to improve primary health care in London was Pounds 30m above the figure recommended in the Tomlinson report.

The government's proposals won a broad welcome yesterday from most of the hospitals affected, Robert Rice and Richard Tomkins write.

Both Guy's and St Thomas' said they were pleased that Mrs Bottomley had accepted the recommendation that they should merge as a single NHS Trust. St Thomas' said it particularly welcomed the government's recognition of the need for a merged accident and emergency department for south London on one site.

University College and the Middlesex said the planned merger of the two hospitals was in line with their own strategy.

They expected to merge on the UCH site, redeveloping it to incorporate the Hospital for Tropical Diseases and the Royal National Throat, Nose and Ear Hospital.

The Royal London said it was uneasy about the proposal to strip it of responsibility for community services, but it strongly welcomed the forthcoming review of specialities. Charing Cross, which remains under the threat of closure, said the report clearly recognised that the hospital's specialty services had a future: it now had to be established exactly what form that future would take.

A 'CONCENTRATED effort' was announced by the government yesterday to improve London's local health services and prepare the capital for hospital closures.

Ministers have accepted the logic and implications of the Tomlinson report's recommendations for changes in London's healthcare. They have put off politically-sensitive decisions about hospital closures until later in the year but set up a structure which should ensure that - unlike previous attempts to rationalise hospital provision in London - the decisions are eventually taken.

Final announcements on the future of some of the capital's most famous hospitals will come after further consultation and a review of the allocation of specialist services.

Meanwhile, action will be launched to improve general practitioner and community services in a London Initiative Zone covering the inner city. This is likely to lead to extra family doctors being brought into the capital on short-term contracts, with primary care centres set up in shops, sports centres, schools and offices.

The job of improving London's relatively poor family doctor and community services presents ministers with a considerable challenge. But the difficult political decisions involve hospital closures. Yesterday's announcement, in a document called Making London Better, represents a compromise between ministers who have advocated immediate tough action and those counselling caution for fear of adverse public reaction.

Most of the closure options proposed in Sir Bernard Tomlinson's report remain on the table for further consideration. A delay until the autumn will allow the government more time to prepare a detailed case to justify particular closures.

St Bartholomew's hospital in the City, which has run the most conspicuous campaign against the Tomlinson report's recommendation that it should close, remains high on the danger list.

The government intends to conduct consultations on removing its accident and emergency facilities and says the hospital then faces one of three options: closure, forming a combined trust with the Royal London - with the new trust management deciding how to rationalise services - or retaining Bart's as a much smaller specialist hospital.

The document stresses that the option of retaining a smaller, specialist Bart's - the solution favoured by its management - 'would need to stand the test of the specialty reviews and its costs would have to be acceptable to purchasers'.

Ministers will consider firm proposals in the autumn. But Bart's application to become a self-governing trust from April will not go ahead and its management links with the Homerton hospital in Hackney - included in the Bart's management's survival plan - will be severed.

The Royal Brompton and Royal Marsden specialist heart and cancer hospitals in Chelsea are among the few clear winners from yesterday's announcement. Both have campaigned powerfully against Tomlinson's recommendation to re-house them at the Charing Cross Hospital, and the government says it is not convinced of the case for doing so.

This decision adds to the threat facing the Charing Cross Hospital, which Tomlinson recommended should close if the Royal Brompton and Royal Marsden did not move there. The government will consult on proposals to close its accident and emergency department, and will consider detailed proposals for the future of Charing Cross in the autumn.

Ministers are supporting proposals for two pairs of hospitals - University College and the Middlesex and Guy's and St Thomas' to be rationalised on single sites.

The London hospitals have lost Pounds 50m in contract income this financial year and are expected to lose a further Pounds 50m next year. On a cautious estimate, says the government document, the capital's hospitals are likely to have to shed between 2,000 and 2,500 of their beds - between 15 per cent and 20 per cent of the total - in four or five years.

TWO FORMER Tory employment ministers last night came out against the abolition of wages councils, as MPs opposed a Labour proposal requiring the government to make an annual report to parliament on the conditions of low-paid workers.

Mr Peter Bottomley challenged the government to explain why it had not 'make plain' before the last election that a move to abolish the bodies, which set minimum pay rates for 2.5m low-paid workers, was in the offing. 'The question is at what level is it worth taking away protection from the vulnerable,' he asked.

Mr Jim Lester, another former junior minister, said: 'The whole responsibility of parliament . . is to look after those least able to defend themselves.'

But a new clause proposed by Labour forcing ministers to report annually to parliament was defeated by 290 votes to 262 as the Trade Union Reform & Employment Rights Bill reached its Commons report stage.

MPs earlier backed a new government clause phasing out public subsidy for union ballots - a move similarly opposed by Mr Bottomley. Mr Michael Forsyth, employment minister, described continued subsidy as 'inappropriate.'

Mr Frank Dobson, shadow employment secretary, warned that 'third world' pay levels and working practices were being introduced into Britain.

He sought to dismiss the contention that Wages Councils cost jobs, arguing that the number of people working in the sectors they covered had actually risen, while those employed in other industries had fallen substantially.

Labour did not believe wages councils should be abolished as the bill proposed, but if they were, Labour's suggestions would help to protect those affected.

THE government was last night accused of trying to 'wreck' a bill on increasing the information available on medicines - in spite of previously indicating some support for the measure.

Mr Giles Radice, Labour MP for Durham North, said ministers were mounting a 'shabby and cynical' exercise aimed at undermining his Medicines Information Bill.

MR MICHAEL Heseltine yesterday hit back at recent criticism of the cost and availability of credit cover for British exporters, highlighting recent cuts in premium rates for sales to the Middle East.

The trade and industry secretary said the UK's Export Credits Guarantee Department has cut premium rates by 25 per cent in Abu Dhabi, Dubai, Oman, Saudi Arabia and Bahrain. He also announced the resumption of medium-term cover for Morocco.

MINISTERS staved off defeat in the Lords yesterday over its proposed changes to asylum law, with a modest last-minute concession which they said would introduce a further safeguard into the system, Alison Smith writes.

Lord Ferrers, the Home Office minister, promised that - at all the larger British embassies and consulates dealing with immigration applications - a new scheme would ensure that a senior manager would review at the end of each day all refusals by entry clearance officers. Where a decision was reversed a visa would be issued.

Peers voted 148-124 against a move to streamline the right of appeal by introducing a role for an adjudicator who would decide whether someone should have leave to appeal.

MINISTERS staved off defeat by an all-party coalition of peers yesterday over its proposed changes to asylum law, with a last-minute concession which would introduce a further safeguard into the system.

Led by Lord Ackner, a law lord, many peers argued that there should continue to be a right of appeal against refusal of entry for a short visit or as a student, but that this would be streamlined by introducing a role for an adjudicator, who would decide whether someone should have leave to appeal.

But Lord Ferrers, the Home Office minister, promised that at all the larger posts abroad dealing with immigration cases a new scheme would ensure that a senior manager would review at the end of each day all refusals by entry clearance officers, and where a decision was reversed a visa would be issued.

An adjudication system would, he argued, be almost as cumbersome as the present 'appeals edifice' and was not really necessary for the problem it was aimed at addressing.

Lord Ackner said that some form of filter was needed, because one in about five cases succeeded in appeal last year, and there was a risk that if there were no right of appeal the number of cases where entry clearance officers made a wrong decision was likely to rise to one in two or three. 'Without an opportunity to have a decision scrutinised,' he said, 'consciously or subconsciously, arbitrariness tends to become part of the decision process'.

Baroness Flather, a Tory backbencher, said that unless there was a review procedure the powers that entry clearance officers would have would 'not be acceptable in a liberal democracy'.

The government won the decision by 148 votes to 124.

MR JOHN Smith, the Labour party leader, last night expressed concern that the Daily Mirror's political editor, Mr Alastair Campbell, had left his job. Mr Smith said: 'My concern at the political stance of MGN and the need to maintain political pluralism has been reinforced by his regrettable departure.'

MR PETER Bottomley, a former Tory employment minister, last night came out against the abolition of Wages Councils and challenged the government to explain why it did not 'make plain' before the last election that such a move was in the offing, David Owen writes.

His remarks came as the Trade Union Reform & Employment Rights Bill, abolishing the councils that set minimum pay rates for 2.5m low-paid workers, moved through its report stage in the Commons.

Mr Bottomley also opposed a government move to phase out the public subsidy for trade union ballots. To Labour protests, Mr Michael Forsyth, employment minister, described the continued subsidy as 'inappropriate'.

THE government's proposals won a broad welcome yesterday from most of the London hospitals affected, Robert Rice and Richard Tomkins write.

Both Guy's and St Thomas' said they were pleased that Mrs Virginia Bottomley, health secretary, had accepted the recommendation that they should merge as a single NHS Trust. St Thomas' said it particularly welcomed the government's recognition of the need for a merged accident and emergency department for south London on one site.

A Pounds 3.25m expansion of accident and emergency facilities is already under way at St Thomas' to cope with expected rise in attendances following the closure of the nearby Westminster Hospital.

University College and the Middlesex said the planned merger of the two hospitals was in line with their own strategy. They expected to merge on the UCH site, redeveloping it to incorporate the Hospital for Tropical Diseases and the Royal National Throat, Nose and Ear Hospital.

The Royal London said it was uneasy about the proposal to strip it of responsibility for community services, but it strongly welcomed the forthcoming review of specialities. If the accident and emergency services department of Bart's was closed, it said, it could easily handle the extra work. The reaction from Charing Cross, which remains under the threat of closure, was more cautious. It said the report clearly recognised that the hospital's specialty services had a future: it now had to be established exactly what form that future would take.

BRITAIN'S flag-carrier airline, British Airways, had a volatile and busy session as the market digested the company's third-quarter results.

Profits for the three-month period to December 1992 dropped by Pounds 80m to Pounds 20m, but were at the top end of analysts forecasts. The initial reaction was favourable and the shares moved ahead, with dealers also cheered by the absence of the feared rights issue announcement.

However, closer examination of the accompanying statements and discussions with the company, which pointed to a poor trading outlook, later brought a change of view in the City. The shares retreated as analysts cut year-end pre-dictions. Smith New Court reduced its forecast by Pounds 15m to Pounds 230m, Lehman Brothers came back by Pounds 15m to Pounds 225m, and James Capel by Pounds 20m to Pounds 200m.

At the day's worst, the shares were down 9 at 270p, but afternoon buying, mainly by US houses, prompted a rally for a close of 3 off at 276p after heavy turnover of 10m.

Bowater firm

Paper and packaging group Bowater ignored both overall market weakness and a potentially dilutive rights issue. The shares climbed to 497p at one stage and survived the later pressure on UK stocks imposed by sharp falls in the US to close 8 ahead at 493p.

The company announced a one-for-six cash call at 400p per share to raise Pounds 295m and finance the Dollars 434m (Pounds 305.6m) acquisition of US group Specialty Coatings. Mr Tim Rothwell, media analyst with investment bank BZW, said: 'It is a cracking deal. It is an excellent fit for their current Rexham business and seems to be a reasonably fair price.' Bowater also announced a 48 per cent rise in profits in 1992.

Glaxo hit again

Drugs group Glaxo fell sharply in early trading yesterday as the bears latched on to news that the company is to cut the ex-factory price of its migraine drug Imigran in the Netherlands by 15 per cent. There were also recurrent worries that Glaxo is poised to announce a big rights issue to finance an acquisition.

Finally, there was position-taking ahead of the announcement of Glaxo's results tomorrow and reaction to US President Bill Clinton's address last Monday which could herald a tightening of federal health spending. However, Mr James Culverwell of Hoare Govett argues that the stock has become a hostage to fortune. 'Glaxo is out of favour but the arguments are misinformed,' he said.

The slide, which continued through the day to leave the stock 32 down at 667p on turnover of 6.7m, spearheaded more general weakness in the sector. When Wall Street opened down, Wellcome lost 24 to 900p and SmithKline Beecham fell 15 1/2 to 449p in the 'A's and 21 1/2 to 391p in the Units on joint turnover of 9.6m.

Hanson easier

Conglomerate Hanson eased 4 to 250p after announcing first-quarter profits of Pounds 236m. SG Warburg Securities said that even though the figure included a Pounds 20m sale it still came in at the house forecast, which was at the low end of market predictions and had excluded any extras.

Renewed hints of a bid for TSB rumbled on and the shares added 1 1/2 at 173p. Lloyds Bank, the favoured candidate, fell 8 to 505p.

Insurer Legal & General improved 4 to 456p on the back of a bear squeeze.

Oil issues dipped as a full ministerial session at the Vienna Opec meeting, expected to agree production cuts, was delayed. Opec had been due to hold a full session which analysts said was expected merely to rubber stamp an agreed cut in production quotas to a total 23.6m barrels. BP lost 5 to 262p, Shell Transport 14 to 576p and Enterprise 10 to 458p.

Oil and gas exploration company Pittencrieff jumped 28 to 351p on news that it plans to make its mobile communications unit an independently financed corporation and will raise its final dividend. The company added that it had successfully completed share placings of just over 2.1m shares at 312p per share. Aviva Petroleum closed 3 higher at 54p on positive drilling news.

Shares in GKN bucked the poor market trend, adding 8 at 465p, with James Capel said to have been recommending the stock.

Confirmation by Lucas Industries that it is to shed 510 jobs at its diesel operations in Kent led to renewed bid speculation and the shares rose 3 to 146p, although the company said the move was part of its restructuring programme.

Both British Aerospace and TI Group continued to suffer from reports that American Airlines may return some of its 34 Airbus aircraft. The former gave up 7 to 243p, while the latter lost 12 to 283p. A squeeze in VSEL caused the shares to advance 8 to 591p.

Leisure conglomerate Pearson moved ahead 9 to 388p after a UK investment bank turned buyer on the shares.

BZW shifted its recommendation from a sell, arguing that recent cost reductions would prompt analysts to reverse their recent trend and begin to raise forecasts.

The house said Pearson will also benefit from the strengthening dollar - BZW has dollar/sterling averages of Dollars 1.50 for this year and Dollars 1.30 for next. Finally it is looking for UK cyclical recovery.

Selling of the BT partly-paid shares continued ahead of the payment deadline next month and they closed 3 1/2 adrift at 297 1/2 p. The fully-paid shed 3 to 403p.

Chubb Security added a penny at 264p ahead of planned presentations to UK analysts next week.

Investors searching for second liner bargains in the food manufacturing sector picked out Dalepak Foods and the shares rose 12 to 274p.

Old rights issue talk descended on Cadbury Schweppes, 7 adrift at 462p. Profit-takers took the wind from Unilever's sails, the stock tumbling 17 to 1144p. Positive press comment supported United Biscuits, steady at 348p.

Continued bid talk in Alexon was counterbalanced by speculation that the recovery story was becoming more credible and the shares rose 6 to 89p.

Concern over the US drugs market hurt Boots, off 3 at 485p. US economic worries also impacted on Dixons, the high street electricals retailer, which finished 5 off at 211p.

Other stores stocks responded to a more positive CBI retail survey. WH Smith rose 4 to 419p, Storehouse was steady at 185p, Sears gained a penny at 100p and Marks and Spencer lost a penny at 332p. Furniture sales fared less well in the report and MFI weakened 5 to 121p.

Several leading leisure stocks were in demand as Smith New Court renewed its recommendation that investors go overweight in the sector. Sentiment continued to improve in Forte following its recent financing deal and renewed talk of acquisitions. The shares rose 2 to 192p.

Granada Group found itself in demand, with several securities houses, including Hoare Govett and Smith New Court, recommending the stock. The shares gained 7 at 370p.

International drinks stocks stood out, with Grand Metropolitan the best performer for a second session as more brokers expressed enthusiasm for the stock. Among these, BZW reiterated its positive stance, emphasising the deflationary pressures on food costs and the attractions of the group's mixture of businesses. In particular, the weak North American food market was thought to be improving.

GrandMet was boosted on Monday by inclusion in NatWest Securities' Top Ten Buy list, and the house continued yesterday to recommend a switch out of Whitbread. The latter fell 17 to 457p.

Other domestic brewers also weakened, Courage's figures from Monday again casting a pall. Scottish & Newcastle lost 9 to 414p and Bass 6 to 567p. GrandMet, 17 ahead at one stage, closed a net 8 up at 446p. Allied-Lyons rose 4 to 584p and Guinness 8 to 465p.

Building group Wolseley advanced 8 to 553p on talk that SG Warburg had reiterated its buy recommendation on the stock. Meanwhile, Ibstock Johnsen shed 2 to 47p on the announcement of Pounds 28m restructuring costs.

NEW HIGHS AND LOWS FOR 1992/93

NEW HIGHS (136).

BRITISH FUNDS (32) OTHER FIXED INTEREST (3) African Dev. 11 1/8 pc '10, Asian Dev. 10 1/4 pc '09, Hydro Quebec 15pc '11, CANADIANS (1) Can. Pacific, BANKS (2) Bk. Scot. 9 1/4 pc Pf., Do 9 3/4 pc Pf., BREWERS (1) Kirin, BLDG MATLS (3) Anglian, BPB, Kalon, BUSINESS SERVS (2) Chubb, ISS-Intl. Serv., CHEMS (3) Evode 7p Pf., Laporte, Yule Catto, CONGLOMERATES (1) Harrisons & Crosfield, CONTG & CONSTRCN (1) Berkeley, ELECTRICALS (2) Critchley, Nokia, ELECTRICITY (5) Eastern, Northern, Norweb, Seeboard, Southern, ELECTRONICS (5) Forward, Gresham, Learmonth & Burchett, Peek, Sage, ENG GEN (7) Barry Wehmiller, Clyde Blowers, FKI, Hay (N), Rotork, VSEL, Whessoe, FOOD MANUF (2) Barr, Clifford, HEALTH & HSEHOLD (1) Bespak, HOTELS & LEIS (2) Pelican, Stanley, INSCE LIFE (2) Transatlantic, Utd. Friendly, INV TRUSTS (24) Abtrust New Dawn B Wts., Euro. Assets, Flmg. Emrg. Mkts., Flmg. Euro. Fldg., Hong Kong, Do Wts., JF Indonesia Fd Inc., Mid Wynd, Murray Smllr. Mkts., Do B, New Frontiers Dev., New Zealand Inv., Nth. Amer. Gas., Pacific Assets, Do Wts., RIT Cap., Do 2 1/2 pc Cv. '00, Rights & Issues Inc., River & Merc. Stppd. Pf., Second Cons., Siam Select. Growth, Do Wts., TR Euro. Growth, Thornton Asian Emrg. Mkts., MEDIA (4) GWR, Harrington Kilbride, LWT 5.90625p Pf., Scottish TV, MERCHANT BANKS (4) Schroders, Do N/V, Singer & Friedlander, Warburg, MISC (4) Bluebird, Faber Prest, Lincoln House, Ricardo, OIL & GAS (4) Bow Valley, Pict, Pittencrieff, Shell 7pc Pf., OTHER FINCL (3) Invesco MIM 9pc '95-00, Natl Home Loans, Do 7 1/2 pc Pf., PACKG, PAPER & PRINTG (1) Enso-Gutzeit, PROP (3) Land Sec. 10pc '25, Do 10pc '27, Do 10pc '30, STORES (3) Courts, Essex, Oriflame, TELE NETWORKS (1) Cable & Wireless, TEXTS (1) Alexandra Workwear, WATER (7) Anglian, Cheam, Severn Trent, South West, Southern, Wessex, Yorks., MINES (2) Antofagasta, Vizcaya.

NEW LOWS (5).

BLDG MATLS (1) Darby, CONTG & CONSTRCN (1) Ball (AH), INV TRUSTS (1) Radiotrust, PROP (2) Olives, Warnford.

Other market statistics, Page 25

SHARP reaction from both the US currency and Wall Street share prices to President Bill Clinton's warning of higher taxes ahead pulled the rug from under the London stock market yesterday. A recovery from early falls, prompted by favourable views of the latest UK Public Sector Borrowing statistics, was abruptly reversed and London fell nearly 38 points on the FT-SE 100 scale as the Dow dropped 78 points in early trading.

London's setback, driven by a plunge in stock index futures where the March contract fell to a discount, came almost too quickly for the bears to get out of the market. But there was a good deal of attempted selling of the blue chips as the pound climbed against the US dollar in late dealings.

The final minutes of the London session saw the Footsie rallying with the Dow Average after regulatory suspension of dealing in stock index futures on the New York market.

The final reading left the FT-SE 100 down 33.7 points at 2,812.2, after dipping to 2,808 earlier. At 3009.5, the FT-SE Mid 250 lost 13 points. Trading volume increased as the market fell away and traders feared that the Footsie 2,800 mark could be tested today.

Domestic considerations were entirely blotted out by the setback in New York. Equities had opened firmly as the January distributive trades survey by the Confederation of British Industry appeared to indicate a modest revival in the UK economy. But the 6-point gain on the FT-SE 100 was replaced by a 17-point drop as traders took on board a heavy profits fall at British Airways, a Pounds 295m rights call from Bowater and a weak opening by stock index futures.

Selling was modest and Seaq volume was slow to climb to 400m shares. The mood brightened quickly when news of a repayment of Pounds 3.83bn on public sector debt in January cheered the government bond market and prompted some economists to revise downwards their UK budget deficit forecasts.

In spite of nervousness ahead of Wall Street's reaction to President Clinton's taxation warning, the UK market was only a few points off as opening time for the New York market drew nigh.

But all this optimism was swept aside by the Dow's plunge and UK traders sounded unhappy as the Dow continued its fall after the London market closed.

Today and tomorrow could prove significant tests for the UK stock market. At home, investors are braced for the release this morning of the January retail sales figures and, perhaps more keenly, for disclosure tomorrow of the unemployment data for the month.

Analysts fear that UK unemployment could breach the 3m total, perhaps even prompting another reduction in base rates 'from weakness rather than strength', as one senior trader suggested yesterday.

Today also brings President Clinton's State of the Union Address to Congress and important auctions in the New York bond market, as well as the outcome of the latest repo arrangements by the Bundesbank.

After a slow start yesterday, Seaq volume finally advanced to 634.3m shares, of which around 62 per cent was in non-Footsie stocks. On Monday, equity retail business worth fell to only Pounds 864.9m, the first daily total below Pounds 1bn since the Christmas period.

STOCK index futures followed the afternoon slide on Wall Street, falling sharply after a steady performance earlier in the day, writes Joel Kibazo.

Trading in the March contract on the FT-SE 100 opened at 2,854. This proved to be the high of the day and March drifted down, mainly due to a lack of buying interest at the higher levels. By mid-morning the contract had retreated to 2,846.

However, the release of Public Sector Borrowing Requirement figures that were better than expected provided some comfort and caused a turnround in the contract as buyers emerged.

But this recovery was wiped out in the afternoon when dealers in London, seeing the falls on Wall Street as it reacted to the prospect of higher taxes, rushed to sell March in a bout of almost panic trading. Having traded at around fair value for most of the day, the contract fell to a discount which was as deep as 6 points at the worst.

March finished at 2,798, just ahead of the day's low and with a fall of 55 against the previous session. Turnover, at 12,151 lots, was healthy.

Volume in the traded options was also good, reaching 34,541 contracts by the close. The FT-SE 100 option had 9,581 lots dealt, while some 1,606 contracts were traded in the Euro FT-SE 100 option. BP, the busiest stock option, traded 2,568 lots, followed by Tesco with 2,093.

Wall Street

US SHARE prices tumbled across the board in very heavy trading yesterday after investors greeted details of President Bill Clinton's economic proposals negatively, writes Patrick Harverson in New York.

The Dow Jones Industrial Average closed 82.94 down at 3,309.49, just off its low for the day. The index has fallen 133 points, or 3.8 per cent, since it reached a record high of 3,442.14 earlier this month.

The more broadly based Standard & Poor's 500 dropped 10.67 to 433.91, while the American SE composite finished 9.66 lower at 405.81. The Nasdaq composite, which has risen the furthest in recent months, was the hardest hit index, shedding 25.15 to 665.39. Trading volume on the New York SE swelled to 332.8m shares, and declines outnumbered rises by more than four-to-one.

After incurring sizeable losses last week, the markets opened in a depressed mood following the extended President's Day weekend.

Mr Bill Clinton's television address on Monday night was the main cause for the weakness in equities. In the broadcast he warned that a wide range of tax increases would be introduced which, coupled with selective spending cuts, he hoped would go some way towards shrinking the huge federal deficit.

Investors disliked what they heard, fearing that the tax increases and spending cuts would hinder the economic recovery, which has only recently begun to gather pace. They were also disappointed that there was no mention of a reduction in capital gains tax.

Consequently, investors rushed to liquidate some of their holdings in an attempt to cash in profits earned during the record-breaking rally earlier this month.

Drug and healthcare stocks were especially hard hit because of concern that health system reforms will involve placing restrictions on pharmaceutical prices and healthcare costs. Sector leader Merck fell Dollars 2 1/2 to Dollars 37 7/8 , while Schering-Plough tumbled Dollars 3 3/4 to Dollars 59 1/2 and Pfizer Dollars 4 1/8 to Dollars 60 1/8 .

Leading Dow issues were all victims of the sell-off: IBM fared better than most, losing just Dollars 5/8 to Dollars 50, while Philip Morris retreated Dollars 2 1/2 to Dollars 70 3/8 and AT&T Dollars 1 1/4 to Dollars 52 5/8 .

Airline shares were troubled by talk of a broad-based energy tax. AMR, parent of American Airlines, fell Dollars 2 3/8 to Dollars 60 5/8 , Delta lost Dollars 2 3/8 to Dollars 49 and UAL weakened Dollars 6 1/2 to Dollars 119 1/2 .

On the Nasdaq market, selling was particularly fierce. Biggest losers in the healthcare sector were US Healthcare, Dollars 2 5/8 lower at Dollars 45 3/4 , Healthcare Compare, Dollars 4 1/8 cheaper at Dollars 16 1/2 , Coventry, Dollars 6 7/8 down at Dollars 20 1/8 , and PacifiCare, off Dollars 7 1/2 at Dollars 40 1/4 .

Canada

TORONTO stocks retreated sharply in heavy trading as Canadian markets were dragged down by the steep Wall Street setback.

The TSE 300 index closed 31.7 off at 3,410.5 and declines led advances by 443 to 215 after volume of 48.7m shares.

The gold shares group was a bright exception, gaining 2.3 per cent as the spot price for gold rose USDollars 3.35 an ounce to USDollars 332.30 in New York. Gold dealers in New York attributed the precious metal's rally to fears about President Clinton's economic plans.

BEFORE Wall Street opened yesterday, Frankfurt was showing relative strength in a dull Europe and strategists were saying that the Netherlands, Switzerland and Spain looked like better value, writes Our Markets Staff.

Afterwards, the late closing markets - including the Netherlands, Switzerland and Spain - were more obviously marked by the Dow's setback.

PARIS had generally been inactive ahead of Wall Street but then lost 2 per cent quickly before recovering a little in the last few minutes of trading. The CAC-40 index finished the day 21.32 lower at 1,878.17 in turnover of FFr2.4bn.

There was little fresh corporate news to arouse interest. CarnaudMetalbox, which resumed trading after Monday's suspension, closed 6 per cent lower, down FFr12.90 at FFr197.10 while CGIP, a major shareholder, dipped FFr49, or 4 per cent, to FFr1,036.

On Monday MB-Caradon of the UK said that it wanted to dispose of its 25 per cent stake in CarnaudMetalbox and yesterday the stock market regulator said that it had no objection to CGIP raising its stake by 7 per cent without making a full bid.

ZURICH, which was promising a strong performance before Wall Street showed its weakness, came back late on the Dow and the lower dollar to close with the SMI index 14.4 down at 2,130.4.

Multinationals and banks were the chief victims. Nestle bearers eased SFr15 to SFr1,095 and Brown Boveri by SFr30 to SFr3,930 as CS Holding fell SFr40 to SFr2,130.

The chocolate maker, Lindt & Sprungli, was active on continuing takeover speculation and the bearers rose SFr600 to SFr17,700.

MADRID took one of the biggest European tumbles on theWall Street slide, the general index closing 3.25, or 1.4 per cent lower at 233.45. Repsol went down with the market, losing Pta40 to Pta2,800 on the day that it heralded an international institutional placement of its equity as a further step in its privatisiation process.

FRANKFURT refused to consolidate gains seen in London on Monday afternoon, and the DAX index eased by 0.49 to 1,664.22 in turnover up from DM5.6bn to DM7.3bn.

Yesterday afternoon was a different matter, as blue chips reacted individually, rather than en bloc to the slide on Wall Street.

Volkswagen was the most serious casualty, dropping DM6.90 to DM284.10 on the official session following the DB Research downgrade last Friday, and then tumbling again to DM278 in the post-bourse.

AMSTERDAM declined towards the close, the CBS Tendency index falling 0.8 to 98.3. Royal Dutch lost Fl 2.10 to Fl 152.30 as the Opec meeting remained stalled while Oce-van der Grinten fell Fl 2.40 to Fl 41.00 on a 13 per cent decline in its 1991/1992 earnings.

Elsewhere Akzo shed Fl 1.00 to Fl 149.20 and Unilever was Fl 2.20 weaker at Fl 195.00.

DUBLIN, with the latest close in Europe, reflected renewed sickness in the Dow at Wall Street's midsession with the ISEQ overall index 24.32, or 1.9 per cent lower at 1,277.68.

BRUSSELS weakened with Petrofina giving up some of the gains it has made over the last six sessions. The Bel-20 index closed 3.48 lower at 1,207.57 in turnover of BFr873m as Petrofina shed BFr40 to BFr7,980.

MILAN again featured Fiat on a day which saw mild profit-taking. Fiat, continuing to deny reports that it might be considering reorganisation plans or the sale of some of its assets, fixed L141 lower at L5,099 before L5,075 on the kerb.

But the group's chemicals division, Snia, attracted interest, gaining L85 to L1,130 before rising to L1,150 on the kerb. The Comit index eased 0.02 to 500.27 on the first day of the new account.

STOCKHOLM, which extended the session by 90 minutes following earlier technical problems, was strong in banks on hopes that proposed accounting rule changes would benefit the sector. Handelsbanken B shares gained SKr2.50 to SKr53.00 and S-E Banken rose SKr2.50 to SKr14.50. The Affarsvarlden general index rose a modest 0.9 to 984.6 in turnover of SKr724m.

Skandia went against the trend, falling SKr8 to SKr109 after announcing that it would pass its 1992 dividend.

VIENNA rose on the day with a gain in the ATX index of 13.85 to 815.18. Lenzig was one of the best performers, rising Sch16 to Sch570.

ATHENS, once again, seemed to acknowledge that some of its recent enthusiasm had been misplaced, the general index dropping another 15.46 to 776.75. This left it 12 per cent down from last week's 1993 peak, but still registering a gain of over 15 per cent on the year so far.

---------------------------------------------------------------------- FT-SE ACTUARIES SHARE INDICES ---------------------------------------------------------------------- February 16 THE EUROPEAN SERIES ---------------------------------------------------------------------- Hourly changes Open 10.30 11.00 12.00 ---------------------------------------------------------------------- FT-SE Eurotrack 100 1130.07 1127.57 1127.57 1128.13 FT-SE Eurotrack 200 1182.17 1180.24 1179.73 1183.20 ---------------------------------------------------------------------- Hourly changes 13.00 14.00 15.00 Close ----------------------------------------------------------------------

FT-SE Eurotrack 100 1128.11 1127.44 1125.09 1123.14 FT-SE Eurotrack 200 1182.33 1182.27 1179.83 1179.54 ---------------------------------------------------------------------- Feb 15 Feb 12 Feb 11 Feb 10 Feb 9 ---------------------------------------------------------------------- FT-SE Eurotrack 100 1132.97 1129.97 1126.71 1121.50 1124.14 FT-SE Eurotrack 200 1184.15 1181.05 1175.45 1171.08 1177.40 ---------------------------------------------------------------------- Base value 1000 (26/10/90) ---------------------------------------------------------------------- High/day: 100 - 1130.07; 200 - 1183.55 Low/day: 100 - 1122.64 200 - 1177.22 ----------------------------------------------------------------------

SHARE PRICES lost ground on profit-taking and arbitrage selling and the Nikkei average closed below the 17,000 level, writes Emiko Terazono in Tokyo.

The 225-issue average lost 201.67 to end at the day's low of 16,916.32, having risen to a high of 17,172.37 in the morning session, before falling in the afternoon on heavy selling by investment trusts and tokkin, or specified money trusts.

Volume was virtually unchanged at 220m shares, against 214m. Declines led rises by 585 to 330, with 200 issues unchanged. The Topix index of all first section stocks shed 8.43 to 1,292.33, and in London the ISE/Nikkei 50 index eased 1.29 to 1,039.97.

Investment trusts and corporate tokkin funds which were liquidated ahead of the March book closing depressed shares, but buying at lower levels by public funds gave support.

Many investors remained absent ahead of an economic statement from Mr Bill Clinton, the US president, while others were concerned about the implications of a court trial linking Mr Noboru Takeshita, the former prime minister, to dealings involving art transactions.

Electronic issues were lower on profit-taking by foreigners and corporations. European investors were seen taking advantage of the higher yen against European currencies, while tokkin liquidations also depressed high-technology blue chips. Hitachi relinquished Y10 to Y685 and NEC receded Y13 to Y637.

Isuzu Motors, the most active issue of the day, lost Y3 to Y375 on trading by dealers. Other car makers were also weak, with Toyota Motor down Y30 to Y1,350 and Nissan Motor falling Y13 to Y632.

Housing-related shares, which were higher on hopes of a recovery in the condominium market, lost ground on profit-taking. Daikyo, the leading condominium builder, slipped Y4 to Y855 and Mitsui Fudosan retreated Y7 to Y978. Vending machine manufacturers firmed on increased demand for smaller vending machines: Fuji Deniki Reiki put on Y10 at Y1,820 and Sanden gained Y12 at Y562.

In Osaka, the OSE average eased 4.17 to 18,405.85 in volume of 110m shares. Joshin Denki, an electric appliance retailer, dropped Y110 to Y900 after investigators raided the company's headquarters on allegations that company officials had enlisted gangsters to oust the former president.

Roundup

THERE WERE some impressive performances in the region yesterday.

HONG KONG saw a 75-point gain eroded as investors took profits after the market's recent strong performance on reports of an easing of political tensions between China and Britain. The Hang Seng index closed a net 16.18 up on the day at 6,065.62 in good turnover of HKDollars 4.3bn.

HSBC Holdings again led the actives, but finished flat at HKDollars 63, while Cheung Kong advanced 40 cents to HKDollars 21.40 and Jardine Matheson firmed 75 cents to HKDollars 46.75.

AUSTRALIA began to take the view that the conservative opposition coalition might win next month's federal election and the All Ordinaries index rose 15.6 to 1,612.1 in turnover of some ADollars 309m. Banks led the way, ANZ gaining 6 cents at ADollars 3.30 and Commonwealth Bank 10 cents at ADollars 6.54.

News Corp and TNT rose after denying reports that they were seeking an ADollars 500m loan to fund the international expansion of their jointly owned airline, Ansett Transport Industries. News Corp added 36 cents at ADollars 30.44 and TNT 2 cents at 78 cents.

NEW ZEALAND registered its biggest one-day advance in 19 months, as Telecom climbed 29 cents to NZDollars 2.83 after announcing that it is to reduce its workforce by some 40 per cent over the next four years. The NZSE-40 index put on 48.95 at 1,621.65, its highest close since August 1990.

SINGAPORE improved on institutional buying of blue chips, the Straits Times Industrial index rising 10.79 to 1,629.36 in turnover of SDollars 217m.

Some shipyard stocks were stronger on reports of new repair contracts, with Far East Levingston Shipbuilding gaining 26 cents at SDollars 3.94.

SEOUL saw a morning rise fail to follow through and the composite index finished a net 5.30 off at 672.22 in turnover of Won361bn. Many analysts expect the market to remain flat until the new government is sworn in on February 25.

TAIWAN declined on profit-taking, with Taiwan Cement easing TDollars 1.50 to TDollars 57, although the financial sector remained firm. The weighted index lost 2.03 to 3,874.73.

MANILA advanced on optimism about oil drilling tests taking place off the south-western island of Palawan. The composite index rose 6.99 to 1,413.08 in combined turnover of 470.5m pesos.

BANGKOK saw weakness in the financial sector as the SET index fell 11.68 to 986.65 in turnover of Bt8.4bn.

Financial First City Investments, suspended from trading since Monday, said it was deferring the repayment of matured deposits. Bangkok Bank, which has said it might help to rescue First City, declined Bt3 to Bt137.

KUALA LUMPUR was lifted by bargain hunting in the afternoon session but the composite index managed a gain of just 0.10 at 635.01.

BOMBAY fell for the fourth trading session, ahead of India's national budget in 10 days' time. The BSE index shed 32.69 to 2,607.51. Selling pressure in KARACHI was fuelled by a proposal to ban insider trading. The KSE 100 index slipped 14.36 to 1,185.20.

European bourses approached the tradition of a new year rally somewhat tentatively this year, with share price declines in France and Germany only barely offset by gains in the UK and Italy. Where there were gains, traders rather than investors seemed in the ascendant, and the effect on equity market activity was generally muted.

January's bourse turnover figures, in aggregate, show a rise of 8 per cent over December, itself only 2.8 per cent lower than in the preceding month. Mr James Cornish of NatWest Securities, which produces the figures, notes that the biggest volume gainer in January was Switzerland, which rose by 70 per cent on the month, back up to a level not seen since early 1990.

Switzerland produced a barely average advance on the month, according to the FT-Actuaries World Indices, which had it 0.66 per cent higher over the four weeks to January 29, against a rise of 0.63 per cent for Europe as a whole.

However, says Mr Cornish, it was the best performer in 1992, a performance based on a strong economy and currency and a certain independence from the strains within the ERM, and foreign investors were on feed. 'Swiss share volumes on SEAQ International (London's screen-based trading system for foreign stocks) rose by 46 per cent,' he says, 'indicating that non-Swiss investors were also busy.'

Belgium had a good month, too, with a gain in turnover of 45 per cent reflecting a rise of 5.3 per cent on the month in local currency terms. The country had suffered from the stability of its own currency in the final quarter of 1992, says Mr Geoffrey Taylor of Dillon Read, but the underlying economic disciplines enabled Brussels to get its interest rates down very sharply around the year-end.

This produced a lot of turnover in interest rate-sensitive stocks such as Electrabel; another utility, Tractebel, saw the placing of Petrofina's stake of around 2 1/2 per cent in mid-January inflate the turnover figures to some extent.

The market also moved, says Mr Taylor, on the strength of the dollar and a strong performance in cyclicals such as Arbed, the Luxembourg steel company, Glaverbel, Solvay and Societe Generale de Belgique, whose major industrial holdings are in non-ferrous metals, steel and cement.

Elsewhere, the Netherlands saw a gain of 17 per cent in response, says Mr Cornish, to the market's return to outperformance, with particular help for Royal Dutch from a 3 per cent rise in the crude oil price. The UK was up 10 per cent on the month as it reached new highs on the cut in base rates.

Germany recovered by 11 per cent after a very weak December, but the attraction of the Frankfurt market to institutional investors has been realised this month, following the Bundesbank's cut in key interest rates on February 4.

---------------------------------------------------------------------- EUROPEAN EQUITIES TURNOVER Monthly total in local currencies (bn) ---------------------------------------------------------------------- Bourse Oct Nov Dec Jan US 1992 1992 1992 1993 Dollars bn ---------------------------------------------------------------------- Belgium 47.56 43.93 43.35 62.75 1.89 France 108.08 92.39 120.72 106.66 19.58 Germany 98.85 92.20 82.80 91.67 56.97 Italy 17,112.00 24,248.80 14,210.72 13,852.04 9.25 Netherlands 14.00 11.70 12.50 14.60 8.07 Spain 687.70 619.31 790.00 653.20 5.72 Switzerland 11.78 11.60 13.10 22.30 15.00 UK 39.76 39.57 39.05 42.86 63.73 ---------------------------------------------------------------------- Volumes represent purchases and sales. ---------------------------------------------------------------------- Italian data adjusted to include off-market trading. Some figures may be revised. ---------------------------------------------------------------------- Source: NatWest Securities ----------------------------------------------------------------------

GOLD shares were stronger on the expectation of renewed US interest this week and the index closed 47 higher at 1,008. The overall index added 33 at 3,507 and industrials advanced 33 to 4,583. Vaal Reefs rose R7.25 to R181.

THE DOLLAR fell sharply in late European trading as the US stock market dropped in response to President Clinton's Monday night address, writes Emma Tucker.

Strong signals from the US president that he plans an early assault on the budget deficit prompted fears in the market that high tax increases would stymie the economic recovery.

Mr Brian Hilliard, international economist at Societe Generale Strauss Turnbull, commented: 'The market is worried that President Clinton's plans to increase taxes will slow down growth and depress company profits.'

The US currency sank more than 2 1/2 pfennigs to end in London at DM1.6315, after Monday's close of DM1.6590. The dollar also slid against the yen to Y119.65 from a previous Y120.90. In New York it finished at DM1.6280 and Y119.96.

Sterling benefited from the dollar's weakness, ending almost 3 cents better at Dollars 1.4475, and in New York it closed at Dollars 1.4485. Mr Neil MacKinnon, chief economist at Citibank in London, said the pound was enjoying a temporary respite from bad news on the economy. He added that today's UK retail sales figures were expected to be quite good and that the market had already priced in a month-on-month rise of about 0.6 per cent.

A Confederation of British Industry survey earlier this week suggested that today's official figures could show an even stronger rise. The slightly more optimistic mood was reinforced by figures showing that the government repaid Pounds 3.83bn last month. Although the figure will not alter general gloom about the state of public sector finances in the UK, it was better than forecasts for a Pounds 0.9bn repayment.

The pound was also higher against the D-Mark, closing a pfennig up on the day at DM2.3625. In early US trading, however, sterling lost some of its gain against the German currency, with US dealers said to be sceptical about yesterday's relatively better economic data.

Trading in other European currencies was quiet, although the Italian lira suffered from rumours of a corruption scandal and reports that last year's budget deficit had overshot earlier estimates by L11,000bn.

'So long as there is a question mark over the government's ability to push through its privatisation programme and bring down its budget deficit, there will be problems for the lira,' said Mr MacKinnon.

It ended at L943.3 against the D-Mark, down from the previous close of L935.0. Dealers said the next technical resting point for the lira above a close of L945 would be L990. Pressure is said to be building on current levels, and if political worries intensify, dealers expect the Italian currency to lose ground rapidly.

The D-Mark was mostly stronger, climbing against the dollar, lira, pound and yen, but it retreated slightly against the Swiss franc after Monday's firm close.

EUROPEAN futures markets were buoyed by yesterday's news that German civil servants are to receive a lower than expected wage increase next year.

Mr Hermann Otto Solms, parliamentary leader of the Liberal Free Democrats, said civil servants would get a pay rise of 3 per cent to take effect from May 1. This was less than the market had expected and prompted an 8 basis-point gain in the March Euromark contract as dealers weighed up the possibility that the Bundesbank might cut rates earlier than expected. The December French franc contract rose by about 6 basis points.

The small rally was given an extra boost by a market rumour that the Bundesbank would surprise everyone by announcing a rate reduction at its council meeting tomorrow, and that the next set of money supply figures would be towards the bottom end of the central bank's target range.

German call money rates were tighter, however, as strong outflows of funds for tax payments continued to drain liquidity from the country's money market.

In the UK, short sterling futures stood on the sidelines, trading in a very narrow range, while longer dated interbank rates were virt-ually unchanged on the day.

However, this inactivity masked some stickiness in Bank of England operations, where the failure to remove a large liquidity shortage pushed overnight rates to above 6 per cent.

In the morning the Bank announced a Pounds 950m forecast liquidity shortage, but did not operate in the early round. A squeeze on rates at the short end continued when the Bank revised the shortage upwards to Pounds 1.05bn but removed only Pounds 50m. Tensions were eased in the afternoon when the Bank more than removed the shortage by purchasing Pounds 1.01bn of bills. The overnight rate then dropped back to below 6 per cent.

Some dealers speculated that the Bank was underlining its desire to support sterling at current levels by deliberately keeping liquidity tight, but others said the failure to remove the shortage in the morning reflected reluctance among money market practitioners to part with paper.

The March short sterling contract stood at around 94.05 at the close. Mr Nick Parsons, economist at Canadian Imperial Bank of Commerce, said he expected to see the contract drift lower to around 93.82 over the next few weeks as prospects for a pre-Budget rate cut receded.

JUTE

February/March C and F Dundee BTC Dollars 360, BWC Dollars 380, BTD Dollars 325, BWD Dollars 340, C and F Antwerp BTC Dollars 340, BWC Dollars 340, BTD Dollars 315, BWD Dollars 315.

COTTON

Liverpool- Spot and shipment sales amounted to 457 tonnes for the week ended February 12, compared with 713 tonnes in the previous week. Improved demand brought moderate purchases mainly in American, CIS and Asian descriptions. Pakistani and Spanish growths made some headway.

INDONESIAN cocoa producers have advised against membership of the International Cocoa Organisation, despite the country's emergence as a leading world producer.

Indonesia is expected to produce 220,000 tonnes of cocoa in this crop year, which ends on September 30, replacing Malaysia as the world's fourth largest producer, according to the Indonesian Cocoa Association (Askindo). The country's production has soared since 1981-82 when it produced just 23,000 tonnes. Askindo expects production to rise to 250,000 next year and to more than 400,000 tonnes by the end of the decade.

It estimates that about 330,000 hectares (815,000 acres) are under cultivation but only 60 per cent are in production, with the remainder producing a first crop by 1996.

Next week members of the ICCO, which groups main consuming and producing nations, meet in Geneva to negotiate a new price support mechanism for cocoa.

The current agreement, signed seven years ago, has failed to maintain world prices, which have fallen from about Pounds 1,300 a tonne in 1987 to Pounds 730. Traders say the continued refusal of Indonesia to join the ICCO would weaken any new accord.

Indonesian producers fear membership would have a negative impact on the domestic industry. 'We are very worried that if we become a member our production programme may be constrained by outside factors,' explained one executive yesterday.

Some officials also wish to remain removed from the ICCO's internal squabbles and financial problems.

The head of one plantation company noted: 'Most important (for a new price support agreement) is financing. But who is to pay, producers or consumers? And what about arrears? Some producers owe the association about Dollars 140m'.

Askindo officials take a more pragmatic line, however, saying membership of the organisation may be inevitable given Indonesia's importance as a producer and the government's policy of promoting economic co-operation between developing nations.

They say the preferred option for a new price support agreement would be a withholding scheme, based on historic production levels, rather than a quota or buffer stock systems.

Prices from Metal Bulletin (last week's in brackets).

ANTIMONY: European free market 99.6 per cent, Dollars per tonne, in warehouse, 1,665-1,710 (same).

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 (0.40-0.50).

COBALT: European free market, 99.5 per cent, Dollars per lb, in warehouse, 15.50-16.00 (same).

MERCURY: European free market, min. 99.99 per cent, Dollars per 76 lb flask, in warehouse, 120-145 (same).

MOLYBDENUM: European free market, drummed molybdic oxide, Dollars per lb Mo, in warehouse, 1.80-1.95 (1.85-1.95).

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, 38-48 (same).

VANADIUM: European free market, min. 98 per cent, Dollars a lb VO, cif, 1.60-1.70 (1.65-1.70).

URANIUM: Nuexco exchange value, Dollars per lb, UO, 7.65 (same).

DESPERATE attempts are being made to salvage a Dollars 640m project to renovate one of the world's biggest polluters, the Pechenga nickel smelter on Russia's Kola peninsula, near the Finnish border.

The scheme was first aborted in March last year because of Russia's financial problems but was resurrected when Outokumpu, the state-owned Finnish group acting as technical manager of the proposed project, reinstated its tender - Dollars 600m for smelter renovation and Dollars 40m on infrastructure.

Outokumpu said yesterday that it had not proved possible to reduce the cost of the project any further, so recent efforts had concentrated on reducing the amount of foreign currency Russia would need by establishing how much equipment could be supplied from that country.

This study would be completed early next month and then the proposals would be considered by the Nordic governments. Finland and Norway have promised environmental grants of up to Dollars 100m towards the project and, with Sweden, have said they would provide loans for the rest of the required investment. If Russian remained short of foreign currency, Outokumpu would be willing to take up to Dollars 100m of nickel a year and would help repay the banks.

Pechenga spews out about 284,000 tonnes of sulphur dioxide a year. Some falls on the nearby town of Nikel but prevailing winds take two-thirds across Finland and Norway where the acid rain it causes has severely damaged forests.

The project would cut sulphur dioxide emissions to only 15,800 tonnes and enable Russia to meet the undertaking (first given by the Soviet Union) to halve emissions in the Finnish border area.

Equally important, from Russia's point of view, the project would provide the Norilsk nickel group, one of the country's most reliable and successful exporters, with a new smelter. Western observers suggest that the present Pechenga smelter, established in the 1930s and renovated in the 1940s, has only a few years of life left.

Pechenga produces about 100,000 tonnes a year of nickel in matte (an intermediate material), which is sent to Montshegorsk for refining. At first the pollution abatement scheme was to have cost more than Dollars 1bn and to have included Montshegorsk but this proved to be economically impossible because of transport problems.

Outokumpu said yesterday there had been little progress in negotiations with the Russians in the past year. 'But we are trying to make ourselves useful, whatever route they choose,' said an official. Outokumpu has spent between Dollars 3m and Dollars 5m so far on the project.

GOLD moved ahead on the London bullion market after Comex opened ahead following the US Presidents' Day holiday. New York traders said investor interest had been sparked by early sell-offs in the Dow Jones Industrial Average and the dollar, which had been put on the defensive by uncertainty over President Clinton's economic plans. New York raw SUGAR prices were sharply higher at midday, buoyed by heavy commission house and fund buying as well as bullish chart factors. The gains were fuelled by market rumours that Cuba had had to buy 100,000 tonnes of Thai sugar to fulfil its Chinese contracts, and that Kenya was said to be tendering for physical sugar. London COCOA futures were depressed by sterling's advance against the dollar. On the LME BASE METAL trading continued in narrow ranges. Dealers said the lacklustre markets might prevail for some time yet, as overall physical interest and activity was slow and stocks continued to build.

Compiled from Reuters

THE WORLD wool market has deteriorated rapidly in the past three months, according to the latest report from the International Wool Textile Organisation.

A forecast fall in supplies has not been as significant as expected, mainly because of large stocks carried over in Argentina and a higher than expected clip in Australia.

On the demand side economic problems have kept western European purchases down, while Japan has 'excessively large' stocks of yarns, fabrics and completed garments.

The former Soviet Union and eastern Europe, which played an important role in expanding wool demand during the 1980s, have stayed away from the market, while Chinese buying has not been as strong as in 1991-92.

Last week the Australian wool indicator price fell by 22 cents to 459 cents a kilogram. The Australian Council of Wool Exporters said on Monday that prices would remain under pressure and reported the largest offering of the season so far - 146,594 bales.

The New Zealand Wool Board has advised its farmers not to send wool to auction while prices are so low.

The IWTO has revised upwards its estimate for the 1992-93 clip by 3,000 tonnes and for the 1991-92 carry-over stocks by 34,000 tonnes. Total availability of wool (production plus carry-over stocks) is now put at 2.3m tonnes for 1992-93, up from a November estimate of 2.26m. While this is well below the 2.45m tonnes of 1991-92, it is still well ahead of the 1986-91 average of 2.04m tonnes.

Since November the IWTO has reduced its clip estimates for New Zealand, South Africa, Lesotho and Namibia, but has raised the Australian estimate from 549,000 tonnes to 557,000 tonnes.

SCOTTISH SALMON farmers meeting in Glasgow yesterday for the start of their annual exhibition and conference were more cheerful than for several years. That was because the wholesale price of farmed salmon had recovered after being at crisis levels for two years.

The happy farmers do not, however, include those from Shetland. The wrecking of the tanker Braer at the beginning of last month spread a film of oil up the west coast of the islands, affecting 16 salmon farms that account for about a quarter of the 10,000 tonnes of salmon produced annually in the islands.

Moving to protect their industry's reputation, the Shetland farmers declared an exclusion zone over the affected area, from which no fish can be sold. It is likely that 2.5m salmon with a market value of between Pounds 8m and Pounds 10m will have to be slaughtered in the next few weeks and the farmers compensated from the International Oil Pollution Compensation Fund.

Salmon farmers in Norway, Scotland and Ireland have been through hell since the late 1980s. But even Norwegian farmers accept that their own industry, by far the largest in Europe, must take most of the blame for what went wrong. Norway hugely increased its salmon output from 1989, reaching a peak of 160,000 tonnes in 1991 and driving prices down sharply. Norway was selling fish at below production cost in the European Community market - in a word, dumping.

In late 1991 Norway began putting its house in order. Nearly 40,000 tonnes of Norwegian salmon were bought up, frozen and disposed of outside the EC. The EC temporarily imposed a minimum price on Norwegian imports. These moves, plus a slight cut in Norway's output and a drop in salmon catches in the North Pacific, have reduced world supply and enabled prices to recover.

But during the crisis many smaller Scottish salmon producers went bankrupt, their sites being bought up by other companies. Unilever last year pulled out of salmon farming, selling Marine Harvest, the biggest Scottish producer which also operates in Chile, to MariFarms, a US company in which Hanson has a large stake.

With salmon produced on a three-year cycle, Scottish farmers reined back their growing production by reducing the number of smolts (small salmon) they transferred to cages at sea. Scottish Office figures show that output dropped last year to 36,000 tonnes from the 1992 record of 40,500 tonnes.

Prices rose by 35 per cent between March and September last year, and farmers, already benefiting from low interest rates, hope UK demand will improve this year.

Now the Scottish salmon farmers want to ensure that they never again have to go through the perilous boom and bust cycle of the past few years, and Norwegian, Irish and Faroese producers agree. They all propose setting up compulsory producer organisations to control the release of smolts and operate an intervention buying system to keep up prices.

All the producer organisations would meet twice a year in a European Salmon Industry Forum which would review salmon breeding and try to co-ordinate production, though its recommendations would be voluntary.

The producer organisation idea is backed by nearly 90 per cent of Scottish salmon farmers. It received public support yesterday from Highlands and Islands Enterprise, the development body for the Highlands, and has strong backing in Norway. But the UK government is indicating that though it supports voluntary organisations it would not enact legislation necessary to make the producer organisations' rulings compulsory, which the salmon farmers say is essential.

Mr Donald MacRae of TSB Bank Scotland says: 'It is most unlikely that the EC Commission would agree to an international producer cartel' and asks whether the system would be workable, arguing that farmers would produce for intervention.

But Mr Paul Torgnes, secretary of the Norwegian Fish Farmers Association, warned in Glasgow yesterday that Norway was now on course to more than double its production to 310,000 tonnes in 1997. 'It is imperative that we introduce mechanisms to prevent this development,' he said.

STRONG DISAGREEMENT between Kuwait and other members of the Organisation of Petroleum Exporting Countries over the wording of a final communique had by late yesterday prevented ministers from sealing a deal to cut production for the second quarter, after nearly four days of talks.

Ministers have decided allocations for second quarter production that would cut output to slightly less than 23.6m barrels a day, that the cuts should in most instances be pro-rata and that the full reduction of just under 1m b/d from the first quarter ceiling should take effect on March 1.

Kuwait has also said it is willing to pump 1.6m b/d, nearly 400,000 b/d less than its claimed output, under this basic agreement.

But it also insisted yesterday that the communique should contain some form of proviso making clear that present output levels were temporary and reflected neither its eventual capacity, after full rebuilding of its damaged oil industry, nor its historic production levels.

Iran and some other delegations, however, flatly rejected any such special mention for Kuwait and at least three proposed drafted wordings had failed to bring the parties closer by late last night. Almost all members believe it is vital for Opec to produce a unanimous agreement, with no stated reservations or exceptions, if their proposed output cut is to look fully credible.

The row over the communique scotched momentum towards a deal that by late on Monday was enough to persuade the Saudi Arabian's to pack their bags ready to leave. The Algerian, Gabonese and Indonesian ministers all left on Monday saying the basis of a deal had been reached.

But Kuwait was unwilling to budge after Mr Ali al-Baghli, the country's oil minister, was understood to have been given assent by Sheikh Saad al-Sabah, the Kuwaiti crown prince, to accept a level of 1.6m b/d only on condition that there be some formal Opec acknowledgement of the Gulf state's special status since the Gulf war.

Several delegations were again settling their hotel bills ready to leave last night, and there was no little concern in some camps that Opec was taking so long to finalise a deal for which an apparent pre-meeting consensus had been so publicly trumpeted.

Although a number of industry analysts attending the meeting said the proposed second quarter ceiling would be welcomed by the markets, if adhered to, many also felt that much further delay in finalising the deal cast familiar doubt on Opec's real internal discipline.

However, Kuwait is determined that the present agreement should not be seen as somehow freezing the present accident of its lower overall output capacity.

IF RECENT events such as the dispute over ownership of the giant Porgera gold mine caused international investors to turn their backs on Papua New Guinea for a while, it might be a blessing in disguise, Mr Noel Levi, PNG's high commissioner in London, said yesterday.

He pointed out that PNG became independent only 17 years ago and in the past few years had attracted well over Dollars 2bn of foreign investment in mining and oil projects while exploration expenditure by foreign companies was running at an annual Dollars 100m. The country had been 'thrown into the mining boom with no preparation' and might benefit from some breathing space.

'Perhaps we need time to reflect on the past decade and to put in place mining laws that are more up-to-date. Perhaps the present laws are not entirely to our benefit.'

Mr Levi made it clear, however, that he, personally, wanted the USDollars 760m Lihir island gold project, which aims to develop one of the world's biggest and lowest-cost deposits of the precious metal, to go ahead as quickly as possible. Start-up of this project, in which RTZ, the world's biggest mining company has an 80 per cent stake, had already been delayed from 1992-93 to 1995, he said. 'But if RTZ wants it to happen, it will happen.'

Mr Levi also pointed out his government's official policy was to welcome foreign investment 'because the international business community offers technical expertise and financial resources needed to develop our natural resources responsibly to build national prosperity.'

At a meeting with institutional investors organised by Prudential-Bache Securities, the financial services organisation, Mr Levi was closely questioned about the Porgera mine. PNG has a 10 per cent stake in Porgera but both the new prime minister, Mr Paias Wingti, and the mining minister, Mr Masket Iangalio, have indicated this should be raised to 30 per cent, suggestions that created a bitter dispute with the Australian partners in the venture: Placer Pacific; Renison Goldfields; and a subsidiary of MIM Holdings.

It was suggested by Mr Iangalio on Monday that the dispute would be settled by the end of this week but Mr Levi pointed out that so far the PNG cabinet had not been asked to approve any move to raise the Porgera stake or to allocate money to pay for it.

------------------------------------ LME WAREHOUSE STOCKS ------------------------------------ (As at Monday's close) tonnes ------------------------------------ Aluminium +9,150 to 1,648,450 Copper +550 to 319,425 Lead -125 to 235,075 Nickel +684 to 80,988 Zinc +1,775 to 539,000 Tin +190 to 17,120 ------------------------------------

LATIN AMERICAN exporting countries have accused the European Community of hypocrisy following its decision to impose import restrictions on their bananas.

In Costa Rica president Rafael Calderon declared that 'we will continue to fight if the Europeans are not prepared to do us justice. We will fight within Gatt (the General Agreement on Tariffs and Trade), though that does not preclude (other) settlements.'

A commission of the region's banana producing countries is trying to establish whether the EC's decision actually violates Gatt norms and EC Gatt representatives are being asked to justify the measures

Meanwhile Mr Guillermo Endara, the Panamanian president, declared that EC leaders had 'no idea what damage they were causing to our countries'.

In Ecuador, the world's largest banana exporter, the foreign minister, Mr Diego Paredes, said, however, that his country was not considering retaliatory measures. Ecuador believed in free trade, he said.

The minister announced that a delegation would travel to Europe early next month to seek negotiations and make leaders there more 'sensitive to the problems the import restrictions are causing'.

Last Friday the presidents of the region's banana producing countries rallied together in a display of solidarity, pledging to challenge the EC import restrictions.

Yet despite a unanimous condemnation of the EC decision, the nine state representatives stopped short of adopting more aggressive measures. The idea of using the Panama Canal to put pressure on some EC countries was rejected by President Endara, who said that international agreements forbade such action.

Ecuador has begun to seek alternative markets. Negotiations are under way with Middle and Far East countries and sales have already been clinched in Iran.

The import restrictions come at a time when many Latin American countries have recently made considerable investments to increase banana production.

Mr Sixto Duran Ballen, president of Ecuador, declared that: 'The developed countries are now showing us that free trade is only a farce. Protectionism is returning, this time hiding behind more powerful economic blocs'.

THE international debt market is braced for a further onslaught of global deals today, when the previously-announced yen issue for the World Bank is expected to be launched.

The World Bank is widely expected to raise between Y200bn-Y250bn through a 10-year deal priced to yield 25 to 26 basis points above the benchmark Japanese government bond No 145.

Meanwhile, the Canadian province of Quebec's first global bond offering, a 30-year deal raising a larger-than-expected CDollars 1.4bn, was launched late yesterday. The issuer had said it would be raising a minimum of CDollars 1bn.

Of the total amount raised, CDollars 150m was placed with the Caisse des Depots, the Quebec government pension fund, which an official at the joint lead manager, Merrill Lynch, said was a typical feature. He also confirmed market talk that the bond was practically sold out before its official launch.

Quebec's issue is due to be priced today to yield 90-91 basis points above comparable Canadian government bonds, in line with market expectations.

The Kingdom of Sweden joined the rush yesterday when it announced that it would be launching its first global bond in the near future. Syndicate managers expected the US dollar deal to be launched this week.

This offering will almost complete the country's SKr230bn (Dollars 31bn) foreign borrowing programme which was announced late last year. To date, SKr200bn has been raised.

Officials at Morgan Stanley and Salomon Brothers, which have been appointed as joint lead managers and book runners of the Swedish offering, said the issue was expected to raise around Dollars 2bn. Both the Canadian province of Ontario and the Republic of Finland have raised Dollars 3bn through global offerings in the past.

Some syndicate managers said they expected the Swedish deal to be priced to yield 45-47 basis points above 10-year US Treasuries, though others said the pricing was more likely to be pitched in the low to mid-40s range.

Mr Staffan Crona, director-general of the Swedish National Debt Office, said that after this deal, Sweden would continue to borrow in the foreign debt market but not as heavily as in recent months.

He added that half of the funds raised to date in the foreign debt market have been used to shore up the Swedish central bank's foreign exchange reserves and the remainder has been used to finance the country's budget deficit.

In the current fiscal year, ending June 30, the Swedish budget deficit is forecast to be SKr200m but is expected to narrow to SKr160bn in the next fiscal year.

Elsewhere, the current fashion for Canadian dollar bonds continued as the European Investment Bank raised CDollars 350m via a seven-year deal priced to yield 27.5 basis points over the Canadian government bond yield curve.

Syndicate managers said the EIB's deal had gone well considering it had been pitched at an area of the yield curve where there is little natural demand - there is no benchmark seven-year Canadian government bond, for example - and in view of its ungenerous pricing.

All the recently-launched Canadian dollar Eurobonds have had maturities of three, five or 10 years, so the seven-year area stood out as the obvious gap, syndicate managers said.

There were reports in the afternoon that the European Investment Bank was going to launch a Ecu500m seven-year Eurobond today. The bank's president, Mr Ernst-Gunther Broder, said in Lisbon that the EIB planned to issue up to Esc70bn worth of escudo Eurobonds in 1993, following a successful Esc10bn offering two weeks ago.

THE long end of the gilts market rallied nearly half a point yesterday, on better-than-expected public sector debt repayment (PSDR) figures in January. The news prompted switching into long-dated paper, causing a further flattening of the curve.

The market had already rallied sharply on Friday, when the retail price index in the year to January fell to 1.7 per cent.

The Bank of England took advantage of the market's strength to issue Pounds 1.2bn of 9 per cent stock due 2011 and Pounds 150m of 4 1/8 per cent index-linked Treasury stock expiring 2030.

The market absorbed the extra paper easily, taking comfort from the fact that the government is now well ahead on its funding.

ELSEWHERE in Europe, investors continued to view the German market as a safe haven. The spread between 10-year French OAT and German bund yields widened to 89 basis points, from 82 basis points last week. Dealers said that although the bund market is not particularly bullish, some nervousness about the franc is encouraging investors to switch.

The spread against Danish and Belgian bonds has also widened on fears of further currency turmoil. The margin between 10-year German and Danish bond yields has widened to 184 basis points, while the spread between German and Belgian 10-year yields has increased to 77 basis points.

TREASURY prices were mixed yesterday as the market digested President Clinton's deficit-reduction plans. In late trading the benchmark 30-year government bond was down 7/32 at 99 23/32 , yielding 7.138 per cent. At the short end, however, prices remained firm, with the two-year note up 3/32 at 100 1/4 , to yield 4.098 per cent.

The president's televised address on Monday night, in which he outlined his proposals to cut the deficit, was initially well received by the bond market. By mid-morning New York time, however, local investors' enthusiasm for Treasuries had waned, and long-dated prices soon moved into negative territory due to lack of domestic demand.

The long end was also pressured by more good economic news. The Johnson Redbook service reported a 6.3 per cent rise in US store sales during the second week of January.

THE government bonds table includes three new benchmark issues from today: a 9 per cent Belgian government bond due 2003, a 6 1/4 per cent US Treasury due 2003 and a 7 1/8 per cent US Treasury due 2023.

STANDARDS for trade data messages, aimed at reducing the risk of errors in cross-border transactions, are to be developed by 21 of the world's leading securities industry bodies.

At a recent exploratory meeting in Brussels, organised by the Society for Worldwide Interbank Financial Telecommunication, the group agreed to set up by mid-year a neutral standards advisory board representative of and visible to the securities markets worldwide, as well as a framework to prevent duplicated or fragmented work on standards.

Both bodies will be recognised by the International Organisation for Standardisation (ISO) as being designated by it for the global development of securities message standards.

THE BOARD of Meff, the Spanish Financial Futures and Options Exchange in Barcelona, yesterday announced plans to cut fees and extend trading hours on its Spanish government bond futures contracts.

Trading in three-year and 10-year bond futures on Meff will be extended by more than an hour each day, and fees reduced to a fixed level of Pta75 (63 cents) per contract side - a 70 per cent reduction from average 1992 levels.

The move comes in response to a decision by the London International Financial Futures & Options Exchange (Liffe) to launch a 10-year Spanish government bond future next month, in competition with Meff. Mr Jose Luis Oller, Meff's chief executive, responded fiercely to Liffe's plans, when they were announced earlier this month, saying that the rival contract would split liquidity and segment the market.

TELECOM Corporation of New Zealand yesterday reported a 9.7 per cent improvement in third quarter net profit to NZDollars 121m (USDollars 65m) and announced a redundancy and restructuring programme aimed at shedding about 5,000 jobs.

Mr Roderick Deane, chief executive, said that Telecom, which is 68.2 per cent owned by Bell Atlantic and Ameritech of the US, was on target to report improved earnings for the full year, despite redundancy costs of NZDollars 350m.

The redundancy costs, which will be treated as an abnormal item, are part of a restructuring over the next four years that will cut staff numbers from 12,600 to 7,500.

Net earnings for the nine months ended December, were 5.3 per cent higher at NZDollars 305.8m. For the whole of last year Telecom's net profits totalled NZDollars 402.3m.

Mr Deane said that the restructuring was designed to rationalise the company's structure by combining its four operating companies into one.

It would also substantially improve service quality and reduce operating costs.

FUJITSU, the world's second largest computer company after International Business Machines, took a bold first step into the consumer electronics market with the launch yesterday of a multi-media video games machine.

The new machine, which is a multi-media CD-ROM player, plugs directly into a television set to display images, graphics and text stored on a compact disc.

It will also play conventional CDs and comes with a floppy disc drive to display material compiled on a PC.

The new machine, which goes on sale in Japan this month and will be known as Marty, marks a diversification for Fujitsu into the highly competitive consumer electronics market.

It also reflects the blurring of borders between the computer and consumer electronics industries with the spread of digital technology.

Computer manufacturers in the US and Japan have been working to develop multi-media technology, which combines data, graphics, text, video and sound, not only as an added feature for PC users but as a means to enter the consumer market.

Dataquest, the high technology consultancy, expects the multi-media market to be worth Dollars 1.6bn by 1996.

For Fujitsu, the move is a logical step after the launch of its multi-media PC, FM Towns, four years ago.

The consumer machine will run software for FM Towns in addition to titles which will be launched specifically for the new consumer machine. Fujitsu plans to have 300 software titles available by the end of March and 400 by the end of the year. It aims to sell 200,000 of the new machines in the first year.

However, Fujitsu's foray into the home entertainment and education market faces substantial hurdles.

The market already appears crowded, with Nintendo and Sega, the video games manufacturers, maintaining a firm grasp on the hearts and minds of young games players. The two companies have a distinct advantage over newcomers in the large number of installed machines and the popularity of their games titles, and have been moving aggressively into new software developments such as games using real film footage.

Meanwhile, other companies, such as Philips, the Dutch consumer electronics manufacturer, and Tandy of the US have launched their own CD-based multi-media entertainment machines that aim to provide more than video games.

Fujitsu does not have any experience of marketing consumer products. The company has set up a consumer products division in its personal business department, and plans to market the new machine not only in electronics and computer stores, but also through retailers such as department stores, supermarkets and electrical goods stores.

Although Fujitsu has attempted to differentiate its new machine from conventional video games machines by emphasising its educational potential, there is little evidence to suggest that the appeal of educational material could provide a strong boost to sales.

For Fujitsu, the move is a gamble. In the six months to September 1992, it posted its worst results, turning in a loss of Y7.5bn (Dollars 62m) on a consolidated basis against a profit of Y30.9bn previously.

SCITEX, the Israeli maker of colour electronic pre-press systems, yesterday reported a net profit of Dollars 122.3m in 1992, a 22 per cent increase over the previous year, as strong growth in both the US and Europe took sales to Dollars 550m.

Although profit growth was less than in the three previous years in percentage terms, the results further entrenched Scitex, which is traded on the New York over-the-counter market, as the star of Israel's successful high-tech industry.

Mr Giora Bitan, finance director, said demand for Scitex's range of computerised products for the publishing, printing and graphic design industries had grown despite a second year of low or negative overall growth in the company's main markets in north America and western Europe.

He said half of 1992 sales were to new customers. The trend of ungrading technology in these sectors was not exhausted.

Scitex said fourth-quarter sales of Dollars 153m were 31 per cent ahead of the same 1991 period and almost one-third were accounted for by products introduced in 1992.

Over the year, sales to the 'mid-range' market of small print houses, a key growth target, reached Dollars 69m, compared with Dollars 25m in 1991.

International Paper of the US bought an 11 per cent stake in Scitex during the year for more than Dollars 200m. This helped leave Scitex with a year-end cash balance of Dollars 325m. Mr Bitan said he was actively looking for further acquisitions.

He said Leaf, the US maker of photo-scanning and transmission systems, bought for Dollars 35m last year, had made a second-half loss which knocked 4 cents per share off Scitex's fourth-quarter earnings.

SAMANCOR, the South African chrome and manganese ore and alloys producer, yesterday reported a 27 per cent fall in attributable net profits to R110.8m (Dollars 35.5m) for the six months to December.

Earnings per share tumbled 31 per cent to 59 cents. The company is halving its dividend to 20 cents a share.

Mr Hans Smith, managing director, said no ferrochrome producer was making money at current prices. Samancor's ferrochrome operations were running at about 40 per cent of installed capacity, he added.

Although Mr Smith is keen to stress the success of the restructuring and the healthy state of Samancor's balance sheet - available cash resources stand at about R500m - the figures tell a grim story.

Adjusted to take account of the Middelburg Steel acquisition, turnover declined by 11 per cent to R930.9m and pre-tax profits fell by 72 per cent to R71.4m, taking in a R42m one-off retrenchment charge

The real trouble for Samancor came on the ferrochrome side, where large volumes of distress sales from the CIS and former eastern bloc countries played havoc with the market.

STRONG pharmaceuticals sales helped Sumitomo Chemical to a 28 per cent increase in consolidated profits before tax in the year ended December, the company reported yesterday.

However, on an unconsolidated basis, pre-tax profits fell 63.6 per cent to Y8.9bn (Dollars 74.1m), the third successive annual decline.

Overall unconsolidated sales fell by 11 per cent to Y624bn.

Sales of basic chemicals, which account for about 60 per cent of overall sales, fell by 13.4 per cent.

Aluminium sales dropped by 21.1 per cent.

Sumitomo Chemical's consolidated income before tax rose to Y40.2bn from Y31.2bn.

Net income fell by 19 per cent to Y16.3bn.

Net sales fell by 6 per cent to Y1,018bn.

However, a 19 per cent drop in basic chemicals, mainly petrochemicals supplied to the rest of Japanese manufacturing, was largely offset by a 8 per cent growth in sales of speciality chemicals and pharmaceuticals.

Operating income was marginally lower at Y53.7bn, compared with Y54.2bn the year before.

The growth of the comp-any's speciality chemicals division was mainly due to a 21 per cent growth in sales of its pharmaceuticals.

Sales of fine chemicals were also up largely through supplies to other pharmaceuticals producers.

THE senior ratings of Mitsubishi Corporation and Marubeni Corporation, the leading Japanese trading houses, were downgraded yesterday by Moody's Investors Service, the ratings agency. Moody's said both corporations took on extra risk through diversification programmes in the late 1980s.

Mitsubishi's rating was lowered from Aa3 to A1, while that of Marubeni was downgraded from A2 to A3. This means both companies retain investment-grade ratings. But the downgrading may mean they face slightly higher costs in raising new funds.

The downgrading of Mitsubishi comes as a surprise in Japan. Under the stewardship of Mr Shinroku Morohashi, its chairman, it is regarded as one of the country's most solid institutions, although net profits are expected to be halved for the year ending March.

Moody's suggested its core trading business had been eroded through increased competition, prompting Mitsubishi to diversify into satellites, cable television, and a broad range of direct investments.

Similar observations were made about Marubeni, though Moody's noted the downturn in international property had affected its development and construction businesses.

AMPOLEX, the Australian energy group, yesterday announced a 114 per cent increase in net profit to ADollars 29.8m (USDollars 20m), largely thanks to revenues from the Kutubu oilfield in Papua New Guinea.

Ampolex said operating profit increased by 207 per cent to ADollars 67.5m in the six months to the end of December, reflecting a 100 per cent increase in sales of crude oil to a record 6m barrels.

Net profit was reduced by an increase in tax payments from ADollars 8m to ADollars 37.6m, mainly as a result of exposure to higher tax rates in PNG, where the group paid tax of ADollars 28.2m.

Revenue increased from ADollars 89m to ADollars 238.3m, reflecting the group's 16.46 per cent share of Kutubu output and revenue from the resale of oil purchased from other Kutubu producers.

Ampolex said Kutubu production is expected to rise to an average of 120,000 barrels a day in the second half, compared with 114,000 barrels in December and 99,000 barrels over first six months.

The group said gas production for the period rose by 15 per cent to 1bn cubic feet, due mainly to higher output from its US interests.

KAWASAKI Steel yesterday warned that it was heading for a consolidated loss this year, mostly because of difficulties with its US joint-venture, Armco Steel.

The warning underlines the mounting costs which Japanese manufacturing companies face from their aggressive expansion in the late 1980s.

Most of Japan's leading steel makers formed joint ventures in the US in the second half of the 1980s, partly to supply Japanese car manufacturing plants which were being set up in North America.

The US steel industry welcomed the injection of Japanese capital and technology to help them out of a structural crisis. During the late 1980s, low interest rates in Japan meant many Japanese companies were able to raise funds for international expansion extremely cheaply.

However, it is now thought that most Japanese steelmakers are losing heavily on their US joint ventures, which have required substantial investments in technology and management to compete effectively with low cost mini-mills.

Kawasaki Steel, which is engaged in an extensive restructuring of domestic plants, said it expected to make an after tax loss of Y29bn (Dollars 240m) for the year ended March. It made a net profit of Y14bn in 1991-1992.

The company's unconsolidated pre-tax profit is expected to fall 66 per cent to Y18bn on sales of Y1,320bn, down 4.2 per cent.

The consolidated loss is mainly due to the cost of restructuring Armco Steel, a joint venture with Armco, the US steel maker.

The joint venture declared an extraordinary loss of Dollars 300m after writing off some of its production facilities in an attempt to modernise production and reduce costs.

AT&T, the US communications and computer group, announced yesterday that it will take a Dollars 7bn charge in the first quarter of this year to comply with a new standard of accounting for the post-retirement health benefits of employees.

The size of the charge was at the high end of the company's own forecast, which had originally put the post-tax liability of the accounting change at between Dollars 5.5bn and Dollars 7.5bn. In the wake of yesterday's announcement AT&T's share price fell Dollars 1 1/4 to close at Dollars 52 5/8 in a broadly weaker stock market.

AT&T said that the accounting change would have no effect on its present and future retirement health benefits, nor would it affect the company's cash flow, its long-term earnings objectives or its ability to pay for dividends, research and development and capital expansion programmes.

FLETCHER Challenge, the New Zealand forestry and resources conglomerate, yesterday reported a 27 per cent increase in profits after tax for the six months to December 31, Reuter reports from Auckland.

Fletcher Challenge, the country's third largest company with forestry, energy and construction interests off and onshore, saw earnings rise to NZDollars 153.5m (USDollars 80.7m) from Dollars 121.1m in the comparable period a year earlier.

The company said the latest profit was assisted by one-time gains of NZDollars 47m related to transactions involving its interest in energy utility Natural Gas Corp.

Sales fell 5 per cent to NZDollars 4.95bn compared to NZDollars 5.21bn.

HONEYWELL, the US elec-tronics and controls group, saw final quarter net profits slip to Dollars 29m from Dollars 102.6m in the same period a year ago. Earnings per share fell to Dollars 0.21 from Dollars 0.73.

The company said its fourth quarter figures included a Dollars 3.1m loss on early redemption of debt. Revenues in the quarter were essentially flat at Dollars 1.71bn.

For the full year, the company reported profits after tax down to Dollars 246.8m from Dollars 331,100. Earnings per share were Pounds 1.78 compared with Dollars 2.35 in 1991. Revenues fell slightly to Dollars 6.19bn from Dollars 6.22bn. Honey-well said net earnings were affected by an Dollars 8.6m charge for early redemption of Dollars 180.8m of long-term debt.

The full year figures also included a Dollars 85.1m or Dollars 0.l62 a share after-tax charge for the costs of restructuring three business segments.

Honeywell yesterday announced that Mr Michael Bonsignore would take over from Mr James Renier as chairman and chief executive in April. Mr Bonsignore, aged 51, has been an executive vice-president and board member since 1990.

Mr Larry Moore, aged 56, was named as president and chief operating officer.

LOSSES at Abitibi-Price, the Canadian forestry group, almost quadrupled last year as a result of the severe slump in the newsprint and other paper markets.

The loss from continuing operations was CDollars 200m (USDollars 160m), or CDollars 2.91 a share, up from CDollars 58m, or 86 cents a share, in 1991.

The company also reported a loss of CDollars 19m last year from businesses which have been classified as discontinued operations, compared to a CDollars 18.2m loss in 1991.

In spite of an increase of almost 10 per cent in sales volumes, revenues were almost unchanged at CDollars 1.7bn.

Metall Mining, the Canadian mining arm of Germany's Metallgesellschaft group, is buying out the 49.6 per cent minority holding in Minnova, a Canadian exploration and development company, in a deal worth CDollars 115m (USDollars 90.8m), writes Robert Gibbens in Montreal.

Metall will offer one of its own shares and CDollars 4 cash for each Minnova share it does not own. At Monday's market price for Metall, the offer is worth about CDollars 16.12 per Minnova share, representing a premium of about CDollars 2 over the market price of Minnova shares.

ITALY'S Benetton clothing group will announce a 10 per cent rise in 1992 sales when the group's results are revealed next month. Sales will be about L2,500bn (Dollars 1.61bn) on earnings which will have remained static at worst.

But the upbeat figures will again raise doubts about how long the company, never shy of publicity, can continue raising turnover and earnings at a time of worldwide recession.

In spite of the downturn in consumer spending, Benetton's profits should at least equal the net L164.8bn made in 1991. In the first half of last year, net earnings climbed by 6 per cent to L92.8bn on a 6.9 per cent sales rise to L1,233bn.

The expected increase in profits has triggered hopes of a higher dividend, already boosted last year by L50 a share to L300. In 1991, shareholders were shocked when the company halved its L500 a share payout to generate extra cash at a time of continuing sharp growth.

Last year's dividend rise restored confidence in Benetton's payout policy. 'Now we've established this good relationship, it's important to maintain it,' hints Mr Luciano Benetton, managing director.

The company's priority is still to increase sales by expanding internationally. It has just opened its 7,047th store, this time in Cuba. But early indications for this year suggest even Benetton's sales growth could be turning more sluggish.

Turnover growth has fallen below last year's 10 per cent level. 'But we hope to pick up in the second half,' says Mr Benetton. Benetton has cut prices by up to 15 per cent this year in order to improve competitiveness.

The price cuts vary between markets and seasons. While price tags in Italy have hardly changed, prices in France, Germany and the US will be between 6 per cent and 10 per cent lower.

The decision to cut prices was made six months before the lira left the exchange rate mechanism last September and before the landmark agreement in July between employers and unions to abolish Italy's 'scala mobile' (wage indexation system). Both were windfalls for many Italian manufacturers.

'We acknowledged our markets were becoming more difficult,' says Mr Benetton. 'So we tried to improve the appeal of our products by cutting prices.'

The strategy has been conducted without putting profits at risk, he claims. Internal costs have been squeezed. 'We have frozen our costs for the past two years and expect to do the same in 1993.' Lower borrowing has helped too by reducing interest charges.

Benetton has been sending a similar pricing message to its hundreds of independent suppliers although Mr Benetton denies the group has demanded lower prices. He does admit, however, to having looked askance on suppliers pushing for price rises.

Highly-geared suppliers have been treated with particular caution, on the grounds that companies facing heavy interest charges are unlikely to be pricing as keenly as those with more solid balance sheets.

Mr Benetton acknowledges that last year's 'scala mobile' deal and the lira devaluation provided unexpected benefits. The two developments have given Italian exporters an edge after years of declining competitiveness.

The labour agreement 'came out better than we had budgeted,' he says. And the devaluation of the lira, which has fallen by about 20 per cent against the D-Mark, has greatly enhanced competitiveness. Meanwhile, recession and oversupply mean important raw materials, such as wool and cotton, have not gone up in price in spite of the lira's fall, says Mr Benetton.

Exchange-rate factors will only come through fully in the 1993 accounts, although there will be some limited effect this year, he says. In spite of the recession, he remains confident about the year ahead. Sales of the spring-summer 1993 collection, already ordered by retailers, have exceeded levels for same season in 1992 - even excluding the additional small orders that filter through later in the season. Based on such indications, Mr Benetton's expects turnover to rise by 7 to 8 per cent this year.

But even Benetton has its problems. Plans to expand in Russia, where there are now 10 of the group's stores, have gone adrift due to the severe slowing of production at the Armenian factory set up to supply the new shops.

Matters are as gloomy in the US, where Benetton is still struggling to find the right niche and pricing for its goods. Such difficulties have led to heavy losses and closures. The store network has been cut to around 300 units from a peak of 700 in 1987.

Mr Benetton admits the company's clothes are 'too expensive' in the US. 'We have the image of being more of a luxury goods there.'

Theoretically, Benetton should be isolated from such problems. Under its store licensing system, it is the retailer, rather than the manufacturer, which bears the burden of pricing policy in the high street - Benetton's job is done once retailers buy its collections. However, Mr Benetton admits the group has been hurt by the bankruptcy of several US outlets.

'With the lira having fallen to L1,500 against the dollar, I think we now have a chance with products made in Europe,' he says. 'We feel very commited to this market.' Benetton's bruises in the US have given it vital, if costly, experience in one of the world's toughest retailing markets.

'And that experience comes in very useful elsewhere,' Mr Benetton adds.

WHEN Tenaga Nasional, Malaysia's electricity utility, was partially privatised early last year, it became an instant glamour stock.

Within hours, shares were changing hands at nearly double the initial offering price of MDollars 4.50 (USDollars 1.70). Tenaga quickly became Malaysia's biggest listed company, with a market capitalisation of nearly MDollars 30bn (USDollars 11.4bn), accounting for more than 20 per cent of total stock market value.

But the lustre has gone out of Tenaga. Both local and foreign investors have become disenchanted and on the Kuala Lumpur stock market last week the shares fell 7 per cent, reducing the total market value of the company from MDollars 28.35bn to MDollars 26.4bn.

The reasons for Tenaga's decline range from acts of God to management deficiencies and political in-fighting. Things started to go wrong on September 29 last year, when the lights went out through most of peninsula Malaysia.

Power in many areas was restored only after several days. Preliminary estimates of industrial losses due to the blackout came to more than MDollars 200m. Mr Samy Vellu, the energy minister, blamed the power failure on a freak lightning strike - an 'act of God'.

Not everyone, and that includes some government ministers, was satisfied. While about 25 per cent of Tenaga is in private hands - with a fifth of that controlled by foreign fund managers - the company is still under the control of the ministry of finance.

Critics say Tenaga is still bureaucratically run, with little accountability in many areas and too much government interference. The company also finds itself caught up in high-level political arguments between Mr Vellu and other cabinet ministers.

There has been anger that a full report on the September 29 blackout has still not been made public. Recent nervousness about Tenaga has been caused by renewed blackouts in many areas.

But the company says that essential maintenance and building work means that a certain amount of power shedding will continue for another year. It says peak demand in Malaysia's fast growing economy has been greater than anticipated and has called on heavy industrial users to adjust working hours to off-peak periods.

This suggestion does not seem to have gone down well with industrialists or with some members of the government. Mrs Rafidah Aziz, who, as minister of trade and industry, deals with foreign investors in the country, describes as 'intolerable' the number of complaints she has received.

'Tenaga's current performance is not up to the mark,' she says.

A system of rebates has been proposed to compensate industrialists. But some companies say they are investigating legal action against Tenaga. Most worrying for Tenaga and its future prospects have been suggestions that other companies be invited to participate in running the national grid, now solely in its hands.

Independent power producers have already been invited to build, operate and own a number of power stations in Malaysia. The first such project, a joint project between National Power of the UK and a local company, is due on stream by 1995.

Analysts point out that Tenaga has good prospects - if present difficulties can be overcome and if the government does not decide to drastically limit the scope of its activities. Tenaga made pre-tax profits of MDollars 1.41bn in the year ended August, 1992, up from MDollars 702m previously. It has gained not only from the massive infusion of funds from its partial privatisation in May last year but also from the appreciation of the Malaysian dollar against the US dollar, which has resulted in a reduction in the company's dollar loan portfolio.

Tenaga has entered into several projects with UK companies; it is likely to benefit substantially from the fall in the value of sterling, particularly in the purchase of high cost electricity generating equipment.

Tenaga is confident that once the present problems are overcome, medium and long term prospects are bright. 'Tenaga is a good investment in the long term,' says Dr Ani Arope, Tenaga's executive chairman. 'In a rapidly industrialising economy like Malaysia's it is even more attractive because electricity demand has not peaked and will continue to pace the GDP growth for many years ahead.'

But public and government patience is wearing thin. 'The power crisis is a priority for the government,' says Mrs Aziz. 'If Tenaga cannot meet demand, then the private sector will have to come in. Tenaga will have no more monopoly of electricity supply.'

PLACER Dome, the Van-couver-based gold producer, more than countered a lower gold price last year with productivity improvements at its mines in north America and rising output from low-cost properties in Papua New Guinea and Chile.

Net earnings from continuing operations were USDollars 111m, or 47 cents a share, compared to a Dollars 242m loss, or Dollars 1.02 a share, in 1991. The 1991 loss was due to hefty writedowns totalling Dollars 344m on various mining assets, notably the Mt Milligan property in British Columbia.

Revenues rose to Dollars 1.09bn from Dollars 1.02bn. Long-term debt was cut to Dollars 69m at the end of 1992 from Dollars 250m a year earlier. Cash and short-term investments currently total Dollars 477m.

Placer's share of gold output at its mines totalled 1.95m ounces, up from 1.68m ounces in 1991. Average cash production costs fell by 17 per cent to Dollars 186 per ounce, offsetting a 7 per cent drop in the average price received.

Placer has interests in 17 mines in north and south America and Australasia. The biggest producer last year was its 30 per cent-owned Porgera mine in Papua New Guines, where Placer's share of the output totalled 445,500 oz at a cash cost of Dollars 92 an oz. Porgera also accounted for the biggest increase in output in 1991.

The company announced that Mr Robert Franklin is replacing Mr Fraser Fell as non-executive chairman.

METALL Mining, the Canadian mining arm of Germany's Metallgesellschaft group, is buying out the 49.6 per cent minority holding in Minnova, a Canadian exploration and development company, in a deal worth CDollars 115m (USDollars 90.8m).

Metall will offer one of its own shares and CDollars 4 cash for each Minnova share it does not own. At Monday's market price for Metall, the offer is worth about CDollars 16.12 per Minnova share, representing a premium of about CDollars 2 over the market price of Minnova shares. Metall also assumes CDollars 65m of Minnova convertible debentures.

Metall bought 50.4 per cent of Minnova from Noranda for CDollars 131m in October.

DEN NORSKE BANK, Norway's biggest bank, yesterday announced a reduction in net losses of almost 50 per cent to NKr3.07bn (Dollars 450.2m) from NKr6bn a year earlier, and warned of heavy job cuts later this year.

Mr Ole Lund, DnB's chairman, said that although losses had been cut he considered the bank's result unsatisfactory. DnB's improved operational performance was helped by substantial foreign exchange gains which doubled to NKr1.03bn last year from NKr551m in 1991. However, net interest income fell to NKr4.675bn from NKr4.810bn.

Group operating income increased to NKr2.69bn from NKr2.1bn while credit losses fell to NKr4.85bn from NKr6.780bn.

DnB was forced to charge 1992 accounts with a NKr815m loss on assets compared with a charge of NKr631m in 1991. The bank explained the write-off was mainly due to loss provisions for Scandinavian Banking Partners, a consortium in which it participates with Sweden's Skandinaviska Enskilda Banken and Union Bank of Finland.

The group reduced net operating losses to NKr3.058bn from NKr5.842bn in 1991. DnB said that non-performing loans had increased to NKr11.36bn from NKr10.2bn during the course of 1992, and that by the end of the year it had repossessed property valued at NKr2.74bn and spent nearly NKr2bn on finance and operations costs for non-performing assets. 'Although loan loss provisions are on the way down, the road to recovery is still long for the Norwegian corporate customer sector,' said Mr Finn Hvistendahl, chief executive. According to a survey undertaken for the bank, an estimated 41.3 per cent of Norway's 88,199 companies, or some 36,400, suffered an operating loss or broke even in 1992.

An estimated 17.4 per cent operate with zero or negative equity capital, the survey revealed.

DnB's figures were weakened significantly by the UK operations, which increased net losses more than three-fold to NKr785m from NKr207m as credit losses nearly doubled to NKr617m from NKr325m.

DnB said its shipping business operated at about break-even in 1992, but credit losses by the sector rose sharply to NKr392m from NKr179m in 1991.

Prior to last year, the bank's shipping operations had generated annual operating income of an estimated NKr500m. Group operating expenses were reduced by NKr566m to NKr4.763bn in 1992 and assets were pared back to NKr187.9bn from NKr195.8bn in 1991.

SYNTHELABO, the French pharmaceuticals company that belongs to the L'Oreal cosmetics group, is expanding its interests in the UK by taking full control of Lorex Pharmaceuticals.

Lorex, which was formed in 1983 to market Synthelabo's products in the UK, specialises in the development of cardiovascular and central nervous system drugs. Until now it has operated as a joint venture between Synthelabo, with 51 per cent holding, and Searle, the US drugs company which owns 49 per cent of the shares.

Synthelabo is buying Searle's interest for an undisclosed sum and will run Lorex with Delalande, the French laboratory that it bought in late 1991. The Delalande acquisition followed six weeks after the purchase of Delagrange, another French laboratory. The two deals formed part of the expansion strategy pursued by Synthelabo under L'Oreal ownership.

L'Oreal has been expanding Synthelabo in order to reduce its reliance on its traditional cosmetics interests and to add to its expertise in research, which plays an increasingly important part in product development within the cosmetics market.

Synthelabo was one of the contributors to L'Oreal's strong performance last year.

STRONG demand and the benefits of rationalisation led to a 63 per cent increase in 1992 profits at Huhtamaki, the Finnish confectionery, pharmaceutical and packaging group.

The group increased its profit after financial items to FM399m (Dollars 73.8m) from FM245m, as operating earnings climbed 41 per cent to FM561m and net sales rose 9 per cent to FM6.58bn from FM6.03bn. The dividend is being increased to FM3.20 per share from FM2.70, reflecting a 72 per cent growth in earnings per share to FM11.07.

A further increase in pre-tax profits is anticipated in 1993 with sales expected to exceed FM7bn.

Mr Timo Peltola, chief executive, said: 'Huhtamaki's profitability has improved to a new level earlier than envisaged. Key products enjoyed a strong demand despite tight market conditions, while consolidation and rationalisation programmes boosted profitability in each business sector above targeted levels.'

Finland accounts for less than 20 per cent of Huhtamaki's sales, so the group was a beneficiary of the sharp weakening of the markka during 1992.

The Leaf group, one of the world's top 10 confectionary producers, saw operating profits rise 31 per cent to FM312m as net sales climbed 18 per cent to FM3.86bn.

The Leiras pharmaceutical unit lifted operating earnings by 77 per cent to FM148m on a 10 per cent increase in net sales to FM744m.

The Finnish banking sector's combined credit losses will be about FM20bn this year compared with about FM21bn in 1992, the Finance Ministry said in an economic forecast, Reuter reports from Helsinki.

'The number of bankruptcies will stay very high and banks' credit losses (in 1993) are likely to remain at last year's level or about 20bn markka,' the forecast said.

ENSO-GUTZEIT, the Finnish pulp and paper group, cut its 1992 loss after financial items to FM190m (Dollars 35.1m) from FM950m a year earlier as net sales rose 10 per cent to FM10.24bn.

'Increase in sales volume and higher export revenue as a result of the devalued Finnish markka were the main reasons behind the growth,' said Mr Jukka Harmala, Enso chief executive.

The group benefited from lower wood prices and from increased productivity at its mills and within central administration.

However, the group's recovery was held up by lower prices for many products in the face of continuing industry overcapacity. Its deficit was exacerbated by FM80m in exchange rate losses for financing items.

The group's operating profit was FM1.63bn, or 15.9 per cent of net sales. Asset sales produced extraordinary profits of FM550m, leaving the group with a profit of FM360m before adjustments and taxes, compared with a FM515m loss in 1991.

The group said FM300m in exchange rate losses on foreign currency loans connected to the unfinished Enocell pulp mill project had been entered against the project.

Net asset value of Trust of Property Shares fell from 78.43p to 57.14p over the 12 months to December 31.

However, by February 10 it had recovered to 65.44p.

Net revenue for 1992 improved 9 per cent to Pounds 101,000 (Pounds 95,000) for earnings per share of 1.529p (1.443p).

The proposed single dividend is increased from 1.432p to 1.503p.

Losses at Howard Holdings, the housebuilder and plant hirer, fell from Pounds 211,248 to Pounds 197,771 pre-tax for the half year ended October 31.

Turnover declined by Pounds 1.24m to Pounds 1.47m.

Main activities continued to feel the full impact of recession with both volumes and margins suffering downturns.

Losses per share were slightly higher at 0.76p (0.69p).

Attributable profits of Temple Bar Investment Trust fell from Pounds 8.23m to Pounds 7.82m over 1992, equal to basic earnings of 13.57p per share, against 14.29p.

The final dividend, however, is lifted to 8.75p, making a 13.25p (13p) total.

Net asset value per share net of prior charges at nominal value improved from 269.81p to 310.9p.

Net of prior charges at market value the figure rose from 270.88p to 310.76p.

The board was more confident about 1993 and said it seemed likely that the year would see a modest return to economic growth in the UK.

However, directors added that the recovery was 'unlikely to be without setbacks' and 'it would be wise to caution against excessive optimism'.

County Smaller Companies Investment Trust reported a net asset value of 84.44p per share at December 31; a year earlier the value stood at 94.4p.

Net revenue for the six months to end-December amounted to Pounds 173,815 (Pounds 236,086 for period from incorporation on April 10 to December 31 1991) with earnings at 1.06p (1.44p) per share.

The interim dividend is unchanged at 1.125p.

Union Jack Oil has sold its 7.5 per cent interest in UK North Sea block 29/5b to Texaco Britain for Dollars 9.8m (Pounds 6.9m) cash and a 3.5 per cent interest in the Claymore field.

Directors said the cash would be used to repay debt and to fund future exploration, appraisal and development activities.

Union would benefit, they added, from the positive cash flow which the interest in the Claymore field was expected to generate.

The strength of Far Eastern currencies, especially after the decline in sterling, helped TR Pacific Investment Trust increase net asset value from 79.9p to 114.6p per share over 1992.

The trust concentrates on capital growth. Net revenue dipped to Pounds 490,000 (Pounds 696,000) for earnings of 0.731p (1.039p) per share.

A dividend of 0.35p is proposed for the year. The distribution for 1991 comprised a final of 0.25p and a special of 0.45p.

GREENWICH Resources, the Worcestershire-based gold mining company, reported a pre-tax deficit of Pounds 697,000 for the 12 months to September 30 1992, against a profit of Pounds 108,000.

The result was struck after an exceptional Pounds 337,000 cost resulting from the financial restructuring of the Australian subsidiary, United Goldfields, and redundancy costs.

The operating loss amounted to Pounds 749,000 (Pounds 28,000). Losses per share rose from 0.2p to 1p.

In spite of the sharp reversal, Mr Colin Phipps, chairman, said the year had been a positive one for the group.

Highlights included the award of the Konos Concession in Greece and the completion of a joint venture agreement with Newcrest Mining to explore and exploit it.

He added that during the last 18 months the group had been restructured and overheads had been significantly reduced.

SHARES IN Pittencrieff defied the general market decline yesterday with an 8 per cent jump to 351p as the group finally confirmed plans to demerge the telecommunications division from its oil and gas activities.

The company accompanied the announcement with a forecast increase in its annual dividend of at least 17 per cent to 7p. The share rise came despite a placing yesterday of about 2m shares at 312p to pay for purchases.

Pittencrieff intends raising about Dollars 50m (Pounds 35m) by floating a minority stake in the mobile communications subsidiary in the US through a public offer. In just two years the offshoot has been built up into an operation with turnover of Dollars 2m a month.

Mr Doug Sinclair, finance director, said the group had decided to float the business rather than call continuously on existing shareholders for cash to fund such rapid growth.

He added that there was a greater understanding in North America of Pittencrieff's particular communications sector, making the US a sensible place to float.

The proceeds would be used to repay part of telecommunications' loans to Pittencrieff and for further expansion. The repayments and expected dividends would fund expansion in the on-going oil and gas business.

Ms Liz Butler, analyst at Panmure Gordon, said the decision to float the communications business in the US was a good move. 'If the US goes well, it will underpin the UK shares.'

Pittencrieff is acquiring a communications business in El Paso, Texas, for Dollars 6.65m and oil and gas reserves, also in Texas, for Dollars 3.75m.

RECEIVERS OF Mountleigh, the property company that failed last May, have agreed to sell Merry Hill, a Midlands shopping centre and the group's largest UK asset, for Pounds 128m to Chelsfield, the property company headed by Mr Elliot Bernerd.

Chelsfield, which is acting in partnership with one of its associated shareholders, expects to complete the deal in about 10 weeks time. The price includes some tax benefits that stem from enterprise zone allowances.

Mr Stephen James of KPMG Peat Marwick, the joint receiver, said he was 'extremely satisfied with the outcome of the negotiations.' Before Mountleigh went into receivership, it had failed in an attempt to sell the shopping centre for Pounds 115m, he said.

'We were in no hurry to sell,' he said. 'This proves that a distressed seller is someone seeking to avoid going into receivership, not one that has gone into receivership.'

The deal attracted interest from half a dozen potential buyers, including O'Connor Group, the US fund which came close to buying the shopping centre a year ago.

Mr Bernerd said he was a 'cautious enthusiast' about UK property. He drew encouragement from the surge in overseas investment in good quality property that followed the devaluation of sterling last September.

Mr James said it would be over-optimistic to claim that the market was recovering, although more buyers were emerging. 'We are seeing a greater ability to sell things, but not prices moving up,'

The receivers described Merry Hill as one of the most successful shopping centres in the UK. The centre, which has more than 260 shops and is served by a monorail transport system, is 98 per cent let. The centre was built by Don and Roy Richardson, the Dudley-based property entrepreneurs.

The sale of Merry Hill was complicated by concern that the centre, which is built on a former steel works, would be placed on the contaminated land register that is planned by the government. The receivers responded to these concerns by commissioning a study which showed that no remedial action would be needed to comply with current or likely environment legislation.

Mountleigh's receivers have realised about Pounds 200m from the sale of 20 of its 83 properties.

ST MODWEN Properties, the Birmingham-based group with development and investment interests around the UK but outside central London, is increasing its dividend in spite of a 19 per cent fall in annual profits.

Pre-tax profits for the year to November 30 were Pounds 1.71m, compared with Pounds 2.11m, on turnover down from Pounds 45.1m to Pounds 18.5m. The directors stated that in 1991 property development sales were abnormally high because of the sale of an office park in Manchester.

Mr Stan Clarke, chairman, said he believed that 'property values have generally bottomed out in the regions where the company operates, and I am cautiously optimistic that during 1993 there will be some recovery.'

This belief, combined with the fact that the group was now earning enough from the increased rent roll from its investment properties - Pounds 7.5m last year compared with Pounds 6.9m in 1991 - both to cover its interest rate bill and company overheads, led to the increase in the dividend.

The distribution is lifted to 0.6p (0.55p). Earnings per share were 1.1p against 1.7p.

Valuation of property holdings led to a 9 per cent reduction to 35p in net assets per share.

The lower value of its properties, coupled with a slight increase in borrowing because of property acquisitions, pushed gearing over the last financial year up from 88 per cent to 99 per cent.

St Modwen has sought in recent years to concentrate on property investment and undertake development only where sales or leasing are assured beforehand.

Mr Paul Doona, finance director, said: 'We are now in a position where we make a profit without a need to rely on a development contribution.'

MR DAVID McErlain is to step down as chairman of Anglo United, owner of the Coalite smokeless fuel business, after its banks agreed yesterday to a financial restructuring, including a debt-for-equity swap, which will leave shareholders with just over 50 per cent of the company.

Mr McErlain said he had 'warned the banks' that receivership would be preferable to a restructuring which left shareholders with little of the enlarged equity.

However, the shareholders' stake could still fall to as low as 36 per cent depending on the rate of take up of warrants and of banks' conversion of loan notes into shares.

His restructuring plan was backed by the banks but he has had to relinquish the top job. Mr Harold Cottam, chairman of Haden MacLellan Holdings, the engineering group, takes over next month.

Anglo recently faced a Pounds 16.3m interest bill and Pounds 7m outstanding from this year's debt repayment, when operating profits fell from Pounds 13.4m to Pounds 4.68m for the half year to September 30 1992.

Following the highly leveraged bid by Mr McErlain for Coalite in August 1989, the group's total debt was Pounds 467m. Disposals and the proceeds of a rights issues reduced borrowings to Pounds 211m by March 31 1992.

However, debt recently rose to Pounds 250m as the group failed to make further divestments, precipitating the present problems.

The group warned that its trading performance continues to be 'hampered' by the recession.

The main features of the restructuring are: the swap of Pounds 45.9m debt for 459.3m new shares at 10p (placed with the banks, subject to open offer); conversion of Pounds 74.9m debt into deep discount notes and convertible loan notes; and the rescheduling of the remaining Pounds 130.5m of bank debt.

The rescheduled debt is repayable in two instalments: Pounds 10m on September 30 1994 and Pounds 120.5m on March 31 1995.

The convertible loan notes can be converted over the next 10 years at 10p a share. Interest at an equivalent 10 per cent is being deferred until conversion, while the deep discount loan notes will have a 12 per cent yield, payable on redemption at their maturity date.

The effect will be to defer interest on Pounds 50m of debt converted into deep discount loan notes.

Existing shareholders are being offered warrants on the basis of 1-for-3, which can be exercised at 10p. Anglo's share price yesterday rose 1p to 6 1/2 p.

The Hongkong and Shanghai Banking Corporation and Samuel Montagu will end up with more than 40 per cent of the enlarged group.

The outstanding preference shares are being converted into new ordinary shares at the enhanced conversion rate of 12.4 new shares for each preference share.

Following the restructuring, they will end up with 14 per cent of the enlarged share capital.

SHARES IN AH Ball Group fell by 30p to 75p yesterday after the civil engineer issued a warning on trading results for the year.

Mr Tom Austin, chairman, said that as a result of deteriorating trading conditions during the six months to March 31, the optimism expressed in the interim report had proved unfounded.

Order awards had been delayed or cancelled and the group had experienced a serious decline in the volume of work being executed within the AH Ball & Co period schedule maintenance contracts.

That, linked with an expected 3 per cent fall in gross margins and reduced interest receivable, was likely to result in the outcome for the whole of the current year showing little or no improvement on the Pounds 407,000 achieved in the six months to September 30 1992.

In the last full year pre-tax profits amounted to Pounds 960,000.

Mr Austin added that trading conditions for the coming year remained uncertain, although tendering levels for specific contracts were currently higher than in recent years. From December 1992 to February 1993 the group had received about Pounds 3m of new orders, of which about Pounds 1m related to KD Process International, the maker of process control systems for the water industry which AH Ball acquired last July.

Cash balances at March 31 were expected to remain satisfactory. However, Mr Austin said the directors anticipated cutting the final dividend to 3.3p (4.8p).

The group transferred from the USM last August.

ALLDERS, the department store and duty and tax free shops group, suffered a fall from Pounds 22.6m to Pounds 15.2m in pre-interest profits for the year to September 30.

Its annual report shows turnover fell 2.3 per cent to Pounds 555.6m, with sales in the department stores down by 2.1 per cent to Pounds 259.1m and by 2.4 per cent in the duty and tax free shops to Pounds 296.5m.

Mr Tony Collyer, finance director, said that the loss of an important duty free contract at Sydney airport had hit profits, but he said the group had won a number of other licences.

The group, which was the subject of a management buy-out from Hanson in 1989, is looking to float at some point, although probably not in the current year.

The department store side had been affected by the opening of two shops, the first new stores since 1985, and closure of one.

The group also launched an out-of-town format, At Home with Allders, at five sites. Mr Collyer said they were expected to generate sales in a full year equal to one department store, but at a fraction of the cost.

During the year capital expenditure totalled Pounds 20m, he said. The high level of debt from the buy-out had not stopped the group investing, especially as a refinancing in 1991 had deferred repayments of the debt.

The group had net debt of about Pounds 90m at the year-end and the interest charge was Pounds 10.6m, down from Pounds 16.2m, thanks to lower interest rates and the effect of a refinancing.

However, exceptional debits took Pounds 8.1m, compared to a credit of Pounds 36.8m from the refinancing, leaving a pre-tax loss of Pounds 3.4m, against a Pounds 43.2m profit.

The exceptional item related to unusually large pre-opening costs of Pounds 3.7m on two new department stores, a Pounds 1.7m provision for rent on two unused properties - a closed department store, where the site is now being redeveloped, and a warehouse now sold - and a Pounds 2.7m adjustment to the value of the closed store.

PENTLAND, the cash-rich sporting and consumer goods company, has paid Pounds 7m for Berghaus, the outdoor clothing and equipment group.

The acquisition was Pent-land's first since it pulled out of talks last October to buy Adidas, the sports-shoe maker. Pentland has about Pounds 350m net cash and further small to medium-sized acquisitions are expected.

Berghaus, which operates from two factories near Newcastle upon Tyne, is the UK market leader for specialist mountaineering and hiking clothing and last year reported sales of about Pounds 20m. Its products are expensive, with some jackets retailing at more than Pounds 350.

Mr Frank Farrant, Pent-land's finance director, said Berghaus' brand name would be developed and popularised. 'We intend to make it more accessible to the general outdoor enthusiast without detracting from the brand.'

The Newcastle factories, which employ about 500 people, will be retained while Pent-land hopes to use its sourcing experience in the Far East to lower costs. Pentland, which owns the Speedo swimwear brand, also acts as sourcing agent in the Far East for LA Gear, the US sports shoe maker.

Mr Peter Lockey and Mr Gordon Davison, who founded Berghaus about 20 years ago, are leaving the company, although Mr Davison will remain as a consultant.

Mr Farrant said: 'They think they've taken it as far as they can. The next stage will take more money and a more structured organisation behind it'.

The purchase price includes Pounds 3m of bank borrowings. Berg-haus has net assets of Pounds 2m. The company is profitable after interest costs and should slightly enhance Pentland's earnings. Mr Farrant said he hoped Berghaus' operating profit margin, currently about 5 per cent, would improve towards 10 per cent as turnover grew.

The company's main market is the UK, although it has subsidiaries in Germany and Italy and is hopeful about growth from Scandinavia.

Pentland, which earned its cash holdings from an investment in Reebok, the US sports shoe maker, is understood to be looking at several other potential acquisitions, both in the US and UK. But none of the potential targets are equivalent in size to Adidas, which earlier this week was sold to a consortium of investors by Mr Bernard Tapie, the French businessman.

MRS JENIFER Rosenberg, the clothes designer who built up J&J Fashions before departing acrimoniously following the company's takeover by Claremont Garments (Holdings) last year, has reached an out-of-court settlement with Claremont.

Under the settlement, Mrs Rosenberg will receive a payment of about Pounds 100,000 and be freed from a service agreement signed when Claremont bought J&J. In return, she will remain bound by certain restrictive covenants signed as part of the acquisition agreement.

However, the two sides seemed to disagree yesterday about the scope of the restrictions. For example, advisers to Mrs Rosenberg believed she was able to design blouses for suppliers to Marks and Spencer, J&J's main customer, while Claremont's advisers believed she was not. There was further confusion as to whether she could work as a designer of children's wear and coats.

Claremont, which is also one of Marks and Spencer's main suppliers, paid Pounds 27m for J&J in June last year. But the relationship with Mrs Rosenberg turned sour and Claremont terminated her service agreement, which was due to run for two years, in October.

LORD HANSON, chairman of Hanson, the US-UK conglomerate, said yesterday: 'As expected the new year has begun with lower operating margins than in the comparable quarter'. He said there were 'some signs of a slow improvement in the US, but it is too early to say this for the UK'.

He was reporting results for the first quarter of the current financial year, which showed pre-tax profits up from Pounds 226m to Pounds 236m, helped by a Pounds 20m disposal profit. The group does not reveal operating profits at the first quarter stage, but analysts suspected that interest receivable was slightly lower and operating profits were down.

Recession is still affecting many of the group's businesses. However, in the US Cavenham Forest Industries was seeing markedly higher prices for lumber used in the construction industry. Mr Martin Taylor, vice chairman, said prices were 30 to 40 per cent higher than six months ago.

This could be a leading indicator of an upturn in construction However, any increase in demand has yet to work through to Hanson's aggregates business.

Mr Taylor said another good sign was that DuPont, the leading maker of titanium dioxide, had removed its price discounts on the chemical which could help Hanson's SCM subsidiary.

In the UK, profits at Imperial Tobacco were higher, he said, but otherwise there were no signs of 'green shoots'. The group's brick and aggregates operations were not seeing any upturn in demand yet.

He declined to comment on negotiations in the US between the coal industry and miners. In the US, 44 per cent of the group's coal mining capacity has been hit by a strike since the beginning of this month. He said a judgment on the case against Costain over the sale of Costain's Australian coal mining business, was expected in the next week or so.

BOWATER'S acquisition of Specialty Coatings International was welcomed by the City yesterday and marks the final phase of the revamp of the group begun in 1987.

The group has come to be seen as a model of how to run a business in a recession, and it says much for its standing that yesterday's rights issue - the second in less than a year - was greeted by an 8p rise in the shares to 493p.

The new management which has transformed the company, headed by Mr Norman Ireland, for 20 years finance director of BTR, the industrial holding group, decided in 1987 to reduce its traditional interests in the paper and packaging sectors. It moved instead towards more sophisticated value-added products, offering bigger profit margins and growth potential.

In 1987 it acquired Rexham Corporation, the US packaging group, and its portfolio of custom coating and laminates businesses. Two years later it purchased Release Technologies, the release films and papers manufacturer.

Having studied the potential of these businesses, Bowater adopted a strategy in 1990 of developing a 'critical mass' in three areas: health care packaging, personal care packaging, and coated industrial films.

The first two aims were largely achieved through the acquisition last March of DRG Packaging, which supplies speciality packaging to the food and healthcare markets, and Cope Allman, a cosmetics and pharmaceuticals packaging group. The purchases were funded largely by a Pounds 333.5m rights issue.

SCI, Bowater's latest target, was formerly part of James River, but was acquired in a leveraged buy-out in 1991 by AEA Investors, a group of New York investors.

It specialises in precision coating of specialist films and papers, used in the imaging, graphic and computer industries, through a number of wholly owned subsidiaries in the US, UK and the Irish Republic. For the year to December 27 1992, it made operating profits of Dollars 48.6m (Pounds 34.2m) on sales of Dollars 568m. Net assets, before deducting borrowings of Dollars 125.9m, were valued at Dollars 276.3m.

Its activities can be grouped into four main areas: Graphics Technology International, which supplies microfilm, phototools, and computer output media; HP Smith and Smith & McLaurin, which specialise in self-adhesive label products; Decorative Specialities International, which supplies latex-saturated paper used in book coverings and other products; and Custom Paper Group, which makes papers used in filtration and other absorbent products.

Bowater said yesterday that Custom Paper, although a profitable and successful business, did not fit with Bowater's core businesses and would immediately be put up for sale.

Otherwise, Mr David Lyon, Bowater's chief executive, said the acquisition would increase its annual sales of coated films and papers to Pounds 500m, or about 25 per cent of the group's annual turnover. It would also broaden Bowater's existing coating capabilities into new areas with attractive growth rates.

He added that SCI's skills at finding applications and products for new processes would complement Bowater's own expertise in research and development.

Mr Tim Rothwell, packaging industry analyst at brokers BZW, said SCI was an 'excellent' fit for Bowater.

'If you had asked me two years ago what was the most likely business for Bowater to acquire, this is the one I would have mentioned. It must have been irresistible for the management even if it involved another rights issue.'

He said the Dollars 434m price tag, representing only 76 cents for every Dollars 1 of sales and an earnings multiple of 14.4, was attractive, while the decision to fund the deal through equity rather than debt was sensible in order to keep gearing, currently 57 per cent, under control.

The deal is conditional on approval under US anti-trust legislation, hence the decision to launch the rights issue in two stages. Mr Michael Hartnall, finance director, said: 'We believe we will get clearance, although it might take longer than we would hope. AEA investors would not have put this up for sale and let us go this far if they did not believe it would be approved.'

If the deal falls through, the Pounds 95m first stage of the rights issue will be used to reduce gearing and take advantage of other acquisition opportunities.

IBSTOCK JOHNSEN, Britain's third largest brick manufacturer warned yesterday that it expects to report a Pounds 27m pre-tax loss for 1992 after taking into account plant closure costs and other provisions.

The company, which plans to close up to four of its nine UK brick plants, intends to reduce its final dividend to 0.5p making a total of just 1p, compared with 6p.

In 1991 Ibstock made pre-tax profits of Pounds 10.6m on sales of Pounds 285m. The group's share price yesterday fell 2p to 47p.

Mr Ian Maclellan, group managing director, said provisions for the period should be about Pounds 28m. All but Pounds 4m of this would be needed to cover the cost of the reorganisation of its UK brick business.

The group was intending to close smaller works to concentrate production at larger more economic plants.

About 200 jobs are expected to be lost by the end of this year as UK brick production capacity is gradually lowered from about 300m to about 250m bricks a year.

Mr Maclellan said that the closures had been caused by the shrinking of the UK brick market due to the construction recession.

Ibstock, despite the closures, expected to maintain its UK market share at about 8 per cent behind the market leaders, Hanson, which owns London Brick and Butterley, and Redland.

As well as closing smaller plants the group is increasing capacity at its Laybrook plant in Sussex and its Atlas works near Aldridge in the West Midlands.

After taking into account write-downs the debt to equity ratio would be less than 20 per cent, said Mr Maclellan.

More than a fifth of British brick plants have closed since 1988 while manufacturing capacity of the industry has fallen by almost a quarter according to the Brick Development Association.

Even so, the industry's potential capacity to make 3.7bn bricks a year continues to outstrip sales which last year fell to just 2.9bn bricks compared with more than 4.7bn in 1988. The number of workers employed by the industry since then has fallen from 14,000 to less than 9,000.

Stocks of unsold bricks in December totalled 1.5bn, enough to build 150,000 homes and equivalent to 30 weeks supply to the construction industry.

Mr Maclellan warned that the industry could expect another year of pain as stocks gradually were reduced. He said this ought to lead to a better year in 1994 provided the recent revival in the UK housing market was sustained.

----------------------------------------------- Companies in this issue ----------------------------------------------- UK ----------------------------------------------- Allders 21 Anglo United 21 Ball (AH) 21 Berghaus 20 Bowater 36,20,19,18,14 British Airways 36,19,18,8 Burmah Castrol 14 Chelsfield 21 Claremont Garments 20 County Smaller Cos 21 Davy International 3 GEC Avery 14 GPA Group 19 Glaxo 36 Greenwich Resources 21 Hanson 36,20,19,18 Howard Hldgs 21 Ibstock Johnsen 20 Lloyds Chemists 14 Lucas 6 Mountleigh 21 Pentland 20 Pittencrieff 21 St Modwen Properties 21 TR Pacific Inv Tst 21 Taylor Woodrow 20 Temple Bar Inv Tst 21 Trust of Property 21 Union Jack Oil 21 Virgin Atlantic 8 ----------------------------------------------- Overseas ----------------------------------------------- AT&T 23

Abitibi-Price 23 Allianz 22 Ampolex 24 BP Oil Espana 22 BellSouth 23 Benetton 23 Canada Maritime 23 Canadian Pacific 23 Cigna 23 Cummins Engine 23 Den Norske Bank 22 Enso-Gutzeit 22 Ericsson 22 Fletcher Challenge 23 Framatome 22 Fujitsu 24 Honeywell 23 Hutamaki 22 Indelec 22 Kawasaki Steel 24 Komatsu 23 Lorex 22 L'Oreal 22 Marubeni 24 Metall Mining 23 Minnova 23 Mitsubishi Corp 24 Mrs Fields 20 NZ Telecom 24 Oce-van der Grinten 22 Placer Dome 23 Samancor 24 Scitex 24 Skandia 22 Speciality Coatings 19 Sumitomo Steel 24 Tenaga Nasional 23 Thomson 19 Varity 3 -----------------------------------------------

The squalid story of intrigue and dirty tricks against Virgin Atlantic has kept British Airways in the headlines this year. But after reporting an 80 per cent drop in its third quarter pre-tax profits, the emphasis yesterday shifted to how the world's 'favourite' and most profitable airline is coping with the current harsh realities of the industry.

Although the fall in profits was not as bad as some City analysts had anticipated, it raises the possibility that the corporate darling of the Thatcher years is losing some of its glamour.

Sir Colin Marshall, who took over as chairman from Lord King this month, blamed much of the fall in profits on the depreciation of sterling. But BA has not escaped the fierce fares wars that are cutting airline profit margins, and the down-trading which has seen first and business class passengers moving down the cabin to cheaper seats.

On the plus side, BA expects the benefits of the weaker pound on its international revenues to show through in coming months. Sterling's devaluation had an almost instantaneous negative effect on half the airline's operating costs, while the foreign revenue benefits will show through later because most tickets are booked in advance.

The airline continues to have one of the strongest balance sheets in the industry; it operates in profit at a time when most of its competitors are swimming in red ink ('I think the most important thing is that we made a profit,' Sir Colin said yesterday); it has invested heavily in other airlines to strengthen its global reach; it continues to cut costs; and it believes it will be in a strong position to take advantage of the recovery when it comes.

But for all this, the 1990s are likely to be a fundamentally different decade for BA compared with the 1980s. BA was among the first airlines to address the problem of costs and to introduce aggressively the commercial techniques of retailing. It was also the first to recover from the Gulf war crisis. But now Lord King has gone and with him perhaps some of the airline's considerable political influence, which risks being further eroded by political reaction to the Virgin affair.

BA and Virgin are still trying to come to a settlement and bury the hatchet for good. The saga has left scars on BA's image and internal morale. Allegations of a fraud at BA's property maintenance department, which surfaced last weekend, have not helped clear the atmosphere. 'It suggests that management controls are not all they are made out to be,' said one analyst.

Although the airline industry has traditionally lived through 'boom and bust' cycles, there is no guarantee that the eventual upturn in the current cycle will be as robust as previous ones. 'A structural change is taking place in the revenue outlook for the industry,' says Mr Chris Tarry, aviation analyst at Kleinwort Benson. 'There is likely to be continued pressure on revenues and fare yields are unlikely to recover fully when the cycle comes up again.'

BA's competitors, which were slow to react during the last decade, are now also scrambling to cut costs and stitch up international alliances to strengthen their market presence.

BA is also absorbing a series of investments in other airlines, including USAir, Qantas, the former operations of Dan-Air, as well as some smaller European airline ventures. With Dan-Air, the challenge will be to turn loss-making activities at London's Gatwick airport into profit. The first step has been to convert the Gatwick-based European operations into a lower-cost airline. All these operations have been grouped at the airport's North terminal and last week BA launched a Pounds 4m marketing campaign to promote it.

As for the investments in Qantas and USAir, the benefits will not be immediate and could take as long as one or two years to emerge, according to some analysts. Moreover, the new Clinton administration, under intense pressure from the big three US carriers (American Airlines, United Airlines, and Delta Air Lines), may try to block the USAir deal. The question is whether BA will be able to take full advantage of the access it will gain into USAir's domestic network in America without having to give up some ground at its Heathrow base to other US carriers. 'I can't see BA's protection under the existing US-UK aviation agreement lasting for ever,' the head of a large European airline has said.

A further sign of the new competitive pressures facing BA came yesterday from the airline's current bete noir. Mr Richard Branson said he would step up his challenge to BA at Heathrow by starting a service to New York's Newark airport at the end of next month, adding a fourth long-haul destination out of BA's home base.

THOMSON Corporation, the Canadian-controlled publishing and travel group, is severely curtailing its UK free-newspaper business, and selling or closing about one-seventh of its paid-for titles in North America.

Thomson said yesterday that the planned disposals and closures will result in a USDollars 170m (Pounds 119m) charge against fourth-quarter 1992 earnings, which are due to be published in mid-March. A third of the writedown applies to publishing rights, circulation and goodwill at the UK free-newspaper operations, comprising about 70 weeklies under the Herald & Post title.

Citing the steep decline in advertising during the recession without the benefit of circulation revenues, Thomson said yesterday that 'we will be involved to a much lesser extent in the free newspaper business'.

The company has not yet decided, however, which titles will be sold or closed. Several may be merged into larger units. The process is expected to take up to a year. None of Thomson's paid-for UK regional newspapers will be affected.

Mr Gordon Paul, chief executive of Thomson Regional Newspapers in the UK, denied there was any fundamental change of direction. But he said: 'I do not want to pretend we are not going to review our business.'

Thomson also plans to sell or close about 30 of its 217 daily and weekly papers in the US and Canada. The company refused to identify them, except to say they are all in small communities.

Thomson shares lost 38 cents to CDollars 14 in early trading on the Toronto stock exchange.

BRITISH Airways' pre-tax profits fell 80 per cent to Pounds 20m in the third quarter compared with Pounds 100m in the same period last year.

The sharp decline was largely caused by the significant depreciation of sterling following Britain's withdrawal from the European exchange rate mechanism last September. This alone accounted for more than half of the Pounds 80m profit fall.

The third quarter performance was at the top end of City expectations. Analysts had forecast earnings anywhere between a Pounds 20m profit to a Pounds 20m loss. BA shares closed 3p lower at 276p.

Although passenger traffic on scheduled services rose 7.3 per cent to 6.18m passengers, the increase fell short of the airline's capacity in the third quarter.

Sir Colin Marshall, BA chairman, also said traffic growth was concentrated on lower yielding economy passengers, with demand for high yielding first and business class tickets below last year's levels.

Passenger yields fell by 4.9 per cent, reflecting fares wars in the airline industry as well as the continuing trend of passengers trading down from first and business class to economy class.

However, Sir Colin said that the benefits of the weak pound were beginning to show through and 'sound progress continues in the cost reduction programme'. But he also warned that trading conditions remained difficult and that the fourth quarter was traditionally the weakest of the year.

Group turnover rose by 4.5 per cent to Pounds 1.37bn in the third quarter compared with Pounds 1.31bn the year before. Operating profits fell 36.9 per cent to Pounds 70m from Pounds 111m in the third quarter, while after-tax profits dropped 51.2 per cent to Pounds 40m from Pounds 82m the previous year. Earnings per share in the quarter were 5.1p on a fully diluted basis, down 48 per cent.

Pre-tax earnings for the first nine months of the year were 13 per cent lower at Pounds 247m, compared with Pounds 285m the year before. After-tax profits for the first nine months totalled Pounds 222m compared with Pounds 234m the year before. Earnings per share were 26.5p on a fully diluted basis.

After funding capital expenditure, there was a net cash outflow of Pounds 183m in the first nine months compared with a cash inflow of Pounds 399m the year before. The group wrote off Pounds 48m of the cost of taking over Dan-Air, the former Gatwick-based airline, against reserves.

Lex, Page 18

MR Nigel Wilson has resigned from GPA Group just over a year after he was brought in as chief executive-corporate to improve the aircraft leasing company's relations with shareholders, banks and aircraft manufacturers.

Several of the group's shareholders yesterday described Mr Wilson's resignation as a blow to the company, which is in the middle of debt restructuring negotiations. One institutional shareholder said: 'Mr Wilson had a feel for institutional sentiment which the company sadly lacked. His departure will be a great loss.'

A spokesman for GPA last night confirmed that Mr Wilson is to leave next week. He said the decision had been agreed amicably and would not affect the restructuring proposals.

Mr Wilson's responsibilities will be taken over by other departments. GPA is expected to announce a management reshuffle within the next 48 hours.

Mr Wilson, the 36-year-old former managing director of Stanhope Properties, was recruited just before the group aborted its planned flotation. When the company failed to go public, Mr Wilson become involved in the refinancing proposals. One banker involved in the negotiations said: 'It is a pity the company could not persuade Mr Wilson to stay on.'

PRE-TAX profits at Hanson, the Anglo-US conglomerate, rose in its first quarter from Pounds 226m to Pounds 236m. However, the figure was boosted by a Pounds 20m disposal profit and currency movements, and underlying profits fell 10 per cent.

The biggest surprise in the figures, covering the three months to December 31, was an increase in the tax rate from 17.7 per cent to 27.5 per cent. As a result, earnings per share in the quarter fell 10.3 per cent to 3.5p. That, and a downbeat statement from Lord Hanson, chairman, took 4p off the shares to 250p.

A rise in the tax rate from the unusually low level of 15.3 per cent for 1991-92 had been expected. But the company had said in December the rate would probably be 26 to 27 per cent. Yesterday analysts revised estimates for the tax rate up to around 28 per cent for the current financial year, as well as shading back pre-tax profit forecasts.

Mr Martin Taylor, vice-chairman, said the higher tax charge was 'almost entirely down to additional advance corporation tax'. Last year the group moved to quarterly dividends, and as only two payments were made in the year instead of four, there was a one-off benefit in reduced ACT. That is now being reversed.

Analysts surmised that the higher than expected tax rate meant UK profits were weaker than budgeted, giving less mainstream corporation tax against which ACT can be offset. The quarterly dividend is also slightly higher at 2.85p compared with 2.75p a year ago, though the same as the last quarterly dividend announced in December.

Turnover rose 10.2 per cent to Pounds 2.3bn. Pre-tax profits included a Pounds 20m profit on the sale of Weber Aircraft, for Dollars 75m (then Pounds 49.5m), announced in October. Excluding these, profits would have been Pounds 216m. Had the previous year's pre-tax profit been translated at the end-December exchange rate it would have been Pounds 240m.

Hanson now uses FRS 3. Profits in the comparable quarter included Pounds 11m from businesses since sold. On the acquisition side there was a full three-month contribution from Beazer, which was bought on December 4, 1991. The extra two months had little effect at the pre-tax level.

Lex, Page 18; Details, Page 20

BOWATER, the packaging and industrial films group, said yesterday it was buying Specialty Coatings International, the US coatings company, for Dollars 434m (Pounds 305m), increasing its strength in the coated films and papers market.

The deal is being funded by a Pounds 295m one-for-six rights issue - Bowater's second in less than a year - but was welcomed by the stock market. Its shares gained 8p to 493p, compared with the issue price of 400p.

Mr David Lyon, chief executive, said the business offered 'real complementarity. It is a huge strategic gain for us.'

He said the acquisition was expected to enhance earnings this year, and would increase Bowater's annual sales of coated films and papers to Pounds 500m, or 25 per cent of annual group turnover.

SCI was formerly part of James River, the US paper group, but was acquired in a leveraged buy-out by a group of New York investors in 1991. It specialises in precision coatings of specialist films and paper for the imaging, graphic and computer industries.

The rights issue will be in two stages, as the deal is conditional on US approval under anti-trust legislation. The unconditional first stage will raise Pounds 95m, while the second instalment is due to be issued between March 23 and November 10, depending on US approval.

Bowater raised Pounds 333.5m from a rights issue last March to fund the acquisition of the packaging businesses DRG Packaging and Cope Allman.

News of yesterday's deal was accompanied by better than expected estimated results for 1992, showing an unaudited Pounds 147m pre-tax profit - an 48.5 per cent increase on 1991.

Turnover is estimated to have risen from Pounds 1.27bn to Pounds 1.57bn, while earnings per share, excluding exceptional items, rose from 18.5p to 25.1p. Bowater is forecasting a final dividend of 6.65p, making a total of 11.5p, an increase of 11.1 per cent.

The company said trading in the fourth quarter had been 'rather ahead' of expectations, and the performance had been maintained in January. Mr Michael Hartnall, finance director, said it was too early to talk of recovery: 'We have seen a lot of false dawns.'

Lex, Page 18; Details, Page 20; Observer, Page 17; People, Page 14

A CUT in crude oil production by almost 1m barrels a day in the second quarter of 1993 was agreed by the Organisation of Petroleum Exporting Countries last night in a determined attempt to bolster world oil prices.

The cuts will be imposed in full by March 1.

Opec ministers concluded almost four days of talks in Vienna by agreeing to make pro-rata cuts to a ceiling of 23.85m b/d - a figure which would take almost 1.5m b/d of oil off the market given that Opec has been producing well above its first-quarter ceiling.

The organisation hopes the deal will at least support crude prices at present levels, which had hardened by more than Dollars 1.5 a barrel before the meeting on expectations of a deal to cut the second-quarter ceiling by 1m b/d.

Markets reacted bearishly to the deal. In New York, US light crude futures ended 45 cents a barrel lower at Dollars 19.53 a barrel for March delivery.

Industry analysts attending the meeting said that prices would only firm above present levels if Opec showed unusual discipline.

Opec's president, Mr Alirio Parra of Venezuela, thought it less likely that members would fail to comply with quotas now, when prices are weak. 'Even allowing for leakage - and I think everyone believes compliance will be very important - you will still have a significant adjustment.'

Saudi Arabia, Opec's biggest producer, has sought to convince the markets of Opec's seriousness by notifying its customers that it will be cutting production by 400,000 b/d to 8m b/d.

Agreement on the final wording of the communique was delayed by strong disagreement between Kuwait and other member states about the Gulf state's desire for special mention.

Kuwait agreed to cut production from its present claimed level of 1.98m b/d to 1.6m b/d, but argued fiercely that it should be given special treatment while recovering revenue lost during the Gulf war and while rebuilding its damaged oil industry.

Kuwait wanted the final communique to acknowledge that its present production and capacity was temporary and did not reflect either its eventual output capacity or its historic market share within Opec. Kuwait had the capacity to pump up to 2.5m b/d before the Iraqi invasion.

Iran and several other delegations opposed making special mention for Kuwait.

Finally, the ministers agreed to include what one delegate called 'positions for the future'.

In Kuwait's case, this appears to allow that the Gulf state will in the third quarter be allocated an output with parity to fellow members of equivalent capacity and historic market share.

Iraq, which had its quota cut from 500,000 to 400,000 b/d but did not send its minister to the talks, rejected the deal as 'nonsense'.

RUSSIAN president Boris Yelstin and his main political rival appeared to have temporarily set aside their differences last night as they agreed on a plan to resolve the country's constitutional crisis.

After a mere half hour's talks in the Kremlin, Mr Yeltsin and Mr Ruslan Khasbulatov, the speaker of the Supreme Soviet, agreed to call a special session of the Congress of People's Deputies to ratify a 'constitutional agreement' which will be thrashed out over the next 10 days by teams appointed by the two men.

The agreement signifies that both have decided to abandon their personal battle of attrition. Instead, opposing experts will haggle over the form of constitutional government in Russia - the fundamental question between Mr Yeltsin and Mr Khasbulatov.

However, the brief statements issued by the presidential press office and the official Itar Tass news agency after the early evening meeting raise more questions than they answer, and leave the result of the increasingly bitter struggle over how Russia is governed still in balance.

The presidential statement said that a range of proposals aimed at getting agreement between the executive and legislature on the constitutional system and on alleviating the economic crisis would be published today. These will include Mr Yeltsin's own version of the constitution.

Over the next 10 days, a joint commission of experts headed by Mr Vladimir Shumeiko, the first deputy prime minister, and Mr Nikolai Ryabov, the first deputy speaker, will attempt to obtain an agreement on a draft constitution to be presented to the special Congress in early March.

However, the statement from the president's press office stressed that until the Congress ratified this putative agreement, the government would continue to prepare for a referendum on the constitution, scheduled for April 11 under a prior agreement between Mr Yeltsin and Mr Khasbulatov made in December. At the same time, Itar Tass said that both men voiced 'anxiety over the possible results' of such a referendum.

The newsagency quoted Mr Khasbulatov, during a meeting yesterday with former US president Richard Nixon, as saying that a danger of dictatorship loomed and that 'only a strengthening of the principles of parliamentarism can help us'.

Although Mr Yeltsin, according to the statement, 'came forward with the initiative of calling an extraordinary Congress', it is precisely that forum which has been the most bitter critic of his government's actions and of his policies.

The December Congress forced him to replace Mr Yegor Gaidar as prime minister with the more conservative Mr Victor Chernomyrdin, and only grudgingly agreed to a constitutional referendum.

MR JOHN MAJOR was accused of 'outright abuse' of Britain's constitution by Mr John Smith, the Labour party leader, yesterday over the government's handling of the bill to ratify the Maastricht treaty.

The attack, which followed an embarrassing about-turn by ministers on Monday, foreshadowed a possible clash between the government and parliament over Labour's amendment to include the social chapter in the bill.

Labour leaders said they would try to turn the debate on its amendment 27 on the social chapter into a vote of principle, even though the government said on Monday that fresh legal advice meant that Maastricht could still be ratified without changes if the amendment was passed.

Separately, Lord Tebbit, former Tory party chairman and opponent of Maastricht, stepped up his attacks on the prime minister, saying in a speech in Hammersmith, London, that Britain's political leaders no longer cared about the country's independence.

Although the government has removed some of the sting from Labour's amendment, the spectacle of Mr Douglas Hurd, foreign secretary, correcting the government line set out a few weeks ago by Mr Tristan Garel-Jones, Europe minister, gave ammunition yesterday to Labour - and Tory opponents of the bill.

Last night Mr Smith wrote to the prime minister asking for the publication of the apparently conflicting advice on amendment 27 given by the government's law officers and by the Foreign Office.

Earlier in the Commons, Mr Smith said the prime minister was 'determined to use every slippery manoeuvre to avoid parliament deciding this issue. Aren't you engaged in an outright abuse of our unwritten constitution?'

He asked Mr Major to say whether parliament should be able to decide if the social chapter should be incorporated.

The prime minister confirmed that MPs who back the social chapter will only have the choice of accepting the treaty as a whole or not at all. 'It is for this house to decide by its vote on third reading whether to approve the European Communities (Amendment) Bill and enable the government to ratify the treaty.' There were two sorts of amendment, Mr Major said. 'Those that would render our law incompatible with the treaty and must be defeated, and others which are undesirable but would not prevent us from ratifying.' The government sees amendment 27 as in the second category.

But asked by a Labour MP whether he was planning to ignore parliament, Mr Major replied: 'I can't and I don't'

Euro-sceptic Tory MPs signalled that they may still vote for Labour's amendment because of possible embarrassment to the government and the faint prospect that it would scupper ratification of Maastricht. With the Liberal Democrats still pledged to back Labour and less likely to back down, the chances of a government defeat have risen since Monday, one Tory rebel said.

Labour has been restricted by Commons procedures over what amendments it can table. Amendment 27 would in fact remove the Maastricht treaty protocol including both the social chapter for the other 11 EC members and Britain's opt-out. Labour believes its amendment could still force the government to call an EC conference and implement the social chapter.

Edward Mortimer, Page 16

Blocking a two-tier Europe, Page 17

Yesterday's third-quarter results from BA confirmed the extent of the short-term pressures afflicting the airline. But they also hinted at the long-term promise for shareholders able to contain their queasiness. The Pounds 80m drop in the quarter's profits largely resulted from the immediate impact of the falling pound and customers' continued reluctance to sit at the dearer end of the cabin.

But sterling's devaluation should now work in BA's favour as 60 per cent of ticket sales are made overseas while only half its costs are incurred in harder currencies. Firmer evidence of recovery should prompt a strong rise in the shares of such a highly cyclical stock. In that event, however, BA will probably tap the market to ease the financial strains of its global ambitions.

A healthy scepticism about Hanson's low tax charge has in the end proved justified. While the reasons for the rise in the tax rate to 28 per cent are as opaque as the traditionally low charge, Hanson is at least becoming a more normal company.

The outlook for Hanson's operations remains gloomy. There is little prospect of robust recovery in UK basic industries - as Ibstock's cut in brickmaking capacity confirmed yesterday. Meanwhile the fall in base rates will cut interest income through the year. In the US hopes of a large federal spending package which would benefit the aggregates business are also fading. The shares have been buoyed by the company's overseas earnings and cyclical recovery prospects. That process cannot go too far, however much investors are comforted by the 5.8 per cent yield.

The slide in US equities following President Bill Clinton's outline proposals for reducing the budget deficit looks like the response of an over-valued market. Income tax increases now proposed go far beyond the millionaires tax promised in campaign rhetoric. Yet that should hardly come as a surprise. An energy tax and higher corporation tax were also bound to be unpopular. Still, a package which reduced the deficit by Dollars 145bn over 4 years might be expected to shave only a fraction of a percentage point from growth.

Wall Street fears that by raising taxes on the middle class now the President risks pushing the economy back into recession. The big car makers were among the hardest hit yesterday on just such sentiment. If higher corporate taxes also lead companies to rein back investment plans, the strong earnings recovery now factored into share prices could be cast into doubt.

With so much already in the price, the equity market can not be blamed for worrying. The greater danger, though, is that the long process of horse-trading between the White House and Congress leaves the deficit to grow unchecked. The Federal Reserve has indicated a deal on the deficit might leave room for lower interest rates - especially if employment growth remains sluggish. Without a deal the Fed may be more inclined to send rates higher. On a prospective yield of less than 3 per cent, US equities would then look vulnerable indeed.

In recent years Bowater has demonstrated a deft touch in the takeover game. Its proposed Pounds 305m acquisition of the US-based Speciality Coatings International appears just the latest in a string of well-conceived and constructed deals. With the addition of SCI, Bowater will significantly strengthen its hand in the coated films and papers market, which boasts high margins and good growth prospects. It will continue to drive into higher value-added markets while disposing of its commodity-style operations along the way. Despite sterling's depreciation, Bowater has achieved a keen price for SCI, paying just over 14 times historic earnings, so the deal should enhance earnings next year.

The company also has scope to squeeze more juice from its existing businesses as yesterday's healthy profits estimates make clear. Add in the highly cyclical nature of many of Bowater's markets, and it becomes easy to justify the company's heady premium rating. Even so, shareholders may begin to blanch at the speed of progress. Yesterday's Pounds 295m rights issue will be the third in four years bringing the total of equity finance raised to Pounds 770m. In that time, the range and complexity of Bowater's businesses has multiplied greatly. The market's adoration may cool while investors convince themselves Bowater's management really does have a firm grasp on its recent purchases.

While it is helpful to have the Bank of England's detailed analysis of UK inflation, its new report only tells half the story. Without details of the Bank's view on the real economy, it is hard to tell whether it thinks the benign short term inflation outlook will prove sustainable. Given that output is severely depressed after a long recession, and that debt deflation is curbing consumption, it is small wonder that inflation is subdued. It would be more encouraging if the Bank was confidently predicting strong growth and low inflation two years from now.

Unfortunately, it seems more likely that inflationary psychology has not been broken in the UK. Despite severe deflationary forces, the underlying rate remains near the top of the government's target range. Service sector inflation, wage rises and bond yields all reflect cynicism about the prospects of price stability. Importers are steadily increasing prices to compensate for sterling's devaluation.

Under the circumstances the government's huge budget deficit is one more reason to worry: the prospect of inflation eroding the value of debt has tempted administrations before now. Perhaps the Budget will provide the long term fiscal strategy needed to give the current policy credibility. If it does not then even the justified expedient of relaxing the full funding rule might not bring much relief. Even if the supply of gilts is reduced, long yields will remain high if the markets believe that the government has caught the British inflationary disease.

STERLING'S ignominious departure from the ERM on September 16 of last year led not to perestroika, but to glasnost. Among other changes, the chancellor has announced a target range for inflation of 1 to 4 per cent. He also invited the Bank of England to comment on its chances of achievement. Yesterday's first report makes sobering reading. The economy is still bumping along the bottom, while inflation is expected to bump along at the top of its range, with the risks mostly on the up-side.

The Bank's aim is to increase public understanding and thereby stimulate a more informed debate. But it is not, it insists, an independent central bank, which is why it leaves the implications for others to draw. This is a little disingenuous, for two reasons. First, the Bank's policy conclusion is evident from its emphasis on the risks to inflation of 'sustained further depreciation and a faster pass-through of the depreciation that has already taken place'. Second, the Old Lady of Threedneedle Street has been given a rod for the chancellor's back. The unanswered question is whether she will dare to use it when she should. On this evidence, she just might.

The report is professional in its analysis of what inflation means and of how and why it has fallen. It is equally professional in its analysis of the risks. It shows, in particular, that the government continues to have a credibility problem. This will increase the real cost of achieving its targets, which must make its determination to achieve them less credible.

The fundamental assumption underlying the exercise is that there is no long-run trade off between inflation and unemployment. That assumption is fully borne out by the UK's experience over the past 20 years, during which the price level has risen six-fold and the level of unemployment five-fold.

In the short to medium term, however, things look very different. The Bank report shows that employment has fallen still more than at the comparable stage in the recession of the early 1980s. Meanwhile, both labour productivity in the economy as a whole and real earnings have risen rather more. The increase in unemployment will be durably reversed, hoever, only if real wages at last stop rising, just as the decline in inflation will be sustained only if the effects of depreciation on the prices of tradable goods are not passed through into wages. Pay inflation has to fall further and stay down, notwithstanding recovery and the lagged effects of depreciation.

The Bank shows that achievement of the inflation target is far from secure. In the short term, that may not matter as much as how that target will be met. The target can be overshot temporarily, provided pay inflation continues to decline. If it does not, what price the government's target for inflation? How long before it too is thrown on the dustbin of history?

Classical music may be winning fans at an unprecedented rate, but it does no harm to give the slow learners a prod. The advertised programme for this Sunday's Baroque Masterpieces concert, at the Barbican Hall, includes: 'Bach: Sleepers Awake (Lloyds Bank black horse theme).'

Will Douglas Hurd's promotion to the government somersault team hasten his departure from politics? He turns 63 next month and as an ex-diplomat with a relatively young family he is not as comfortably off as some of his colleagues.

It's been rumoured for some time that he would retire before the next election, and past form suggests a well-connected Tory politician, sorry statesman, should have no difficulty picking up a few handsome retainers.

Lord Carrington, a former foreign secretary, went on to chair GEC, for example, and old cronies such as Lords Howe and Tebbit have picked up some nice little earners. Trafalgar House is known to be looking for a chairman, and Lonrho, Barclays and HSBC Holdings may be in the market for one in the not-too-distant future. If Hurd wants something less challenging then there are plenty of merchant banks that would welcome him with open arms.

However, the natural place for him to go is not the City, even if he wants to earn some money. It would be the headship of an Oxbridge college. Lesser politicians than Hurd have gone the same way. Lord St John of Fawsley, for example, is now Master of Emmanuel College, Cambridge. So have some of the best, such as 'Rab' Butler who went on to Trinity College, Cambridge.

Hurd would be at home at any high table, and the higher the better. He would also have time to write, whether memoirs or thrillers or both. His thrillers, such as Scotch on the Rocks and The Smile on the Face of the Tiger, are very good. Given time and the right environment, he might even make more money than the down-market Lord Archer.

Dun and Bradstreet, the business information group, has just written to Cheltenham hotelier Patrick Roach, advising him that an important customer has just gone belly up, thereby underlining the need to keep a close eye on the creditworthiness of his clientele.

The letter, from one David Gelstharp, marketing communications manager of D&B, turns out to be a spoof, offering Country Home Hotels the chance to insure against the real thing happening by subscribing to an information service which claims to keep tabs on anything that moves in corporate Britain.

Trouble is that Roach's company itself went into liquidation at the end of 1990. Having set up a new business, which is now thriving, Roach can afford to see the funny side of the Dun and Bradstreet's botched marketing ploy.

Let's hope Dun and Bradstreet can laugh it off as easily.

Now that 65-year-old Norman Ireland has decided to hand over the chairmanship of Bowater to a man four months younger, could he be freeing himself up to take over the chairmanship of BTR from his old boss, Sir Owen Green?

Admittedly, it's unlikely. BTR is Britain's 10th biggest company and under Sir Owen Green has been one of the country's most successful. However, Green turns 68 in May and has indicated unofficially that he plans to retire this year. But so far no word on his successor.

BTR has had a non-executive chairman before - Sir David Nicolson did the job for 15 years - but given Sir Owen's thoughts about non-executive directors it would be out of character if he encouraged his colleagues to look outside for his successor.

The obvious internal candidate would be BTR chief executive Alan Jackson, 56. He is said to have made a success of BTR's Hawker Siddeley acquisition. But he has only been doing his job for a couple of years, so perhaps Ireland, who is two years younger than Sir Owen, might stand in to keep the seat warm till Jackson is ready. Unlike British Aerospace chairman John Cahill, another old BTR hand, Ireland does at least have time to spare now. Just an idea.

Should the world's news agencies be judged on the speed of their reporting or on the viciousness - or obscurity - of their ads?

Last week, in the FT, Reuters was boasting how it had tipped off the world that the Bundesbank was going to cut interest rates 33 minutes before the central bank's own official announcement of the February 4 policy change.

VWD, the German economic news agency, in which Reuters had a one-third interest until 1980, blasted back yesterday - in German except for the citation of the Reuters copy and with no explanation for the Brits as to who or what VWD might be - that this was not true. It was there with the news a whole 28 minutes earlier, it claimed.

Reuters says VWD's was an unsourced report; VWD, in turn, says the Reuters' piece was 'just as much speculation as ours, but our report was harder'. (Eh?)

VWD thinks Reuters is trying to sabotage its English language service - though why it should then couch its rejoinder in German is a bit of a puzzle. Reuters, almost a century older than VWD and able to trace its German roots back to Baron de Reuter no less, just thinks the competition is unnerved by missing out on the odd scoop recently.

As usual in the more delicious Anglo-German rows, the Bundesbank has the last word. 'They can write what they like, but it is a little bit strange that they should be arguing about who was the first to start a rumour.'

Back to your terminals, boys.

There is an air of relief among British building societies as they prepare to disclose their results for last year, one of the worst in the UK housing market. Fears that the industry's foundations were threatened have receded. 'I think it is a minor miracle that we have survived as well as we have,' says Mr Mark Boleat, director-general of the Building Societies Association.

The slump in the housing market - which brought a wave of house repossessions and bad debts - seemed last year as if it could provoke losses among medium-sized societies, though the fears have proved unfounded. That would have led societies into unknown territory. Some society chief executives talked of rejecting their traditional role of merging with loss-makers to save them. An erosion of public confidence appeared possible.

A taste of the problems inflicted on societies based in the vulnerable south of England housing market will be disclosed tomorrow when the Gloucestershire-based Chelsea Building Society is expected to report sharply reduced profits. Other large societies such as Bristol & West, which lent heavily in 1989 and 1990 to borrowers who have had difficulty meeting mortgage repayments, will follow in the next month.

Britain's exit from the European exchange rate mechanism on September 16 calmed the worst fears. The UK's 110 societies, descendants of the 'terminating' societies formed in the 18th century by individuals saving to buy houses, were given a respite. The fall in base rates from 10 per cent to 7 per cent between September and December 1992 let them raise income by delaying cuts in rates on existing mortgages, while reducing savings rates promptly. 'We were saved a bit by Black Wednesday,' says Mr Boleat.

This windfall aside, it was a hard year for societies in the south. House prices in the region fell by 9 to 11 per cent, while base rates remained high for the first three-quarters of the year. As a result, some 68,500 properties were repossessed in Britain, compared with a tenth of that number a decade earlier. A further 352,000 owners were at least six months in arrears with their mortgages in December.

The fall in southern property values strained the insurance policies which nearly all the societies hold to insulate them against repossession losses. These protected them as long as properties stayed above 75 or 80 per cent of their original value, but the limit was often breached in the south. Premiums have risen sharply because insurers estimate that they have lost Pounds 3bn on mortgage indemnity in the past three years.

The most chastening experience has been that of the larger societies which merged with distressed smaller societies in 1991. Consolidation through mergers has gradually reduced the number of societies - which numbered 289 in 1980 - and appeared virtually risk-free. Larger societies expanded their branch networks and market share by taking on sound mortgage assets that were well covered by reserves.

The increasing risk of mergers emerged last year. Some large societies found they had taken on loan books in a far worse state than they imagined. Cheltenham & Gloucester, the sixth-biggest society, merged with the troubled Portsmouth in June 1991. 'The provisions we had to make against the Portsmouth were vastly in excess of what a reasonable person could have expected,' says Mr Andrew Longhurst, Cheltenham & Gloucester chief executive.

Such experiences have prompted larger societies to be more cautious about taking on others. Mr Jim Birrell, chief executive of the Halifax - the largest society - says it is unhealthy for societies to assume they will be rescued no matter what they do. 'It is wrong for individual members of an industry to think whatever problems they get into will always be taken over by others,' he says.

This attitude marks a change for an industry that has supported its weaker members to preserve public confidence. Because societies hold the savings of many relatively unsophisticated investors, they are vulnerable to runs on funds if they appear weak. This is despite the fact that their average ratio of capital to assets is 11.8 per cent - well above the international minimum of 8 per cent set by the Bank for International Settlements.

Ms Rosalind Gilmore, the building societies commissioner who regulates the industry, has already emphasised that she sees nothing wrong in a society with strong reserves dipping temporarily into loss. She has received a chorus of support from chief executives. 'There is no reason why a society which is well managed and secure, which happens to make a loss one year, should have to close its doors,' says Mr Longhurst.

The prospect of more than one medium-sized society making a loss nonetheless caused some nervousness among chief executives last year. In the event, the south's problems have been balanced by the widening of margins late in the year, and by the performance of societies lending in the more resilient northern market. The Northern Rock Building Society, based in Newcastle-upon-Tyne, has already announced a 37 per cent rise in pre-tax profits for 1992.

The profits of the 25 largest societies are now expected to fall only 7 per cent on average. Yet although the immediate crisis appears to have passed - and house prices seem to be stabilising - societies in some ways face an even harder task this year. They will have to struggle to increase profits in a stagnant housing market, with about half the transactions of the late 1980s to attract fee income, and stiff competition for savers' funds.

Mr John Wriglesworth, building societies analyst at UBS Phillips & Drew, says societies are facing pressure on both sides of their balance sheets in the coming year because of the fall in base rates.

On the deposit side, it will be hard to attract retail funds because of higher yields on equity investments. They also face competition from the government, which needs to attract funds through National Savings to help finance a projected annual public deficit of Pounds 50bn. The difficulty of attracting retail deposits under these conditions is already evident. Societies only had a net retail fund inflow of Pounds 295m in 1992 compared with more than Pounds 5.8bn in the previous year.

On the lending side, they will face competition from lenders offering cheaper mortgage rates. This is because centralised lenders such as the Household Mortgage Corporation have unfettered access to wholesale funds that are now cheaper than societies' retail funds. Societies are limited to borrowing 40 per cent of funds on wholesale markets under the 1986 Building Societies Act. 'Banks and other lenders will be rushing back into the mortgage market. The societies are going to be forced to squeeze their margins if they do not want to lose market share,' says Mr Wriglesworth.

The last time other lenders competed so hard for mortgages was in the mid-1980s, when societies' share of mortgage lending fell from 72.1 per cent in 1986 to 50.6 per cent in 1987. But the level of housing transactions meant there was a lot more business to go around. Societies now face much lower sales: there were only 1.1m transactions in England and Wales last year, compared with 2.1m at the peak in 1988.

The fall in transactions reduces societies' profits because each purchase can attract an additional Pounds 1,000 or so in fee income on products such as life insurance. Yet only a modest recovery in house sales is expected, while the rise in arrears last year means bad debt provisions on repossessions are likely to stay high. Provisions for last year are expected to reach about Pounds 2bn, compared with Pounds 1.2bn for 1991.

The upshot is that while societies are relieved that 1992 did not match their worst fears, they face a tough climate over the next few years. Those that expected to follow Abbey National's 1989 share flotation, and abandon mutual ownership, are now more cautious. The advantages of not having to answer to shareholders during a period of subdued profitability has struck some of them forcibly.

'Mutuality has been important to us in the past year,' says Mr Peter White, chief executive of the Alliance & Leicester. 'We have been able to take a long-term view without having to look over our shoulders every few months.' He is not the only chief executive to emerge from last year with renewed respect for societies' traditional strengths. But the year to come may hold just as stiff a test.

MRS VIRGINIA Bottomley, the UK health secretary, yesterday announced her response to the Tomlinson report on the future of London's health services. While she is stopping short of fully implementing Sir Bernard Tomlinson's recommendations, she has given the green light to much of the report. Mrs Bottomley has thus launched the first serious attempt to rationalise the capital's health services in a century, in marked contrast to the shelving of earlier reports.

London's hospitals consume 50 per cent more resources per head than those in other large cities. The internal market in the National Health Service leaves health authorities increasingly free to shop around for hospital treatment. As that freedom is exercised, health authorities in the home counties will send their patients to cheaper local hospitals rather than more expensive beds in London. It already requires a subsidy of Pounds 50m to keep open London's teaching hospitals; this could double next year unless surplus beds are eliminated.

And while London's hospitals consume a disproportionate share of the NHS budget, Londoners are ill-served by their community health services. Family doctors outside the capital often work in large practices housed in modern health centres offering a range of services, including some day surgery and other forms of treatment. In London, too many family doctors are working single-handed from lock-up premises and able to offer little by way of screening or day care. The government will give an immediate boost to primary health care in the capital, with innovative experiments to improve services locally to reduce demands made on hospitals.

Mrs Bottomley has delayed final decisions on hospital closures until the completion in May of a review into where particular specialties should be located. But she has made it clear that many of the Tomlinson recommendations will proceed. She has also sensibly accepted alternative strategies where they have made sense, as, for example with the plans to relocate the Royal Brompton and the Royal Marsden.

On the most controversial of the proposed closures, Bart's hospital in the City of London, Mrs Bottomley has deferred a final decision. Bart's has waged a brilliant campaign to remain open, using its connections in City and the media with skill. Mrs Bottomley accepts that Bart's cannot survive in its present form, but has given the hospital another six months to come up with alternative strategies for consideration.

It is understandable that ministers have adopted a risk-averse strategy in delaying the decision. With a 21-seat Commons majority and confidence at a low ebb since last year's setbacks in economic policy, ministers are as vulnerable to a parliamentary challenge on hospital closures as on pit closures. Given these constraints, Mrs Bottomley has done well to keep the momentum of rationalisation, even if Bart's has been awarded a temporary reprieve.

THE UPHEAVALS causing flows of uprooted migrants into the rich countries of western Europe show little sign of abating. While war rages in former Yugoslavia, economic and political dislocation in other hard-hit parts of eastern Europe and the developing world has become a seemingly permanent source of instability.

The west should prepare itself for immigration pressures to persist at least until the end of the decade. To cope with the challenge Europe needs a strategy. Unfortunately, though not surprisingly, European interior ministers meeting in Budapest this week failed to come up with it.

The ministers agreed to toughen measures against the criminal organisations which charge exorbitant fees for transporting refugees illegally across western borders. They will set up mobile police units, and intensify information exchanges. But pleas led by the Bonn government for the rest of Europe to pool resources in providing funds and accommodation for refugee resettlement fell on deaf ears.

Five countries - Germany, Switzerland, Austria, Sweden and Hungary - have between them accommodated about 85 per cent of the more than 500,000 refugees displaced from ex-Yugoslavia since mid-1991, with roughly 250,000 of these people in Germany. In effect, these countries have now been told that it is up to them to find solutions to difficulties posed by the inflows.

This lack of European solidarity is short-sighted. Such a response fails to address a problem which is growing larger, in terms of both numbers and geographical complexity. Roughly 670,000 refugees sought political asylum last year in western Europe, up 24 per cent from 1991, of whom 440,000 entered Germany (against 27,500 for France, 24,600 for the UK, 11,700 for Spain and 2,500 for Italy). Hungary has turned back 1m people at its borders since October 1991.

European countries are following a policy of trying to minimise their exposure to refugee inflows, pushing would-be migrants back to adjacent countries. This was the approach in the resolution on 'host third countries' adopted by EC ministers at the end of last year, which put the onus on dealing with refugees from Bosnia and Serbia on neighbours such as Hungary, Croatia and Slovenia.

It is also the policy adopted, for understandable reasons, by Germany, which is tightening its previously liberal asylum regulations through a change in its constitution. This, inevitably, will increase strains on Poland and the Czech Republic.

A policy which ends up concentrating refugees in countries least equipped to accommodate them is misguided. Europe at present is unable to check the pressures which are forcing refugees to flee from the east. But unless the west enacts a policy which seeks to spread the burdens of assisting and integrating them, it will share part of the blame if the potential for disorder spreads.

The shambles of Foreign Secretary Douglas Hurd's legal about-turn on the social chapter of the Maastricht treaty on Monday should not be allowed to confuse the issues that are at stake. Labour's amendment 27, by seeking to remove the opt-out, could only ever be the first step on the road towards the social chapter's inclusion in the treaty. Parliament should vote in favour, for two reasons.

First, the arrangement negotiated at Maastricht by John Major, the prime minister, is a legal and political mess. The opt-out creates a two-tier Europe in the social dimension which many Community experts believe to be unworkable.

Mr Major has left Britain, in this vital area, with reduced influence, diminished status and, once again, without the ability to shape the institutions that will guide the Continent.

At Maastricht, the prime minister had the opportunity to negotiate a social chapter which conformed more clearly with British desires for decentralised decision-making and a free-market approach. He passed up that chance and chose isolation instead. Mr Major's tactics may have given him something to show his sceptical backbenchers when he returned from the negotiations. He was determined to prove that he had not abandoned his predecessor's legacy. But he has robbed his country of the ability to steer the social legislation of the Community.

Second, the British public needs to understand and support the process of European integration. A single market, leading to a single European currency, will oblige British companies and employees to face up to competitive stresses and strains.

Why should those same British men and women be denied the benefits of the minimum social and employment legislation that is agreed at a European level, and which will be upheld in every other member state? And has Britain not something to learn from those of its neighbours who have shown that co-operation and partnership can lead to economic success? All of the other member states understand that Europe must have a social face.

A specific clause has already been inserted which requires legislation to respect 'national practices'. Another protects the position of 'small and medium-sized undertakings'. The chapter specifically excludes pay, the right of association and the right to strike. All of the legislation so far proposed has arisen not from the Maastricht treaty but from the Single European Act, passed by a Conservative government in the 1980s.

Liberal Democrats do have concerns about the corporatist nature of some of the procedures for decision-making within the chapter which could by-pass the elected European Parliament. But the British government has shown no interest in improving the democratic accountability of the Community. In any case, such concerns should not outweigh the desire to see Britain 'at the heart' of the Community, able to participate in all of its deliberations and to shape its institutions.

Amendment 27 does not by itself insert the social chapter in the UK's version of the treaty. It is a necessary step towards that end, but it is not in itself sufficient.

Even so, the government was claiming until Monday afternoon that the amendment, if carried, would 'wreck' the treaty. Douglas Hurd attempted to raise the stakes further by threatening to ditch the treaty. He sounded petulant and bullying, unsure of his case.

Now that the government's case has been blown apart, it is clear that its problems are not technical, but political. On this occasion, Britain would be moving towards its European partners, who would welcome the end of an opt-out. The UK should take further steps to make this possible.

With the French elections now upon us, and with a heightened political atmosphere at Westminster, much nonsense will be spoken over the next few weeks about the social chapter on both sides of the Channel. Some will allege 'social dumping'. Conservatives will claim that an opt-out is Britain's only route to prosperity. Labour has persuaded itself that the chapter could return Britain to the days of collectivist industrial relations.

The truth is more mundane, but none the less important to Britain. It is in British interests for the Community to move together as 12. Yes, there are problems with the chapter. But these will only be solved with Britain inside a more democratic Community.

Last November, Liberal Democrats voted to support the Maastricht treaty in the 'paving' debate. Next month, we shall vote to improve the treaty by supporting the social chapter.

The author is leader of the Liberal Democrats

'MUST do better]' is the clear message of the Bank of England's first quarterly report on the government's efforts to meet its target range of 1 per cent to 4 per cent for underlying inflation during the life of this parliament.

The Bank believes that the government can meet its target for annual growth in the retail prices index excluding mortgage interest payments. The target was announced by Mr Norman Lamont, the chancellor, last October.

It says: 'The balance of probabilities is that inflation will be slightly lower in 1994 than it was at the end of 1992,' when underlying inflation was rising at an annual 3.7 per cent. Its central forecast is for this inflation measure to stay in a 3 per cent to 4 per cent range over the next two years with policies staying broadly unchanged.

But the emphasis placed in the 45-page report on the up-side risks to the forecast gives added weight to the recent messages from Mr Eddie George, the Bank governor-designate, and Mr Lamont that there is very little scope for a further easing of monetary policy through lower interest rates.

The Bank says the consistent message from a wide range of indices is that inflation has fallen sharply over the past two years.

It expects underlying inflation will be about 3.5 per cent this month and in March. But for the purposes of monetary policy, the Bank must look at the inflation outlook two years into the future.

The Bank believes that the authorities should pay close attention to the value of the pound. The main risks to underlying inflation bursting through the 4 per cent top of its target range come from 'the possibility of a sustained further depreciation of sterling' and a faster pass-through to prices of the depreciation that has taken place since sterling left the European exchange rate mechanism on September 16. The Bank is also worried that the UK's high fiscal deficits (forecast by the government at Pounds 37bn in 1992-93 and expected to rise further) might create expectations of higher inflation in the future.

The changing structure of anticipated interest rates since September, (illustrated by higher interest rates at the long end of the maturity range) also points to a rise in expected inflation while private sector forecasts of inflation in 1993 and 1994 suggest that the target range lacks credibility.

Underlying inflation, the report says, should be nearer 1 per cent than the 4 per cent end of the target range at this stage of the business cycle. January's 3.2 per cent annual inflation rate ex-mortgage interest payments 'demonstrates that there is still some way to go before the underlying inflation rate is consistent with the objective of price stability.'

The report says the easing of monetary policy since September through the depreciation of sterling and the cuts in bank base rates to 6 per cent from 10 per cent is consistent with the prospect of a slight reduction in inflation in the next two years, although the progress in reducing inflation will be slower than before September.

Cost pressures from sterling's depreciation have become apparent in the past few months. The ability of the economy to absorb the increase in prices that was caused by sterling's 15 per cent devaluation since September will depend crucially on wage developments. Here some changes are needed. 'Expectations in financial markets, and of wage earners and firms, have some way to adjust, and a change of expectations is required,' the Bank says.

Wage increases, although sharply lower over the past two years, will have to fall further if the UK is to keep within its inflation target while avoiding further sharp increases in the numbers of unemployed.

The Bank warns that rising unemployment and a growing gap between output and potential output in the UK economy will cause nominal wage increases to decline further and profit margins to remain subdued.

It says that the consistent pursuit of a counter-inflationary monetary policy will ensure that expectations do adjust and that price stability is attained.

But its report concludes with a clear warning: 'Steady progress has been made towards achievement of the government's inflation objective but further progress is required.'

The Bank of England Inflation Report, Booksellers or Economics Division, Bank of England, Threadneedle Street, London EC2R 8AH. Pounds 4. Also included in the Bank Quarterly Bulletin, Vol 33, Number 1, Pounds 7.50.

MANUFACTURING output fell in each of the latter two quarters of last year, according to government statistics issued yesterday which do little to support hopes of a recov-ery.

The output of all production industries, including manufacturing, energy and water, dropped last year for the third year running - the first time that this has happened since the early 30s.

The seasonally adjusted data indicate that manufacturing production, which accounts for just under a quarter of the economy, has yet to show any significant rebound from its trough during the re-cession in the fourth quarter of 1991.

During 1992 production by the sector was down 0.8 per cent compared with the previous year. That followed a 5.2 per cent annual fall in 1991 and one of 0.5 per cent the previous year.

Last year output of mineral products, metals and mechanical goods dropped in each case by more than 4 per cent compared with 1991, while food, chemicals and artificial fibres all experienced an output increase of more than 1 per cent.

In the last quarter of last year manufacturing volumes were down 0.2 per cent compared with the previous quarter that came after a 0.1 per cent drop between the second and third three-month periods.

Manufacturing saw a provisional rise in production of 0.1 per cent in December compared with November.

In the three months between October and December last year output by the manufacturing sector was up by just 0.4 per cent compared with the low point for the sector a year previously.

In the fourth quarter, aided by a 6.3 per cent quarterly jump in North Sea oil and gas extraction, output of all production industries was 0.9 per cent up on the previous three months.

But for the year as a whole, output by these industries, which account for just over one third of gross domestic product, was down 0.4 per cent compared with the previous 12 months.

The sector registered year-on-year falls of 3 per cent and 0.6 per cent respectively in 1991 and 1990.

In the fourth quarter of last year car production was down 4.9 per cent compared with the previous three months.

Over the same period the metals, artificial fibres and mineral-products industries registered quarterly production falls of 7.1 per cent, 4.9 per cent and 3.6 per cent respectively.

Output of chemicals and electrical products increased by a quarterly 3.1 per cent in both cases.

A NATIONAL forum to promote digital audio broadcasting (Dab), a new sound broadcasting technology, was announced yesterday by Mr Michael Heseltine, the trade and industry secretary.

Describing Dab as an important development, he said the forum would involve broadcasters, equipment manufacturers, retailers and service providers. Dab is expected to replace FM broadcasts over a 15 to 25-year period, starting with the first commercial Dab broadcasts in 1995.

Dab offers the prospect of compact-disc quality sound and improved reception in car radios and portable receivers. It also makes it possible to provide a greater number of services using the same radio spectrum.

A preliminary specification for the technology, developed under the European collaborative research programme Eureka, is already before the European Telecommunications Standards Institute.

Among the organisations collaborating on the project are the BBC, Philips of the Netherlands, Grundig of Germany and Thomson of France.

ECONOMIC ACTIVITY is weakening rapidly in much of western Europe with falling business and consumer confidence posing 'a clear downside risk to prospects in most European countries', the Bank of England reports, Peter Norman writes.

In a review of economic developments among the UK's leading trading partners the Bank says in its latest quarterly bulletin that worsening conditions in western Europe and Japan have been largely offset by strengthening in the US in the past three months.

The US recovery means that growth for the 'major six' economies - the US, Japan, Germany, France, Italy and Canada - slowed only moderately to an annualised 1 per cent in the third quarter of last year from a 2.2 per cent annual rate in the first half.

The French, Italian and German economies contracted in the third quarter of last year and the recession in Germany seemed set to continue into this year, the Bank says. But it expects the six will still achieve 'moderate growth' in aggregate in 1993.

It adds that production is running below potential in all six countries, with 'output gaps' ranging from 0.4 per cent in Italy to 6.5 per cent in Canada.

The average output gap of about 2 per cent will dampen in-flationary pressures in the six as a group.

HIGH CORPORATION tax revenues, coupled with relatively low government spending, contributed to a higher-than-expected Pounds 3.83bn surplus in government finances in January. It was the first monthly surplus for a year.

About Pounds 1bn of the surplus was due to a new system for collecting value added tax from big companies on a monthly basis. This brought forward to January receipts which would normally be paid this month.

The large surplus recorded for January is likely to be countered by big deficits this month and in March. These are expected to push the public sector borrowing requirement for 1992-93 to about Pounds 37bn, after a Pounds 13.7bn deficit in 1991-92.

The Treasury and Central Statistical Office said yesterday that the PSBR for the first 10 months of the year came to Pounds 21.6bn, compared with Pounds 6.5bn at the same stage in 1991-92. The deficit has increased as the recession has reduced tax receipts and pushed up spending on unemployment.

Receipts last month were boosted by a Pounds 5.27bn payment of corporation tax. Another factor was relatively low central government spending in January of Pounds 20.15bn, only slightly higher than the comparable Pounds 19.46bn last year.

Total central government receipts last month came to Pounds 23.0bn, compared with Pounds 23.33bn in January last year. The surplus for January last year was Pounds 3.78bn. Privatisation proceeds last month came to just Pounds 4m.

THE self-regulatory body for chartered accountants who conduct investment business is considering reducing the monitoring of its members.

Mr Bruce Picking, director of practice regulation at the Institute of Chartered Accountants in England and Wales, said 'embryonic' discussions were under way to increase the period between inspections by the joint monitoring unit, which is run by all the chartered accountants' institutes in the British Isles.

The unit at present visits every five years all 6,000 chartered accountants registered to conduct investment business. It visits every two years all those - numbering only about 600 - who are authorised to hold clients' money.

But Mr Picking said: 'We are considering lightening the burden. We don't need blanket monitoring with visits. We may move to a more risk-based approach.'

He stressed that inspectors would continue to monitor annual returns from all registered firms and would carry out targeted visits to those which required greater attention.

The discussions come soon after the institute made representations to Mr Andrew Large, the chairman of the Securities and Investments Board, over the regulatory demands imposed on accountants.

Accountants already had to comply with their own codes of professional conduct and investment business comprised a small fraction of their work - estimated at only 1.5 per cent of fee income.

MR RICHARD BRANSON'S Virgin Atlantic Airways is stepping up its challenge to British Airways and launching a new service from London's Heathrow Airport to New York's Newark Airport. The service is expected to start at the end of next month.

Mr Branson, who is still seeking compensation from BA for the commercial damage he claims his airline suffered from BA's 'dirty tricks' campaign, is expected to announce the start of the new service when he opens Virgin's new Pounds 1m passenger lounge at Heathrow next week.

Virgin will switch its present Newark service from London's Gatwick airport to Heathrow because the airline has secured necessary take-off and landing slots at the bigger airport.

Mr Branson said the service would enable Virgin to compete directly against BA on the Newark route out of Heathrow.

The Virgin chairman said yesterday the airline planned to resume a separate service from Gatwick to Newark next year, when it expects to receive new aircraft to increase the size of its fleet.

Virgin is in advanced talks with the European Airbus consortium to acquire four A340 long-range jets with an option for an extra one. It is also negotiating with Boeing to acquire a 747-400 jumbo with options for the Boeing 777 twin engine widebodied airliner.

The Newark service will bring to four the long haul destinations served by Virgin from Heathrow.

The airline already operates to Los Angeles, New York's JFK airport and Tokyo. It plans to start additional services to San Francisco and Johannesburg from Heathrow later this year if it can secure the necessary slots.

Lex, Page 18, Profits fall, Page 19

THE Personal Investment Authority, the proposed self-regulatory body for retail financial services, has appointed Sir Brian Jenkins, a partner at accountants Coopers & Lybrand, to conduct an independent review of membership criteria.

The appointment follows a letter in December to the PIA's board from Mr Andrew Large, Securities and Investments Board chairman, saying the PIA would not be approved as a self-regulatory body unless it raised standards of investor protection. Sir Brian is expected to seek a meeting with Mr Large to discuss SIB's requirements.

The PIA board said it had asked Sir Brian for recommendations on how to assess the 'fitness and properness' of applicants, and on standards for members to meet and transitional arrangements to meet those standards.

Sir Brian will also seek meetings with banks, building societies, unit trusts, life offices and representatives of the independent advisory sector. It is expected that he will complete his report to the PIA board by April or May.

The move is seen as a sign that the retail financial services industry has taken seriously the threat that SIB might refuse to recognise the PIA. Some in the industry have urged the PIA board to resist Mr Large's demands - particularly the minimum capital requirement for members and the insistence that the PIA must vet all firms, even if they were previously members of another self-regulatory body.

RELATIVES of the victims of home income plans will be allowed to continue to claim compensation even after the death of a victim, the High Court ruled yesterday.

Investment bond home income plans were sold in the late 1980s, mainly to elderly people as a way of releasing income from their homes.

The schemes involved taking out a mortgage and investing in equity-linked bonds. The value of these bonds fell as the stock market performed poorly and mortgage rates rose. Elderly people were pushed into debt and, as house prices fell, some lost their homes.

In cases where the risks of the schemes were not explained victims can receive compensation from the Investors Compensation Scheme to a maximum of Pounds 48,000.

Barnett Sampson, solicitors, which represents 450 home income plan cases, sought a judicial review of the ICS's stipulation that a claim ceased when the victim died.

The High Court ruled yesterday that the 'personal representative' of a deceased person can bring or continue a claim on their behalf.

But the Court ruled against the claimants on other points. Barnett Sampson argued that the ICS should not deduct from compensation any money claimants spent in the mistaken belief they were spending profit on investment rather than capital - a couple might not have spent money on a holiday if they had known it would be eating into their capital.

LUCAS Industries, the international engineering group, plans to lay off 510 employees at its plants which make pumps for diesel engines, in Gillingham and Rochester, Kent.

The group yesterday blamed falling demand, especially in the agricultural machinery and off-highway vehicle markets.

Some redundancies had been expected at the plants. Last October Lucas said it would reduce its workforce by 2,750, half of which would be in the UK - reducing the worldwide Lucas workforce to 47,000 from 59,000 in July 1990.

The Rochester plant, which has 156 employees, will close this summer.

The Gillingham plant, which also supplies diesel fuel injection systems for the Ford Transit van, has 1,856 employees.

Yesterday Lucas could not say how many of the latest round of redundancies sprang from the fall in orders and how many were the result of the planned slimming of the group workforce.

COMPANIES will be subject to more equitable taxation on foreign exchange gains and losses under long awaited and radical draft legislation circulated yesterday by the Inland Revenue.

The changes will principally affect any UK companies that take out finance in foreign currencies and those with assets held in foreign currencies subject to significant exchange rate fluctuations.

The rules will permit them to offset losses on exchange fluctuations against tax for the first time. Previously they have been taxed on any exchange gains without being allowed to take any corresponding allowances for losses.

The Revenue said the legislation would not be retrospective, so it will not help companies which suffered heavy exchange losses after the depreciation of sterling when Britain withdrew from the exchange rate mechanism last autumn.

Tax practitioners generally welcomed the proposals as a change that would bring the UK into line with tax regimes in other countries.

Mr Derek Jenkins, a tax partner with Coopers & Lybrand, said: 'This gives British companies more of a level playing field with the rest of the world. They will be taxed on their trading transactions in foreign currencies in the same way as they are accounted for in economic terms.'

Ms Emma Lubbock of Price Waterhouse said: 'Companies will welcome the certainty of tax treatment and the removal of anomalies.'

She said they would find the 40 pages of regulations and notes daunting. The Revenue said the effect of the changes would be broadly tax neutral, with any losses from the introduction of allowances being offset by new taxes on gains which were outside the remit of previous legislation.

MR JOHN Smith, the Labour party leader, last night expressed concern at the resignation of the Daily Mirror's political editor, Mr Alastair Campbell. Mr Smith said: 'My concern at the political stance of MGN and the need to maintain political pluralism has been reinforced by his regrettable departure.'

LUCAS Industries, the international engineering group, plans to make 510 employees redundant at its plants which make diesel engine pumps in Gillingham and Rochester, Kent.

The group yesterday blamed falling demand. The two plants together employ more than 2,000 people.

CUSTOMS officers belonging to the Civil and Public Servants' Association plan to strike for the day on Thursday over what the union claims is a pay cut.

Customs and Excise is seeking to replace overtime payments with an annual allowance for flexible working. CPSA says the move will mean pay cuts of up to Pounds 2,000 a year.

LONDON bus drivers are to be balloted on industrial action following an offer by London United to buy out current working practices.

Union representatives said the company, part of London Buses, had offered a one - off payment of Pounds 3,800 in return for a longer working week and lower wages.

SOUTHERN Electric, the privately-owned utility, yesterday agreed a flexible working pattern with its 5,000 employees which it believes is the first of its kind among the main UK utilities.

The five unions, in return for a 2.9 per cent pay rise and one-off lump sum payments averaging Pounds 200, have accepted the phased introduction of a six-day working week over the next 18 months and a big reduction in voluntary overtime which costs the company Pounds 10m a year.

RELATIVES of the victims of home income plans will be allowed to continue to claim compensation even after the death of a victim, the High Court ruled yesterday.

Investment bond home income plans were sold in the late 1980s, mainly to elderly people as a way of releasing income from their homes.

The schemes involved taking out a mortgage and investing in equity-linked bonds. The value of these bonds fell as the stock market performed poorly and mortgage rates increased. In cases where the risks of the schemes were not explained victims can receive compensation from the Investors Compensation Scheme to a maximum of Pounds 48,000.

Barnett Sampson, the solicitors, which represents 450 home income plan cases, had sought a judicial review of the stipulation that a claim ceased when the victim died.

THE present bias in fraud trials towards defendants should be changed to simplify issues and shorten the time cases spend in court, the judge in the final Guinness trial said yesterday, John Mason writes.

Mr Justice Turner criticised the present procedure under which the prosecution has to outline all details of its case at the start of a trial while defence lawyers can withhold material to set up 'ambushes'.

In the final Guinness trial, which ended with Mr Thomas Ward being acquitted on Monday, much time had been spent pursuing matters that were never live issues, he said. The single real issue before the jury had been whether Mr Ward's Pounds 5.2m fee had been dishonestly obtained. 'Why should this issue have taken five weeks to resolve?' he asked.

His comments were welcomed by Mr George Staple, director of the Serious Fraud Office.

MR WILLIAM Waldegrave, public service minister, has sought to head off concern that the government's drive to contract out public services will be derailed by legal uncertainties over the rights of employees involved.

He says in a pamphlet published yesterday that the protests are 'simply the usual noise you get when a major new policy begins to affect powerful vested interests'.

Mr Waldegrave also says it is 'not unreasonable' to expect market testing in the future to produce savings averaging 25 per cent - even when work is not contracted out but continues to be performed by in-house providers.

Mr John Major, the prime minister, will today chair a Downing Street seminar of ministers and senior civil servants on the next stages of the Citizen's Charter. The seminar is likely to cover how competitive tendering and market testing can be extended.

Fears about contracting out arise because legal advice suggests that under the 1977 European Acquired Rights Directive, civil servants affected may have to be offered equal employment conditions when transferred to a new employer. If they are not, the government could be liable to damages.

In his pamphlet, Public Service and the Future, Mr Waldegrave says market testing has faced 'vociferous criticism' from public-sector unions.

'A final desperate ploy is to allege that the European Acquired Rights Directive will stop the policy: it will not, any more than it has stopped the tens of thousands of private-sector transfers of undertakings since 1977 when it was passed,' he adds.

Mr Waldegrave also used his pamphlet to launch a thinly disguised attack on some newspapers' coverage of the royal family. He complained of 'the savagery of the attack on members of the royal family for no reason other than the exploitation of the pain of an unhappy marriage'.

PICKETING the gates of Yarrow Shipbuilders union official John Dolan dismisses the ghost of Red Clydeside with a shrug.

'This dispute has been eight months brewing. On Red Clydeside they would just have walked out on the first day,' he says.

The 1,300 men of Yarrow Shipbuilders are settling in for their second week of an indefinite strike over wages, while next door the 550 workers of Leyland Daf's Albion axles plant have voted for industrial action in the hope of putting pressure on the government to help the stricken truckmaker.

The Clydeside setting of the neighbouring disputes lends them a resonance beyond their real moment, but there are some parallels with the 1960s and 1970s. Then there were frequent disputes, culminating in the 1972 work-in at Upper Clyde Shipbuilders after its closure was announced .

The work-in added to pressure on the Heath government, which eventually agreed to provide state support to the yards, abandoning its policy of refusing to salvage 'lame ducks' at a time of high unemployment - then about 1m.

For all the parallels, Mr Jimmy Airlie, one of the leaders of the UCS work-in, does not see the Yarrow dispute and the Daf strike vote as the rebirth of confrontational unionism in Scotland. 'There is no direct link between the two current disputes, no trend, and the political context has changed completely.'

Mr Airlie, now the AEEU electrical and engineering union's executive council member for Scotland, says the two groups of workers share a heritage within which industrial action remains a legitimate last resort.

The Yarrow dispute owes as much to Lady Thatcher's 1980s as it does to the decades before. The men say they are not being rewarded adequately for the low pay rises and changes in working practices which helped to keep the yard going and to win the Pounds 700m in orders now on its books.

Skilled workers do boilermakers' work as a matter of course and wages have been kept so low that most of their wives must work too, they say.

The company points out that to win the orders it had to put in competitive bids, which assumed low costs.

Some things never change. The workforce which rejected the company's above-inflation pay offer - against the advice of union officials - says the management style of Mr Murray Easton, Yarrow's managing director, is partly to blame for the deadlock.

He is the son of the company's former manager director and the workforce says it is offended by his 'spoilt wee boy' approach to negotiations.

The workforce is deeply opposed to this year's pay settlement being expressed as a Pounds 300 lump sum, rather than an increase in basic pay which would be reflected in holiday pay and eventual pension benefits.

Mr Francis McNeill, who has worked for Yarrow for 18 years, says: 'We have had more than 800 redundancies in the last 14 months. We just had to sit back and accept it. We had no press coverage although there were guys tapped on the shoulder at two and three in the morning and told to go. They called a strike over 67 job losses down the road at Daf's'

GKN, one of the biggest component suppliers to Leyland Daf, yesterday struck an agreement with the receivers to resume deliveries of all components to the beleaguered truck and van maker.

GKN is the source of axles, prop shafts and other main components. Without them the truck plant in Leyland, Lancashire, and the van plant in Birmingham would have no prospect of resuming steady production to meet orders for several thousand vehicles which some customers, such as Royal Mail and Parcelforce, have so far refrained from withdrawing.

Leyland Daf executives were hoping last night that the decision by GKN, one of the UK's biggest industrial groups, to resume deliveries would act as a catalyst to other suppliers to follow suit. About two dozen other suppliers have suspended deliveries.

Hours before the agreement with GKN, employees from the Birmingham plant had travelled to Dunstable, Bedfordshire, where they staged a protest outside an AC Delco components plant in an effort to persuade the General Motors subsidiary to resume supplies of wiper motors.

A spokesman for the receivers, Mr John Talbot and Mr Murdoch McKillop of accountants Arthur Andersen, said hopes were now rising that 'something resembling full production' would be resumed at the van plant by the end of this week.

The situation at Leyland is more difficult, however, with little prospect of more than completion of vehicles already on the assembly line.

Meanwhile the receivers made redundant 80 of the 270 Birmingham-based staff still assigned to the Excel project, a joint venture between Renault and Daf to create a new range of vans.

The move was expected to be the first stage in winding up the Birmingham end of the project, with Renault likely to announce shortly - possibly today - that it plans to proceed with the project on its own or that it has found a replacement partner.

THE SOCIAL security department's budget is the largest target in the sights of the government's review of public expenditure.

As the highest spending department - Pounds 74bn this year, more than a quarter of government spending - it is where the biggest savings might be expected.

Also, Mr Peter Lilley, the social security secretary, like Mr Michael Portillo, the chief secretary to the Treasury who is carrying out the review, is on the Conservative right and might be expected to be enthusiastic about the unthinkable in seeking new ways to cut public spending.

But, eager though he might be to curtail public spending, Mr Lilley will find it hard to offer Mr Portillo savings that will make much impact before the next century. Indeed, he might find that the withdrawal of the state from some central areas of social security will initially cost money, rather than saving it.

The elderly get nearly half the social security cake, most of it for the flat-rate basic pension paid to almost everyone over state retirement age - 65 for men and 60 for women.

The basic pension accounts for about a third of the social security budget and 10 per cent of public spending as a whole. Yet while it is an important part of most pensioner incomes it is of declining importance to the growing numbers who retire with substantial occupational pensions and savings.

Until now most attention has focused on ways in which the state could stop paying the basic pension to the minority of pensioners who are well-enough off to provide for themselves. In previous years the government has made much of targeting additional help to the most needy through means-tested benefits. One policy option - under consideration by Labour's Commission on Social Justice - would be to extend means-testing to the state pension.

But Mr Lilley seems to have set his face against offering Mr Portillo a means-tested pension. One reason is that it would involve breaking a manifesto promise to continue paying the pension as at present and uprating it annually in line with inflation. There is also a strong Conservative aversion to further 'intrusive' means-testing, well expressed in a recent pamphlet by Mr David Willetts, the MP for Havant who formerly directed the Centre for Policy Studies, the think tank founded by Baroness Thatcher and Lord Joseph.

The other options likely to be considered are no easier. Mr Willetts wants to spend more on some pensioners - the over-80s - who are less likely than recently retired pensioners to have substantial income from savings or occupational pensions, and so are more likely to be at the lower end of the income distribution.

To pay for this, Mr Willetts proposes raising the retirement age to 65 for all (and possibly to 67 eventually). Some of the Pounds 3bn saved in this way could be ploughed into higher pensions for the over-80s - which could later be phased out as all pensioners came to enjoy some private pension income. The savings from such a move would be slow in coming through.

A similar delay in reaping savings may be expected from proposals from the Adam Smith Institute, the free-market think tank, to extract the state from the provision of welfare benefits. Dr Madsen Pirie, institute president, will unveil a strategy he describes as the privatisation of choice in a pamphlet to be published tomorrow.

This extends the approach adopted by Sir Norman Fowler, Conservative party chairman, in offering incentives to people who opt out of the state earnings-related pension scheme (Serps) into personal pension policies. The institute will advocate incentives for people who opt out of other parts of the welfare state, especially the fast-growing sickness and invalidity benefits.

No one would lose entitlement to the present welfare benefits if they wished to stick with them, so no manifesto pledges need be broken. The policies which qualified for the incentives would, like the pension policies which allow opting out of Serps, guarantee minimum levels of benefits. The problem is that providing incentives to opt out would almost certainly add to the cost in the short term. The Serps incentives have cost more than Pounds 6bn, which might not be recouped through the payment of lower pensions for a very long time.

These are not the only ideas on the table for the Portillo review. There is interest in the idea that employers, rather than the state, should be responsible for industrial disablement benefits. This would make little impact on the Pounds 650m these benefits will cost next year, but would mean that no more people would become eligible in future.

Ministers might also consider making individuals responsible for their own unemployment insurance, to eat into the Pounds 2bn-a-year cost of unemployment benefit. If this also included cover for mortgage payments, some of the more than Pounds 10bn of income support paid to the unemployed might be saved. Again, both measures could only be applied to people becoming unemployed in the future, reducing the immediate savings that would be possible.

Ministers may also find time to return to an earlier proposal from Mr Willetts to freeze child benefit at its present level and concentrate future increases on the under-fives, whose family income is usually affected by the mother stopping work. As with basic pension, however, there are manifesto commitments that would make it hard to touch the Pounds 6bn child benefit bill before the next election.

All this suggests that Mr Lilley and Mr Portillo will find it hard to make significant savings in the social security budget in the near future. In spite of the size of the target, ministers are boxed in by manifesto commitments and the cost of persuading taxpayers to switch from state welfare benefits to private provision.

SCOTCH whisky exports increased by 7 per cent last year to Pounds 1.96bn, despite a 10 per cent fall in UK sales, according to the Scotch Whisky Association. Overseas whisky sales have increased every year since 1983.

LAST WEEK'S leak from the Sellafield nuclear complex has been classed as '1' - the least serious type of incident - on the international scale of nuclear events. The scale, devised by the IAEA, the international nuclear watchdog, ranges from 1 to 7 - the Chernobyl blast was classed as a '7'.

THE Personal Investment Authority, the proposed self-regulatory body for retail financial services, has appointed Sir Brian Jenkins, a partner at accountants Coopers & Lybrand, to conduct an independent review of membership criteria.

The appointment follows a letter in December to the PIA's board from Mr Andrew Large, chairman of the Securities and Investments Board saying the PIA would not be approved as a self-regulatory body unless it raised standards of investor protection.

The PIA board said it had asked Sir Brian for recommendations on how to assess the 'fitness and properness' of new applicants, and on standards for members to meet and transitional arrangements to meet those standards.

ADMINISTRATIVE receivers of the Leyland Daf truck and vans group yesterday made redundant 80 of the 270 Birmingham-based staff still assigned to the Excel project, a joint venture between Renault and Daf to create a new range of vans.

The move was expected to be the first stage in winding up the Birmingham end of the project, with Renault expected soon to announce either that it plans to proceed alone or has found a new partner.

The receivers said last night that negotiations over the exact future of the Excel facilities were continuing.

Yesterday's redundancies came as employees from the Birmingham plant travelled to Dunstable, where they staged a protest outside an AC Delco components plant in an effort to persuade the General Motors subsidiary to resume supplies of wiper motors to the van plant.

COMPANIES will be subject to more equitable taxation on foreign exchange gains and losses, under long-awaited and radical draft legislation circulated yesterday by the Inland Revenue.

The changes will principally affect any UK companies that take out finance in foreign currencies and those with assets held in foreign currencies subject to significant exchange rate fluctuations.

The rules will permit them to offset losses on exchange fluctuations against tax for the first time. Previously they have been taxed on any exchange gains without being allowed to take any corresponding allowances for losses.

The Revenue said the legislation would not be retrospective, so it will not help companies which suffered heavy exchange losses after the depreciation of sterling when Britain withdrew from the exchange rate mechanism last autumn.

Tax practitioners generally welcomed the proposals as a change that would bring the UK into line with tax regimes in other countries.

Mr Derek Jenkins, a tax partner with Coopers & Lybrand, said: 'This gives British companies more of a level playing field with the rest of the world. They will be taxed on their trading transactions in foreign currencies in the same way as they are accounted for in economic terms.'

Ms Emma Lubbock of Price Waterhouse said: 'Companies will welcome the certainty of tax treatment and the removal of anomalies.' She said they would find the 40 pages of regulations and notes daunting. The Revenue said the effect of the changes would be broadly tax neutral, with any losses from the introduction of allowances being offset by new taxes on gains which were outside the remit of previous legislation.

The draft regulations have been circulated for comment before the end of March following a previous consultation document in 1991.

The legislation is unlikely to be enacted until next year at the earliest.

Practitioners said the new version reflected the comments made during consultations with organisations, including the so-called 'Group of Nine' professional bodies and corporate representatives.

Mr Jenkins said there were still concerns about the apparent exclusion from the new rules of allowances for foreign exchange losses of holding companies, and for foreign companies with a series of UK operations.

He also expressed doubts about the fairness of some of the provisions for anti-avoidance on loans between related parties and on inconsistent taxes and allowances on unrealised gains.

Ms Lubbock said that in the short term companies that had structured their operations to accomodate exisiting tax arrangements would be concerned about the implications of the new system and how it would be implemented.

She said the new arrangements would treat all exchange movements on monetary balances as part of ordinary taxable income, removing the tax distinction between long-term and short-term balances.

SOUTHERN Electric, the privately-owned utility, yesterday agreed a flexible working pattern with its 5,000 employees which it believes is the first of its kind among the main UK utilities.

Mr Henry Casley, chief executive, said the agreement 'broke the mould of 40 years of traditional nationalised industry thinking' with the help of the 'positive and constructive attitude of the staff and the trade unions'.

The five unions, in return for a 2.9 per cent pay rise and one-off lump sum payments averaging Pounds 200, have accepted the phased introduction of a six-day working week over the next 18 months and a big reduction in voluntary overtime which costs the company Pounds 10m a year.

The deal is expected to set an example for other privately-owned utilities and follows the end of national pay bargaining which covered the electricity supply industry for 40 years.

The company said the deal would increase productivity by as much as 25 per cent. It would help to produce annual pay savings of at least Pounds 15m by the mid-1990s.

Mr John Peach, area negotiator for the Electrical section of the Amalgamated Engineering and Electrical Union, said it was a 'tough' agreement and he was 'not ecstatic about it', but at a time of recession it was acceptable. The workers accepted the deal in a secret ballot by 58 per cent for to 42 per cent against.

Mr Peach stressed the company had promised job security and no compulsory redundancies.

At present workers work a 37-hour week from Monday to Friday over an 8am to 5pm working day, with voluntary overtime. Their new 37-hour week will be applied flexibly over a 12-hour working day from 8am to 8pm Monday to Friday and 8am to 5pm on Saturdays.

Premium payments will continue for work outside those hours and on Sundays.

All restrictive practices and demarcation lines are to be abolished and the number of grades cut from 29 to 11.

THE CLINTON administration is calling for a commission to be set up to produce solutions to what it calls the 'crisis' in the US airline industry.

'I think it is very clear we have a crisis,' said Mr Federico Pena, transportation secretary, as he backed calls for an airlines commission yesterday.

Mr Pena said the 15-member commission, with five members each nominated by the president and the Senate and House leaders, should complete its report in 90 days.

'It's not going to be a report that's put on a shelf somewhere,' Mr Pena said.

Mr Pena was joined by both Democratic and Republican congressmen, who said the Dollars 8bn (Pounds 5.6bn) of losses generated by the airline industry over the last three years made the situation critical.

Air transport policy came to the fore in last year's election campaign as the airlines lobbied fiercely over whether whether British Airways should be allowed to take a large stake in USAir.

United, Delta and American, the three biggest US airlines, continue to oppose the proposed tie-up and have been pressing for an inquiry. They argue that allowing BA to proceed would give it complete access to the US air transport market while they remained shut out of the British market and cost them more than Dollars 500m a year in lost revenue.

Besides problems of foreign competition, the US airlines also complain that they suffer from excessive regulation and from the unfair competition of airlines which continue to operate while under the protection of the bankruptcy code.

US SECRETARY of state, Mr Warren Christopher, yesterday sought to damp down expectations of a breakthrough in the Middle East peace process during his first visit to the region beginning tomorrow.

He said that he did not expect early agreement on a date for resumption of peace negotiations which have been suspended since the middle of December.

Instead, he wanted to get 'some sense' of how the talks were viewed by regional leaders in the hope that a date for the ninth round of talks could be fixed fairly soon after his return to Washington.

Mr Christopher will travel first to Egypt then to Jordan, Syria, Saudi Arabia, Kuwait and Israel.

Meanwhile, a spokesman for the Palestine Liberation Organisation repeated yesterday that it would not resume negotiations with Israel until the fate of nearly 400 Palestinians expelled to southern Lebanon had been satisfactorily resolved.

'We cannot participate in the peace talks even if the other Arab states are willing to,' Mr Yassir Abed-Rabbo, the PLO's information director, told Reuters.

He said Palestinian leaders in the occupied territories would tell Mr Christopher that they insisted Israel should immediately take back the Palestinian activists as demanded by UN resolution 799 before they would rejoin the peace talks.

Israel agreed a compromise formula with the US last week allowing for 100 of the Palestinians to return immediately to the occupied territories in order to head off the threat of UN sanctions and to encourage Arab delegations to draw a line under the episode. However, it is doubtful whether Syria, Jordan or Lebanon will resume negotiations without the Palestinians.

President Bill Clinton said in a statement yesterday that his decision to send Mr Christopher to the region was an indication of the priority the administration was giving to the Middle East. He warned of the dangers that this 'historic opportunity could all too easily slip away'.

CIVIL rights activist the Rev Jesse Jackson yesterday urged President Bill Clinton to end the crisis over Aids-infected Haitians quarantined at a US Navy base, Reuter reports from Washington.

Mr Jackson is on hunger strike in sympathy with 267 Haitians infected with the HIV virus that causes Aids who are quarantined at the US naval base at Guantanamo Bay, Cuba.

'Mr Clinton's policy on Haiti is a sound one - restore democracy, return (exiled Haitian President Jean Bertrand) Aristide, but delaying becomes denial,' Mr Jackson said.

Mr Jackson said he would continue his hunger strike for at least this week. 'It's a kind of leprosy island, and there they are desperate, they're in the dark and they're dying,' he said.

Mr Clinton has said he wants to lift the immigration prohibitions preventing people with Aids from entering the US, but has taken no action.

JAMAICA'S political parties have started campaigning for a general election, even though the date of the poll has not yet been announced by Mr P J Patterson, the prime minister.

The election is constitutionally due within a year, but Mr Patterson is widely expected to call an early vote in the next eight weeks.

The prime minister, who took office a year ago after the resignation of Mr Michael Manley because of poor health, is thought to be keen to get his own popular mandate. However, pressure on him to call an early election is also being determined by developments which suggest that his People's National Party has a better than even chance of being returned for a second consecutive term.

Opinion polls have shown that after a mid-term slump, the PNP's electoral support has again surpassed that of the opposition Jamaica Labour Party. Mr Patterson's decision is also being influenced by the internal problems of the JLP where Mr Edward Seaga, the party leader, has been at odds with some of his lieutenants over the past two years.

The government's political stock has also been improved by an appearance of stability in the economy over the past ten months, after depreciation of the currency and billowing inflation which followed the deregulation of the foreign exchange market and the floating of the Jamaican dollar.

Inflation for the first nine months of the current fiscal year was 17.9 per cent, against 73.1 per cent for the similar period of the last fiscal year.

Although he has not confirmed the reports that he is planning an early election in the Caribbean island of 2.3m people, Mr Patterson has indicated his intentions in moves which are expected to lift the ruling party's popular support.

The income tax rate was cut last month from 33 per cent to 25 per cent, and import duties on motor vehicles were significantly reduced. The government has also announced several road building projects costing millions of dollars, with work on many of these starting immediately.

The signs have not been lost on the JLP which, like the ruling party, has been completing its slate of candidates. So convinced is Mr Seaga that Mr Patterson will call a snap election that the opposition leader has announced that his party's campaign will start next week. This has been proceeded by well publicised walkabouts by Mr Seaga and the dissidents who had rebelled against his leadership of the JLP, including Mr Pearnel Charles, a former deputy leader.

The big issue in the campaign will be the government's handling of the economy, particularly its decision to deregulate extensively, giving greater play to market forces while divesting several state-owned economic enterprises. The JLP has raised questions about aspects of the government's economic policies, claiming that it has gone overboard in its enthusiasm for market forces, and has pointed to what it says is the absence of any significant new investments which the government said its economic policies would encourage.

The expansion of the economy which the government had expected has been constrained by the poor performance of the bauxite mining and refining industry because of a weak international market for aluminium. Official figures on the performance of the economy last year are yet to be published, but government economists have said the growth in the economy was 'moderate'.

Export agriculture - sugar and bananas - improved slightly, and the main contribution came from strong growth in tourism, now the main earner of foreign currency.

There are already indications of party political violence, which has become a part of Jamaica's election campaigns. In the last election in 1989, both parties made much of a publicly signed compact against political violence, and the campaign was less violent than expected.

Already, however, the parties have exchanged accusations over responsibility for a spate of shootings in one of the poorer sections of Kingston, the capital.

IT CANNOT be said that his country is unprepared for what President Bill Clinton has to say tonight in his televised State of the Union address to a joint session of both houses of Congress. Indeed, there has been no advance marketing of a speech quite like it for the last 12 years.

Just as President Ronald Reagan and his advisers prepared the ground for his proposals on February 19 1981 to cut taxes and government spending, so has Mr Clinton. Just about everybody who works for the president has followed a similar script, especially now that extraneous issues, such as the search for a new attorney-general and the debate over gays in the military, no longer compete for attention.

The only difference, and it may be crucial, was that Mr Reagan was offering the sort of medicine most people like to take, while Mr Clinton will try to force some less palatable prescriptions down the nation's throat.

Nevertheless, on national television on Monday night Mr Clinton told the country that to support what he would propose - to bear some of the pain today in order to enjoy a better tomorrow and to frustrate the evil designs of special interests - was nothing less than 'patriotism'. It could have been vintage Reagan, coming from the mouth of a man who looked a third of the old gunslinger's age.

The address, Saturday's radio broadcast and last week's televised town meeting and the haranguing of and exhortation to business leaders constitute the populist side of the selling of the programme. Later this week the president and his Cabinet will fan out across the country to drive home the message.

But there has been some tough selling in Washington too. Hardly a day has passed without congressional delegations having their ears bent by the president, his wife, and his staff or without members of the Cabinet pontificating on television.

Policy kites on Medicare for the elderly, social security and other taxes have been flown around Washington as if every day was windy. Some have seemed aerodynamically unsound but others have probably been sent aloft deliberately to be shot down and thus make alternatives more attractive.

Equally, to show he is capable of leading from the front and to drive home the cause of 'shared sacrifice', Mr Clinton has announced a 25 per cent cut in his White House staff and an extensive programme to eliminate government waste.

The president's strategic approach is clear. He knows he must deal with Congress, and that the Democratic majority in the legislature does not guarantee obedience. Thus he will seek to create his own political relationship with the country-at-large.

His early problems in Washington notwithstanding, there remains plenty of polling and anecdotal evidence that the country wants Mr Clinton to succeed. Having elected him into office because of the state of the economy and the size of the federal budget deficit and national debt, it is looking forward to him putting his presidential money where his candidate mouth was.

The big change since last November is in the growing evidence of economic recovery which, in turn, has led many economists and the markets to conclude that the stimulus elements in Mr Clinton's proposals ought to be toned down.

However, true to his campaign promises and partly reflecting a conviction that even in recovery the economy is still not creating enough jobs, there is likely to be about Dollars 30bn (Pounds 21.1bn) in additional public works spending and investment tax credits. This will be offset by generally higher taxes on incomes and on commodities such as energy, and by additional cuts in government spending.

This approach lends itself to easy criticism from Republicans. Mr Robert Dole, their leader in the Senate, has already dismissed the Clinton package as yet another variation on traditional 'tax and spend' Democratic policies. But the Republican ability to frustrate the president may be more apparent than real, if for no other reason than that the party cannot be seen as perpetuating Washington 'gridlock'.

Other special interests in the Washington power structure may work their wills more deviously, but more effectively, on integral parts of the new proposals as the legislative battle unfolds.

Pre-emptively, Mr Clinton warned on Monday night that 'within minutes of the time I conclude my address to Congress the special interests will be out in force. . . many have already lined the corridors of Congress with high-priced lobbyists.'

What he did not say, naturally enough, is that not every lobbyist is a chartered member of the 'Gucci gulch' club representing only corporate and trade interests. Many work for those constituencies - the poor, the elderly, and the family farmers - which voted for Mr Clinton but which could suffer from any serious budgetary cuts.

Having raised the rhetorical stakes so high and having painted apocalyptic visions of the future if problems are ducked, it is also up to Mr Clinton to deliver proposals that not only can be sold but are credible and tough.

The suspicion still exists, mostly in Washington, that this is a president whose analytical abilities are greater than his determination to proceed with the unpopular. Tonight he is going to tell the middle classes, to whom he promised lower taxes last year, that they will have to pay more. Making it stick will not be popular.

Twelve years ago Mr Reagan made the reverse pitch and in the end won much of what he wanted, partly because the consensus for the change he advocated was there and partly because the opposition faded into insignificance after the president was wounded in an assassination attempt.

There are differences today - in the relative performance of the economy and in the lack of real national consensus about what should be done. Still, on Monday night Mr Clinton again sounded like Mr Reagan when he said his approach was 'just common sense'. But then he added: 'In the 26 days I've been your president I've already learned that here in Washington common sense just isn't too common.'

ANY proposal to have President Bill Clinton appear before the US House of Representatives to answer questions in the British parliamentary tradition would require further study, US congressional leaders said yesterday, Reuters reports from Washington.

House Speaker Thomas Foley told reporters there would be no invitation for such an appearance this week following Mr Clinton's address to a joint session of Congress on the economy tonight.

The idea was suggested by Mr Richard Gephardt of Missouri, House majority leader, who said Mr Clinton should visit the House and answer questions about his economic programme.

But Mr Foley said the unprecedented step was an idea for the future that 'requires further study and analysis'. He said Mr Gephardt concurred with this position.

The White House has said Mr Clinton was considering the idea.

CIVIL rights activist the Rev Jesse Jackson yesterday urged President Bill Clinton to end the crisis over Aids-infected Haitians quarantined at a US Navy base, Reuter reports from Washington.

Mr Jackson is on hunger strike in sympathy with 267 Haitians infected with the HIV virus that causes Aids who are quarantined at the US naval base at Guantanamo Bay, Cuba.

'Mr Clinton's policy on Haiti is a sound one - restore democracy, return (exiled Haitian President Jean Bertrand) Aristide, but delaying becomes denial,' Mr Jackson said.

'There must be a sense of urgency about restoring democracy because if you restore democracy quickly then you end the crisis around Guantanamo Bay and the embargo (against Haiti) and the blockade, as well as the mass exodus' from Haiti, he said on US television.

Mr Jackson said he would continue his hunger strike for at least this week and might try to enlist more hunger strikers unless there is action on the Haitian situation.

'It's a kind of leprosy island, and there they are desperate, they're in the dark and they're dying,' he said.

He called on Clinton to address the Haiti situation in his speech tonight before a joint session of Congress.

Mr Clinton has said he wants to lift the immigration prohibitions preventing people with Aids from entering the US, but has taken no action.

Overall, Clinton has in effect adopted former President George Bush's policy on Haiti to return fleeing Haitians to their island homeland but he has sent emissaries there to try to restore democracy.

RUSSIA'S mounting defaults on its US agricultural loans are promising to add to the cost of US farm subsidy programmes and make them a more visible target for the Clinton administration's effort to cut the budget deficit.

The states of the former Soviet Union, including Russia, have piled up defaults of Dollars 305.5m (Pounds 215m) on US-government guaranteed grain loans, having stopped paying interest in late November, the Department of Agriculture said yesterday,

With little sign of movement in multilateral debt negotiations, the payment gap could widen to Dollars 4.2bn, the total in short-term grain and foodstuffs loans the US Department of Agriculture has extend to CIS countries.

To date, most banks writing the guaranteed loans have been willing to carry the defaults on their books, hoping debt restructuring would bring full payment. Only one, Banque Indosuez, has filed claims with the department to recover lost interest payments on Russian grain loans.

The amount, Dollars 354,000, is tiny compared to outstanding defaults and, because not all of the interest was guaranteed, the department has paid out only Dollars 187,000 to the bank.

However, with US farm subsidy payments promising to top Dollars 17.1bn in fiscal 1993, double the 1992 outlay and the highest seen by Washington in several years, Russia's loan problems will only add to the farm-support debate. Lawmakers from urban areas argue that farm subsidies have grown as farm population has fallen, propping up the income of a rural elite.

JAPAN'S trade surplus rose by 39.4 per cent to Dollars 5.3bn (Pounds 3.7bn) last month, the government announced yesterday, just days after the new US administration called upon Japan to boost domestic demand to increase imports.

The sharp increase in the surplus, which was well above expectations, was mainly due to a 6.4 per cent fall in the value of imports which outweighed a 0.8 per cent rise in the value of exports.

The Japanese government's sensitivity over the figures was underlined by a highly political delay in their publication. They had been originally scheduled for publication last Friday, when Mr Michio Watanabe, foreign minister, met senior officials of the Clinton administration in Washington.

The finance ministry blamed the delay on a discrepancy between computer figures from the customs department and findings of the ministry's survey of trading companies.

The rise in the surplus will raise pressure on the ruling Liberal Democratic party to augment the 1993 budget with an emergency package to stimulate the economy.

The sluggish state of both consumption and investment was underlined by figures showing a 6.5 per cent fall in Tokyo department store sales last month compared with January 1992, a 38 per cent drop in industrial machinery orders and a 35 per ent fall in orders received by the top eight manufacturers of machine tools.

IT ARCS up over the elevated highway that passes along Yokohama's waterfront - 70 stories of pristine post-modernist architecture. The Landmark Tower, the tallest building in Japan, is set amid 70 hectares of reclaimed land and disused docks, criss-crossed by empty new roads and abandoned railway tracks.

The Tower was conceived in the late 1970s, financed during the bubble economy of the late 1980s and it will be finished just in time to join the worst glut of office space Japan has ever seen. When it was started in the late 1980s, the space was three times oversubscribed. With the opening due this summer only 50 per cent of the offices has been rented out.

The glut is increasing every day as long-planned buildings are completed in Tokyo, Osaka and Nagoya, the main cities, and threatens to depress rents and commercial land prices for years to come. The property market will be haunted by an oversupply of office space for at least five years.

The consequences could be devastating for property developers, many of whom have been driven to the verge of bankruptcy by the worst slump in Japan's residential land prices since 1945.

The property companies' troubles means bad debts are likely to continue to flow into Japan's severely weakened banks. The bank's weakness could in turn limit their ability to lend to finance the economy's recovery.

There is some good news for the banks. The residential real estate market is reviving. At the peak in 1987, residential land prices in the three main cities of Tokyo, Osaka and Nagoya rose by 33 per cent, followed by a further 22 per cent rise the following year.

Last year they have fallen by about 15 per cent after a 4.2 per fall last year. In some central Tokyo areas such as Setagaya and Yokohama the fall has been about 59 per cent.

Lower prices have brought houses within reach of first-time buyers with average earnings, prompting a sharp increase in construction work on owner occupied homes, up about 11 per cent in the first nine months of last year year.

Sales of the cheapest condominiums worth Y40m (Pounds 234,000) or less are higher than they were in either 1990 or 1991, whereas sales of apartments which are more expensive than this are down. Tokyo's stock of unsold condominiums is six times greater than during the height of the boom in 1987. The Nomura Research Institute estimates this oversupply has reduced prices to a point where there could be a mini-boom in sales of cheaper apartments.

Yet the grounds for optimism are limited. Sales of the most expensive apartments, which were built by speculators, are still sluggish. This unsold stock will hang over the market for years.

Prices outside the main cities are only just starting to fall. The increase in sales of cheaper housing may not help the banks as their vulnerability is to the speculative real estate lending which went into luxury condominiums. Sales in these expensive apartments are likely to remain sluggish for at least a year.

Mr Jun Konomi, NRI's real estate analyst, expects residential land prices will be depressed for at least three years after falling by a further 10 per cent in the next year.

However, the banks' relief that an end to the fall in residential land prices may be in sight will be short lived. Prices in the commercial sector are about to plunge as the centre of Tokyo develops its first ever glut of unsold office space.

The figures are alarming. In the last two years projects amounting to 4,679 hectares of office space were started in Japan, with about 2,300 hectares in Tokyo and Osaka.

Over the next four years about 5.4m square metres of office space is planned within Tokyo alone.

This extra space will be hitting the market just as the main client - the financial services industry - is cutting back on staff to reduce costs.

This oversupply is yet to be reflected in official figures for office rents and commercial land prices because they are based on publicly quoted prices which bear little relation to the deals which tenants and owners do behind closed doors.

Mr Yasu Ohno, Sumitomo Trust's Bank's long-serving real estate analyst, believes unofficial rents are often 40 per cent below published prices.

Mr Konomi at NRI estimates that these lower rents mean commercial land prices in most of central Tokyo should fall by between 30 per cent and 40 per cent after an initial fall of about 7 per cent this year.

Such a slump in the commercial property market can only be extremely worrying for the banks. The 21 top banks reported a 54 per cent increase in non-performing loans to Y12,300bn in the six months to the end of September. That largely reflects the deterioration of the residential property market. The looming slump in the commercial market is certain to sharply increase the banks burden of non-performing and rescheduled loans.

Most of the excess Tokyo office development is within spitting distance of the city's Otemachi financial centre district. It can be little consolation to the banks' senior executives that they will be able to watch one of the reasons for their mounting bad loans build up each day before their very eyes.

JAPANESE manufacturers are turning their backs on one of the key ingredients in their business philosophy of the last decade - that their international competitiveness depended upon producing ever wider ranges of products at an ever quickening pace.

Surveys by the Ministry of International Trade and Industry show that, in the last year, Japanese makers of electrical goods and home appliances have begun to prune their product ranges and extend model life cycles in an effort to cut costs.

The moves suggest that the pace of competition US and European companies will face from Japanese manufacturers is lessening.

Most Japanese companies, hit by a combination of falling demand and rising labour and investment costs, are facing their third year of falling profits . Electrical retailers are offering huge discounts on electrical goods.

The change in strategy in part reflects official guidance. The Ministry of Trade and Industry has been urging manufacturers to trim their often bewildering array of products to cut costs.

The surveys found that the 10 leading manufacturers of televisions expect to produce 192 different types of television this March, about 10 per cent fewer than in March last year.

There will be even sharper cuts in product ranges of video recorders, washing machines and vacuum cleaners.

Nine companies which make video recorders told Miti the number of product types would be cut by 25 to 72 in the year to this March. The range of washing machines made by eight leading companies will be reduced by about a fifth to 101, while the number of different types of vacuum cleaners will be cut by almost a quarter to 79.

Much more modest cuts are planned for the range of video cameras, down 3 to 20 and refrigerators, down 9 to 138.

The only consumer electronics good to have its product range expanded is the microwave oven.

The surveys found that although the turnover of products is still rapid, the product life cycle is slowly being extended to cut engineering and development costs.

The average model life cycle for televisions has been extended by two months to 14 months, while the video recorder life cycle is now about 12 months, an increase of two to three months.

BRITAIN and China are expected to announce this week that they will hold talks on Hong Kong's future political development.

At a meeting of Governor Chris Patten's Executive Council yesterday, his top advisory body agreed to defer temporarily the introduction of a bill in the Legislative Council (Legco), the colony's law-making institution. The bill would give effect to Mr Patten's plans for broadening the democratic franchise in elections due next year and in 1995.

It is unlikely, however, that the talks herald a change in China's opposition to Mr Patten's plans. Beijing's overture was seen in Hong Kong as an attempt by China to slow down the process of Legco ratification.

The negotiations about talks have been conducted in Beijing by Sir Robin McLaren, Britain's ambassador, and senior Chinese government officials. The two sides are still working out the details.

It was unclear last night what the scope and duration of the talks would be. Barring last-minute hitches, they are expected to be announced by Friday. Mr Patten's legislation is not expected to be discussed.

Beijing's decision to request talks has placed Mr Patten and the British government in a difficult position. Mr Patten, who has called for dialogue with China since he announced his proposals last October, could face a strong backlash in Hong Kong if he refused to talk.

However, few in the Hong Kong administration believe that China's 11th-hour agreement to talks is anything but a tactical manoeuvre to prevent Mr Patten's legislation from being introduced into Legco.

The governor has been receiving conflicting advice as to whether he should introduce legislation while talks are in progress or wait until they finish.

Britain's Foreign Office was strongly of the view that presenting the bill to Legco while talks were under way would be unacceptable to China.

Deferral of the bill would be likely to draw stiff criticism from Hong Kong's pro-democracy politicians. Mr Martin Lee, leader of the United Democrats, said that while he welcomed the prospect of talks, he saw no reason why Mr Patten should delay the bill's introduction into Legco.

However, deferral of the legislation would probably be welcomed by Hong Kong's conservative politicians, who have been advocating such a policy.

TWO key meetings this week could determine the fate of the recent power-sharing deal between the South African government and the African National Congress.

The ANC's policy-making national executive committee is meeting to decide whether to ratify the deal, and government is due to open talks with the mainly Zulu Inkatha Freedom party today to try to sell power-sharing to the country's third largest political group.

Both meetings could delay installation of a multiracial interim government, or prevent it altogether.

ANC negotiators were confident that they could persuade the organisation's national executive to formalise an outline agreement reached with the ruling National party last week, calling for power-sharing until the end of the century. The national executive, which began its meeting yesterday, is due to take its decision by tomorrow night. The executive is also expected to consider calling for the lifting of sanctions against South Africa.

Several of the ANC's regional leaders, including the firebrand Natal leader, Mr Harry Gwala, are known to oppose power-sharing, and many other executive committee members are believed to feel that a five year 'sunset clause' before majority rule is too long. Last year the national executive broadly endorsed the principle of power-sharing - though not for the long period now envisaged - but only after a bitter fight between ANC radicals and moderates.

Later today the same power-sharing deal will be debated at a meeting between government and the Inkatha Freedom party of Chief Mangosuthu Buthelezi, who has already sharply condemned the agreement. Government negotiators will try to persuade Inkatha that the power-sharing deal would meet its demand for devolution of power to regions.

Economic reforms, Page 16

THE KUWAIT Investment Office, the external investment arm of the Kuwaiti government, was dealt a serious blow yesterday by a Spanish judge who turned down a KIO appeal against a decision not to open a criminal investigation into the actions of former KIO managers in Spain.

The KIO's new management has accused its predecessors and some Spanish associates of losing more than Dollars 5bn (Pounds 3.5bn) in Spain since 1986 and claims they stole Dollars 1bn through Grupo Torras, the KIO holding company in Spain.

Last month Spain's senior judge in economic matters, Mr Miguel Moreiras, refused to allow the KIO to bring criminal charges against Sheikh Fahad al-Sabah, former chairman of the KIO, Mr Fouad Jaffar, former KIO general manager, Mr Javier de la Rosa, who managed the KIO's investments in Spain and five Spanish associates. Judge Moreiras said then the KIO suit contained 'no evidence' of criminal wrongdoing.

Judge Moreiras said yesterday the KIO's lawyers had no new evidence and had 'not known how to, or not been able to, focus their accusations into any known crime'. The high court in Madrid has to approve Judge Moreiras' two rulings in the KIO case so far but it would be a judicial sensation if they were overturned.

The rejection of the appeal will probably encourage the KIO's new management to begin judicial proceedings elsewhere, possibly in London.

Until now, the campaign against the former managers has resulted only in the collapse of the Spanish businesses. In the process, however, Kuwait's finances have been opened to close international scrutiny for the first time and, if the new management is unable to prove its allegations of fraud and conspiracy to steal, some believe Kuwait's credibility in world financial markets will suffer.

Mr Javier de la Rosa, the former manager of KIO investments in Spain, said yesterday he intended to sue KIO officials for Dollars 150m for defamation.

THE Chinese government has complained to Japan over the arrival in Tokyo yesterday of Chien Fu, the first Taiwanese foreign minister to visit in two decades.

Mr Chien has arrived on a tourist visa for a four-day 'private' visit, but Beijing has taken his presence as an unwelcome sign of a growing Taiwanese diplomatic profile.

China is concerned that several countries have recently appointed senior diplomats to head unofficial missions in Taipei, the Taiwanese capital, at the same time as the island's independence movement is gathering momentum.

While Mr Chien is not scheduled formally to meet Japanese government officials, he is likely to meet senior officials of the ruling Liberal Democratic party at a parliamentarians' function this evening.

A Japanese government official said China's foreign ministry lodged a protest with the embassy in Beijing, noting that the issuing of any visa to Mr Chien is a de facto recognition of his role as foreign minister.

The Nationalist Chinese government in Taiwan still claims to be the legitimate Chinese government, which makes Mr Chien the 'Chinese foreign minister'.

However, Beijing regards Taiwan as a rebel province and opposes any foreign recognition of the island's government.

'We knew that Mr Chien's visit was a sensitive matter for China, but we have explained to them that this is a private matter and that he is here as a tourist. We are not surprised that they have complained,' a foreign ministry official said last night.

The visit by Mr Chien is the first by a Taiwanese foreign minister since 1972, when Japan recognised the government in Beijing and severed links with Taipei.

Instead of an embassy, Taiwan maintains an 'Economic and Cultural Representative Office' in Tokyo.

JAPAN'S urban farmers have fuelled a sharp rise in house building over the past year by turning their hands to property development, writes Charles Leadbeater.

These would-be-property developers are the main force behind last year's 17 per cent increase in apartment building, which is one of the brightest spots in an otherwise depressed economy.

Large swathes of Japan's big cities are still reserved for agriculture, mainly rice paddies and fruit trees. About 13 per cent of Tokyo's land is classified as farmland, worked by about 300,000 families. It is estimated that about 500,000 homes could be built upon this land.

A surge in apartment building in cities over the past year is largely due to urban farmers turning over their land to housing to take advantage of the tax changes of September 1991. These changes affected the capital gains tax on land sold for residential development and lowered the tax exemptions for farmers who promised to farm their land for at least 10 years.

As the farmers want to hold on to their land holdings they have built apartments for rent rather than condominiums for sale. The farmers have been queueing to borrow money from the official Housing Loan Corporation to finance their development plans. At their peak last year loans from the corporation were rising at a rate of about 600 per cent annually.

A report by Credit Suisse securities says there is no sign of land prices bottoming out yet and an additional fall of between 10 per cent and 30 per cent is still possible in big cities.

AUSTRALIA'S conservative opposition took a commanding lead over the ruling Labor party during the first week of campaigning for the federal election on March 13.

According to a Newspoll opinion poll published yesterday in The Australian newspaper, support for the conservative Liberal/National party coalition increased during the week by 3 percentage points to 48 per cent.

Support for the government fell by half a percentage point to 39.5 per cent, giving the coalition a lead of 8.5 points. A swing of 0.9 per cent is needed for a conservative win.

Newspoll said the results suggested the conservative parties would win by 53.5 per cent to 46.5 per cent after the distribution of preferences under Australia's preferential voting system.

This would give the conservatives a majority of around 30 seats in the 147-seat House of Representatives, and make the coalition the largest grouping in the Senate.

Worryingly for the government, 50 per cent of voters said they expected the coalition to win, against 29 per cent who expected a Labor victory. Only 55 per cent of committed Labor supporters expected the government to win.

The poll indicates a less emphatic conservative lead than a poll last week in The Age newspaper in Melbourne, which estimated the coalition lead at 12 points. However, Newspoll has a reputation as an accurate poll.

TWO key meetings this week could determine the fate of the recent power-sharing deal between the South African government and the African National Congress.

The ANC's policy-making national executive committee is meeting to decide whether to ratify the deal, and government is due to open talks with the mainly Zulu Inkatha Freedom party today to try to sell power-sharing to the country's third largest political group.

Both meetings are likely to prove difficult, and could delay installation of a multiracial interim government, or prevent it altogether.

ANC negotiators were confident that they could persuade the organisation's national executive to formalise an outline agreement reached with the ruling National party last week, calling for power-sharing until the end of the century. The national executive, which began its meeting yesterday, is due to take its decision by tomorrow night. The executive is also expected to consider calling for the lifting of sanctions against South Africa.

Several of the ANC's regional leaders, including the firebrand Natal leader, Mr Harry Gwala, are known to oppose power-sharing, and many other executive committee members are believed to feel that a five year 'sunset clause' before majority rule is too long. Last year the national executive broadly endorsed the principle of power-sharing - though not for the long period now envisaged - but this was accomplished only after a bitter fight between ANC radicals and moderates.

Later today the same power-sharing deal will be debated at a meeting between government and the Inkatha Freedom party of Chief Mangosuthu Buthelezi, who has already sharply condemned the agreement. The two sides are due to meet for three days at a secret venue in northern Zululand. Government negotiators will try to persuade Inkatha that the power-sharing deal would meet its demand for devolution of power to regions. Inkatha, which has a strong regional base in Natal but little support elsewhere, insists that a new constitution provide for strong regional governments.

Natal has been the scene of some of the worst violence between ANC and IFP supporters.

Nearly 8,000 people have died since President FW de Klerk started to dismantle apartheid three years ago.

Economic reforms, Page 16

THE KUWAIT Investment Office, the external investment arm of the Kuwaiti government, was dealt a serious blow yesterday by a Spanish judge who turned down a KIO appeal against a decision not to open a criminal investigation into the actions of former KIO managers in Spain.

The KIO's new management has accused its predecessors and some Spanish associates of losing more than Dollars 5bn in Spain since 1986 and claims they stole Dollars 1bn through Grupo Torras, the KIO holding company in Spain.

Last month Spain's senior judge in economic matters, Mr Miguel Moreiras, refused to allow the KIO to bring criminal charges against Sheikh Fahad al-Sabah, former chairman of the KIO, Mr Fouad Jaffar, former KIO general manager, Mr Javier de la Rosa, who managed the KIO's investments in Spain and five Spanish associates. Judge Moreiras said then the KIO suit contained 'no evidence' of criminal wrongdoing.

Judge Moreiras said yesterday the KIO's lawyers had no new evidence and had 'not known how to, or not been able to, focus their accusations into any known crime'. The high court in Madrid has to approve Judge Moreiras' two rulings in the KIO case so far but it would be a judicial sensation if they were overturned.

The rejection of the appeal will probably encourage the KIO's new management to begin judicial proceedings elsewhere, possibly in London. These managers have been running the KIO for about nine months now, most of which have been taken up with denouncing the KIO's Spanish investment drive.

Until now though, the campaign against the former managers has resulted only in the collapse of the Spanish businesses. In the process, however, Kuwait's finances have been opened to close international scrutiny for the first time and, if the new management is unable to prove its allegations of fraud and conspiracy to steal, some observers believe Kuwait's credibility in world financial markets will suffer.

Judge Moreiras obliquely criticised the KIO and its lawyers for trying to drum up publicity in the Spanish media. 'There is no legal way of taking into account the spectacular nature (of the accusations),' he said, 'and they are viewed independently of the notoriety they have achieved.'

The state of the KIO's investments in Spain has become the focus of a heated debate in Kuwait, with the new parliament demanding greater controls over finances. A parliamentary delegation is investigating the scandal. Two Kuwaiti members of parliament retained their seats with increased majorities in a second round of polling held because of suspected voting irregularities in the October general election, Reuter reports from Kuwait.

The constitutional court ordered the rerun after claims that troops and police, barred from voting by the constitution, took part in the poll.

AUSTRALIA'S television moguls are enmeshed in a soap opera more bizarre than anything on the small screen. The plot involves politicians, big business and struggling entrepreneurs. And the final episode, expected shortly, could seriously embarrass the government.

The story began in November, when parliament approved the federal Labor government's plans for the introduction of subscription television services. It provided for two 4-channel commercial licences, and a 2-channel licence for the state-run Australian Broadcasting Corporation (ABC).

As an afterthought, the act also allowed the use of fibre optic cable or multi-point distribution systems by microwave (MDS) technology. 'There will be no restriction on the use of other technologies to deliver pay TV, such as cable or microwave,' Senator Bob Collins, the communications minister, told parliament. It is not clear whether Mr Collins realised that MDS could compete with satellite services.

But the potential was spotted by some small media entrepreneurs, including Mr Steve Cosser, a former managing director of the Channel Ten commercial network, and Mr Kerry Stokes, a Western Australian publisher. By the end of January, Australis Media, Mr Cosser's private company, had acquired 24 microwave channels in Sydney and Melbourne, and was preparing to bid for a further six in each of Australia's six state capitals.

Australis was also negotiating a partnership with Time Warner, the US publishing group, and Australian Provincial Newspapers (APN), an offshoot of Dr Tony O'Reilly's Irish Independent media group.

Mr Cosser's plan was to set up a national subscription service, using microwave channels for local distribution and a satellite to carry the signal between cities. But less than 24 hours before the deadline for the remaining MDS channels, Mr Collins announced that the auction had been abandoned. He also instructed the Australian Broadcasting Authority (ABA), the independent regulatory body, not to issue licences to owners of microwave channels.

Mr Collins said the ban was necessary to prevent 'inferior' MDS technology undermining the prospects for satellite transmission. He also claimed to have acted in response to pressure from the ABC. But a leaked letter from Mr David Hill, ABC chairman, shows that the government broadcaster told Mr Collins only three days earlier that it wanted to compete with Mr Cosser in MDS broadcasting.

Nor does the claim that MDS is 'inferior' stand up to examination. The technology is in use in more than 20 countries, including in more than 17m homes in the US.

The government's action has attracted almost universal opprobrium. But Mr Cosser has an explanation of why Mr Collins changed tack.

He claims that the government was asked to block MDS by Consolidated Press Holdings (ConsPress), the media group owned by Mr Kerry Packer, Australia's richest man. Mr Packer, who dominates magazine publishing and owns a controlling share in Channel Nine, the top-rating commercial television network, is believed to be planning to bid for one of the two commercial satellite broadcasting licences.

'Kerry made us an offer, basically to get out of the road or get crushed. We rejected that offer,' says Mr Cosser. 'I believe that Kerry Packer's people and other large media players made representations to the government in the dying days of the tender process, some more forceful than others. But I don't know what was said, threatened or offered that led to such a dramatic policy reversal.'

Mr Packer, who rarely speaks even to his own media, has not commented on Mr Cosser's claims. However, it is clear that both Channel Nine and the forthcoming satellite services would have faced serious competition if MDS broadcasting had not been blocked.

In addition, the broadcasting act requires satellite broadcasters to use newly developed digital compression technology, which may not be available until 1996, giving MDS operators two or three years to build market loyalty.

Whatever the reasons for his decision, Mr Collins has succeeded in reviving long-standing criticism of Labor's close relationship with media proprietors such as Mr Packer and Mr Rupert Murdoch, chairman of News Corporation, which controls 70 per cent of daily newspaper circulation.

The decision has also hurt Australia's reputation among foreign investors, already wary following the last minute blocking of a proposed gold mine at Coronation Hill, in the Northern Territory, and the government's frequent policy changes over the sale of the Fairfax newspaper group, eventually acquired by Mr Conrad Black's UK Daily Telegraph group.

However, the biggest blow to the government may be delivered in the courts, where it faces litigation on two fronts. In Western Australia, Mr Stokes won an interim injunction against the government's decision to stop the sale of MDS channels. The federal court will decide shortly whether the government has the power to stop the auction.

In Sydney, Mr Cosser claims Mr Collins exceeded his authority in directing the ABA not to award MBS licences, and is threatening to sue for damages if the authority refuses his application. The wording of the broadcasting act suggests that he may win if the case goes to court.

Australis has also lodged a complaint with the Trade Practices Commission, the competition watchdog, alleging that the commercial television networks colluded to prevent the company entering the subscription television market. Such collusion would be illegal under Australian competition legislation.

AN ENGINEER at Infosys, an Indian software group, presses a computer key in Bangalore, south India, and his machine connects directly with the computer centre of the Holiday Inn hotel chain 12,000 miles away in the US.

Infosys is supplying Holiday Inn with hotel reservation software.

Its other customers include General Electric of the US and Reebok, the British-owned sports shoe maker, which have bought sales management programs, and Digital Electric, the US computer company, which ordered software to control a fleet of 15,000 sales vehicles.

Thanks to satellite technology, engineers in Bangalore can communicate almost instantaneously with counterparts in the US, Europe and Japan.

Software exports are pouring out of India in ever-increasing volumes, as more multinationals take advantage of the high-skill low-cost engineers who are one of India's biggest competitive advantages.

'India is already a great influence on the world software market,' says Mr Michael Klein, head of the Indian operations of IBM, the US computer group. 'They are getting better all the time. If they continue to get better they will become unbeatable for the next 10 or 20 years.'

India must overcome many hurdles, if it is to fulfil Mr Klein's prediction.

Its phone and transport networks are inadequate and red tape still hinders business activities despite economic liberalisation in recent years.

Violence after destruction of the Ayodhya mosque has also disturbed some foreign companies' plans.

Moreover, there is tough competition from other low-cost software exporters, including east Asian and east European countries.

But many foreign high-tech companies believe India's engineers are hard to beat because they speak English, the language of international high-tech trade, and are trained at some of the best universities in the developing world.

According to a World Bank-funded report, average monthly wages for programmers in India are just Dollars 225 (Pounds 158) compared with Dollars 600 in Singapore and Dollars 2,500 in the US.

India is starting from a low base, with less than 1 per cent of world software output.

Indian software engineers estimate they have a sizeable 12 per cent share of developing countries' software exports. Exports are expected to reach Dollars 225m in the year to June 1993 and are growing at an annual rate of 30-40 per cent.

Moreover, success in software is beginning to encourage improvements in the quality of domestically produced hardware, potentially also a significant export.

Foreign companies have held back from investing in India, not least because of the painful experience of IBM, which quit the country in the mid-1970s in a row with the government over ownership of its Indian subsidiary.

But the economic liberalisation that started in the mid-1980s and that gathered pace when Mr P V Narasimha Rao, the prime minister, launched reforms in 1991, has persuaded multinational companies to reconsider India.

Texas Instruments, the microchip maker, which opened a software centre in 1986, was one of the first to invest. Motorola, Digital Equipment and Intel have followed.

IBM, because of its past experience, has been one of the later arrivals. It signed a joint venture with Tata, the industrial conglomerate, last year. This month it opened an office block in Bangalore and launched three ranges of computer on to the Indian market.

Mr Richard Gall, managing director of the Indian subsidiary of Texas Instruments, says: 'India is now a critical part of our design capability.'

Indian-controlled exporters are also winning increasingly complex orders. Tata Consultancy Services, a Tata group software house and the biggest exporter, is capable of 'studying' client businesses and 'helping' to design 'one-off' systems. So is Infosys, which is opening marketing offices this year in Boston, San Francisco and Paris and next year in Dallas and Chicago.

Indian companies believe they are more likely to succeed in producing customised packages than in competing in the market for packaged software, which requires far more marketing muscle in developed countries than they can afford.

Foreign buyers are far more cautious about purchasing Indian hardware.

The partnerships struck so far between multinationals and Indian computer companies generally involve the export of software.

In return, the foreign group supplies the Indian partner with brand-name computers and/or kits for sale in India but not for export to other countries. This helps foreign companies enter the Indian market and Indian groups to sell top-quality machines.

However, the domestic industry is still protected by high import tariffs, which restrict sales growth by keeping prices high - above Dollars 2,000 for a basic personal computer.

Only 110,000 computers were sold in India last year, split among over 20 manufacturers, giving little scope for large-scale cost-efficient production.

Mr Dick Heimlich, corporate vice president of Motorola, the American electronics group, says: 'The problem isn't quality standards but costs, which can be three times higher than in the US.'

Given enough support and a big export order, some Indian hardware suppliers may make the grade.

Dell Computers of the US, the personal computer maker, has placed an order for the assembly of printed circuit boards with PCL, a leading Indian manufacturer, for no less than Dollars 50m. 'That's a breakthrough. It means they can reach critical mass,' says Mr Gall of Texas Instruments.

But others have yet to follow Dell. Mr Klein at IBM believes it will take time for Indian companies to meet the company's quality standards. He plans to start by purchasing low-technology items such as cables and transformers.

For the next few years at least, fortune is likely to favour software producers. This should work to India's advantage, since software sales are expected to grow faster than hardware revenues in the global computer industry.

Moreover, some engineers believe that innovations in software will increasingly lead hardware development in the future. As Motorola's Mr Heimlich says: 'The industry is evolving in India's favour.'

----------------------------------------------------------------------- INDIAN SOFTWARE EXPORTS IN Dollars m (years to June) ----------------------------------------------------------------------- 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93* ----------------------------------------------------------------------- 39 52 67 100 128 179 225* ----------------------------------------------------------------------- *1992-93 figure projected. ----------------------------------------------------------------------- Source (Indian) National Association of Software and Service Companies. -----------------------------------------------------------------------

KELSEY-HAYES, the motor components subsidiary of Varity of the US, is to invest up to Dollars 40m in a greenfield plant in Europe with an eventual annual capacity of 1m vehicle anti-skid braking systems.

Mr John Utley, Kelsey-Hayes' vice-chairman, indicated in London yesterday that Spain, Portugal and the UK had been ruled out as locations for the new systems plant. Last year, Kelsey-Hayes established a European research, development and sales headquarters in Frankfurt. However, Germany's high cost base makes it almost certain that the new plant - a high-technology centre expected to employ only about 100 people - will be based in France or one of the Benelux countries. The location is expected to be announced within two weeks.

Mr Utley said the group had signed two contracts worth Dollars 110m a year to supply European car makers with the anti-skid systems, starting late next year.

The move comes as Hayes Wheels International, the group's vehicle wheel manufacturing operation recently floated on the New York Stock Exchange - in which Kelsey-Hayes retains a 46 per cent stake - prepares to sign this week an agreement to create a joint venture company with Czech steel maker Ostrava to supply car wheels to both east and west European car makers.

DAVY INTERNATIONAL, part of the Trafalgar House engineering-to-hotels group, has won the UK's largest export order to South Africa in recent years with a Pounds 200m contract to supply a complete stainless steel rolling mill.

The order, which will be announced today, is a big boost for Britain's heavy engineering sector. Most of the equipment will be bought in the UK from suppliers including GEC in Rugby and Bronx Engineering in the West Midlands.

The contract is for the R3.5bn (Pounds 790m) expansion of the Columbus stainless steel plant at Middelburg, which will quadruple South Africa's stainless steel capacity to 500,000 tonnes a year from 1995, and turn it into the world's sixth largest producer.

The order was won against strong international competition. Mr Fred Boshoff, chief executive of Columbus, said there had been 'tremendous interest' in the tenders for the project, with bids from companies in the UK, France, Germany, Italy, Austria and Japan.

Some of the bids had been very keen, indicating the lean state of the international engineering industry.

Columbus, for which Davy built the original plant in 1980-1982, is a joint venture between subsidiaries of Anglo American and Gencor, South Africa's two mining giants.

The award of the complete hot mill and cold mill facility gives Davy the responsibility for the design, supply, installation and commissioning of equipment which will make strip, coil and plate from slabs produced in the new Columbus melt shop.

This will be supplied by Voest Alpine, the Austrian engineering group, while Mannesmann Demag of Germany will supply cranes for the project.

In response to local criticism that major contracts were going offshore, Mr Boshoff said in order to compete internationally state-of-the-art plant was required and nobody in South Africa had the capability to supply the integrated steel plant. He noted that Davy and others would be buying many of their parts in South Africa.

The contract is Davy's biggest since its takeover in 1991 by Trafalgar House, and comes a month after Davy won a Pounds 100m turnkey contract to build a new coking oven for Bethlehem Steel in the US.

Financing for the rolling mill contract was arranged by Kleinwort Benson. The UK merchant bank is raising 15 per cent of the money privately and the rest is being arranged through the UK's Export Credit Guarantee Department.

AN IMPORTANT US private sector advisory panel has called on the Clinton administration to negotiate a series of specific trade targets with Japan, aimed at boosting US manufactured exports.

Failure to achieve these 'temporary quantitative indicators' within an agreed time span would result either in further negotiated measures or US sanctions, says the Advisory Committee for Trade Policy and Negotiations in a report to the president.

With the trade community awaiting a cogent Clinton trade policy, the report is receiving particular attention. It supports only 'restrained use' of trade sanctions, but says they must be used if trade pacts are violated.

Although US manufactured exports to Japan have increased at an annual rate of 13.1 per cent since 1989, the rate of increase has slowed dramatically. The bilateral trade imbalance has become 'a lightning rod politically' in the US and it may well become a political problem worldwide for Japan, the report says.

At the start of the Bush administration, the committee recommended a programme including fiscal and monetary changes. This eventually became the Structural Impediments Initiative, under which both countries agreed to take macroeconomic steps to improve the trade balance.

The panel's latest report says Japan has done well with its Dollars 85bn supplemental budget proposal to stimulate domestic demand. But it urges it to take further steps to reduce Japanese savings, increase consumption and discourage anti-competitive business practices.

The US has done less to meet its commitments. Savings and investment have declined as a percentage of gross domestic product and the budget deficit has shown no improvement. 'As long as the US economy remains biased toward consumption and the Japanese. . . . toward production, the US will have a significant trade deficit with Japan,' the report admits.

Mass Rapid Transit of Singapore has awarded a SDollars 65.3m (Pounds 28m) trackwork extension contract to a joint venture between the UK's Balfour Beatty and Gammon Construction of Hong Kong, Reuter reports from Hong Kong.

Gammon, which announced the contract yesterday, is owned jointly by Jardine Matheson's Jardine Pacific and Trafalgar House. The Balfour Beatty-Gammon joint venture was selected from five tenders. The contract is one of the last two large ones for the 16km Woodlands extension project. The line is due to start operating in 1996.

THE Thai cabinet yesterday approved a draft bill to establish an export and import bank, according to Radio Thailand, AP reports.

The measure, expected to be introduced in the next session of parliament in May, would set up the bank as an arm of the Finance Ministry, free from commercial banking rules. It would be capitalised at Bt2.5bn (Pounds 67m), which would be contributed by commercial banks and the Bank of Thailand, and drawn from foreign exchange profits confiscated from commercial banks for misconduct.

The governor of the central bank would serve as the exim bank's director for the first three years to smooth the transfer of some functions.

BUSINESS confidence across the European Community dropped last year to its lowest level since the deep recession of the early 1980s, a European Commission survey published yesterday shows.

A picture of continuing economic gloom emerged from capitals across Europe at the same time as the Commission survey revealed scant prospects for early recovery.

The Commission's leading economic indicator, which combines calculations for output and confidence, dropped from 96.3 in November to 96.1 in December, equal to its previous low in October 1982.

In Paris, a Bank of France survey showed output falling and stocks rising in most sectors last month and depressed demand throughout the business sector. Cars and consumer goods were the worst affected sectors.

French exports also slowed and orders were down, reflecting economic instability in Germany and increased competition from other European countries because of the comparative strength of the franc.

Some companies put off investment programmes and although employment was stable in trade and services, it fell in construction and manufacturing.

Official figures released in Rome yesterday showed a further decline in industrial output, hitting Italy's industrial heartland worst.

Output declined 0.6 per cent last year although the full extent of the decline was masked by three extra working days last year compared with 1991. The drop in production began to accelerate after last summer and in December was 2 per cent down against the same period the previous year, according to figures released yesterday by Istat, the national statistics institute.

The worst affected sectors were the automotive industry and engineering, down 11.1 per cent and 7.9 per cent.

Unions said 145,000 jobs were at risk in the northern industrial region.

The Commission survey suggested industrial investment was likely to remain weak throughout this year after failing to achieve downgraded estimates last year.

The sentiment indicator would have fallen even further in December, the survey showed, had it not been for the glimmer of recovery in Britain. But latest UK official figures yesterday showed manufacturing output fell in each of the final two quarters of last year.

Britain was the only one of the 12 Community members to show an improvement in sentiment last year in the Commission survey. In France and Germany the indicator fell to 97.4 and 95.5, respectively, from November's 97.9 and 96.0. France's indicator is well below October 1982's 98.5. Consumer expectations, both for their own countries and for the economy as a whole, were particularly low in Germany, France, Italy and Portugal.

TWO undersecretaries in Italy's Budget and Interior ministries were warned yesterday that they were under investigation for alleged corruption.

The most prominent, Mr Claudio Lenoci, a Socialist at the Interior Ministry, is being investigated by Rome magistrates concerning alleged misuse of the Italian overseas aid programmes. Mr Lenoci, a parliamentary deputy since 1979, was previously in charge of the overseas aid programme at the Foreign Ministry.

The other undersecretary is Mr Vito Bonsignore, a prominent Christian Democrat deputy from Turin. He is under investigation over a hospital contract in the Turin area. He issued a statement yesterday declaring his willingness to co-operate and denying any wrongdoing. The Turin magistrates' move follows the arrest of two senior politicians in the regional administration.

In other developments in Italy's widening corruption scandals, Milan magistrates leaked details of their interrogation in a Swiss jail of Mr Florio Fiorini, the former finance director of ENI, the state oil concern. Mr Fiorini, who is charged with fraudulent bankruptcy, is alleged to have told the Italian magistrates ENI paid an annual L1.2bn (Pounds 540,000) to the main political parties throughout the 1970s.

From 1970 to 1980, Mr Fiorini is said to have claimed, ENI paid L40m a month to both the Christian Democrats and Socialists, with a further L10m to each of the small Social Democrats and Republican parties. The ENI money, he claimed, derived from foreign exchange operations profits and had not affected ENI's finances. These alleged payments stopped in March 1981 following exposure of the P2 secret masonic lodge.

Potentially more damaging in the Fiorini testimony were allegations that ENI and other entities channelled funds to the Socialist party via a bank account in Lugano. Until now Milan magistrates have only indicated they were examining this account, in the name of Mr Silvano Larini, a Milan architect arrested 10 days ago, for two alleged transfers totalling Dollars 7m from the late head of Banco Ambrosiano, Mr Roberto Calvi. The transfers were allegedly made to compensate Dollars 50m worth of loans said to have been provided by ENI to the troubled bank.

Both Mr Bettino Craxi, who stepped down from the Socialist leadership last week, and Mr Claudio Martelli, who resigned the Justice portfolio, have been issued with warrants that they are under investigation concerning alleged illicit use of this account in the fraudulent bankruptcy of Ambrosiano. Mr Craxi was also told yesterday he was under investigation for alleged corruption concerning Milan's municipal energy authority. Mr Craxi has consistently denied wrongdoing.

THE French government yesterday officially denied it had influenced the decision of three state-controlled financial groups to buy shares in Adidas, the German sportswear group, from a company controlled by Mr Bernard Tapie, the controversial minister of urban affairs.

The Finance Ministry said in a formal statement that the government had 'no knowledge' of the decision by Credit Lyonnais, one of France's biggest banks, and Union des Assurances de Paris (UAP) and Assurances Generales de France (AGF), the insurance groups, to participate in the consortium which on Monday bought Mr Tapie's controlling stake in Adidas.

This denial followed calls for an official inquiry into the deal from the conservative opposition, which is favourite to win next month's legislative elections. It comes as the French socialist government's relationship with state-controlled companies is under the spotlight.

Last month a similar furore broke out after Elf-Sanofi, subsidiary of Elf Aquitaine, the state-controlled oil group, bought Yves Saint-Laurent, the French fashion house chaired by Mr Pierre Berge, a friend of President Mitterrand.

Opposition politicians, who promised to privatise many of France's state-controlled companies including Credit Lyonnais, AGF and UAP in their election manifesto, also demanded an investigation into the YSL transaction.

Despite the Finance Ministry's insistence yesterday about the independence of state-controlled companies, the close links between the government and some public sector companies were highlighted last week when Elf Aquitaine was ordered to abandon plans to close a unit at Boussens in south-west France.

The proposed closure would involve transferring 480 jobs from Boussens, a socialist stronghold, to Elf plants in other parts of France when the socialists are under attack because of the steep rise in unemployment.

The French Justice Ministry yesterday forbade a judge from investigating the circumstances in which Mr Pierre Beregovoy, French prime minister, received an FFr1m (Pounds 125,000) interest-free loan in 1989 from Mr Roger-Patrice Pelat, the now-deceased financier. The ministry said there was no evidence to suggest the loan had been fraudulent.

IG METALL, Germany's powerful steel and engineering trade union, yesterday called on the European Commission to ensure that the restructuring of the European steel industry would not be left to individual producers eager to close down competitors, writes Ariane Genillard.