ON SEPTEMBER 29 last year the lights went out through most of peninsular Malaysia. The blackout, blamed on a freak lightning strike and described officially as an Act of God, left many parts of the country without power for several days.

In subsequent months there were a growing number of power breakdowns. Earlier this year what industrialists and others had been talking about for months became official - Malaysia was in the midst of a power crisis.

Dr Mahathir Mohamad, the prime minister, demanded prompt action. Mrs Rafidah Aziz, minister of trade and industry, described the blackouts as intolerable. Mrs Aziz deals with foreign investors in Malaysia: the fear was that electricity shortages would have a damaging impact on the investment climate.

Tenaga Nasional, the country's electricity utility which was partially privatised early last year, has been taking steps to remedy the situation. Maintenance work on existing facilities has been speeded up. Under a special 'fast track' energy programme, new power plants are being built.

The incidence of power shedding and blackouts has been reduced. Mr S Samy Vellu, the energy minister, says that by the end of the year more than 500MW of extra power will be available each day to meet maximum daily demands of about 4,600MW.

But Malaysia's economic growth could run out of steam if power output is not constantly expanded. Mr Samy Vellu estimates that Malaysia needs to invest MDollars 10bn (Dollars 4bn) over the next 10 years to cope with increasing electricity requirements. Over the next 25 years about MDollars 100bn will have to be invested in the power sector.

Malaysia cannot meet these massive investment needs from its own resources: it is therefore inviting independent power producers (IPPs) to participate in building, owning and operating power plants.

Malaysia is the first country in the region to get such projects off the ground. Already two IPPs have been granted power producing licences - one to build own and operate a 1,300MW plant at Lumut, in the northwest of peninsular Malaysia, and the other for two plants with a combined capacity of 1,230MW near Singapore in the south.

A variety of other IPP projects are also being considered. Foreign companies are being encouraged to participate and are able to hold 25 per cent of equity in the projects.

But there have been some hiccups. Foreign companies have complained that there is a shortage of local expertise in the power sector and reliable partners are difficult to find. There have also been accusations of political favouritism in the government's granting of IPP licences.

Under new regulations the IPPs will purchase gas to feed their power plants from Petronas, the state oil company, and sell power to Tenaga. These buying and selling contracts, binding over an extended period, have proved very difficult to negotiate. Financiers are also being cautious about extending the large amounts of credit needed to build these IPP power plants.

However there are few who doubt that these plants will be built and Malaysia's power output will be substantially expanded. 'It's got to happen,' says an energy analyst. 'Without the power all the plans for economic growth over the coming years will come to nothing.'

THE INHABITANTS of Kuala Lumpur have a habit of shaking their heads sympathetically when they meet a visitor from Thailand. Are not the traffic jams in Bangkok appalling, they ask, and is not Thailand's infrastructure wholly inadequate?

Yet Malaysians too are starting to pay a high price for economic success after six years of rapid growth.

Utilities are struggling to keep pace with demand. It can be difficult to place a local telephone call. Power cuts have become more frequent because of a shortage of generating capacity (something which has yet to hit Thailand).

The streets of the Malaysian capital are increasingly congested and polluted, to the extent that the government has launched a car-pooling scheme with the slogan 'Get our city moving again'. It is true that the roads of Kuala Lumpur are less crowded than those of Bangkok, but then Bangkok's population of some 8m is four times as large as Kuala Lumpur's.

Both cities have promoted the cult of the motor car, failed to provide adequate public transport, and are struggling now to build light commuter railways. Both cities need new international airports, and each is about to construct one.

As in Thailand, Malaysia's drive to remedy its infrastructural shortcomings presents mouthwatering opportunities to local contractors and foreign companies with the right skills; Malaysian officials cheerfully discuss projects worth billions of dollars as they seek to bring everything from telephone networks to sewage treatment plants up to standards adequate to keep pace with continued economic growth.

Some economists are even concerned that the government's eagerness to upgrade Malaysia's infrastructure and maintain high growth rates may itself put further strains on the economy.

Building new roads, for example, deprives businesses of much needed workers when unemployment is effectively zero across much of the country. 'People look at growth rates here like they look at inflation rates in Germany,' said an economist in Kuala Lumpur. 'It's a political question, not economic.'

One thing that is not - so far - in short supply is capital, foreign or local. Malaysia's foreign debt service ratio has declined to below six per cent of export earnings. Local investors are as enthusiastic as foreign banks to finance viable projects. But Malaysia could face stiff competition for funds from other countries in the region who also face similar infrastructure problems.

Dr Mahathir Mohamad, the prime minister, has taken his cue from Mrs Margaret Thatcher's government in Britain in the 1980s and started to privatise transport and utilities with an enthusiasm rarely matched elsewhere.

Portions of the electricity and telephone networks have been sold to the public and the companies - Tenaga Nasional and Telekom Malaysia respectively - have been listed on the Kuala Lumpur stock exchange.

Faced with serious power shortages, the government has also strongarmed Tenaga into agreeing to buy electricity from independent power producers known as IPPs, some of which may eventually be listed on the stock exchange. Sixty proposals for power stations have already been made by various joint ventures, but only five have so far been approved and financing constraints will probably mean that not all the approved projects actually proceed.

Private sector responsibility for infrastructure projects does not make Malaysia a wholly free market.

Many of the companies which have won big contracts for roads and other infrastructure developments, like Renong and Berjaya, have strong connections with government, either through personal friendships or because they are linked to the United Malays National Organisation (Umno), the dominant party in the government.

Eyebrows were raised, for example, when the Berjaya group, in association with Britain's North West Water, won, without a public tender, a preliminary MDollars 6bn agreement to build and upgrade urban sewage facilities. Berjaya has little experience of such contracting work, but it is an influential company and Mr Vincent Tan, the group's chief, is said to be close to leading figures in government.

Some businessmen have criticised the use of funds from organisations such as the Employees' Provident Fund, or the police and army pension funds (the last two have stakes in the sewage venture) to finance infrastructure projects with Umno connections, but others believe there is no problem as long as the project concerned is bankable; such organisations have to invest their money somewhere.

Although there is no doubt that some companies benefit from government largesse in such deals, Malaysia does not suffer as badly as Indonesia or Thailand from the corrosive effects of corruption and official indecision.

Infrastructure projects, says a banker, 'are not so obviously overpriced'. Existing and proposed projects include:

Airports and ports: About MDollars 20bn is to be spent on a new international airport at Sepang, south of Kuala Lumpur, with the first phase costing about MDollars 10bn and an express rail link to the capital a further MDollars 1.2bn. A masterplan study drawn up by an Anglo-Japanese consortium, comprising Balfour Beatty, Trafalgar House Construction, Gammon of Hong Kong, G-MATS and Marubeni, forecast that the number of passengers passing through Kuala Lumpur could rise to between 55m and 60m by the year 2020, compared with 8.8m in 1991. Other airports and sea ports are also being upgraded.

Telecommunications: Malaysian officials say about Dollars 10bn of investments will be needed over the next decade. Demand is expected to rise sharply, with international traffic growing by as much as 30 per cent a year. There is scope for expansion; at the end of last year there were 11.6 lines per 100 inhabitants, a third of Singapore's ratio.

Railways and roads: The Malayan Railway Administration (KTM) has embarked on a programme to double-track busy lines. Work is underway in the Klang valley between Kuala Lumpur and its seaport at Port Klang, and there are plans eventually to double-track the entire distance between Johor in the south and Butterworth, opposite the island of Penang, in the north. There are also plans for a light rail transit system in Kuala Lumpur. An Anglo-German consortium led by Taylor Woodrow this month raised Pounds 300m to finance the first 12 kilometre link which will take 34 months to build. As for the road network, the north-south highway, a toll road, is expected to be completed next year after the securing of additional funds to meet cost overruns. A second causeway is planned for the crossing to Singapore.

Construction and property: United Engineers Malaysia (UEM), a company connected to the Renong group, plans to build a MDollars 450m stadium and village for the 1998 Commonwealth Games outside Kuala Lumpur, in exchange for property with development potential in the capital, including the old national stadium. Other developments include a huge twin-tower office complex in central Kuala Lumpur, and private and state hospitals.

'THAT is Christ. You know who Christ is?' says the Portuguese descendant as he points to an altar clearly lit up inside his home.

We are in the Portuguese settlement, a mile outside Malacca on the west coast of Malaysia. It is the night of the cultural show, and Portuguese Square, remnant of a long-gone empire, is strung with lights to attract the tourists.

Malacca first grew up as a port in the 15th century. It has always known how to market itself. When traders needed a well run port, where rules were made and kept, Malacca offered it. The town prospered as one of the earliest gateways to the east, home to wave upon wave of settlers and colonial powers.

The city is still selling itself today, but its audience now are tourists rather than merchants. Malaysia's only designated 'historical city', its past is now providing for its future.

In the central museum an entire hall is filled with colourful tableaux showing the wedding ceremonies of the many ethnic groups that came to the city. In reality, five centuries as a Straits settlement gave birth to a hybrid people.

The Malay bride of Malacca wears anything from seven to 13 national costumes on her wedding day, parading in each.

In the Portuguese settlement, the speciality, advertised on the Lisbon Restaurant's neon sign, is prawn sambal, a traditional Malay dish; and the dancers in the cultural show are dressed in Malay costumes.

In old Malacca, Malaysia's oldest Chinese temple, a mosque and an Indian temple all stand within yards of one another. The Chinese houses have Portuguese tiles on their front walls, Portuguese homes are built on stilts, Malay-style.

But the authorities are determined to make things easy for the busy tourist. The answer is the Malacca theme park, where all can be sated.

On a bend by the river there is a Malay kampong, or village, housing two further miniaturised villages.

In the old quarter, and equally stylised, is the world of the Baba-Nyonya people, the Chinese who settled here and took up local ways. Here, the Straits Chinese present a mix of cultures, replete with Venetian mirrors, Victorian chandeliers, and ornate Chinese furniture. In a warren of nearby antique shops, artifacts are piled high. The charm is real, but the goods look a little short on history.

The other side of the river is the Dutch town hall and church, painted deep red. And, in case of doubt, a 15-foot-high model windmill. Beyond these, for those seeking global norms, there is the shopping mall, bowling alley and leisure complex, built on land reclaimed from the sea.

In the city centre, modern-day China town, with its stores full of bicycle wheels and jars of pickle, draws the bargain hunter away from the confusion of cultures. But, back at the remnants of the Portuguese fort and the old British planters club - now an independence memorial - huge concrete models of Malay bullock carts quickly restore the feel of fantasy.

Here, every night, an hour-long sound and light show puts the whole picture into a new perspective. Suddenly, six cultures are no longer six, but one. Like a litany the narrator returns every few minutes to his driving theme: Malacca is where it all began. And what began in Malacca was not the blend that is Baba Nyonga, which is never mentioned. What began in Malacca was Islam, and Malay nationalism.

Now the tourist is made to understand that it is the Malay identity that is, was and always will be at the heart of Malacca.

Arab traders brought Islam to Malacca, from where the city's people spread the word of Allah throughout south-east Asia, the 'spectacular' explains. And it was the people of Naning, just inland of Malacca, who most fiercely defended the Malay way, by rising up against the Portuguese, Dutch and British colonialists. Here, too, is where the independence movement began.

In the flash of a light, the ancient port's flow of Indian and Chinese traders is negated, as the show explains that the British introduced racial tension to Malaysia by importing workers from the sub-continents.

The courting of tourism seems forgotten as the need for political correctness comes to the fore. Ironically, though officialdom may point to the city as a monument to all that is Malay, it is the descendants of the Straits Chinese that come in their droves to rediscover their roots. More than 3m tourists came to Malacca in 1992, of whom nearly two-thirds were daytrippers from Singapore. The opening of a second crossing from Singapore should see their numbers rise still further, as the travel time by road comes down to 2 1/2 hours.

Old Singapore may be hard to find, but old Malacca is not. In fact nothing could be easier. The city has recognised a niche market. Its heritage has not just been retained, it has been improved upon. The developers have been held at bay in much of the city's heart, although its fringes have given way to the obligatory high-rise hotels.

More than 1m tourists stayed in the city in 1992, spending Dollars 350m, equivalent to more than 15 per cent of the state's gross domestic product.

There are hopes for more tourist dollars in 1994. The success of the 'Visit Malaysia Year' in 1990 was too good not to be repeated, and the government is full steam ahead to repeat the exercise next year.

In the meantime, one people or six, the Malaccans' cash registers are ringing out.

THE Kuala Lumpur stock exchange has been breaking records this year. The composite index has reached successive peaks and the number of shares traded has sometimes exceeded levels in New York and Tokyo.

Following a round of privatisations which brought companies such as Telekom (the telecommunications network) and Tenaga (the electricity utility) on to the market, the KLSE's market capitalisation of more than Dollars 100bn is now comfortably ahead of regional rivals Bangkok and Singapore.

The increased volumes and the rise in the index, however, have not always moved in step.

The first half of the year was characterised by frenzied activity from local speculators, largely in secondary stocks. Volumes soared - on April 15 more than 1bn shares worth about Dollars 1bn changed hands - but the index, dominated by blue chips, responded only sluggishly.

Trading patterns were typical for a developing market in a booming economy; as in Bangkok a few months earlier, investors piled into a maelstrom of speculation and share-ramping by syndicates. Some brokers slept in their offices at night as they struggled to keep up with the paperwork, and chartered helicopters to shift scrip around the country.

'Before they would buy 10 lots (of 1,000 shares), now it's 100 lots,' said one stockbroker of his clients. Money held offshore by ethnic Chinese businessmen flooded back into the country as confidence in the ringgit, the Malaysian dollar, strengthened. A lack of rights issues as a result of a reorganisation of the market's regulatory system has left investors with plenty of cash, although that is likely to change in the remaining months of this year.

Each political rumour, each hint of a tenuous business deal in China produced a flurry of activity in the stock concerned, a trend encouraged by a series of tentative agreements signed by Malaysian businessmen during a visit to China in June by Dr Mahathir Mohamad, the prime minister.

It was the smaller stocks that were attracting the most attention. The price of a small property company called Granite, with a handful of employees and an unimpressive track record, increased more than tenfold on the back of an agreement to install thousands of gambling machines in north-east China.

Other China gaming plays soared as well. Timber stocks rose as the price of logs on the international market climbed sharply. Companies with strong government connections, such as Renong, were bought heavily, with speculators assuming they would benefit from contracts for large infrastructure projects; sometimes several competitors for the same deal were ramped one after the other, brokers said.

Political manoeuvering ahead of elections in November for posts in the United Malays National Organisation (Umno, the dominant party in the government) has added further zest to the stock market. Attention is focused on an expected tussle between Mr Abdul Ghafar Baba, the incumbent party deputy president and deputy prime minister, and his undeclared challenger Mr Anwar Ibrahim, the finance minister.

Speculators buy stocks in companies linked to politicians they believe will do well in the election. Conversely, they also buy companies connected to probable losers, on the grounds that the losers will be persuaded to withdraw in return for financial favours from the eventual winners.

Stockbrokers believe that the finance ministry will, before the election, rush through a plan to list the state Heavy Industries Corporation of Malaysia (Hicom), probably by means of a reverse takeover involving New Serendah, a small listed rubber company whose share price has jumped in anticipation; an allocation of 30 per cent of the shares to Bumiputras (Malays) at a substantial discount is likely to give the Malay community a pre-election windfall.

Perhaps inevitably, the bull market has been marked by an element of greed. Traditional blue chip stocks such as the Sime Darby conglomerate are considered too dull for speculators interested only in quick profits.

'When you tell a client the upside of a share is 20 to 30 per cent, they say they're not interested - they want 100 per cent,' said a local stockbroker.

The dangers of such a febrile market were demonstrated recently by a fiasco involving Union Paper, a small toilet paper manufacturer thought to be a target of a reverse takeover bid by a property and financial cooperative dominated by Umno members. The shares soared to more than 10 times their original value and then plunged, leaving some speculators in default, apparently because of illegal short-selling.

The new Securities Commission, established earlier this year, has investigated the affair and is expected to make an announcement soon. Union Paper's shares were suspended.

It was a salutary lesson for small investors, who subsequently lost some of their enthusiasm for second board stocks and took more interest in blue chips. Both the KLSE and the Commission are attempting to tighten regulation of the market to curb share manipulation and put a stop to misleading company announcements, although foreign and local brokers have yet to be convinced that the regulators have teeth.

'People start to feel that there is one place where they can make quick and big money,' acknowledged Mr Nik Mohamed Din, KLSE executive chairman.

'When the market becomes bullish there are bound to be some problems that come up. We are very concerned and very vigilant to avoid situations where people benefit through manipulation,' he said. 'If we do not check this kind of activity then the market will not be sustained. One of these days it will just burst.'

While the KLSE is demanding more frequent and accurate announcements from companies - about, say, their deals in China - the Commission is tasked with investigating other misdemeanours and with streamlining the hitherto bureaucratic procedures for new listings.

Other developments include the proposed establishment of the Kuala Lumpur Options and Financial Futures Exchange (Kloffe) by a politically well-connected private sector consortium (in the face of initial opposition from the Kuala Lumpur Commodities Exchange and the KLSE), and the slow implementation by the KLSE of its central depository system for immobilising scrip and reducing paper transfers; 11 shares from the second board have been included so far and the KLSE wants to bring in the other 60 or so second board companies by the end of 1993, and to complete the entire process within five years. Merrill Lynch, meanwhile, has issued call and put warrants on the composite index.

Although some foreign brokers are unsure whether Kuala Lumpur needs complex derivatives markets at this stage in its development, they are confident in the underlying strength of the KLSE, which now has nearly 400 companies quoted on its main and second boards.

Brokers in the Malaysian capital also believe that the threat to their turnover posed by the over-the-counter CLOB market in Singapore - which Mr Nik Mohamed describes as a 'black market' - is gradually diminishing, especially as CLOB does not deal in newer arrivals on the KLSE such as Tenaga or Telekom.

The KLSE itself says there are 69 foreign funds with investments in the Kuala Lumpur exchange, and foreign interest has increased since the middle of the year, pushing up the index - if not the volume - after the local speculators eased off.

'In the first half of the year, it was retail-driven, but in the past month or two it's swung around the other way towards institutional buying,' said Mr Eugene Marais of Baring Research (Malaysia). 'Foreign interest has surged.'

Even if much of the trading by Malaysian investors on the exchange is purely speculative, the economy remains robust and continues to grow at eight per cent or more a year. Average earnings per share are forecast to rise 13.5 per cent this year and 15 per cent in 1994.

By mid-August, however, Kuala Lumpur shares were starting to look pricey to investors interested in fundamentals, especially when compared with rival stocks in Asia's other fast-growing economies. The KLSE's prospective price/earnings ratio for 1993 was more than 22, and even for 1994 it stood at 20. 'It's quite expensive,' said one broker.

TODAY the sign at the gate of the 'Financial Park' on Labuan island leads only to a muddy building site and a cluster of pile drivers, but by the end of 1995 the island's small town should be overshadowed by at least MDollars 400m worth of office, condominium and commercial buildings.

The creation of the Financial Park - by a consortium of the Malaysian central bank and commercial banks - underlines the determination of the federal authorities to make Labuan a thriving international offshore financial centre (IOFC) in the face of widespread scepticism among bankers in south-east Asia.

Labuan's shortcomings are well known: office space is in short supply on this 92 square kilometre island off the coast of Borneo and clerical staff are hard to find. Only small aircraft such as the Boeing 737 can land at the airport, and the government has deferred plans to lengthen the runway.

Since declaring Labuan an IOFC in 1990, however, the Malaysian government has devoted much time and millions of ringgit to ensure that Labuan succeeds.

'We the authorities are quite worried that it's moving too fast,' says Mr Mohamad Khir Abd Rahman, manager of the bank regulation department at Bank Negara, the central bank. 'New offshore banks are fighting for new office space.'

That problem should be solved when the Financial Park is finished - the developers say a third of the office space has already been informally booked - and in the meantime banks are allowed to manage their offshore units from Kuala Lumpur, although they must also maintain an office on the island.

So far 13 banks have been licensed to establish offshore units in Labuan, including Standard Chartered, Hongkong Bank, two Japanese banks and the main Malaysian banks. Bank Negara officials say total loans and deposits have each reached about Dollars 1bn - tiny by comparison with Hong Kong or Singapore but growing fast. There are also three insurance companies and 139 other companies licensed to operate offshore in Labuan.

The Labuan economy, previously reliant on regional entrepot trade based on its free port status, services to the oil and shipping industries, has profited from the government-inspired building boom.

Officials of the opposition state government in Sabah argue that the federal authorities are pouring money into Labuan to persuade voters that cooperation with Kuala Lumpur is better than confrontation: Labuan was part of Sabah but became federal territory in 1984. 'Perhaps the idea is to show it's a success if you cooperate with the feds,' says one banker.

Dr Mahathir Mohamad, the prime minister and driving force behind the development of Labuan as an IOFC, also looks at the project as a way of stimulating Malaysia's financial sector.

The Malaysian government urges most state companies to raise foreign loans through Labuan. Bank Negara officials say Labuan is centrally located among the countries of Asean, the Association of South East Asian Nations. They are hoping the island will benefit from capital flight from Hong Kong in the lead up to China rule in 1997.

Labuan compares favourably with its regional rivals on tax concessions. There is no withholding tax on bank interest, and offshore companies are given the choice of a three per cent tax on net profits, or a flat rate of MDollars 20,000. Secrecy for offshore companies is assured.

But international bankers are still sceptical about Labuan. In Singapore or Bangkok, they say, customers can conduct their regular as well as their offshore business. Bermuda and Jersey are millionaires' playgrounds as well as offshore centres. (Mr Khir has an answer to that: 'Labuan might just turn out to be that way - a Monte Carlo for instance').

But Labuan is difficult to reach and has few facilities, the bankers say. Why, they ask, does an 'offshore' tax haven need to be physically offshore at all?

Although Malaysian officials put a brave face on it, they were taken aback by the almost casual way in which the Thais established their own offshore business earlier this year - called the Bangkok International Banking Facility - and quickly attracted applications from more than 50 local and foreign banks; Thailand granted licences to 47.

Even the few foreign banks already establishing their offshore units in Labuan - with a handful of staff - are believed to be doing so as a kind of political insurance.

Those with domestic networks in Malaysia want to protect their interests by pleasing the authorities; those without operations in the restricted Malaysian banking market hope that supporting Labuan might help them in the future. 'People are assuming that this is a good way to score points,' says one economist in Kuala Lumpur.

Although this attitude is widely acknowledged, bankers say it does not necessarily mean that Labuan will fail as an offshore centre; the government's financial 'pump-priming' and its real or imagined efforts at persuasion could easily give the island's offshore industry the critical mass it needs to succeed.

'It's almost at the stage when they can't afford for it not to work,' says one banker.

MALAYSIA has a dream, called Vision 2020. The idea is to achieve the economic status of an industrialised nation by the year 2020.

Its car industry is one of the ways that it sees of getting there.

Perusahaan Otomobil Nasional, or Proton, produced its first car in 1985. The country's 'First National Car Project' was seen as the means of expanding the nation's engineering skills and manufacturing capabilities.

In conjunction with Mitsubishi of Japan, the government set up the plant and Proton began to motor.

By 1992, the company accounted for more than 67 per cent of the domestic car market, was exporting to 17 countries, and had established a sizeable sales network in the UK. Delighted at this progress, the Malaysian government announced Proton's partial privatisation and a second car project.

From the beginning, the government's intention has been to use its car industry as a way to develop an engineering sector. By supplying its own industry, it hoped to iron out any start-up problems, so that it could move on to the world stage as a fully geared up supplier of cars and subsequently of components.

Local content was the name of the game, and Proton was playing well.

British consultant engineers were imported, to the disappointment of the manufacturer's Japanese partners, and Hicom, the government controlled heavy industrial holding company, began manufacturing car parts.

Fuel tanks followed radiators and exhaust systems on to the local content list.

Success is measured only partially in the 102,800 units that Proton produced in the year to March 31 1993. More significant for the government were the 200 car component companies that emerged, including more than 70 which were producing for the original equipment market.

A ban on external sourcing of more than 30 components had helped to take the local content of motorcycles assembled in Malaysia to more than 75 per cent, Proton to over 60 per cent and other passenger and commercial vehicles to more than 30 per cent by the beginning of this year.

By 1993, the country could boast 13 vehicle assemblers, including Proton, with a total installed capacity of 306,000 units of motorcycles per year, and 202,000 units of passenger and commercial vehicles, none of which was 100 per cent externally sourced.

As for the second national car project, the government claims that it will not eat into Proton's sales but will offer a variant of a Japanese 660c model aimed at the market below the Proton's price range. In collaboration with Daihatsu of Japan, it aims at a 1994 start-up to produce 20,000 cars a year.

The government has taken steps to ensure that any market contraction will be felt first by imported vehicles. Hire purchase limits, introduced in 1991 to moderate domestic demand, were amended in April 1992 to exempt cars costing less than MDollars 40,000, which Protons do.

The rules were subsequently lifted altogether, but the slowdown they prompted cut the sales of the dearer imported cars. Sales of non-Protons fell by 25 per cent between 1991 and 1992.

Import tariffs have also been used to sharpen the price differential between locally assembled cars, parts for which are charged at between 13 and 40 per cent, and completely built car imports, charged at 140 to 300 per cent: and are anyway limited to 10 per cent of the market.

But Proton has been ailing in its own right of late. Sales in the financial year to the end of March 1993 were down nearly 2 per cent on the previous year.

The setting for the decline was a slowdown in Malaysia's motor industry as a whole, after marked growth from 1988 to 1991. In terms of sales, commercial vehicles fell by nearly 57 per cent to 35,054 in 1992, compared with 81,099 in 1991, while passenger vehicles fell 13.5 per cent to 117,773.

The decline at home made Proton all the more determined to export. By the end of April 1993, it had exported 66,183 cars, of which 56,821 were to the UK, where it has gained from the demand for cheaper cars in recessionary times. There is even talk of an overseas plant, in Indonesia, or maybe in Chile.

The outlook for Proton certainly rests on its success as an exporter. Malaysia's own demand could not support one car manufacturer, let alone two. It is also exposed to foreign exchange risk because of its yen-based costs, which one industry analyst suggests were as high as 45 to 50 per cent in 1992.

It can offer cheaper labour costs than many of its competitors, but lacks economies of scale.

At the end of the day, Proton is an anomaly. It exists to feed a nation's greater need, and it is likely to receive all the protection it needs to survive, until its survival is no longer tied up with Malaysia's Vision.

MR Mohamad Nadzmi Mohamad Salleh has one of the most difficult jobs in Malaysia. At only 39, he is head of Proton, Malaysia's national car company. Proton is the pride of Malaysia and the project most dear to Dr Mahathir Mohamad, the prime minister.

'It's tough now and it's going to get a lot tougher,' says Mr Nadzmi, who has been in his new post since mid July. 'Proton is the cornerstone of the country's industrialisation programme. It's daunting to take such a job on. If things go wrong then that's the end of my career. There's no turning back. We have to succeed.'

Mr Nadzmi describes himself as a professional manager rather than a technician or engineer. He studied economics, chemistry and mathematics in the US, then returned to Malaysia to work for Petronas, the state oil company, and HICOM, the government controlled heavy industrial holding company.

Mitsubishi, Proton's Japanese partner, has had its men at the head of the national car project for most of time since the first car rolled off the assembly line in the mid 1980s.

But there has been talk of friction between the partners, with the Malaysian side dissatisfied about the slow rate of Japanese technology transfer, while Mitsubishi apparently disapproved of Proton's ambitious export plans - fearing competition overseas from the Malaysian car.

Mr Nadzmi was catapulted into the managing director's seat on the insistence of Dr Mahathir. 'It was always realised that the Japanese could not go on running the company indefinitely. It was felt that now was the time for Malaysians themselves to take control,' says Mr Nadzmi.

A Malaysian did head Proton for a time five years ago. But the Japanese reassumed control as various problems threatened the project's future.

In Malaysia, questions of politics and race are part of almost every activity. Mr Nadzmi has to have the right political allies if his authority is to be maintained. Part of Mr Nadzmi's brief is to encourage more bumiputra or Malay participation in the industry. He has to do this while not offending other groups.

'I know people will be watching to see if I perform well. I think I have about five years to really prove myself. Proton has achieved so much but the next phase will be harder. We've got to find new markets so we can expand production and bring costs down. We've got to introduce more competition in our supply network. That means I'm going to make enemies and offend some politically well connected people. But it's got to be done.'

Mr Nadzmi has already proved himself as a businessman. Before his present job he built up Edaran Otomobil Nasional (EON), Proton's distributing company, into one of Malaysia's most successful conglomerates, with a listing on the Kuala Lumpur stock exchange.

'I'm not going to disregard what the Japanese have done at Proton. We can't reinvent the wheel. The Japanese have introduced their proven production methods. But as a Malaysian I think I know how to motivate people better.' Mr Nadzmi feels Malaysians have a great flair for design, They are also good innovators. But making sure people stick to modern industrial working practices is not easy.

IN most countries, a yearly 8 per cent economic growth figure would throw finance ministers and central bankers into paroxysms of joy. Not so in Malaysia.

Last year Malaysia's overall GDP growth was indeed 8 per cent, but the figure was described merely as 'creditable' by Bank Negara, the country's central bank.

Malaysia has been used to flying in the clear skies of economic success, with soaring GDP growth rates of 9 per cent in 1988, 8.7 in 1989, nearly 10 per cent in 1990 and 8.6 per cent in 1991.

The buzz word now is consolidation. The economy, say the official planners, is taking a breather. A combination of continuing tight counter-inflationary policies at home and a less than buoyant market abroad means that GDP growth will further moderate to between 7.5 - 7.8 per cent this year.

'The prospects for a slow and moderate recovery in the major industrial countries could well be a blessing in disguise,' says Bank Negara. 'It would provide some much needed respite for the Malaysian economy to consolidate its position - to alleviate outstanding infrastructural and supply impediments and pave the way for sustainable growth with stability over the medium term.'

But overcoming those impediments, which include serious labour shortages, infrastructure bottlenecks, a drop in investments growth and weak markets for various export sectors, will not be easy. Malaysia has been climbing fast. Last year per capita income increased a further 11 per cent to MDollars 7,541 (Dollars 2,950).

Malaysia's long term plan is to be a fully industrialised country by the year 2020. The government has set an average annual growth target for the next 27 years of 7 per cent. Achieving these targets is likely to become progressively tougher.

The fundamentals of the economy are still sound. The main achievement of 1992 was on the balance of payments front. At the end of 1991 the finance ministry had predicted a 1992 merchandise trade deficit of MDollars 3.7bn. In the event the merchandise account recorded a surplus of MDollars 7.3bn last year, compared with a deficit of MDollars 461m in 1991.

A sharp fall in imports rather than export growth was the main reason for the merchandise account improvement. The value of imports tripled in the years 1987 to 1991. In 1992 the value of imports increased by only 0.4 per cent.

The deficit in the services account, mainly due to freight and insurance payments, narrowed slightly to MDollars 12bn last year, giving an overall current account deficit of MDollars 4.4bn, representing 3.1 per cent of GNP, compared with a deficit of MDollars 12.5bn or 10.1 per cent of GNP in 1991.

Officials are now predicting a small current account surplus of MDollars 350m for this year, the first since 1988.

The international reserves position also improved. Reserves stood at MDollars 47.2bn at the end of 1992, up from MDollars 31bn the previous year and topping the country's external debt of MDollars 41.4bn.

In recent months the overriding concern of economic policy - and the factor which has been chiefly responsible for the moderation in growth rates - has been the fight against inflation. Traditionally Malaysia has had low inflation: when inflation was rising above 5 per cent at one stage last year the alarm bells started to ring.

High interest rates were maintained through 1992. This lessened demand for domestic credit but caused a large inflow of funds from abroad. As a result Bank Negara was forced to mop up more than MDollars 15bn of excess liquidity from the domestic banking system.

Restrictions were imposed on hire purchase and credit card use. Government spending in a number of areas was cut back. Investment projects in the private sector were curtailed. As a result there was a sharp drop in the growth of private sector spending - from 16.5 per cent in 1991 to 2.3 per cent in 1992. (Car sales in 1992 dropped by 15 per cent - compared with a growth in sales of 14 per cent the previous year.)

The battle against inflation continues: Bank Negara says the overall inflation rate last year was 4.7 per cent compared with 4.4 per cent in 1991. 'The real issue for us is to build a strong foundation for our economy to make a leap towards the next phase of industrialisation,' says Mr Anwar Ibrahim, the minister of finance. 'Unless we are firm in our resolve to break the back of inflation, that foundation will be shaky and our future progress will be jeopardised.' There seems little room to dampen down domestic demand further without damaging overall growth prospects. Officials see little likelihood of bringing price rises down to under 4 per cent by the end of the year.

Malaysia is vitally dependent on trade: two way merchandise trade is equal to nearly 60 per cent of GDP. For the first time in several years export earnings in 1992 failed to achieve double digit growth rates. Exports earnings for the year were MDollars 102.8bn, an increase of 8.8 per cent compared with growth of 18.6 per cent in 1991.

The moderation in export growth was mainly due to the continuing problems being faced in Malaysia's main markets - Japan, the US and the EC. Malaysia's commodity export earnings also declined due to generally low world prices. Exporters were hit further by the appreciation of the ringgit, the Malaysian dollar, against the major currencies.

Official predictions of a better export performance this year seem to be right: in the first four months of the year exports were up 24 per cent as against 8 per cent in the previous corresponding period. Meanwhile imports rose by 9 per cent.

One of the main reasons for Malaysia's economic growth over the last five years has been due to its success in attracting millions of dollars worth of investments - both from overseas, and more recently, from internal sources.

According to government figures total investment approvals rose from MDollars 3.9bn in 1987 to MDollars 9bn in 1988, to MDollars 12.2 in 1989 and MDollars 28bn in 1990.

In 1991 investments peaked at MDollars 30.8bn. Last year they dropped to MDollars 27.7bn. Of that figure MDollars 17.7bn was foreign sourced - an increase of 2 per cent over the foreign content in the 1991 figure - while MDollars 10bn was domestic - representing a fall of more than 30 per cent from the previous year.

Mrs Rafidah Aziz, Malaysia's minister of trade and industry, says Malaysia has already achieved more than 70 per cent of its investment target under the present five year plan (1991-95). But there is no doubting the official concern about the investment downturn.

Other countries in the region, in particular China and Vietnam, are attracting investments away from Malaysia. In 1991 Taiwan was one of Malaysia's biggest investors, with investments of MDollars 3.6bn. Last year Taiwan invested less than half that amount.

Foreign investment approvals in the first six months of 1992 were MDollars 7.5bn. This year the figure for the equivalent period was MDollars 1.6bn. Over the same period last year approved domestic investments were MDollars 4.1bn. This year the figure was MDollars 2.7bn.

'It is important for the government to come on more aggressively to promote domestic private investment in the absence of a strong inflow of direct foreign investment,' says the mainly privately funded Malaysian Institute of Economic Research. In a budget later this year the government might lower corporate tax from its present 34 per cent as an added incentive to investors.

A key problem with attracting investments is Malaysia's contracting labour supply. The official unemployment rate is 4 per cent but in many parts of the country it is zero. Industrialists have become frustrated with a high rate of job hopping and upward pressures on wages.

In some areas 70 per cent of workers on rubber and palm oil estates are foreigners - mainly from Indonesia or Bangladesh. The government is nervous about the implications of the presence of a large immigrant population - estimated at up to one million - and the possible upsetting of the country's delicate racial balance.

No one is suggesting that Malaysia's economy is about to take a dive. But there are many who forecast economic turbulence ahead as the country runs into constraints on investments and labour - and braces itself for a more competitive regional environment.

THE mountain range that runs from north to south in peninsular Malaysia serves more effectively than any border in carving out separate nations of the east and west, writes Jenny Luesby.

Peninsular Malaysia's largest state of Pahang is only 40km from Kuala Lumpur at its western border, but in terms of development the distance is far greater.

Where much of the west coast is heavily industrialised, the east remains an agricultural economy where timber and rubber are supporting the first tentative moves into resource-based industry.

The development of oilfields off the east coast at Kemaman, in the coastal state of Terengganu, has given the region a leg-up, and its natural beauty has brought in the tourists, but its growth remains in its infancy.

The official line is candid: 'Ten years ago, Terengganu had virtually nothing to offer,' says Mamat Ghazalee bin abd Rahman, chairman of the state committee for petroleum, industry and human resources. But, things have changed, he says, with the arrival of oil and gas.

And they have. The state has built a port, upgraded its roads, expanded power and water supplies, improved communications and set up the obligatory crop of industrial estates.

The oil revenue has also brought ornate local government, police and state assembly buildings, heavy with marble. Mining and quarrying, which includes the oil industry, accounted for 63.8 per cent of Terengganu's Gross Domestic Product in 1990.

Manufacturing remains thin on the ground. So too does employment. 'We have had many inquiries,' says Haji Mohd Zaki bin Haji Yusoff, director of the Terengganu development corporation, 'but people generally locate elsewhere.'

In neighbouring Pahang, more than 40 per cent of investments up until December 1991 fell within the public sector, highlighting further the investors' shyness.

The less educated population on the eastern side of the peninsula and the limits on its infrastructure may have deterred some, but the states of Pahang and Terengganu probably have a point when they suggest that people do not come because they do not know what is there.

Both Pahang and Terengganu have abundant supplies of power. They also have products such as polyethylene, for producing plastics, which have come with the petrochemicals industry. The states seem to have the potential for developing a sound industrial base.

'We see Vietnam and China as competitors really,' says Haji Mohd Zaki. But facing them across the South China Sea, the region may find its location an added advantage.

Serviced to western standards in every area from legal and accounting services through to cargo facilities, the east coast offers a haven of order next door to what could be the world's fastest growing markets in years to come.

The east coast's facilities include two new ports, a deep-water natural harbour at Kemaman, capable of taking vessels up to 120,000 dwt, and a small and efficient operation at Pahang's state capital, Kuantan. These could be used as transshipment centres.

And while the official downgrading of Kuantan airport from international status has brought irritation in Pahang, and a degree of inconvenience as air cargo heads to Kuala Lumpur, the decision could be reversed if air traffic picks up.

In the meantime, local ambitions are subdued. There is the occasional mention of electronics and high-technology, but conviction is absent. The area's real thrust for development is through industry rooted in the region's ample resources.

Agriculture is expected to account for nearly 40 per cent of GDP in Pahang in 1993, and more than 40 per cent of employment. Oil palm, rubber and timber made up its bulk, with oil palm alone accounting for an estimated 20 per cent of the state's GDP.

Both Pahang and Terengganu also offer an enviable range of minerals, which as well as tin, include mercury, silica, tungsten and graphite.

'We do not want loggers, we want chipboard, and even furniture manufacturers,' says a local official. Unlike the west coast, the region is also interested in heavy and labour-intensive industry.

But, for now, the region's manufacturing is small - in 1992, manufacturing accounted for 14 per cent of GDP in Pahang. In the somewhat information shy state of Terengganu the most recent figures available are for 1990, when manufacturing accounted for just 8.2 per cent of GDP.

Tourism has been the states' true testing ground. Tourist arrivals in Pahang rose by 77 per cent between 1986 and 1991, to reach 1,712,647. The length of stay also increased, and hotel occupancy rates improved from an average 50 per cent to 80 per cent.

In this context, the states, both predominately Moslem, are at pains to emphasise their religious tolerance. The balance is a delicate one, especially with the recent switch to a more fundamentalist government - opposed to the federal authorities - in the state of Kelantan, north of Terengganu. But the fact that nearly half of Pahang's tourist spending is in the rural Genting highlands, notable for the fact that it houses the one and only gaming casino in Malaysia, would tend to bear out the assertion that tolerance is high: gambling is contrary to Islamic teachings.

The rural casino is not the region's most off-beat venture. There is also an eel farm set up by a Taiwanese investor, which boasts of being the largest in the world. Odder still is the imminent arrival of the kit from the recently closed Ravenscraig steel plant from Scotland.

----------------------------------------------------------- Area 332,965 km2 Population 18.6m (mid-1992) Head of State King, Sultan Azlan Shah Head of Government Prime Minister Mahathir bin Mohamad Currency Ringgit, also known as Malaysian dollar Average exchange rate 1992: 2.55 per US Dollars; currently = 2.5537 (1) ----------------------------------------------------------- ECONOMY ----------------------------------------------------------- 1992 Latest ----------------------------------------------------------- Total GDP (US Dollars bn) 55.02 n/a Real GDP growth (%) 8.0 8.1 (2) GDP per capita (Dollars) 2,960 n/a Components of GDP (%) (3) Private consumption 51.5 Gross fixed investment 34.4 Government consumption 13.5 Exports 78.4 Imports 77.3 Consumer price inflation 4.7 3.2 (4) Manufacturing wage inflation 9.0 10.0 (1) Ind. production (% change pa) 8.7 8.1 (2) Unemployment (yr end % of lab force) 4.1 4.0 (5) Reserves minus gold (Dollars bn) 19.4 18.9 (6) Prime lending rate (% pa end period) 9.5 8.75 (4) Narrow money growth (% pa) 9.5 n/a Broad money growth (% pa) 19.1 n/a FT-A index (% change over year) 35.8 40.63 (7) Gen govt. balance (% of GDP) -2.5 -3.4 (8) External public debt (% of GDP) 38.0 n/a Current account balance (Dollars bn) -1.7 -0.9 (9) Exports (Dollars bn) 39.7 44.0 (9) Imports (Dollars bn) 36.9 40.2 (9) Trade balance (Dollars bn) 2.8 3.8 (9) Main trading partners (1992) ----------------------------------------------------------- Exports Imports ----------------------------------------------------------- Singapore (% of total) 23.3 20.6 Japan 13.2 25.9 US 14.8 15.7 Germany 4.1 4.2 UK 4.0 3.4 ----------------------------------------------------------- ----------------------------------------------------------------------- Notes:(1) latest; (2) year to first quarter; (3) 1991 figures; (4) May; (5) Bank of America 1993 forecast; (6) January; (7) 1993to date; (8) government target; (9) Barclays Bank 1993 forecast ----------------------------------------------------------------------- Source: IMF, Datastream, Economist Intelligence Unit, Barclays Bank, Bank of America -----------------------------------------------------------------------

IN mid July Dr Mahathir Mohamad, the Malaysian prime minister, arrived back in Kuala Lumpur after a three day official visit to Albania. The prime minister's jet touched down at 7.20am. By 9am Dr Mahathir was in his office, chairing a cabinet meeting.

Dr Mahathir, 67, sets a bruising pace. Though he had open heart surgery in 1989, the prime minister, in power for the past 12 years, shows no sign of wishing to retire. 'As long as I'm welcome and the people want me, I'll serve,' said Dr Mahathir in a recent interview.

Yet these days Malaysia is bubbling with talk about the succession. The political temperature is rising, the rumour mill is working overtime.

At issue are elections in November in the United Malays National Organisation (UMNO), the country's dominant political party and main grouping within the ruling Barisan Nasional (National Front) coalition government.

By tradition, the head of UMNO is also prime minister. It's very unlikely that Dr Mahathir's position as party head will be challenged in these elections. But there is an increasingly bitter battle for the posts immediately below Dr Mahathir, particularly the number two position. The theory is that whoever emerges as deputy will one day inherit the Mahathir mantle.

There are two main contenders for the position of UMNO deputy leader - Mr Ghafar Babar, the present incumbent, and Mr Anwar Ibrahim, the finance minister.

A genial, rotund man who makes no claims to great intellectualism, Mr Ghafar, 68, describes himself as 'just a kampong (village) boy'. He has been an UMNO party stalwart for many years. Look at the old black and white pictures of the early Malay leaders and Mr Ghafar is there, urging the crowds to fight for independence from British colonial rule.

More recently Mr Ghafar has proved himself as a Mahathir loyalist. Renowned for his political contacts with UMNO's traditional bedrock of support in rural areas, Mr Ghafar was used by the prime minister to build up a new, Mahathir aligned, UMNO after a party split in 1987-88.

Earlier this year Mr Ghafar was at the forefront of pushing through controversial constitutional reforms limiting the powers of the sultans, the Malay rulers.

Mr Anwar is a very different politician, said to represent the 'Malay baru' - or the new breed of Malay. The finance minister, still only in his mid forties, has had a meteoric rise through the party ranks, propelled in no small way by Dr Mahathir.

He was once regarded as a firebrand and, as a former head of ABIM, the Islamic youth movement, a vocal government critic. For a time in the mid 1970s the present finance minister was detained under Malaysia's powerful internal security act.

His image has changed since those days. To visitors he is genial and relaxed, his conversation ranging from literature and music to the problems of third world debt.

But no one doubts the presence of an extremely astute and ambitious politician behind the finance minister's urbane exterior.

Mr Anwar is felt to reflect the opinions and aspirations of an increasingly powerful part of the Malay community - the urbanised, sophisticated Malays who, it is felt, will be at the forefront of the country's next economic leap forward.

Dr Mahathir has said he would prefer if Mr Ghafar's position as party number two were not challenged in the November elections. But for once it seems the prime minister's word is not being obeyed.

Mr Ghafar's and Mr Anwar's political stormtroopers are already out in the towns and countryside rounding up support.

Some have warned of a party schism. Mr Anwar has said he is a Mahathir loyalist - but feels he must obey party sentiment and stand for election. 'There will be no disunity in UMNO,' said Mr Anwar announcing his candidacy earlier this month.

Meanwhile Mr Ghafar seems determined to retain his post, and with it the possibility of becoming Malaysia's next prime minister. 'I don't care if anyone says that I'm not prime ministerial stuff but please don't think that I'm not qualified enough to handle UMNO's deputy presidential post or even the presidential post,' says Mr Ghafar. 'I have been in UMNO long enough. I know exactly what UMNO is all about. I will defend the post even if only two party divisions nominate me.'

Each candidate has his powerful backers, with the older hands in cabinet generally favouring Mr Ghafar, the younger, rising stars such as the state chief ministers, backing Mr Anwar.

At a rally in Kuala Lumpur about 8,000 turned up to voice support for Mr Ghafar. Less than friendly words are being exchanged between the two sides. There is open talk of 'money politics' with funds being used to influence delegates' voting patterns. Mr Anwar, in particular, is charged with accumulating a vast monetary war chest to further his cause - a charge he vigorously denies.

But it is clear that the impact of these elections is being felt well outside UMNO ranks. Politics and business have long been closely related in Malaysia. Though the UMNO leadership denies party involvement in business, the party is immensely rich. Brokers - and corporate leaders - talk openly of 'UMNO connected companies'. Stock market analysts look as much at who is in or out of political favour as they do at company balance sheets in assessing market performance.

Race remains a key factor in Malaysia's political life. To an outsider it might appear strange that UMNO - a party which is, as its name implies, strictly Malay - is alone deciding who will run the country. The Chinese, Indians and other races, who together make up nearly 50 per cent of the population, are not involved in the process.

The Malaysian Chinese Association (MCA) and the Malaysian Indian Congress (MIC), are UMNO's main partners in the Barisan Nasional. But neither party has much political clout.

'If you are a rich or ambitious Chinese or Indian you don't get involved with MCA or MIC politics,' says a local academic. 'Instead you quietly seek to align yourself with the main forces in UMNO - and give generously to UMNO party funds.'

Opposition is limited to the Democratic Action Party (DAP), headed by veteran Chinese politician Mr Lim Kit Siang, and remnants of the old UMNO headed by Mr Razaleigh Hamzah, once a close colleague of Dr Mahathir, but now a fierce critic.

The Barisan Nasional has 127 of the 180 seats in the lower house of parliament and the opposition parties can do little but snipe at Dr Mahathir's government.

The DAP says there is an increasingly undemocratic trend in Malaysia, citing Dr Mahathir's enthusiasm for tinkering with the constitution as evidence that the basis of the country's democracy is being undermined. The DAP has also been forthright in attacking what it considers to be the increasingly cosy relations between senior government figures and leading businesspeople.

The Barisan Nasional faces a more formidable opposition threat at state level - in the northern state of Kelantan, where the strongly Islamic Parti Islam Malaysia (PAS) holds power, and in Sabah in East Malaysia, which is controlled by the Parti Bersatu Sabah (PBS).

Dr Mahathir remains deeply suspicious of any opposition to his rule and has made considerable efforts to undermine both PAS and the PBS. But in deeply conservative Kelantan PAS remains strong. In Sabah, some senior politicians formerly aligned with UMNO have switched to join the PBS.

While not a direct threat to the Barisan Nasional's rule, such developments are worrisome for Dr Mahathir's government. Many analysts forecast an early general election being called in the first half of next year: UMNO would not only seek to renew Dr Mahathir's mandate but also to unite the party after what many fear will be a bruising and divisive internal election contest.

Dr Mahathir himself tries to play down the intensity of political feeling within UMNO. 'It might look like a bubbling cauldron of political activity but I don't think it's all that bad,' he said.

'We (in UMNO) are quite rational people. We have been quite rational all this while. We don't have that kind of very violent antagonism towards each other or total inability to work with each other,' said Dr Mahathir.

Not everyone would agree.

THE earth movers and diggers are hard at work on the old racetrack in the centre of Kuala Lumpur. A new city centre is being built which will include what is being billed as one of the world's tallest buildings - a 450 metre twin tower complex which, when completed in 1996, will be higher than New York's World Trade Centre or the Sears Tower in Chicago.

Critics say the city centre project is proof that the government of Dr Mahathir Mohamad, the prime minister, is carried away by its own economic success, full of grandiose, ill conceived, schemes.

To the government and its many supporters, the new city centre will be a monument to the new Malaysia, a country standing tall with its economy growing to join the ranks of industrialised nations.

Even the critics cannot ignore the considerable progress made in Malaysia in recent years. Overall GDP has grown by more than 8 per cent in each of the last five years.

Malaysia has been transformed from a commodity based to a manufacturing economy. In the mid 1960s tin and rubber accounted for nearly 80 per cent of export earnings. Last year the manufacturing sector accounted for 70 per cent of the value of exports.

'There is no doubt that had we remained with tin and rubber, we would be a basket case today,' said Dr Mahathir recently. 'Moving into manufacturing saved us.'

Living standards have improved: per capita incomes have increased from Dollars 350 in 1970 to nearly Dollars 3,000 last year.

Foreign investors have poured hundreds of millions of dollars into Malaysia, attracted by the country's political stability and its generally low wage regime.

The government's goal now - called 'Vision 2020' - is full industrialisation by the year 2020 - with an economic growth rate of 7 per cent in each of the next 27 years. There are few more compelling images of modern Malaysia than that of Dr Mahathir, sitting confidently in the back of his official limousine, a Malaysia made Proton car: the number plate on the car is 2020.

But there are those who question whether Dr Mahathir's vision can be turned into reality.

One of the key factors in Malaysia's recent success has been foreign investment. In 1990/91 foreign companies were investing about MDollars 17bn (Dollars 6.6bn) per year in Malaysia, representing well over half annual total investments.

In the first six months of 1993 foreign investments were only MDollars 1.6bn.

The continuing problems being faced by the industrialised countries is one reason for the decline in inward investment. But Malaysia is also in danger of losing out in the competitiveness stakes, particularly to the fast emerging economies in the region such as China and Vietnam.

Recently productivity has not been keeping pace with wage rises. This not only deters investors - it also jeopardises Malaysia's export competitiveness.

Dr Mahathir and his officials constantly preach the need to restrain wage increases. Union activity is strictly controlled. But having been told so often of their country's economic success, workers want to have a share of the benefits.

The situation is exacerbated by growing labour shortages which, in many industries, have become a serious impediment to further growth.

The short term solution is the government's tacit acceptance of about 1m illegal foreign workers in the country. But the long term presence of such a large group of foreigners could lead to serious social problems and upset Malaysia's delicate racial balance.

The more lasting solution proposed by the government is to go into more capital intensive, sophisticated, value added industries - much as Singapore decided to do some years ago. But while Malaysia has developed expertise in a number of fields - mainly in the commodities sector - much of its industry still lacks depth and know how.

The problems are well recognised. 'Malaysia is lamentably weak in research and the application of new technology,' says Dr Mahathir.

Education is a problem area. For the next phase of its development Malaysia needs an ever bigger pool of highly qualified engineers, technicians and managers. But these are not being produced in anything like sufficient numbers.

Government critics blame the New Economic Policy (NEP), introduced in the early 1970s, for many present problems. The NEP emphasised discrimination in favour of the Malays, the dominant racial group in the country. The Chinese, who make up about 35 per cent of the population, controlled most economic activity in the country. The idea was to give the Malays a greater share of the economic cake.

The policy was a partial success. According to official figures Malays controlled about 20 per cent of corporate equity by 1990.

But critics say the NEP gave rise to more problems than it solved. With Malays favoured in education, for jobs in both government and the private sector, a large measure of competitiveness was removed from the system and standards fell. Meanwhile the Chinese, Indians and other groups were made to feel like second class citizens.

The NEP is also blamed for giving rise to an uncompetitive business culture. Dr Mahathir himself frequently berates the Malays for their 'get rich quick' attitude and their lack of entrepreneurial zeal.

Government policy has now changed, emphasising growth rather than discrimination as the principal means of achieving a level of economic equality between the races. But the old ways live on. In business, political connections with the Malay dominated government are often more important than commercial competitiveness.

In part economic success has helped alleviate some of the tensions between the races. But there is still a question mark over whether government policy has made Malaysia a more equal, less racially segregated society.

The Chinese still control a large slice of the country's economic life and sit on a considerable pile of capital. That capital now needs to be invested in the country's future.

The government speaks of the need to 'wean' the country off foreign investment and depend more on domestic capital resources. But many Chinese remain hesitant, still wondering about their place in Malaysian society. Last year domestic investment fell by more than 30 per cent and shows signs of an even steeper fall this year.

Sensitivities about racial or political questions and a heavily government influenced media mean that there is little or no public debate on these issues. Government opponents accuse the government of sensing conspiracy in any criticism - even when things have gone obviously wrong.

In March it was revealed that Bank Negara, the central bank, had incurred a 'paper loss' of about MDollars 12.8bn (Dollars 4bn) last year, most of it due to speculations on the foreign exchange markets.

Dr Mahathir dismissed criticism of the bank's operations. Opposition calls for a full inquiry into the bank's activities were brushed aside. Yet there is no doubting the disquiet the issue caused in both the local and foreign financial community.

Sensitivity to criticism is also evident in Malaysia's dealings with the outside world. Dr Mahathir has tilted at many windmills: he continues to attack the industrialised world, the US in particular, for what he considers to be double standards on human rights and environmental questions.

Malaysia remains deeply suspicious of what it feels is a protectionist trade campaign directed against developing countries by the richer nations.

Dr Mahathir continues to lobby hard for recognition of an 'East Asia Economic Caucus' (EAEC) - to counter the activities of perceived western trading blocs. Other nations in the region tend to feel Malaysia has, at times, a rather exaggerated view of its own importance and do not necessarily share Dr Mahathir's views. So far the EAEC has met with a only a guarded response.

But, hubris or not, Malaysia marches on. Its economy seems likely to grow at close to 8 per cent again this year. Kuala Lumpur's new city centre project is going ahead full steam.

Malaysia is still breathless from its first sprint up the economic ladder. But as it loses many of the competitive advantages it has enjoyed in the past, the upward climb will get considerably tougher.

President Bill Clinton's pledge to 'end welfare as we know it' was one of the most popular lines in last year's election campaign. His idea of a strict two-year time limit on welfare cheques appealed to voters (especially 'Reagan democrats') not just as a way of cutting government spending and thus reducing taxes, but as a solution to the nation's most pressing social problems.

In the American mind, welfare has become synonymous with such evils as urban decay, fatherless children, drug abuse and violent crime. By promising radical welfare reform, Mr Clinton was sending a powerful subliminal message: he would wage war on all the diseases that are ravaging urban society.

Since becoming president, Mr Clinton has barely mentioned the word welfare, raising fears that his grandiose promise will prove as cynical as former President George Bush's 'read my lips: no new taxes' pledge.

The White House insists that welfare reform is not forgotten but has just had to take its turn behind two even more urgent priorities: the deficit reduction plan finally approved this month and the healthcare reform scheduled for September. It claims both measures will help shift people off welfare by 'making work pay.'

The budget advanced this cause by expanding the earned income tax credit (a kind of negative income tax). This gives poor working families a cash bonus of up to Dollars 2,500 a year, increasing the incentive to take low paid jobs. If healthcare reform guarantees health insurance for all workers, welfare recipients will no longer be able to reject jobs on the grounds that they stand to lose their health care benefits.

In addition, the administration promises to bolster the economic position of welfare mothers by strictly enforcing laws requiring absent fathers to support their children financially.

Such measures should help. But they are hardly going to solve America's welfare problem, which differs substantially from that in Europe.

In keeping with Franklin Roosevelt's dictum that a permanent dole is 'a narcotic, a subtle destroyer of the human spirit', the US has never provided permanent welfare support for single, able-bodied adults. When pundits talk of a 'culture of welfare' they are referring mainly to the Dollars 20bn spent on Aid for Families with Dependent Children, a benefit received by 5m single-parent families. The objection is not that some families in straitened circumstances need AFDC as a short-term prop, but that half of those on welfare behave as though they have a meal ticket for life.

So what should Mr Clinton do?

Many conservatives favour the concept of a strict time limit. Once people accept that benefits are not going to be paid indefinitely, they argue, behaviour will change. Teenagers will stop having babies and start recognising the economic advantages of marriage. Those whose welfare benefits expire will face a stark choice: accept low-paid employment or hand over children for adoption. At first the adjustment will be horribly painful but in the longer term society will gain enormously because destructive lifestyles will no longer be underwritten. With its economic life support system (welfare) ripped away, the underclass will shrivel.

But no modern president would contemplate so brutal a social experiment. If welfare stops, something has to take its place. One suggestion is that Mr Clinton should follow the example of Roosevelt's Works Progress Administration, an agency that at its peak created over 3m public sector jobs. After two years, welfare cheques would thus be replaced by the offer of a government job at slightly below the private sector minimum wage. Mothers with young children would also be offered state child care facilities. According to one advocate, this would amount to replacing the welfare state by the 'work ethic state'.

This solution is more appealing than a mere cessation of benefits. But it would involve a huge expansion of public sector employment and cost perhaps Dollars 50-60bn a year, far more than the Clinton administration is willing to spend on welfare reform.

Fortunately there is a fall back position for Mr Clinton: the bipartisan Family Support Act of 1988, which he helped steer through Congress. This recognised the impossibility of ending welfare overnight and instead set targets for the gradual introduction of 'workfare'. Next year states will receive federal assistance only if they ensure that at least 15 per cent of the 'employable' welfare case load is working or in training programmes; by 1995 the required ratio rises to 20 per cent. These seemingly undemanding targets require a much larger fraction of the welfare population to take jobs at some point during the year.

Mr Clinton could tighten the definition of 'employable', so as to include mothers with children under the age of three, and set more demanding workfare participation targets, for example that 50 per cent of welfare recipients should be working or in training by the year 2000. Such a gradualist approach would be both humane and cost effective. The only trouble is that it falls far short of the presidential promise to 'end welfare as we know it'. Like Mr Bush, Mr Clinton may have raised expecta-tions that simply cannot be met.

It is Saturday night in a gloomy Beijing hall. Dozens of men and women line the walls, observing and chatting while a few couples waltz to the music of Strauss.

This is a Beijing singles club, and the atmosphere could hardly be further removed from the raucous karaoke bar culture that has mushroomed in Chinese cities: nor does the scene bear much relation to the image of modern China projected by the media.

To an extent, the club is a casualty ward of the enormous social change sweeping China that is producing its share of wounded spirits and broken dreams. Madam Wen, a 37-year-old accountant, becomes tearful as she explains that, after 12 years of marriage, her husband has abandoned her for another woman. 'Traditional values are being swept away,' she says.

Madam Wang Xingjuan, a women's activist and founder of the Beijing singles club, believes that, while economic liberalisation and opening to the outside world have brought many benefits to China, some women have been victims of change.

For a start, the divorce rate has gone up sharply, especially in urban centres like Beijing, rising from 2.1 per cent of marriages in 1981 to 17.7 per cent in 1992. Nationally, marriage failures reached 8.7 per cent last year, low by international standards, but a big increase on previous rates and still rising.

One of the main causes of the rapid increase in the divorce rate, according to Madam Wang, is growing affluence, which is loosening family bonds. 'Men are better off and are looking for lovers. They are losing their sense of responsibility,' she says. 'They are being influenced by western television programmes with their sexy scenes. Extramarital sex is commonplace.'

Prostitution on a fairly big scale has also returned to Chinese cities, perhaps further complicating family relationships. According to Madam Wang, some 200,000 prostitutes were detained last year throughout China, but she estimates that numbers of prostitutes nationwide exceed 1m.

Reaction to a National Women's Hot Line reveals a widespread desperation among urban women over the enormous change in their lives. While life might have been fairly drab in the past, there was more certainty, more stability.

Forty per cent of callers wish to talk about marriage problems, including divorce. Madam Wang and her assistants urge conciliation, but if the marriage has broken down irretrievably they advocate divorce, which has become much simpler in China since the passage in 1980 of a new divorce law.

Previously, social and political pressures, plus the difficulty of securing legal approval for a divorce, had condemned many unhappy couples to stay together. During the Mao era divorce was denounced as bourgeois, and the careers of those who dared to separate were jeopard-ised.

Madam Chen Yiyun, a sociologist with the Chinese Academy of Social Sciences and one of China's leading researchers on women's issues, says that, before China's opening to the outside world in 1978, there were basically two categories of women: urban and rural. Now she identifies four types of urban women.

These include those who have gone into business themselves or who work for joint venture companies; middle-aged women who are relatively uneducated and who have most difficulty coping with change; professional women who are established and do not feel threatened by the changes; and older women whose marriages and lives are fairly settled, and therefore are relatively unaffected.

It is women in the second category who are proving most vulnerable. 'Many of these middle-aged women feel lost and confused,' says Madam Chen. 'Many have worked in state-run factories, but have been fired. It's very hard for them to find a job, and start a new life.' Estimates suggest there are 20m excess labourers in Chinese factories, 70 per cent of whom are women.

Another problem in urban Chinese society is the surfeit of well-educated single women, and this in turn is adding to pressures on existing families. This excess of women in their 30s and early 40s can be attributed to several factors, among them that many young men sent to the countryside in the 1960s during the Cultural Revolution never returned to the cities. Thousands of men have also drifted away from cities like Beijing to make their fortunes in the booming southern coastal towns like Shenzhen and Hainan island.

Of the 1,000 members of the Beijing singles club, 60 per cent are women, and almost all are professionals. Most, if not all, are looking for a husband. Typical is 39-year-old Miss Sun, a magazine editor, who feels under pressure from her family to marry, but has been unable to find the right man.

'The situation is difficult for women today in Chinese society,' she says. 'We are still governed by traditional values, where society looks up to men and down on women. In the allocation of housing, for example, women are always last to get their own place.' Miss Sun is obliged to live in a dormitory, sharing a room with another girl.

Madam Chen says that while it seems that men have benefited from the radical changes in Chinese society more than women, many men are feeling stressed by the pressures of the new consumer age.

'You get so much, earn so much, but you also sacrifice so much,' she says. 'Men are complaining that their wives are buying more clothes and cosmetics. Before, men did not feel so pressured.'

At the Beijing club each Saturday, couples in their best clothes dance on, hoping that this might be their lucky day.

On the wall of the state premier's office in Mainz, capital of Germany's Rhineland-Palatinate, hangs a large and rather faded Gobelin tapestry. It has been there since the days when Mr Helmut Kohl, German chancellor, was the first man in the Land.

I confess that I don't find it very beautiful,' says Mr Rudolf Scharping, the current incumbent of the office. 'I'm planning to replace it with this,' he says, producing from behind his desk an austere but striking Andy Warhol original, recently presented by a friend.

The painting features three champagne glasses, two of them overturned, one upright. 'It seems rather appropriate,' he says.

Just so. For Mr Scharping emerged in June as the clear victor in a three-way race for the leadership of Germany's opposition Social Democrats. Since then he has moved rapidly to consolidate his position, persuading his principal rivals to back him as party candidate for Chancellor.

The fact that he has still not quite set his personal seal on his office in Mainz, since he defeated Mr Kohl's Christian Democratic Union in state elections in April 1991, is also perhaps appropriate. For his sights are now set on Bonn, and the race to displace Mr Kohl in next year's national elections.

It is going to be an uphill struggle, the young pretender against the old campaigner. The SPD has been floundering in the opinion polls, locked in inner-party debates, and shaken by the resignation of its former leader, Mr Bjo rn Engholm, because of a local political scandal, just when it should have been leading the CDU. The economy is in the doldrums; unification, Mr Kohl's great achievement, is proving painful in both east and west; and Mr Kohl himself, in office for 11 years, is blamed for lack of leadership.

Yet Mr Scharping, dapper, neatly-bearded and articulate, but uninspiring in delivery, immodestly sees his own election as SPD leader - in the first poll of grassroots party members - as a potential turning-point. He could be right.

'The SPD is suddenly more hopeful,' he says. 'June 13 (the day of the leadership poll) was a great relief. All this discontent and anxiety, if not completely wiped out, has at least become much less important. Now we must try to use this new enthusiasm.'

He has to overcome the natural inclination of the left-wing Social Democrats to self-destruct in internecine warfare; to counter the impression that social democracy has no role, since the collapse of communism; and to shake-off an immediate inclination of the media to label him as a mini-Helmut Kohl - a cautious man of consensus and career politician, leading from behind.

Since June he has shown he can act decisively, swiftly appointing an election team to unite the the party.

Now he has to deal with the issues, and raise his public profile. It is easier said than done. Last week he suffered his first reverse, when his party colleagues refused to back a move to relax their objections to the Bundeswehr (military) becoming a full participant in UN operations.

'It is embarrassing,' he admits, 'but it is also absurd that a significant part of our whole debate on foreign relations should be concerned exclusively with military matters: that is a dangerous limitation. A foreign policy which fails to keep focused on the economic, social and political stabilisation of eastern Europe, which loses sight of the north-south divide, and therefore loses sight of the real causes of worldwide migration of peoples, that is no foreign policy at all.'

He argues that the answer lies in strengthening the UN itself. 'As it gets stronger, and its activities become UN activities, and not merely the extended arm of a single member state, then it will be easier to see its activities as part of a genuine common security. That is a concept the SPD has always had in mind.'

The next tough issue he has to deal with is the question of curbing the explosion of social welfare costs. He knows that his party cannot continue simply to oppose all cuts in social spending, at a time when the budget deficit, fuelled by the costs of unification, is soaring.

'The government is trying to cut social spending at the expense of the people who can least afford it, the homeless and the unemployed,' he says. 'That is unacceptable. It won't create more jobs or houses. We need to ask what payments are necessary, which people need them, and at what income level should they be paid.' That means more means testing. As a state premier responsible for attracting investment to his own area, he is acutely conscious of the debate over the high costs, and declining competitiveness, of Germany as an investment location. He does not think the answer lies in going back to a 40-hour week. He does think there should be far more flexibility.

'Some international companies are much more imaginative about this than the political establishment,' he says, citing the example of IBM in Mainz.

He sees the idea of 'social dumping' - seeking to attract new investment by offering lower wage costs, including social costs, to companies - as self-defeating. 'It won't work in Germany, France, the Benelux countries or Great Britain,' he says.

He wants the Maastricht treaty put into effect, and he wants Britain to sign on to the social chapter. 'But I don't have any advice to give,' he insists. 'Britain must decide for itself.' As for economic and monetary union, 'Nobody in Europe should make themselves slaves to a timetable.'

What European co-operation needs to focus on is joint action to tackle the technological deficit. 'I remember 15 years ago books appeared in the US calling Europe the sclerotic continent. We were dying of old age, and would perish. It has not happened.

'But I am in favour of the Europeans discovering their common interests. One problem we all share is that in product innovation we must make greater efforts. We should do that together. Our key industries of the future, like micro-technology, computers, electronics, genetic technology and bio-technology, are too weak. We cannot just sit back. If we do, we will learn very painfully that these strengths can be acquired by others, too.'

Mr Scharping's predecessor as SPD leader, Mr Engholm, was probably more telegenic. He was also an instinctively gloomy, pipe-smoking northerner. Mr Scharping doesn't fiddle with a pipe. Instead, he sits calmly eating a peach in the middle of the interview.

Unlike Mr Engholm, he also knows the dangers of excessive pessimism. It lost the SPD the last election, because they spelt out the costs of unification all too bluntly.

'There are far too many people in Germany who just talk in terms of tasks and problems and difficulties, and not about opportunities and challenges,' he says. 'I don't underplay the problems, but for me, unification is not just an historic opportunity, it is also an extraordinary challenge.

'That should not prevent one saying what needs to be done, in order to turn that opportunity into reality. Most people who vote in elections are voting for a hope, for a vision of a future, not a reckoning with the past. It's the job of the SPD to give a realistic hope for the future.'

The media is obsessed with the likelihood of Scharping and Kohl working together in a grand coalition after the next election. But the SPD man won't be drawn. 'The chances are very small,' he says. 'The polls don't tell us much about what could happen next year. If I believed the polls I would never be sitting here.

'Things will only get better in Germany if the SPD gets stronger. That is what I am concentrating on right now. Whoever eventually may offer to help the SPD take power, that can be decided after the next elections.'

PERSONAL FILE 1947 Born Niederelbert in the rural Westerwald 1966-74 Studied political science, law and sociology at Bonn university. 1966 Joined SPD. Became state chairman and national deputy chairman of Jusos (Young Socialists). 1975 Elected to state parliament of Rhineland-Palatinate. 1985 Party leader of SPD in Rhineland-Palatinate. 1987 Defeated in state elections; opposition leader. 1991 Election victory ends 44 years of Christian Democrat rule in Rhineland-Palatinate. 1993 Victor in ballot for national party leader of SPD. Confirmed at party congress.

AFTER THE recent debacle in the European exchange rate mechanism, there are signs that the market's attention could focus more intensely on the dollar, writes James Blitz.

The US currency appeared to be at a turning point against the D-Mark on Friday night. For the second day running, it closed below the DM1.67 level against the German currency.

Some analysts have seen that as an important level. The dollar spent the first six months of this year trying to break through that chart point.

Two sets of data in the US will determine whether the dollar chooses the upside or downside from this level. Tomorrow's National Association of Purchasing Managers' survey could point to only moderate output growth.

An even more significant indicator will be the August non-farm payroll, with the market expecting a rise of 150,000 on the month.

This is regularly seen as the most important indicator for the dollar in the US market. Mr Paul Chertkow, global currency strategist at UBS, believes a strong figure will give the US currency strong support.

The research team at Swiss Bank is more sceptical about the dollar. In its new weekly bulletin on investment strategy, Swiss Bank forecasts that a break towards or below its year-end target of DM1.60 will take place next month.

Much will depend, of course, on data coming out of Germany. The Bundesbank has given a very strong indication that it intends to keep policy on hold for some time. However, the industrial output indicator for July is due out this week.

This is expected to show an 8 per cent drop on the year, adding to pressure on the Bundesbank to stimulate the German economy by easing interest rates.

Wall Street

US SHARE prices ended slightly firmer after moderate trading yesterday, aided by stronger overseas markets and further declines in domestic bond yields, writes Patrick Harverson in New York.

At the close the Dow Jones Industrial Average was up 3.36 at 3,643.99. The more broadly based Standard & Poor's 500 ended 1.36 higher at 461.90, while the American SE composite gained 1.28 at 456.27 and the Nasdaq composite added 3.31 at 737.38. Trading volume on the New York SE amounted to 194m shares.

At the end of last week, profit-taking brought leading indices a few points down from their record highs, so analysts were expecting this week to start on an upbeat note. Those expectations were met, partly due to gains in Japanese, German and French equity markets, and to fresh strength in the US bond market.

In recent months lower bond yields have been the main driving force behind the equity markets' record-breaking run, and yesterday the benchmark 30-year government bond edged higher once again, lowering the yield on the issue to 6.115 per cent, near its historic low.

The day's only major economic news - the 5.0 per cent drop in July new home sales - had no apparent impact upon investor sentiment. Investors will get a much better picture of the state of the economy later this week when a raft of key data, including second-quarter real gross domestic product and the August employment report, is released.

Technology issues were in demand, with Motorola firming Dollars 7/8 to Dollars 96 1/2 , IBM adding Dollars 1/2 at Dollars 44 5/8 , Digital Equipment rising Dollars 3/8 to Dollars 41 1/2 and Compaq, which launched new models on one of its range of personal computers and lowered prices on others, gaining Dollars 1/4 at Dollars 52 3/4 .

Chubb fell Dollars 1 5/8 to Dollars 88 1/4 as investors responded to news that the big insurance company will be taking an after-tax charge of Dollars 358m, or Dollars 3.95 a share, in the third quarter to cover an agreement that one of its units has struck to settle certain asbestos-related insurance claims.

Profit-taking took the shine off car manufacturing issues, which were among the market leaders last week. Chrysler eased Dollars 1/4 to Dollars 43 1/4 , Ford shed Dollars 1/2 to Dollars 51 1/4 and General Motors dipped Dollars 3/8 to Dollars 47.

On the Nasdaq market, Lotus Development moved ahead Dollars 2 1/2 to Dollars 33 1/2 in volume of 3.5m shares after broking house Donaldson Lufkin & Jenrette upgraded its rating on the stock to 'buy' from 'moderately attractive', citing the strength and breadth of the company's products.

Other technology stocks were also firmer, with Microsoft up Dollars 3/4 at Dollars 72 5/8 , Intel Dollars 3/8 higher at Dollars 64 and Sun Microsystems Dollars 5/8 ahead at Dollars 25 7/8 .

Canada

TORONTO posted a small rise in relatively light trading. The TSE 300 index finished 5.4 higher at another record closing peak of 4,138.8 as advances led declines by 382 to 330 after volume of 45.6m shares.

The gold shares index added 1.44 per cent as the New York bullion price gained USDollars 1 an ounce. Minings also registered a solid gain.

GOLD shares ended mainly lower in slow trading as the bullion price remained steady. The golds index relinquished 9 to 1,705, while the overall index receded 6 to 4,011. However, industrials inched forward 1 to 4,615.

Among golds, Vaal Reefs resisted the trend and firmed 50 cents to R349.50. Kloof lost 75 cents to R42.75 and Gold Fields fell R2.25 to R82.50.

Elsewhere, Barlow Rand and SA Breweries retreated 50 cents apiece to R40.50 and R62.50 respectively.

THE ABSENCE of UK traders for the August bank holiday affected bourse turnover, writes Our Markets Staff, leading in some cases to increased sensitivity at share price level.

PARIS, hoping for an interest rate cut by the Bank of France, which failed to materialise, nevertheless maintained its heady optimism for economic recovery, and the CAC-40 index soared to another record close. The index advanced 21.79, or 1 per cent, to 2,205.67 in turnover of FFr2.7bn.

Even a rise in unemployment data, which came in at a record high of some 3.2m, did not dent the market's enthusiasm, as the Matif also rose to unseen levels. Some technical trading ahead of today's expiry of August futures and options was another contributory factor behind the gains.

There were technical reasons, too, for the rise in St Gobain and L'Oreal stock, with the index weighting of the two groups due to be increased today as new shares are listed. St Gobain rose FFr7 to FFr584 and L'Oreal FFr27 to FFr1,183.

Canal Plus was one of the day's few fallers, off FFr7 to FFr1,295, as the government announced plans to raise the limit on stakes held in television companies from 25 per cent to 50 per cent.

FRANKFURT overcame a couple of minor disappointments to close higher, led by Allianz on technical grounds and Daimler on fundamentals. The DAX index rose 17.29 to 1,921.89 with Allianz up DM58 at DM2,570 and Daimler DM18.50 higher at DM748.50 - both at new highs for the year.

Turnover fell from DM6.7bn to DM5.8bn. DB Research said that it liked the Allianz chart, now that the insurer has broken firmly through the DM2,500 level; a technical analyst saw the next resistance level at DM2,800.

Daimler figured in a weekend report by Manager magazine which said that its Mercedes operating unit wanted to cut costs by DM3bn in the current year, in addition to job cuts already announced. Daimler said there was nothing new of substance in the report.

Hoechst, the third of the big three chemical groups to report half year profits, lost DM1.10 to DM280.10 after a 31 per cent fall at pre-tax level. Some traders called this marginally disappointing; others said that the results were in line with expectations after the BASF and Bayer declines last week.

A more dramatic fall was seen at Linotype-Hell, the printing machinery company, which lost DM32 to a new 1993 low of DM378 after a heavy first half loss. It recovered from an intraday low of DM365 after the company announced a wide-ranging job cuts programme to reduce its workforce by 15 per cent.

ZURICH featured recovery hopes at the employment agency group, Adia, and the forecast of a marked 1993 loss at the telecommunications equipment manufacturer, Ascom, as the SMI index maintained its equilibrium to close 2.5 higher at 2,481.0.

Both Adia and Ascom had been seen as turnround situations, said Mr Frederick Hasslauer at Swiss Volksbank in Zurich, but yesterday's news sent them in opposite directions with Adia SFr4 higher at SFr175 and Ascom SFr70, or 5.3 per cent lower at SFr1,250.

AMSTERDAM set new records, with the CBS Tendency index gaining 1.8 or 1.4 per cent to 129.9. The financial sector was strong following ABN Amro's good results last week: its shares advanced Fl 2.00 to Fl 69.20, while ING was up Fl 2.20 to Fl 73.90.

IHC Caland, the dredging group, added Fl 2.50 to Fl 38.00 in advance of a forecast of 14 per cent profits growth in 1993, which came after the close.

MILAN saw some activity in Montedison and Ferfin as the former's shareholders meeting was held, with the latter's due today. Montedison picked up L41 or 5 per cent to L845 as fears that there might be an announcement of a merger between the two groups abated. Ferfin's shares advanced L4.75 to L245.

The Comit index rose by 4.95 to 632.86.

Analysts at InterEuropa added that strength in banks yesterday might also have been due to a number of foreign investors coming into the market. Banca Commerciale rose L47 to L5,432 and Credito Italiano L70 to L2,850.

BRUSSELS sounded despondent as the Bel-20 index ended 8.88 down at 1,306.25 in lower than usual turnover of BFr704m. The market has retreated from the highs it achieved nearly three weeks ago; some dealers said that investors were unwilling to move on Belgian shares until the country's social pact is on track, and a solution is found to its burgeoning pubic debt.

STOCKHOLM's equities, especially its interest rate sensitive ones, defied a rise in bond yields as the Affarsvarlden general index recovered 22.00, or 1.7 per cent to 1,292.20 with the financial index up 4.4 per cent.

Volvo Bs closed SKr14 better at SKr484 on speculation about a merger with the French Renault, and on last week's unexpectedly strong six-month earnings report.

VIENNA continued to move forward, although prices ended off earlier highs. The ATX index rose 3.51 to 1,007.75.

WARSAW fell by some 7 per cent as as investors took profits after the market's recent heavy gains. The WIG index fell 503.4 to 6,970.7 in active turnover of 1,000bn zlotys.

The FT-SE Eurotrack 100 index was unavailable yesterday because of the holiday in the UK.

HOPES of an imminent cut in the official discount rate helped the Nikkei average to register its fifth consecutive gain, writes Emiko Terazono in Tokyo.

The Nikkei rose 121.01 to 20,912.69. Index-linked trading supported activity in the morning session, but lost steam later, the index falling to a day's low of 20,747.67 in the afternoon before rising to a high of 20,924.09 just before the close.

Volume came to 205m shares and advances led declines by 615 to 332, with 217 issues unchanged. The Topix index of all first section stocks put on 7.09 at 1,677.63.

Market participants hoped that the government's flotation of East Japan Railway shares, which will be listed in October, would revive trading. The public offering price for the 1.4m shares was fixed at Y380,000 after the market closed.

Fujitsu, the day's most active issue, firmed Y5 to Y839, supported by hopes about the government's investment in telecommunication infrastructure, and the company's development of a shopping cart with a scanner which reads bar codes. Nippon Telegraph & Telephone appreciated Y8,000 to Y955,000.

Strong demand in semiconductor chips boosted Nikon, which climbed Y12 to Y937. The company is likely to revise upwards its sales forecasts forchipmaking equipment for the year to next March.

Housing issues were strong on hopes of renewed demand in the near term. Sekisui House rose Y30 to Y1,440 and Daiwa House Y40 to Y1,710.

Steels were lower on profit-taking: Nippon Steel shed Y6 to Y375 and Kawasaki Steel lost Y9 to Y365.

In Osaka, the OSE average rose 27.50 to 22,773.75 in volume of 20.2m shares.

Roundup

THE REGION was quiet and mixed yesterday, reflecting the UK holiday and other closures in Hong Kong, Kuala Lumpur and Jakarta.

AUSTRALIA set a six-year high, the All Ordinaries index adding 7.4 at 1,956.0, its best since before the global stock market crash in October 1987.

Turnover fell from ADollars 810m to ADollars 366m, but brokers reported US-based buying on a combination of a higher gold bullion price and a favourable interpretation of Australia's current account deficit.

Media stocks were among the star performers, the media shares sub-index rising 265.1, or 1.8 per cent, to 14,353.0 after weekend claims that they were undervalued. News Corp moved forward 10 cents to ADollars 10.04 and John Fairfax was 19 cents higher at ADollars 2.95.

SEOUL tumbled in thin trading as it extended last week's 6 per cent decline, the composite index falling a further 17.70, or 2.6 per cent, to 672.12 in volume of 12.9m shares.

Share prices were hit by speculation that the government will not include measures to boost the stock market today when it unveils a package of follow-up measures aimed at minimising the adverse effect of the newly enforced financial system, requiring the use of proper identities in all financial transactions.

NEW ZEALAND was dragged lower by falls in Telecom, Carter Holt Harvey and Fletcher Challenge, although Brierley Investments bucked the trend, rising 4 cents to a 1993 high of NZDollars 1.25 on speculation about a large asset sale, later denied by chief executive Mr Paul Collins. The NZSE-40 index finished 14.40 down at 1,984.10 in turnover of NZDollars 65m.

SINGAPORE consolidated, a 12.82 fall to 1,995.10 in the Straits Times Industrial index aggravated by a decline in Metro Holdings, which traded ex-rights for the first time.

MANILA was lifted by Friday's advance of Dollars 1 1/8 to Dollars 42 3/4 in Philippine Long Distance Telephone on the American Stock Exchange. The composite index rose 10.28 to 1,776.07.

BOMBAY, closed today for a Moslem holiday, fell 35.17 to 2,633.79 in thin trading.

Taiwan's equity market could be ready for an upturn helped by improved prospects for export-oriented manufacturers and financial companies.

Confidence may also revive on political grounds: worries over a possible split in the ruling Kuomintang (KMT) party were eased earlier this month.

Some analysts believe that the TSE weighted index could again reach the 5,000 level that it hit at the beginning of April this year, although others more cautiously forecast a move to about 4,400.

Since April the index has fallen back, before stabilising around the 3,800 to 4,100 area, closing yesterday at 3,923.

The market's prospects may also be helped by a recommendation last week by Baring Securities, rating Taiwan as the most attractive of the world's emerging markets, with performance in the short term being assisted by the strength of the dollar.

The market's first-quarter rally coincided with the resignation of Mr Hau Pei-tsun as prime minister and his replacement by Mr Lien Chan, who has adopted a more pro-business style of government.

However, indications of an economic slowdown emerged in the second quarter, while the start of an economic contraction in mainland China also hurt a number of manufacturing companies exporting to or investing there.

As a result, the weighted index fell back, recording a year's low of 3,135.56 on July 7.

Earlier hopes for brighter economic prospects in the second half have been dampened by the most recent government forecast, which anticipates a slight decline in growth in the last six months of the year. Nevertheless, the recent depreciation of the New Taiwanese dollar against the US dollar has begun to have a positive impact on export orders.

'This factor will boost the performance of export-oriented sectors, such as electronics,' says Mr George Hou, deputy manager of the fund department of Jardine Fleming Taiwan Investment Management. He adds that the performance of Taiwanese electronics companies will also be helped by the intense competition raging in the personal computer sector in the US and Japan.

'US and Japanese makers are coming to Taiwan to order low cost but high quality components, or to set up original equipment manufacturing arrangements,' he notes.

The most positive development for equities has been the recent decision by the Central Bank of China to relax its usually tight monetary policy in an effort to spur a sluggish economy.

Mr Lin Yung-kui, manager of SG Warburg's research department in Taipei, believes that this decision will be 'a very major factor' in boosting the market.

The Central Bank of China began to lower interest rates on secured loans from banks to encourage local banks to reduce their own rates.

But after major local banks showed a reluctance to make rate reductions, the CBC relaxed selective credit restrictions on August 14. These had been imposed in February 1990 to cool speculation in equities, the property sector and foreign exchange markets at a time when the TSE hit its all-time high of more than 12,000.

'This measure, and lower deposit rates, will make stock market investments more attractive,' says Mr Hou.

Taipei is also trying to attract more foreign capital into the local market, mainly through liberalising the regulatory environment.

Mr Yu Ping-nan, assistant general manager of CBC's foreign exchange bureau, says the bank, together with the Ministry of Finance and the Securities and Exchange Commission, decided to introduce several measures to encourage foreign investment in the equity market.

Mr Yu says the Ministry of Finance will soon announce a rise in the total quota for investment by foreign securities houses in the stock market from Dollars 2.5bn to Dollars 5bn. Approved foreign securities investment has already surpassed Dollars 2.1bn.

'Foreign investment is far below the proposed new quota, but the move indicates a positive attitude,' says Mr Huang Shu-shen, vice-president of the international department of National Securities.

The CBC also announced recently a rule which allows each foreign investor to invest up to Dollars 100m at a time, instead of having to divide investments in lots of Dollars 50m. The CBC also asked the Ministry of Finance to liberalise rules on the repatriation of capital and earnings.

At present, each investor can repatriate earnings or invested capital a year after entry and only once each year.

The new draft rules, which may take effect by the end of the year, will allow foreign investors to repatriate earnings or invested capital within three months of entry, and will not place limits on the number of transactions.

Mr Lin Yung-kui, manager of SG Warburg's research department in Taipei, is impressed: 'Unless the results of the local elections in late November are very bad for the KMT, political apprehension should be relaxed, producing a strong performance in the last month of the year.'

IN THE wake of the widening of the exchange rate mechanism's bands earlier this month, European political leaders - and in particular the French - have talked of getting their own back on the speculators who sabotaged their cherished system. But the politicians may not have to wait very long before they get some revenge.

Over the last year, currency dealers have made substantial profits by taking successful one-way bets on the devaluations of sterling, the Italian lira, and the Iberian currencies. But the latest ERM crisis does not appear to have been a source of unqualified joy for foreign exchange players. Unexpected exchange rate movements in the French franc and Danish krone have trimmed some of the profits of speculators who were selling these currencies.

At the same time, the greater fluctuations now seen in European exchange rates have forced some speculative players to abandon long-standing techniques for making huge profits out of Europe's semi-fixed exchange rate system.

In recent weeks, some dealers in London and New York have talked of how movements in European currencies have taken them by surprise and caused them to give back some of their profits.

The French franc has performed far more strongly against the D-Mark than had been anticipated when the ERM bands were first widened. Instead of the immediate move down to FFr3.60 against the D-Mark that had been expected, the franc bottomed out at FFr3.5300 immediately after the ERM bands were widened.

The franc has been supported by France's policy of slowly reducing interest rates, and analysts think that the French currency will soon be forced to new lows against the D-Mark. But some traders who borrowed francs and sold them near the FFr3.5300 level have closed their positions and taken a loss.

A number of US investment banks have operated funds in recent years which allowed customers to use low interest rate currencies, like the US dollar, to invest in high-yielding ones like theDanish krone and Spanish peseta.

These investments were bound to lead to high returns because there was little chance of a depreciation in the value of the currencies that had been purchased while they were in the narrow bands of the ERM.

Using the technique of margin trading, an investment bank could enhance profits by taking positions in these currencies which were up to 10 times the size of the original sum deposited by clients.

But the recent changes in the ERM, and the greater volatility in exchange rates, has made these funds far riskier to operate.

Last week, Bankers Trust, the US investment bank, revealed that it was seeking a vote from investors to liquidate a fund called 'The Diversified Currency Management Fund' which had made substantial gains by investing in European currency markets.

Bankers Trust said it was also seeking to change the nature of operations of another fund which had gained from differentials in interest rates. Its investment objectives were now to become more 'opportunistic'.

Both funds had assets of Dollars 640m invested in them by the bank's customers. The funds were used to take leveraged positions up to 10 times that size, and could therefore have been responsible for pushing as much as Dollars 6bn through the currency market.

Mr Bill Tazza, managing director at Bankers Trust, said the investment bank had been 'pro-active' in its decision, and that the widening of the ERM bands had made this interest rate play more difficult. He said the decision to change the nature of these funds had not been taken against a background of losses.

'There are quite a number of these sorts of fund in the market place,' he said, 'but the risk/reward ratio of this trade has now changed considerably'.

European governments should not take the view that the crisis in the fixed exchange rate system was entirely in the interests of currency speculators. For some players in this market, the wreckage of the ERM may have signalled the end to an era of easy profits.

JUDGING by the recent flurry of international bond issues from Finland and Sweden, a significant thaw is under way in investor sentiment which a few months ago was as frozen as the Baltic Sea in winter.

'If I count the number of foreign investment banks that call me and send me proposals compared to 10 months ago, then, yes, it is clear that attitudes have changed,' a senior Stockholm banker remarked last week.

Late last year, when the extent of the losses run up by Nordic banks became clear and the region was wracked by a deep economic and currency crisis, foreign investors turned their backs on what had previously been among the world's best credit risks.

But pledges by the governments of Sweden, Norway and Finland to support their respective banking systems, as well as mounting evidence that the banks are coming off the critical list, has enabled investors to adopt a more balanced view on Nordic borrowers

'I think it is a crucial factor for foreign investors that they see the level of government support behind the banks,' says an official at Finland's Okobank, whose Dollars 150m issue of floating-rate notes (FRNs) in July marked a turning-point for Nordic credits.

The most obvious indicator of the extent of the rehabilitation of Swedish and Finnish borrowers has been the sharp cut in the margin or 'spread' they have to pay over the yield on underlying government paper. Last week, Finland achieved its best pricing in three years when it raised Dollars 250m through an offering of three-year Eurobonds priced to yield 28 basis points over underlying US Treasuries. During the financial crisis last year, spreads on Finnish sovereign paper widened to around 90 basis points.

Sweden is now able to raise funds at 10 basis points below the London interbank offered rate (Libor) compared with around 25 basis points over Libor late last year when, like Finland, it had to raise large amounts quickly.

Now that the sovereign borrowers have accomplished a large part of their international funding programmes, there is room in the market again for the banks and the spreads they have to pay have come back down.

Last week Spintab, the Swedish domestic mortgage association owned by Swedbank, raised Dollars 250m through an issue of five-year FRNs at an all-in cost of 33 basis points over Libor, less than half the spread on a similar offering launched in February.

Kansallis-Osake-Pankke (KOP), the leading Finnish bank, also tapped the market last week with a Dollars 150m issue of perpetual subordinated notes. This would have been virtually impossible several months ago when investors were reluctant to buy even senior Nordic debt.

Mr Jean-Francois Tapprest, who deals with international funding at KOP, says: 'The access to funds has opened totally and the spread which KOP has to pay over Libor for three to five-year maturities has halved.'

The rehabilitation of Nordic borrowers is being helped by a hunger among investors for high-yielding assets. Despite the improvement in pricing, Nordic issues still offer a substantial pick-up over the yields on other bonds. In addition, investors are now eager to buy Nordic bank debt in anticipation of an upgrading of their credit ratings.

Their hopes have been fanned by the recent crop of good news from the banking sector. Earlier this month Scandinaviska Enskilda Banken, Sweden's leading bank, said it had returned to profit in the second quarter and had withdrawn its request for state support.

Norway's two biggest banks, Den norske Bank and Christiania Bank, reported a return to profit in the first half. In Finland, KOP and Unitas, the second-largest bank, say they will cut their losses this year.

So far, the two biggest Swedish players, SE Banken and Svenska Handelsbanken, have not moved back into the bond market, concentrating instead on rights issues in order to rebuild their capital.

The only Swedish corporate borrower this year has been Vattenfall, the national power group, which raised Dollars 500m through an issue of five-year Eurobonds in May.

Syndicate managers and borrowers alike believe spreads will continue to tighten, but there are two factors which could interrupt this trend. One worry is the huge borrowing requirements of the Swedish and Finnish governments stemming from their budget deficits.

They are spreading their borrowing among different instruments, but there is some concern that non-sovereign borrowers could be crowded out once again, in which case spreads would go back up.

The second is the depth of demand for Nordic issues, despite the improvement in investor sentiment. 'Certainly there is a window of opportunity now,' says an official at a senior Swedish bank. 'But if a lot more banks come out with issues rapidly, the market could become saturated.'

NOW that 30-year bond yields, currently at 6.1 per cent and falling, look as if they will breeze through the 6 per cent barrier, some Wall Street analysts are beginning to have second thoughts about the robustness of the market's rally.

Donaldson, Lufkin & Jenrette is one broking house clearly unnerved by the bond market's strength. In its latest weekly report, it warned: 'We regard the long end of the fixed income market as severely overbought and vulnerable to a 35-45 basis point intermediate-term back-up in rates.' It predicted a sharp upturn in yields would follow on the heels of this week's economic data.

The people at Bear Stearns have similar reservations, although they believe any upturn in bond yields is probably a bit further down the road. In a report entitled 'Bond Overshoot,' Bear Stearns economists wrote: 'It is our judgment that people are underestimating the US economy at present . . . We believe that the pace of growth in the second half of this year will be stronger than many people think. Based on the fundamentals, the bond market will face a correction later in the year.'

Mr Robert Brusca, the chief economist of Nikko Securities who has long been unconvinced by the bond market's rally, took a similar track. His argument is that inflationary pressures are lurking in the economy, ready to reappear.

Some of these remarks must have been prompted by last week's bond market performance, which was nothing short of remarkable. It was a week when no important economic data was published, and when nothing new about the direction of monetary policy was said.

Yet it was a week when the 30-year bond gained one and a quarter points, and yields dropped from 6.22 per cent to 6.1 per cent. All of this was achieved without any particular support from fundamentals, or even the technicals - it seemed that the momentum of the market's summer rally was the only thing keeping prices moving higher.

At least this week dealers and investors should have something substantial to get their teeth into, in the form of a fresh supply of economic data. If bond yields are to drop quickly under 6 per cent, the economic news will have to be consistently bearish.

Today's release of preliminary second-quarter real GDP figures should cause a stir. Two weeks ago, the government announced an unexpectedly wide June trade deficit, since when economists have been predicting that the real GDP numbers would be revised downward to reflect the drop in export sales.

Consequently, analysts expect real GDP growth to come in between 0.8 per cent and 1.0 per cent, down from the original estimate of 1.6 per cent. These revisions are already priced into bonds, but any figure under 0.5 per cent would probably prompt heavy buying, and could well send the 30-year yield below 6 per cent for the first time.

Tomorrow's purchasing managers' index for August will also be closely watched, and the consensus of forecasts shows the NAPM index of manufacturing activity edging above 50 per cent for the first time since May.

The most important number of all arrives on Friday. The August employment data will provide the latest look at the still-depressed labour market. Economists, however, anticipate broad improvement in the data, with non-farm payrolls rising between 85,000 and 200,000.

An increase in the civilian labour force, however, will probably have pushed the national unemployment rate up from 6.8 per cent in July to 6.9 per cent or 7.0 per cent.

News of an unexpectedly large 5.0 per cent decline in July new home sales boosted US Treasury prices yesterday. In late afternoon trading, the benchmark 30-year bond was up 5/16 at 101 27/32, yielding 6.115 per cent, and the two-year note was up 3/32 at 100 1/16, to yield 3.80 per cent.

JUST when you think it is time to get out of the water, the sun comes out again.

So it has been with the UK government bond market. The rally that had extended for the past three months taking long-dated maturities to record highs was, by the early part of last week, beginning to look slightly waterlogged.

Dealers at some UK investment houses said overseas investors, particularly from the Middle East, were pocketing profits. Overseas buyers have been one of the mainstays of the rally with gilts seemingly offering a way into a strengthening pound plus an economy growing with low inflation.

Thus it had begun to look comparatively chilly for long gilts even before the German Bundesbank's decision to leave its discount rate unchanged at 6.75 per cent.

Economists had expected a cut of at least a quarter percentage point which would have given an opportunity for hard-pressed European economies, such as France, Belgium and Denmark, to cut rates.

In the event UK gilts were sidelined after the news but sterling jumped sharply and the FT-SE 100 index hit record highs. Then, on Friday, the sun came out again with a 1.25 point surge in 10-year gilts and heavier gains at the ultra-long end of the curve.

Part of those gains represented position taking before the long bank holiday weekend but there was also a view that if ERM interest rate cuts are being pushed further back a UK cut is also less likely. The receding prospects for monetary easing encouraged investors to move assets towards the long end of the yield curve, which reflects the prospects for low inflation.

The question that continues to hover over the long-dated end of the curve is whether gilts are nearing the end of their bull run. UK institutional investors, used to years of domestic boom-bust economics, have been particularly wary of the argument that low inflation is here to stay.

However, Mr George Magnus, of SG Warburg, believes that long yields have further to fall and could break through 7 per cent before the end of the year. 'We are revising our forecasts for yields of all the long-dated maturities. As people become more accustomed to the idea of low inflation yield curves will continue to flatten,' he says.

He views both domestic and global factors as perpetuating the rise and the main four reasons he cites for a continuation of the trend are:

The subdued outlook for UK inflation

The possibility of fiscal tightening at the November budget

A downgrading of Public Sector Borrowing Requirement forecasts

The generally favourable environment for longer dated bonds.

Ms Jane Sargent, Hoare Govett's head of fixed interest research, agrees that any weakness in the gilts market will be short-lived and cites the strong demand for BT's Pounds 500m Eurosterling issue last week as underlining the seemingly insatiable appetite of overseas investors for sterling bonds.

The Bank of England took advantage of Friday's gilts surge to announce Pounds 800m worth of taps consisting of Pounds 400m of 9 per cent conversion stock maturing in 2000 and Pounds 400m of 8 per cent Treasury stock expiring in 2009.

Even Mr John Shepperd, of Yamaichi, who takes a pessimistic view on the future of the UK government bond market, acknowledged that the overseas buyers were back in force on Friday. However, he says their impact was exaggerated because dealers were unwilling to upset their books before the weekend and consequently prices were squeezed higher than the buying would normally have taken them.

Much depends on whether Mr Kenneth Clarke, the chancellor of the exchequer, is prepared to cut base rates again within the next few months. Whatever the outcome Mr Shepperd feels that the sunshine is unlikely to continue and long yields have fallen as far as they can. 'A base rate cut has already been discounted,' he says. 'We are at the bottom of the inflationary cycle and although PSBR pressures have been reduced, that reduction has already been taken on board.

'Also the government won't tighten fiscal policy and we are in a fairly robust recovery which is bound to have some impact on the inflation rate.'

Yamaichi has lowered its current long yield forecast to take into account what it sees as the short-term move to long gilts following Germany's discount rate stance. However, the revised figure is 7.7 per cent, some 40 basis points higher than current levels.

Over the week, 10-year gilts saw a fall in yields of about 13 basis points to 6.84 per cent. Further out, the 8 3/4 per cent Treasury bond maturing in 2017 was quoted at 116 5/32, yielding 7.3 per cent compared with 115 3/8. Index-linked gilts also rose sharply.

EUROPE's high-yielding bond markets may soon no longer deserve their name. This month, 10-year bond yields in Spain, Italy and Portugal all fell below 10 per cent, the most important psychological barrier for investors.

It is the first time in their short history that Spanish and Portuguese markets have reached these levels.

The strong rally in the last month was achieved despite the fact that the Bundesbank did not cut German interest rates, confounding many traders' expectations.

The breaching of the 10 per cent barrier represents a remarkable shift of sentiment within a short space of time - as recently as last October Spanish 10-year yields were above 14 per cent.

While there is nothing fundamental to stop further appreciation of the Italian and Spanish markets, analysts are becoming rather edgy about the prospects for a correction. However, the recovery following the lack of action by the Bundesbank on Thursday, despite an initial sell-off by traders, reflects that underlying demand from investors, including the retail end of the market, remains firm.

Mr Michael Burke, bond economist at Citibank, favours Italy over Spain. 'Italy has much better inflation prospects,' he argues, with wage growth of 2.6 per cent compared with 7.5 per cent in Spain.

'Spain has some serious structural problems which the minority government is ill-placed to address,' he says. He cites rigidities in the labour market which have allowed wage inflation to advance unimpeded.

Spain is also faced with a burgeoning budget deficit, fuelled by regional government spending, which is difficult to curb without offending nationalist parties.

The deficit could well be as much as 7 per cent of Spain's GDP by the end of the year, from just 4.4 per cent in 1992, according to analysts.

Of course, the size of Spain's debt is dwarfed by Italy's debt mountain. But the market is quite aware of the structural problems facing Italy, and it could be argued that these are well discounted.

'I still don't feel comfortable with the budget situation and the progress on electoral reform,' said Mr Steve Major, a bond analyst at Credit Lyonnais.

Also he argues that the 120 basis point rally in 10-year bond yields in the last month has been overdone considering that three-month rates have fallen only 25 basis points. 'The long bonds have discounted a lot of easing,' he said.

Mr Burke at Citibank takes a more positive view of the Italian picture. While Italy's debt burden remains a serious concern, he believes there is room for some improvement, since a large portion of Italy's obligations are in the form of interest payments. However, since more than 80 per cent of Italy's public sector deficit is in the form of short-term bills, 'much of the problem is easily curable with lower short-term interest rates,' Mr Burke argues.

Whatever the logic of the rally, it has undoubtedly been fuelled by foreign investors, in search of higher yielding paper, who have rarely been such active buyers of Italy and Spain. According to statistics, foreign investors now hold around a third of the Spanish market. It remains to be seen whether or not they will soon decide that the yields on offer are no longer high enough to justify the extra risk of buying more volatile markets.

SHIMADZU, a leading Japanese precision equipment maker, and Allied-Signal of the US have agreed a wide-ranging partnership for the joint development and production of jet engine parts. The Japanese group said the deal might lead eventually to an equity relationship between the two companies.

The bilateral accord calls for Shimadzu and the aerospace division of Allied-Signal to adopt a risk-revenue sharing system in the tie-up whereby profits are split between the two companies according to the respective share of funds injected into the product development of particular projects.

It follows a deal made last October for Shimadzu to supply engine gearboxes to Allied-Signal, which is headed by Mr Lawrence Bossidy. The Japanese company will start shipping gearboxes to Allied-Signal next month.

The two will also co-operate in developing market opportunities in China and other Asian countries, which are expected to be growing markets. Furthermore, they are considering taking equity stakes in each other or setting up a joint venture company.

The latest agreement between the two companies reflects the growing pressures aerospace groups are experiencing in the post-cold war environment. The worldwide economic slump is also dampening demand from commercial customers and the deal between the two groups is an example of the restructuring that is likely to spread in the aerospace industry.

Shimadzu, which has supplied components mainly to Japan's defence forces, is facing a slowdown in business for its aircraft equipment.

The two companies will set up respective teams to discuss specific projects in which they might be able to co-operate in the autumn.

KEMIRA, the Finnish state-owned chemicals group, is linking with L'Air Liquide of France to produce and market industrial gases in Finland.

The two companies are setting up a joint venture, Polargas, which will be 70 per cent owned by the French group.

The venture will take over Kemira's industrial gas production and distribution facilities in Oulu and Raahe on the west coast of Finland. The operations mainly produce oxygen, nitrogen and argon and have a FM100m (Dollars 17.1m) annual turnover.

L'Air Liquide will contribute know-how and make a payment of unspecified size for its holding in the new company.

Kemira said it was optimistic about growth possibilities for industrial gases, but did not want to expand its operations in this area on its own.

SWISS Reinsurance, the world's second largest reinsurance group, is following the growing trend of creating companies which specialise in natural catastrophe insurance.

The group has joined John Head & Partners, a New York merchant bank specialised in the insurance field, to form Partner Reinsurance.

Swiss Re will put Dollars 100m into the venture, which will be based in Bermuda, John Head Dollars 25m, and other founder institutional investors Dollars 130m.

Partner Reinsurance then plans to raise Dollars 500m from the US, European and Japanese equity markets in an initial public offering as early as October.

The move follows a series of similar ventures created by leading reinsurers in recent months. The idea is to respond the soaring demand for natural catastrophe insurance following the sharp increase in damage caused by earthquakes and hurricanes around the world in recent years.

Paradoxically, while soaring insurance claims have hurt all reinsurers in the short term, they have also led to a fundamental improvement in trading conditions by shaking out weaker competitors.

As a result, the US capital market has become more enthusiastic about insurance securities, making it possible for ventures like the new Partner Re to raise equity.

Swiss Re said the new venture would differ from its rivals in that it would concentrate more on markets outside of the US.

'Our wide experience in other parts of the world will be of great value,' Mr Walter Kielholz, a Swiss Re director said.

Partner also differed from others in that Swiss Re would not control it. Its stake, initially 13 per cent, would not exceed 20 per cent. Swiss Re said it deliberately sought to maximise outside capital. 'Our aim is to generate as much new capacity as possible,' Mr Kielholz said.

Also, Swiss Re itself did not want to raise its exposure to the natural catastrophe market.

The public share issue, of 66 per cent of the initial share capital, is being arranged by Smith Barney and Morgan Stanley International.

ATLAS Copco, the Swedish industrial components group, said lower interest rates and exchange rate gains contributed to a 12 per cent rise in first-half profits, despite a substantial fall in sales and orders.

Profits after financial items climbed to SKr661m (Dollars 449m) from SKr590m. The favourable interest rate trend produced SKr21m in net interest income, compared with an outlay of SKr87m in the same period of 1992. Exchange rate gains increased to SKr24m from SKr10m.

The group's underlying business was flattered by the depreciation of the Swedish krona, which lifted sales by 13 per cent to SKr8.93bn from SKr7.87bn and orders by 9 per cent to SKr9.34bn.

Sales were sharply lower in volume terms, which pushed operating income after depreciation down 8 per cent to SKr604m.

The group said improved sales in the US, south-east Asia, the Middle East and Australia failed to compensate for weak demand in most European countries. However, second-quarter operating income at SKr319m was SKr34m higher than in the first three months.

Orders were also down, particularly in Europe, which only accounted for 54 per cent of orders in the latest six months, compared with 61 per cent a year ago. Orders rose in North America, Africa, the Middle East, Asia and Australia.

The group's industrial technique division lifted operating profits to SKr125m from SKr88m due to rationalisation while construction and mining technique profits were unchanged at SKr84m. Profits within the compressor technique division slumped to SKr457m from SKr548m.

Mr Michael Treschow, chief executive, said he expects the weak demand trend in Europe to persist, but he still forecasts 1993 profits in excess of the SKr1bn level reached last year.

SHARES in Linotype-Hell, the German print technology group, tumbled 8 per cent yesterday after an alarming half-year report announced a plunge into loss and a drastic overhaul of the business.

The 'unexpected' deficit of DM57m (Dollars 33.7m) following a first-half profit of DM16m last time, had 'cast a shadow over the whole year', the company said.

The company's shares dropped DM33 in Frankfurt to close at DM377. Group sales were down 3 per cent to DM471m.

Aiming to return to the black by 1994, Linotype plans to cut its international workforce by about 15 per cent, reduce its product range, and reorganise management and production structures.

The report hinted at possible domestic capacity closures with a statement that efforts to reduce manufacturing costs would be actively pursued, especially to tackle problems associated with production within Germany.

While there had been no sign of problems in the first quarter, the company said, its customers were now complaining of falling advertising revenues and profits.

Incoming orders fell 7 per cent, stemming partly from a 17 per cent slump in Germany, although demand in other European markets was down by as much as 50 per cent. Orders from Japan, the third-biggest market after the US and Germany, were down 15 per cent.

Announcing job losses of 500 in Germany and 200 abroad, the company said it might not be able to avoid compulsory redundancies.

TWO important deals launched on Friday in the growing sterling asset-backed bond market may herald a quickening of the pace of securitisation in the UK. Securitisation allows companies to remove assets from their balance sheets, by repackaging and selling them as bonds.

Two landmark deals - a mortgage securitisation by National Westminster Bank and a loan securitisation by Barclays Bank - are widely expected to emerge in the next few months.

Last Friday, Bank of Ireland Home Mortgages, the Bank of Ireland's UK mortgage subsidiary, returned to the sterling mortgage-backed securities market after a five-year absence in order to fund its expanding Pounds 2.6bn mortgage book.

The Bank of Ireland's third public mortgage-backed offering consisted of a Pounds 250m issue of floating-rate notes issued through a special purpose company, Residential Property Securities No. 3, and arranged by NatWest Capital Markets. It had previously completed two private placements.

The Bank of Ireland bought Bank America Finance's mortgage business in 1987.

Mr Tom O'Neill, finance director at Bank of Ireland Mortgages, described the securitisation as 'a very attractive way of financing our business,' and said the bank would continue to tap the market.

Also in the sterling market, Anglo Leasing, a subsidiary of the Summit Group, a UK leasing company, launched the first issue in the UK backed solely by lease receivables. Lease receivables have been used to back commercial paper. The Pounds 165m issue of FRNs, arranged by Kleinwort Benson, is backed by leases on business equipment such as photocopiers, vending machines and computers.

THE PRICE at which shares in East Japan Railway, one of seven regional railway companies created in 1987 by the break-up of the national system, are to be offered for sale was yesterday fixed at Y380,000 (Dollars 3,656) a share.

JR East, which will be listed on the Tokyo stock exchange in October, will be the first state flotation since Nippon Telegraph and Telephone, the 65.7 per cent government-owned telecommunications giant, went public in 1987.

The flotation, initially scheduled for last year, was postponed as a result of stock market weakness. Half of JR East's 4m shares, with a face value of Y50,000, will be sold in the first tranche.

The success of JR East's listing is seen in Tokyo as crucial for other semi-privatised companies, such as Japan Tobacco, and the remaining six railway groups.

The price was based on the auction of 600,000 shares last week, where the weighted average of successful bids came to Y379,806. The accepted bids ranged from Y352,000 to Y623,000.

Over 17,000 bids were placed for the auction, with 3,993 successful bids, including 52 from foreign investors. The 10 largest buyers were all major financial institutions led by Fuji Bank with 30,000 shares and Long Term Credit Bank with 21,500 shares.

ITOCHU, the Japanese trading house, is expected to establish a wholly-owned subsidiary next month in China, which, in theory, will allow the company to compete on equal terms with Chinese companies, writes Robert Thomson in Tokyo.

The trading house, which will be the first Japanese company with such a subsidiary, expects government approval in coming weeks, and will use the new company to oversee its 50 joint ventures in China.

The new subsidiary, yet to be named, will have an initial capital of Dollars 10m and be based in Beijing.

MR Roger Rutz, the president of the Chicago Board of Trade Clearing Corporation, has resigned after 10 years at the head of the Chicago exchange's independent clearing organisation.

Mr Rutz, 40, cited personal reasons for his departure. Mr William Feldman, the Clearing Corporation's chairman, named Ms Denise Hagerty as interim chief executive while an international search is conducted for Mr Rutz's replacement.

Ms Hagerty, presently chief operating officer, joined the Clearing Corporation in January after 12 years managing clearing operations for a prominent Chicago brokerage firm.

Mr Rutz's departure comes at a critical time for the Chicago Board of Trade. The Clearing Corporation guarantees trades for the exchange, and maintains its top quality credit rating. A year ago, the Chicago Board of Trade and the Chicago Mercantile Exchange entered exploratory talks to merge their clearing operations.

Mr Patrick Arbor, chairman of the CBoT, said Mr Rutz's departure should not affect those discussions.

'The board of directors of the Clearing Corporation are fully committed to unified clearing,' Mr Arbor said. 'They will choose a successor (to Mr Rutz) with that goal in mind.'

The new Clearing Corporation president will have to contend with the professional differences that have impeded progress in those talks, industry sources said.

SA BREWING, the diversified Australian brewer, reports a 6.6 per cent increase in net earnings to ADollars 120.1m (USDollars 80.1m) for the June year. Sales rose 13.3 per cent to ADollars 2.29bn, and the dividend is being stepped up from 15.5 cents to 15.75 cents a share.

The packaging operations were the only division to increase earnings, moving up from ADollars 97.4m to ADollars 104.4m. The contribution from the beverage and food division eased from ADollars 75.7m to ADollars 74.9m and the appliances' result slipped from ADollars 63.6m to ADollars 58.2m.

COMALCO, the Australian integrated aluminium producer, has raised its interim dividend from 2 cents to 3 cents a share after overcoming lower prices to record a marginal earnings increase in the six months ended June.

Operating profit rose from ADollars 15m to ADollars 15.7m (USDollars 10.5m) on a 10.4 per cent revenue lift to ADollars 1.09bn.

But the result was transformed by abnormal items and a superannuation fund adjustment which boosted earnings available to shareholders from ADollars 8.5m to ADollars 50.3m.

Directors said the average London Metal Exchange three month price for aluminium was USDollars 1,182 per tonne for the reporting period, compared with an average of USDollars 1,296 per tonne previously.

'This first-alf average price is the lowest for any half-year period since the LME high grade three month contract began in June, 1987,' they said.

LOW world metal prices caused MIM Holdings, the Australian mining group, to dip into the red in the final quarter, but the group reported only a marginal decline in operating earnings for the full year to the end of June, writes Bruce Jacques in Sydney.

Operating earnings fell marginally from ADollars 87m to ADollars 85.1m (USDollars 56.8m) on an 8 per cent improvement in revenue to ADollars 2.02bn. The dividend is being held at 5 cents a share.

Abnormal items including large divestments, write-offs and currency fluctuations, had a substantial influence on earnings available to shareholders. This caused bottom line earnings to fall 30.4 per cent to ADollars 74.0m.

SOPHUS Berendsen, majority shareholder in Rentokil, the UK environmental and property services group, reports an increase in first-half net profits to DKr269m (Dollars 39m) from DKr250m a year earlier, writes Hilary Barnes in Copenhagen.

The results were adversely affected by the strength of the krone. Group sales, of which about 60 per cent are accounted for by Rentokil, advanced 8.5 per cent to DKr4.20bn.

Berendsen said that full-year results will be significantly influenced by two important investments earlier this year, Rentokil's acquisition of the Securigard Group and the Berendsen industrial division's acquisition of the UK's Lucas Fluid Power Group.

THIRD-QUARTER results of two US insurance groups, Chubb and CNA Financial Corp, will suffer as a result of an agreement on settling certain claims related to asbestos products manufactured by the Fibreboard Corp.

As a result of the accord, Chubb yesterday warned that it would post a loss in the third quarter after taking an after-tax charge of Dollars 358m relating to the settlement. However, the company expects to report a net profit for the first nine months of 1993 and for the full year.

The expected quarterly loss, which works through at Dollars 3.95 a share, would follow the company's announcement of second-quarter net income of Dollars 168.5m or Dollars 1.89 a share. For the first half, Chubb posted net income of Dollars 294.3m, or Dollars 3.31.

CNA Financial, which is 83 per cent-owned by Loews Corporation, said it would take a Dollars 325m after-tax charge, or Dollars 5.26 a share, in the third quarter because of asbestos-related claims.

Loews, in turn, warned that the agreement would reduce its third-quarter earnings by about Dollars 270m, or Dollars 4.17. In last year's third quarter, Loews, which also owns Lorillard, which markets tobacco products, posted net income of Dollars 128.6m, or Dollars 1.98. The figure included a Dollars 109.7m charge relating to claims at CNA from damage caused by Hurricane Andrew.

Chubb said it was boosting its reserves for Fibreboard claims by Dollars 675m, to Dollars 1.25bn.

---------------------------------------------------------------------- BIDDER/INVESTOR TARGET SECTOR VALUE COMMENT ---------------------------------------------------------------------- Wolseley (UK) Erb Lumber (US) Building 51.5m Resumes materials acquisition programme ---------------------------------------------------------------------- Hasbro (US) Unit of Virgin Computer 16.8m Taking Inter- (UK) Games active stake ---------------------------------------------------------------------- Bass (UK)/INN Joint Venture Hotels 10.8m Franchise Realty Hotel venture Ventures (India) ---------------------------------------------------------------------- Dresdner Bank BNP-Dresdner Banking 6.7m Joint bank (Germany)/BNP Bank Rossiya (JV) licence won (France) ---------------------------------------------------------------------- Novo Nordisk Anergen (US) Pharmac- 5.4m Taking (Denmark) euticals 17-1/2% stake ---------------------------------------------------------------------- McKechnie (UK) Phipps Intl. Metal 5.1m Buy via (Australia) components local arm ---------------------------------------------------------------------- Hiram Walker (UK)/ JV Drinks 2.2m Indian Jagatjit Industries liberalisation (India) continues ---------------------------------------------------------------------- Silicon General Unit of Peek (UK) Data Systems 1m Peek sells (US) Navstar remnants ---------------------------------------------------------------------- InterEurope Telub Inforum Business 0.4m Indirect Technology (UK) Services (Sweden) services Celsius ---------------------------------------------------------------------- Philip Morris JV Cigarettes n/a Manufacturing (US)/China National move Tobacco Corp (China) ----------------------------------------------------------------------

RTZ CORPORATION, the world's biggest mining company, is putting the finishing touches to the sale of assets acquired only in June when it bought Nerco, the floundering US natural resources group, and says total proceeds will be about Dollars 600m (Pounds 405m).

That compares with RTZ's outlay of Dollars 470m plus the assumption of Dollars 692m debt when it bought Nerco which was 82 per cent owned by PacifiCorp of the US. Also, RTZ's cash outlay was reduced to Dollars 245m by a loan from PacifiCorp to be repaid from Nerco contract revenues.

One of the outstanding details RTZ previously has held back concerns the expected proceeds from the sale of the Con gold mine in Canada's North West Territories. However, it now says it expects this will bring at least Dollars 25m.

When RTZ first announced in February that it was negotiating to buy Nerco it made clear that it wanted only Nerco's coal operations in the Powder River Basin in Montana and Wyoming.

Morgan Stanley, the investment bank, was retained to offload Nerco's oil and gas interests and definitive agreements for their sale to two US energy groups, Western Gas Resources and Louisiana Land and Exploration Company for a total of Dollars 510m were announced in July.

Even before that, arrangements had been made to sell Nerco's gold and silver mines - which Nerco had previously decided to put on the market.

Minorco, the Luxembourg-quoted overseas investment arm of the Anglo American Corporation of South Africa, is paying Dollars 21m cash for Nerco's Pikes Peak Mining Company which owns 80 per cent of the Cripple Creek mine in Colorado. And Kinross Gold, a US group, is paying Dollars 16.8m cash for the DeLamar gold-silver mine in south-west Idaho and the Candelaria silver mine in western Nevada.

RTZ says negotiations are in progress about the sale of the Con gold mine to Red Lion Management, a private Vancouver-based conglomerate controlled by Mr Walter Berukoff. Red Lion has arranged to sell on the Con mine to Miramar Mining, another Vancouver company. Red Lion says it exercised its option to buy the Con on August 15 and has 60 days from that time to complete the acquisition.

RTZ also expects to raise Pounds 900m from the sale of its Pillar industrial division, mainly to MB-Caradon, which, with the Nerco disposals, will reduced the group's gearing to 14 per cent compared with the 63 per cent to which it briefly rose after the Nerco acquisition.

ALLDERS International, the tax and duty free retailer which is part of the Allders Group, has signed a deal with BAA covering all its shops in BAA's UK airports. The contract runs until 1999 and replaces individual contracts for each store, some of which were due to run out this year.

The new agreement also changes the way in which each side makes profits from retailing, sharing risks more equally between them. It will give Allders, which is hoping to float in the next few months, a more stable flow of profits from its BAA shops. BAA said that as well as long-term security it would enable the two sides to work together on new ideas while sharing the risk.

About a quarter of Allders' turnover is being secured by the deal with BAA. Its BAA shops had sales of Pounds 161.1m in the year to March 1993, while Allders International's turnover was Pounds 296.5m in its financial year to September 1992. Allders other activity, department stores, had sales of Pounds 259.1m in that period.

Usually airport shops are run under five-year contracts at the end of which they are put out to bidders. Allders 1992 profits were adversely affected by the loss of a large contract to run a shop at Sydney airport.

Mr Harvey Lipsith, chief executive of Allders, said 'there is always a bit of nervousness about contracts. This deal allows us to target other geographical areas without covering our backs all the time.'

He said the new system of payment 'should benefit both parties and make it much easier to predict profitability.' Until now Allders has been paying BAA a rent based on turnover with a guaranteed minimum. Now BAA will pay Allders a management fee, more than covering Allders International's costs. A profit target will be set, and profits above that will be split between the two.

Mr Lipsith said this shifted the balance of risk away from Allders International, and gave it a greater incentive to drive the business for growth.

BAA said it had struck a similar deal with Forte, the hotels and catering group, which had been operating since January with benefits to both sides' profits.

BAA's strategy is to expand the space in its airports devoted to shops over the next three years. Tax and duty free shops are central to this plan, and Sir John Egan, chairman, said they provided 'an important source of revenue to BAA' as well as offering customers 'choice and value'.

Allders International is the largest retailer in BAA's airports.

COMPANIES in any other industrial sector would have been tempted to call it a day.

Year after year UK electricity companies and their pre-privatisation predecessors have struggled to make significant profits on their retailing operations, and some have recorded losses. Yet still most of them persevere.

Now their competitors, including Dixons and Kingfisher, are trying to force a re-think. They say the retail results of the regional electricity companies and the Scottish power companies have been exaggerated and have demanded an investigation.

At their prompting, Offer, the electricity industry regulator and the Office of Fair Trading are looking at whether power companies cross subsidise their retail operations from other businesses and obstruct fair trade.

If the inquiries confirm this is the case, more electricity companies may follow the lead of London Electricity and South Wales Electricity which have ended or are ending their direct involvement in retailing.

Whatever the profitability, power company retailing is big business. With more than 1,100 shops, electricity groups collectively own the second largest group of electrical goods outlets in the UK after Dixons, which also owns the Currys chain. Their market share is about 13 per cent.

Such a presence is not common internationally. In neither France nor the US do power distributors feel the need to sell goods in high street shops.

The retailing tradition in the UK stems in part from an industry culture which has promoted increases in electricity volume sales as the main aim of the power industry.

'The logic is that the more appliances are sold, the more electricity volumes will rise,' says one power company executive.

Retailing has also grown alongside customer service facilities which customers use to make complaints and pay their bills. Almost every power company shop in the UK has a services counter, and they are highly valued by customers.

That is one source of complaint from rival retailers. They believe that in many cases the customer services units do not contribute a fair share of the rent of the showroom they occupy.

More serious, they say, are the cross subsidies from the recs' main businesses to their retailing arms. 'The problem is that many shops are not being charged fully for the services they use,' says one rival company executive.

'Rents are more realistic than they were in the late 1980s when we estimate the regional boards (electricity companies predecessors before privatisation) were charged a third of the market rate.

'But most recs are still not charging their retail operations fully, if at all, for the capital used in special promotions. That is why their shops can offer so much interest free credit.'

Not so, say the regional companies. Seeboard is typical in its response. 'We negotiate with electrical manufacturers for supporting promotions just like any other retailer,' says Mr John Weight, retailing head. 'One hundred per cent of costs associated with Seeboard's business are charged to the business.'

If the recs are robust in their defence of the way they apportion costs for their shops, few are able to declare retail profits with pride. Norweb, serving the north west of England, is generally considered the most impressive retailer, and last year made operating profits of Pounds 6m from the business, on turnover of Pounds 139m, against operating profits in the company as a whole of Pounds 155m. It is planning significant expansion from its 88 stores.

Other companies are less bullish. Most declared operating profits for last year on retailing, in contrast to the previous year when most recorded losses. But the amounts were small - typical examples were East Midlands' Pounds 200,000 and Manweb's Pounds 500,000 - and some lost money, including Sweb which declared losses of Pounds 1.9m.

In addition, several companies made significant provisions for restructuring which wiped out any profits.

So why persist? One answer is that the companies have taken action aimed at significantly improving retailing performance.

Since the break-up of national collective bargaining last year, most power companies have negotiated deals with retailing staff which either freeze or reduce wages.

Several companies have also merged their retailing business with other recs and are seeking to improve service and transform the dowdy image of the rec stores by hiring specialist retailers. The new alliances include East Midlands and Yorkshire in one unit and Eastern, Southern and Midlands in another.

Another factor in keeping stores open is the fear of customer reaction to closure plans. 'If we were starting again we would not go into retailing but there is more work in closing one shop than there is in re-organising our entire company,' one power company chief executive says.

He adds: 'Closures get the chambers of commerce and local business up in arms. We closed one branch four years ago and we are still getting petitions.

'There is also the complication that you still have to provide some kind of a high street presence for people who want to pay bills. We do not have the direct debit culture of the US.'

For these reasons, most recs believe that the decisions of Offer and the OFT will make only marginal difference to the number of high street stores.

They also point out that if cross subsidisation was found and the regulatory authorities order change, the effect on the overall businesses of each company would be minimal since it would simply transfer profitability from one business arm to another.

Competitors are unconvinced. According to one: 'If the power company businesses become as transparent as they should be, shareholders will be able to see what is happening and the pressure to get out of retailing will intensify.'

MR DENNIS Stevenson, chairman of SRU Group and the Tate Gallery, is expected to take over as chairman of a restructured GPA Group following the signing of its rescue deal with GE Capital, the financial services arm of General Electric of the US.

Mr Stevenson, who is also a member of the Takeover Panel and a non-executive director of Pearson, has been invited to succeed Mr Tony Ryan and is expected to accept the appointment.

Under the terms of the rescue deal GPA's Dollars 5.2bn (Pounds 3.48bn) borrowings are being separated from its assets and a new company, GE Capital Aviation Management, is being set up.

GECAM will be responsible for the combined leasing business of GPA and GE's subsidiary, Polaris Aircraft leasing, including the day-to-day management of GPA's 470 aircraft.

Mr Ryan, GPA's founder, is expected to be appointed executive chairman of the new company working with a chief executive appointed by GE.

Another two non-executive directors are to be announced soon, replacing Lord Lawson, former chancellor, Mr Garret FitzGerald, former Irish Prime Minister, and Sir John Harvey-Jones, former ICI chairman.

------------------------- UK ------------------------- Aetna UK 17 Thornton 17 ------------------------- Overseas ------------------------- Allied-Signal 19 Atlas Copco 19 CNA Financial 19 Chubb 19 Comalco 19 East Japan Railway 19 Hoechst 17 Itochu 19 Kemira 19 L'Air Liquide 19 Linotype 19 MIM Holdings 19 SA Brewing 19 Shimadzu 19 Swiss Reinsurance 19 TNT 17 -------------------------

This year has been so good for the securities industry that it has tested Mr Mark Houghton-Berry's faith in an old adage.

'There may be no such thing as a free lunch, but this one has at least been heavily-subsidised,' he says.

Mr Houghton-Berry is head of bond trading at Goldman Sachs in London. For nearly a year, he has watched foreign exchange, equity and bond markets combine to provide international banks and securities houses with one of their most profitable and least risky trading environments for a decade.

The results have become evident in Europe and the US over the past month, as banks have reported large rises in income despite subdued lending business.

The US house Morgan Stanley is the latest beneficiary, disclosing record second-quarter profits of Dollars 224.2m (Pounds 151m), driven by a huge leap in trading.

The US securities firms have not been alone. The European universal banks have offset large bad debt provisions and sluggish lending with dealing income. Swiss and German banks have benefited, while among UK banks Barclays made Pounds 234m on the Pounds 1.3bn in capital in its BZW securities business.

'It is unusual to have equities and bonds going strongly at once. Usually you expect one or other cylinder to be firing, but we've had both,' says Mr David Band, BZW chief executive. While much public attention has been on foreign exchange, securities trading has been at least as strong.

The industry has benefited from a mix of short, medium and long-term trends. The near-collapse of the European exchange rate mechanism created currency volatility; falls in European interest rates led to a bonds and equity rally; and the shift towards lower inflation sparked a 'search for yield'.

This has created a series of effects that have helped banks and securities houses:

Re-rating of equities and rising bond prices have all led to large amounts of trading on behalf of customers. 'Volumes have been high in continental Europe and the UK, and a lot of US money has flowed this way,' says Mr Michael Sargent, head of equities at SG Warburg, the British investment bank.

Mr Band says equities trading has been boosted by switches in asset allocation caused by political uncertainties and the shift in European interest rates. 'As long as political paths are not clear, institutions can change their big picture views of the world quite a lot, and quite rapidly,' he says.

The breakdown of currency and interest-rate stability has led to demand for risk management services, as companies seek ways of hedging risks through derivatives. 'They are becoming aware that we can sell them insurance,' says Mr Michael Davis, a senior vice-president at Chase Manhattan in New York.

As interest rates have fallen, companies have issued bonds and even equity to re-finance higher interest bank debt. This has been good for the 'bulge bracket' Wall Street firms that have picked up higher-margin equity origination business as well as the tighter-margin distribution of bonds.

Integrated securities houses with the capacity to design and sell over-the counter derivatives have been able to stimulate business though what Mr Band calls 'reverse origination'. This means designing a product to suit investors, and using swaps to translate it into a form that attracts debt issuers.

This has helped increase debt issues by companies which do not have a pressing need to re-finance, but are attracted by the chance to 'lock in' lower interest rates. Derivatives have given companies of all sizes more access to debt markets, so adding to the shift away from traditional bank finance.

The size of the market for equity and debt has been raised by the shift towards privatisation of state assets both in west and east Europe. French bank privatisation this autumn follows Warburg's handling of the BT3 share offer, and the growing sale of assets from former communist countries.

These trends have allowed large trading profits, which have been underpinned by the emergence of positive yield curves - higher yields for long-term than short-term bonds - in Europe. A positive yield curve in the US led to banks investing their short-term liabilities in longer-term government bonds.

The shift towards similar conditions in Europe raises the question of how much risk banks and securities houses have taken on through proprietary trading in addition to handling customers' business. Most participants agree that market buoyancy has led to a rise in proprietary trading.

Mr Houghton-Berry says that proprietary trading has been encouraged by the narrowing of margins on client business, and customers wanting to know whether a bank is confident in its own market view. 'Firms are increasingly being asked to put their own money where their mouth is,' he says.

This in turn means that firms will be exposed to more risk when the exceptional market conditions turn down. The easiest profits have probably passed, since currency volatility is now easing. Yet a longer-term shift to lower interest rates would provide good trading conditions for bonds and equities.

Mr Rod Barrett, an analyst at Goldman Sachs in London, says the market cannot carry on for ever, but may have some way to go yet. 'Maybe we will have another year of it, who knows?' he says, 'Eventually if rates settle down, the market will adjust to a trading range, and things will get quieter.'

A gradual tailing-off of exceptional profits would be the best outcome for the industry. The alternative would be a sharp reversal of inflationary expectations or interest rate trends that would expose firms to losses on their proprietary trading positions in equities, bonds or derivatives.

'The easiest money has been made already. Sooner or later there will be a correction and someone could come unstuck. At the moment, people are still encouraged to go on,' says Mr Houghton-Berry.

Even if he retains the subsidy on his own lunch, others could yet end up paying for theirs.

GREAT battles are often followed by a phoney war: and such has been the case in the European exchange rate mechanism.

The dramatic events that ended in the early hours of August 2 in the widening of ERM fluctuation margins to 15 per cent gave way to an eery calm in exchange markets and a deafening silence about the future of the system from policy makers.

But new realities are slowly taking hold. The Bundesbank's decision last Thursday to leave its discount rate unchanged at 6.75 per cent and its action on Friday setting a short-term 'repo' rate at 6.9 per cent against 6.8 per cent previously were blows for those who believed that the ERM might be able to count on falling German interest rates for quieter times ahead.

The idea that former 'hard core' ERM currencies such as the French franc, Danish krone, Irish punt and Belgian franc might be able to move back within a 2.25 per cent range against the D-Mark is implausible for the time being at least.

The Bundesbank made clear last week that it would use the freedom of the wider bands to strengthen its fight against domestic inflation.

Last week's public flexing of the Bundesbank's muscles merely confirmed the reports that have seeped out of meetings of July 31 and August 1 of a brutal crushing of French monetary aspirations.

France opened the discussions in the European Community's monetary committee on July 31 with demands that the Bundesbank should intervene unconditionally, intramarginally and on its own account to keep the franc in the 2.25 per cent range. France also urged an immediate cut in Germany's repo rate to be followed by reductions in official interest rates as soon as the Bundesbank's decision-making council could meet.

It is unclear whether the French negotiators truly believed the Bundesbank would acquiesce to their demands.

If they did, they were quickly disabused of the idea. Mr Hans Tietmeyer, the Bundesbank vice president and president designate, interrupted Mr Jean-Claude Trichet, the head of the French Treasury and monetary committee chairman, as he enumerated the French proposals with the observation that France had forgotten one item: that Germany abandon the D-Mark and its monetary sovereignty.

Mr Tietmeyer's emergence as the hard man of the Brussels talks lends credence to reports that circulated shortly after the first great ERM crisis of September last year. It was rumoured among highly-placed European monetary officials that Chancellor Helmut Kohl had warned Mr Tietmeyer that he could forget about becoming Bundesbank president if the Franco-German currency link were broken.

The old D-Mark-French franc parity survived successive crises that included the departure of sterling and the Italian lira from the ERM and the devaluations of the Iberian currencies and Irish punt.

However, when the most recent wave of speculation began against the ERM in July, Mr Tietmeyer's promotion to Bundesbank president on October 1 had been confirmed and he was well clear of any possible move by Bonn to curb his room for manoeuvre.

But there were also practical reasons for yielding to market pressures and moving to a 15 per cent ERM fluctuation band for all currencies except the D-Mark and Dutch guilder.

The flow of funds out of the French franc at the end of July was unprecedented. The ERM was protected by exchange controls in most member states when it started operating in March 1979. The past year showed that it was no longer capable of dealing with the pressure of deregulated international currency trading.

In the light of recent circumstances, it is no surprise that policy makers are still somewhat shell-shocked and disinclined to advocate new steps to reform or restore the old system. Conversations last week with monetary officials in Germany and some of Germany's neighbouring countries revealed an almost universal rejection of the idea of moving rapidly back to 2.25 per cent fluctuation margins for the ERM.

Pride and embarrassment are contributing to a do-nothing approach. Last September's crisis spawned two official reports - one from the EC central bank governors' committee and the other from the EC monetary committee - which concluded that the ERM was broadly sound.

Those reports, which look ridiculous today, were the result of lengthly horse trading among officials which eliminated all but the blandest remarks from the final texts. Officials do not want to reopen old wounds with a thorough-going examination of recent ERM developments.

But inaction may not be a sustainable policy. The quest for European Monetary Union will not go away despite the past year of crisis in European exchange markets. Even Emu sceptics among continental policy makers are uncomfortable with a monetary free-for-all which could easily subvert the EC's single market.

One central banker last week suggested that the Maastricht convergence criteria for low inflation, government debt and interest rates could be used to guide EC member states back towards the narrow bands in the coming years after which they could move swiftly to Emu.

The financial markets are a more pressing issue. August has been quiet because many speculators went on holiday after banking huge profits from the ERM debacle.

Market operators return in force this week for the 'autumn term'. The reluctance of France and Germany's ERM satellites to cut their most important interest rates and stimulate their recession-hit economies in the past weeks will be the subject of as much critical scrutiny as the Bundesbank's determination to maintain its tight monetary policy.

Few of the expectations that followed the most recent ERM crisis have been fulfilled. That means new speculative activity could easily get underway, particularly in the run up to the annual meetings of the International Monetary Fund and World Bank at the end of September.

TENSIONS at the top of TNT, the Australian transport group, spilled over into a boardroom split yesterday with the abrupt resignation of five directors, including the company's founder and former chief executive, Sir Peter Abeles.

TNT chairman, Mr F. W. Millar, indicated yesterday that the resignations reflected disagreement over strategy for the company which has racked up losses, including write-offs, totalling more than ADollars 260m (Pounds 118m) in the latest two reporting years. Further heavy losses are likely when the company reports for the latest year, ended June.

Mr Millar said TNT's strategy for the past year had been very clear, following agreement by the then board early last financial year.

'It concentrates on improving operating earnings, selling non-core assets and reducing debt,' he said.

'It focused management's efforts on our very strong core transport businesses.

'The directors who resigned sought a change in that strategy. That change was not adopted by the board.

'I regret the resignations, but I must say that management can now proceed to implement the continuing strategy with confidence.'

Analysts said yesterday that Sir Peter and the other resigning directors were believed to be pushing for a more expansionary strategy, possibly involving a renewed increase in the company's debt levels.

It was heavy debt and rapid expansion that pushed the company close to failure in 1991. Observers further speculated that Sir Peter's continued presence on the board since stepping aside as chief executive last September may have sat uneasily with the new chief executive, Mr David Mortimer.

The other resigning directors are Mr Christopher Sporborg, deputy chairman of Hambros Bank, the UK merchant bank, Mr John Landerer, Mr Evan Cameron and Mr Gilles Kryger.

TNT shares added 5 cents to ADollars 1.27 yesterday.

Mr Millar said the directors would soon consider board replacements.

THORNTON, the fund management group owned by Dresdner Bank, plans to acquire Aetna UK's unit trust business in a move which signals further consolidation in the retail investment fund industry.

The group, which is chaired by Lord Peter Walker, the former Cabinet minister, is expected to announce a deal under which it will pay Pounds 13m for Aetna UK's unit trust operations which have Pounds 240m of funds under management.

The deal, which is expected to be announced once due diligence investigations are completed, will lift Thornton's total funds under management to above the Pounds 1bn mark.

Negotiations are understood to have been completed, however Lord Walker, who was brought in by Dresdner two years ago to restructure and expand the business, said yesterday he could not divulge details until the due-diligence process was complete.

The deal would be Thornton's biggest purchase since it was acquired by Dresdner in 1988 and another important step towards its goal of becoming a leading investment group.

If confirmed, the Pounds 13m price tag on the deal represents about 5.4 per cent of funds under management. This compares with the Pounds 2.5m paid by Edinburgh Fund Managers when it acquired the 10 unit trusts of Target Life Assurance Company in January - equivalent to just 2.25 per cent of the Pounds 110m in unit trust funds under management.

HOECHST, the big German chemicals group, yesterday blamed a 31 per cent slump in first-half earnings on weak domestic demand and restructuring costs.

The German parent company recorded an unspecified operating loss, while its pre-tax profit fell by almost 50 per cent to DM342m (Pounds 136m) the group said yesterday.

Business had continued to be weak in the first two months of the second half, and there were no signs of improvement. Forecasting a 'very difficult' six months ahead, it said cost-reduction and rationalisation measures would continue at speed.

Group pre-tax profits of DM781m for the first half were worse than expected by most analysts, but fitted the pattern established last week when rival chemical groups Bayer and BASF reported pre-tax declines of 20 per cent and 50 per cent respectively.

All have been hit by low demand, weak prices, the effects of health service spending cuts in Germany, and adverse movements in foreign exchange markets.

Hoechst said that more than a third of its 2.4 per cent sales decline in the first six months to DM22.9bn was due to currency movements and lower prices.

In the US, Hoechst Celanese reported a 6 per cent sales drop to Dollars 3.1bn (Pounds 2.09bn), attributable to lower volumes in pharmaceuticals markets and the effects of last year's sale of its polyethylene business.

In Germany, the company said, its healthcare business was hit by an overall 6 per cent fall in pharmaceutical sales.

Turnover in the European Community, which accounts for almost half annual sales, dropped 10 per cent.

While government and economists claim the domestic recession bottomed out in the second quarter of the year, Hoechst's figures showed the situation worsening. In the three months to the end of June the group earned DM345m pre-tax, down 34 per cent on the comparable period of 1992. It blamed further deterioration in home markets, which had cancelled out an overall improvement in foreign business.

First-quarter earnings of DM436m were 28 per cent lower on the year.

TIMEX UK faces a legal challenge from its dismissed workers after announcing at the weekend the closure of its circuit board production plant in Dundee.

Mr Jimmy Airlie, national officer for the Amalgamated Engineering and Electrical Union (AEEU) in Scotland, said yesterday that the union planned to take the company to court seeking redundancy payments and financial compensation for its dismissed workforce.

'It is an absolute scandal that a company can provoke a dispute to force its workers to accept vastly inferior pay and conditions and avoid the normal costs of a plant closure,' he said. 'It is time something was done about situations like this. Timex provides us with a test case.'

The union intends to press the cases of the 343 Timex workers before industrial tribunals with claims of unfair dismissal. The existing pension rights of the Timex workforce were safeguarded but none of those dismissed last February will receive any redundancy pay. The AEEU has been taking legal advice throughout the dispute.

Timex also went to court on numerous occasions to safeguard its legal rights against what it saw as intimidation and violence through mass picketing. But the union won a number of judgments during the often fierce legal battles. Timex was compelled last week to lodge Pounds 40,000 as security in advance of any compensation awards made by industrial tribunals.

Timex said on Sunday it deeply regretted closing its production facilities in Dundee after 47 years. Local strike leaders vowed to continue their campaign against Timex by encouraging a global boycott of its products.

Timex's decision to hasten closure reflects the bitterness surrounding a dispute that produced some of the worst scenes of picket line violence in Britain for years. The Timex workers were all dismissed on February 18 when they refused to support a management-imposed wage freeze and fringe benefits cuts which the company argued would secure their jobs and ensure competitiveness.

Ballots 'cut down on strikes', Page 7

EC trade negotiators will renew pressure on Japan this week to rein in car exports to the Community, in the light of worsening monthly figures for new car sales in Europe.

European Commission officials fly to Tokyo today to persuade Japan to improve on the commitment made in April to cut exports by 9.4 per cent this year.

The Japanese have hinted they are ready to agree a further reduction, so Thursday and Friday's discussions will focus on the scale of new cuts. EC officials have not revealed their new target, but after meeting the Japanese in Brussels last month, they indicated they were hoping for an 18 per cent reduction this year.

The Commission says sales figures released or confirmed since the inconclusive Brussels meeting show the situation has worsened. According to one Commission official, there would now have to be 'an incredible boom in the second half of the year' to fulfil the Japanese forecast that 1993 sales will decline by 12 per cent. The same officials said even the Commission estimate of 16 per cent - in line with industry forecasts in July - was 'becoming an optimistic number'.

Industry estimates published earlier this month suggested that new car sales in western Europe had dropped by an estimated 20.1 per cent in July, contributing to a fall of 17.7 per cent over the first seven months of the year, compared with the equivalent period.

In the last week, DRI, the UK-based automotive analyst, has forecast a 16 per cent decline in west European sales of new cars this year; Volkswagen and Renault have announced poor financial results for the first half of the year; and Nissan, the Japanese carmaker, has said that its UK plant may not achieve the increase in output forecast for this year.

The European Automobile Manufacturers' Association plans to release provisional figures for August sales shortly. 'A little upturn in the UK has certainly not been enough to offset the terrible picture everywhere else,' said a spokesman yesterday.

Under the terms of a 1991 'understanding' between the EC and Japan, Tokyo and Brussels agree informal annual limits on the export of cars and light commercial vehicles to the EC, to allow the Community to gradually open its market to full competition. The 1991 deal does not directly cover Japanese vehicles manufactured in Europe.

The news that the Securities and Investments Board is looking again at regulation of the UK equity market is certainly welcome. After the controversy over market manipulation and the degree of control exercised by SG Warburg during the BT3 issue, some clear and widely accepted guidelines need to be established before further large equity issues come to market.

Yet the SIB and the Stock Exchange seem to have retained the leisurely approach which led to the BT3 problem in the first place. Almost a year elapsed between the Wellcome and BT3 issues during which time little was agreed.

Now the SIB has given itself until the turn of the year to produce a discussion document, while the secondary offer of the generators' shares may well take place in the spring.

The Stock Exchange, which scarcely covered itself in glory over BT3, is now not prepared even to venture an opinion on the subject.

The self-regulatory framework has attracted great criticism, and practitioners must now prove that they have something to add to the operation of the system. If some of the simpler problems cannot be quickly resolved, inefficiency may be added to the charge of ineffectiveness. Utility regulators work reasonably well without the presence of water or electricity company chief executives on their panels. The time is fast approaching when the financial services industry will have to demonstrate why it is so very different.

There have been false dawns before during the great derating of the pharmaceuticals sector. But recent gains against a rising stock market suggest that drug stocks are at least attracting bargain hunters. Since the outlook for the industry has barely changed, there is no obvious reason for a renewed burst of optimism. Although President Clinton's healthcare reforms look unlikely to include direct price controls, the concentration of power among big buyers of healthcare is having the same effect. The worst of the pain arising from reform in Germany and Italy may be over, but France and Spain have yet to show their hands.

The question, then, is whether drug shares offer fair compensation for the continued risk of government intervention. Earnings growth will certainly be below the heady levels of the 1980s, and little better than that achieved by other industries during recovery. Price earnings multiples below the market average now reflect that. More importantly given the dwindling returns on cash, Glaxo and Zeneca yield more than the market average. With a good record of cash generation, and a large cash pile in the case of Glaxo, dividend growth looks assured.

If investors are starting to look at drugs companies in terms of total returns rather than just earnings growth, the recent rally in the shares may have further to run. The fog of uncertainty should clear when the details of President Clinton's reforms are unveiled in the autumn. But while the industry reshapes to accommodate whatever new world order appears, it would not do to expect too much.

After their decline of more than a full percentage point this summer, it seems nothing can stop long-gilt yields falling further. Not only has recovery got under way at home without rekindling inflation; the climate also looks unusually positive abroad. US bonds have been boosted by dwindling inflationary fears, while in Europe the Bundesbank stands determined. Its reluctance to cut its discount rate does not help short-dated European bonds, but, by damping inflationary expectations, it does maintain downward pressure on long-term yields.

A sense that the UK may have beaten inflation, too, has reduced the yield premium international investors traditionally demand to hold gilts. This has happened just when long-term rates are anyway falling elsewhere. The Bank of England has further helped by restricting supply to the long end of the gilt market so that UK institutions are short of paper.

In theory, there could be room for further gains if inflationary expectations are poised to settle at 3 per cent or even less. Real rates could fall as uncertainty abates, a development which would benefit index-linked as well as conventional gilts. Just the same, the fact that the market has continued to advance amid diminishing expectations of tax increases in November suggests an air of unreality. Not just in the UK, but around the industrialised world, government finances are in a mess. Bond markets are in dangerous territory when they start believing that does not matter.

Given the financial strains on Ladbroke, it is worth asking whether the board would be wise to choose between a rights issue and a dividend cut with its interim figures this week. Balance sheet gearing and total outstanding debt are both uncomfortably high, while potential disposals would fetch little more than book value and cut gearing only marginally. A rights issue would bring greater comfort to the company's finances.

On the other hand, the dividend is clearly out of line with the underlying trading prospects of the group. If the company were to follow Forte's lead, it would cut its dividend to a sustainable level, then try to regain credibility with the market before deciding how to proceed. Certainly attempting a rights issue while the threat of a dividend cut was still in the air would make many institutions gag - all the more so if it were below the level of the 220p issue in 1991.

Then again, Ladbroke's chairman, Mr Cyril Stein, is proud of his unbroken dividend record over a generation. He will be loath to spoil that in the latter part of his career. The temptation will be to soldier on until things improve. That, however, will mean more shareholder value leaking away to the banks through high interest charges. Perhaps the company might risk further market displeasure by cutting the cash outflow of dividends and sneak in a mini-rights issue through another enhanced scrip dividend. It may even be tempted to follow the lead of Rank, and roll the full-year dividend into the interim as a larger enhanced scrip. With Ladbroke's high yield, however, that would mean adding more than 10 per cent to the equity which needs to be serviced in future years.

MR JACQUES DELORS, president of the European Commission, has issued a new call to arms to the partisans of a federal European union. He warned that unless a bold 'new initiative' emerges quickly, the Maastricht treaty and its envisaged economic and monetary union will be a dead letter.

'Why should we hide it? If we go on like this, there will be no convergence in economic policies and, consequently, no single currency. The commitments in the Maastricht treaty will come to nothing,' Mr Delors told a weekend meeting of his French Socialist supporters in Brittany.

The Commission president, politically bruised by the year-long delay in ratifying Maastricht and the damage to the credibility of the Emu project caused by this month's near implosion of the European exchange rate mechanism, warned that Europe faced sinking into decline through 'the absence of a broad and long-term vision'.

'This risk is so obvious in the light of Europe's powerlessness that one might well expect a startled rebound on the part of certain heads of state and government,' Mr Delors said, in implicit reference to the hopes now placed in the EC's traditional Bonn-Paris axis to get European integration back on the rails.

The Commission president's wide-ranging speech was more analytical than prescriptive, peppered with references to the 'myopia and insouciance' of some nationalist and 'ultra-liberal' EC governments which he said saw Europe merely as a giant free trade zone. He derided the embryonic common foreign and security policy contained in Maastricht as a racing car with a two-stroke engine, incapable of handling a crisis like Yugoslavia, even if a joint foreign policy structure were fully functional.

He said that the EC's classic strategy of 'small steps forward' had 'reached its limits', and that the time had come 'to spell out the political Europe that we want'. This was 'the federal approach, which alone sets limits to the powers of European institutions, and guarantees the powers of the nation-states and regions'. On Emu, he insisted there was no remedy in reorganising the ERM, 'even if that in itself would be welcome'.

This remark squares with the EC's formal agenda of getting the second stage of Emu - with a European Monetary Institute as forerunner to a European central bank - set up by January. But some observers yesterday saw Mr Delors' call as encouragement for a mini-Emu with harder currencies grouping around the D-Mark.

WARNINGS about the decline in Britain's science base and the dire implications for the country's competitiveness - have been a feature of the British Association annual meeting for at least three decades. A particular theme this year at Keele is that the UK is producing too few trained scientists and breeding a scient-ifically illiterate younger generation.

The sharp decline in numbers taking science A-levels is causing alarm. So is the glaring contrast between empty places on university science courses and serious overloading in the arts and social sciences. And in the background is a sense of anticlimax following the science white paper three months ago; although it contained some good ideas, the government has not built on the opportunity it created to lead the case for British science.

The debate about how to attract more bright young people to the subject - and at the same time increase public understanding of science - contains so many strands, knitted together by so many people over such a long period, that it is sometimes hard to disentangle prejudice, anecdote and special pleading from soundly based argument.

For example, if it were true as alleged that the British education system had systematically, over many years, produced fewer scientists than business and academia needs, there is no doubt that their price would rise. And yet evidence from the UK job market points to a higher graduate unemployment rate in science than in arts and yields abundant evidence of poor salaries in scientific research. Manifest shortages do exist, but only in well-defined areas, such as top quality pharmaceutical scientists for the drugs industry.

Fundamental issue

There does not seem to be too much point in increasing the supply of scientists, if there is no demand for them. But that, of course, raises the question of whether Britain is using as many scientists as it should.

Apart from the fundamental issue of the relative size of its research and development effort, where Britain lags, there is the well-documented shortage of scientists in the upper reaches of management in British companies, as well as in the public sector. Research recently sponsored by the Economic and Social Research Council suggests that companies perform better if they have senior managers with scientific backgrounds.

Here the government is in a position to help - by making the civil service give a higher priority to science graduates when recruiting administrative trainees. This might also improve government's skill in handling the wide range of policy issues that touch on science and technology, from reprocessing nuclear waste to investing in new trains for British Rail.

Primary focus

On the supply side, action is certainly needed at all levels of the educational system, with perhaps a primary focus upon the 11 to 15 age range. Strong anecdotal evidence suggests that many older scientists working today were inspired originally by excellent science teaching in the early years of secondary school. Those teachers have retired and their successors are, on the whole, less inspiring; so the current generation of schoolchildren is being turned off science by dull lessons that seem both pointless and more difficult than other subjects. The government's bursary scheme for trainee science teachers is beginning to turn the tide here, but better financial incentives are still required to attract good scientists to teaching.

Further up the educational ladder, science would benefit from a broadening of the A-level system, so that all candidates studied at least one arts and one science subject to the age of 18. It should be recognised that such a change would increase the teaching burden on universities; most science students would start off knowing less than someone today with maths, physics and chemistry at A-level. It might even be necessary to add an extra year to many three-year undergraduate courses.

Change to the A-level system is something which the government has vigorously resisted for years. If it is serious about bringing science and scientists to greater prominence in education and business, it will have to change its mind.

Jericho, for all that its name resonates with history, now seems just another sleepy, dusty Palestinian town in the Israeli-occupied part of the Jordan valley. But if an extraordinary deal hammered out in secret by Israeli and Palestinian representatives in recent weeks becomes reality, it may just be in for something of a revival.

If it is consummated and implemented, Israeli troops will withdraw from the Jericho area and from the Gaza Strip, both of which they have occupied since the six-day war of June 1967. For the first time since the foundation of the state of Israel in 1948, their Arab inhabitants will be allowed substantial control over their own affairs as part of a five-year interim arrangement for Palestinian self-rule.

And with a lot of luck, a conflict that has claimed thousands of lives and several times brought the world close to war in the past 45 years will have taken a small but momentous step towards resolution.

A signed accord between Israel and the Palestinians would itself be of enormous psychological significance, especially if it entails mutual recognition between Israel and the Palestine Liberation Organisation, a body that Israelis have grown used to excoriating as a terrorist group bent on their destruction. Progress in Israeli-Palestinian talks could also trigger movement in separate peace negotiations between Israel and Syria, which could - eventually - open the way to a comprehensive Middle East peace agreement.

These developments would have seemed all but inconceivable even a few weeks ago. The Arab-Israeli peace talks launched in Madrid in November 1991 had dragged on for 22 months with little tangible sign of progress, and no sign of preparedness by the Israelis or Palestinians to budge from long-entrenched positions. Now, all of a sudden, almost anything seems possible - even, someone suggested yesterday, a summit meeting between Mr Yitzhak Rabin, Israel's dour, growling prime minister, and Mr Yassir Arafat, mercurial chairman of the PLO.

Small wonder that seasoned Middle Eastern observers were yesterday reeling in disbelief - or that sceptics were pointing to the many hurdles that have still to be surmounted.

What has stimulated the current anticipation is the fact that Israel - in the person of Mr Shimon Peres, the country's veteran foreign minister - and the PLO have already apparently reached an outline agreement. According to Israeli and Palestinian officials, the document was finalised at a secret meeting last week in Norway between Mr Peres and Abu Mazen, the PLO official responsible for peace talks. It is expected to be signed formally at the Washington peace talks, which enter their eleventh round this week.

Many of the most difficult and sensitive details remain obscure. But what is known is that it outlines a comprehensive plan for a five-year period of interim Palestinian self-rule in the West Bank and Gaza Strip, two or three years into which 'confidence-building' phase, talks about the final status of a Palestinian 'entity', probably in confederation with Jordan, will begin.

At the heart of the agreement is the so-called 'Gaza-Jericho First' plan which envisages an Israeli military withdrawal from the Gaza Strip and from a hitherto undefined enclave around Jericho. Gaza, a 360 sq km sliver of land, is home to 780,000 economically deprived Palestinians, many living in sprawling squalid shanty towns. A Palestinian elected interim authority will assume full control over Palestinian affairs in Gaza-Jericho but its powers will fall short of a Palestinian mini-state. In the rest of the occupied West Bank, excluding east Jerusalem, the Palestinians will have lesser powers over their affairs.

There are sufficient uncertainties to warrant caution about whether the deal will stick. The extent of Israeli withdrawal, for example, remains unclear. The PLO has said the agreement provides for a full withdrawal of Israeli troops and military administration. Jerusalem says the agreement means a troop redeployment away from the population centres in Gaza-Jericho but leaves the Israeli army with a security role for settlers in Gaza and for the critical road between Jerusalem and the Allenby bridge border crossing into Jordan. It is also unclear whether Israel will agree to PLO interpretations of the agreement that as soon as the document is signed the PLO leadership, including Mr Arafat, will be able to relocate to either Jericho or Gaza.

Despite the doubts, however, the agreement may be different from the dozens of other peace plans that have littered the map of the Middle East - partly through its design, and partly as a result of the atmosphere in which it has been constructed.

Mr Arafat, in particular, has been under intense pressure to strike a deal. As a result it was the the PLO, bereft of powerful friends, crippled by internal dissension, mounting criticism from extremists, and a cash crisis, that played the key role in bringing both sides to a draft settlement.

From Mr Rabin's point of view, the deal is carefully crafted to deflect potential domestic criticism. Firstly, it leaves untouched the largest potentially hostile community - the estimated 120,000 Jewish settlers in the West Bank. The most directly affected settlers - the small community of 4,000 in Gaza - have long been told that they will eventually have to move.

Secondly the agreement has no serious impact on Israel's borders or its security arrangements. Indeed, Mr Rabin can exploit widespread enthusiasm for getting rid of Israel's major security headache - the Gaza Strip, which has long been the scene of the worse Pales-tinian attacks against Israeli soldiers.

Thirdly the Israeli public has become gradually accustomed to the government talking to the PLO - a move Mr Rabin argues was implicitly sanctioned by the previous Likud government at the 1991 Madrid conference.

Nor - despite mounting accusations of betrayal from the right yesterday - does Mr Rabin need to worry that the proposed deal poses a threat to his coalition. For the moment he has an unshakeable majority in the Knesset of 67 votes to 53. Although his coalition is fragile owing to a continuing row with a small religious party, the Knesset coalition for peace is much more solid.

All these factors have led the government to believe it has a window of opportunity now to do a deal with relatively small concessions to the Palestinians.

Its attractions to the Israelis are many. It seems to contain PLO concessions on the ultra-sensitive question of who should control Jerusalem, long claimed by Israel as its 'eternal and indivisible capital'. Also, the autonomy arrangements for Gaza-Jericho provide maximum reassurance: although the Palestinians will have full internal powers over education, health, economic policy and housing over the estimated 900,000 population of Gaza-Jericho, Israel will continue to be the predominant authority by virtue of the enclaves' dependence on Israel proper. It is bound to exploit this economic dependence to the limit as a way of ensuring that the interim Palestinian authority toes the line.

But the agreement does have its attractions for the 64-year-old Mr Arafat as well. It appears to deliver a tangible and rapid step towards Palestinian self-rule. And it should allow the PLO to make a quick start in tackling the deteriorating conditions of Palestinians in the territories who have been drawn to the Islamic fundamentalism of the Hamas movement.

The challenge - to deliver rapid economic improvement to Palestinians in the territories - is herculean. If the PLO fails, Israel would have no reason to cede control over any more of the West Bank. If it succeeds in Gaza-Jericho, however, the Palestinian people may be on the road to claiming a respectable portion of its rightful inheritance.

CHRONOLOGY OF THE CONFLICT

May 1948 - First Arab-Israeli war; Israel annexes large portions of proposed Arab state in Palestine.

1956 - Egypt nationalises Suez Canal. Israel attacks Sinai peninsula, pushes towards canal. Anglo-French troops invade Egypt. Israeli, British and French forces withdraw under US pressure.

1964 - Arab states create the Palestine Liberation Organisation.

June 1967 - Six-day war: Israel attacks Egypt, Syria and Jordan, captures Sinai Peninsula and Gaza Strip from Egypt, the Golan Heights from Syria, and the West Bank and East Jerusalem from Jordan.

November 1967 - UN Security Council passes Resolution 242, basis for international efforts to secure a land-for-peace agreement, calling for Israeli withdrawal, recognition of all states in the area and a refugee settlement.

1969 - Yassir Arafat (left) becomes PLO chairman.

October 6, 1973 - Egypt and Syria attack Israeli forces in Sinai and Golan Heights on the Jewish feast of Yom Kippur. The war is inconclusive.

October 22, 1973 - UN Security Council Resolution 338 calls for a ceasefire, implementation of Resolution 242 and immediate peace negotiations.

1974 - Arab states recognise PLO as sole legitimate representative of the Palestinian people.

September, 1978 - Egypt, Israel and the US sign Camp David accords, offering limited autonomy to Palestinians in occupied territories.

1979 - Israel, Egypt sign treaty. Israel agrees to return Sinai Peninsula to Egypt but keeps Gaza Strip.

June, 1982 - Israel invades Lebanon to drive out Palestinian guerrillas.

December 1987 - Intifada (uprising) against Israeli rule breaks out in West Bank and Gaza Strip.

November 1988 - Palestinians in exile declare own state, implicitly recognising Israel. December 1988 - Arafat recognises Israel's right to exist and renounces terrorism.

April-May, 1991 - US seeks support for regional peace talks.

November 1991 - Madrid conference launches peace talks.

August 1993 - Israeli PM Yitzhak Rabin (top left) and Foreign Minister Shimon Peres (bottom left) open talks with PLO.

A burglar rifling a house was suddenly surprised by a voice saying: 'Me and Jesus are watching you.' Frightened, the burglar swung his torch round desperately until he spotted the culprit, a parrot.

Recovering his composure, the burglar asked the parrot what it was called. 'Imogen', replied the bird. 'That's a silly name for a parrot', said the burglar.

'Not half as silly as calling a rottweiler Jesus', chirped the bird.

Glad to hear bassoonist and economist Bill Robinson has found another opportunity to earn a crust, three months after losing the last one as special adviser to Norman Lamont.

Robinson starts work tomorrow with London Economics, run by John Kay and Nick Morris, where his main task will be to extend the consultancy's established reputation in microeconomics into the macro arena.

So how is the jobs market for former advisers to sacked chancellors? Working in a think tank did not appeal - 'I've done that before at the Institute of Fiscal Studies', says the ever-affable Robinson. And talks with three City firms 'did not work out'.

Meanwhile, will London Economics' corporate clients be prepared to pay good money for forecasts of inflation rates and trade deficits?

'We want to develop techniques for macroeconomic risk management', he says. 'People are a bit disillusioned with forecasting.'

Bosnian Serb leader Radovan Karadzic, whose troops control about 70 per cent of Bosnia, is not a name usually identified with peace and ethnic harmony.

So some surprise to see that the Greek Orthodox Church has appointed him a member of the 900-year-old Knights' order of the first rank of Saint Dionysius of Xanthe for 'his contribution to peace in the world'.

However, the medal probably says more about the ever-blossoming Greco-Serbian alliance than Karadzic's contributions to humanity.

Serbian president Slobodan Milosevic, a close friend of Greek prime minister Mitsotakis, who has lobbied for his Slavic neighbour, is planning to visit Greece early next month.

Which world leader watched 50 of the 52 matches televised in the 1990 soccer World Cup, is an avid bridge player and saw his son paralysed by being thrown out of a window by his own guards?

Despite his public disapproval of the cult of personality, Deng Xiaoping, China's paramount leader, has allowed the Chinese taboo against publishing an account of the life of someone still alive to be infringed with the publication of his biography. Written by his daughter, Deng Rong, it is now being serialised in mass-circulation Chinese newspapers.

But Rong's rose-coloured prose allows for no hint of scandal in her beloved father's life. She provides some details of his student days in France - where he developed decidedly bourgeois tastes for wine, cheese, coffee, bridge and his life-long interest in soccer - and in Moscow.

Deng had three wives; the first died in childbirth in 1930, the second left him after a political disagreement in 1933, and the third, whom he married in 1939, produced five children. Rong is the youngest.

Having just turned 89, his 'meeting with Karl Marx' cannot be far off; the tone of the book suggests that Deng is moving from the realm of earthly being towards communist sainthood.

Now that Barclays has roundly trumped National Westminster, bringing in 41-year-old Martin Taylor, who beats Derek Wanless by four years in the chief executive youth stakes, the question of succession at Lloyds recurs, both men being a generation younger than Lloyds' 61-year-old boss.

Brian Pitman, a wise old bird who has avoided some of the obvious pitfalls of the last decade, will bow out in 1995, three years after the bank's retirement age.

Inside favourites as next-in-command include 51-year-old Paul Brown, a talented linguist, now heading retail banking. Another front-runner, David Pirrie, three years his senior and in charge of international and private banking, was in 1986 tipped to run Standard Chartered had that eccentric bid gone through. John Anderson, boss of Lloyds' National Bank of New Zealand, is also thought to be in with a chance, even if his British banking experience is limited.

None, however, is a sure-fire custodian of Lloyds' daunting reputation as the UK's best-managed bank, so perhaps it is time to search the younger echelons. There are a couple of bright regional heads; Gordon Pell, 43, in charge of Thames Valley, and Dennis Holt, 44, for the south-west. Or perhaps Michael Hepher, 49, who departed for British Telecom two years ago, could be lured back.

The real, but unlikely, trump would be a female candidate. Prominent as City regulators - think of Frances Heaton of the Takeover Panel or Rosalind Gilmore at the Building Societies Commission - women have yet to breach the formidable terrain of the senior clearing bank hierarchies.

Nor is the current fad for ex-journalists - Taylor, but also Rupert Pennant-Rea - a rich vein. Sarah Hogg, ex-Telegraph journalist turned Number Ten policy unit head, was an outsider as the next Bank of England governor, but running number three of Britain's 'big four' clearers might be a come-down for one sometimes assumed to be running the country.

UNLESS NIGERIA'S civilian leaders settle their differences, the grip of the military will tighten and the country's crisis will deepen.

The promise by Chief Moshood Abiola to return to Lagos this week and claim the presidency denied him is dangerous and impractical. The bellicose response from Chief Ernest Shonekan's new interim government, equating such an act with insurrection, smacks of a military diktat. Neither serves the interests of 80 million anxious Nigerians.

United the two men are better placed to demand that the military fulfill its promise to hand-over to civilian rule; divided they may provide General Ibrahim Babangida with a pretext to return.

The general, who ostensibly stepped down last Thursday as Nigeria's military leader, has left a dangerous legacy. The new interim civilian government has little popular support, and the military regime behind it is divided. Babangida loyalists wish to extend military rule, some officers are anxious to return to barracks, while others believe it is their turn to plunder state coffers.

Meanwhile the economy continues its rapid deterioration. The country's structural adjustment programme has lapsed, and mounting arrears push external debt towards Dollars 34bn, well beyond the country's capacity to service. A general strike called in support of Chief Abiola paralyses Lagos and threatens to disrupt vital oil exports. Last week's announcement of a ten-fold increase in the price of a new premium grade of petrol coincided with a nation-wide shortage of the lower grade fuel, infuriating the public and risking massive protests when the holiday weekend finishes today Confronted by the country's worst crisis since the Biafran civil war in the 1960s, civilian politicians are split into two camps.

Pragmatic argument

One supports the interim government led by Chief Shonekan, albeit with generals in charge, but has promised fresh elections by March next year. The other insists that Chief Abiola's victory in the annulled June presidential poll be put into effect.

Both have a case. The former is based on the pragmatic argument that civilians must make the best of the army's terms; the latter rests on the principle that the electorate's verdict should be respected, and maintains that the army's record of broken promises warrants confrontation.

Ethnic rivalries

But underlying a division over tactics are tense ethnic rivalries, with the Yoruba south lining up behind Mr Abiola, and the Hausa-Fulani north seeking a second chance to win the presidency.

Before Mr Abiola risks a confrontation that could split the nation, Mr Shonekan should be given time to show that his alternative could work. Admittedly there is good reason to be sceptical. The previous interim government was also led by Mr Shonekan. Within weeks it became clear that the civilians were powerless.

Nor does the new cabinet inspire confidence. It includes a minister of information who enthusiastically endorsed the recent banning of several newspapers. The proposed minister of planning is a vociferous critic of the economic reforms Mr Shonekan tried unsuccessfully to revive.

If Nigerians are to be convinced that this time round things are different, he has to act swiftly. He has already taken some first steps, persuading the military to shorten the transition period from 12 to six months. Over the weekend he released jailed journalists and human rights campaigners. He should follow this by lifting the newspaper ban.

But above all he should seek an accommodation with Chief Abiola, in which together they keep up pressure on the military. The chief should be guaranteed safe passage when he returns home, together with the right to contest the March election. In return Mr Abiola should suspend his threat to form a Lagos-based government.

The generals may object: in which case the interim government is exposed as a sham, and Nigeria's prospects are bleak indeed. But in the meantime Mr Shonekan annd Mr Abiola owe it to their country to exchange olive branches, not epithets. The sooner the two men find common cause, the better the chance that democracy will finally come to Nigeria.

Never in the 22 months of the Middle East peace process have minds been more wonderfully concentrated. To its advocates, the 'Gaza-Jericho first' proposal offers for the first time the prospect of Palestinian autonomy in the lands occupied by Israel in 1967. To its opponents, it is a 'catastrophe', in the words yesterday of Mr Abdul Aziz Rantisi, the exiled leader of Hamas, the Palestinians' militant Islamic movement. The next few weeks will show whether Mr Rantisi and other rejectionists can avert this 'catastrophe'.

For the moderate Arab governments who have pressured the Palestinian leadership to agree to this first, limited form of autonomy, the 'Gaza-Jericho first' proposal is the start of the endgame. Mr Amr Moussa, the Egyptian foreign minister, welcomed the proposed deal as such yesterday, saying any withdrawal of Israeli forces from occupied lands was welcome, though only so if it was the first step in a greater disengagement.

But the rejectionists within the Palestinian fold signalled their profound distaste for a deal which they see as a sell-out by a beleaguered Mr Yassir Arafat, chairman of the Palestine Liberation Organisation. Can organisations such as Mr Ahmed Jibril's radical PFLP-GC and Hamas, which has been the main beneficiary within Gaza and the West Bank of the long stalemate in the peace process, muster the force to stop the proposal? The answer will lie partly in the hands of the sponsors of these groups, who have a habit of playing the rejectionist card for their own ends - most particularly Syria and Iran.

Very little is ever clear about the strategy of Syria's President Hafez al-Assad, except that it involves patience and caution. But he has already shown willingness to rein in rejectionist groups his government sponsors in the interests of an eventual peace. The recent decision to lean on Hizbollah, the pro-Iranian and deeply rejectionist guerrilla group, after its attacks on Israel prompted a week-long bombardment of south Lebanon, was the most telling example - and seems to have cleared the air in the Syria-Israel peace talks.

But whether Syria would be prepared to act similarly with respect to groups such as Mr Jibril's is unclear. Equally, there is doubt as to whether either Syria or Iran can decisively control rejectionist groups which have garnered increasingly strong grass-roots support in the occupied territories.

Mr Assad is not in a strong position to argue with them, given that many Palestinians see him as hastening to conclude a 'separate peace' with Israel involving the return of all or part of the Golan Heights, captured by the Israelis in the 1967 war. The Syrian leader's repeated assertions that he has no intention of proceeding to a full peace with Israel without them do not cut much ice with Palestinians mindful of the violent history of their relations with Damascus.

Those who oppose the current peace plan argue that once a limited autonomy deal is concluded, Syria will move full-speed to a broad normalisation of relations with Israel. The result, say the critics, could be a matter of 'Gaza-Jericho last' as well as first, with the Palestinians having to settle for exercising self-rule only in those two small enclaves. Syria's attitude - and Jordan's, a country whose own peace deal with Israel is all but done - may also be influenced by the way the present proposal was reached substantially without their consultation. Some observers suggested yesterday that this could prompt both countries to take a harder line with Israel, partly so as to resist pressure to make greater concessions themselves. Both Amman and Damascus were notably muted yesterday in their response to the proposal.

Much will depend on the contents of an eventual 'Gaza-Jericho' agreement. If it appears to open the way for direct linkage between an interim period of Palestinian autonomy and a final agreement - one which would address the still unresolved issue of the status of Jerusalem - it would be hard for either Syria or Jordan to hold out against the PLO-negotiated deal.

But if opposition to the deal deepens and widens, both within the occupied territories and among the hundreds of thousands of diaspora Palestinians in Lebanon, Syria and Jordan, then Jordan, in particular, could decide to position itself for a broader agreement giving it greater control over the occupied West Bank. Syria, too, might then decide that it cannot peg its own peace with Israel to an interim agreement which proves to have broad, grass-roots opposition among the Palestinians.

The key, in both cases, will be the degree of Palestinian opposition to the agreement. Many independent Palestinian groups, and even many in the mainstream Fatah group, have already voiced doubts about 'Gaza-Jericho'.

Mr Arafat will have to demonstrate to the Palestinian rejectionists that this deal will be tightly linked to a comprehensive settlement leading to a total Israeli withdrawal from the occupied territories, and recognising the right of diaspora refugees to return.

Whatever else the 'Gaza-Jericho' proposal will achieve, it appears already to have shifted the fundamental axis on which the peace process will turn. As Mr Mohammed Sayed Ahmed, the Egyptian commentator, noted yesterday: 'We are no longer looking simply at an Arab-Israeli confrontation - now the confrontation is within the Palestinian camp.'

Sir In your leader of August 27 you point belatedly to the fact that the financial world is overwhelmed by English-speaking analysts and commentators. Nevertheless, your standpoint remains unchanged as you try to interpret the policies of the German central bank.

You continue to underestimate two considerations that influence the Bundesbank's decisions over and above its current statutory duties: first, that if there is to be a single European currency it will have to be indistinguishable from the D-Mark; and second, that the central bank responsible for a European currency will have to demonstrate - and be able to defend - its independence, not only from politicians but above all from the market.

It is obvious that the attitude in Frankfurt is that, if possible, no significant reduction in base rates should occur under market pressures and that, for as long as thunder continues to roll in New York and London, such corrections will be resisted. Too much is at stake.

It should be equally obvious that a majority of continental politicians are under no illusions. There is a deep-seated, if unstructured, demand for a higher degree of unity; it may be naive but it is a political reality that the UK has never fully appreciated.

Matters would be quite different if the cohorts of English-speaking analysts could point to decades of successful economic management where their advice was taken seriously.

Regrettably that is not the case. Those with whom we have felt most comfortable in the marketplace will always have the strength to safeguard their dollar.

Sterling, our once proud unit, will be left to its fate, and we to ask ourselves how that came about. No reasons are to be found in any of the memoirs of our politicians.

D A A Fagandini,

6 Alleyn Park,

London SE21 8AE

Sir, As the editor of the only English-language newsletter focusing on German monetary policy I have to take issue with your contention that it is almost impossible for non-German analysts to understand what the Bundesbank is about ('Bundesbank stays tough', leading article, August 27).

It is very simple really. The Bundesbank has a legal mandate to combat domestic inflation. Its 1957 constitution makes no mention of cross-border responsibilities. And domestic growth and employment are accorded considerably lower priority. So why the puzzlement as to Bundesbank motives?

Two further points. First, there is a growing case for questioning if high nominal short rates are, under the present circumstances, the best method of bringing German money supply and inflation back under control.

They are artificially inflating time deposits (32.5 per cent of M3) to the detriment of longer-term forms of savings, and they are inducing speculative capital inflows that expand overall domestic liquidity.

Second, non-German financial professionals constantly overlook the fact that credit policy decisions in Germany are made by a Bundesbank council consisting of 16 members, each with one vote and an individual political affiliation.

Rate decisions are a matter of high politics in both a partisan and a personal sense within this closed forum - whatever the Bundesbank itself tries to maintain.

As long as many in the council, including its current president, continue to believe that high rates are the solution to unacceptably high inflation, the absence of cuts on July 29 and last week completely fulfils the Bundesbank's constitutional mandate.

There are, however, signs that a rethink of the current high-rate policy is being kindled by the newly appointed senior Bundesbank officials, particularly vice-president designate Johann Wilhelm Gaddum.

Such arguments have yet to win the hearts and minds of the council majority. But we believe that they will do so well before the end of the year.

Allan Saunderson,

editor,

The Old Continent newsletter,

Frankfurter Allgemeine Zeitung

Information Services,

D-60267 Frankfurt/Main,

Germany

As President Bill Clinton returns to Washington this week after his seaside holiday, domestic and economic problems, such as the ambitious reform of the healthcare system or the passage of the North American Free Trade Agreement, loom largest on his agenda for the autumn.

But the clocks are running on a more international task, the transformation of the Atlantic alliance to meet a new set of needs and perils after the end of the Cold War.

One clock is of Mr Clinton's own setting: the summit of the North Atlantic Treaty Organisation scheduled for January 10, called at the US's request, demands an effort to spell out a new future for the alliance.

Ticking more insistently, however, is the festering disaster that confronts Nato and the world community in Bosnia.

If Bosnia is the model for the kind of regional and ethnic conflict that will replace the monolithic threat of the Warsaw Pact in Nato's strategic planning, it has posed uncomfortable questions that have received few good answers.

'It is a terrible model but it is the first one,' commented Mr Helmut Sonnenfeldt, a scholar at the Brookings Institution in Washington and formerly a senior foreign policy official in the Nixon and Ford administrations.

Mr Sonnenfeldt is one of many observers who join General John Shalikashvili, the Supreme Allied Commander in Europe who has just been appointed to the chairmanship of the US Joint Chiefs of Staff, in arguing that Nato has, at least on the technical and military level, done well in the face of the Bosnian crisis.

'On a military level the institution has performed very effectively. What has not happened are the political decisions that trigger action,' Mr Sonnenfeldt said, pointing to the plans drawn up, but never implemented, for the policing of the Vance-Owen peace plan as well as for air strikes against the Serbs.

Colonel Don Snider, director of political-military affairs at the Center for Strategic and International Studies, a Washington research centre, sees a need for further changes to Nato's command structure and conventional forces, but agrees that the greatest challenge is in the political area.

'The political transformation of the alliance is not complete,' he said.

In the search for a broader political vision of the future of Nato, clear leadership has yet to emerge from the governments of member countries, and especially from the US; for the moment, at least, the debate is taking place mostly among academics.

One contribution to the debate, by Messrs Ronald Asmus, Richard Kugler and Stephen Larrabee of the Rand Corporation, a California-based think tank, is published today in the journal Foreign Affairs.

The authors have worked closely with Senator Richard Lugar, the Indiana Republican who is one of the few members of Congress to have grappled with the issue, and who has trademarked the catchy phrase 'out of area or out of business' to summarise Nato's dilemma.

They argue that Nato desperately needs to address the conflicts along its southern and eastern flanks if it is not to become irrelevant, and spell out six political steps they see as necessary 'to forge a new transatlantic bargain'.

The first is 'to transform Nato from an alliance based on collective defence against a specific threat into an alliance committed to projecting democracy, stability and crisis management in a broader strategic sense'.

Nato also needs a more harmonious balance between the US and Europe and a strong Germany fully participating in the alliance.

Asmus, Kugler and Larrabee also urge a constructive security relationship with both Russia and the Ukraine, and a co-ordinated strategy for the integration of Poland, Hungary, the Czech Republic and possibly Slovakia as members of the alliance.

The call for Nato to extend its membership to the east is now widely echoed in US academic circles, though hotly contested in the same issue of Foreign Affairs by Mr Owen Harries, formerly a senior Australian diplomat.

Poland last week renewed its urgings to Nato to make a formal statement that it viewed the country as a future member after President Boris Yeltsin of Russia declared Polish membership would not be contrary to Russia's interests.

But although the proposal is gaining ground in the US Congress, where Senator Lugar has warmly endorsed it, and also among some German politicians, in the US administration ideas about 'outreach' to eastern Europe stop well short of early Nato membership.

Most European governments, meanwhile, are too preoccupied with ensuring the US does not leave the alliance to be much interested in new members.

Academics and think-tank analysts in Washington complain bitterly that the Clinton administration is still a very long way from formulating anything like a comprehensive approach to Nato's future - although many are hopeful that General Shalikashvili has thought hard about the problem and may inject a new sense of urgency.

'Right now I don't think anybody in the administration can tell you what they are going to do at the Nato summit,' says Colonel Snider.

So far, haphazard defence budget cuts in the US and Europe have done more to reforge Nato than any clear strategic conception.

Because it was he who called for the meeting - and because his claim to leadership on the world stage remains sparse - Mr Clinton stands in particular need of turning next January's summit into a success.

But if Nato continues to play the grand old Duke of York in Bosnia, marching its troops to the top of the hill and then marching them back down again, it seems likely to be seen to have failed its first big post-Cold War test - whatever the effectiveness of its military planning.

If the Bosnian crisis continues to fester, Nato's perceived failure there could cloud the summit, and the alliance's future.

The question of whose pollution is producing acid rain, causing European forests to wither and fish to die, is one of the longest-running international environmental disputes. Officals from 36 countries meeting in Geneva this week will try to find an answer.

The issue is particularly sensitive for Britain, which has been accused of jeopardising a United Nations-backed treaty to curb the pollution. Britain's refusal in 1985 to sign an earlier agreement curbing sulphur emissions, one of the leading causes of acid rain, earned it the tag of 'dirty man of Europe'. The UK has found it hard to shrug off the label, despite introducing expensive measures to clean up power stations, the main polluters.

Now Britain's resistance to the latest, more stringent targets proposed by the United Nations Economic Commission for Europe in Geneva, which includes western and eastern Europe as well as the US and Canada, is drawing new venom from its neighbours. Earlier this month, , Mr Thorbjoern Berntsen, Norway's environment minister, hurled personal abuse at Mr John Gummer, his UK counterpart.

The British reluctance is prompted by the desire to protect the already shrunken demand for British coal from power generators. Tighter emission standards might force them to burn less British coal. But some government officials privately fear that the UK is sacrificing its hard-won environmental record for nothing.

The programme to close mines and to generate a greater proportion of electricity from gas means that the UK may meet the proposed targets, in the same way that it has now met the terms of the 1985 protocol it once resisted. 'The negotiating position on acid rain is not taking account of the actual run-down of the coal industry,' according to one observer of the talks.

International disputes over acid rain first emerged at the end of the 1970s when the Scandinavians sought explanations for why some of their forests were turning brown. Acid rain is caused mainly by sulphur dioxide, which is emitted when coal and oil are burnt, and by nitrogen oxides, emitted by power stations and transport. The acidity is generally slight, 'about the same as a can of Coca-Cola', says Professor Ian Fells of Nottingham University. But the gases, sometimes dissolved in rain, can travel thousands of miles - across national borders - before being deposited, making disputes particularly hard to resolve.

Scientists generally agree about the harmful effect of the acid on water quality and fish, and its role in corroding buildings. However, 'there is more doubt about the mechanism of damage to trees - it can be hard to distinguish the effects (of acid rain) from those of drought', says Prof Fells.

The source of acid rain is clear, however. In Britain, coal-burning power stations are the main culprits, spewing out 72 per cent of total sulphur emissions in 1990. They also discharged 28 per cent of nitrogen oxides in the same year, though this is less than the amount discharged by traffic.

Nevertheless, Britain's emissions have been falling because the decline of heavy manufacturing has reduced industrial energy demand, and there has been a switch by domestic users from coal and oil to gas. Sulphur dioxide emissions

dropped from 6.4m tonnes in 1970 to 4.9m tonnes in 1980 and 3.5m tonnes last year.

Emissions are now set to fall further, partly because of the need to fall into line with the European Commission's large combustion plant directive, a treaty covering power stations. National Power, one of the two main generators in the UK, emitted 1.3m tonnes of sulphur dioxide last year; it must halve that level by 2003. PowerGen, the second-biggest generator, last year produced slightly less than 1m tonnes of sulphur dioxide and must cut levels to 669,000 tonnes by 1998.

These targets will be reached by two routes. The first - fitting old, coal-fired power stations with equipment to remove sulphur and other pollution - is expensive. Between them, the generators expect to spend more than Pounds 3bn on such improvements during the 1990s. But power companies find it cheaper to switch to cleaner fuels such as natural gas or imported coal, which has roughly half the sulphur content.

The result of these changes, environment ministers say, is that the UK will not only meet the EC directive on large plants, but also the terms of the 1985 United Nations treaty it refused to sign. That prediction holds firm, ministers say, despite the government's decision this month to license the use of orimulsion, dubbed the 'world's dirtiest fuel'.

Despite such optimism, Britain is arguing in Geneva that it would have difficulty meeting the proposed terms. The UK's neighbours are pressing for it to make a 79 per cent cut in sulphur emissions on 1980 levels possibly by 2000. Britain is countering with a bid of a 70 per cent cut by 2005.

Other countries derive the 79 per cent figure from the model developed by the Austria-based International Institute for Applied Systems Analysis, the most-quoted of the three scientific models used by the UN. According to Ms Fiona Weir, of Friends of the Earth, the environmental pressure group, Britain's reluctance to accept the 79 per cent target implies that it is abandoning 'the principle of basing standards on good science'.

Government officials reject this claim, saying that Britain's resistance stems from disagreement with the model. They argue that another UN model, run by Imperial College in London, recommends a lower target for UK emis-sions.

But officials also concede that the principal force behind the British position in Geneva is the Department of Trade and Industry's desire to protect British Coal, after the political storm aroused by this year's pit closures. The DTI fears that power generators would turn to imported coal or shut down ageing coal-fired power stations prematurely rather than fit expensive pollution-control equipment.

Some independent forecasters endorse this view. Mr Jim Skea, energy specialist with the Sussex University-based Science Policy Research Unit, says: 'If the government signed up to a 79 per cent reduction by 2005, that would probably be the nail in the coffin for what is left of the British coal industry.'

The DTI argues, though, that its caution is warranted. Its officials believe the decision not to sign the 1985 protocol was right at the time - a fall in emissions during the 1980s was not anticipated.

But some officials in the UK environment department point out that the dispute on targets may be unnecessary. The irony, they suggest, is that many coal-fired power stations are scheduled to be taken out of commission only a few years after the date set for pollution reductions. Britain will then see a further sharp fall in emissions, and may, after all, meet the toughest proposed targets.

If this is the case, the UK government's awkward diplomacy on acid rain will, for a second time, have tarnished the appearance of a respectable environmental record. In the meantime, by insisting on keeping its options open, Britain is dealing itself a difficult hand, and its neighbours' frustration is unsurprising. If 'drittsekk' is the only insult hurled at British cabinet ministers on the road to a new sulphur protocol, and Norwegian the only European language in which abuse is uttered, the government may consider that it has got off lightly.

Sir, Why should it merit front-page headlines when the government plans to go into the next general election holding out the prospect of tax cuts?

Isn't this what they always do?

Geyve Walker,

The Old Vicarage,

Barton,

Tirril,

Penrith,

Cumbria,

CA10 2LR

Sir, July's lower than expected public sector borrowing requirement figure (not, please, 'number') followed hard on the heels of last year's lower than estimated current account deficit. Once again, this underlines the precariousness of short-term economic forecasts. And because of the growing likelihood of a lower than budgeted PSBR out-turn for the current financial year as a whole, it also points to inaccuracy in long-term forecasting.

So why can't forecasters take the hint and hedge their bets more safely by forsaking the dare-devilry of decimal-point precision, in favour of nothing more ambitious than half, or at most quarter percentage-point gradations only? (As if the difference between actual or forecast 1.2 and 1.3 per cent gross domestic product growth was at all meaningful.)

Let them remember, first, that the greater the accuracy aimed at, the poorer the accuracy likely to be achieved, quite apart from the ricketiness of underlying data.

Second, let awareness of their fallibility encourage more humility on their part and less gullibility on ours - both, admittedly, tall orders.

Ernest J Freyhan,

65 Vincent Court,

Bell Lane,

Hendon,

London NW4 2AW

Sir, So who does have original programming on television these days, Christopher Dunkley could have asked before he savaged cable and satellite channels ('Scrambled Sky at a premium', August 25).

Look at the schedules for that day. At peak time, 9.30pm, all four terrestrial channels had repeats. Of course they also produce lots of their own material. So, in time, will the cable and satellite channels in the UK - just as, for example, Discovery's US parent is doing after only a few years in business. It already has fresh programming: last month it showed the four-part series, The Dinosaurs, later repeated by Channel Four.

Both Sky News and CNN International carry original programming of the most expensive kind all day (including FT Reports). I, for one, would not be without them. Meanwhile, this weekend the cable and satellite sports channels had live cycling, motor racing, motorcycle racing, horse racing, golf, tennis, athletics, soccer and rugby league. Not to my taste, perhaps not to Mr Dunkley's. But to offer such programmes is hardly 'repackaging parasites'.

What is wrong with repeats, anyway? The BBC has revived a 1960s cult by digging out Thunderbirds and today it is dedicating the whole day to a celebration of that decade. Is this very different from having Sunday's choice of The Six Wives of Henry VIII and Oliver Twist on UK Gold, Brighton Rock and Loot on Bravo?

Alan Burkitt-Gray,

editor,

Cable & Satellite Communications International,

104 City View,

463 Bethnal Green Road,

London E2 9QY

One of the splash-making themes of this year's Edinburgh festival is the representation of four internationally 'hot' theatre-directors: Peter Sellars, Bob Wilson, Robert Lepage, and - the focus of this final week - Peter Stein. This is the sort of high-wire planning and achievement that (in this country at least) now go on nowhere else. And certainly, the Canadian Opera Company double bill of Lepage-produced one-act operas by Bartok and Schoenberg - shown at the Edinburgh Playhouse at the weekend (for two performances only]) - proved the very stuff of festival art: fresh, daring, full of striking ideas executed on a level well beyond the quotidian mundane.

It was an occasion full of firsts: the first British sojourn of Canada's leading opera company, Lepage's first encounters with opera, the first performances at the restored Playhouse after the eve-of-festival backstage fire. The French-Canadian Lepage, whose in-the-mud Midsummer Night's Dream was recently staged at the Royal National Theatre, is a theatre magician, conjuror of a floating succession of picturesque images, sometimes haunting and sometimes startling, through which narrative is advanced.

Bartok's duo-drama Bluebeard's Castle and Schoenberg's monodrama Erwartung - two crypto-autobiographical masterpieces from the first decade of our century in which the deepest human passions are analysed in music and through psycho-symbolic stagecraft - would seem to offer him rich opportunities for just such conjuring.

Both operas, designed (by Michael Levine, brilliantly) to operate different features of the same setting, here colonise different corners of the same dream-world. In both the stage, fronted by a gauze scrim, is lined along the right by the same large block-built wall, a surface pregnant with possibilities - in Bartok, for reflecting the light-images thrown by the seven-fold door-opening on the opposite stage side; in Schoenberg, for suddenly releasing surreal visions through unexpected apertures and for supporting marvellous slow-motion body-tricks with gravity.

Fluid patterns of imagery are set in motion by cinematic changes of lighting (or should have been: at the Playhouse neither Robert Thomson 's lighting-plot nor the general level of stage management was expertly seamless as one guesses they were meant to be). The unfolding of both operas, indeed, borrows from film method and manner: in grossly oversimplified terms, Eisenstein-cum-Disney.

In principle the style would appear ideally devised to unlock the tortured poetic secrets of both pieces. In practice I found it unexpectedly erratic ' partly because banal moments (advert-style autumn leaves and over-used plays with water-reflection) mingle with the magical, partly because a certain intellectual shallowness can be detected in Lepage's larger response to both operas.

The Bartok couple, though handsomely personated by Victor Braun and Jane Gilbert, are prone to obvious, melodramatic gesturing. More simple-minded still, in the Schoenberg, is the framing of the whole piece as an asylum patient's pathological fantasy - a straitjacket, a hospital bed, a psychiatrist with notebook are some of the ways in which Lepage, by 'explaining' the opera's content, robs its symbolic substance of multi-layered suggestiveness. Blood-links between the worlds of Schoenberg and Freud may be numerous and easily instanced, but that is no excuse for a cartoon-ish reductiveness in treatment of Erwartung.

If the reason was a determination to make more accessible a supposedly 'difficult' opera by a famously tough-nut composer, why then the singing of both Schoenberg and Bartok in the original languages, with surtitles high up and far away on the Playhouse proscenium arch? The total effect - of production style linked to the distancing impact of language-choice and of gauze limiting the performers' expressiveness of acting detail - was, I would say, the opposite: concealment as much as revelation.

Happily, however, the excellence of the purely musical realisation worked its own countervailing action. The Canadian Opera Company orchestra, plainly of very high quality, showed itself in complete command of the Bartok's floods of colour no less than Schoenberg's nerve-end refinements of musical imagery; under Richard Bradshaw (COC chief conductor) both scores were revealed in depth.

Victor Braun, though lacking lowest-register solidity, is a superbly dark, noble Bluebeard, Jane Gilbert a vocally lustrous, wide-ranging mezzo Judith. The Erwartung protagonist, Rebecca Blankenship, used an uneven dramatic soprano with admirable warmth, commitment and emotional urgency. In spite of my cavils, it all added up to a genuine festival-event.

Sponsored by AT&T

Look on this circus and on this. Here we see smiling fresh-faced young performers, dressed in fairy tale costumes juggling cheerfully as they spin across the ice. There we see a grotesquely tattooed man known as The Enigma, crunching live locusts and chewing worms.

Circus has always been generous in its range, presenting the height of human endeavour in the ring while embracing freaks in its side shows. Today political correctness has forced circuses to specialise and the great Russian Circus on Ice offers escapist delight for children, while Jim Rose's American Circus Sideshow provides acts that usually surface in a Hammer move.

Both have their attractions. A man on a monocycle (yawn, yawn); a man on a monocycle skipping (yawn); but a man on a monocycle skipping on ice - now that's entertainment. The performance is sugary in the extreme, but its expertise and physical precision hold the interest, and you expect some camp in a tent.

I only closed my eyes once in Jim Rose's tent, erected on Carlton Hill with its stunning views over Edinburgh. That was when the Torture King put needles through his eyes. But it is all done against a backdrop of Rose's genially hysterical commentary which by the end had convinced me with its mock Gothic that at least some of the bodily defying deeds were tricks. This 'circus of the scars' was in its way as camp as its rival in The Meadows.

For all that the festival proper would rather have nothing to do with such things, Edinburgh is currently full of worthwhile exhibitions, with the National Galleries of Scotland offering a substantial quiverfull. The Queen's Holbeins at the National Gallery apart, the most important is the show of early-modern Russian painting put together by the Musee des Beaux Arts de Nantes, which has come to the Museum of Modern Art for its sole British showing.

Its subject is the heroic period of Russian modernism from the turn of the century to the first years of the Communist state. The subject has been thoroughly investigated since the spirit of glasnost threw open Russian collections locked away these 60 years. Even so, drawn as it is for the most part from regional museums from Samara to Novgorod, this remarkable show brings us many works for the first time, fresh and fascinating.

Not that it breaks new ground exactly: the expected names are here and no new reputations are made, no accepted critical analysis overturned. It is but an open celebration of the work as it is, in all its variety, and a poignant memorial to an historic moment and opportunity lost. For here was a national school of such vigour and originality that, had it remained within the mainstream of modernist development, might have profoundly moderated its course. Would the assumed authority of the Paris school have remained so persuasive for so long? Would the habit, now ingrained, of assuming there to be at any moment a single significant centre of activity, have taken such a hold? The questions hang in the air.

As it was the Russians had influence enough, on the course of abstraction and constructivism especially, through such as Kandinsky and Malevich, and such work as remained in the west. The greater loss was to expressionism, which in its Russian manifestation - alive to developments elsewhere, in Germany especially, in the years before 1914 - brought to it a zest and geniality, wonderfully angst-free, derived from its alternative sources in the profound folk tradition.

Goncharova, Popova, Rozanova, Stepanova - how important the women are - Falk, Filanov, Kravchenko, Larianov, Shevchenko, and Chagall, Malevich, Kandinsky and so many more besides: Cubist still-lifes, suprematist abstraction, streets in the snow, country villages, men talking, women working - it is a lovely show.

* The National Galleries have also taken over the Royal Scottish Academy, filling its ample spaces with an ambitious historical survey of drawings, water-colours and prints by Scottish artists from 1700 to 1990. It is a dense and constantly intriguing show that holds many beautiful and remarkable things, yet it has to be said that it over-reaches itself. Set up under such a heading as The Line of Tradition,it invites an expectation of continuity and thematic consistency that in the event is simply not sustained.

The landscape, the portrait and the figure, the colourist instinct, objectivity, romanticism - any one of these would have supplied a proper theme for a smaller, more concentrated and particular show. I am all for a miscellany, openly acknowledged, but even that would have been better for a shorter historical span. In this respect this show simply tails off into a token presentation of a few currently fashionable names allowed a disproportionate amount of space. None of this should put off the visitor prepared to immerse himself in the material and indulge his own interests and enjoyments. Scottish painting and graphic art from the 1880s well into the 1960s was especially strong and too readily disregarded by the world at large. There are many fine examples here - James Cowie's studies of his students, William Gillies' landscapes, James MacBey's first world war etchings, Walton's Black Bull beneath its tree. The large and so deceptively free water-colours of Arthur Melville alone are worth the visit.

Much the same ground is covered by the Scottish Gallery in its truly miscellaneous survey of work by artists associated, as teachers or students, with the Edinburgh College of Art, since its foundation in 1909. In recent years especially the college has been a bastion of the painterly and graphic disciplines too lightly abandoned in the name of creative liberality south of the border some 30 years ago. With such mentors to hand as Gillies, Anne Redpath, Robin Philipson, John Houston, David Michie and Elizabeth Blackadder, it has remained a policy of creative conservatism beyond price.

* Back at the Academy, the RSA itself has given over its basement gallery to the Imperial War Museum, to put up a small display of works commissioned lately from contemporary artists. The point it makes is important but could all too easily go by default. War remains a legitimate subject for the artist, whether we are engaged in any formal war or not. Without engaging in the artist's own particular polemic or moral debate, the museum is surely right to monitor the currency of such response on our behalf.

Finally I have room only to recommend Phoebe Anna Traquair - Scottish decorative artist within the arts & crafts movement and Celtic revival at the turn of the century - at the Scottish National Portrait Gallery until November 7, (sponsored by Baillie Gifford & Co., General Accident, and Mobil).

Russian Painting of the Avant-garde 1906-1924: Scottish National Gallery of Modern Art, Belford Rd, until September 5, sponsored by Scottish Power and the Foundation for Sport and the Arts.

The Line of Tradition: Royal Scottish Academy, The Mound, until September 12, sponsored by Dawson International, BSIS, Lothian & Edinburgh Enterprise, and the Esmee Fairburn and Hope Scott Trusts.

The Edinburgh School: The Scottish Gallery, 16 Dundas Street, until September 8.

No More Heroes Anymore: Royal Scottish Academy, until September 12.

John Lill is the soloist in Brahms' Piano Concerto No 2 in the first half of today's BBC Proms (7.30 Radio 3). The Leipzig Gewandhaus Orchestra is conducted by Kurt Masur. In the second half (8.40) they play Mendelssohn's Overture & Incidental Music to A Midsummer Night's Dream.

Mulberry was one of those quirky comedies which can take a long time to catch on. Karl Howman played a charming jack-of-all-trades who becomes a servant to Miss Farnaby (the endlessly watchable Geraldine McEwan). It never really had time to become a hit, so writers Esmonde and Larbey wrote a final episode which was missed by many of the dedicated band who had been watching. So today (8.30) BBC1 provides a repeat.

Storm From The East, telling the story of Genghis Khan and his descendants, has had some good pictures of galloping armies and crusader castles, but has never really gripped the imagination. The last episode (9.45 BBC2) tells the story of 'the most illustrious of all the Mongol Khans' - Genghis's grandson, Khubilai who inspired Coleridge.

The Proms and Edinburgh may overshadow August, but there are some idyllic outlying festivals. You could do worse than sample the charms of Presteigne, a small town astride the picturesque mid-Wales border, where a modest, friendly bank holiday chamber music event has taken off during the last few years. But for the charged atmosphere of live contemporary music-making, make for coastal St Donat's.

This summer's Vale of Glamorgan festival is a minimalist's paradise. David Williams, the festival chairman, who, with another hat on, helped sway a healthy Pounds 25,000 grant from the Welsh Arts Council, explains: 'We felt we should do something constructive, not just for new music in broader terms, but for living composers. It seemed more positive to concentrate resources rather than dissipate them, and promote a worthwhile series focusing on the diversity of contemporary works in particular, post-modernist music since the '70s.'

The principal sponsors, Allied Steel and Wire (ASW), have proved an added lifeline, injecting several thousands and, no less important, setting up gatherings to help widen the sponsorship net.

At Cardiff's unspoiled Victorian Coal Exchange on Bute Square (the city's former commercial heart), John Metcalf's decidedly adventurous programme was launched last week with a mesmerising, sold-out evening by the American composer Steve Reich, fresh from his South Bank triumph with The Cave. Llandaff Cathedral offers an ampler venue tonight for a full-scale John Adams concert, climaxing with his celebrated Whitman Civil War setting The Wound Dresser - like his operas Nixon in China and The Death of Klinghoffer, something of a cult piece.

Getting to the outside-Cardiff events is easiest - be warned - by car. But it's well worth the effort. These attractive smaller venues bring their own rewards, be it the atmospheric oak-rafted fourteenth century Bradenstoke Hall, part of St Donat's Castle within the Atlantic College campus, or the medieval wall-painted St Illtud's Church in Llanylltud Faur (Llantwit Major), an early Celtic Christian site with the added merits of an adjacent pub-studded square and a good surfing beach a mere two miles' distance.

Minimalist the diet may have been - but by no means monochrome. The Smith Quartet, one of Britain's answers to the Kronos, made appearances at both venues, the hall marginally the better for sound and paradoxically more intimate, thanks largely to the players being raised on a dais.

Like the 'modernism' it purports to replace, postmodern and minimalist fare is a mixed bag. The Smiths' reading of the now legendary Different Trains was somewhat differently balanced from Reich's own - not quite as haunted, perhaps, but clear and forceful. The South African-born, Princeton-associated Kevin Volans' Second Quartet, Hunting/Gathering, seemed to be questing for a style as much as anything. Its repeating motifs and unfinished paragraphs have all the intensity of a short-running sitcom. Bones stick out balefully, rather as Steve Martland's Patrol is all sinew - laborious invention, oddly conventional and quintessentially dull.

But nothing can take away from the dedication of these players. Volans' Third Quartet, Songlines, like his Rimbaud (and Bruce Chatwin) inspired Almeida chamber opera The Man who strides the wind (L'Homme aux Semelles de Vent), was a revelation: riddled with imaginative ideas, well teased out, an array of string sounds that 'delight the ear and hurt not', that constantly challenge, dazzle and amaze. And Graham Fitkin's quartet Servant, like the Michael Nyman encore the following night, gave clear evidence of how minimalism can successfully subsume native and wider traditions.

You can still catch John Adams tonight at 7.30. Next summer's festival includes Australian Peter Sculthorpe and - yes - Gorecki. So book early (Tel. 0446 794848 792151).

David Schofield has been appointed director, head of fixed income sales into Germany and France, at UBS; he moves from Lehman Brothers.

David Mee has been appointed director and senior legal adviser at NOMURA INTERNATIONAL; he moves from Allen & Overy.

Greg McNulty has been appointed a director of Fox-Pitt, Kelton.

Valerie Lane, formerly a senior vice-president at Kleinwort Benson, has been appointed md of head of US private placements and structured distribution at BZW in New York.

Brian Phillips (below left), formerly a director of Invesco Ventures, and Donald Maclennan (below right), formerly an investment director with 3i, have been appointed directors of GARTMORE VENTURE CAPITAL.

Jamie Gunn, formerly finance director of Griffin Factors, part of Midland Bank, has been appointed group strategic planning director of NOBLE LOWNDES.

Massimo Perazzo, formerly direttore generale, corporate finance at Pasfin Securities SIM in Milan, has been appointed a director in the corporate finance department of SWISS BANK CORPORATION.

Glenn Wellman, formerly an md and chief investment officer at Alliance Capital, has been appointed a director and head of global equity management at CSFB INVESTMENT MANAGEMENT.

GARDINER & THEOBALD has been appointed by Thamesdown Borough Council to act as quantity surveyor for the pre-contract stages of the Pounds 30m refurbishment of the Brunel Centre in Swindon.

The project includes the refurbishment of the Brunel Arcade with provision for a new 130,000 sq ft store and a 1,100 space car park.

Airport operator BAA is to use the New Engineering Contract (NEC) for the main tunnel for the Pounds 300m Heathrow Express scheme. This is believed to represent the biggest UK civil engineering project to adopt the new form of contract.

The New Engineering Contract (NEC) is a standard form of contract suitable for use in the design and construction (including erection) of new works involving any, or all, of the building disciplines.

BAA is a leading proponent of the NEC having already used this form of contract on a number of successfully completed projects at Heathrow and Southampton airports.

The contract for a new terminal and car park at Southampton will be the first UK building contract to use the NEC.

Explaining the benefits of the new form of contract, BAA's project director, David H. Williams said 'We see the radical and less adversarial approach which is required to administer this contract as improving the pre-planning productivity and project performance generally.

The use of the NEC is one of a number of initiatives currently being embraced by BAA as part of a continuous improvement process for its Pounds 300m a year capital investment programme.

The West Midland's constr uction industry has received a boost with the appointment by Brindleyplace of Birmingham-based builders, TILBURY DOUGLAS CONSTRUCTION. Tilbury Douglas has been awarded the contract for 'The Water's Edge', the first phase of Birmingham's Pounds 250m showpiece development, Brindleyplace. Work on the Pounds 3m design and build contract is due to start on September 6 and will include the shell and core construction of 'The Water's Edge', the first phase of retail and catering facilities on the 15 acre site.

The Water's Edge is a 60,000 sq ft canalside development of restaurants, shops, bars and cafes which will be linked to the canalside entrance of the International Convention Centre by a new pedestrian steel suspension bridge which is part of the contract.

A civic square will be created at the heart of Brindleyplace. The initial layout will be set out in time to open to the public next summer.

Christopher Reeves, who was chief executive of Morgan Grenfell at the time of the Guinness affair, has seemingly been fully rehabilitated by the City now that he has been promoted to chairman of Merrill Lynch Europe/Middle East.

Nearly two years after resigning from Morgan Grenfell in 1987, he had joined the US investment banking group as senior adviser to Jerry Kenney, then president of Merrill Lynch Capital Markets; Reeves later moved on to become vice chairman of Merrill Lynch International.

When he first joined, Merrill denied that the Bank of England had blocked his appointment as chief executive of the European operations on account of his connections with the Guinness affair, but at the end of last week a spokesman indicated that 'certain restrictions' on his activities previously in place had now been lifted, and that approval for the current appointment had been secured from both the Securities and Futures Authority and the Bank of England.

No-one has held the title of chairman of Merrill Lynch Europe since Stani Yassukovich left two and a half years ago, although Mike Giles, chairman of Merrill Lynch International Bank had taken effective responsibility.

Reeves says that his new title means that he will be 'much more executive rather than advisery' and will be allowed 'to do more things', notably chairing the executive committee in charge of the region, a position that Giles had also previously held.

He adds that Merrill is 'so much bigger and more active that it is more necessary to have someone in this role'. It has expanded its capital raising activities generally, has applied to become a market-maker in gilts and is growing on the Continent, particularly in France and Germany.

Reeves says he himself has developed a special interest in India which, despite his job title, is in fact 'on the extremity' of his region, and he sits on the board of the India Fund and the India Growth Fund.'

Asked if he was now receiving the million pound salary that reports suggested he had had to turn down in 1988, he commented: 'Sadly not'.

SISTEM TRANSIT ALIRAN RINGAN (STAR), has raised Pounds 300m of funding for work on Phase One of the project to develop a light rail transit system (LRT) for the Malaysian capital, Kuala Lumpur.

Over 18 months ago, the Anglo-German consortium of Taylor Woodrow International and AEG Westinghouse Transport Systeme GmbH formed STAR to raise private investment capital for the first phase of the LRT project. Having secured capital, STAR would then own and operate the system under a franchise agreement with the Malaysian government.

STAR now has in place the required funds to begin work on the project. Over 60 per cent is sourced from commercial bank loans, around 10 per cent from a government support loan and the balance in the form of equity from Malaysian and foreign investors.

This project represents the first phase of an integrated light rail network for Kuala Lumpur and surrounding areas.

Taylor Woodrow International and AEG Westinghouse Transport Systeme GmbH, together form the Kuala Lumpur Transit Group Sdn Bhd (KLTG), which has entered into a Pounds 225m contract with STAR to undertake the design, construction, delivery, installation and testing of the LRT system.

CONDER PROJECTS, a member of the Miller Group, has been awarded new orders to the value of over Pounds 10m.

The main contract award, valued at over Pounds 7.7m, involves designing and building a cold store and distribution centre at Tilbury Docks for Van Bon Cold Stores (UK), a food importer and distributor based in Holland. Project management is being undertaken by CAER URFA Consultancy.

The building at Tilbury Docks, covering a floor area of almost 32,000 sq metres, will include plant rooms, offices and associated facilities. Chill storage will be handled on three levels, with temperature control from 15`C to 0`C, together with humidity control. The cold stores will have drive-in racking to all five chambers.

Bristol currently boasts several important construction contracts which will shortly be starting on site. PEARCE CONSTRUCTION is playing its part with the start of a design and build contract for the new Pounds 30m international production centre for DRG Medical Packaging.

The investment by the Bowater company is being project managed by Gleeds Management Services.

COUNTRYSIDE PROPERTIES has been awarded two contracts by Tesco Stores for the design and construction of two new food superstores in Harlow, Essex.

A superstore in Edinburgh Way will provide 60,500 sq ft of retail accommodation together with parking for 560 cars and a petrol filling station. The new store is programmed to open in February 1994.

The second superstore forms the basis of a community neighbourhood centre at Church Langley near Harlow and construction started on August 4. On completion in June 1994, the 49,000 sq ft superstore will be the largest unit in the centre, providing parking for 465 cars as well as a petrol filling station and four other retail units.

The Plymouth Urban Development Corporation in Devon, set up by the government five months ago to regenerate unwanted Ministry of Defence sites including the Royal William naval yard, will begin to pick up steam tomorrow with the arrival of a chief executive, John Collinson.

The corporation, the 12th UDC in England, came into being on April 1 with a projected budget of Pounds 45m over its intended five-year lifespan. Collinson, recruited after the advertised post attracted over 200 applications, has been working out his notice as property director of the Black Country Development Corporation, where he has been for five years.

Collinson, who is 43, spent five years before that with Salford city council, but in his new post he will be returning to his home county. He was born in Exeter.

His first priority in Plymouth will be the UDC's business plan which is due to go to the Department of Environment within a month of his arrival. The next priority, he says, is 'hands on deck' in terms of staff. One necessary appointment, that of finance and administration director, is expected to be made shortly.

Already on deck is Vice-Admiral Sir Robert Gerken as chairman and board members include the leaders of Plymouth city council and Devon county council. The UDC covers 165 acres and it is envisaged that there will be mixed development including offices, shops, restaurants and housing.

It may be the last message that the thousands of small UK businesses struggling to survive want to hear. But there is an excellent chance they are committing a criminal offence each time they switch on their computer terminals.

The reason is they are ignoring, or are not even aware of, their obligations under the Data Protection Act 1984.

The legislation was the first in the UK to address the use or potential misuse of computers. Nine years on, enormous confusion and uncertainty surrounds its workings.

Under the act, which does not cover information held and processed manually, organisations using data about people are required to register details of their activities and to adhere to a code of good practice.

The same applies to computer agencies which might handle the data for them.

Any organisation which fails to register - it costs Pounds 75 for three years - or does so and then breaks the code can face fines of up to Pounds 5,000 in a magistrates court. Unlimited fines apply in higher courts.

More than 100 companies and individuals have so far been prosecuted.

Under the legislation, private individuals have the right of access to information held about them and can demand compensation for any damage or distress arising from the storage of inaccurate data or from unauthorised disclosure of the information.

The potential for financial penalties arising from non-compliance, is therefore immense.

The enforcement of data protection is made more difficult because who is and who is not covered by the legislation often remains unclear.

Even Eric Howe, the Data Protection Registrar, acknowledges he has found no satisfactory or reliable way of establishing exactly the number of data users who should be on his books.

Howe, who is an independent officer reporting directly to parliament, says he recognises the complexities involved in interpreting the act and in analysing the diversity of situations in which it can apply. He has only 100 staff and limited finances to enforce the legislation throughout the UK.

Small wonder then that the most unsuspecting candidates have fallen foul of the law.

In one recent case, a local newsagent's shop found itself on the receiving end of an official visit, following a formal complaint from a local customer that a computer screen on full display was broadcasting the names and addresses of some of its customers, many of whom were elderly and vulnerable.

The business was told to register under the act; the computer was immediately moved out of sight.

In another example, a ticket agency was fined Pounds 250 with costs after a customer who had purchased cinema tickets then received unsolicited mail from a third party.

The agency had sold on customers' personal information.

A recent report from the National Audit Office, the public spending watchdog, said that as many as 100,000 data users who should be registered under the act have not done so.

The NAO believes that the total may be considerably higher.

A further problem is that organisations are failing to re-register after the initial three years.

The registrar has consequently concentrated resources on this area. In doing so, however, and because of limited resources, other areas have failed to be adequately monitored, resulting in the growing number of qualifying companies which have yet to make a first registration.

Howe believes that one-third of all small companies are unaware of their statutory obligation to register and more than two-thirds of all small businesses are believed to have no idea about the obligations which are imposed upon them as a result of the legislation.

There is clear need for government departments and other public bodies to maintain the confiden-tiality of personal information on their files. The same arguably goes for the police, local authorities, educational centres and professional organisations. Less obvious perhaps is the requirement for smaller businesses - from travel agents, employment bureaux and ticket agencies - to register.

According to the registrar's office, the general guideline is that 'anyone holding information about living individuals on computer is a data user and therefore needs to register.

'The information in question need not be particularly sensitive and it can be as little as a name and address'.

Howe says: 'The act as it stands makes no particular allowance for small businesses. It requires every organisation to register and comply in exactly the same way, regardless of size or type of business.'

In an attempt to improve on the general lack of awareness of registration requirements among small companies, a new information pack and free video designed to explain the act has just been produced.

There are exemptions for some types of data handlers but they are very narrow and subject to strict conditions.

Registration may not be necessary if, for example, the information is used only for calculating wages and pensions or for keeping accounts. Sports or recreational clubs which do not have limited company status are also exempt.

The best advice for small organisations unsure as to whether they qualify or not is to register anyway.

Once businesses are on the registrar's books, the code of good practice demands that they adhere to a list of guiding principles.

The guidance includes obtaining and processing information 'fairly and lawfully', keeping it safe and up-to-date and not holding it any longer than is necessary.

An information pack tailored for the small business is available from the registrar's office at Wycliffe House, Water Lane, Wilmslow, SK9 5AF.

Individual advice can also be obtained from Richard Ansell, the small business officer at the same address.

North Yorkshire Training and Enterprise Council (TEC) has just launched a pilot service to help 20 small and medium-sized businesses increase their exports. The first stage is a half-day's free consultancy to produce an export action plan.

The second part is a heavily subsidised place on a trade mission to selected European countries to make contacts and accompanied visits to selected international trade fairs.

Owner-managed businesses appear to be optimistic about their future, but would-be entrepreneurs appear to be more cautious.

That is the impression given in this month's Touche Ross survey of owner-managed businesses and National Westminster Bank's latest quarterly start-up index.

According to Touche Ross, 74 per cent of respondents are anticipating a positive growth in turnover over the next 12 months.

This confidence is backed up by improved sales and order levels in the last quarter at more than half the 197 businesses polled.

Most promisingly 48 per cent are anticipating increasing staff over the next year, compared with 9 per cent expecting to reduce them and the remainder expecting no change.

NatWest's figures, meanwhile, show that the number of small business start-ups in the second quarter of 1993 - around 90,000 - showed a slight dip on the 95,000 estimated for the first quarter.

However, the six-month total of 185,000 was the same as that for the second half of 1992.

'New, small-business owners are thinking very carefully about the commitments they are prepared to take on, especially when other people's livelihoods are at risk as well as their own', according to Jane Bradford, who is head of small business services at NatWest.

'On average they spend nearly eight months planning their business venture before they actually start up'.

The risks for small shopkeepers from violent crime in some parts of Britain have been highlighted by researchers at the University of Sheffield.

A total of 92 shopkeepers in one part of London and 70 shopkeepers in part of a large Midlands city were interviewed, among them newsagents, off-licences, grocery stores and small supermarkets.

In the London area a quarter of respondents had been the victim of a robbery or attempted robbery (with a knife or gun/imitation gun) in the past 12 months.

In the Midlands area, the figure was 17 per cent.

Some 24 per cent of London shopkeepers and 34 per cent of Midlands shopkeepers had suffered acts of deliberate vandalism to the shop or its property.

The bulk of small business research work in the UK has been focused on Asians and West Indians.

However, besides Bangladeshis and Afro-Caribbeans, a new study on ethnic enterprise and the high street bank includes interviews with Greek-Cypriots.

The authors of the report* - James Curran and Robert Blackburn of Kingston University - point out that Greek-Cypriots are the longest established of the UK minorities and have the most diverse pattern of ownership.

Their businesses are the largest, and the most likely to have broken out of the ethnic market.

The report is generally sceptical about the importance of ethnic communities as alternative sources of finance.

It says that the Greek-Cypriots are the most frequent users of bank advice, have expanded their businesses more than the other two minorities, and are likely to perform similarly to white-owned firms.

*Available from Small Business Research Centre, Kingston University, Kingston Hill, Surrey, KT2 7LB. Price Pounds 40 inc p&p.

UK COMPANIES

TODAY

COMPANY MEETINGS:

Latham (James), Leeside Wharf, Clapton, E, 12.30

Marling Inds., The Chartered Accountants' Hall, Moorgate Place, EC, 10.00

BOARD MEETINGS:

Finals:

Bellwinch

Throgmrtn 1000 Smallst Cos

Interims:

Admiral

Crane Europe

Ferry Pickering

HSBC

Henlys

Macfarlane

Owen & Robinson

Rhino

Robinson Bros.

Severfield-Reeve

Simon Eng.

TOMORROW

COMPANY MEETINGS:

Clayhithe, Naval & Military Club, 94 Piccadilly, W, 12.00

Debenham Tewson & Chinnocks, Intercontinental Hotel, 1 Hamilton Place, Hyde Park Corner, W. 11.00

Dudley Jenkins, 2A Southwark Bridge Office Village, Thrale Street, SE, 10.30

Eve Group, Minster House, Plough Lane, SW, 10.30

Sterling Publishing, 15 Portland Place, W, 10.00

BOARD MEETINGS:

Final:

Union Square

Interims:

Anglo Pacific Res.

Burford

Calderburn

Cookson

Courtaulds Textiles

Dixon Motors

English & Overseas Props.

INSTEM

Invergordon Distillers

Johnston Press

Page (Michael)

Persimmon

Plantsbrook

Provident Financial

Senior Eng.

Waterford Wedgwood

THURSDAY SEPTEMBER 2

COMPANY MEETINGS:

Carclo, Post House, Near Wakefield, 4.00

Hadleigh Inds., Novotel Hotel, Ipswich, 1.00

Prism Leisure, The Registry, Royal Mint Court, EC, 10.00

Siam Selective Growth Trust, The Cazenove Conference Suite, 4 Kings Arms Yard, EC, 10.30

Vega Group, Montague Park Hotel, 12-20 Montague Street, Bloomsbury, WC, 4.30

BOARD MEETINGS:

Final:

Isotron

Interims:

American Trust

Aran Energy

Ashley Grp.

Bowater

British-Borneo Petrlm.

Burmah Castrol

Ladbroke

Microvitec

Northern Eng.

PCT

Psion

Reckitt & Colman

Rolls-Royce

Sun Alliance

Vickers

Yorkshire Food

FRIDAY SEPTEMBER 3

COMPANY MEETINGS:

Fletcher King, Stratton House, Stratton Street, W, 12.00

GEC, The London Hilton, 22 Park Lane, W, 12.00

Hobson, Holiday Inn, Berkeley Street, Piccadilly, W, 10.00

Learmonth & Burchett Management Systems, CBI Conference Centre, Centre Point, 103 New Oxford Street, WC, 10.30

Victoria Carpet, Green Street Kidderminster, 3.00

Wessex Water, Assembly Rooms, Barnett Street, Bath, 11.00

BOARD MEETINGS:

Finals:

Black (Peter)

China & Eastern Inv.

Stavert Zigomala

Interims:

Laird

Pittencrieff

Suter

Company meetings are annual general meetings unless otherwise stated.

Please note: Reports and accounts are not normally available until approximately six weeks after the board meeting to approve the preliminary results.

DIVIDEND & INTEREST PAYMENTS YESTERDAY

Amdahl Corp. Dollars 0.125

Bank of Montreal CDollars 0.28

Commonwealth Bank of Australia 8 3/4 % Nts. 1994 Ecu437.5

Throgmorton Tst. 0.9p

TODAY

Allnatt Lon. Props. 10 1/2 % 1st Mtg. Deb. 1994/99 Pounds 5.25

Automated Sec 5% Cv Rd Pf 2.5p

Bankers Inv. Tst. 0.9p

Bank of Nova Scotia Fltg. Rate Sb. Cap. Db. 2085 Dollars 177.6

Bank of Scotland Und. Var. Rate Nts. Dollars 113.8

Barclays O'seas Inv. BV 6% Gtd. Bd. 1996 Y60000

Baring Tribune Inv. 1.7p

Berkeley 4.35p

BP Amer 11 1/8 % Gtd Nts 1994 ADollars 111.25

Bradford & Bingley Bldg. Soc. Fltg. Rate Nts. 1994 Pounds 156.16

Cambridge Water 9 1/4 % Rd Db '92/97 Pounds 1.51712

Charter Cons. 15p

Chase Manhattan Fltg. Rate Sb. Nts. 1997 Dollars 94.01

Chemical Bank Fltg. Rate Sb. Cap. Nts. 1994 Pounds 78.9

Chemical Banking Corp. Fltg. Rate Sen. Nts. 1999 Dollars 46.67

Collateralised Mortgage Sec. (No. 5) Mtg. Bkd. Fltg. Rate Nts. 2027 Pounds 149.36

Do. (No. 7) Class A1 Mtg. Bkd. Fltg. Rate Nts. 2028 Pounds 80.56

Do. Class A2 Mtg. Bkd. Fltg. Rate Nts. 2028 Pounds 167.55

Do. Class A3 Mtg. Bkd. Fltg. Rate Nts. 2028 Pounds 170.15

Do. (No. 9) Class A1 Mtg. Bkd. Fltg. Rate Nts. 2033 Pounds 33.62

Do. Class A2 Mtg. Bkd. Fltg. Rate Nts. 2033 Pounds 167.55

Do. Class A3 Mtg. Bkd. Fltg. Rate Nts. 2033 Pounds 169.37

Contra-Cyclical Inv. 2.25p

Cullens Hldgs. 0.5p

Danae Inv. Tst. 4.575p

Derby Tst. 6.2883p

Eastern Intl Inv Db '92/97 Pounds 3.982192

Ecclesiastical Insce 13% Db 2018 Pounds 6.5

Excalibur 11 1/2 % Prf. 5.75p

First Chicago o'seas Fin. NV Gtd. Fltg. Rate Sb. Nts. 1994 Dollars 138.54

Fujitsu 4 7/8 % Bd. 1994 (with wts.) Dollars 487.5

Do. 4 7/8 % Bd. 1994 (without wts.) Dollars 487.5

Gen. Motors Acceptance Corp. of Canada 10% Nts. 1995 CDollars 100

Gibbon Lyons 7% Cv Rd Pf 3.5p

Glasgow Inc. Tst. 0.6p

Goldsmiths 0.3p

Great Western Finl. Dollars 0.23

Halifax Bldg. Soc. Fltg. Rate Ln. Nts. 1996 Pounds 78.9

Do. Fltg. Rate Ln. Nts. 1996 (Sers. A) Pounds 26.93

Hill Samuel Fin. BV Fltg. Rate Nts. 1996 Dollars 271.25

Honda Motor 5 1/4 % Cv Bd 1998 Dollars 131.25

Do. 5 1/2 % Cv. Bd. 1997 Dollars 137.5

IFG IR0.25p

Intercare 0.7p

Johnson & Firth Brown 11% Un Ln '93/98 Pounds 4.58

Kingfisher 8 1/2 % Cv Un Ln 2000 Pounds 2.86438

Kitty Little 1p

Lloyds Bank Prim. Cap. Und. Fltg. Rate Nts. (Sers. 2) Dollars 92.36

Do. Prim. Cap. Und. Fltg. Rate Nts. (Sers. 3) Dollars 174.17

London & Assoc. Inv. 0.53p

Lon. & St. Lawrence Inv. 5% (3 1/2 % net) Pf. 1.75p

Mitsui O. S. K. Lines Fltg. Rate Nts. 1997 Y94010

Morgan Grenfell Und. Prim. Cap. Fltg. Rate. Nts. Dollars 190.52

Natl Westminster Bk 7% (4.9% net) Pf 2.45p

Do. Prim Cap Fltg Rate Nts Ser. C Dollars 90.71

Nationwide Bldg. Soc. Fltg. Rate Nts. 1996 2nd Sers. Pounds 26.93

Neste Oy Fltg Rate Nts 1994 Pounds 271.25

New Brunswick (Province of) Fltg. Rate Nts. 1994 CDollars 13.85

New Zealand 9% Nts. 1994 Dollars 900

NHL (1) Secs. Dfd. Int. Mtg. Bkd. Fltg. Rate Nts. 2028 Pounds 254.81

Nippon Telegraph & Telephone Corp. 10 5/8 % Nts. 1996 Dollars 106.25

OLIM Cnv. Tst. 4.3p

Ossory Ests 12 1/2 % Bds 1996 Pounds 16421.64

Parkland Textile 4.2% Pf. 2.1p

Prowting 14 1/2 % Pf. 7.25p

Ragby Gtd Fltg Rate Nts 1997 Dollars 9480.21

Rowe Evans Invs. 2p

Royal Bank of Canada Fltg Rate Debs 2005 Dollars 28.89

RPH 4 1/2 % Un Ln '04/09 Pounds 2.25

Do. 9% Un Ln '99/04 Pounds 4.5

Sanwa Bank Sb Fltg Rate Nts 2000 Dollars 940.1

Sanyo Elect Fltg Rate Nts 1998 Y94010

Scott Pickford 0.8p

Second Market Inv 2 1/2 % Cv Un Ln 1994 Pounds 1.25

Seiyu 7 1/4 % Cv. Bd. 1996 Pounds 36.25

Sphere Inv. Inc & Res Cap 0.75p

Do. Share Package Uts. 6p

State Dev. Institute 1- 1/2 % Gtd. Bd. 2000 Dollars 525

Sumitomo Bank Intl. Fin. NV Gtd. Fltg. Rate Nts. 2006 Dollars 1943.96

Do. Gtd Fltg Rate Nts 2007 Dollars 1943.96

Temple Bar Inv. 6% Cv Un Ln 2002 Pounds 3

TGI 1p

3i 11 1/4 % Gtd. Bd. 1996 Pounds 112.5

3i Intl BV Gtd Fltg Rate Nts 1994 Pounds 15.78

TMC PIMBS Fifth Fin 2028 Pounds 99.33

Do. 2030 Pounds 159.22

Do. Class A 2031 Pounds 137.53

Do. Class B 2031 Pounds 174.06

Tokyo Elect. Power 8 3/4 % Nts 1998 Dollars 437.5

TR City of London Tst. 1.23p

Do. 20% (14% net) Pf. 7p

Do. 6% (4.2% net) 1st Pf Pounds 2.1

Do. 6% (4.2% net) 2nd Pf 2.1p

TR Far East Inc. Tst 7% Db '97/02 Pounds 3.5

TSB Var Rate Sb. Nts. 2003 Pounds 167.55

Villiers 11% Cv Un Ln '94/97 5.5p

Wells Fargo Fltg Rate Sb Nts 2000

Dollars 46.67

Woolwich Bldg. Soc. Sb Fltg Rate Nts 2001 Pounds 3614.1

TOMORROW

Aberdeen (City of) 10.8% Rd 2011 Pounds 5.40

Ahmanson (HF) Dollars 0.22

American Brands Dollars 0.4925

American General Dollars 0.275

Asarco Dollars 0.10

Assoc. British Foods 8.5p

Barclays Bk. Non-Cm Dollars Pf Ser. A Dollars 0.556

Do. Ser. B Dollars 0.5438

Do. Ser. C1 Dollars 0.4219

Do. Ser. C2 Dollars 0.1406

Do. C Units Dollars 0.5625

Do. Ser. D1 Dollars 0.4313

Do. Ser. D2 Dollars 0.1437

Do. D Units Dollars 0.575

British Syphon 2.5p

Brit. Telecom Fin. 8 1/2 % Gtd Nts 1994 Ecu85.0

Burndene Invs. 0.5p

Coventry Bldg. Scty. 12 1/8 % Und Mandatorily Cv Sb Nts Pounds 60.625

Dart Group 2p

East Surrey Water 7 1/4 % Rd Db '91/93 Pounds 3.625

Do. 10% Rd Db '97/99 Pounds 5.00

Elect. & Gen. Inv. 9% Db '89/94 Pounds 4.50

Eurocopy 0.5p

Export-Import Bk. of Japan 8 5/8 % Gtd Bd 1999 Dollars 431.25

Fleming Claverhouse Inv. 1.25p

Fleming Mercantile Inv. 3 1/2 % Rd Db '60/95 Pounds 1.75

Ford Motor Dollars 0.40

Govett Dollars 0.10

Halifax Bldg. Scty. 12% PIBS Pounds 3000.0

Inco Dollars 0.10

Ingersoll-Rand Dollars 0.175

Jessups Cv. Rd. Pf. 3.65p

Lon. (County of) 2 1/2 % Cons Pounds 0.625

Do. 3% Cons. Pounds 0.75

Lonrho 2p

Low & Bonar 6% 1st Cm Pf 2.1p

Do. 6% 2nd Cm Pf 2.1p

Do. 5 1/2 % 3rd Cm Pf 1.925p

Lucas Inds. 6 1/2 % Cm 1st Pf 2.275p

Metropolitan Water Board 3% B 1934/2003 Pounds 1.50

Mexico 16 1/2 % Ln 2008 Pounds 8.25

Morgan Guaranty Tst. of New York 12 3/4% Dep Nts 1993 L637500.0

Natl. Home Loans Sec. Fltg Rate Nts 1995 Dollars 1.97

Oldham Metropolitan Borough 11.25% Rd 2010 Pounds 5.625

P & O 3 1/2 % Db. Pounds 1.75

Do. 3 1/2 % 2nd Db. Pounds 1.75

River Plate & Gen. Inv. 5% Cm Pf Pounds 1.75

Sainsbury (J) 8% Irrd Un Ln Pounds 4.00

Sanyo Elect. 5.1% Nts 1999 Y131750.0

Schneiders (S) 6% Cm Rd Pf 2.1p

Slough Ests. Cm Cv Rd Pf 4.125p

South West Water 15.9p

Transcanada Pipelines 16 1/2 % 1st Mtg Bd 2007 8.25p

Treasury 8 3/4 % Ln 1997 Pounds 4.375

Treasury 14 1/2 % Ln 1994 Pounds 7.25

Union Carbide Dollars 0.1875

USLIFE Dollars 0.30

THURSDAY SEPTEMBER 2

Countryside Props. 1.41p

Stakis 0.45p

FRIDAY SEPTEMBER 3

Aberforth Smaller Co's Tst 2.1p

Aberforth Split Level Tst Inc 2.4p

Do. Units 2.4p

Boeing Dollars 0.25

Clayhithe 1.75p

Debenham Tewson & Chnks 1.8p

EFM Japan Tst. 0.4p

Gillette Dollars 0.21

GN Great Nordic DK12.0

Isetan 6.2% Nts 1999 Y620000.0

Ivory & Sime 4.75p

Joseph (Leopold) 13.5p

Letinvest 10 1/4 -11 1/4 % Stppd Int 1st Mtg Db 2012 Pounds 5.625

Meyer Intl. 5.8p

Royal Hotel 6.1% Bd 1997 Y610000.0

Sturge Hldgs. 1p

Thames Water 14.1p

Vega Group 1.86p

SUNDAY SEPTEMBER 5

Joseph (Leopold) 9 1/4 % Un Ln '97/02 Pounds 4.625

FORECASTS vary sharply over the interim results of HSBC Holdings, the parent of Midland Bank, to be announced today. Pre-tax profit estimates range from about Pounds 1bn to about Pounds 1.3bn, both substantially higher than last time's Pounds 521m.

Midland has already revealed profits up at Pounds 385m (Pounds 60m) and Hang Seng Bank has weighed in with HKDollars 2.75bn (HKDollars 2.34bn). Some Pounds 200m from a favourable HK dollar exchange rate will also be included. The only possible black cloud could be China's cooling economy.

Sun Alliance, the composite insurance company, is expected to post a return to interim pre-tax profits on Thursday of Pounds 30m-Pounds 80m compared with a loss of Pounds 114.1m a year earlier. Rises in premium rates, falling expenses and lower claims frequency are behind the turnround. Sun Alliance's balance sheet should also show a considerable improvement following the strong rise in the UK equity market to which the group is heavily exposed.

Bowater, the packaging and industrial films group, is expected to announce a strong increase in interim pre-tax profits from Pounds 62.4m to between Pounds 85m and Pounds 90m on Thursday. Much of the rise is likely to be accounted for by the contribution from Specialty Coatings International, the US coatings company bought for Dollars 434m earlier this year, although estimates differ of how large this contribution will be.

Analysts are hoping for evidence from the company that SCI has been integrated into the group and is performing well. The interim dividend is forecast at 5p, from a restated 4.7p last year.

Analysts expect Ladbroke Group to report a fall in pre-tax profits for the first half on Thursday. Last time's profits will be restated under FRS 3 to about Pounds 81.5m to account for estimated hotel disposals and this time forecasts range from about Pounds 68m, if there is a higher interest charge, to around Pounds 74m. The one bright spot should be UK racing. The dividend should be held at 4.92p.

Rolls-Royce, also reporting on Thursday, is set to reveal operating profits sharply lower at about Pounds 30m (Pounds 44m), affected by the conditions in the aerospace and industrial power markets. Including exceptionals should result in flattish pre-tax profits of about Pounds 20m.

Reckitt & Colman, the mustard-to-lavatory cleaner group, is expected to show an increase in interim pre-tax profits to around Pounds 150m (Pounds 134.2m) when it reports on Thursday. The shares have been poor performers with worries about prices squeezed by retailers, the slowdown in the European economies, and longer term concerns about the value of brands.

Burmah Castrol is reporting interim results the same day and is expected to announce net profits of between Pounds 44m and Pounds 46m. The group's German operations, which since April have had a contribution from Tribol, the industrial lubricants bought from ICI for Pounds 31.7m, are going to be watched carefully.

A RUSH of statistical and survey data this week should enable economists and investors to reappraise the state of the US recovery and establish whether the Wall Street's recent strength is anchored in fundamentals.

Markets will be on tenterhooks for Friday's key employment data for August although economists warn that the important non-farm payrolls figure may be inflated by temporary summer hiring. Tomorrow's National Association of Purchasing Managers' survey is expected to point to only moderate output growth as manufacturers approach the autumn, while a slight softening is forecast in today's consumer confidence index.

In Europe, attention will focus on France's unemployment report and whether the expected poor outturn will prompt the government of Mr Edouard Balladur to exploit the increased room for manoeuvre in the European Monetary System and ease French monetary conditions.

A quiet week is expected in the UK with one bullish indicator: the M0 narrow money figures on Friday are expected to keep growing faster than the government's 0 to 4 per cent monitoring range.

The main economic statistics and events of the week follow. The figures in brackets are the median of economists' forecasts from MMS International, the financial information company.

Today: US, Preliminary 2nd quarter GDP (up 1.2 per cent), GDP deflator (2.6 per cent), after tax corporate profits; August consumer confidence (57.2), Chicago NAPM, farm prices.

Japan, economic ministers meeting; July housing starts (up 1.8 per cent on year), construction orders, construction starts, industrial production (down 0.1 per cent), shipments; mid-August wholesale prices.

Canada, June real GDP at factor cost (up 0.1 per cent on month); 2nd quarter real GDP (up 2.5 per cent on quarter at seasonally adjusted annual rate), consumption (up 1.5 per cent on quarter, SAAR), GDP deflator (up 1.1 per cent on quarter, SAAR), current account (CDollars 25.4bn deficit, SAAR)

Switzerland, GATT Uruguay Round negotiators meet in Geneva.

Finland, July unemployment rate (18.7 per cent).

Wednesday: US, July personal income (up 0.3 per cent), personal consumption expenditure (up 0.3 per cent), construction spending (up 0.2 per cent); August NAPM index (50.0)

UK, purchasing managers' index from Chartered Institute of Purchasing and Supply (53 per cent); Halifax July house price index; June overseas travel and tourism; July advance energy statistics.

Thursday: US, July factory orders (down 1.8 per cent), inventories; initial claims week ended August 28 (333,000); state benefits week to August 21; money supply week ended August 23 (M2 up Dollars 2.8bn).

UK, August official reserves (up Dollars 100m); cyclical indicators.

Australia, July retail trade (up 0.4 per cent).

Friday: US, August non farm payrolls (up 150,000), manufacturing payrolls (down 10,000), hourly earnings (up 0.2 per cent), unemployment rate (6.9 per cent), average workweek ; July leading indicators (down 0.1 per cent); August 21 - 31 auto sales (6.8m), truck sales.

Germany, August seasonally adjusted unemployment (west up 35,000), vacancies (west down 3,000); July employment (down 50,000).

UK, August M0 (up 0.4 per cent on month, 5.4 per cent on year); July final money supply; family spending survey 1992.

Canada, August foreign exchange reserves (down Dollars 1.7bn).

Rest of the Week: Japan, July current account and trade balance.

Germany, July industrial production (down 0.2 per cent on month), manufacturing output (flat); GFK July consumer climate.

France, July unemployment rate (11.7 per cent); May trade balance (Fr5.5bn surplus).

Italy, June wholesale prices (up 5.1 per cent on year), producer prices (up 4 per cent); August consumer prices (up 4.6 per cent)

DISTINGUISHED economists leapt to the defence of much-maligned currency speculators at the meeting.

Sir Samuel Brittan, principal economic commentator of the Financial Times and this year's president of the association's economics section, said: 'George Soros did a certain amount of good and people shouldn't condemn him as an evil speculator.' Mr Soros is the US-based financier who was said to have made Dollars 1bn at the time of sterling's exit from the European exchange rate mechanism last year.

Sir Samuel quoted Milton Friedman's 'beautifully simple theory that either speculators exercised a stabilising influence, or they lost money and damaged themselves'.

Professor Amartya Sen of Harvard University agreed with Sir Samuel about the benign effect of speculators. But his main theme was that 'codes of behaviour' have been central to the achievements of capitalism.

'Capitalism has made it possible to raise productivity by teamwork, by co-ordination and co-operation, and ultimately by trust in each other's behaviour in economic and business relationships,' Prof Sen said.

Mr John Flemming, chief economist at the European Bank for Reconstruction and Development, said that in the former Soviet Union: 'Mafia capitalism is better than no capitalism at all.'

Mr Flemming said that, in their journey from a very heavily regulated state to the moderate regulation typical of western Europe, 'the formerly centrally planned economies should probably plan to move temporarily further in the direction of deregulation than may be the long-run goal.

'The reason for this is that the human and moral capital required for the institutions to run even a moderate regulatory regime is not readily available.'

SINGLE parenthood is not a matter of choice but a result of marital breakdown, according to a survey of 11,000 'thirty-somethings'.

The survey, part of the National Child Development Study that has tracked the 11,000 since they were born in March 1958, was released at the meeting. It shows that most single parents are impoverished.

Dr Angela Dale, deputy director of the Social Statistics Research Unit at City University in London, said: 'When women have children they leave the labour market, and as a result they have a permanent loss of earning power.

'If their marriage breaks down they become dependent on the state because prior to becoming a lone parent they lost the ability to earn a living wage.'

The survey makes depressing reading for women, showing that their gross hourly earnings are 85 per cent of their male counterparts, despite the Equal Pay Act of 1975.

Women who work part time are even worse off, with hourly earnings 51 per cent of those for men in full-time jobs.

Women suffer more from depression than men, with one in eight having been clinically depressed at some time compared with one in 14 men.

Overall the survey shows the 'thirtysomethings' in as much of a flux as the characters in the soap opera of the same name. Nearly 20 per cent of the sample have been divorced, with 12 per cent of divorced men and 11 per cent of divorced women having lived with three or more partners.

More than 80 per cent of the sample owned their own homes, and despite much publicised difficulties over mortgage arrears, only 8 per cent had ever been more than two months behind with payments.

Other attitudes include:

90 per cent thought politicians are in politics for their own good.

29 per cent thought it did not matter which party was in power.

62 per cent thought there was one rule for the rich and another for the poor.

50 per cent believed the government should redistribute income from the better-off to the less well-off.

MEDICAL science will be able to extend the average human lifespan by several years and may be able to lengthen the maximum lifetime of the species - which is now about 115 years - the meeting was told.

Professor Grimley Evans, head of the geriatric medicine division at Oxford University, attacked politicians 'who assume that any means of extending lifespan must be expensive' because very old people need more health care.

He said that there were 'no grounds for assuming that prolonging healthy life will ultimately increase human suffering and its costs.' For example, if someone has a stroke in their 80s, then the period of suffering afterwards is much less than that following a stroke suffered in the 60s.

Extending average lifespan is a matter of improving medical care, continuing economic development and persuading people to following sensible lifestyles - above all, by not smoking.

'We know how to lengthen average lifespan but can we lengthen maximum lifespan?' Prof Evans asked. He suggested three possible approaches:

The eugenic approach would be to breed selectively from deep-frozen sperm of men who ultimately achieve great age.

It may be possible to identify specific human genes that are associated with longevity, and modify them in some way. Such genes have been found in nematode worms but not yet in higher animals.

A third approach would be to reduce the damage that is done to cells by bio-chemical processes in the body, such as free radical oxidation.

'The crucial issue,' Prof Evans said, 'will be what manipulations to increase longevity do to the pattern of disease and disability preceding death. An intervention that postponed death without postponing Alzheimer's disease might not be a good investment for individuals or for society.'

PLANTS which take up toxic metals as nutrients could be used to clean contaminated soils. The crop would then be harvested and metal extracted for recycling.

Professor Steven McGrath of the Agricultural and Food Research Council's Institute of Arable Crops Research described the experimental process - called green remediation - to the British Association meeting.

His research team has tested a number of plants for zinc uptake on soils polluted by heavy metals from London sewage over 20 years.

The most efficient plant, alpine pennycress, reduced zinc to acceptable levels after nine croppings. Prof McGrath said this could be achieved in three years, using intensive cultivation.

Existing methods of physical and chemical treatment to remove soil pollution are expensive and also alter the soil structure, leaving it unsuitable for cultivation.

Using green remediation techniques, a hectare of contaminated soil could be cleaned up for Pounds 5,000, leaving it fertile, whereas conventional treatment by vitrification costs Pounds 18,000 per hectare.

At present the potential of the technique is limited by the productivity of the plants. Prof McGrath suggests that plants could be genetically engineered to speed up the rate of remediation and to improve the plants' take-up of toxic metals to levels where the metals could be harvested economically.

Du Pont, the international chemical company, is interested in using the technique to clean up lead contamination around factories where the petrol additive tetra ethyl lead was produced, and a smelting company plans a test to produce pure metals from harvested material.

Plants which have the ability to handle toxic metals are scarce and need to be protected, Prof McGrath said.

One of the champion natural accumulators is Sebertia acuminata, a tree that lives on nickel-rich soils. 'An obvious application would be to 'tap' such trees for nickel, in an analogous way to that for rubber.' Prof McGrath said green remediation could be combined with bioremediation, the technique in which bacteria are used to break down organic pollutants such as pesticides to produce a one-stage clean-up.

He said he would also like to study plants in areas where there is a high level of radioactivity, to see if they accumulated radioactive materials.

ANTI-SCIENCE feelings among the public, politicians and health policymakers are threatening the progress of medical sciences into 'the most exciting and productive phase in their long history', Sir David Weatherall, Regius Professor of Medicine at Oxford, warned last night.

In his presidential address to the meeting at Keele University, Staffordshire, Sir David said: 'It would be a tragedy if this mood of disillusionment with the basic medical sciences, and science in general, were to impede progress as we move into the next millenium.'

Policymakers were taking an increasingly short-term view of improving patient care. They were also turning their backs on research. A sign of this was the recent white paper on the National Health Service, Working for Patients, 'in which research is barely mentioned'. He added: 'In the resulting marketplace economy of some of our teaching hospital trusts, it is already clear that, presumably because it poses a risk to competitiveness, research is going to be very low on the agenda.'

The government's new research strategy was founded on 'a feeling that high-technology medicine is having a dehumanising effect and that we should be directing much more effort into preventive medicine and the needs of individual patients,' he said.

'Because these changes are occurring at a time when society is disillusioned with science, and when support for medical research is so limited, there is a genuine danger that the pendulum may swing too far and that, in our new customer-driven approach to medical research, the vital role of the basic medical sciences may be neglected.'

Sir David, who is a leading geneticist, sketched out his field of research's potential. 'It will help us to understand the acquired defects in our genes which lead to . . . the generation of cancer. It offers us a completely new way of developing diagnostic and therapeutic agents.'

But Sir David warned against unrealistic expectations. 'Claims by molecular biologists that within the next five or 10 years we will be able to identify the major genes involved and somehow alter our susceptibility to our common killers (such as heart disease) are naive and misleading, based as they are on a complete misunderstanding of the enormous complexity of these diseases.'

The public disillusionment with medical science was due partly to over-optimistic claims about the speed with which research breakthroughs would benefit patients.

Editorial comment, Page 15

THE INTRODUCTION of secret strike ballots has been an important cause of the decline in industrial conflict over the past 10 years.

This is the main conclusion of a survey of opinions of negotiators from 25 large and medium-sized trade unions representing more than 5m workers carried out by the Centre for Economic Performance at the London School of Economics.

Since 1984 the law has required trade unions to hold pre-strike ballots. This obligation 'stands out as the most important of the changes made by government's labour legislation', say Mr Bob Simpson and Ms Jane Elgar, the survey's authors.

Sixty three per cent of the respondents said they thought the law 'had been the most important factor affecting industrial action'.

Eighty-four per cent thought their members were 'now more reluctant to take industrial action'. Only 18 per cent agreed that there is now more unofficial industrial action, with a majority believing members were less likely to take unofficial industrial action.

The survey found employers remain unwilling to take legal action against unions. 'Legal proceedings - or even a solicitor's letter - are still clearly the exception,' it says. Even so, one in four of the respondents said employers had threatened to use the law over industrial action, although only 25 per cent of them had begun legal proceedings.

On the other hand, 93 per cent of the sample said that employers 'had become more hardline in their dealings with unions'. Threats of dismissal against members by employers has become widespread. Where striking was seriously considered, 35 per cent of respondents said dismissal threats had occurred.

The survey says the 'weak legal position' of individual workers going on strike and 'fear for job security in an adverse economic climate' have helped to reduce conflict.

There was widespread support among union negotiators for pre-strike ballots with 68 per cent of them saying they were 'a good thing for trade unions'.

The survey found that where ballots had been held there was 'strong evidence' that they had 'assisted negotiators in bargaining'. Although 75 per cent of ballots were won by the unions, this did not necessarily lead to industrial action but most brought a negotiated settlement.

THE BANNING of all public-sector strikes that breach procedure agreements and the introduction of legally binding, compulsory arbitration for Britain's essential services are being demanded by the Institute of Directors.

With the implementation yesterday of many of the provisions in the new Trade Union Reform and Employment Rights Act, the IoD will use a meeting with ministers this week to step up its campaign for further changes in employment laws.

Its demands are:

The removal of all remaining legal immunities from liability in tort enjoyed by trade unions. This would deprive unions of protection from civil actions and resulting financial damages for involvement in industrial disputes.

The abolition of the current licensing system for employment agencies which is seen as an unnecessary burden on business which inhibits the use of contract labour.

The removal of the legal monopoly enjoyed by the Advisory Conciliation and Arbitration Service's conciliation activities in disputes brought to it by industrial tribunals.

The IoD also wants to see whether Acas services could be market tested or made subject to competition by private-sector providers. In addition, it favours changes to employment protection law to enable further deregulation.

Mr David Hunt, the employment secretary, has so far shown no sign that he is ready to introduce further legislation in the labour market.

But yesterday he did not rule out legislation when he spoke of 'the government's continuing commitment to legislate so as to create and maintain a fair balance between protecting the rights of employees, while avoiding excessive costs and administrative burdens on business'.

The institute is to press the government on its attitude to the European Community's social action programme.

It wants to know how ministers intend to protect British business interests if an EC draft directive on the introduction of European works councils for companies that operate across the Continent is considered under the social chapter protocol of the Maastricht treaty.

The institute is concerned that British multinationals will be affected proportionately more by the directive than companies based in other member states.

HOMES ASSURED was the most cruelly ironic of names. The company was launched to capitalise on the sale of council houses to their tenants, and seemed poised to take advantage of one of the most powerful legacies of the Thatcher years.

Within two years of its creation it had run up debts of Pounds 10.7m before going into liquidation in August 1989. The collapse left more than 1,500 creditors out of pocket and ultimately led to the convictions at the weekend of two of the company's directors.

Homes Assured was established in 1987 by Mr Anthony Dobson, a man described by the judge as 'a Walter Mitty' and 'the ideas man rather than the administrator'.

The idea was to tap the class of new homeowners emerging from Britain's 6m council tenants who had been given the chance to buy their properties under the 1980 Housing Act.

Homes Assured intended making money in several ways: from selling commissions on endowment policies for mortgages, from top-up loans, from mortgage protection policies and from home improvement loans.

The potential seemed enormous. The company used an aggressive commissions policy to encourage sales staff to win business. It also recruited to the board Sir Edward du Cann, the former Conservative party chairman, who resigned as a non-executive director of Homes Assured before liquidators were appointed.

But economic conditions began to change. Mortgage rates rose and the housing market started to cool. Delays were caused by councils, which were unexpectedly swamped by applications or opposed the right-to-buy legislation.

More significantly, the company ran into internal difficulties. It was created with enormous overheads, quickly spending large sums on computers, offices, cars, entertainment and other expenses.

It expanded rapidly, operating four principal subsidiaries and 11 branches and employing up to 400 staff. The quality of the accounting systems varied widely.

But Homes Assured's greatest failing was to underestimate cancellations on the endowments it sold. It had budgeted for only 20 per cent to 25 per cent, but 15,000 of the 20,000 policies were cancelled.

Early in 1988 Mr Dobson received loans of Pounds 250,000 each from Bank of Boston and Anderson and Company. He failed to mention in his applications that he had reached a voluntary arrangement with his creditors to stave off bankruptcy - a factor which Bank of Boston said would have stopped it providing the money.

As the year progressed, there were growing signs that the company was in financial difficulties. Mr Douglas Dunkley, an accountant appointed to the company in April 1988, expressed grave concerns over the quality of the accounting information. He was still struggling to prepare the 1987 accounts in the summer of 1988.

Homes Assured was bombarded by creditors demanding the return of their money. Hundreds of reimbursement cheques bounced.

In November 1988 Stoy Hayward, the auditors, wrote to advise the directors of the risks of trading while insolvent. 'It seems the warnings were coming thick and fast from every possible direction,' Judge John Rogers QC told the jury in his summing up at the trial last week.

Mr Keith Woodward, an accountant who became a director, prepared a statement of the company's affairs which was presented to the courts to stave off an attempt to put it into liquidation in November.

There was just one board meeting between November 1988 and April 1989. Yet the company continued to trade in spite of all the difficulties. It was not placed into liquidation until the end of August 1989.

Two months later the police began an investigation into the collapse. That led to initial charges in May 1991 against Mr Dobson, Mr Woodward and Mr Michael Robinson. The jury was unable to reach a decision on Mr Robinson.

None of the defendants gave evidence at the trial. Their counsels argued that they had acted not dishonestly, but ignorantly or in the belief that Homes Assured would be able to continue trading successfully.

They blamed the collapse of Homes Assured on others - including the assurance company Legal & General, which had a tied-agents agreement with the company - for inefficiency and 'poaching' of policies.

The trial lasted four months, took evidence from more than 100 witnesses and required a huge number of documents.

With the trial complete, the Department of Trade and Industry can proceed with the disqualification orders it is pursuing against seven of the former directors of Homes Assured - including Sir Edward du Cann. The Institute of Chartered Accountants in England and Wales has been monitoring the case closely and is likely to exclude Mr Woodward from membership. But the creditors of Homes Assured remain out of pocket.

THE Serious Fraud Office is to consider a fresh prosecution of Mr Michael Robinson, the former managing director of collapsed mortgage broker Homes Assured, after the conviction of two of his fellow directors for fraudulent trading.

The SFO, which handled both the investigation and the prosecution of Homes Assured's directors following its collapse in 1989 owing Pounds 10.7m to creditors, said it would decide on the matter within the next month.

The Department of Trade and Industry may also restart civil actions against seven former Homes Assured directors, including Sir Edward du Cann, the former Conservative party chairman, to bar them from holding directorships.

The Homes Assured trial concluded on Saturday with the conviction of Mr Anthony Dobson, 60, founder of the company that helped council tenants to buy their properties, and Mr Keith Woodward, 56, its former finance director.

The two men were convicted of trading while the company was insolvent. Mr Dobson was also found guilty of two charges of procuring the execution of a security by deception, and Mr Woodward was convicted of furnishing false information.

The convictions came at the end of a four-month trial, but the jury was unable to reach a verdict on Mr Robinson on the charge of fraudulent trading. The company traded between November 1988 and August 1989 while insolvent.

Mr Dobson and Mr Woodward are due to be sentenced by Southwark Crown Court on October 1.

The jury was told during the trial that Homes Assured had been burdened by inadequate funds. Mr Michael Kalisher QC, the prosecuting counsel, said it had stumbled along 'borrowing from Peter to pay Paul' to stave off inevitable failure.

Witnesses described Mr Dobson, who had been involved in four liquidations, as prone to exaggeration. He had avoided personal bankruptcy through a voluntary agreement before launching Homes Assured.

While the company was insolvent a total of Pounds 116,000 was paid to companies owned by Mr Dobson or members of his family.

None of the directors charged gave evidence, but their barristers argued they had honestly believed that sufficient funds would be available to justify staying in business.

Mr Dobson's QC said that the group's late chairman Mr Eric Orbell, Sir Edward, and Mr Douglas Perryman, another director, had all decided to continue trading.

TRANSPORT MINISTERS are examining whether British Rail's role in the process of bidding for franchises could be 'formalised' to avoid a confrontation with rebel Tories at Westminster.

Mr Steven Norris, the junior transport minister, yesterday emphasised the government's determination not to delay or abandon its rail privatisation plans.

He insisted that ministers would not let a House of Lords amendment allowing BR to bid for franchises stand in their way. He dismissed speculation that the government might defer the proposals in order to avoid defeat.

In July the Lords insisted - against the government's advice - that BR should be allowed to bid. Ministers described it then as a 'wrecking' amendment which attacked the heart of the plans.

Mr Norris made it clear, however, that if there was a way the government could maintain the basis of its proposals while avoiding the need to fight the cross-party alliance among opposition and Tory peers and MPs, then ministers would welcome it.

The more conciliatory tone now is based on the government's argument that BR is already involved in the bidding process: unless potential franchisees from the private sector can show they would run services on lower subsidies than BR, then BR will continue to operate them.

'BR is bidding - it is there constantly as the benchmark against which we should gauge other people's performance,' Mr Norris said yesterday.

His comments suggest that the government will urge outright rejection of the Lords amendment only if it is told that devising a way of assessing BR's costs for the bidding process is too complex.

He added: 'Ministers don't want any more difficulties with the process than they already have. If we can live with it, we will.'

Mr Norris's comments come after renewed warnings of dissent from Tory MPs who rebelled against the privatisation plans when the bill was being discussed earlier this year.

Last week a leaked paper from within BR suggesting that there could be fare increases of up to 16 per cent intensified the calls from some Conservative MPs in the south-east for further concessions from the government to safeguard fare levels after privatisation.

The limited time available to conclude debate before the end of the session will add to the pressure on ministers to find a way to avoid a full-scale clash with the Lords. The legislation must go through parliament in the month or so from mid-October when peers resume their discussion of the bill.

STABLE inflation is encouraging negotiators to reconsider long-term pay deals, according to a study from Incomes Data Services, the research organisation, Lisa Wood writes.

Agreements for two years and more are now a significant feature of pay bargaining for manual workers in a number of manufacturing sectors. These include motor vehicles and components, shipbuilding, general engineering and chemicals.

The study found that while most of the new long-term deals applied for two years, a number of three-year agreements had been reached at companies such as Avon Rubber, BAT, Borden (UK), Rhone-Poulenc and Royal Ordnance. The study also recorded one four-year deal.

Study 536 from IDS, 193 St John Street, London EC1V 4LS. By subscription.

POLICE AUTHORITIES are to be given a new and specific duty to involve the public in the fight against crime, Mr Michael Howard, the home secretary, said yesterday.

His comment came after a Gallup poll for The Daily Telegraph found three-quarters of those questioned believed vigilante action was sometimes justified. The poll also found widespread dissatisfaction with the way crime is handled by the police and the criminal justice system.

The Tories see tough action to tackle crime as a key part of efforts to restore their political fortunes but the survey showed that there was little belief their plans would have much effect. Only 15 per cent believed that promises to get tough on law and order in the coming months would have any impact on crime.

Mr Howard will also announce later this week the next phase of putting the running of prisons out to private-sector tenders.

The move comes in spite of the critical report last week by Judge Stephen Tumim, the chief inspector of prisons, on the Wolds remand jail - Britain's first privately run prison.

Ministers intend to make measures on law and order the centrepiece of the next parliamentary session. Apart from the bill to implement the government's conclusions on the Sheehy report on the police and the changes to police authorities, there will be a criminal justice bill, which will include tougher action against those who re-offend while on bail.

The restructured police authorities will have to prepare plans giving local people a role in helping the police, for example through taking part in neighbourhood watch schemes or by becoming special constables.

Mr Howard did not condone taking the law into one's own hands. He said on BBC radio: 'We do not want vigilantes but we do want vigilance.'

Mr Tony Blair, the shadow home secretary, said the poll showed 'the huge sense of frustration and despair that underlies a lot of people's feelings towards the criminal justice system and towards rising crime'.

POLICE are likely to be more vigilant in checking people entering the City of London today following an attempted bombing in Bishopsgate on Saturday.

Terrorists breached the security ring and planted what police called a 'small device' behind a hoarding in Wormwood Street.

Police were alerted to the attempted bombing by a call from a man with an Irish accent who used a recognised code word. The bomb squad carried out a controlled explosion. There were no injuries.

The latest attempt follows the setting up last month of checkpoints around the City, and the blocking of many entrances to it, in response to previous terrorist explosions.

The alert will intensify a debate over the effectiveness of the measures which are considered too disruptive by some critics and as a propaganda coup for the IRA by others.

Saturday's explosion came just 48 hours after a warning from Mr Owen Kelly, City of London police commissioner, that the area was still at risk from hand-carried bombs.

'Clearly it would be rash to claim that we have 100 per cent security, but I do know that we have reduced drastically the risk of another large vehicle-borne bomb getting into the financial heart of the City,' Mr Kelly said.

He added: 'Hand-carried bombs may in the future be planted in the zone and the less well-informed will claim that our arrangements have failed.

'Of course we have never claimed that we could ever detect or prevent any one of the hundreds of thousands of people who come into the City daily, most of whom carry bags or cases of some sort, from bringing in a bomb.'

THE LABOUR party yesterday set up shop in London's Spitalfields market to launch a campaign against counterfeit goods, John Griffiths writes.

It says they cost 100,000 UK jobs and Pounds 1bn in lost sales to British companies each year.

Mr Robin Cook, Labour's trade and industry spokesman, said some of the goods were dangerous and could even kill.

Markets are a main channel for selling such goods. The party displayed recently seized counterfeit goods, including designer-label clothes, computer games, music cassettes, videos and replacement car parts.

Mr Nigel Griffiths, Labour consumer affairs spokesman, said legislation left a loophole which acted as a 'counterfeiter's charter'.

LIMITS ON investments in state schools should be abolished to allow more investment from the private sector, Mr Michael Fallon, the former schools minister, argues in a pamphlet published today.

His move extends the debate on the private finance initiative announced by Mr Norman Lamont, the former chancellor, in the last autumn statement to the education sector.

Mr Fallon describes the current system of capital investment in schools as 'bureaucratic and fossilised'. He adds: 'Worse still, it cuts across the government's central objective of extending parental choice.'

He proposes that schools themselves, rather than local authorities, should be given access to private-sector capital investment. This liberalisation could lead to joint ventures and leasing arrangements with private developers and other educational institutions.

The private sector could also build and run language laboratories, sports halls and drama workshops which could then be contracted for use by a range of state schools and local companies, Mr Fallon suggests. Schools, he adds, could work with universities, colleges and the private sector to create 'education parks' for multiple educational use.

Mr Fallon also attacks planning arrangements which stop schools being built if other nearby schools have unused capacity. He describes this as the 'thrombosis at the heart of the system' and suggests that full reform would 'encourage new schools quite irrespective of over supply provided that they can demonstrate sufficient commitment on the part of local parents to transfer from existing schools'.

The pamphlet suggests that when a new school is needed in an area it should be put out to tender with either existing schools or private promoters free to bid for a contract.

Brighter Schools. The Social Market Foundation, 20 Queen Anne's Gate, London SW1. Pounds 6.

THE pleasure of reading is declining among schoolchildren, a survey has found. Less than a third of children enjoy reading in the classroom compared with more than half when their their grandparents were at school.

The survey was by Birds Eye frozen foods for its free books for schools scheme in conjunction with HarperCollins.

THE ROYAL College of Nursing will announce shortly that its total membership has reached a record level.

However, its claim that membership is increasing at the expense of Unison, the new public service union formed by the amalgamation of Cohse, Nupe and Nalgo, has been disputed by Unison.

There are about 641,749 qualified individuals registered with the Central Council for Nursing Midwifery and Health Visiting, of which 384,000 are working in the National Health Service. The total nursing workforce in the NHS is about 543,000, a figure which includes 159,000 nursing auxiliaries and nursing assistants.

The college admits only qualified nurses while Unison includes nursing auxiliaries and assistants in its 235,000 nursing membership. In the year to last December the college's membership grew from 292,180 to 297,719 and next month it is expected to be a record at more than 300,000.

ONE IN 10 companies are providing users of company accounts with property valuations that bear little comparison with market values, a survey by Company Reporting, an Edinburgh-based journal, says.

The report adds that only a third of company accounts show signs of recent property revaluations. A total of 62 per cent of companies are continuing to revalue at least some of their properties and half of these have done so within the last three years.

The report criticises the accounting standards for tangible assets. It says a strong lobby would prefer to see a return to a historical cost approach because once a business occupied a property it was no longer subject to property market forces.

The survey covered 565 company accounts published in the last year.

Company Reporting Limited. 68 Dundas Street, Edinburgh, EH3 6QZ.

ITV LAST night signalled its renewed determination to move News at Ten to an earlier slot.

Mr Marcus Plantin, ITV network director, indicated at the Edinburgh television festival that he would be taking on politicians, including Mr John Major, the prime minister, who said in June that they wanted the programme kept in its present 10pm slot.

Mr Plantin said: 'News at Ten is still very much on the agenda and we must be able to make ITV scheduling more dynamic by being able to switch programmes around.'

Politicians opposed an earlier slot because the programme, made by ITN, would not have the opportunity to react to late-breaking news from around the world. Mr Plantin said of Mr Major's intervention: 'For a moment I thought he wanted my job.'

After the intervention it had been thought the programme would not be moved but its future is to be discussed by the ITV board next month.

The ITV companies say they can sell more advertising and attract more viewers by screening big films unbroken, rather than splitting them round a news slot at 10pm.

ALMOST HALF the people in work remain concerned about the prospect of being made redundant or becoming unemployed during the next 12 months in spite of signs of an economic revival.

This is the key finding in the latest monthly survey on redundancy commissioned for the Financial Times and Industrial Relations Services and conducted by MORI, the polling organisation.

The findings suggest there remains widespread and continuing scepticism among the workforce about the strength of the economic upturn.

This month 47 per cent of the sample said they were very or fairly concerned at losing their job.

This figure has dropped from 51 per cent in July but is the second highest level of concern shown among people at work in the survey since it began in April.

By contrast 49 per cent said they were not at all or not very concerned about losing their job and joining the unemployed, compared with 45 per cent in July.

Over the past five months some distinctive trends can be seen. The proportion of workers under 24 who are concerned about redundancy and unemployment has risen from 40 per cent in April to 50 per cent last month.

A sharp rise is also apparent among people at work from social classifications A and B. This has climbed from 28 per cent five months ago to 37 per cent in August. The proportion of unskilled and semi-skilled manual workers concerned about redundancy and unemployment has also gone up from 44 to 53 per cent over the same period.

Scotland and northern England have suffered a sizeable growth in concern from 38 per cent to 48 per cent between April and August as has the Midlands - up from 40 per cent to 48 per cent. Concern in southern England has remained stable.

MORI interviewed 1,007 adults aged 18 and over.

SMALLER companies in Britain are more confident of economic recovery than their counterparts in the rest of Europe, a survey has found.

The survey by 3i, the investment capital group, and Cranfield School of Management found that while fewer Spanish and German companies expect a decline in profitability over the next six months, French and Italian businesses have become more pessimistic since the last survey six months ago.

The different views are reflected in investment plans over the next six months. UK companies plan to spend more on training, marketing, and research and development.

In France, by contrast, budgets are falling in these areas and a majority of companies expect to cut their training programmes.

Professor Paul Burn of the Cranfield School of Management said: 'UK companies are anticipating recovery and are doing things that will contribute to it.'

But he warned against complacency, pointing to differences in expectations on prices.

French companies expect falling prices and low wage increases while UK companies envisage price rises and Germany has the highest proportion of companies expecting wage rises.

A report today from the National Westminster Bank says that growth in the north of the UK will match that in the south over the next few years, thanks to the manufacturing sector.

Mr David Kern, NatWest's chief economist, says in a preview of the September issue of the bank's Economic and Financial Outlook: 'Over the period 1994 to 1998, I expect growth to average 2.1 per cent (per year) in the northern and southern UK regions against 2.5 per cent in central Britain.'

He expects manufacturing output to grow at an above-average 3.5 per cent and that northern and central Britain will have an above-average share of manufacturing. The share of GDP taken by manufacturing will rise from 19.9 per cent in 1991 to 21.4 per cent in 1998.

Mr Kern says: 'The south-east will be relatively subdued - reflecting the continued impact of high indebtedness and some further relocations from the region.'

THE pleasure of reading is declining among schoolchildren except in Scotland, according to a survey.

Less than a third of children enjoy reading in the classroom compared with more than half their grandparents in their schooldays. But in Scotland the popularity of reading has grown from 33 per cent two generations ago to 43 per cent.

Some 52% of grandparents looking back on their schooldays said reading had been one of their favourite subjects. But for primary school children today the figure is 30 per cent.

Reading for pleasure at home has suffered a similar fall in popularity, down from 43 per cent to 32 per cent.

In all, 679 children aged between five and 11 and 570 grandparents across Britain were surveyed by Birds Eye frozen foods at the start of its free books for schools scheme in conjunction with HarperCollins.

JOB losses at United Technologies a car components factory in Londonderry, Northern Ireland, have been cut from 94 to 49 following negotiations between management and unions.

The company, which employs 800 workers at the plant, blamed the job losses on the recession in the European motor industry.

SIR JOHN Harvey-Jones, the former chairman of ICI and the presenter of the BBC television series Troubleshooter on business efficiency, yesterday gave his qualified support to BBC chiefs embroiled in arguments over changes being made to the corporation.

He told the Edinburgh television festival it was 'no good shooting the poor devils' trying to change things before the BBC charter comes up for renewal in 1996.

He said: 'One of the problems that the BBC is struggling with is that it has not changed in the past. If organisations do not change fast enough, when change comes it is cataclysmic and very painful.'

Sir John has in the past been outspoken in his views on the BBC, which he has described as inefficient. He believes the BBC should reduce costs by a third and cut many management posts.

THE ROYAL College of Nursing will announce shortly that its total membership has reached a record level, in spite of a general decline in trade union membership.

However, a claim by the college that its membership is increasing at the expense of Unison, the public service union which incorporates Cohse, Nupe and Nalgo, has been disputed by the new union.

There are about 641,749 qualified individuals registered with the UK Central Council for Nursing Midwifery and Health Visiting, of which 384,000 are working in the National Health Service. The total nursing workforce in the NHS is about 543,000, which includes 159,000 nursing auxilaries and nursing assistants.

The college admits only qualified nurses, while Unison includes nursing auxilaries and assistants in its 235,000 nursing membership.

The college is one of the few unions that has grown over the past few years. Between December 1991 and December last year its membership rose from 292,180 to 297,719. Next month it will be a record at over 300,000.

Ms Christine Hancock, general secretary of the college, said: 'There is some evidence that we have been recruiting from nurses in other unions, most notably nurses from Cohse who could not see themselves as part of a large generalist trade union.'

The RCN has no factual evidence yet to support its contention but Ms Hancock said her claim was based on reports from local branch officials. If it is accurate, the RCN claim would provide the first evidence that the creation of Unison in July is having an adverse effect on membership.

THE US remains outwardly cautious about the prospects for a preliminary self-rule agreement between Israel and the Palestinians, but US officials are more excited than they have been for some time about the chances of a breakthrough in the peace process.

As delegates gathered in Washington for the 11th round of Middle East talks, President Bill Clinton warned that apparent good news had often turned into disappointment. 'We've still got a long way to go,' he said.

Mr Clinton said he could not comment until progress was more concrete. He said: 'I don't know if I would call it an intervention, but we have certainly worked hard to be a handmaiden, or whatever the appropriate term is. We are involved, but our position is not at issue here and should not be discussed until the parties themselves work out their differences.'

State Department officials, however, said that a meeting in California on Friday between Mr Warren Christopher, the secretary of state, and Mr Shimon Peres, the Israeli foreign minister, had made it clear that 'the parties are focused on choices that could produce real progress'.

Mr Christopher's aides are clearly elated at the possibility that their boss, who has been vilified in the US press over his handling of the Bosnia crisis as a passive and unprincipled administrator, might score a diplomatic victory.

Officials told the New York Times that it was Mr Christopher's trip to the Middle East at the beginning of this month that gave new momentum to the peace talks.

'They needed the US to stimulate things. They have all needed an awful lot of assurance and hand-holding from the US,' the newspaper reported a US official as saying.

Mr Christopher's trip turned into an exercise in damage control, as he sought to negotiate an end to Israel's assault on southern Lebanon, and even his aides found little heart to defend his confident assertion that the fighting in Lebanon had in fact 'given a new burst of energy to the negotiations'.

US officials said that the crucial success of the trip was in persuading President Hafez al Assad of Syria to advance talks with Israel on the future of the Golan Heights. They suggested that this might have encouraged Mr Yassir Arafat and the Palestinian Liberation Organisation to participate more actively in talks with Israel.

This explanation is not universally shared in Washington, however.

'The main pressures on Arafat are financial. The people who have leaned on him are the Saudis and the Egyptians,' said Dr Michael Hudson, professor of Arab studies at Georgetown University.

Dr Hudson warned that Israel's proposal to give the Palestinians limited self-rule in Jericho and the Gaza Strip faced serious opposition among Palestinians in the occupied territories, and not just in the militant Hamas movement.

'Much depends on how the US interprets its role as a full partner in the peace process, and how far they are willing to go to make sure this is not the last stop on the road,' he said.

Self-rule will begin first in the occupied Gaza Strip and West Bank town of Jericho, where Palestinians will have what Israel describes as full autonomy. They will take over most functions of the Israeli military government including internal security and policing.

The principle of 'early empowerment' will apply to the rest of the West Bank. Palestinians will take control of five spheres of daily life - health, education, welfare, tourism and culture - and perhaps others, depending on the outcome of negotiations.

The Israeli army will redeploy to agreed areas, withdrawing from all Palestinian population centres but remaining to protect Jewish settlements on the outskirts of Gaza and Jericho.

Israel will keep control of the border crossing from Gaza to Egypt and the Allenby bridge near Jericho, which links the occupied West Bank to Jordan.

The status of Jerusalem, which thwarted earlier talks on self-rule, will be left to negotiations on the permanent arrangement for the occupied territories, which will begin two years after the signing of the joint declaration of principles.

Expanded authority over Gaza and Jericho as well as early empowerment in the rest of the West Bank could be implemented within weeks of signing the document on the table at the 11th round of Middle East peace talks, starting today in Washington.

Palestinians will elect a council to administer self-rule at least nine months after the declaration of principles is implemented.

The seat of the administrative council will be in the West Bank town of Bethlehem.

'THIS is the beginning of the end of our 100-year dispute with the Palestinians. And you, yesterday's men, can't see five steps forward.'

With these words, before a raucous Israeli Knesset yesterday, Israel's foreign minister, Mr Shimon Peres, hit back at his critics on the opposition benches, and defended agreements for granting Palestinian autonomy in the occupied territories. 'The world has changed completely,' shouted Mr Peres at members of the opposition Likud, 'and only you haven't realised it.'

News of the agreements between Mr Peres and the Palestine Liberation Organisation (PLO) stunned almost everyone. When Mr Peres first disclosed the agreements to his cabinet colleagues on Sunday morning, jaws dropped. Mr Elyakim Rubinstein, the man who has led Israel's negotiators through almost two years of unproductive dialogue with the Palestinians in Washington, was said to have been 'flabbergasted' at what had been achieved behind his back, and threatened to resign.

No sooner had the first shock waves passed, than the opposition reacted furiously. Settlers' leaders in the West Bank and Gaza Strip were unimpressed by government assurances that not a single settlement would be moved during the planned five-year autonomy period.

Right-wing Knesset members have been united in their demands for new elections, claiming that the prime minister, Mr Yitzhak Rabin, has no mandate for making deals with the PLO. Mr Benjamin Netanyahu, the Likud leader, urged the government in yesterday's stormy Knesset debate to 'go to the people. Tell them the truth.' Mr Netanyahu has accused Messrs Rabin and Peres of betraying their country by offering the PLO 'a headquarters 15 minutes from Jerusalem' from which to plot Israel's destruction.

The secretary-general of the Labour party, Mr Nissim Zvilli, told the French TV station TF1 he did not think it was yet the time for Israel to recognise the PLO.

Mr Peres's cabinet colleagues, by contrast, have been almost unanimous in their delight at the foreign minister's progress, many echoing his own talk of a 'major breakthrough'. Well aware that public opinion here remains sensitive to both the idea of territorial compromise and direct contacts with the PLO, several ministers - including Mr Rabin himself - have taken pains to stress that the agreements are not a harbinger of a PLO state and that Israel will not formally recognise the PLO unless it renounces terrorism and deletes various anti-Israeli sections of its charter.

Almost two decades of general elections have shown that public opinion is divided between those who regard Israeli control of the territories as crucial to its security and those who believe the state can only prosper once the Palestinians are given self-rule. An instant survey, conducted overnight by the Yediot Ahronot tabloid, showed that this division persists, with 53 per cent of those polled saying they support the 'Gaza and Jericho first' autonomy proposals, and 45 per cent against.

On a hair trigger, Page 15

PALESTINIAN rifts came swiftly into the open yesterday following signs of progress in the Middle East peace talks, report David Horovitz and agencies.

Conflicting signals emerged from the Palestine Liberation Organisation - euphoria from Mr Bassam Abu Sharif and Mr Yasser Abed-Rabbo, aides to the chairman Mr Yassir Arafat, contrasting with pessimism from political department head Mr Farouk Khaddoumi.

The Hamas Islamic Resistance movement has said it will do everything to block a deal. The fundamentalist group is the main rival of the PLO in the West Bank and Gaza Strip.

Mr Abdel Aziz Rantisi, the spokesman for the 400 deported Palestinian radicals stranded since last December in southern Lebanon, said that Moslems throughout the world rejected any deal recognising Israel.

THOUSANDS of Jewish settlers demonstrated last night in Jerusalem, vowing to block proposals for Palestinian autonomy in the occupied territories by all means possible, David Horovitz reports.

'(Yassir) Arafat will not be allowed to take control,' said settler leader Uri Ariel. 'Rabin has no mandate for this deal. He must go home and we must have new elections.'

The clashes, in which three protesters and two police were injured, indicate that the settlements may become a flashpoint for right-wing Israeli opposition to the deal expected to be signed shortly between Israel and the Palestinians. More than 100,000 Jews live in about 150 settlements dotted throughout the occupied territories.

Mr Rabin told his coalition partners yesterday that no settler would be forced to leave home under the five-year interim autonomy proposals. 'The settlements will remain - none will be uprooted,' Mr Rabin stressed. However, the long-term future of the settlements is uncertain.

In its 14 months in office Mr Rabin's government has demonstrated that the settlers are far lower on its list of priorities than under previous Likud governments. State funding has been sharply reduced, and Mr Rabin has said more than once that his main concern is to maintain the security of residents of 'sovereign Israel'.

About 20 Israeli settlements are located in the Gaza Strip and Jericho, where Palestinian self-rule is first proposed. During the five-year interim period, government officials said yesterday, settlers there (the areas in white in the map on the left) would remain Israel's responsibility, protected by the army.

Neither Mr Rabin nor any of his colleagues have offered guarantees as to settlers' fate after the five years are over. The government may hope that those living in or near Arab population centres will decide to relocate inside Israel's pre-1967 borders.

IT DID not take long to bring Palestinian rifts into the open, following the signs of progress yesterday in the peace process.

Conflicting signals emerged from the PLO itself - euphoria from Mr Bassam Abu Sharif and Mr Yasser Abed-Rabbo, aides to the chairman Mr Yassir Arafat, contrasting with pessimism from political department head Mr Farouk Khaddoumi.

Mr Ahmed Jibril's Popular Front for the Liberation of Palestine-General Command was more extreme and threatened to assassinate Mr Arafat. The PLO responded by saying the guerrilla group was out of touch with the needs of Palestinians.

The Hamas Islamic Resistance movement, which has its strongholds in Gaza, has said it will do everything to block a deal. The fundamentalist group, which opposes the US-brokered Middle East peace talks, is the main rival of the Palestine Liberation Organisation in the Israeli-held West Bank and Gaza strip. Its main stronghold is believed to be in Gaza.

'This project opens the door wide to inter-Palestinian fighting and civil war because it does not fulfil their aspirations and liquidates their cause,' Mr Mohammed Nazzal, the Hamas representative in Jordan said.

Mr Abdel Aziz Rantisi, the spokesman for the 400 deported Palestinian radicals stranded since last December in southern Lebanon, said in a telephone interview with the Associated Press yesterday that Moslems throughout the world rejected any deal recognising Israel. 'This agreement will not prevent the Islamic generation, now or in the future, from fighting to restore its rights in Haifa, Acre, Lydda, Jaffa and Jerusalem,' he said.

Mark Nicholson adds from Cairo: The Egyptian government, which has played an increasingly important role in brokering Arab-Israeli talks, yesterday welcomed the 'Gaza-Jericho first' agreement as a move towards achieving Palestinian self-rule in the occupied territories. But it emphasised that this should be seen as a first step.

In the first reaction from any Arab government to the proposed deal, Mr Amr Moussa, Egyptian foreign minister, said: 'Any withdrawal from any part of the Arab land occupied (by Israel) since 1967 is a step forward'. It is a step that does not meet all requirements on its own, but is a move towards achieving self-rule in all the Palestinian occupied territories.'

He said a full solution should embrace the terms of the original Madrid formula for the peace talks, the full satisfaction of United Nations resolutions and an acceptance by Israel of the principle of 'land for peace'. 'The Gaza-Jericho proposal is under careful study and if the Palestinians approve it, we will approve it too. The decision is a Palestinian one,' the minister said.

Mr Arafat was due to arrive in Cairo last night for talks with Mr Moussa and is due to meet Mr Hosni Mubarak, the Egyptian president, this morning at the presidential palace in Alexandria. Mr Moussa, before yesterday's talks, put his government squarely behind the PLO leadership in the face of hardline Palestinian opposition to the proposal, praising Mr Arafat as 'working hard to reach a comprehensive settlement'.

THE United Auto Workers' union yesterday set in motion a tussle over the pay and conditions of half a million US car industry workers when it named Ford Motor as the company with which it intends to negotiate a new contract first.

Under traditional 'pattern bargaining', the UAW tries every third year to reach a new contract with a target company and then to impose similar conditions on the other two big Detroit vehicle-makers. The UAW's current contracts with the big three are to end in mid-September.

Ford wanted to be the target company and presented an outline package to the UAW last week. It is financially more robust than rivals General Motors and Chrysler.

The union, concerned about GM's competitiveness, may well be more flexible than usual. Industry analysts, who do not expect a strike against any of the car companies this autumn, point out that union leaders have struck a conciliatory tone towards the big three recently.

Richard Waters reports: Workers at Bethlehem Steel, the second biggest US steel producer, have approved a six-year labour accord which will allow a representative of the United Steelworkers of America union on to the board.

About 150,000 people left islands off North Carolina as Hurricane Emily swept in from the Atlantic towards the US east coast yesterday, agencies report. The National Hurricane Centre in Florida issued a hurricane watch for the coast from mid-South Carolina to the Delaware border.

Hooded gunmen invaded a shantytown in Rio de Janeiro, Brazil, yesterday and opened fire on residents as they went to work, killing 21 people, Reuter reports. The killings, in Vigario Geral, came a day after four police officers were shot dead there by alleged drug traffickers.

Rio Governor Leonel Brizola linked the two incidents, speaking of 'an inadmissible act of vengeance.'

National Medical Enterprises, the US hospital group, yesterday announced steps aimed at restoring its credibility after last week's FBI raids on its hospitals and offices, writes Karen Zagor in New York.

The company faces suits from big insurance companies alleging that it defrauded them of more than Dollars 750m. The company is appointing an independent task force to test compliance with the company's policies and procedures on patient admission practices and patient referral.

Mexico's privatised banks are to issue quarterly reports to give a clearer picture of their finances, said the National Banking Commission, writes David Luhnow in Mexico City.

Regulations will force the nation's banks to issue, as of next month, reports that detail levels of reserves and rates of bad loans, said officials.

THE CHILEAN government has proposed a solution to the Dollars 4bn (Pounds 2.66bn) subordinated debt issue which has plagued domestic banking for a decade, writes David Pilling in Santiago.

Ten of Chile's commercial banks owe the central bank Dollars 3.9bn. This dates back to 1983 when the state took over their non-performing loans to prevent a collapse of the banking system. Banks have since been obliged to repurchase these debts yearly by handing over 70 per cent of their after-tax profits to the central bank.

A reform bill, to be sent to Congress today or tomorrow, seeks to end the repayment period after 40 years.

SALES of new homes in the US fell 5 per cent in July compared to June, raising new doubts about the health of the housing market, the Commerce Department said yesterday.

In a separate report, it said a surge in imports had resulted in a US trade deficit of Dollars 34.4bn (Pounds 23.2bn) in the second quarter, the biggest shortfall in more than five years.

The weakness of new home sales puzzled analysts, as it had followed a recent drop in mortgage rates to the lowest level in more than two decades and a report last week of a robust 5.4 per cent gain in sales of previously owned homes last month.

Sales fell in all regions, not just the flooded parts of the Midwest.

Figures for June were also revised down sharply to show a gain from May of only 3.3 per cent, rather than the 11 per cent initially reported.

The unexpected weakness since May left sales running last month at a seasonally adjusted annual rate of 629,000 - far below Wall Street projections of about 675,000. For the first seven months of the year, however, sales were still nearly 7 per cent higher than in the equivalent period last year.

The trade deficit rose 17 per cent in the second quarter compared to the first, mainly because consumer and investment demand in the US is much stronger than in its recession-hit trading partners. Exports rose 1.4 per cent from the first quarter to Dollars 113.1bn; imports rose 4.7 per cent to a record Dollars 147.5bn.

The annualised deficit in the first half was Dollars 127.4bn compared with Dollars 96.1bn for the equivalent period last year.

---------------------------------------------------------------------- This table shows growth rates for the most widely followed measures of narrow and broad money, a representative short-and long-term interest rate series and an average equity market yield. All figures are percentages. ---------------------------------------------------------------------- UNITED STATES ---------------------------------------------------------------------- Narrow Broad Short Long Equity Money Money Interest Interest Market (M1) (M2) Rate Rate Yield ---------------------------------------------------------------------- 1985 9.0 8.9 8.00 10.59 na 1986 13.5 8.3 6.49 7.67 3.43 1987 11.6 6.5 6.82 8.39 3.12 1988 4.3 5.2 7.65 8.84 3.61 1989 1.0 3.9 8.99 8.49 3.43 1990 3.7 5.3 8.06 8.54 3.60 1991 5.9 3.3 5.87 7.85 3.21 1992 12.4 2.0 3.75 7.00 2.95 3rd qtr. 1992 12.6 1.6 3.35 6.61 2.96 4th qtr. 1992 14.3 1.8 3.55 6.73 2.94 1st qtr. 1993 11.9 0.5 3.20 6.26 2.81 2nd qtr. 1993 11.8 0.9 3.18 5.98 2.80 August 1992 12.4 1.6 3.37 6.59 2.95 September 13.5 1.8 3.24 6.41 2.98 October 14.4 2.0 3.32 6.58 3.02 November 14.4 1.8 3.66 6.86 2.94 December 14.2 1.5 3.67 6.75 2.87 January 1993 13.4 1.0 3.26 6.59 2.87 February 11.5 0.2 3.18 6.26 2.80 March 10.7 0.2 3.17 5.97 2.76 April 10.8 0.3 3.15 5.96 2.81 May 12.0 1.1 3.14 6.02 2.81 June 12.7 1.4 3.25 5.94 2.80 July 12.7 1.5 3.20 5.79 2.80 ----------------------------------------------------------------------

JAPAN ---------------------------------------------------------------------- Narrow Broad Short Long Equity Money Money Interest Interest Market (M1) (M2+CDs) Rate Rate Yield ---------------------------------------------------------------------- 1985 5.0 9.3 6.62 6.51 na 1986 6.9 8.2 5.12 5.35 0.84 1987 10.5 11.5 4.15 4.64 0.55 1988 8.4 10.4 4.43 4.77 0.54 1989 4.1 10.6 5.31 5.22 0.48 1990 2.6 8.5 7.62 6.91 0.65 1991 5.2 2.0 7.21 6.37 0.75 1992 4.5 -0.4 4.28 5.25 1.00 3rd qtr. 1992 3.2 -0.5 3.90 5.10 1.06 4th qtr. 1992 2.0 -0.4 3.67 4.78 1.03 1st qtr. 1993 1.8 -0.4 3.29 4.34 1.00 2nd qtr. 1993 3.2 1.4 3.09 4.55 0.83 August 1992 3.7 0.3 3.75 5.03 1.12 September 2.9 -0.5 3.74 4.99 0.98 October 2.5 -0.6 3.71 4.90 1.04 November 1.6 -0.6 3.65 4.76 1.05 December 1.9 -0.4 3.64 4.70 1.00 January 1993 2.4 -0.3 3.59 4.55 1.03 February 2.3 0.1 3.15 4.31 1.01 March 0.9 -0.4 3.13 4.19 0.97 April 2.4 0.5 3.08 4.42 0.85 May 3.9 1.5 3.09 4.64 0.82 June 3.4 1.4 3.10 4.58 0.82 July 3.7 1.7 3.11 4.40 0.81 ----------------------------------------------------------------------

GERMANY ---------------------------------------------------------------------- Narrow Broad Short Long Equity Money Money Interest Interest Market (M1) (M3) Rate Rate Yield ---------------------------------------------------------------------- 1985 4.3 5.1 5.45 6.94 na 1986 10.0 8.3 4.64 5.90 1.79 1987 9.0 7.3 4.03 6.14 2.21 1988 9.7 6.4 4.34 6.46 2.61 1989 6.3 5.8 7.11 6.94 2.22 1990 4.5 4.5 8.49 8.71 2.11 1991 5.1 5.6 9.25 8.44 2.38 1992 7.1 8.2 9.52 7.77 2.45 3rd qtr. 1992 6.6 8.8 9.72 7.88 2.53 4th qtr. 1992 10.7 9.6 8.98 7.34 2.67 1st qtr. 1993 9.6 7.5 8.31 6.87 2.42 2nd qtr. 1993 9.5 8.6 7.68 6.73 2.24 August 1992 6.1 8.7 9.88 7.99 2.60 September 8.3 9.3 9.50 7.65 2.62 October 8.5 10.4 8.95 7.38 2.72 November 11.2 9.7 8.94 7.36 2.66 December 12.5 8.7 9.03 7.29 2.64 January 1993 9.5 7.7 8.60 7.10 2.58 February 9.2 7.3 8.39 6.94 2.43 March 10.0 7.6 7.98 6.59 2.27 April 9.1 8.7 7.92 6.63 2.23 May 9.3 8.5 7.52 6.80 2.27 June 10.1 8.5 7.60 6.77 2.22 July 10.1 8.8 7.24 6.57 2.09 ----------------------------------------------------------------------

FRANCE ---------------------------------------------------------------------- Narrow Broad Short Long Equity Money Money Interest Interest Market (M1) (M3) Rate Rate Yield ---------------------------------------------------------------------- 1985 6.2 7.4 10.03 11.74 na 1986 6.9 6.8 7.79 8.74 2.65 1987 4.1 9.9 8.26 9.46 2.75 1988 3.9 8.4 7.94 9.08 3.69 1989 8.1 9.6 9.39 8.79 2.88 1990 3.7 9.0 10.32 9.92 3.19 1991 -4.7 2.8 9.62 9.03 3.58 1992 0.1 5.5 10.36 8.57 3.55 3rd qtr. 1992 -0.2 4.8 10.58 8.90 3.67 4th qtr. 1992 0.1 5.5 10.77 8.26 3.72 1st qtr. 1993 0.6 5.2 11.83 7.66 3.38 2nd qtr. 1993 1.2 2.8 8.00 7.08 3.33 August 1992 -1.2 5.4 10.39 9.06 3.71 September -0.2 4.8 11.12 8.75 3.61 October 1.8 6.3 11.12 8.43 3.83 November 0.4 6.1 9.77 8.14 3.70 December 0.1 5.5 11.35 8.20 3.64 January 1993 0.9 5.1 12.16 7.93 3.58 February 0.6 5.4 12.12 7.76 3.40 March 0.6 5.2 11.27 7.33 3.19 April -1.9 4.1 9.06 7.14 3.25 May -2.0 3.2 7.64 7.16 3.39 June 1.2 2.8 7.32 6.95 3.35 July 8.06 6.72 3.28 ----------------------------------------------------------------------

ITALY ---------------------------------------------------------------------- Narrow Broad Short Long Equity Money Money Interest Interest Market (M1) (M2) Rate Rate Yield ---------------------------------------------------------------------- 1985 13.2 13.5 14.34 13.71 na 1986 10.5 8.2 13.25 11.47 1.41 1987 10.4 9.8 11.32 10.58 1.94 1988 7.8 6.9 11.24 10.54 2.71 1989 7.1 8.2 12.41 11.61 2.46 1990 9.3 9.1 11.98 11.87 2.84 1991 7.3 8.0 11.83 13.20 3.45 1992 6.7 7.5 13.86 13.29 3.63 3rd qtr. 1992 5.9 6.8 16.14 13.83 4.02 4th qtr. 1992 2.8 5.8 14.64 13.84 3.68 1st qtr. 1993 2.8 6.2 11.88 13.13 3.04 2nd qtr. 1993 2.4 6.0 10.82 12.49 2.48 August 1992 5.3 6.5 15.27 13.71 3.94 September 5.0 6.1 17.82 14.14 4.35 October 5.5 7.3 15.53 14.36 3.95 November 2.5 5.8 14.53 13.48 3.48 December 0.4 4.4 13.90 13.66 3.61 January 1993 2.2 5.4 12.73 13.46 3.26 February 2.9 6.3 11.51 13.03 3.01 March 3.5 6.8 11.41 12.92 2.86 April 1.9 5.8 11.48 13.13 2.75 May 2.3 6.1 10.80 12.50 2.53 June 3.0 6.1 10.22 11.87 2.15 July 3.4 6.5 9.54 11.12 1.99 ----------------------------------------------------------------------

UNITED KINGDOM ---------------------------------------------------------------------- Narrow Broad Short Long Equity Money Money Interest Interest Market (MO) (M4) Rate Rate Yield ---------------------------------------------------------------------- 1985 4.7 13.2 12.32 11.03 na 1986 4.0 15.3 11.02 9.97 4.35 1987 4.7 14.6 9.77 9.52 3.60 1988 6.8 17.0 10.41 9.69 4.48 1989 5.9 17.5 13.96 10.30 4.36 1990 5.3 16.0 14.82 11.53 5.07 1991 2.4 8.2 11.58 10.04 4.97 1992 2.3 5.2 9.73 9.09 4.91 3rd qtr. 1992 2.4 5.3 10.39 9.21 5.21 4th qtr. 1992 2.7 4.4 7.68 8.45 4.64 1st qtr. 1993 4.4 3.3 6.43 7.97 4.35 2nd qtr. 1993 4.2 3.6 6.00 7.92 4.04 August 1992 2.5 5.4 10.43 9.37 5.33 September 2.2 4.8 10.54 9.18 5.14 October 2.4 5.2 8.49 8.69 4.83 November 3.0 4.3 7.32 8.27 4.60 December 2.8 3.7 7.24 8.38 4.49 January 1993 3.9 3.1 7.04 8.33 4.46 February 4.5 3.3 6.23 7.97 4.36 March 4.9 3.6 6.04 7.65 4.24 April 4.8 3.5 6.02 7.81 4.08 May 3.3 3.9 6.03 8.08 4.04 June 4.4 3.3 5.95 7.88 4.01 July 4.8 3.6 6.01 7.49 4.03 ------------------------------------------------------------------------ Monetary growth rates: show the percentage change over the corresponding period in the previous year, and are positive unless otherwise stated. All growth rates refer to the seasonally adjusted series except for Japan and Italy. German monetary statistics now form a continuous pan-German series. Monetary data supplied by Datastream and WEFA from central bank sources. Interest rates: short-term, period averages of US - 90-day commercial paper, Japan - 3-month certificates of deposit, Germany - 3-month Fibor, France - 3-month Pibor, Italy - 3-month Euro-lira, UK - 3-month Libor; long-term, period average yields on 10-year benchmark government bonds. Interest rates supplied by Datastream. Equity market yield: period averages of the gross dividend yield on the relevant FT-A world index. ------------------------------------------------------------------------

CHINA is to establish a credit bank to fund large capital works projects, as part of long-awaited and extensive reforms expected in the moribund banking sector.

Mr Lou Jiwei, a senior official of the Commission for Restructuring the Economy, said at the weekend that the Long-Term Development and Credit Bank, planned for early next year, would fund projects in 'vital sectors', such as those of energy and transportation.

Mr Lou, a close adviser to Mr Zhu Rongji, China's senior vice-premier in charge of the economy, also confirmed that an Export-Import Bank would be established in the new year to 'stimulate' exports of machinery and electronics.

Announcement of the formation of the new 'policy-lending' banks, plus indications that the People's Bank of China (PBOC) would have its functions as a central bank more clearly defined under a new central bank law, follows extensive consultation with officials of the World Bank, the IMF and other international institutions.

World Bank officials have urged China to relieve its specialised banks of the policy-lending burden for large capital works projects. 'Priority investment, especially in long-gestation or very expensive projects, belongs to an institution similar to the policy banks' described by Chinese economists,' a World Bank report said.

'These investments could be financed by government-guaranteed bonds. This would obviously be accompanied by re-focusing the attention of existing banks on commercial activities. This will require much-strengthened supervision capacity in the central bank,' the report said.

Chinese officials indicated at the weekend this process was already under way, with emphasis on tightening the regulatory functions of the People's Bank of China under Mr Zhu's governorship.

Among the World Bank's recommendations is that the PBOC be shorn of its non-central bank functions such as ownership of securities companies and mutual funds to allow it to 'focus on its primary role as a central bank', on the lines of the US Federal Reserve.

Western bankers in Beijing say that any step towards strengthening and streamlining the central bank's operations is welcome, but they are sceptical about plans for sweeping reforms of the banking sector.

They point out that China's 'big four' specialised banks - the Industrial and Commercial Bank, Bank of China, Construction Bank and Agricultural Bank - are heavily burdened by non-performing loans to state enterprises.

Transformation of these institutions into commercial banks would require an enormous commitment of government funds which may well prove beyond the resources of the central government.

The World Bank, in its recommendations, suggested that subsidies for loss-making state enterprises and allocations for agricultural procurement be removed as 'a matter of priority' from the responsibility of the banking sector.

'This type of lending,' the bank said, 'belongs to the budget.'

SOMETHING unprecedented in the post-war era has been happening over the last few years: bonds have been a better investment not only than cash but even than equities. The question is how long this performance can last.

A report* published in July by a British investment advisory boutique brings together the facts and assesses both the process and the prospects. The chart, taken from that paper, shows the value of an assumed investment in the Standard & Poor's composite index, with reinvestment of dividends, since 1957, relative to cash. Over the entire period the lucky investor would have earned 3 1/2 times more in equities than in cash.

Not so the hapless investor in bonds. Over the same years the value of a US bond portfolio, with reinvestment, would have fallen by about a quarter, relative to cash. The UK offers a similar picture, although Germany, not surprisingly, is a country where bonds have been a somewhat better investment than cash.

Bad things, like good things, do come to an end. The turnaround for US bonds relative to cash came in the early 1980s, thanks to Paul Volker's disinflationary heroics at the Federal Reserve. More remarkably, global returns on bonds have outstripped those on equities since 1987, while returns on bonds have exceeded those in equities in each of the main financial markets since 1990. The advantage of bonds has been very small in the US, where the equity market has been buoyant, but huge in Japan. A Japanese investor who bet on the bond market in 1990 would have made 31 per cent per annum more than in the equity market, on average, since then. In the UK the margin in favour of bonds has been 5 per cent per annum, on average, over the period.

Theory suggests that ex ante returns on different assets should be the same, allowing for risk. So equities should be more profitable than bonds and bonds more profitable than cash over any long period. This is not what has tended to happen.

Furthermore, if the return on bonds is to be the same as that on cash, allowing for risk, a steep positively sloping yield curve, such as the one now in effect in the US, implies that bond prices are expected to fall and vice versa. If bonds have returned much less or more than cash, these expectations cannot have been fulfilled. Up to the early 1980s bond prices fell more than expected. Since then they have risen more than expected. The main reason for this is that inflation outstripped expectations for a long period. But since the early 1980s the reverse has been the case.

The authors of the study argue, however, that the reason for the market's mistakes has not just been unanticipated developments in inflation. The market has also not been processing the information available to it efficiently. In particular, bond prices should be relatively high when short-term interest rates are much below long ones, because bond prices should then be expected to fall, and vice versa. In fact, the yield gap has been a poor predictor of subsequent changes in bond prices. The authors of the report argue that they have been able to identify better predictors, which means that an active trader should be able to earn higher returns than a passive holder of bonds.

What now? Whether or not traders can outperform the market, the principal determinant of exceptionally high relative returns on bonds is bound to be unexpectedly low inflation (or unexpectedly low real rates of interest). Since the inflation expectation implied by present bond yields is already around 3 per cent in the US, the chances of further favourable inflation surprises may be relatively low.

At the same time a trading rule the report recommends is to hold bonds when the gap between bond yields and short rates has recently risen and hold cash when it has recently fallen. On that basis too, the chances of further high returns may be modest, at least on US bonds.

Andrew Smithers and Stephen Wright, The Outlook for Bonds, July 1993, Report No. 43, Smithers & Co, London. Tel: 071 377-3765; fax: 071 377-3292.

UN weapons inspectors investigating Iraq's missile installations say they are struck by their remarkable similarity to Argentina's Condor II missile complex, closed in 1990 by President Carlos Menem, writes John Barham in Buenos Aires. UN officials recently in Argentina were quoted as saying the similarity of the production plants and missiles gave them insights into how the larger Iraqi project worked. Argentina, Iraq and Egypt co-operated closely in developing missile technology in the 1980s.

Mr Ibrahim Mohamad, a prominent Malaysian businessmen, has been fined MDollars 500,000 (Pounds 131,000) for his share-dealing on the Kuala Lumpur market this year, writes Kieran Cooke in Singapore. He pleaded guilty to illegal dealing in Union Paper Holdings, a small paper mill operator listed on the second board of the Kuala Lumpur exchange.

Guatemalan President Ramiro de Leon has demanded that members of Congress and Supreme Court judges resign as part of his campaign to rid state bodies of corruption, writes Edward Orlebar in Guatemala City.

This follows weeks of criticism in the media and among civilian organisations, which have called for a purge of Congress and the court.

THE CHILEAN government has proposed a solution to the Dollars 4bn (Pounds 2.66bn) subordinated debt issue that has plagued domestic banking for a decade, writes David Pilling in Santiago.

Ten of Chile's commercial banks owe the central bank Dollars 3.9bn. This dates back to 1983 when the state took over their non-performing loans to prevent a collapse of the banking system. Banks have since been obliged to repurchase these debts yearly by handing over 70 per cent of their after-tax profits to the central bank.

A reform bill, to be sent to Congress today or tomorrow, seeks to end the repayment period after 40 years. Banks with a realistic chance of achieving this would continue to pay the 70 per cent of profits to the central bank, but would be subject to an 'efficiency test' stipulating a minimum rate of profit. Those with less prospect of repurchasing all their outstanding debts within the 40 years - which include Banco de Chile and Banco de Santiago, two of the country's biggest - would issue convertible bonds to cover the shortfall. This would imply a dilution of existing shareholder stock, and is likely to be controversial in Congress.

In return for their agreement to new repayment terms, banks - participating voluntarily - would be allowed to take on new activities such as factoring, securitisation and setting up international finance consultancies abroad.

MR Nelson Mandela, president of the African National Congress, yesterday refused to punish ANC officials found guilty by the organisation's commission of inquiry into murders, torture and other human rights abuses in ANC prison camps in the 1980s.

The commission, which was appointed by Mr Mandela, last week called on the ANC to punish those involved in the deaths of 22 detainees, and other cases of abuse and injury, and to pay compensation to victims or their families. Mr Mandela rejected these recommendations, calling instead for a 'Truth Commission' to investigate all cases of human rights abuse, including those involving government officials.

Mt Cyril Ramaphosa, the ANC secretary general, drew a distinction between abuses carried out in defence of apartheid, and those committed in the fight for liberation. Asked whether the ANC believed that the ends justified the means in cases of human rights abuse, Mr Mandela replied: 'You can draw your own conclusions.'

He said the ANC accepted 'collective responsibility' for what happened. He went on to excuse the abuses by saying that they were committed 'in an attempt to prevent violations of human rights by the other side'. Mr Mandela said any compensation to victims would have to be paid by a future government, not by the ANC.

Meanwhile, he announced that Mr Thabo Mbeki, a leading moderate, had been elected national chairman of the ANC. This will boost Mr Mbeki's chances to succeed Mr Mandela as president. Mr Ramaphosa, another moderate, is the other possible successor, though he has come under increasing criticism for making too many concessions to whites.

A Chinese worker (left) cycles past the toll gates of a new highway, near Beijing's international airport, due to be opened next month. Meanwhile, water spills at the weekend from a ruptured dam at a reservoir in China'a remote north-western Qinghai province. The flood obliterated several villages, 223 people were killed and 180 were missing

THE INTERIM government of Nigeria faces the first real challenge to its authority today.

If a national strike called by unions and the pro-democracy movement can hold firm on the first working day after a long weekend, the economic pressures on the new government installed by the country's military will be considerable, for the main business and industrial centres, Lagos and Ibadan, will have been paralysed for nearly a week by absenteeism and strikes.

The Nigeria Labour Congress called its members out on Saturday to protest against the former military government's failure to return the country to full democracy. The congress wants the interim government to honour the result of the presidential election in June, which was annulled by Gen Ibrahim Babangida, the military ruler who stepped down last Thursday.

Oil workers have been on strike since Saturday, but production of crude for export was not thought to be affected.

Civil service unions say they will walk out from today.

Road transport is paralysed due to a chronic shortage of locally refined fuel.

The introduction last week of a two-tier price system for petrol, with a new grade costing 10 times the price of the current subsidised fuel, has led to panic buying.

Chief Ernest Shonekan, Nigeria's new head of government, on Sunday ordered the release of three prominent political prisoners and several journalists detained on conspiracy and sedition charges. But a military decree to ban several opposition newspapers and magazines is still in force.

Mr Beko Ransome-Kuti and fellow lawyers Mr Gan Fawehinmi and Mr Femi Falana had been jailed since July 7 for organising demonstrations against the cancellation of the presidential poll results. They support the claim to the presidency of Chief Moshood Abiola, the Moslem millionaire businessman credited with having won the contest.

The pro-democracy campaign is planning to hold rallies in the northern cities of Kano and Kaduna, where support for their demands has been lukewarm.

See editorial comment

ECONOMISTS who dared to speculate on the direction of German interest rates last week are now pondering the question of where German monetary policy goes from here after the decision not to cut rates.

The question is delicate at a time when there is suspicion in some European capitals that the Bundesbank takes pleasure in wrong-footing those who try to guess the timing and scope of future interest rate moves.

The economic factors governing policy are conflicting - inflation is on the way down, according to Mr Otmar Issing, the Bundesbank's chief economist and member of the policymaking directorate, and this should lead to lower interest rates. But money supply growth - the yardstick by which the German central bank steers its interest rate policy - is running well above the bank's target range.

Price stability and the defence of the German currency have long been at the core of Bundesbank policy. But there is another factor - the worst downturn in Germany since the second world war.

Mr Issing declared last Friday that monetary policy would increasingly take its cue from the German recession, implying that the Bundesbank wanted to do its bit to alleviate the problems suffered by German industry.

In practice, however, Mr Issing's concern about the recession is likely to mean that interest rates will eventually come down, but only at a slow pace. Comments by Mr Hans Tietmeyer, vice-president and president elect of the Bundesbank, also point to lower rates and concern for the wider economy. Mr Tietmeyer said recently that further appreciation of the D-Mark within Europe was undesirable in the light of German exporters' need to remain competitive.

But the Bundesbank finds itself between a rock and hard place. On the one hand it wants to cut rates, which would help alleviate the recession. On the other, despite signs inflation is on its way down, the Bundesbank is still constrained by money supply growth. As it never tires of explaining when setting out its ideological stall, current money supply growth is the determinant of inflation two or three years down the road.

To some extent, the latest M3, or broad money, figure is distorted - chiefly by the effect of the Bundesbank's interventions in the currency markets in recent months. This will feed through into the August number and will ensure that for a fifth month M3 growth will exceed the target.

'The big problem is that the Bundesbank has not successfully dealt with an increase in money supply which dates back to German reunification (in 1990),' says Mr Joachim Fels, economist at Goldman Sachs in Frankfurt 'The reason we have high inflation now is because of monetary growth several years ago.'

The Bundesbank's room for manoeuvre is helped by the widening of fluctuation bands within the exchange rate mechanism. The most likely next step is a cut of 50 basis points at most in the discount rate. This is currently at 6.75 per cent and a cut from this level could be justified on 'technical grounds' because of the narrow margin between this rate and current money market rates.

'The Bundesbank likes to engage in practical psychology,' says Mr Fels. 'It must strive to keep hopes of further interest rate cuts alive. The only way it can do this is by giving the market less than it expects, and more slowly.'

NORWAY'S Industry and Energy Ministry has rejected applications for new oil and gas exploration offshore acreage submitted by the Norwegian subsidiaries of Royal Dutch/Shell and Exxon Corporation, according to leaked reports.

Mr Finn Kristensen, industry and energy minister, is due tomorrow to announce the award of 50 blocks of new acreage offered under Norway's 14th licensing round. Both companies said yesterday they had submitted 'selective' applications based on their respective technical and profitability assessments of the blocks on offer. Neither Shell or Esso, Exxon's Norwegian subsidiary, said they had demanded 'special' conditions or treatment of their applications.

Mr Einar Knudsen, director of information at Norske Shell, said the company had told energy officials that its return on investment for exploration drilling had to increase.

Mr Per Schoeyen, public affairs manager of Esso, said if his company failed to win any fresh exploration acreage it would not be seen as 'dramatic'.

Both Norske Shell and Esso have criticised Oslo's tough fiscal and licensing regimes. Other foreign oil companies have said that Norway, which faces tough competition from emerging oil and gas producers, should provide incentives for maintaining foreign investment.

'It takes longer for opportunities in new areas to materialise and I think Norway is exploiting this opportunity to drive a hard bargain while it can,' one industry official said yes-terday.

Norway's ruling Labour party, facing a general election next month, got a boost from a poll yesterday showing that Norwegians backed its controversial decision to seek membership of the European Community, Reuter reports from Oslo.

THEY are usually aged between 36 and 45 years. Most have a background in science or engineering. And - perhaps inevitably - nine out of 10 are men. Three years after Poland embarked on its 'big bang' policy of economic liberalisation, the new entrepreneurs are not only thriving, but providing the backbone of the country's attempts to emerge from recession.

Even more significantly - according to a recent study by the International Finance Corporation - the focus of their market skills is shifting. Instead of simply trading, as they did in the early days, in imported 'luxuries' such as alcohol or frilly undergarments, Polish entrepreneurs are moving into manufacturing, producing goods ranging from car parts and plastics to homoeopathic remedies.

The IFC says the shift has left Poland's private sector arguably the best developed in East Europe, providing more than 50 per cent of Poland's GDP and employment.

For those who wonder whether this can be repeated elsewhere in Eastern Europe, the IFC's case studies are illuminating.

The key to the Polish would-be capitalists is, the study claims, their economic 'agility'. Poland is apparently peppered with academics who have turned their hand to producing hot dog kiosks, farmers who have switched their skills from hop growing into spice marketing, and engineers who have moved from metal work to meat processing to publishing and back again.

With credit hard to raise, and interest rates high, most starting capital has come from family funds, often gained from speculative trading during the late 1980s.

Nevertheless, a familiar litany of problems remain: loans are difficult to obtain, trading bureaucracy is Byzantine, market information is scarce, and almost all entrepreneurs report being plagued by that old problem - the crackly telephone.

Coping with Capitalism: The New Polish Entrepreneurs. The International Finance Corporation, 1818 H Street, NW Washington DC.

RUSSIAN troops are to be withdrawn from the Baltic republic of Lithuania today on schedule, Mr Algirdas Brazauskas, the Lithuanian president, said yesterday in a national radio address.

A spokesman for Russian Presdent Boris Yeltsin later confirmed the troops' withdrawal, but refused to say if it would be today.

The normally good relations between Russia and Lithuania were soured earlier this month when Russia said it would suspend the withdrawal of 2,500 service personnel and their families because Lithuanian negotiators had insisted on raising the issue of compensation for damage done since the first Soviet occupation in 1940.

Russia is in neither the mood nor any condition to make reparations for a Soviet past it disavows. Evidence of this came yesterday when Mr Sergei Filatov, chief of staff to Mr Yeltsin and chairman of a commission to determine events which led up to the shooting down in 1983 of the South Korean civilian airliner KAL007 over Soviet airspace, said that the Soviet Union bore no guilt for the incident.

Mr Filatov said pilot error had taken the plane 350 miles off course, deep into Soviet airspace.

THE French government yesterday quietly vaunted its cautious monetary policy as helping to stabilise the economy, despite the news that unemployment rose further to 11.7 per cent in July, from 11.6 per cent the month before.

Mr Edmond Alphandery, the economy minister, claimed, in highly qualified terms, that 'the hypothesis of (the economy) emerging from the tunnel (of recession) at the end of this year or at the latest at the start of 1994 is far from unrealistic'.

In his interview with La Tribune newspaper, the minister, evidently chastened in his public pronouncements by the recent monetary storms, said that after the rate of decline in industrial production had slowed in the first half of this year, 'to all appearances, we are therefore now at the bottom of the cycle, at a weak level of economic activity'.

But with long-term interest rates still slightly below those of Germany, and short-term rates finding again their pre-August crisis level, the minister said the government had no intention of 'changing the direction' of its economic and financial policy.

The one lesson to draw from the recent crisis of the European exchange rate system was that 'economic convergence is a precondition for monetary convergence', Mr Alphandery said, in a marked shift from the position held by previous French ministers during the Maastricht treaty negotiations.

France's conversion to the necessity for convergence with Germany was reflected, Mr Alphandery said, in the decision by Bonn and Paris to work together in preparing medium-term budgetary plans.

Despite the claims of ministers to see light at the end of the economic tunnel, the government itself has forecast that unemployment will keep rising until early 1994. It has moved to improve the cash position of companies by refunding their VAT payments more quickly, but most are reluctant to hire new workers until they see real evidence of a pick-up in consumer demand.

Mr Alphandery said there was now evidence of improvement in the beleaguered construction sector, but admitted many sectors were still in recession.

THE headlines in Belgrade newspapers each day reflect a human tragedy as the Serbian economy suffers under the weight of United Nations sanctions. 'Babies are dying,' one says, while others claim that 'starving pensioners are committing suicide' and 'grocery store shelves are bare'.

After months of virtually ignoring the west, Serbian leaders have launched an offensive to get sanctions lifted on humanitarian grounds. Mr Milorad Unkovic, federal minister for foreign economic relations in the rump Yugoslavia, which comprises Serbia and Montenegro, said there was 'great danger with the approach of winter. People will not be able to heat their homes.'

The economic decline of Serbia shows no sign of bottoming out. Inflation in August ran at a monthly rate of 1,500 per cent. The Yugoslav National Bank yesterday issued a 1bn dinar banknote worth less than Dollars 3.

Industrial production in June dropped by 37 per cent compared with the same month last year and hundreds of thousands of workers have been sacked as factories close.

Serbian health care is suffering badly. Medicines and food are not covered by sanctions, but 'if you need surgery, bring your own medicines, needles, anaesthetics and linens, or commit suicide if you don't have money,' said Mr Predrag Simic, director of the Belgrade institute of international politics and economics.

If a settlement is reached in Geneva this week for a partition of Bosnia, Serbia will step up pressure for lifting sanctions. But if sanctions were eased, Serbian President Slobodan Milosevic would be rewarded for destroying Bosnia and creating Greater Serbia.

Russia has called for sanctions to be eased if progress is made on partition but the US says it is far too early even to discuss such measures. Proponents of sanctions on Serbia are convinced that they represent the only means of containing an aggressive state, which is now a regional military power.

However Mr Vladislav Jovanovic, Serbian foreign minister, warned that 'sanctions have become the biggest generator of instability in the Balkans'. Serbian officials point to a growing number of countries hit by 15 months of sanctions on Serbia: Greece, Romania, Bulgaria, Ukraine, and Hungary have all sustained large losses, while officials from Macedonia say sanctions are harming the former Yugoslav republic even more than Serbia, its northern neighbour.

The imposition of sanctions against Serbia has proved to be one of the few issues on which the west was united. But removing them looks likely to be yet another divisive issue.

MR Cornelio Sommaruga, president of the International Committee of the Red Cross, warned yesterday that modern warfare would descend into 'absolute chaos' if governments did not stop violations of humanitarian law.

Opening a three-day conference in Geneva on the protection of war victims, Mr Sommaruga stressed that signatories of the 1949 Geneva conventions and the 1977 protocols protecting non-combatants were committed not only to upholding the rules themselves but to ensuring others also did so.

The ICRC and the Swiss government, depositary state for the conventions, called the conference at a time of mounting violations of international humanitarian law. Red Cross and United Nations aid officials have described the fighting in former Yugoslavia as the most savage in recent memory, but many other conflicts reveal a similar picture of carnage and brutality.

The ICRC is particularly alarmed by two new developments: the targeting of civilians as a war objective and the obstruction of humanitarian relief efforts, including attacks on aid workers and contempt for the Red Cross emblem.

Ministers and officials from some 160 countries attending the conference are expected tomorrow to endorse a declaration backing outside intervention to prevent violations of humanitarian law and supporting UN moves to establish a permanent war crimes tribunal.

The ICRC, which monitors the Geneva conventions, admits it faces a paradox. While urging signatory states to enforce the conventions, it maintains a neutral stance that prevents it from exposing specific wrongdoing or giving evidence to a war crimes tribunal. 'If they thought we were there to collect information they would not allow us to fulfil our mandate,' Mr Sommaruga said recently.

However, this policy is being debated within the ICRC, which has been stung by criticism that it was slow to reveal the existence of detention camps in Bosnia.

Another paradox is that many of those involved in current, mainly civil, wars are not attending the conference. Invitations went only to UN members and observers.

THE trucks cluster each evening in lay-bys close to Macedonia's border with Serbia, waiting for UN sanctions monitors to go off duty. But even if the monitors stay up late, the drivers, keeping in touch through walkie-talkies, can choose from dozens of unwatched tracks to cross the frontier.

As measures to enforce sanctions against Serbia and Montenegro have tightened along the Danube and Serbia's border with Bulgaria, Macedonia has become the main supply route for the rump Yugoslavia.

According to the UN protection force, which also monitors the border, about 4,000 trucks make the crossing in both directions every week. Vehicles carrying oil products, construction materials and spare parts for heavy machinery have been spotted, but not stopped.

The 38-member sanctions assistance mission, made up of customs officers from several countries, encourage the Macedonian customs service to inspect loads crossing the border. But it has no authority to enforce the sanctions.

'Once in a while the customs will follow our suggestions, but whole days go by when no trucks get inspected,' said Mr Gordon Evers, a Canadian customs official leading the SAM team.

The rail link between Athens and Belgrade is still in operation. Two or three freight trains leave Skopje every night and tanker trains carrying oil head north several times a week.

Macedonia, which was admitted to the UN earlier this year, has formally backed the embargo against Serbia, its main trading partner. The government claims that the sanctions cost the Macedonian economy more than Dollars 1.2bn (Pounds 810m) last year.

However, government officials argue that the economy is so battered by the loss of trade with Serbia, together with the effects of more than a year of diplomatic isolation, that it cannot be expected to apply sanctions fully unless compensation is guaranteed.

'We ask the UN about compensation and they refer us to the European Community. There's no money in sight, but we have to cope with another 15 per cent fall in industrial output this year and an unemployment rate of more than 30 per cent,' says a government economic adviser.

Macedonian officials admit, too, that their enthusiasm for complying with sanctions has been diluted by delays in the arrival of Ecu100m (Pounds 76.4m) in EC aid, promised last December.

Half of that amount is being contributed by member states on a bilateral basis, with the rest provided by the European Commission.

The government also claims it is being blackmailed into shipping oil to Serbia by Greece, which is Macedonia's main source for oil supplies.

According to a senior Macedonian official, Greece last month threatened to cut off all oil shipments to Macedonia unless half the supply from the northern Greek port of Thessaloniki, amounting to more than 80,000 tonnes monthly, was sent on to Serbia.

MR Alija Izetbegovic, Bosnia's president, yesterday cast doubts on the prospects of reaching a peace agreement when talks resume today in Geneva, saying 'he felt like a thirsty man sent to find water in the desert'.

Mr Izetbegovic, a Moslem, is due to meet his Serb and Croat adversaries after international mediators set a deadline of this week for them to endorse the republic's partition.

A UN official yesterday warned against any side seeking 'radical' concessions instead of minor territorial adjustments of the package put forward by peace envoys Lord Owen and Mr Thorvald Stoltenberg. 'Those concessions and the whole package are not going to stay on the table indefinitely,' said the official, adding 'bits and bobs are one thing but whole shopping lists are another'.

The next days would determine whether the peace was to be given a chance or whether there was to be an intensified conflict, the official said.

Bosnia's ruling assembly rejected the 'compromise package' at the weekend for failing to restore government control over territory that was mostly Moslem before the war. The assembly also criticised the plan for failing to provide sufficient Nato and US guarantees that it would be enforced.

After his assembly backed the plan, Mr Radovan Karadzic, the Bosnian Serb leader, repeated threats that the Moslems would be left with nothing if they rejected the offer.

Bosnian Croat leaders said they would seek some minor changes in the plan, reportedly along Bosnia's frontier with Croatia which, under the proposed map, was mostly designated part of the Serb republic.

The peace envoys have expressed their disappointment in failing to wring more concessions from Bosnian Serb leaders. Serb forces currently control about 70 per cent of Bosnian territory. The proposed map gives Serbs about 54 per cent, Croats 17 per cent, and Moslems some 28 per cent.

Lord Owen last week said the settlement was the best deal he could salvage for the Moslems, Bosnia's biggest ethnic group comprising 44 per cent of the pre-war population.

But Mr Izetbegovic, speaking after yesterday's talks were postponed until today because the Bosnian delegation had difficulties in leaving Sarajevo, was reported to have said: 'Our people need peace, and the proposals being offered are worse than war.'

Meanwhile, the UN Security Council yesterday condemned the use of UN troops as pawns in the Bosnian war after Spanish peacekeepers spent a fifth day trapped in the Moslem sector of Mostar, AP reports. At least 53 Spanish UN troops have been unable to leave the eastern sector of the embattled city since Thursday. Moslems under Croat siege fear renewed attacks if the soldiers leave.

------------------------------------------------------ STOCK MARKET INDICES ------------------------------------------------------ Tokyo Nikkei 20,912.69 (+121.01) New York: Dow Jones Ind Ave 3,643.99 (+3.36) S&P Composite 461.9 (+1.36) ------------------------------------------------------ US CLOSING RATES ------------------------------------------------------ Federal Funds: 3 3/16% (3%) 3-mo Treas Bills: Yld 3.1% (3.085%) Long Bond 101 13/16 (101 9/16) Yield 6.12% (6.133%) Gold New York Comex Dec Dollars 373.3 (372.1) ------------------------------------------------------ STERLING ------------------------------------------------------ New York: Dollar 1.4931 (1.506) DOLLAR New York: DM 1.672 (1.664) FFr 5.8475 (5.8255) SFr 1.4725 (1.4685) Y 103.8 (same) Tokyo open Y 104.06 ------------------------------------------------------ London markets closed ------------------------------------------------------

Middlesex have won the Britannic Assurance County Championship. Their position became unbeatable when Northamptonshire failed to beat Leicestershire.

Singer Michael Jackson, facing allegations of child abuse in the US, collapsed backstage just before he was due to give a concert in Singapore.

Matsushita Electric Industrial of Japan demonstrated a TV screen which makes it possible to make a 14-inch set less than four inches thick. On sale in Japan from October, Flat Vision TVs will cost Y288,000 (Pounds 1,858), but Matsushita forecast screen prices would drop with mass production.

Nikos Gryllakis, ex-security adviser in Greece's ruling New Democracy party, was charged with masterminding a plot to tap the telephones of opposition politicians and rivals of premier Constantine Mitsotakis.

A new bout of pressure on the French franc, Belgian franc and Danish krone put more strain on the exchange rate mechanism's grid at the end of last week. At the close on Friday, some 8.13 percentage points divided the weakest currency in the system - the Danish krone - from the strongest - the Dutch guilder. The permitted fluctuation is 15 percentage points. Currencies, Page 29; Economic notebook, Page 17

Crack US troops stormed aid compounds in the Somali capital, Mogadishu, yesterday and detained United Nations staff in an operation aimed at capturing aides of fugitive Somali leader Mohamed Farah Aideed. Jamie McKindrick of the Save the Children Fund called the raid 'another blunder'. But the UN denied that the operation had been bungled and criticised staff of a UN aid agency and a French humanitarian agency for occupying buildings they were not authorised to use.

THREE MINISTERS are to speak at meetings organised by Conservative Way Forward, a Thatcherite group, during the Tory party conference, intensifying the pressure on Mr John Major, prime minister, from the right of his party.

The latest issue of Conservative Way Forward's quarterly magazine contained a vigorous attack on Mr Major's leadership, from Lord Parkinson, the former cabinet minister and chairman of the group.

High-profile ministerial support for the group will further undermine party managers' hopes that the October conference would provide the basis for a political revival.

Newspaper serialisation of Mr Kenneth Baker's memoirs is already raking over the divisions during the leadership contest of 1990. Tories are also apprehensive that Mr Norman Lamont, the former chancellor, will use a speech to a conference fringe meeting to cause further difficulties for the prime minister.

Mr Peter Lilley, the social security secretary, is the most senior of the three ministers to address the CWF. The others are Mr Michael Forsyth, the employment minister, and Mr Neil Hamilton, the deregulation minister. All will speak on matters within their own responsibilities.

Apart from Lord Parkinson's bitter accusation that Mr Major's 'disunited' government left natural Tory supporters feeling betrayed, the CWF also took a hard line earlier this month on taxation. Its magazine warned that there could be a further rebellion from the right wing if Mr Kenneth Clarke, the chancellor, extended the base for value added tax, without making deep cuts in public spending.

Mr Michael Portillo, the Treasury chief secretary, recently refused to rule out tax rises, although he made clear his opposition to such increases and his desire to reduce public spending.

However, despite Mr Portillo's rightwing credentials, rightwing MPs are not yet convinced the government will be as tough on public spending as they want.

Further divisions could surface over the second group of government departments to feature in the long-term public spending review. These are expected to include the ministry of agriculture and the department of the environment.

NORWAY hosted several clandestine meetings between Israelis and Palestinians to help secure the interim agreement on resolving the Middle East conflict, Norwegian officials said yesterday, writes Karen Fossli in Oslo.

Representatives of both sides met in Norwegian farmhouses and in the private homes of Norwegian officials between April and August this year.

Mr Shimon Peres, Israel's foreign minister, and Mr Abu Ala, a top Palestine Liberation Organisation official, are said to have met for the first time earlier this year at the 19th century Borregaard farm near Sarpsborg, just south of Oslo.

Mr Johan Joergan Holst, Norway's foreign minister, said his country's role as a 'back-door' mediator was central to what he described as a historic breakthrough.

There were 25 meetings in all, he said. They took place, with Washington's blessing, in Norway, elsewhere in Europe and in Tunisia.

Five Norwegian representatives made up a special mediating team. They included Mr Holst, his wife, Ms Marianne Heiberg, a foreign policy researcher, Mr Jan Egeland, secretary of state in the foreign ministry and Mr Terje Roed-Larsen, head of Norway's Trade Union Centre for Research and Documentation, and his wife.

Norway, currently governed by the Labour party, gained the trust of the PLO and Israel largely because of its traditional ties to Israel's Labour party, earlier meetings with PLO leader Yassir Arafat and Norway's status as a founding member of Nato.

The Borregaard farm is thought to have been chosen as one of the sites for talks because it is owned by Orkla, the listed paper and food group. Mr Jens Heyerdahl, Orkla's chief executive, has close links with Mr Roed-Larsen, a leading figure in the Norwegian team at the talks.

LEADING trade negotiators expressed concern in Geneva yesterday that France is bent on undermining the Uruguay Round of talks on world trade liberalisation.

This follows French insistence that its European Community partners must water down a farm trade agreement with the US which Paris claims the European Commission should not have negotiated with Washington last November. French officials will this week continue discussions with Germany on Paris's proposed changes to the so-called Blair House accord on US-EC trade in subsidised farm goods.

But in Geneva yesterday, trade officials from 106 countries, gathering for three critical months of negotiation which were intended to finalise the long-stalled Uruguay round, warned that reopening the Blair House agreement would scupper the round.

'If the EC were formally to ask for Blair House to be reopened, you can forget the Uruguay round,' one leading negotiator predicted. The round was launched in 1986, but stalled in 1992 because of EC-US conflict on farm trade reform.

The French push follows a meeting last week between Mr Edouard Balladur, France's prime minister, and Chancellor Helmut Kohl of Germany, when Mr Kohl appeared to endorse France's call for renegotiation.

German officials have been at pains since then to insist that the German leader's comments were misinterpreted. But the confusion in their wake has led to speculation that the EC might be forced to renege on a deal that took a year to negotiate.

Mr Peter Sutherland, the new director general of the General Agreement on Tariffs and Trade (Gatt), is expected to give a clear but coded signal to France to modify its position when he begins the autumn talks at a top-level trade negotiations committee in Geneva today. He will call for governments to exert political leadership in the face of pressure from lobbies.

Senior officials in Mr Kohl's office yesterday reiterated that Germany did not seek formal renegotiation of the US-EC farm agreement. They said the government was aware that Blair House could not be renegotiated, even in parts, without putting the Uruguay round at risk.

Confusingly, a spokesman then added that the Blair House accord had 'neither been signed nor finally signed . . . It is of great importance that this agreement is compatible with the EC common agricultural policy.'

Mr Sutherland will meet Mr Kohl in Bonn tomorrow to seek clarification of last week's comments. A meeting with Mr Balladur is due next Wednesday.

ISRAEL last night committed itself to a historic peace agreement with Palestinians which could be a first step to ending a conflict that has wracked the Middle East for decades.

Mr Yitzhak Rabin, prime minister, said Israel would sign an unprecedented accord with Palestinians at peace talks which resume in Washington today.

This is expected to provide for a degree of Palestinian self-rule in the Israeli-occupied West Bank and Gaza Strip, and conditional Israeli recognition of the Palestine Liberation Organisation, according to Mr Shimon Peres, foreign minister, who concluded the agreement in secret talks with a PLO representative in Norway last week.

Following the announcement by Mr Peres and Mr Rabin, an extraordinary session of the Israeli cabinet approved the peace plan by an overwhelming majority. Ministers said that 16 members of the cabinet were in favour and two abstained.

Mr Peres said: 'It's a beginning and there is a lot of work ahead of us. We are determined to bring peace to the whole of the Middle East.'

A senior official of the PLO confirmed the agreement and said it could be signed within 48 hours. Egypt welcomed the move, but Palestinian and Israeli extremists condemned it and warned of violent opposition.

In Washington, Mr Michael McCurry, the State Department spokesman, said: 'We hope and expect that this progress will now be reflected in the next negotiating round and will lead to an early agreement on a draft declaration of principles.' President Bill Clinton warned, however, that 'we've still got a long way to go'.

The agreement is a comprehensive package providing for:

A five-year interim period of self-rule for 1.8m Palestinians in the territories occupied by Israel since the 1967 Arab-Israeli war.

A partial Israeli military withdrawal from the occupied Gaza Strip and an undefined enclave around the West Bank town of Jericho.

Mutual recognition between Israel and the PLO.

If signed, and not derailed by Israeli and Palestinian extremists, the plan could hasten progress towards a comprehensive Middle East peace agreement between Israel and all its Arab neighbours. Mr Rabin told ministers it was 'a great step forward to advance Israel towards peace with all the neighbouring states and especially Palestinians. I believe this will happen'.

The Palestinians will be granted full authority over their internal affairs, including policing in Gaza-Jericho, but will have lesser powers in the rest of the West Bank. Jericho, a small dusty town in the parched Jordan Valley, will become the administrative capital for the expanded elected Palestinian authority. Bethlehem will be the site of the lesser authority governing the rest of the West Bank.

Israel will redeploy troops out of population centres in Gaza-Jericho, but will still provide a security role for the estimated 6,000 settlers on the outskirts of Gaza and Jericho. Israel will keep full control of occupied Arab East Jerusalem, the Israeli settlements and the Israeli-Jordanian and Israeli-Egyptian border crossings, at least until talks begin on permanent arrangements two years after the interim pact is signed.

Mr Peres said yesterday Israel could recognise the PLO as part of the deal if the organisation completely renounced violent acts and gave up parts of its charter calling for the extermination of the Jewish state. Once signed, the deal could trigger progress on stalled bilateral peace talks between Israel and Syria, and Jordan and Lebanon.

Public announcement of the deal yesterday sparked immediate protest. Rightwing parties in Israel's parliament heckled and shouted down Mr Peres as he tried to explain the peace package and last night up to 2,000 demonstrators protested outside the cabinet meeting.

On the Palestinian side, the Islamic fundamentalist Hamas movement, the PLO's main rival, accused the PLO of betraying Palestinian aspirations and warned of a Palestinian civil war. Another extremist organisation, Mr Ahmed Jibril's Popular Front for the Liberation of Palestine-General Command, threatened to assassinate Mr Yassir Arafat, the veteran PLO chairman who pushed acceptance of the peace plan through his hostile executive committee.

Mr Rabin moved to deflect potential criticism among Israelis by arguing that Israel had made no concessions on the two most sensitive issues: East Jerusalem and the settlements. 'Jerusalem remains under Israeli sovereignty and is its capital. The settlements remain. None will be uprooted,' he said.

An overnight poll for Hebrew tabloid Yediot Ahronot showed 54 per cent of 523 Israelis interviewed backed the plan and 45 per cent were opposed.

Palestinian divisions exposed, Page 5 US still cautious, Page 5 Hair trigger peace, Page 15

A pregnant French woman with a young child and an unemployed husband has gone on hunger strike in Grenoble to try to win back her FFr 3,000 (Pounds 345) a month job as a secretary.

THE success of Banque Nationale de Paris' privatisation this year was critical to the prospects of the rest of the Balladur government's privatisation programme. The government did everything it could to ensure the issue was a success - from launching a lavish advertising campaign to pricing BNP's shares, at FFr240 each, well below market expectations.

To the government's relief, the issue was indeed a roaring success. Michel Pebereau, who was this summer parachuted into the BNP chairman's seat from Credit Commercial de France, now faces the challenge of getting to grips with the management of one of Europe's biggest banks.

Analysts are confident that there is lots of scope for improvement. BNP saw net profits fall sharply to FFr552m in the first half of this year after sliding to FFr2.1bn in 1992 from FFr2.6bn in 1991.

However, most observers suspect that Mr Pebereau has taken an aggressive stance on provisioning. There is also plenty of potential for cost-cutting and for weeding out the poor performers among BNP's peripheral interests. The consensus is that BNP, aided and abetted by Dresdner Bank, its new German ally, should soon bounce back to profits growth.

----------------------------------------------------------------------- BANQUE NATIONALE DE PARIS (BNP) ----------------------------------------------------------------------- Market capitalisation on issue price FFr43bn Government stake ----------------------------------------------------------------------- 1992 1991 ----------------------------------------------------------------------- Net banking income FFr40bn FFr38bn Net profits FFr2.1bn FFr2.9bn -----------------------------------------------------------------------

Courtaulds, the chemicals group, is being sued by Flamemaster Corp. of the US for Dollars 75m. Courtaulds has said the suit was 'without foundation'. Yesterday's edition reported incorrectly that Courtaulds Textiles was the defendant.

SCOTLAND'S parliament-that-never-was, a debating chamber built in Edinburgh in the late 1970s, is to be scrapped, the government said last night.

The Scottish Office said it had 'no foreseeable need' for the building beyond next year. It will then be decided whether to sell it or offer it to other government departments.

In recent years the debating chamber has been occasionally used for meetings of the Commons Scottish Grand Committee.

Shares in National Medical Enterprises plunged yesterday on news of FBI raids of the hospital company's offices and hospitals in a national investigation of possible health insurance fraud, writes our New York staff.

On Wall Street, shares in National Medical dropped Dollars 3 1/8 to Dollars 8 yesterday. The company used to own the British nursing home group, Westminster Healthcare Holdings, and now holds 42 per cent of its shares.

National Medical is already facing suits from many of the big US insurance companies alleging that National Medical defrauded them of more than Dollars 750m (Pounds 507m), and more than 100 former patients have sued the company for fraud, physical mistreatment and false imprisonment.

National Medical has sued 19 insurers on charges of conspiring to delay or deny payments for patients.

California-based National Medical last year earned about Dollars 133m on revenues of about Dollars 4bn.

The probe is part of a Justice Department and FBI decision last year to give top priority to health care fraud.

MR DENNIS POTTER, the distinguished television playwright who has frequently written for the BBC, last night suggested that the corporation be broken up into smaller units.

Mr Potter told the Edinburgh television festival that the time was near when public service broadcasting had to be saved from the BBC.

'The old Titan should spawn smaller and more nimble offspring if its present controllers cannot be removed,' he said in the James MacTaggart Lecture which traditionally opens the festival.

The playwright suggested separating radio from television and turning BBC2 into a separate public service broadcaster.

'Let us begin to consider afresh how the thousands of millions of pounds of licence money could be apportioned between two, three or four successors to the currently misled corporation,' he said.

Mr Potter said the political pressure from market-obsessed radicals and the BBC's confused self-defence had drawn the organisation so heavily into the 'dogma-coated discourses' of 'market efficiency' that in the end it might lose sight of why it was there in the first place.

He attacked what he saw as a one-way system of communication in the corporation which carried signals laden with 'costive, blurb and bubble-driven didacticism'.

In a clear reference to Mr Marmaduke Hussey, the BBC chairman, and Mr John Birt, director-general, Mr Potter said: 'You cannot make a pair of croak-voiced Daleks appear benevolent, even if you dress one of them in an Armani suit and call the other Marmaduke.'

The BBC was under governors who seemed incapable of performing the public trust invested in them and under a chairman who seemed to believe he was heading a private fiefdom.

Mr Potter also argued for the vigorous enforcement and even extension of current cross-ownership provisions to prevent 'dangerous concentrations of the media power which plays such a large part in our lives'.

He said no individual, group or company should be allowed to own more than one daily, one evening and one weekly newspaper. No newspaper should be allowed to own a television station and vice versa.

Mr Will Wyatt, managing director of BBC Network Television, said last night: 'The world of broadcasting has changed. And the BBC must change as well . . . Radical reform was our only option. I make no apology for seeking a BBC that is well-run.'

Sir, In response to 'Doubts over effectiveness of Japan-style work practices' (July 19), here is an alternative view.

Oki's manufacturing site at Cumbernauld, Scotland, has adopted many Japanese working practices and combined them successfully with the best from western culture. The facility is committed to kaizen, or continuous improvement, and the close involvement of its staff. For example, every morning a meeting is held in each section where employees are able to discuss the previous day's activities and provide feedback to their supervisors. It is at these meetings, or chokai sessions, that everyone has an opportunity to participate in the company's affairs.

The strong communications links between staff and management on a variety of issues is vital to the culture that has been developed at Cumbernauld. It is this culture that resulted in Oki being presented with the Investors in People Award. At the ceremony, an assessor from Investors in People in Scotland said: 'I have not previously come across a workforce that has been so motivated, committed and enthusiastic.'

The 100 per cent commitment of staff and management has also brought tangible rewards in the form of new contracts. The key ingredient to such success is to select the elements that create the right working environment and to mould and build on them - not just to implement a rigid code that suffices business needs but does not take account of human requirements.

If the companies involved in your article had truly embraced the principles of kaizen and chokai, the outcome may might have been different. I encourage them to try again and invite them to visit our factory to see Oki's management style in action.

Christopher J Gill,

director,

Oki Europe,

Central House,

Balfour Road,

Hounslow,

Middlesex TW3 1HY

Mr Martin Sorrell's continued tenure as chief executive of WPP Group, the marketing company, is seen by many in the industry as proof that there is life after death.

If one refinancing in 1991, due to burgeoning debt, could be put down to bad luck, a second the following year must look like carelessness. In most other industries the price for avoiding receivership would have been the chief executive's head.

Yet Mr Sorrell remained at the helm of WPP while it restructured its borrowings. And earlier this week he announced that half year pre-tax profits to the end of June had jumped from Pounds 1.8m to Pounds 24.1m.

While Mr Sorrell is the first to admit that WPP is not yet out of the woods - it still has borrowings of about Pounds 350m - he can finally see light at the end of the tunnel. 'And thankfully,' he adds, 'there is no train coming the wrong way.'

The 48-year-old entrepreneur has avoided the fate of others who allowed borrowings to get out of hand, partly because creative people are the main assets of an advertising agency.

But his financial acumen, more than his talent as a copywriter, may have impressed the syndicate of 28 banks which helped keep his empire intact. Many in the US agencies Mr Sorrell controls loathe him for the fierce financial controls he has imposed, including salary cuts.

His survival also owed much to what one friend described as 'the sheer brute force of his negotiating tactics, which wore the bankers down'. Those who negotiated with Mr Sorrell over the past few years describe him variously as 'determined', 'desperate to succeed' and 'infuriatingly obstinate'.

According to Mr Sorrell he was 'no hired hand' that could just walk out when things got difficult. 'I had an enormous amount of emotional involvement; it was my baby and I wanted it to succeed.'

Mr Sorrell says the bankers were 'sensible enough to understand that to dispose of businesses would not have helped cash flow in the long term'.

As an only child, Mr Sorrell admits to being used to getting his own way. His father, who was chief executive of a radio electrical company, gave him a taste for business. He read economics at Cambridge and went to Harvard Business School.

Part of his studying was to examine the case of Mr Mark McCormack, the US lawyer who managed the affairs of sports stars and celebrities. Not content with studying him, Mr Sorrell ensured that he met him in person.

The two got on well, and after his first job working for Glendinning Associates of Connecticut, a small agency, Mr Sorrell was offered a job with Mr McCormack when he opened a London office in 1969. He moved into a London flat below that of Mr James Gulliver, then running Fine Fare, the supermarket group, and looking for a personal financial adviser. Mr Sorrell got the job and became one of the original shareholders when Mr Gulliver started James Gulliver Associates, which later became the Argyll Group.

Mr Gulliver took a small stake in the advertising company which became Saatchi and Saatchi. Mr Sorrell found himself giving the Saatchi brothers corporate financial advice and by 1977 he became their group financial director.

The Saatchis and Mr Gulliver had started from scratch and by 1985 Mr Sorrell was ready to emulate them. 'I began to have my male menopause at 40 and I decided it was time to do something on my own.'

With about Pounds 200,000, half of which he borrowed, he bought an interest in a small engineering company called Wire and Plastic Products, which made wire baskets. The object was to gain control of a small quoted company that could be used as a vehicle for acquiring other businesses.

In 1987, the famous New York-quoted advertising agency of J Walter Thompson was suffering a lack of strategic direction, losing money and big clients such as Burger King. WPP bought it for Dollars 525m (Pounds 354.7m). Two years later, in a contested bid, Mr Sorrell bought Ogilvy & Mather for Dollars 864m. 'With hindsight we paid too much for Ogilvy & Mather,' admits Mr Sorrell.

By 1990, the advertising industry was going into recession and WPP's revenues began to fall. A year later, the company was refinanced but its difficulties mounted and WPP failed to make scheduled dividend payments. That triggered a legal clause giving full voting power to owners of preference shares who found themselves with 78 per cent of the company's voting rights - forcing a second refinancing.

WPP's bankers do not disagree with Mr Sorrell's view that the deal proved satisfactory from their viewpoint. In the second refinancing the banks wrote off Dollars 275m of debt in exchange for 250m new shares, priced at an average 54p each. Yesterday the shares closed at 96p.

If most of the banks have been placated the same cannot be said of all institutional shareholders.

Some are angry that Mr Sorrell was given a five-year contract in 1989, which they regard as too long. Postel, the UK's largest pension fund, has written to Mr Gordon Stevens, WPP's chairman, to complain.

Mr Sorrell says his terms and conditions were fixed at the behest of some US institutions and points out that he waived Pounds 111,000 of his Pounds 510,000 salary this year .

At the same time, not all of WPP's investors are convinced that shareholder interests are best served in the long term by keeping the company together. WPP's recovery over the past year was based mainly on good performances from the group's US agencies. Revenues at J Walter Thompson and Ogilvy & Mather rose by 6 per cent and 4 per cent respectively. Neither is represented on WPP's board, prompting the questions about whether the agencies should be run separately.

Mr Sorrell says he is sure that keeping WPP's subsidiaries under a holding company has the effect of increasing total revenues. If WPP is to remain as one group, Mr Sorrell will have to prove that he can keep profits rising and convince his backers that his financial prowess remains indispensable.

ONE CONSTANT and unremitting theme of the post-war financial world has been the decline of the personal investor. Year in year out, almost without fail, the UK personal sector has appeared in the official statistics as a net disinvestor in company securities. Anonymous investment institutions have filled the gap, taking their stake in British equities up to two-thirds or more of the total value of the stock market. Not even the rhetoric of the Thatcher period, with its emphasis on popular capitalism and privatisation, was able to change the trend.

Then, last year, came a dramatic, though untrumpeted, volte face. The private individuals who had sold Pounds 19.8bn, Pounds 7.8bn and Pounds 2.6bn in 1989, 1990 and 1991 respectively, suddenly bought a net Pounds 3.6bn of equities. In the first quarter of this year they added a further Pounds 835m to their holdings. It looks suspiciously as though the collapse in the housing market has finally achieved what years of exhortation by Tory politicians and stock exchange chairmen so signally failed to bring about.

While richer individuals have been flocking back to the stock market, smaller retail investors have been pouring money into unit trusts. July alone saw a net Pounds 948m flood into the unit trust managers' coffers, taking the total for the first seven months of the year to over Pounds 5bn. That is more than the total cash flow of Britain's pension funds for the whole of last year - a remarkable reversal of another lengthy trend.

This shift in the balance of power between retail investors and the big investment institutions is partly a reflection of the traditional hunt for income at a time when interest rates are plumbing historically low levels. People have been withdrawing their savings from low-yielding deposit accounts at banks and building societies and putting them into unit trusts or shares.

Modest improvement

That pattern is repeated all the way up the investment scale. Within an overheated equity market higher yielding shares have out-performed for much of this year as investors have sought protection in income. Elsewhere the institutions have re-acquired an appetite for commercial property investment that they lost in the disinflationary 1980s. The big question in all this is whether the quality of the income compensates for the risk of falling prices.

By historic standards, the current dividend yield on British equities of 3.7 per cent looks low. Moreover dividends shrank last year in real terms and look set for only modest improvement this year. This does not, then, look the time to buy equities for the long term; but note that, after the 1967 devaluation, equities were exceptionally buoyant despite negative dividend growth. Today the market looks set to bubble away in comparable fashion until interest rates are perceived to have run their downward course. The mere fact that equities bounced back to record levels after the Bundesbank threw a wet towel on the proceedings on Thursday by failing to cut key interest rates suggests that this bull will take some stopping.

Heavily oversold

In property the long-term position is very different from equities. Despite the sharp recovery since last year yields are still historically high, relative to gilts, in a market which had been heavily oversold by the institutions. The problem for investors is that the excess supply of property, much of it in the hands of banks, is not all income-producing. The attraction of a higher yield than in gilts depends on the existence of a good quality tenant and a long lease with upward-only rent reviews.

Even here, there is a question mark in that underlying rental income continues to fall while capital values are rising. Many tenants are committed, under the terms of standard institutional leases, to paying way over the open market rent. Buyers have to base their judgment on the likely rent and the potential value of the property in, say, 10, 15 or 20 year time. If their assumptions about residual values are over-optimistic, the comparison with gilts is a nonsense.

Nor are gilts immune from questions about the quality of income. For while gilt yields have been falling, budget deficits across the developed world have been rising, thereby raising questions about future inflationary pressures. As the London-based securities firm BZW points out, the debt overhang cannot be stabilised until real debt yields fall below the likely trend growth of GDP. Taking British index-linked gilts as a yardstick, real government bond yields have almost certainly fallen across the Group of Seven industrialised countries. But even at around 3.3 per cent, they are still above any plausible growth assumption for the short to medium term, which means that debt burdens will continue to grow. But if governments do confront their fiscal problems, economic growth will, paradoxically, be slower in the next year or two.

Investors, it seems, are making precious little allowance for risk in equities, gilts and property alike. But that is because, in the hallowed phrase, they cannot find a better hole.

The problems at Volkswagen are as old and as durable as the dear old Beetle itself. Foremost among them has long been the carmaker's chronic inability to confront the simple truth: that its costs are too high.

Now, 55 years after the launch of the Beetle phenomenon, in the middle of the motor industry's worst post-war slump, Ferdinand Piech and Jose Ignacio Lopez de Arriortua are bidding to effect a cure. But while their abilities are not in doubt, their rough-and-tough methods, and criminal allegations against Lopez are threatening to destroy dreams that VW can be restored speedily to full health.

The malaise was apparent back in the 1930s, when Ferdinand Porsche was developing his pop-eyed rear-engined runabout and when Adolf Hitler was growing increasingly excited by 'his' Volkswagen: his people's car.

'I have no doubt that the outstanding ability of the designer, and at a later date the economic acumen of the manufacturers, will make it possible to make available to the German people cars which are low-priced and cheap to run, similar to those the American people have enjoyed for a long time,' Hitler proclaimed at the 1936 Berlin motor show.

As Dan Post, the celebrated Beetle historian, noted *, Mr Schickelgruber failed to mention that in 1936 an American had to work only 300 hours to buy a car while a German would have to toil for 800.

The differentials have narrowed, the world has shrunk, and the Volkswagen concern has ballooned into an international giant since the Wolfsburg works opened in 1938. In May that year the first 'KdF' (Kraft durch Freude - Strength through Joy) cars rattled out at a handsome 990 Reichsmarks apiece.

But the dangers inherent in overblown costs have persisted. They were ignored for years as VW cars first filled the garages of Germans benefiting from the post-war economic miracle, and later moved off into international markets as puttering proof of Germany's reputation for engineering excellence.

Progress through technology, or Vorsprung durch Technik, to borrow a phrase beloved of Piech, Porsche's grandson, and by a fateful twist, today's chairman at VW, served the German motor industry well in its youth and adolescence. But high costs threaten to be the death of it in its maturity, Piech says.

Piech, former head of Audi, the VW quality car division, and patron of its Vorsprung durch Technik slogan, took charge of the group in January this year as it toppled into its worst losses ever. A technical man by training, he was chosen for the skills he displayed in re-engineering Audi into the most profitable part of VW. He, in turn, chose another engineer, the controversial Lopez, formerly General Motors' cost-cutting wizard, to help him with his work.

Since March, when Lopez arrived shrouded in suspicions of having stolen GM industrial secrets, the rehabilitation work has been progressing at speed. The eccentric Basque is said to work from five in the morning to midnight every day. In less than six months, Piech claims, he discovered and applied cost-saving methods worth DM700m. But as allegations and evidence mount up, it appears increasingly unlikely that the dynamic duo will remain together for long.

Thr group could find a replacement relatively easy for Lopez. There are plenty of managers who understand and can implement the 'lean' production and group working methods he uses, but it would be more damaging if Piech were forced to go. Since he arrived, he has hacked hard at VW's internal costs structure, its civil service-style bureaucracy, and its cosy relationships with its mostly German, high-cost components suppliers. He has also set about cutting its bloated workforce.

While his claims of having DM8.7bn-worth of savings 'in my pocket' do not bear close inspection, and even he has given up on his earlier claims of reaching break-even this year, there is ample evidence that the Austrian engineer is giving VW the shake-out of its life. As Lopez and his team terrorise components suppliers, Piech is carving into investment plans, paring every budget to the bone. He is even making a brave show of tackling over-employment, the single most important cause of the group's malaise.

Since his arrival in January, Piech has announced the shedding of about 20,000 jobs in VW's six German works. But in keeping with post-war industrial tradition, there is not a single redundancy among them. Natural wastage and early retirement on generous terms are, as usual, the order of the day. There is no role for hire-and-fire methods in Germany's social economy, where even the threat of industrial conflict is anathema.

But Volkswagen is a special case. As a 'new' industry in post-war Germany, it was cosseted under government control. Based in a traditional Social Democrat (SDP) stronghold, Lower Saxony, it was an exemplar. It was a pillar of the social economy: a creator of jobs and wealth in what used to be a faraway, hard-up corner of West Germany, tucked close against the old East German border. When Bonn sold off the last 16 per cent of its holding in 1988, commentators cheered: at last action would be taken to reduce VW's cost base, they said. At the time, VW's profit margin was exactly one third that of its main European competitors.

'I don't know of a single example where a company has lost the government as a shareholder where it hasn't led to fundamental change,' one analysts wrote at the time.

But the commentators appeared to have forgotten the 20 per cent holding left under the control of the Lower Saxony government. The state authorities, today wearing the red and green colours of an SPD/Green party coalition, together with worker representatives on the company's board of supervisors, still control VW's fate.

As a result, Volkswagen has continued until now to be managed more in the style of a social security office than a commercial concern. It has fired workers only once in its entire history. Even today, its in-house pay agreement is the most generous in the German car industry. Two weeks ago, seeking to shave another 3,000 jobs from its domestic payroll, the management offered an extraordinary deal, allowing employees to retire at 55 on 90 per cent of their net income until the normal retirement age of 60.

In an industry where labour costs account for 70 per cent of the total cost of a typical vehicle, according to the VDA automotive industry association, the workforce is the single most important source of potential economies. VW calculates that its latest early retirement package should bring the number employed in its six domestic plants to about 100,000. Industry observers, given to understand that the desired target is 80,000, are puzzled.

Times may be desperate, but even hard men such as Piech and Lopez would have no hope of gaining the assent of their labour-oriented supervisory board to job losses on such a scale within the two years they have given themselves to turn the company around. Accordingly they have gone about their other cost-saving activities with sometimes alarming vigour.

But the fact that they were put in charge, and that Piech won agreement to his first phase of job cuts, reflects the new chairman's powers of persuasion and the Lower Saxony government's belated acceptance that fundamental change is needed if VW is to prosper in Europe's single market and in an increasingly liberalised global economy.

Now, several years behind innovative, privately-controlled companies such as BMW, and at least two years behind most other German industrial groups, where task-master bankers hold large stakes, sit on supervisory boards and hold the whip hand over management, the duo has set about a crash cure.

There is no time for niceties, they say. Without drastic action now, says Lopez, the Japanese will colonise European industry and 'become our landlords'. For Piech the issue is the 'survival' of Germany's second-biggest industrial concern.

Both arguments are deliberately pitched to disseminate fear and prepare the ground - in the supervisory board and the workforce - for their Blitzkrieg tactics. But they have signally failed to convince the watchers beyond the borders of Lower Saxony.

The Austrian Piech and the Spaniard Lopez appear to have overlooked that change on the scale they demand, especially in Germany's conservative business culture, requires management, not force. They have also to remember that the ground rules of a social economy demand consensus, not coercion, and not just with a company's own workforce and supervisors.

While Lopez's purchasing department 'warriors' are allegedly dashing around, tearing up component suppliers' contracts and demanding instant price cuts on pain of loss of contracts, more conventional managers are pursuing similar ends through dissimilar means. Proceeding according to the tiresome but tested principle that co-operation is preferable to confrontation in Germany, business competitors in the motor sector and other industries are negotiating their way to improved competitiveness, at a gentler pace. Most important, they are operating out of public earshot.

However great VW's difficulties and however inspired the new management may be, a director at one competitor says its methods are unacceptable. The fact that Volkswagen is so large, so well-known and seen internationally as a flagship of German industry, makes 'this bullying' all the more reprehensible, he adds.

VW, Germany's most persuasive argument for privatisation, is also its most suitable case for treatment. But as its supervisory board appears to have realised, with recent hints that Lopez may have to go, the malaise afflicting it is an indigenous German ailment which demands German therapy for an effective and lasting cure.

* Volkswagen Nine Lives Later, 1930-1965, by Dan Post, Motor-Era Books, Arcadia, California

THE 16 top executives at London Weekend Television who will become paper millionaires next week as a reward for investing in a Pounds 3m golden-handcuffs scheme before the 1991 franchise auction will not be the only people feeling prosperous at the company.

Leaving aside the 16 - who include such well-known names as Sir Christopher Bland, chairman; Mr Greg Dyke, chief executive; and Mr Melvyn Bragg, arts controller and presenter of the South Bank Show - there are plenty of lesser-known winners of LWT's corporate jackpot, making a total of 54. All those who benefitted from the scheme were in management at some level, but why were they so richly rewarded?

Those who left LWT before Sir Christopher Bland dreamt up the golden handcuffs scheme, or were not senior enough to participate in it, struggle to give even-handed replies.

Mr Anwer Bati, a freelance producer who worked at LWT in the early 1980s, gulped at the thought of a former colleague, Mr Robin Paxton, being worth Pounds 2m. 'They were in the right jobs at the right time, so lucky them,' he said.

He added: 'It's not that they were in dire danger of being headhunted, but the station needed to convince the IBA (Independent Broadcasting Authority) that the people behind its star programmes would not be headhunted by rivals. Take Barry Cox (director of corporate affairs). He's a very nice guy, was an ordinary programme maker. Now he's worth Pounds 1.5m.'

The scope of the scheme has penetrated some surprising corners. Mr Paul Gibson is a classic example - an unknown manager on the technical side of LWT's operations, he is one of nine investors who have ended up with shareholdings worth Pounds 915,000 each.

Mr Gibson is LWT's group systems controller, in charge of all corporate information technology, airtime bookings and production bookings. His past experience includes time as a senior systems analyst at Lyons and Tesco, the food retailers. He would not comment on his participation in the share scheme nor why he was chosen for it.

According to Korn Ferry, the media headhunters, Mr Gibson's job at LWT would involve extensive responsibilities and probably command a salary of about Pounds 70,000. 'But he wouldn't be all that hard to replace,' Korn Ferry said yesterday.

LWT says the 54 managers are justly reaping the reward of their loyalty in 1989.

At a time when it was not clear whether Carlton Communications, chaired by Mr Michael Green, would compete for the London weekend franchise, they took a risk by putting their own money, sometimes borrowed, into LWT.

Mr Peter Coppock, head of press relations at LWT, was keen to put this side of tale of the 'telly millionaires'.

He was offered 18,028 shares at 83p, and made 'no small investment' of Pounds 15,000. But he did not know until the franchise was renewed that he had made money rather than lost it. 'For a long time the share price was 65p and it was brown-trouser time,' he recalled. 'It's easy enough now the share price is 470p to say it was a cushy investment but it didn't feel like that at the time.'

Mr Coppock's investment is now worth Pounds 342,991 - 22 times its original value. He said that a shareholding this size is the norm - and that only the 16 top managers became millionaires overnight.

TRADITIONAL life offices the mutual assurance companies owned by their policyholders - will have to fight competition from banks and building societies to survive, a report to be published next week says.

Life Assurance 1993, to be published on Friday by Mintel, the market analysts, says the life assurance market has become overcrowded both with new domestic players, such as the recently established insurance arms of some banks and building societies, and with foreign companies entering the market.

This has led to pacts, such as the exclusive distribution deal between Halifax, the largest UK building society, and Standard Life. It has also resulted in foreign buy-outs such as the purchase of Equity & Law by Axa, the French insurance group.

The link-up between life offices and banks and building societies benefits both partners. The life office gains a valuable distribution channel while the banks and building societies earn commission for the sale of life products.

Mr Paul Hersey, senior finance analyst for Mintel, remarked: 'The mutuals are disappearing slowly. The traditional medium-size Scottish offices are coming under attack . . . The traditional composites will also suffer unless they make a firm decision regarding which segment of the market they want to target.'

The survey also reports that the independent financial adviser is winning the confidence of clients. People are less prepared to return to their bank manager for further financial advice, it says. In 1991, 34 per cent of those who sought financial advice in the previous 12 months said they would go back to the bank manager, but of those who sought advice in the previous 12 months this year that figure declined to 26 per cent.

Yet 17 per cent would return to their independent adviser for further advice, compared with 13 per cent in 1991.

Life Assurance 1993. Mintel International Group, 18-19 Long Lane, London EC1A 9HE. Pounds 795.

CONSUMERS ARE increasingly likely to shop around for cheaper insurance policies in the face of rising premiums, a survey says today.

The number of people switching to another insurer almost doubled between September 1991 and March this year, from 1m to nearly 2m, NOP Corporate & Financial, the market research company, says in the survey.

NOP, whose survey is based on interviews with 30,000 people, says sharp increases in premium rates had been the biggest factor.

Rises in premiums for motor and household policies averaged 20 per cent a year in 1991 and 1992, but many policyholders have faced much greater increases as companies have changed the way they rate risks.

Some householders living in areas judged to be prone to subsidence or storm damage have faced increases of more than 100 per cent. Drivers of faster or fashionable cars, which are more likely to be stolen, as well as younger drivers who tend to have more accidents, have been hit by steep increases.

Different insurance companies often rate the same risk in a different way, with correspondingly wide variations in quotes.

A random sample of six risks by SelectDirect, a telephone-based company jointly owned by Rollins Hudig Hall, the insurance broker, and General Accident, the composite insurer, showed variations of more than 100 per cent.

Mr Peter Friend, managing director of SelectDirect, said that the differences reflected the limitations of the data available to insurers. Decisions are often taken on the basis of claims to the insurance company rather than market-wide figures.

Mr Friend added: 'Every underwriter believes he is right. The fact is that at the end of the day they all make different decisions because they have all got partial information.'

Policyholders who switch their household cover tend to be younger and from the ABC1 social classes, with the C1 group being most likely to switch, the survey says. In the motor insurance market switchers tend to be very young and from the C2DE social classes.

Londoners are most likely to switch their policy in the household markets, while those in the Midlands and Wales are the most likely to change motor insurer. The survey adds that women are more likely to switch household policies, while men are more likely to switch their motor insurance policy.

Most policyholders are still unlikely to change their cover. The survey shows that 60 per cent of household policyholders and 39 per cent of motor policyholders were unlikely to seek alternative cover.

Ms Heather McAdam, NOP director, said: 'There is still an awful lot of inertia in the marketplace.'

The Consumers' Association, which has accused insurance companies of charging their customers for past mistakes, welcomed the trend.

Mr Roger Taylor, a senior researcher, said: 'It's excellent news. We have been saying for some time that some insurance companies are charging outrageous premiums and our advice has always been that people should shop around.'

------------------------------------------------------------------------ THE COST OF INSURANCE ------------------------------------------------------------------------ Household risk Building: Sum insured - pounds80,000. Contents pounds25,000 and all-risks cover of pounds2,500 for a householder based in Stockport, Cheshire postcode SK08. Cheapest pounds329.75 Most expensive pounds581.00 ------------------------------------------------------------------------ Building: Sum insured pounds150,000. Contents pounds40,000 and all-risks cover of pounds5,000 for a householder in Farborough, Hampshire postcode GU14 Cheapest pounds592.69. Most expensive pounds955.98. ------------------------------------------------------------------------ Motor risk (assumes pounds100 of each claim paid by policyholder) Volkswagen GTI for a female driver aged 22 with a five-year no-claims bonus based in Brighton, East Sussex postcode BN1 Cheapest pounds699 (with extra pounds50 excess and installation of acceptable security device). Most expensive pounds 1,254 (assumes pounds75 extra excess). ------------------------------------------------------------------------ Ford Fiesta for a 30-year-old woman with five-year no-claims bonus based at Westcliff-on-Sea, Essex postcode SS0. Cheapest assuming additional pounds100 excess - pounds363.60. Most expensive pounds809 - again assuming additional pounds100 excess ------------------------------------------------------------------------ Jaguar XJ6 for 40-year-old male driver living in London, postcode SW6, with five-year no-claims bonus, assuming pounds100 excess. Cheapest pounds796.20. Most expensive - assuming additional pounds75 ex cess - pounds1,805. Vauxhall Cavalier for 23-year-old male in Cardiff, postcode CF4, without no-claims bonus. Cheapest pounds1,110. including additional pounds150 excess. Most expensive pounds2,324 - including an additional pounds250 excess. ------------------------------------------------------------------------ These are the 'cheapest' and 'most expensive' insurance quotes offered for a randomly selected sample of household and motor risks. Data has been collected by SelectDirect, a broker which is a joint venture between Rollins Hudig Hall and General Accident. ------------------------------------------------------------------------

BRITISH ATHLETICS goes into its end-of-season meeting at Sheffield tomorrow trying to work out how to build on the successes of last week's World Championships in Stuttgart. There Linford Christie won the 100m in the second-fastest time ever and Colin Jackson, in the 110m hurdles, and Sally Gunnell in the 400m hurdles, both broke world records.

The plan being considered by the British Athletics Federation is to put Britain's top 50 to 75 athletes under contract. The idea is that British athletes will commit themselves to supporting federation events and in return will receive some guaranteed income, medical screening and medical insurance.

Mr David Bedford, honorary secretary of the BAF, said that the principle had been agreed for some time and now the federation was discussing the practicalities of the scheme.

Britain's world champions are in demand at all the big grand prix meetings around Europe. But for many British athletes the eight or nine domestic televised meetings a year controlled by the federation represent the largest chunk of their incomes.

The federation scheme is regarded with scepticism in some quarters. Fatima Whitbread, the former javelin world champion and world record holder, said: 'I don't know where they are going to get the money from. All the athletes had a good laugh. Athletes are individuals, most do not want to be tied down.'

She said athletes wanted to be able to tinker with their competition schedules throughout the season to make sure they peaked for the big events, such as the World Championships and the Olympics. These events do not pay appearance money, but provide the prestige which increases earnings.

Whitbread is president of a promotional club, the Chafford Hundred, which she founded with Christie and Jackson to promote athletes. British athletes who wear the logo of Lucozade, the soft drink, are part of the club's multi-year deal with SmithKline Beecham which Whitbread says is worth Pounds 1m.

So what is the earnings potential of the UK's top track and field stars?

Christie earns far more than any other British athlete. His earnings leapt after he won the 100m in the Barcelona Olympics last year and he can expect another spurt in his income after his win in Stuttgart.

Even so he is still behind Britain's top soccer players and a long way below the world's best-paid boxers, golfers and tennis and basketball players.

Gunnell is the next highest-paid British athlete and Jackson should reach her level after finally winning a big championship.

Below them is a small group of well-paid runners, but the rest of the British team, even some who reached finals in Stuttgart, are struggling to get by.

Gunnell has complained about the disparity between her race fees and Christie's, arguing that she is a world record holder while Christie is not.

One newspaper estimated that the British men's 100m relay team of Christie, Jackson and two individual silver medallists, Tony Jarrett and John Regis, which finished second to the US in Stuttgart, is worth Pounds 2.2m while the women's 400m team, which Gunnell anchored to a bronze medal, is worth Pounds 880,000.

One leading promoter said: 'The only one of those who earns anything other than a living wage is Sally and I would be flabbergasted if she earnt that much (close to Pounds 800,000).'

Athletes' incomes come chiefly from fees and prize money for races, and sponsorship and endorsement deals. The biggest sponsors are sportswear companies. Christie has a long association with Puma, the German sportswear manufacturer. Gunnell has a contract with Mizuno, the Japanese company.

But even athletes of this stature are not secure. Last year Jackson, who is now with Puma, was dropped by Puma's great German rival, Adidas. Paul Magner, sport manager (running) for Adidas UK, said the company decided to concentrate on road running and training shoes because, while sprinters such as Jackson offer marketing spin-offs, the market for running spikes is small.

The jewel in Adidas's crown is an athlete who no longer competes: the former decathlon Olympic champion Daley Thompson. Thompson is now a television pundit.

'We got excellent coverage from Daley appearing on the BBC in branded clothing,' said Mr Magner.

Among competing athletes the next level is represented by young runners with potential such as Curtis Robb, 21, who finished fourth in the 800m in Stuttgart. After Robb reached the Olympic final last summer he was, said one observer, the subject of a 'bidding war'.

He ended up with a contract worth Pounds 20,000 a year for four years from Nike. Mr Simon Taylor of Nike UK said Robb was also part of Nike's global bonus structure which rewards performances in everything from national championships to Olympic Games.

The real problem is that athletics is a poor draw in the US, the world's biggest market. Athletics earnings pale alongside Nike's contracts with tennis player Andre Agassi and basketball stars Michael Jordan and Alonzo Mourning. Jordan's contract is worth an estimated Dollars 20m (Pounds 13.5m), while Mourning's is put at Dollars 16m for five years.

The runners therefore still have a long way to go. But, as Whitbread said: 'It does not matter how many gold medals you win, there is only so much money in the pot.'

Linford Christie, Olympic and world 100 metres champion, is paid about Pounds 30,000 per race - a little more for some big European grand prix events - and runs in up to 20 meetings a year. He and American Carl Lewis were recently paid Pounds 100,000 each to race at Gateshead. These are almost certainly the highest appearance fees ever paid to an athlete. Christie has a contract worth a basic Pounds 60,000 with footwear company Puma. Industry estimates suggest that, including bonuses, this contract will earn him more than Pounds 200,000 this year. He also has a Pounds 100,000-a-year contract with Lucozade and can command Pounds 5,000 for a personal appearance. These are limited by training, racing and commitments to leading sponsors.

Sally Gunnell, Olympic and world 400 metres hurdles champion, has a contract with the Mizuno shoe company worth Pounds 220,000 over three years. Her race fee is Pounds 20,000 and personal appearance fee is Pounds 3,000.

Colin Jackson's race fee is Pounds 10,000. But that will rise following his victory and world record in the 110 metres hurdles at the World Championships in Stuttgart. His personal appearance fee is Pounds 3,000.

LONDON Transport Advertising (LTA), the capital's largest poster contractor, is to be privatised.

LTA, an internal department of London Transport, generates Pounds 23m a year from the sale of poster space on Underground stations, trains and buses. It is to be a subsidiary company within London Transport employing all existing staff of 300. This company will be offered for sale.

MR PETER HAIN, secretary of the Tribune group of Labour MPs, yesterday claimed that some voters no longer knew what the party stood for, as it had got rid of so many policies since the general election.

The party's main weakness, he said, was its failure to provide a credible economic alternative to the government's policies.

The MP's comments followed a survey by MORI in yesterday's Times newspaper, showing support for Labour at its lowest level since Mr John Smith became party leader.

At 42 per cent in the poll, however, Labour is still 14 percentage points ahead of the Conservatives.

NATIONAL union officials have been called in to try to prevent industrial conflict at Vauxhall motor company after shop stewards representing 9,000 workers rejected a two-year pay offer.

The company said yesterday that it was 'disappointed' at the outcome and warned employees at its plants at Luton, Bedfordshire, and Ellesmere Port, Cheshire, that it was facing extremely difficult market conditions. On Thursday it offered a rise of 2.1 per cent this year and 2.6 per cent next year.

INDEPENDENT schools improved their A-level performance this year by 2.2 per cent, according to figures from the Independent Schools Information Service, John Authers writes.

Analysis by the Financial Times shows that the strongest results have again come from big-city, single-sex day schools. Most of the top 20 schools have shown remarkable consistency over the past six years.

St Paul's School in Barnes, south-west London, finished first. In terms of the points system used to judge A-level results, its average score per pupil was 29.4. A score of 30 would be equivalent to three A grades.

The highest-placed fully co-educational school was Leicester Grammar, at 29th.

Details, Weekend FT Page X

HOPES of saving four pits no longer required by British Coal finally ended yesterday when it emerged that an invitation to private-sector operators to mine them had produced no takers.

The disclosure will disappoint the government which is already struggling to find a way of providing a future for another 30 mines still operated by British Coal.

Further closures among the 30, which include 11 reprieved by the government in March, are considered inevitable by British Coal following a steeper-than-expected decline in the coal market.

With a strong political reaction to future closures likely, ministers want the private sector to take over as many as possible of the 19 pits already declared surplus to requirements by British Coal.

British Coal has been advertising the 19 pits in tranches of four and five. In the latest tranche - the third - private-sector companies were offered five pits. Just one, Trentham, near Stoke-on-Trent, was the subject of a bid that involves mining.

The bidder's identity was not disclosed by British Coal yesterday, but it is thought to be Mr Malcolm Edwards, the corporation's former marketing director.

Vane Tempest in County Durham, another of the five in the tranche, also attracted some bids. However, they involved proposed activities on the colliery surfaces.

The other three pits in the third tranche, Grimethorpe and Houghton Main, in South Yorkshire, and Westoe, in Tyne and Wear, attracted no offers for the final stage of the process in which bidders had to provide a Pounds 50,000 bond.

British Coal is likely to move quickly to seal the four pits which are no longer wanted as mines, although local union officials will have to be consulted.

Together the four employed more than 3,500 miners when mining ceased.

British Coal has now closed the bidding deadline for 14 of the 19 pits it no longer wants to mine. It has received 17 tenders in all for 10 of them but four pits have attracted no interest - the three disclosed yesterday together with Bolsover in Derbyshire.

In addition three pits - Cotgrave and Silverhill, in Nottinghamshire, and Vane Tempest - are the subject of bids that involve use of surface assets only.

Another five mines have still to go out to tender. These are Shirebrook in Nottinghamshire, Taff Merthyr in Glamorgan, Coventry near Coventry city, Parkside in Merseyside, and Sharlston in West Yorkshire. Coal analysts believe it is unlikely that mining will be resumed at more than six of 19 pits which have been closed by British Coal.

British Coal yesterday closed its north-east headquarters in Sunderland. The office, where 45 people were employed, was considered unnecessary with just two working pits left in the region which once employed 150,000 miners at more than 100 pits. The corporation will administer its north-east operations from Nottingham.

MRS VIRGINIA BOTTOMLEY, the health secretary, yesterday warned two London hospitals to cut costs after they ran into funding difficulties just five months into the financial year.

The Department of Health last night confirmed that four other hospitals in the capital - the Royal London, the Royal Orthopaedic, the Royal Ear Nose and Throat and the Havering - have been asked to cut back on some non-urgent operations.

Mrs Bottomley's warning to University College Hospital - one of the capital's biggest teaching hospitals - and Middlesex Hospital underlined the government's intention to take a firm stand against inner-city hospitals which fail to bring their spending into line with contractual obligations.

UCH and Middlesex Hospital, both part of the UCL Trust, have been forced to stop carrying out routine operations after exceeding targets imposed by Camden and Islington Health Authority.

The hospitals had treated 500 patients too many, putting them 21 per cent over budget by the end of June. Ms Alyson MacRae, the health authority manager, said the hospitals had over-performed on their Pounds 26m contract.

She said: 'If they were allowed to treat everyone on the waiting list as they wanted to, the contract would be used up, leaving no more funds for the urgent cases. We took this action so that they did not treat too many people on the waiting list too fast.' The authority had no contingency or reserve funds for hospitals that exceeded their contracts.

The health authority said that it was monitoring non-urgent cases 'very closely' at St Bartholomew's Hospital with which it also has a contract. Individual cases were being referred to the authority for approval.

UCH, like many of the large inner-city teaching hospitals, has seen demand for its services dwindle as shire health authorities, which used to refer patients, started to use local hospitals under the contracting system.

A spokesman for UCH and Middlesex Hospital admitted that management might not have faced up to financial pressures quickly enough. He said the hospitals had known that the contract could not cover the expected number of patients based on previous years, but managers had hoped that more money could be made available.

The hospitals now plan to shed between 20 and 30 consultants' posts and up to 40 non-medical staff as part of a cost-cutting exercise designed to save Pounds 10m this year, he said.

Ms MacRae said: 'They have not responded quickly to the market situation.' The authority had no contingency or reserve funds for hospitals that exceeded their contracts.

Mrs Bottomley said costs of treatment at the hospitals were high compared with The Royal Free or St. Mary's, two other London hospitals. 'For every two patients treated at UCH and Middlesex and Bart's more than three could be treated at the other hospitals.'

Mr Geoff Martin, campaigns director of London Health Emergency, a pressure group backed by Labour-controlled local authorities, warned that similar cuts could happen elsewhere in London and in other large urban areas.

He said: 'We know of other health authorities in London with similar financial problems. We are in a situation where before Christmas we could have a blanket ban on non-emergency operations across the whole of inner London.'

STORE GROUPS accused this week by Labour of charging allegedly extortionate credit-card interest rates claim there are good reasons for higher rates than those levied by bank credit cards.

Ms Elizabeth Stanton, director of the Retail Credit Group, which represents large retailers who offer credit, said that the average amount outstanding on store cards, at Pounds 163, was far less than the Pounds 420 typical of bank credit cards. Stores had to recoup their fixed costs over this smaller sum which was why rates were higher.

Furthermore, holders of store cards often benefited from special offers - such as discounts on goods - not available to holders of other credit cards. Also, those who paid their card accounts in full each month did not pay interest.

The Retail Credit Group says that while sales on credit rose 11.5 per cent year-on-year in the first quarter of this year, the amount of outstanding balances fell 11 per cent to Pounds 1.4bn.

Labour said on Thursday that the average margin over base rate charged on store cards had risen from 18 per cent in 1990 to 21 per cent.

Labour said the most expensive store credit card was operated by Dixons, which charges 34.4 per cent to customers who do not pay their accounts by direct debit.

Store cards represent only a small part of the consumer credit market. The total value of store-card transactions last year was Pounds 3.2bn, a survey by Datamonitor, a market-research group, found. This represents only 10 per cent of other credit cards.

A few store groups dominate the market. According to Datamonitor the Marks and Spencer card accounts for almost a third of all consumer store-card expenditure.

It adds that John Lewis, the Burton Group and the House of Fraser account for another 41 per cent.

Cards are attractive to store groups because they encourage customer loyalty and provide valuable marketing information. A store group such as Marks and Spencer, which does not accept other credit cards, will save substantially on the fees it would otherwise have paid to credit-card companies.

Nevertheless, the costs of running a store-card operation caused several retailers in the late 1980s and early 1990s to sell their credit-card operations to outside organisations who could run the business more cheaply.

GE Capital, for example, bought the card operation of the Burton Group. And retailers have had limited success in selling other financial services to their card-holding customers.

THE TAKEOVER of Group Lotus by Bugatti brings together two of the most famous motor racing names of the pre-war and post-war eras.

Ettore Bugatti, the Italian creator of some of the world's most beautiful classic cars, died in 1947, and his car factory in France had already ceased production by the early 1950s in the aftermath of the war.

In the UK Colin Chapman, the Group Lotus founder and one of the most creative and successful designers of racing cars, started his business in the early 1950s. His company has had a chequered history and never achieved a financial strength to match its success on the grand prix racing circuits.

Group Lotus struggled to survive both before and after Chapman's death in 1982. It has proved to be none too secure in the hands of General Motors since 1986, and last year recorded a a pre-tax loss of Pounds 36.6m on a turnover of Pounds 60.98m.

General Motors was forced to put in Pounds 18m to repair the battered Lotus balance sheet in 1991, and the reverses convinced the giant carmaker that it had neither the desire nor the management resources to cope with such a small and specialised business.

Group Lotus losses have grown from Pounds 2.1m in 1988 to Pounds 4.4m in 1989, Pounds 12.7m in 1990, Pounds 14.7m in 1991 and the record Pounds 36.6m last year.

However, in the past 12 months General Motors has been restructuring the business to ready it for disposal.

Following the demise of the Elan sports car, Group Lotus has limited production to just one model, the Esprit luxury sports car, of which it is planning to build 350 this year. The workforce has been cut from 1,717 in 1990 to about 700 - a total of 500 in engineering and 200 in car production.

Now the latest saviour has come from Italy in the shape of entrepreneur and life-time Bugatti lover Mr Romano Artioli, who holds an 18 per cent stake in Bugatti Automobili.

He has recreated the Bugatti marque - supported by unnamed financial backers in the European automotive components industry - both as a maker of exotic and expensive cars and as a designer label for exotic and expensive fashion items, from sunglasses to table-ware.

The first car of the new Bugatti company, created in 1987, was the EB110 supercar unveiled early last year with a mid-mounted 550 bhp V12 engine, carbon-fibre chassis and four-wheel drive. Production began in December and 47 have been delivered to date.

Bugatti Automobili is based at Campogalliano near Modena, not far from the homes of Ferrari and Lamborghini.

Mr Artioli was at one time a Ferrari dealer and is now the Suzuki distributor in Italy, but Bugatti has been his passion for 40 years.

His campaign to revive the marque began in 1987 when he negotiated with the French government for the rights to the Bugatti name and badge.

Ettore Bugatti was born in Italy, but the cars that made him famous were produced in Molsheim in the Alsace region of France. After his death the factory was taken over by Hispano-Suiza which eventually became part of Aerospatiale, the French state-owned aerospace group.

The Bugatti holding company is registered in Luxembourg and its shareholders remain anonymous. Some big corporations have co-operated in developing the EB110, however, including Aerospatiale, which produces the carbon-fibre monocoque chassis.

MR ALAN Sugar, chairman of Tottenham Hotspur, has launched a court move to 'strike out' a legal attempt by Mr Terry Venables to seize control of the football club.

Mr Sugar says Mr Venables, the club's former chief executive, should be blocked from pursuing his action because he has still not paid the Pounds 300,000 'security for costs' demanded by the High Court as a condition of being allowed to continue with the case.

The payment, ordered on July 29, was due by August 19. The deadline was not met and Mr Sugar is to apply on September 13 for a court order striking out the action.

Mr Venables has already made an application for extra time to pay the money - but that plea is not due to be heard until October.

Yesterday Mr Justice Lindsay granted Mr Sugar's lawyers an order for production of official transcripts of the July 29 hearing for use in the strike-out move.

Mr David Mabb, counsel for Mr Sugar, his holding company Amshold and Tottenham Hotspur, said it was 'somewhat curious' that Mr Venables' plea for extra time was scheduled for October - well beyond the 21-day extension he was seeking. Mr Sugar issued the strike-out application after failing to obtain an explanation from Mr Venables' solicitors as to the basis of the plea for more time.

National union officials have been called in to try and prevent industrial conflict at Vauxhall motor company after shop stewards representing 9,000 workers rejected a two-year pay offer.

The company said yesterday that it was 'disappointed' at the outcome. On Thursday it offered a rise of 2.1 per cent this year and 2.6 per cent next year.

CIVIL SERVANTS have been given advice on how to improve their chances of keeping their jobs when government departments face competition from the private sector.

Detailed advice on how to prepare an in-house bid has been included in the revised guidance on the market-testing programme, which was published yesterday by the Office of Public Service and Science.

The new guidelines reflect experience since last autumn, when Mr William Waldegrave, the public services minister, announced a programme to test whether some Pounds 1.5bn of government activities would be performed more efficiently by officials or by the private sector.

Officials in Mr Waldegrave's department admit privately that not all departments will meet the market-testing targets set for the end of September, but say that delays arise merely from the necessary procedures rather than a lack of enthusiasm. They emphasise that departments which fail to achieve the targets by the deadline will be expected to meet them in the following months. This is in addition to proceeding with the next tranche of the programme which starts in October and is intended to cover a further Pounds 1bn to Pounds 2bn of government activities.

Earlier this summer Mr Waldegrave had to call on Mr John Major, the prime minister, to put pressure on departments that were falling behind in the programme.

The guidance was revised after discussions with departments and Civil Service unions, and also takes account of private-sector suggestions.

It does not include a revision of advice to departments on the impact of regulations designed to protect the rights of workers in takeovers and mergers. This will be updated as case law develops.

The application of the Transfer of Undertakings (Protection of Employment) regulations, which guarantee the jobs and pay of existing workers in many cases when work is contracted out, has caused some confusion in Whitehall.

The Government's Guide to Market Testing. HMSO. Pounds 8.95.

Malaysia's official anti-corruption agency has cleared Mr S Samy Vellu, Malaysia's energy minister and head of the Malaysian Indian Congress (MIC) political party, of any criminal offence in relation to a share transaction nearly three years ago, writes Kieran Cooke from Singapore.

The Malaysian opposition had accused Mr Samy Vellu of 'hijacking' millions of shares in Telekom Malaysia when the telecommunications company was partially privatised in October 1990.

The shares had originally been allocated by the government to the MIC and Malaysia's Indian community.

CHINA has jailed one of its best-known businessmen for 20 years for obstructing justice. Mr Yu Zuomin, former chairman of the board of an entrepreneurial village near Tianjin, had been held up as a national model of the new breed of Chinese entrepreneurs until he fell from grace, writes Tony Walker from Beijing.

Mr Yu's sentence coincided with the passing of death sentences in Beijing against four officials, including one from the Bank of China, for corruption.

China launched a drive this week to root out corrupt officials whose activities had been fuelled by the economic boom. The execution of several hapless individuals had been expected. Chinese describe this process as 'killing a chicken to frighten a monkey', meaning that lesser officials are being dealt with severely as an example to more senior cadres.

Mr Yu of Daqiu village near Tianjin, which had become something of a national entrepreneurial shrine, was found guilty of harbouring criminals, obstructing justice, bribery, unlawful detention and unlawful control of people.

Mr Yu's arrest followed the beating to death of a worker in his village, and his attempts to cover up the crime.

Beijing yesterday threatened to reconsider its commitment to a key international missile control agreement in a furious protest against a US ban on the export of high-technology items to China.

NIGERIA'S political crisis deepened yesterday as oil workers prepared to strike and the winner of the annulled presidential election promised to form a rival government.

Oil workers are challenging the legitimacy of the country's military-installed government with an indefinite strike starting today that could seriously disrupt the vital petroleum industry, which accounts for more than 90 per cent of export earnings.

Nupeng, the oil workers' union, called the strike to demand a democratically elected government based on the June 12 presidential election, annulled by Gen Ibrahim Babangida, the military leader who quit office on Thursday.

The unofficial winner of the election, Chief Moshood Abiola, yesterday dismissed the appointment of an interim government headed by Mr Ernest Shonekan as 'a non-event', and said the new council 'represents nobody but Ibrahim Babangida and a small clique'.

'By the end of next week I will be in Lagos,' he said in London. 'It will be a real government I will form.'

Mr Clement Akpamgbo, justice minister in the interim council installed on Thursday, said such a move would be treated as 'insurrection'.

However,the pressing concern in Lagos yesterday was the impending strike. Oil executives said it could close refineries and disrupt distribution to petrol stations. But they said essential services, including the production of crude and loading tankers, could be maintained by supervisors.

The strike was expected to exacerbate the severe fuel shortage that has brought Lagos and southern Nigeria, the country's economic heartland, to a virtual standstill.

Lagos was deserted yesterday on the third day of a stay-at-home protest organised by pro-democracy activists. But in the north, Nigerians seemed more inclined to accept the new administration.

Secrecy still surrounds the mandate of the new government, which was hastily put together by Gen Babangida when a bid to extend his strongman rule was blocked by fellow officers.

Nigerians have not yet been told how long this 'interim national government' will remain in office. In a country propelled by rumours, speculation is that Chief Shonekan will call fresh elections within nine months.

Gen Babangida appears to have overlooked the naming of a new head of state - a post he was presumably keeping for himself. The post of commander-in-chief of the armed forces is also vacant following Gen Babangida's forced retirement on Thursday.

Chief Shonekan's 32-member cabinet, which included representatives from each of Nigeria's 30 states, was sworn in yesterday.

Nigerians in the Moslem north, which has traditionally held the reins of political power, appeared satisfied with the new regime.

In Lagos, however, several businessmen were scathing about the calibre of Chief Shonekan's team and doubted his ability to reverse Nigeria's economic decline.

Chrysler is to stop buying pick-up trucks from Mitsubishi, ending a 15-year arrangement, writes Michiyo Nakamoto in Tokyo.

The US company's move reflects the growing pressure the strong yen is putting on the competitiveness of Japanese motor exports. Mitsubishi had been expected to raise its prices soon.

Last month Chrysler sold its remaining 2.9 per cent stake in the Japanese company. In July, Chrysler sold its sale of its fAt its peak in 1986, Mitsubishi supplied Chrysler with 78,000 pick-ups. Sales, however, have declined and last year amounted to only 5,300 units.

AFTER a campaign remarkable only for its lack of political vigour, Singapore goes to the polls today to elect a president.

Mr Ong Teng Cheong, a leading light in the governing People's Action Party (PAP), who resigned as deputy prime minister to run for president, is favourite to become Singapore's first elected president. Mr Ong is opposed by Mr Chua Kim Yeow, a former banker and senior government official.

Two critics of the government were declared ineligible to stand for president under a law which, in effect, rules out all but senior members of Singapore's establishment.

Both Mr Ong and Mr Chua have led low-key campaigns which have generated little excitement. In a final televised election address, Mr Ong rejected criticism that he would be a tool of the PAP as president. 'Some people still ask if my long association with the PAP will stop me from acting independently,' said Mr Ong. 'The answer is No. My loyalty, first and foremost, is to the people of Singapore.'

Mr Chua has shyly admitted that he was pressured into standing for president because the government wanted a contest. But Mr Chua did cause a small political spark in his election address by saying that the absence of an effective opposition in Singapore was worrying many people.

'The PAP dominates the government and the legislature,' said Mr Chua. 'Do you want the PAP to dominate the presidency as well?'

Singapore's new president will have some executive powers, including a veto on government spending of the country's USDollars 46bn reserves.

BRITISH Aerospace yesterday signed an agreement with Taiwanese officials on the financial structure of a proposed joint venture to build regional jet aircraft.

The deal came on the fifth day of intensive talks between a team led by Mr John Cahill, BAe's chairman, and Taiwanese bankers, politicians and industrialists.

The venture marks a breakthrough for Mr Cahill's strategy to improve BAe's profitability. The RJ series of aircraft that the joint venture will build partly in Taiwan currently loses money for BAe.

The turning point in the tough negotiations came on Wednesday when Mr Cahill and Mr Liang Kuo-shu, chairman of Taiwan's state owned Chiao Tung Bank, initialled a draft financial structure for the venture, called Avro International Aerospace. They then sent that draft on its tortuous journey through a series of politicians and bank officials who needed to give their approval.

The final stage, a nod from Mr Lien Chan, Taiwan's prime minister, came yesterday. The agreement was signed by Mr Cahill, Mr Liang and Mr Hou Chun-hsiung, chairman of Taiwan Aerospace Corporation (TAC), BAe' s manufacturing partner in the venture.

It marked the end of a tough week for both sides. Taiwan's top bankers and politicians - professions which sometimes overlap in Taiwan - had just emerged from a turbulent congress of the ruling party, the Kuomintang. Mr Cahill and Mr Charles Masefield, president of BAe's Regional Jet division, had cut short summer holidays at the weekend to fly in from the US and Europe respectively.

A hectic series of meetings began at 7am on Monday morning. For the next two-and-a-half days, BAe's five-strong team visited lawyers, bankers, politicians and industrialists in their offices dotted about Taipei.

The talks were essentially over fears within the Taiwanese banking consortium planning to lend money to Avro that the venture was too risky.

These fears were based on the knowledge that the RJ series of aircraft that Avro would build partly in Taiwan had lost money for BAe.

There were also concerns that an associated aircraft leasing company would suffer a repeat of troubles experienced by western aircraft leasing companies such as GPA.

However, the agreement involves an effective Taiwan government guarantee of loans to Avro. BAe also agreed that the leasing facility of substantially more than Dollars 250m would only be tapped when firm orders for the aircraft came in.

There was little inkling last January when the original contract was signed that there lay ahead a gruelling struggle to convince Taiwanese banks to lend to Avro. It was almost three months after the January signing of the contracts that problems began to emerge. Mr Hou of TAC fell seriously ill and was unable to work for more than three months.

US-educated Mr Denny Ko, TAC'S president, was left in control of the company. But he had come from a US corporate environment, having worked for Los Angeles aerospace company TRW and run his own company in California. By his own admission, he found the transition more difficult than he had expected.

Relations between TAC and the consortium of banks slated to lend money to Avro began to deteriorate. By midsummer, the government stepped in to save the deal from collapse.

At the end of July in an attempt to improve the banks' confidence in the deal, the government officially backed Avro. But it was not enough and talks between middle-ranking UK and Taiwanese negotiating teams in Taiwan stalled.

This triggered a series of exchanges between Mr Cahill and senior Taiwanese politicians that culminated last weekend in the arrival from various continents of BAe's top management. In spite of yesterday's signing, compromises have yet to be worked out on some of the non-financial conditions.

These differences, and the incorporation of the Chaio Tung Bank into existing contractual arrangements between BAe and TAC, are to be completed at meetings in London on September 6.

After that, the way should be clear for Taiwan to begin working on RJs in the spring of 1994.

At BAe it is a lifeline for the RJ programme, which began life in the late 1970s as the BAe 146. Its early days were dogged with technical difficulties and the company struggled to improve the reliability of the aircraft.

By 1991, reliability had reached international standards, but competition from the likes of Dutch company Fokker, and a growing recession, didn't help sales.

At the start of 1992, therefore, BAe decided to seek international partners, hitting almost by accident on Taiwan just as a proposed joint venture between Taiwan and US aircraft manufacturer McDonnell Douglas began to founder.

Mr Cahill made his first visit to Taiwan in May 1992. In January 1993, he and Mr Ko signed a manufacturing agreement in London, but it was only yesterday that the financial structure of Avro was resolved.

For Taiwan, the offer from BAe came at an opportune time. Some of the difficulties with the McDonnell Douglas proposals did not apply with BAe: Its aircraft were proven designs, the investment would be in the hundreds of millions of dollars, rather than billions, and there was a larger potential market among domestic carriers flying short trips across Taiwan's rugged countryside.

And as one leading Taiwanese lawyer put it this week: 'Two failed attempts to set up an aerospace joint venture looks bad.'

JAPAN'S ruling coalition yesterday opened what is set to be painful internal bargaining over a plan to lift the flagging economy, due to be tabled in mid-September.

Government departments have proposed more than 70 deregulation measures, although details are still confidential, said ministers after a cabinet meeting.

The Japan Research Institute, a private body, estimated that more than 1m new jobs and over Y10 trillion (Pounds 64bn) worth of demand could be created by curbing government regulations on industry. However, the outcome depends on the details of the proposals and how many of them survive the intense inter-ministerial bargaining.

An indication of the difficulties ahead came when Mr Hirohisa Fujii, the finance minister, yesterday quashed speculation that the government would cut income tax to try to stimulate consumer spending.

Mr Morihiro Hosokawa, the prime minister, wants tax reductions, but the powerful bureaucrats of the Finance Ministry administration oppose cuts. Mr Fujii himself used to be a Finance Ministry bureaucrat as director general of the powerful budget bureau.

One controversial draft proposal made public yesterday is to ease the present 2,000 kilolitre-per-year minimum production allowed for Japanese brewers. If made law, this would break the 30-year, four-company oligopoly of Kirin, Asahi, Sapporo and Suntory - the only brewers big enough to qualify - and is likely to run into fierce opposition from them.

Mr Ishida will hold an emergency meeting with ministerial colleagues responsible for the economy next Tuesday before starting negotiations with the ministries involved.

Further evidence of Japan's deepening economic gloom came yesterday from the latest jobless figures, showing there were only 72 job offers for every 100 applicants last month - the lowest for six years - down from 74 in June. However, the unemployment rate remains unchanged at a seasonally adjusted 2.5 per cent.

Consumer spending remains sluggish, as big retailers yesterday said sales fell 5 per cent last month from the same period last year, the 14th consecutive monthly drop. These figures add weight to fears that the recovery might be further away than some government economists had expected and will increase already heavy pressure on the coalition to find a way to improve consumer confidence.

CHINA has jailed one of its best-known businessmen for 20 years for obstructing justice. Mr Yu Zuomin, former chairman of the board of an entrepreneurial village near Tianjin, had been held up as a national model of the new breed of Chinese entrepreneurs until he fell from grace.

Mr Yu's sentence coincided with the passing of death sentences in Beijing against four officials, including one from the Bank of China, for corruption.

China launched a drive this week to root out corrupt officials whose activities had been fuelled by the economic boom. The execution of several hapless individuals had been expected. Chinese describe this process as 'killing a chicken to frighten a monkey,' meaning that lesser officials are being dealt with severely as an example to more senior cadres.

Corruption has become a pervasive force in China, reaching high into the ruling Communist party. Top officials and their families are engaged in business activities from dealing in cars to speculating in real estate.

Mr Yu of Daqiu village near Tianjin, which had become something of a national entrepreneurial shrine, was found guilty of harbouring criminals, obstructing justice, bribery, unlawful detention and unlawful control of people.

Mr Yu's arrest followed the beating to death of a worker in his village, and his attempts to cover up the crime. His sentencing is certain to capture attention throughout China since Mr Yu had been hailed by party bosses for his money-making skills and elevated to the national parliament. He coined the slogan: 'Only by looking money-ward can you look forward.'

Beijing yesterday threatened to reconsider its commitment to a key international missile control agreement in a furious protest against a US ban on the export of high-technology items to China.

Mr Stapleton Roy, the US ambassador in Beijing, was summoned to the foreign ministry, to be told of Chinese anger over the US action which followed accusations that Beijing was exporting missile components to Pakistan.

Mr Liu Huaqiu, China's vice foreign minister, told Mr Roy the US sanctions 'puts Sino-US relations in serious jeopardy'.

MR Yitzhak Shamir, Israel's former right-wing prime minister, yesterday accused the government of rushing to give away land to Palestinians and demanded elections, in a bid to dampen recent excitement about an imminent peace deal.

Mr Shamir was reacting to statements by Mr Shimon Peres, Israel's foreign minister, and senior officials of the Palestine Liberation Organisation that the two sides were close to a self-rule deal which would be agreed at next week's peace talks in Washington.

Mr Shamir said the issue was too important to be left to the government alone in a country divided over the peace process. 'If someone wants to decide on changing borders he has to go to the people,' he said.

Leading Israeli newspapers said yesterday that Mr Peres had met senior PLO officials during a recent visit to Scandinavia to hammer out the plan for self-rule in the Israeli-occupied territories.

Since his return Mr Peres has been making upbeat statements saying Israel is prepared to withdraw troops from the occupied Gaza Strip and the West Bank town of Jericho - a scheme dubbed Gaza-Jericho First - as part of a comprehensive peace agreement with Palestinians.

His optimism has been shared by several PLO officials. On Thursday Mr Saleh Ra'afat, a PLO central council member, said Israel and the PLO had finalised a provisional accord on partial Palestinian control in the occupied territories after secret high-level contacts. Mr Ra'afat said the agreement centres on the Gaza-Jericho First plan combined with an interim phase of self-rule throughout the rest of the territories.

However, political analysts believe the optimism may be misplaced. The Gaza-Jericho idea is understood differently by both sides and has caused a major revolt inside the PLO by hardliners who are against making any concessions to Israel that would leave any part of the occupied-territories under Israeli control, even during an interim phase.

Mr Yassir Arafat, PLO chairman, was yesterday holding emergency talks in Tunis aimed at diffusing the revolt, also driven by criticism about his leadership style and the PLO's financial crisis.

In addition neither side has so far outlined any breakthrough in the fundamental obstacle in the peace talks - who should control occupied Arab East Jerusalem and the Israeli settlements in the territories during an interim phase of self-rule.

MALAYSIA'S official anti-corruption agency has cleared Mr S Samy Vellu, Malaysia's energy minister and head of the Malaysian Indian Congress (MIC) political party, of any criminal offence in relation to a share transaction nearly three years ago.

The Malaysian opposition had accused Mr Samy Vellu of 'hijacking' millions of shares in Telekom Malaysia when the telecommunications company was partially privatised in October 1990.

The shares had originally been allocated by the government to the MIC and Malaysia's Indian community.

The anti-corruption agency said it was satisified that neither Mr Samy Vellu nor anyone else had unlawfuly utilised the Telekom shares and declared the case closed.

ONLY A very sensitive ornithologist would want to claim that the grouse was a lovely bird. Lagopus lagopus is a gawky creation which barks when it should trill and flies with a sort of aerial stagger when it should soar. Nature, I think, patently intended this fowl of the air for the pot.

Still, I confess to a frisson of pity the first time I saw one downed, somewhere up on the Banff moorlands, not far from the Glenlivet distillery.

A late grouse has marvellous scarlet eyes, with black pupils that catch glints of sunlight as the bird lies blasted in tussocks of Highland ling. This is the stuff of the sporting print, the appetising table-mat, the jaunts of Jorrocks and the fields of Fielding.

But I briefly mourned the unlovely bird. And I now realise why, for it is becoming increasingly hard to put a gloss of time-honoured prowess on a dead grouse in the 1990s.

To begin with, the guns of today are too good. The birds have the odds against them. Humans may be known for their intelligence, but grouse are not. A double-barrelled shotgun has one barrel too many: that is what our great-grandfathers would say.

But that is not the crux of one's objection to glory on the grouse moor. Put crudely, it is that the wrong sort of sportsman is bagging these birds. It would be undiplomatic, not to say ungentlemanly, to name nationalities, though when I last went beating even the unctuous head game-keeper took exception to a detachment of Italian Christian Democrat town councillors firing away at rabbits all stricken with chronic myxomatosis.

The fact is that nothing says so much about the decline of British aristocracy as grouse shooting. All that is left to us natives is the state of vassalage. We can hardly afford to shoot, so give us a stick, affix an old fertiliser bag, marshall us into a line and let us earn a crust by beating the birds towards the guns of our new masters.

Beaters are masochists. They take a delight in the humiliation of it all. The game-keepers run about in plus-four tweeds and hob-nailed boots, dictating strategies over portable telephones. The beaters do as instructed. A whistle sounds. The beaters obediently set off.

It may be a mile before they converge - plashing through streams, beset by midges but always flapping that old fertiliser bag on a stick. Whole families of grouse peacefully grousing in the heather go spiralling up.

As the beaters inexorably unite, and the glen fills with flapping bags, the guns begin to pop and blaze. Scrambling up the hillside, dodging the patter of pellets, the charitable beaters are the ones wearing Barbour jackets.

Before the dogs home in on fallen birds, before the men with foreign tongues begin to congratulate themselves and their quintuple-barrelled guns, there is always the chance to express your pity for a grouse that has ceased to be: pick him up and stuff him into one of those spacious poacher's pockets a Barbour so thoughtfully provides.

After a hearty morning esconced in the butts on the edge of a hill, the alien aristocrats pass round their hip-flasks, exchange a few jokes about the state of the currency markets - and wait for lunch.

Lunch will certainly arrive in a Land Rover, toiling up from the local country house hotel. That vehicle will be even more certainly piloted by two gorgeous Sloanes. Cold cuts, smoked salmon, foie gras and Stilton are disembarked, and Bollinger is found to ease the nourishment down.

The beaters? The beaters will be out of sight, by order of the keepers. An unkempt motley of old Etonians, Oxford graduates and peers of the realm, they have much in common: processed cheese sandwiches, Red Label tea, and a packet of Silk Cut. They bask in the sun. They know their place.

FROM TIME to time, I have dipped a toe into the waters of Britain's seaside resorts. No matter how I disdain the boardwalk for its vulgarity and seediness I am, at the same time, attracted to it for precisely those reasons. So why not, I decided, pay a visit to the oldest and biggest of all promenades in Britain? Result: on a recent Friday evening, I caught a train northwards. Three hours later, I alighted in exotic Blackpool, mother of all British seaside resorts.

Perhaps it was the knifing wind and fine, cold drizzle that blew in off the sea, sending sweet papers and cigarette packets swirling; perhaps it was the recession. Either way, an inescapable air of weariness enveloped the small shops and businesses, the half-empty B&Bs, the down-at-heel pubs along my way. As I walked through back streets towards a Blackpool Tower obscured by mist, I felt suddenly glum. I could not help thinking that the special atmosphere of the English coastal resort might have become superfluous.

Who needs seaside seediness now that it has seeped its way inland, through the entire country? Where is the fun in vulgarity if it has worked its way into the highest social and political circles? There are times, these days, when all Britain seems gripped by the ethos of the penny arcade. Not even a short stroll along the Golden Mile itself - the long band of fast-food kiosks, amusement arcades, souvenir shops and jostling crowds that fronts the sea - cheered me. The chip shops smelled of stale oil. The souvenirs looked grubby and pawed-over.

Braving a ghastly electronic howl, I stuck my head into an amusement arcade. I did not really expect it, but there was not a coconut shy, a dart or hoop or skittle in sight; the fun seemed centred on video-screen games featuring heavily-armed psychopaths trying to kill each other.

Not even the real people looked happy. Groups of loud youths blundered by with beer bottles in hand. Elderly women wandered aimlessly out of bingo halls into the rain. In the restaurant beside the tower, I queued behind a man and wife in bright nylon shell suits, a baby sealed in a plastic-covered pram between them. They consumed their Big Macs joylessly and left without a word.

I had a Big Mac, too, and ruminated. Was this a final picture of England, supine and spiritless? Had the cheer gone even from the cheap and cheerful?

Not at all, said Barbara Rocks, when I asked her what she thought. It was simply the rain and grey weather. Recession or no, Blackpool remains a place where you can find a bit of fun. Barbara, for eight years proprietress of the Norwin B&B, is a level-headed Scot and immediately dispelled my moodiness.

Besides, her spotless little establishment, from the plastic flowers in the dining room to the coloured lights in the bay window, struck just the right note. So did Barbara. I like being called dear and told not to fret. Tomorrow, I was promised, would be a brighter day. And it was. How, I wondered as I strolled towards the promenade, could I have doubted the town's resolve to see the rest of the country through its lowest moments?

The world at large might be down in the dumps but, if sea-front hoardings and advertising are anything to go by, Blackpool is one great laugh of a place. Without leaving town I could watch the Hilarious Jolley Brothers, Nick Miller's Comedy Store, Roy Walker's Family Laughter Show, the duo Joka, the funnymen Little and Large, the Shamrock Music and Laughter Show, Chubby Brown, Bernard Manning, and scores of other comedy routines. There were singers, dancers, musicians, magicians, ventriloquists and every other kind of performer; making people laugh, though, is Blackpool's real talent.

Low-brow mass entertainment? Perhaps. But then, Blackpool is about temporary escape, simple relief from the monotony and enforced dullness of working-class life. And who needs Godot in Blackpool? There is enough of the surreal about the place as it is.

Summer, for example, is not a season in Blackpool but an attitude. In the stiff breeze on the promenade, young couples in shorts and T-shirts strolled hand-in-hand as if whiling away time on the French Riviera. Wind-whipped but undaunted, the elderly reclined gingerly in rented canvas chairs.

I enjoyed walking the piers. On Central Pier, I circled round and round on a Ferris wheel while, far below, bumper cars bumped and the surf crashed to the theme song of Hawaii Five-0. On the Victorian-style North Pier, where a small tram runs between little white pavilions with green onion domes, there are still a few traditional games of skill left. I threw hoops over bottles, fired corks from pistols, aimed balls at moving targets.

I could not even set foot in Harry Ramsden's famous fish restaurant, so great were the queues that evening. Instead, I bought a bag of rock cod and chips from the take-out counter and parked myself on a bench not far away. Why is it that strange women never make saucy remarks to me when I sit on public benches in London? Perhaps there is safety in numbers - Blackpool is a place where whole office-loads of secretaries, entire shops-full of sales assistants, choose to unwind.

I am not sure I could take more than two or three days of Blackpool. There are times when the rain falls, the wind blows, and not even the most successful fantasist could pretend he was on the Riviera. Then, one is forced indoors with hordes of sodden holiday-makers, and it all becomes too much.

What Blackpool has, above all, is amiability. My last evening was spent at a show at the Layton Institute, a working men's club some distance from the Golden Mile. The singing was mediocre, the humour parochial. But the atmosphere was as warm and sociable as anything I have encountered in Britain.

In London, I live surrounded by people of cool, off-handed mien. It is a city where outsiders rarely feel entirely at home. But, in Blackpool, I felt at home in five minutes. Beneath the seediness and vulgarity, it has a strength of popular culture that, even in tough times, can make the airs and pretensions of London seem gaudy.

heads of government, Ross Perot, Nasa, Nato, stuff like that. Yesterday it was the UK sports minister who summoned me to his lair, to discuss Operation Final Push - the last phase of Britain's bid to stage the Olympic Games of 2000 in Manchester. D-Day is September 23, when members of the International Olympic Committee make their decision.

I did not catch the sports minister's name, but I could tell from his clothes and gear - blazer, hockey tie, headguard, cycling shorts - that he was who he said he was.

'Right,' said the minister. 'Some coffee, Julian, mucho rapido.' Julian is the minister's political assistant: a Michael Portillo look-alike from the Conservatives' hard right - gangster suit, purple tie, perfect teeth, Castilian hair-style, muscular, mercurial. Age: 27. Never turn your back to him.

'Manchester,' said the minister. 'Operation Final Push. Big heave essential. Political risks considerable. But rewards, of course, immense. Everything to play for. Grateful your advice.'

I said: 'What is your problem?'

He said: 'As you know, the government has pumped untold billions into the bid to stage the 2000 Olympics. Manchester has acquired a surfeit of infrastructure. Nine new airports. A 12-lane ring-road. Dozens of hotels. Fifteen new museums. Hundreds of new restaurants. Waterfalls and parks. Zero-rent apartment blocks.

'And plans are well advanced for a coup de theatre: the unveiling, on the last day of the Games, of the John Major Millennial Institute of Sport and the Performing Arts.

'But the prime minister is jittery. He read in The Economist last week that Beijing, one of Manchester's main rivals, is running a campaign of the utmost ruthlessness. According to The Economist: 'When the (Olympic) committee visited Beijing, a Chinese representative simply pointed to the five rings of the Olympic flag and said: China has 1.27bn people, more than one-fifth of the world's population . . . One of those rings . . . represents (us).' Absolutely dynamite. And then there is Sydney. It is co-favourite with Beijing.'

'Sydney is smashing,' I said.

'Just so,' said the minister. 'But let us concentrate on Manchester. I have called you in, Michael, because of your intellectual rigorousness - your ability to atomise complex scenarios into fundamental particles. So here is the big question: what is our Achilles' heel? What could possibly spook us?'

I said: 'Three things, actually. Numero one: the weather. It has now rained in Manchester for 613 consecutive days. They have had blizzards and typhoons and showers of speckled frogs. To date, the media have co-operated and not blown the whistle. But the scandal could leak out. Manchester's weather is a catastrophe-in-waiting.

'Numero two: everywhere in the world there is an anti-British backlash. Europe hates us. Asia despises us. So does everyone else. In The Times, Kate Muir reported this week that in New York, especially, there is a campaign in progress denigrating everything British - our boorishness, our grottiness, our racism, our snobbishness, our economic backwardness, our Marks & Sparks underwear, even our garden gnomes. There is a floodtide of Anglophobia raging.

'Numero three: John Major. He's your biggest problem. You know he's got to go, so why muck around? Replace him with Portillo.' From the chair next to mine, Julian flashed a smile. 'But you can forget the Olympics. Manchester? Not a hope.'

'So what should I do?'

I steepled my fingers and let my braincells whirr, atomising the scenario into fundamental particles.

I said: 'There could be a solution. Your best bet, minister, hinges on the fact that Queen Elizabeth II is still Queen of Australia and Australia's head of state. So . . . despatch our nuclear submarines. Have them resurface in Sydney harbour. Take Australia back. It is one of the world's best countries. The Aussies wouldn't mind. I am sure they would welcome you. Their brains have been softened by sun, sex and surf. By reconquering Australia you will acquire Sydney's bid to stage the Games of 2000. The IOC would love that. Adios, Beijing. And we'd all fly south and live in Australia. Bondi here we come.'

The minister said: 'Your cheque is in the post.'

A racehorse being exercised. A convocation of soldiery. Pallid mannequins loitering. At war or at peace, Beirut is a city of the strangest incongruities and juxtapositionings. These photographs are from a portfolio of work shot this summer by Morris Carpenter, one of two winners of the first Alan Harper Bursary, which is open to photographers under 25. The Pounds 5,000 bursary was set up in memory of Alan Harper, an FT photographer who was killed while on assignment in the Kuwaiti oilfields in 1991. For his project, Carpenter, who works for Zoom Photographic, concentrated on the rebuilding of Beirut, the protection of its historical buildings and archaeological sites - and the effects of redevelopment on the survivors of war.

A REFRESHING line was taken in Radio 4's Monday play, The Chicago Conspiracy Trial. It was a dramatised version, by Peter Goodchild, of the transcripts of a real trial - a notably colourful trial, too, with noisy disputes between both sides' lawyers, witnesses and the public. Directed by the BBC's Martin Jenkins and John Theocharis and produced jointly by the BBC, Los Angeles Theatre Works and WFMT of Chicago, it was very exciting.

In 1968, the Democrats held their Convention in Chicago; the Peace Lobby was active, and there were protests about Vietnam war. They led inevitably to riots, and eight selected defendants were tried before Judge Hoffman and a jury of eight women (two black) and two men - who were kept sequestered for six months. The charges seem trivial today, matters like crossing state-lines and unauthorised sleeping in public places. Defendant Bobby Seal, leader of the Black Panthers, had to be bound and gagged to keep him quiet, though this made his supporters less quiet than ever. Interruptions ranged from the serious to the trivial - an attempt was made to disqualify the judge (the one individual to retain his dignity throughout) and to give his Seale a birthday cake. The participants' names are mostly forgotten today, apart from the poet Allan Ginsberg, and the able American players are unfamiliar to us. The production was genuinely memorable.

Wednesday's The World Tonight on Radio 4 contained an alarming report of sexual harassment in the police. A 19-year old WPC said her bottom was forcibly date-stamped as an initiation ceremony; a sergeant driving her home behaved disgustingly in the car; when she complained, she was invited to resign. The London Police Federation was alleged to refuse funds to women for legal advice for an industrial tribunal, but not to men; and the production of evidence was obstructed.

The Federation's general secretary admitted that the police could behave like anyone else (and indeed male apprentices in industry can have similar experiences); but he denied the matter of funds. Hertfordshire's Chief Constable reckoned education would clear up such problems, and had written to every individual in his force to point out that their behaviour must be as firmly controlled as the general public's. A distressing report, all the same.

Radio 3 last night gave A Sorceress of Her Time compiled by Michael Bakewell from Alma Mahler's letters and diaries. She has become a kind of heroine on the basis of her liaisons. Almost engaged to Klimt, she married Mahler instead, although he was 'a rickety, degenerate Jew' and 20 years older than she. No case of compulsive love, though; they had three daughters, but she was soon close to pianist Ossip Gabrilowitsch. Mahler died in 1911, then she was famously courted by Kokoschka, but she set her sights on architect Walter Gropius and married him. They had a son but were soon divorced - leaving her free to marry the writer Franz Werfel in 1929. Her affaire with a priest naturally came to nothing. Manon, her youngest daughter by Mahler, died in 1935, and Alban Berg dedicated his violin concerto to her memory. Alma was a firm pro-Nazi who thought Hitler a 'genuine idealist', but she had had two Jewish husbands, so they fled to New York in 1940. There Werefel died, but Alma lived to be 86, devoted in her way to Mahler's memory. She at least must have felt that she had lived a distinguished life.

I heard some of the young people's stories on Radio 5; this week, Is Anybody There? a serial by Eric Pringle. Little Christine (Moir Leslie), lives with her father in an old house, where his dead mother once lived. In the attic, Christine hears the voice of an unseen little girl. Instead of being scared, she plays verbal games with her. Later, from the attic window she sees a strange family in the garden, but does not ask who they are. It all ends happily.

ALL STUDENTS of opera should have been at the middle week of this year's Edinburgh festival. As a rule composers do their best to bury their first attempts at opera, but posterity has developed a fascination for digging them up again.

After Tuesday's efforts by the 18-year-old Schubert and the 33-year-old Janacek, and Wednesday's double-bill of stage works by the young Scottish composer James MacMillan, Thursday brought the turn of Verdi and his first opera, Oberto. The composer would probably be surprised that we should want to hear the piece. He knew that he had gone on to far better things.

As the concert performance began in the Usher Hall, it was interesting to think back to 1839. The audience that had come to see this first opera by an unknown composer was used to Rossini, Donizetti and Bellini. What can they have made of Oberto? From the first notes the music is rugged and full-blooded; there is a frankness about it, a determination not to dress up simple ideas with unnecessary frills, that must have caught their attention. In short, Verdi was a new voice.

Today Oberto is important for what it promises, not what it achieves. The plot is a feeble affair, which winds up stock characters with intense emotion (father bent on vengeance, daughter spurned by lover, forgiving rival) and then sets them tilting one against another. Verdi fills their lungs with music, but cannot breathe life into them.

The singers of the day had been brought up on Bellini and Donizetti just as much as the audiences, so we can assume that their voices would have been flexible, adept at achieving expression through phrasing and ornament, almost certainly not very large. Maria Guleghina, who took the leading role of Leonora, is a stunning singer, but not of that kind. Getting the words to speak and shaping the vocal line at the appropriate scale do not come easily to a soprano whose glory is soaring out in blazing splendour on high. When she sang, 'My voice will resound among these lofty towers', one believed her. I look forward to her Aida and Tosca.

Dennis O'Neill, Leonora's former lover, a real bounder, matched her in volume and exceeded her in Italianate passion, at the expense of an edgy vibrato. The role of the old, enfeebled father went to the young and by no means feeble Alastair Miles, whose well-focussed voice has grown beyond Handel and may yet mature into a real Verdi bass. Jane Henschel made the most of the low notes in Cuniza's music (Guleghina does not have a chest register with which to answer back). As a team, they delivered the goods.

In place of Edward Downes, David Robertson conducted the Royal Scottish National Orchestra in a performance of some energy and force, the qualities Oberto does possess in abundance. By the end, the opera had made an impact well beyond what the books of theory tell us Verdi the beginner should be able to muster. Students of opera, please note.

Sponsored by the Friends of the Edinburgh International Festival

Fog everywhere. The bleak house of Birling floats above the dank Yorkshire mists until An Inspector Calls at the Aldwych Theatre. Stephen Daldry's fine, dark production has transferred from the National Theatre. The superb design by Ian MacNeil makes JB Priestley's play into a nightmare of shadowy rain drizzling around the bright bourgeois home of the Birling family, northern manufacturers. The theatre-noir opens with the score from Hitchcock's Vertigo. Priestley's 1944 vision of social conscience gradually works its end on the characters, exposing their shame and guilt in the suicide of a girl they all know. The Inspector's calling card carries the message: 'We don't live alone. We are members of one society. We are responsible for each other.' There are excellent strong performances from Julian Glover as Birling, the family patriarch, and Kenneth Cranham as Inspector Goole his implacable opposite. Sylvestra le Touzel plays Birling's daughter and Judy Parfitt his wife, a horror in red taffeta. This is first-rate Priestley played with atmosphere, purpose, style, and wit: Priestley's original setting was 'an evening in spring' - more like a season in hell. (Aldwych Theatre - 071 836 6404)

IT IS 20 years this weekend since first I came to the Edinburgh Festival. If anybody told me now how to 'do' the Festival, I would probably ignore them; but I might well have listened then. So here are some rules of conduct for a young festival-goer to disregard or consider as she/he chooses.

Don't specialise. Follow as many different art forms as possible, even if you are already going to be an actor or a musician or a movie critic, even if your interest in one art is your reason for coming to the festival. Who knows one art who only one art knows?

Keep up an average of three shows per day: a civilised quantity. You have the rest of the year in which you will go to all too few (and in which to recover). But, if you keep up five per day or more (there are those who do ten), be aware that you do so at the cost of such other important festival pleasures as conversation, friendship, meals, sex and sleep. It is better to eat and sleep between, rather than during, shows.

Go to both Official Festival and Fringe events. Yes, some Fringe events are perfectly terrible. So are some Official ones. There are some famous artists on both Fringe and Official sides; some will disappoint. Both Official and Fringe will feature a number of artists you never heard of before; some will thrill, and one or two could change your life.

Follow your instinct, and do no more preparatory homework in your choice of shows than you need. There is nothing so eye-opening as taking in a wonderful new (or old) piece where you have no notion what will happen next, or how you are meant to react. 'All knowledge is a fall from the paradise of undifferentiated sensation.' (RP Blackmur).

Make a schedule for all you plan to see (allowing time to get from place to place and time to get programmes etc.), and then feel free to improvise around it or revise it. Shape your schedule around your digestion. Yes, of course you can go to 10 events a day if you want - but a rumbling stomach does not go down well during a viola revital at the Queen's Hall, and stomach cramps are not the best condition in which to admire plays about incest.

Take time to fit in the non-festival features of Edinburgh - unless you visit the city regularly. It would be silly, for example, to catch all the festival exhibitions but to bypass the permanent collection at the National Gallery of Scotland (which has, as they say, 'one of everything').

Go to several events that you are not sure you will enjoy. (This is easy in Edinburgh.) It is great to find that a show you were looking forward to fulfilled your expectations, but greater to be overwhelmed by a show of which you had no expectations.

Even if you have a Fringe mentality, try a few orthodox events. (This is not too easy in '93. Sexual unorthodoxy is particularly to the fore: with incest, prostitutes, gay love, promiscuity and child abuse all receiving their dues. Also transvestism. The only show I have seen about a married couple made a a big deal out of them going to a drag show.) But there are Holbein, and Verdi, and Shakespeare.

Don't subordinate your own taste to those of the published critics. Some of them are ninnies, some of them are smart but wrong, some of them are right but dull. The ones to pay attention to are those who, whether or not you agree with them, are in some way or other illuminating. It is useful to read that Wednesday morning's performance of the Schubert E flat major trio was not very good. But if you were hearing that trio for the first time, you had a different experience from the critic, who may have narrowly prescriptive notions on how that trio ought to go. If she/he really tells you how that trio ought to go, fine. If she/he really reveals to you how that trio actually went on Wednesday, even better. But the best thing is simply to listen to the trio.

If there is life after Edinburgh, apply the above to that too, where and when possible. If not, not.

WITH EIGHT days to go, the Edinburgh Festival is on line to be a commercial success. But artistically it is still up for grabs.

Director Brian McMaster had a soft start last year when he presided over his first Festival. Now the inevitable criticisms are starting. A lack-lustre opening concert; a pretentious Peter Sellars production of The Persians; doubt over the new works by featured composer James MacMillan - these are nit-picking irritants.

But the row that McMaster has got into with the National Gallery of Scotland is more serious. Every year, the National Gallery mounts its best shows to coincide with the Festival. It has been included in the official Festival programme and to most visitors is part of the festivities. When successful, as the Ramsay exhibition was last year, the Festival gets some of the glory.

McMaster appears to be against the visual arts. He has suggested a separate Visual Arts Festival. He refused to include the major National Gallery shows this year, one devoted to Holbein, the other to the Russian avant-garde, in his programme, even though the gallery pays for the privilege.

The National Gallery is furious. Fortunately, it is getting record attendances for the Russian exhibition at the Gallery of Modern Art but it cannot understand why McMaster does not make use of its great potential contribution to the Festival. McMaster maintains he wants complete control over the contents of the Festivals.

The spat this summer could be put down to inexperience. But there are reports that McMaster is not interested in including the 1994 art shows inside the official Edinburgh Festival brochure for next year. Since they involve expensive and important exhibitions on late 19th century French painting and German Romanticism, and seem sure to be popular, McMaster might wisely think again and perhaps try to attract to the Festival events that tie-in with these themes.

It is unfashionable to say that the arts in the UK have for the past generation enjoyed a Golden Age, prompted in part by government funding that has risen sharply ahead of inflation. If the Arts Council's budget is cut by Pounds 5m next year (and Heritage Secretary Peter Brooke now presides over such a large empire that he could easily switch funds to the arts if he wished) it is a minimal cut compared with recent increases.

Of course, the arts must put pressure on Mr Brooke and defend their corner but sometimes the crisis talk gets out of hand. Take Edinburgh, for example, and Scotland generally. The success this year of the biggest arts festival in the world hardly suggests imminent doom and the Scottish Arts Council is in remarkably good heart. Here follows some good news.

Within 18 months the Lottery should be providing money for the arts. The SAC reckons it could receive Pounds 6m of it, a sizeable improvement on its current grant of Pounds 23m a year. It anticipates using the annual windfall mainly for capital projects. But where?

The arts in Scotland are in the throes of an extraordinary building binge. Glasgow recently got its international concert hall; the money has been found for the new Festival Theatre in Edinburgh, which will open next spring with the largest stage in the UK; the Traverse Theatre is new and sparkling, as is the Citizens' Theatre in Glasgow. The Fruitmarket and the Tron are among a whole array of art institutions that have recently been refurbished. The Lottery money will easily be absorbed, in improving the Usher Hall, for example, but no-one can pretend that the arts in Scotland are in extremis.

There are the inevitable squabbles - over the merger of two Scottish symphony orchestras; whether Edinburgh or Glasgow should play home to yet another new arts structure, the Museum of Scottish Art; but as the SAC awaits its divorce from the Arts Council of Great Britain and becomes a client of a supposedly-sympathetic Secretary of State for Scotland in Iain Lang, it does seem as if one part of the UK is doing well by the arts.

Bill Burdett-Coutts who runs the Assembly Rooms, the biggest venue on the Fringe, is to take over as director of the Riverside Studios in London. It is a challenging job. Riverside is Pounds 200,000 in the red.

Burdett-Coutts will continue to manage the Assembly Rooms during each Festival and hopes that he will be able to integrate programming. He has long wanted to produce new work rather than just act as a receiving house and controlling a London venue makes it feasible to create plays that start in Edinburgh with a guaranteed transfer to the capital and vice versa.

In the meantime he might give some thought soundproofing the various auditoria inside the Assembly Rooms. American comic Greg Proops got so upset at the noise percolating to his show from the performance of the Doug Anthony All-stars playing up above that he rehearsed his 100-strong audience in anti-Anthony slogans and led them on to the All-stars stage The Australians retired hurt for 20 minutes.

WHAT DOES it take to make a music festival in 1993? As the second week of the Edinburgh Festival comes to its close, the programme may look as full and varied as ever, the audiences are up, but a sinking feeling has set in. The music has simply not been strong enough.

These days, image, integrity - call it what you will - is essential. Driven by the need to attract the affluent, music-loving tourist, cities throughout Europe have been starting up festivals at an unsustainable speed. Those which will survive and prosper are the ones which have something special to offer. Glyndebourne, Bregenz, Bayreuth keep to opera, where the real money is; some modestly restrict themselves to chamber music. For the other big festivals the challenge is to adapt and change - and that is not easy. Look at the problems Salzburg is encountering as it tries to re-focus its position after decades of stagnation.

Everybody in Scotland can heave a sigh of relief. Edinburgh's problems are not on that scale. It is a long time since this was a festival of the rich and famous, where the music can hardly be heard for the tinkle of jewellery and the rustle of furs. Fees commanded by top artists have made the old Salzburg-style festival barely feasible any more.

In most years Edinburgh makes the focus of its music programming a central theme. This is a sensible policy: it means each festival is different and events which might otherwise look uninviting take on extra relevance in the context of the overall package. This year, the second under Brian McMaster as Festival Director, there are three themes: Schubert and Janacek 'juxtaposed'; Verdi 'from first to last'; and James MacMillan 'his music in focus' - in principle, a good mix.

Why, then, do I declare this festival's music to be a disappointment? There have, after all, been successes, such as the concert performance of Mozart's Cos fan tutte, the vocal recitals by Sylvia McNair and Thomas Hampson, the concert by the Oslo Philharmonic and Mariss Jansons. But these were one-off events. None of them was special to Edinburgh 1993.

The Verdi theme is a non-starter. Only three operas on offer, Oberto (his earliest) in a concert performance, a modest new I due Foscari and Falstaff (his last) in a revival of a familiar production by Welsh National Opera: Verdi 'from first to last' perhaps, but with precious little in between. The retrospective of James MacMillan, Scotland's leading young composer, has probably been the most well-balanced theme.

Unfortunately, the big one is the Schubert and Janacek series, and that has proved crucially flat. Each half of it looks to me an opportunity missed. So much of Schubert's greatest music lies in the area of chamber-music and song that there was the chance to put on high-class events at relatively low cost. One imagines, for example, a series of song recitals with the great Schubertians of the day: Schreier, Fassbaender, Margaret Price. In Janacek's case the fare has been variable - no operas (a serious omission), decent coverage of the orchestral works, some interesting rarities. But the BBC's Janacek Festival at the Barbican earlier this year put on just as much and performed it just as well.

Here lies the nub of the problem. Day-to-day concert programming throughout the year is growing more adventurous. The Barbican's own mini-festivals devoted to Britten, Stravinsky, Scandinavian music and so on, have been so exhaustive, so far-reaching, that it is difficult for Edinburgh to go any further.

What can be done? The first thing I have missed is performers who really have something to say about the featured composers. If Janacek is to be the theme, then why not Mackerras, sadly restricted here to just a couple of pieces? (His performance of the Glagolitic Mass a couple of years ago was a more memorable Janacek experience than the sum of all we have had so far.) If Schubert, then a leading string quartet; or perhaps Graham Johnson, to draw on the singers of his Schubert Lieder Edition on record. Salzburg has turned to Harnoncourt. Others have looked to John Eliot Gardiner. These are the thinking musicians who can turn a mere series of concerts into a vision.

Secondly, however expensive, however troublesome, there have to be more staged productions which are unique to Edinburgh, or at least to Britain. (This year's theatre programme has forged links with Salzburg, which may be a way forwards.) In 1994 the re-built Empire Theatre will be ready, the home for the large-scale theatre and opera productions that the festival has needed for so long. McMaster, in his last post an enormously successful and imaginative head of WNO, will then have his hands tied by only one constraint - lack of money.

With the Scottish Arts Council soon to enjoy more independence and a substantial sum expected from the proceeds of the National Lottery, there is the prospect of some improvement to the finances. I can think of no better investment for the future than a fund to allow one or two major stage productions at the festival each year. There is no other festival quite like Edinburgh. It should be Scotland's pride and joy.

BLACK SHIPS BEFORE TROY: THE STORY OF THE ILIAD by Rosemary Sutcliff, illustrated by Alan Lee Frances Lincoln Pounds 12.99, 128 pages

ROSEMARY Sutcliff, one of the greatest authors of historical fiction for children in the 20th century, died at the age of 72 in June 1992. The daughter of a naval officer, she had a peripatetic childhood. She suffered throughout her life from a condition known as Still's Disease which confined her to a wheelchair for much of her time. Of her disabilities she once wrote, touchingly: 'There's a great loneliness about having any kind of handicap in a world which in general doesn't, however much you get to the stage where neither you nor anybody else notices. You tend to create somebody on your side of the barrier who will talk your own language.'

She had little formal education, but was a voracious reader, being especially fond of history, legend and myth - subject areas that she would make her own in later life. Her first wish was to be an artist, but her disabilities made it impossible for her to work on large canvases and so she took to writing instead, publishing her first book, a rather unsatisfactory prose version of the tales of Robin Hood, in 1950.

Many important novels followed: the great Roman cycle, which is seen to its best effect in The Eagle of the Ninth (1954), and many re-tellings of traditional stories in modern versions. Her novels were often prefaced by fascinating 'Historical Notes', which seemed to summarise her rather quirkish approach to historical research. 'So in The Mark of the Horse Lord I have written of Caledanes and Dalriads, and not of Picts and Scots, but it comes to much the same thing in the end.'

Earlier this year she published The Minstrel and the Dragon Pup (Walker Books, Pounds 9.99), which marked an unusual development. Set in a rather hazy Middle Ages, it was both a picture book text (her first, in collaboration with the illustrator Emma Chichester Clark) and as much a fantasy as a gobbet of historical narrative. Her last two works to be published, versions of the Iliad and the Odyssey (promised in 1995), are much more characteristic of the general drift of her fictional themes: the testing of the warrior hero; the clash of light and dark; the overriding importance to a culture of the symbolic objects that seem to embody its very reason for existence. As for Dryden and Pope before her, Sutcliff's Iliad was not the culmination of a lifelong passion but an imaginative response to a commission from a publisher.

Though tales from classical myths did not figure in the earliest examples of children's literature that have come down to us, there were some sensible abridgements of the Iliad and the Odyssey for children in circulation at the end of the 19th and beginning of the 20th centuries. Since the 1940s, the most widely available translation of the Odyssey in English has been EV Rieu's; and two years ago, Christopher Logue's spirited version of books one to four of the Iliad was published by Faber. Logue gave the Iliad a mighty pummelling. His version, boldly incongruous, packed with movable incidents, audaciously anachronistic, virtually reduced Homer's epic to a sequence of marvellous storyboards. But it also demonstrated just how resilient and concentrated a story the Iliad is - so much more manageable in plot, themes and characterisation than the elegiacally diffuse Odyssey.

The Iliad demands not so much imaginative elaboration as ingenious restraint - and Rosemary Sutcliff has reached much the same conclusion in her version. Like Logue, she shows us a Greek nation which seems to have developed a mighty contempt for anything other than the culture of war - an attitude which includes holding death itself in disdain. Her most memorable achievement has been to disentangle some of the more difficult elements of plot and characterisation so that the individual players in the drama shine through with a stark and bloody clarity.

Alan Lee's illustrations, as extravagant in their heroic aggrandisement as any sequence of Victorian narrative paintings, match the text perfectly - the clash of metal on metal; the sweat of heaving bodies; the mists of morning rising serenely over scenes of unimaginable carnage.

The book's principal failing is that the dialogue, as often before in Sutcliff, sounds awkward at times, wordily encumbered, unlike even the heightened human speech of those who walked like gods. Perhaps this was the ultimate price that she paid for her own inability to move freely among other human beings. Otherwise, as ever, she remains robust and intellectually challenging, her prose perfectly pitched to the grievous undoing of two fabulously flawed nations.

The giant finger of fate descends again from the Coliseum flies: English National Opera has opened its 1993-94 season with a revival of Simon Boccanegra. David Alden's 1987 production frames a darkly violent, broodingly personal response to perhaps the most 'inward' of Verdi's middle-period operas.

The stage-picture is cluttered by too much psycho-symbolic baggage (Alden's later ENO productions have proved more disciplined in their stagecraft). Atmosphere is unvaried, larger issues tend to get lost, yet on Thursday the contorted passions and confrontations of the characters were heated to boiling-point - any Verdi staging that can urge performances of such searing emotional force out of all its participants must have unlocked some powerful Verdian truths at the opera's centre.

The cast is characterised by strong, unbeautiful voices sensitively used - Gregory Yurisich tremendous in the title role, pictured left, with Janice Cairns (Amelia); David Rendall (Adorno), Keith Latham (Paolo); only John Connell's Fiesco seems short-breathed, underweight. The revival would benefit from a less self-conscious, stop-go conductor than Alexander Rahbari.

SHOULD YOU ever visit an actor after a performance, do not be surprised to find your compliments reciprocated. While at first this may seem theatrical gush - after all you have been sitting still while he's been sweating Shakespeare - if you turn up on a later, less successful night, you may better appreciate what he means.

For the audience's role is crucial, as Oscar Wilde acknowledged when, on the first night of Lady Windermere's Fan, he congratulated the audience 'on the great success of your performance, which persuades me that you think almost as highly of the play as I do myself.' Such curtain speeches may be a thing of the past, but the old maxim that plays are not written but re-written holds true. And as many contemporary playwrights have found, from Simon Gray to Peter Shaffer, the audience is their final collaborator.

So although we can hardly claim royalties, it is clear that we have a validating role over and above the routine dispensation of applause. Michael Frayn is another to have learned from this collective wisdom when the six-week run at the Lyric Hammersmith prompted the changes which ensured Noises Off a four-year life in the West End. Ironically, the reverse occured with its companion piece, Look Look, set across the footlights in an audience, when the actual audience stayed away in droves.

Look Look's demise sent shock-waves through theatreland, but the subsequent spate of West End obituaries proved premature. For not even a playwright of Mr Frayn's distinction could be expected to mould the disparate characters who composed his typical audience - the family party, adulterous couple, elderly gay, middle-aged mother and daughter - into a cohesive whole. But if his attempt was an honourable failure, it is one most managers and directors fail even to make.

It may be a fatal omission. So much of the energy of our post-war theatrical expansion has gone into redefining the bond between actor and audience: reshaping auditoria to replace the outmoded social and aesthetic relationships of the proscenium arch, that little has been left for the equally pressing task of establishing bonds within audiences themselves.

When managements do consider audiences, it is generally in terms of attendances. Thus the arrival of the mega-musical becomes a cause for celebration, even though it raises the theatrical stakes at the expense of genuine engagement. Audiences become mere applause fodder.

Increasingly, managements play the TV card. Everything is done to make audiences feel at home. The frisson of theatre is reduced to the reassurance of the small screen, as familiar faces are promoted, albeit in unfamiliar guise. This can have obvious benefits, as even the pioneering Bush theatre found when Kevin Whateley ('TV's Inspector Morse]') recently appeared there, but more often it can backfire as with the irate couple who loudly left The Entertainer, complaining that Peter Bowles was playing Archie Rice and not Richard de Vere.

Of course it is vital to attract a new audience. Even the Haymarket had its stuffiness knocked out with the Dawn French fans in singlets and jeans rather than twinsets and pearls. And yet this can prove a mixed blessing. The increased chattering, bleeping and even mobile phone calls in the stalls attest to an audience not so much at home in the theatre as behaving as if it were still at home. Though so far we have been spared such sights as the Madonna fans who arrived halfway through her Broadway performance in Speed the Plow and at the end sat back and waited for it to begin again.

Such a response negates both the power and purpose of theatre. It is a quintessentially communal experience where dramas are played out on the public stage. And unless managements respect this role rather than trying to lure audiences with the spectacle of the cinema or lull them with the familiarity of TV, its uniqueness will he lost.

Similarly, if the audience is to play its role in the theatre and the theatre in society, it can no longer remain the province of the privileged few. For though it is heartening to recall that more people go to the theatre each week than to professional league football, it is still a predominantly white middle-class activity.

This is a loss to all concerned - and even to those unconcerned; for the wider the audience, the richer will be its response. A disproportionate audience can grossly distort a performance, as anyone who watched a house full of yuppies turn Caryl Churchill's Serious Money at the Wyndhams from a critique of city practice into a celebration of its own excess, can confirm.

The experience of seeing a play about racism in a predominantly white audience can be still more disquieting. When Ma Rainey's Black Bottom played at the Cottesloe to rows of white faces, the audience seemed to reinforce the segregated world of the play. Whereas in the very different racial mix of the Theatre Royal Stratford East, black people laughing at racist lines in Tunde Ikoli's Scrape off the Black liberated their white neighbours to confront their own prejudice and fear.

But then the Theatre Royal consistently offers a model of successful audience engagement, as the citation for their recent Prudential award attests. 'Community theatre which should be a tautology, remains far too often an unrealised ideal; and yet, at Stratford, it infuses every aspect of their work. In this they uphold the tradition of their founder, Joan Littlewood, who on being questioned before a performance as to why she was scrubbing the foyer steps, tartly replied: 'I'm expecting company, aren't you?''

In most theatres, audiences are not company but simply customers, which in turn prevents them from fully engaging with either one another or the stage - but, at Stratford, the diversity of the audience is matched by the strength of its response. And although I would be the last to encourage patrons at the National to shout 'Behind you]' to Hamlet as Claudius and Polonius hide in the arras, or 'Nice one, Lopakhin' as the new owner of the cherry orchard announces his prize, the highly vocal Stratford audience reveals an energy and enthusiasm far too often ignored.

Audience engagement is by no means the same as audience participation. After all, actors do weeks of exercises to bind them together, while the crash course of a three-hour performance can leave an audience with a deep sense of distrust (I still have nightmares of a Bournemouth matinee where I was plucked protesting onto the stage to conga with a six-foot-four Carmen Miranda). Nevertheless, if the audience is truly to play its part, it is essential to harness that collective energy which remains the theatre's unique aspect and most precious resource.

CLOSE BY Elgar's statue opposite the north side of Worcester Cathedral is a shop named 'Bygones'. You could be forgiven for thinking the Three Choirs Festival, which has been running all this week, fitted the name. Surely it perished years ago, with the rest of those dinosaurian choral traditions - Huddersfield, Birmingham and the Leeds Triennial?

Well, the answer is 'no'. Three Choirs claims to be Europe's oldest festival. This year's is the 266th in a series tracing back to at least the 1720s. The 280-strong three choirs - made up by choral societies from the three cathedral cities of Hereford, Worcester and Gloucester (the venue alternates annually) - continue to pack the naves and aisles. The festival has survived all vicissitudes: the collapse of Hereford's west tower in 1786; the provisioning of George III's entire retinue two years later; and dire cash shortages in the wake of the Napoleonic Wars.

The venues make idyllic settings. Worcester, clasped between the Malverns and the Vale of Evesham, is an agreeable place to spend a few days. The omens seemed good this year. Both a four-day cricket match on the county ground abutting the River Severn and a race meeting dovetailed nicely with the middle of the festival: Elgar would have approved.

But who goes to the Three Choirs now? Critics traditionally lambast the festival as one of the nation's arch-parochial events (where else would you find an informal forum on church music packed to the doors?) William Mann used to speak of its 'senile decay'. But it is a large parish. An audience survey last year showed that some 70 per cent of visitors to the festival are drawn from outside the locality. Many come from London and the Home Counties. Punters, prepared to pay up to Pounds 25 for a seat, arrive from as far afield as Scotland and Cornwall. Some 50 visitors from the US were here; my immediate neighbours proved to be enthusiasts from Durham, North Carolina, Washington DC and Boston, Mass. A few rows down was an attentive Japanese contingent.

Programming to maintain diversity, ensure profitable sales and keep the Arts Council happy is a fine balance. The administration - much of it amateur and laid back, old-style but efficient - annually falls to a local committee, led by the Festival Director, who is also the host cathedral organist. The conducting is shared with visiting professionals: this year the BBC Philharmonic brought with it the Bolshoi's Yuri Simonov, replacing the indisposed Sir Edward Downes, and BBC Scotland's Jerzy Maksymiuka. Some think there should be more guest conductors, but budget plays a role here.

Full accounts date back to early performances of Handel's Messiah. One problem is that County Council and Arts Council support has fallen woefully behind in the last few years, while the costs of orchestras, staging and closed-circuit TV have risen. Fire and safety checks have meant the loss of several hundred mainly cheaper seats, reducing Worcester's capacity to around 2,000.

But the festival has its own resilience, as the Worcester treasurer, Peter Seward, explains. A tradition of stewardships guarantees the bulk of the central nave; sales are completed in March, providing a tidy sum for advance investment. Sponsorship from commerce and industry was initiated in 1976, at the same time as an organised 'Fringe' added diversity. A Royal Worcester donation of Pounds 4,000 towards a performance of Britten's War Requiem, linked to Wilfred Owen's centenary and the 75th anniversary of the armistice, was matched under the Business Sponsorship for the Arts scheme administered by ABSA. The Great War has an added meaning for Worcester: Geoffrey Studdart Kennedy, the pioneering forces' chaplain known as 'Woodbine Willie', was vicar of St Paul's Church.

Ticket sales account for well over half the Pounds 370,000 budgeted expenditure, the bulk of which goes on orchestras and soloists. Sponsorship adds some Pounds 28,000, of which Pounds 10,000 is from county council sources. The dense programme book still makes a healthy profit. Most important, the administration takes up only 14 per cent of the whole. There are advantages in this quiet, in-house efficiency. administrator would meaningfully increase either the income or the professionalism of the set-up.

In the meantime the parent body, the Three Choirs Association, is in the process of drawing up a three-year business plan. Friends of the festival make donations, the odd legacy still makes its way in, and there is an active organising ladies' committee. Slightly less promisingly, an Endowment Scheme recently set up has only produced Pounds 26,000 to date, part of which has been taken up with a new orchestral revolving platform and improved staging.

The festival still seeks to innovate, if modestly. This year's programme includes the European premiere of the American composer Dominick Argento's large-scale Te Deum, plus a string orchestra commission from Robin Holloway. The event would benefit, perhaps, from a closer study of its visiting orchestras' repertoire, or linking in with the wide-ranging contemporary groups and series such as the London Sinfonietta or Contemporary Music Network. Each has been featured before. This week, amid jazz and Ivor Novello favourites, the Composers' Ensemble brought songs from the wholly contemporary Mary Wiegold Song Book. Above all, the festival needs to win over and educate its audience, Rattle-style, to offer a ready ear to the more innovative side of its repertoire. Without that there would have been little Parry and still less Elgar.

Where the Three Choirs does score is in its commitment to second performances - forgotten works like A Spring Canticle by the suffragette Dame Ethel Smyth, not heard since its premiere here in 1926. Her memoirs, 'Impressions that Remained' were displayed in that same 'Bygones' shop window. Impressions that remained of Worcester this week were of a friendly series of events, often into the small hours, and very much alive.

STAND BEFORE YOUR GOD: GROWING UP TO BE A WRITER by Paul Watkins Faber Pounds 14.99, 203 pages

'A WRITER of rare and precocious talent': this kind of glowing review and a prize-studded career to date certainly support Paul Watkins' reputation as one of today's most promising young writers. This 29-year-old author has already published four novels. Two have received nominations for the Booker Prize - the last, The Promise of Light, is currently being re-issued in paperback - while his second, based on his experiences deep-sea fishing off the New England coast, won the Encore Prize for the best second novel of the year and is currently being made into a film.

The Promise of Light is set in 1921, the story of a young American who sets out for Ireland to track down his family and walks straight into the savagery of the Black-and-Tan war. Accompanying its publication comes Watkins' autobiography, his tale of a homesick New Englander growing up amidst the pillow-fights and puppy loves of an English public school.

Why is it that autobiographies seem to be written younger and younger these days? Watkins' self-chronicle, with its lofty title, actually provides few clues as to why he grew up to be a writer. His account of his years, first at the Dragon School, then at Eton, is remembered in such vivid detail that the reader is at first tempted to mistake immediacy for imagination. Watkins loved his Action Man, for instance. He loved him 'saying Brave Things like 'Mission Accomplished - Good Work Men' when you pulled his cord away from his chest.' He is distraught when he foxholes Action Man in the shrubbery and he gets sliced to pieces by the groundman's rotary mower.

The trouble is that when his father, a real life Action Man, dies prematurely from cancer, Watkins' growing-up seems to stop in the classroom. Denied the chance to prove himself or to earn his rite of passage, it is as though he is resigned to have to look out on to the grown-up world outside.

Watkins never says as much - perhaps he cannot, which is why the book is strangely moving - but we glimpse it in the way the film of Michael Caine's last-ditch stand against the Zulus gives him nightmares, or in the way a First World War documentary leads him to spend a solitary school holiday tramping around the battlefields of Ypres and Passchendaele. Here a ghostly camaraderie envelops this fatherless adventurer, as if, among a league of sleeping knights, he had momentarily earned his spurs: 'I felt a kind of gentleness surround me in the mist. It was a sense of being looked at by kind eyes and protected from harm.'

While the book may be psychologically revealing, it is rather one-dimensional to read because Watkins never gets inside the experiences he describes. Indeed, one's overwhelming impression is that he still inhabits the mind-set of these schoolboy dramas of treachery and betrayal. One is reminded, a touch unfairly, of Norman Mailer's remark about JD Salinger: 'the finest mind never to leave prep-school'.

FROM the 1960s to the '80s, many classical musicians, music-lovers and music-promoters saw Kurt Weill as the (dead) composer most likely to bring together the distinct audiences for popular music and 'serious' concerts: a consummation devoutly wished by many, if on hazy grounds. The Brecht-Weill Threepenny Opera had been triumphantly resuscitated off-Broadway toward the end of the 1950s, and 'Mack the Knife' reached the American hit-parade, while a handful of other Weill songs became late-night listening - chiefly on LPs by Lotte Lenya, Weill's widow - among sophisticated folk, especially left-liberals.

Since anyone with a judicious ear could hear that Weill was much more than just a tunesmith, and the smug European consensus that the (profitable) music of his American exile represented an unworthy decline was already passe, he seemed to offer a bridge across an embarrassing musical barrier. Yet hardly anyone crossed it. The people who took to his catchiest theatre-songs do not come to revivals of his harder, less ingratiating pieces, and many of his highbrow admirers are still shy of admitting Gershwin or Cole Porter to the same canon. The first of Wednesday's two Prom concerts tried a brave new tack.

Conducting his Matrix Ensemble, Robert Ziegler offered a programme of jazz- and black-influenced German music, comprising some unusually 'authentic' Weill, his contemporary Wilhelm Grosz's cycle of Afrika-Songs, and Bernd Alois Zimmermann's 1954 trumpet concerto on 'Nobody knows de trouble I see' (typically troubled, looking-both-ways Zimmermann - serialism and modernism v. honest Heart - pointedly delivered here by Hakan Hardenberger). Grosz's 1930 cycle displays impeccably decent sympathies, but also his incurable knack for bland, memorable tunes, of the same ilk as his 'Red Sails in the Sunset', though nobody remembers him for that.

The concert began with the Brecht-Weill Mahagonny-Songspiel. Not the hybrid Kleine Mahagonny, which was amiably eked out with extra songs from their later 'opera' Rise and Fall of the City of Mahagonny (also about capitalist temptations and catastrophe), but the original 1927 sequence of prickly vocal numbers with acrid instrumental interludes. The emollient Grosz cycle might have been chosen deliberately to set Weill's tougher virtues in proper relief.

In the second half we had Cry, the Beloved Country, David Drew's well-calculated arrangement of numbers from Weill's 'musical tragedy' Lost in the Stars, for Broadway - not linked by any dialogue, but by sober narration from Weill's and Maxwell Anderson's source, the celebrated South African novel by Alan Paton. Drew's focus is clinically fixed on the larger social issues, to decently wrenching effect; but Weill's own calculated vein of American uplift is discreetly expunged, even to the starry-eyed title-song.

Yet Drew, than whom nobody knows Weill's music better, would surely agreed that the composer's best European theatre-music relied upon dramatic context for its scathing ironies. (The most vicious people and their deeds got the most elegant tunes.) It seems to me that the later Weill's Broadway shows were just as meticulously planned wholes as before; can it be right simply to jettison his 'sentimental', too-American stuff in favour of the politically right-on numbers?

Among the vocal soloists in all this music Janis Kelly and Jake Gardner made consistent marks, and Damon Evans pushed his light tenor hard enough to score. Cynthia Clarey's equally light, pretty soprano was often threatened by Weill's quaintly jazzy brass and saxes, like the supporting male quartet in Mahagonny. Still, their plucky efforts were appealingly human. In the second Prom of that evening, seven singers from Anthony Rooley's Consort of Musicke were so practised, so elaborately subtle and balanced and secure (and English) in Monteverdi's 6th Book of madrigals that I was driven to imagining what flamboyant, volatile, self-advertising Italians might have sounded like instead.

HOGARTH: ART AND POLITICS, 1750-1764 by Ronald Paulson Lutterworth Press Pounds 35, 568 pages

RONALD Paulson's biography of Hogarth appeared originally in two volumes in 1971. In the intervening 22 years much further research on Hogarth and his period has been accomplished. Not least by Paulson himself, who is Professor of Humanities at Johns Hopkins University in Baltimore. Constantly widening his already encyclopaedic knowledge of this artist, Paulson arrived some time ago at a point where he has was moved to cover the whole ground again. He was especially enlightened by spending a week at the Tate scrutinising the Hogarths in the exhibition of 1971 before it opened.

In 1991 Paulson published the first volume of a greatly revised biography, Hogarth: The Modern Moral Subject, 1697-1732 (Lutterworth Press Pounds 35) and in 1992 the second, Hogarth: High Art and Low, 1732-1750 (Lutterworth Press Pounds 35). With the appearance of this final volume, Paulson sets the seal on a major work of scholarship that includes both interpretation of all the works and biographical narrative.

Hogarth's paintings and engravings were executed over a time-span that begins in the period of Addison's Spectator, which he regarded as a kind of Bible, and continues through the high Augustan era of Pope and Swift into the world of Dr Johnson, Garrick, Goldsmith. Although not as phenomenally successful as his younger rival Reynolds, Hogarth represents a much more significant response to the political and cultural development of the period. Queen Anne died when he was three; George III was on the throne when Hogarth himself died, aged 67, in 1764.

There are many points at which his work touches on contemporary literature. Fielding was a friend and colleague; both as a novelist and as a magistrate he shared Hogarth's concern about public order and his dread of anarchy. Smollett was an enemy who satirised Hogarth as Mr Pallett in Peregrine Pickle. Sterne's way of writing fiction was positively Hogarthian. Defoe and Richardson both come into the Hogarth story. John Cleland's Fanny Hill derives from Hogarth. Paulson raises his eyebrows at the absence of any tribute to Hogarth in Ian Watt's standard The Rise of the Novel and similar studies.

Hogarth was likewise deeply into poetry. One of Hogarth's earliest works was a set of illustrations for the verse satire that preceded those of Pope - Samuel Butler's Hudibras. Hogarth's genius for ridicule was already riotously in evidence here. Busy crowded woodcuts foreshadow his main painterly innovation - a pictorial work in consecutive parts, delineating the progress of an anti-hero, or an anti-heroine, containing coded references to historical and contemporary people. The tradition of the 'political cartoon' later developed by Rowlandson and Gillray stems from Hogarth.

The Hudibras illustrations were followed by The Harlot's Progress - a close kinship here with The Beggar's Opera, which Paulson sees as the transitional work of the whole period and which Hogarth also illustrated. Then came The Rake's Progress - a set of paintings aimed at a single purchaser, accompanied by a parallel edition of prints for popular consumption that were sold to the public by Hogarth from his workshop on subscription. This doubling of painting and print was his usual practice: the prints were not mere copies but often differed in points of detail from their originals.

In London, where Hogarth lived for his entire life, we are fortunate that much of his best work is easily accessible, not only in galleries like the Tate but also in those institutions with which Hogarth was associated: Captain Thomas Coram's hospital for Foundlings of which Hogarth was a governor - he designed the children's uniform - and St. Bartholomew's hospital. Above all, there are the 12 fine Hogarths purchased by that great 18th century collector, Sir John Soane, architect to the Bank of England.

They are on view in the Sir John Soane's Museum, 12 Lincoln's Inn Fields. They consist of the eight original paintings of The Rake's Progress series and four large canvases done in the last decade of Hogarth's life when he was exercised by the corruption evident in party politics - An Election. Paulson deals with this sequence in fascinating depth, showing the contempt that Hogarth had both for the candidates and the mob.

It was not only party politics that preoccupied Hogarth at this time but also the politics of art. As a youth he served his apprenticeship as a silver-plate engraver; he left his master before completing his seven-year indenture; then he became an assistant to Sir James Thornhill with whose daughter Jane he eloped. Setting up on his own as an artist-dealer in 1720, he was much concerned about the protection of engravers' copyrights in their own prints against pirates and succeeded in getting legislation through Parliament in favour of the artists. He was active as an instructor at the re-formed St Martin's Lane Academy and he joined the newly founded Society of Arts, Manufacturers and Commerce (now the RSA) where the first annual exhibitions of paintings in London were held.

Led by Reynolds, many leading artists left the Society and lobbied for an English Academy on the lines of those in France and Italy. When this resulted in the formation of the Royal Academy in 1768, Hogarth parted company from them. He opposed the emphasis the Academy put on the copying of canonical Renaissance models (prescribed by Reynolds in his annual Discourses to the students). By contrast Hogarth believed that they way forward for art in England was by direct, honest, often scurrilously subversive observation.

Much of Paulson's final volume is taken up with Hogarth's theory of art. Hogarth expounded it himself in The Analysis of Beauty in 1750 both in a text and in two engravings. His gesture against the formal symmetry of the continental ideal was to point to the wavy line, the sinuous shape made by the letter S, as the basis of the Beautiful. His first print shows a painter's yard full of statues in S-shaped poses and surrounded on its border by stays, furniture and other examples of the S-bend. The second print shows the S-shape as formed in their movements by a group of dancers at a ball who are doing a minuet. The shape is wayward and variable - elements of variety and surprise were crucial to his theory of art. Looking at a painting also implied search. The spectator is encouraged to observe the picture closely and decode it.

Here Paulson is invaluable. His glosses on the proliferation of emblems and allusions in Hogarth's work amount to a social history of the period. In his concluding chapter Paulson deals with Hogarth's last drawing, Tail Piece or The Bathos made in 1764. At this time Hogarth was under attack from the poet Churchill and in contention with both Burke and Wilkes. He inscribed on it in capitals the word FINIS, a sentiment that will now be echoed by his biographer, with a justifiable sense of triumph.

THE VOICE OF THUNDER by Laurens van der Post Chatto & Windus Pounds 15.99, 229 pages

SIR LAURENS van der Post has led a life of adventure - soldier in the jungles of the Far East, explorer of the deserts of Southern Africa, great white hunter. Like a character in a John Buchan novel, he is equally at home in tent and palace, welcomed, trusted and consulted as sincerely in Botswana as in Belgravia.

Unlike the predecessors who trampled uncomprehendingly over local cultures, he was sensitive and sympathetic. He understood that simple technology does not imply simple minds; that peoples without books may share rich resources of legendary traditions; and that those whose lives are precariously balanced retain an understanding of the changing seasons, the vital force of rain and sun, our kinship with animals, and other aspects of humanity which are lost or obscured in the comfortable West.

Van der Post wrote marvellous books. He was quick to exploit television when it was new and to help change old attitudes. To the post-imperial generation brought up in this country after the war, as well as to recent environmentalists and conservationists, Laurens van der Post is a modern hero.

His new book The Voice of Thunder brings together two pieces written some years ago,'The Little Memory' and 'The Great Memory', and a recent essay, 'The Other Journey'. The earlier pieces are classic van der Post, part autobiography, part good yarn about the desert, interspersed with observations and speculations about how the bushmen of the Kalahari see the world and how we can share their wisdom.

The new essay has no narrative, it is an old man's meditation on the story of the Odyssey, the perpetual cycle of departure, return and departure which he sees as intrinsic to all lives.

As he has grown older, van der Post's mystical streak has become more pronounced. He is sure he has a message to pass on, but it is hard to pin down what exactly it is. The ancient Greeks would have recognised his awe at the power of nature as a sense of the divine, Pan in the woods, Nereids in the Ocean, without implying a personal deity or an intended discoverable design. The romantic poets shared his vision of the mountains, the torrents and the deserts as metaphors of the tempests and aridities of life. Jung, whom van der Post knew personally, suggested the concept of the collective unconscious, the cumulative effect of heredity and experience, which is unique to each individual but of which a good deal is also shared with other human beings.

Van der Post sees a revealed secret in the urge of the unconscious to become conscious. Perhaps, he suggests elsewhere, everything in the universe is synchronised. The metaphor of a journey can give shape to recurring patterns in human lives. Mixing personal experience with fragments of science, myth and literature, drawing on a quotation here and a famous name there, van der Post constantly risks appearing banal and confused. He is a remarkable man, but wonderment and benevolence are not, by themselves, enough to make a poet or a philosopher.

THE MARRIAGE OF CADMUS AND HARMONY by Roberto Calasso Jonathan Cape Pounds 19.99, 403 pages

ROBERTO Calasso's The Marriage of Cadmus and Harmony has been celebrated around the world this year, and it is necessary to ask why. This is not just a retelling of Greek myth, nor even a brilliant evocation of the classical world. It offers itself as much more: a recreation of myth for the modern imagination and so, in some sense, a new myth, composed both of the ancient stories and of the meaning which a 20th century sensibility can make of them.

This makes it a formidable blend of two kinds of minds that often exclude each other - the poetic and the analytic - where the gods are both overwhelmingly present and figures for thought. Calasso gives us the original Greek myths and a reflection upon those myths, both story and interpretation, image and commentary, sitting down side by side with each other as once happened with gods and mortals until Cadmus brought the alphabet to humanity and the gods withdrew into our indifference.

But why does it work? Primarily because Calasso is an enchanting storyteller, weaving his tales together with all the craftsmanship of the bard in the market place, bewitching his audience with iridescent images and poignant dramas, then drawing them subtly into discussion and, suddenly, secular perspective.

For instance, while he is giving us Europa barely lifted above the waves by the shuddering bull, Zeus, in his race to Crete, Calasso mentions in passing the Linear B tablets and the fact that all Cretan stories have a bull at the beginning and the end. As he ranges from Homer through Pindar, Herodotus, Ovid and many others to Nonnus, the little-known 5th century AD Hellenised Egyptian writer, he achieves many fascinating insights into classical myths, and into the nature and persistence of myth in general: as when Harmony, trying but failing to resist marriage to Cadmus, understands 'that myth is the precedent behind every action, its invisible, ever-present lining'. Or, as the fate of Socrates showed, 'we enter the mythical when we enter the realm of risk, and myth is the enchantment we generate in ourselves at such moments.'

Yet the book seems to me to contain a danger which is probably inevitable and a flaw which is not. The danger is that this particular style, suspending all our disbelief, invites us to receive Calasso's interpretations as a part of the story, and so to lose the difference between the Greek and the modern eye, which has so much to teach us. When, for example, following the entrancing story of Theseus and Ariadne, we read that 'the heroic gesture of women is betrayal' and find Ariadne classed with Antigone on the grounds that they were both the ruin of their cities, we may wonder wearily if classical heroines are doomed to suffer the same fate as Eve. 'Antigone betrays the law of her city to make a gesture of mercy toward a dead man who does not belong to that city.' On the contrary, Sophocles' emphasis is on the nobility of the sacrifice of her own life for love of her brother against the tyrant Creon, the tragedy of individual value asserting itself against the collective rule of law. Myths of other cultures offer a unique perspective on our own culture and we have always to guard against re-imagining them in the image of our own one-sidedness.

Another consequence of this blend of modes of discourse is that we have to take the whole story just as he tells it, as, it might well be argued, we do with any storyteller. But many of these characters are already known to us and have a distinct place in the way we think of things. Without demanding that there be only one version, are we not entitled to pursue these figures independently in the other paths they take in the tales he tells? When only the sources of direct quotations are given, but not the sources of reported speech of which most of the book is composed, we cannot carry our reflections further ourselves. The omission of an index (and a bibliography) also limits the ways we can approach the book: perhaps Calasso is frustrating any use of it as a dispassionate reference book; perhaps he's trying to let the stories live on their own?

The flaw is that on occasion he takes the characters out of their separate stories and makes them a composite character, spanning many centuries and embracing incompatible extremes of behaviour, and this confuses the identity of figures we know. He fails at times to honour the integrity of the particular poems and stories which first gave the figures their habitation and their names. In this way, he allows myth to subsume literature, forgetting that it is literature that gives voice to myth.

Myth then becomes a generalisation from literature instead of emerging as a certain depth of resonance in poem and painting which allows an opening into the mythic realm. The Homeric Hymn to Demeter, for instance, which he relates beautifully and at length, so that we enter with delight the particular imaginative world of the seventh century BC poem, is suddenly interrupted with the goddess Demeter's giving of herself 'illicitly' to King Celeus, according to an obscure scholiast, Gregory of Nazianzus, a fourth-century AD saint. We have instantly to abandon the Demeter of the Hymn whose awesome presence, when she revealed herself, terrified Celeus and all the sons of Eleusis into building her a temple immediately.

Even more disturbing are Calasso's several stories of Odysseus, where he moves from one to the other without indication. But Homer's Odysseus is not the same Odysseus as Ovid's; those yet to read the Odyssey will not be assisted by first learning of Penelope as a 'whorish fox' and the mother of Pan, from Lycophron 400 years later (who he?). This skimming across stories, all apparently of equal weight, may do for a sociology of myth but stops working once we engage with art.

These reservations are not intended to diminish Calasso's achievement in bringing the classical world to life. That the book has rapidly been translated into many languages points not just, in the waning of our Christian age, to a release of the old myths, once dismissed as pagan ignorance and excess; nor only to a vital reclaiming of classical culture in a time when Latin is no longer compulsory and Greek is rarely studied. Maybe it has also kindled a recognition that myths, telling a universal story, survive the death of the particular culture which first told them, simply because they belong to our specifically human inheritance. As the American mythologist Joseph Campbell once put it: 'The latest incarnation of Oedipus, the continued romance of Beauty and the Beast, stands this afternoon on the corner of Forty-second Street and Fifth Avenue, waiting for the traffic light to change.'

RIDER HAGGARD AND THE LOST EMPIRE by Tom Pocock Weidenfeld & Nicolson Pounds 20, 263 pages

IN 1885 a young Norfolk barrister called Rider Haggard, who had an adventurous spell in South Africa already behind him, took a bet from his brother that he could not match a new best-seller called Treasure Island. In the two years that followed, in a well-nigh unbelievable burst of creative and imaginative energy, Haggard wrote and published King Solomon's Mines, Allan Quatermain, Jess and She.

After that, it is hardly surprising that the remaining 38 years can sound anti-climactic, although they were undeniably distinguished, successful and lucrative. Tom Pocock, who is a veteran Fleet Street journalist and an experienced biographer, has produced a brusque, no-nonsense, no-padding life story of a fascinating man in which he acknowledges that his aim has been to concentrate not so much on the novelist as on the public servant, above all on the visionary of the British Empire.

This is the first biography for over ten years and it tells a fairly familiar tale to good effect. The boy was denied a gentleman's education by his Norfolk squire father and sent off to South Africa in 1875, in time to hoist the Union Jack over Pretoria in the British annexation of the Transvaal - and also to meet a certain Umslopagaas and fall for the Zulus. He became the youngest Registrar of the High Court, farmed ostriches in the middle of the first Anglo-Boer War, and came home to the boredom of barristers' chambers where he found rapid fame and fortune with his Africa-inspired fantasies.

After some years of this, Mr Pocock claims, Haggard realised he had perfected a novelist's formula which was a licence to print money, and for the rest of his life he churned out the fiction - he wrote 58 novels, most of which are utterly forgotten today - while getting on with his real interests. He was passionately concerned about agricultural reform, land settlement, and the future of the Empire.

He was no blimp and certainly not a conventional Tory. But he believed in 'the divine right of a great civilising people'; he wrote, 'on only one condition . . . have we the right to take the black man's land, and that is that we provide them with an equal and just Government, and allow no maltreatment of them . . . but on the contrary do our best to elevate them and wean them from savage customs. Otherwise the practice is surely indefensible.' His imperialism linked logically with his concern for the health of British agriculture, which was central to the empire's economy.

His particular concern was to promote the (white) peopling of the Empire - 'the great house with the empty rooms', as he once put it in a vivid phrase - and he served, unpaid, on a long sequence of royal commissions and the like, travelling the world to promote policies which were almost all rejected by Westminster.

After the death of his beloved nine-year-old son, his life was gloomy: Pocock is good on the pessimism, in the post-1918 years, of upper-class imperialists like Haggard and his great friend Kipling. Meanwhile Haggard supported Lily, the First Great Love so often glimpsed in his novels, in a house in Aldeburgh (later to be occupied by Britten and Pears) as she disintegrated, Ayesha-like, from the syphilis her husband, Haggard's rival, had given her.

All of this is well enough done, but Mr Pocock must have realised that he is in danger of having written Hamlet without the Prince. The truth is that Haggard is principally interesting because he wrote a sequence of remarkable fictions which, a hundred years later, continue to haunt our imagination (Pocock's title, with its echo of Haggard's influence on present-day dramas like Indiana Jones, suggests that he admits this). See Pocock's glancing reference to She, where he merely footnotes a reference to the book's later interest for Jungians and Freudians and then skidaddles away: this really won't do, we deserve to be told just a little more. To ignore the books, without whose existence we would not be reading this biography, becomes perverse: I cannot believe that Haggard was so uninvolved in these tales which he dictated every day, and I begin to doubt whether Mr Pocock has actually read many of the novels he lists - but that, I am sure, is an unworthy thought.

Let us remind ourselves, then, that Haggard was a popular novelist of genius who also happened to be a Norfolk farmer and a man of public affairs. In that order. Let's remember the best of his novels are unforgettable because their resonances and references belong to the world of universal myth. As CS Lewis once wrote, 'Haggard's best work will survive because . . . a great myth is relevant as long as the predicament of humanity lasts.' Less elegantly, VS Pritchett has written of Haggard letting down a suction pump into the Unconscious. It would be good to read more about this and less about Sir Rider's activities for the Royal Colonial Institute in 1916.

MORTIFIED by my small son's return from a cricket coaching course stiff with straight bat instructions, I watched the Oval Test with renewed admiration for the Australian batting. Not that the Oval displayed this at its best; no less than three of the tourists gave their second innings wickets away with ill-judged hooks or pulls. But there were still many examples of the correctness that has distinguished and strengthened Australian batting this summer.

'Play forward and play straight with bat and pad together.' This principle of safety is obviously as central in Australian first class coaching as it is in the coaching my son received. So much the better for Australia.

When they attacked, accomplished batsmen such as Mark Waugh and David Boon sometimes branched out into a repertoire of more individualistic shots. But most of the time the middle and lower order played straight and did well out of it.

Never one to miss fame as a wild and swinging exception, Merv Hughes got himself out for 12 runs with a wayward hook in his second innings at the Oval, making a total of 999 runs in his Test career. Most likely he could not resist having a go at the English bowling. It had little of the ferocity with which Curtly Ambrose's seven for 25 and Ian Bishop's six for 40 devastated the Australians at Perth and won the West Indies v Australia series last winter.

England at the Oval were a milder proposition. They were slow, as they have been all summer long, to remove the Australian tail. Even with the match well in England's favour, they could not prevent bowlers Paul Reiffel and Shane Warne putting on a ninth wicket partnership of 74, before Angus Fraser finally took both wickets.

That is why Devon Malcolm is at once a healthy and a difficult transfusion. He failed to blast out any tail-enders at the Oval, probably because he concentrated on pace at the expense of length and accuracy. He bowled a fair bit of rubbish, some exotic, some just misguided, all fast. Openers Michael Slater and Mark Taylor both looked distinctly alarmed by Malcolm's bowling, which Atherton used rightly, in short, erratic, frightening bursts.

I doubt if destiny meant Malcolm to be England's perfectly controlled modern answer to the West Indies' Whispering Death, Michael Holding, but his aggression did sharpen England's bowling attack. Pity the Ashes were already lost. Australia too lacked real pace this summer.

Hughes bowled tirelessly, cleverly, with variation and quite but not really fast. With an unfit Craig McDermott flown home early in the tour to convalesce in the shade of the Queensland gum trees, Hughes was left to spearhead a bowling attack consisting only of himself, Reiffel and relief bowler Steve Waugh, punctuated now and then by apprentices Brendon Julian and Wayne Holdsworth.

Australia's bowling strength was their spin, especially Warne's leg-spin. On different occasions his corkscrew spinners removed old hands Mike Gatting and Graham Gooch with balls that twisted across behind their legs to hit the stumps. For Robin Smith, spin is bad news; leg-spin is disaster. He never had a chance to play his shots because he could never follow the ball.

With Ian Salisbury not playing, England had no leg-spin reply. A sad feature of English bowling in this series was its lack of occasional bowling, which can be a useful hidden weapon. Atherton used to bowl a few leg-spinners, as did another English opening batsman, Bob Barber, a generation before him, to good effect. Occasional bowling often serves to break up long partnerships. Gooch always seemed to distrust it. He did not like trying out his own offerings of slow medium pace, even while Steve Waugh was claiming English victims with his.

I was glad to see Atherton try Graham Hick's off-breaks against Australia. They are full length, slow and floating, aggressive because they are tempting, and add an element of the unexpected to the bowling. England's main off-spinner this summer, Peter Such, bowled efficiently and economically, but in the later games it looked as if he saw his job as containing rather than trapping and he gave the ball little air or flight.

A partner in spin at the other end would have helped him develop his bowling, as Warne helped off-spinner Tim May in the Australian team. The more May played, the more he tossed the ball up and the more tricks he tried, his wicket-keeper poised to profit.

Slow bowlers and quick keepers are mutually flattering. I do not think Ian Healy is a great keeper, but he is one whose close work with his spinners is building up confidence all round. A keeper who can bat well, as Healy did, to England's cost, generates more initiative in a team than a batsman who can keep wicket if necessary, like Alec Stewart.

Stewart was good-humoured about his failure to take over the captaincy from Gooch. His light-footed batting was a pleasure to watch and with a steady batting position, preferably as opener, his defiant shots might demoralise some of the West Indian fast bowlers.

Stewart is a superb fielder and I would like to see him freed from behind the stumps. Then he would perform fewer of the premature celebrations and histrionic appeals at which he excelled this summer.

Both England and Australia used these tactics constantly to try and persuade umpires to raise the dismissal finger. Though I doubt if they were responsible for producing what seemed to me to be an unusually high number of questionable and mistaken decisions, they must have unsettled both umpires and players.

I regard false appeals as a lower form of sporting life, unworthy of cricket. Caught behind is one of a modern umpire's nightmares. With so much medium pace bowling relying on swing and bounce for its wickets, no-one knows for certain whether the ball touched the bat, re-plays are often no help and only the umpire can decide, to the inevitable disapproval of either bowler or batsman.

In his second innings at the Oval, Michael Slater suffered a caught behind decision where the fatal touch was right up on his elbow and, in sporty mood with the Ashes safely secured, said: 'It's just one of those things.'

Next time England want good relations but from a differently tilted balance of success. Their Oval victory, though not crucial and slightly false in a way, was good for their crushed morale. A touch of pace, a turn of spin and a thoughtful captain . . .

THE LAST great traditional event of the year, the US Open, starts next week in New York with record prizemoney of just over Dollars 9m, more than double what it was five years ago. There is equal prizemoney for men and women (an absurdity, this) and the two champions will each win Dollars 535,000.

Not that the players will be thinking about the money when they play. They never do; pride and ambition predominate. But there is an unusual sense of expectancy this year, at least among the men, where the battle for the No 1 spot is still raging fiercely. There is no clear leader. The three Grand Slam championships have produced three different winners, though the doughty American, Jim Courier, has been in in all three finals.

Last January he beat Sweden's Stefan Edberg in the sweltering heat of Melbourne. Then, on another hot day in Paris, he surprisingly lost the French title he had held for two years to Sergi Bruguera. At Wimbledon, on yet another scorching afternoon, fellow American Pete Sampras beat Courier - narrowly - on fast grass.

Will Courier triumph at Flushing Meadow to stamp himself unquestionably as the man of the year? That is a teasing question. The seedings say he will: having regained the world No 1 ranking with his victory last week at Indianapolis, the 23-year-old Floridian is the official favourite.

Yet this normally rock-hard competitor has displayed a soft centre at key moments this year, as he has done for the last two years in New York. In 1991, after storming through to the final, he was thrashed by Edberg with the finest tennis I have ever seen from the Swede. Last year Sampras thwarted him in the semi-final. Perhaps Courier's fine win over Becker last Sunday in Indianapolis will give him the confidence.

Sampras knows all about confidence - or rather, lack of it. In Indianapolis he was shattered by a 7-6 6-7 7-6 quarter-final loss to the 20-year-old Australian Patrick Rafter, ranked at 139. That defeat lost Sampras the top ranking and demoted him to the No 2 seeding next week.

Having now glanced at the draw, Sampras must feel that the fates are against him. Whereas Courier has the quietest section, with No 15 seed Cedric Pioline of France as his fourth round opponent, at the bottom Sampras must face Andre Agassi. Even though the erratic but colourful 1992 Wimbledon champion, described by Alistair Cooke as 'the Las Vegas lollipop', has slipped to No 16, he will have a tremendous following among New York's crazy fans. Of course, both must win their first three rounds, but on the evidence of Thursday's draw that seems likely.

If he survives, Sampras will probably have a quarter-final against in-form Michael Chang who won in Cincinnati two weeks ago. In seven meetings since 1989 Pete has won only once. That was on a fast indoor carpet in Paris two years ago. In their five matches on hard courts Pete has won only one set. This is a psychological block that goes back to their junior days. Pete's best hope is that the powerful Czech left-hander Petr Korda (9) or last year's quarter-finalist, Wayne Ferreira of South Africa, who meet in a testing first round match, will beat Chang first.

The holder, Edberg, is also in the tougher bottom half. Seeded No 3 and as delighted with life as any new father, Stefan faces a fourth round meeting with an old enemy, Alexander Volkov. The 14th seeded Russian upset Edberg dramatically in the first round in 1990. The winner is due to face Michael Stich, seeded No 6, another who always gives Edberg trouble. The German has won three of their last four meetings.

The top half, though weaker overall, has its strong sections. Below Courier are the tall Ukrainian Andrei Medvedev (8), a winner of three titles already in 1993, and the tall Dutchman, Richard Krajicek (10). They have met twice. Last February Krajicek won indoors and in April Medvedev prevailed on clay. However, Krajicek could easily lose to his probable third round opponent, Todd Martin. The fast-improving Martin has risen to a career-high ranking of 17.

The continuing absence of defending champion Monica Seles has robbed the women's game of any real interest. Since Seles was stabbed at court-side in April, Steffi Graf has dominated. She has won seven tournaments this year and should add an eighth in New York.

But perhaps Martina Navratilova will give us a last hurrah. At the age of 36, Navratilova should not really be capable of taking this title for the fifth time. But how do you write off someone who won her eighth Los Angeles title recently to bring her career record of tournament victories to 165?

I am particularly looking forward to the first live use of TEL on four of the show courts. This automatic line call system is the first to cover all the lines of the court. After pressure from the players there will be linesmen, too - a sensible decision which should rule out any uncertainty on those calls beyond the system's 1ft range.

HOW THE SEEDS WOULD MEET

MEN

1 Courier v 15 Pioline; 10 Krajicek v 8 Medvedev; 4 Becker v 13 Lendl; 11 Ivanisevic v 5 Bruguera; 6 Stich v 12 Muster; 14 Volkov v 3 Edberg; 7 Chang v 9 Korda; 16 Agassi v 2 Sampras.

WOMEN

1 Graf v 13 Pierce; 15 Coetzer v 5 Sabatini; 4 Martinez v 11 Maleeva-Fragniere; 9 Huber v 8 Novotna; 7 Capriati v 10 M Maleeva; 12 Sukova v 3 Navratilova; 6 M J Fernandez v 16 Garrison Jackson; 14 Tauziat v 2 Sanchez-Vicario.

AS THE major international motor shows in Frankfurt, London and Tokyo draw near, the steady trickle of new models turns into a flood. The latest are the Volkswagen Passat and Golf cabriolet. Britons will have their first chance to see them at the London show (October 21-31) some weeks after they have made their debut at Frankfurt, which opens to the public on September 11.

Neither car will go on sale in the UK until early next year.

When the Passat appeared in the mid-1980s, it was bigger and heavier than any previous Volkswagen car. At its launch in Britain, VW made the point amusingly in a television commercial: a Passat fell through a floor that had supported a Golf.

Owners, however, have appreciated its solid construction and, in the case of the Variant estate, massive carrying capacity. It is a worthy car; so worthy that I have always felt guilty at finding it rather dull.

If the present Golf cabriolet - still one of the darlings of the young and trendy - was a person, they would call it a wrinkly. It is based on the original Golf and has been around since 1979. But it has proved highly successful; Germans alone bought 100,000 last year.

The Cabrio was tough and, by open car standards, very safe. The body shook far less than any contemporary's on imperfect roads. A stout roll-over bar protected occupants if it overturned. Its down-side was a minute boot, cramped rear seats and a soft top that, while made beautifully, stood as high from the body when folded as that of a second world war German staff car.

The new Cabrio, based on the latest Series III Golf, still has a roll-over protection bar (VW says it would not make an open car without one). Boot and rear passenger space is more generous and the body feels even more rigid than before. The hood sticks up hardly at all when folded and power operation is an extra-cost option.

Driving it in Germany this week, I was impressed by the lack of wind noise or buffeting at quite high speeds. The Cabrio comes with 75, 90 and 115 horsepower engines and a five-speed gearbox with a shift matching the highest Japanese standards of delicacy and precision.

Britain will have only the 90 and 115 hp versions, which will be available with four-speed automatic transmission, but the two-pedal, 115 hp Cabrio was my favourite. Its probable cost will be close to Pounds 17,500 against a manual 90 bhp version's Pounds 14,500.

The Passat for 1994 has had a mid-life face-lift. A proper radiator grille has re-appeared by customer demand. But while styling changes make it look a little curvier, it is still too bland to turn many heads. Enhanced passive safety features include air-bags for driver and front passenger and seat-belts that tighten on impact, both as standard equipment.

Two of the most interesting features of the new Passats are the availability of Sycro four-wheel drive (initially, only in a 115 hp Variant estate) and a 90 hp, direct-injection turbo-diesel. This engine, first seen in the Audi 80, cannot equal the near-silence at low speeds of a Citroen Xantia's or Peugeot 306's indirect-injection turbo-diesel, but it is a spirited performer which is quiet over about 30 mph (50 kmh) and promises class-leading fuel economy.

The Passats, which have a pleasing, solid feel, can have anything from 75 hp petrol or diesel four-cylinder engines to a 174 hp petrol V6. Right-hand drive models arrive in Britain next January at forecast prices in the Pounds 13,000-Pounds 22,000 band.

THIS WEEKEND sees the abrupt end of the yearly return on my garden's longest-running investment. I do not mean the swimming pool, which has now drowned its yearly quota of hedgehogs and is staying open in the hope of drowning a few squirrels. I mean my magnolia. Magnolia grandiflora has opened, flowered and turned brown, leaving me wondering if the wait has been worth it.

Experts have no doubt. In his classic book, The Well Tempered Garden, Christopher Lloyd writes that this magnolia: 'is the shrub for whose sake any outmoded old parsonage, however riddled with dry rot, should be acquired with enthusiastic pride.' In my case the old vicarage came first, then the dry rot, and then the magnolia.

I am a magnolia missionary, and missionaries usually have been converted, too. Twenty-two years ago, I was converted by a single grandiflora which had grown to the eaves of a great Elizabethan manor of pinkish stone in Somerset, where it released occasional flowers from the candle-shaped buds.

the Elizabethans would never have seen a grandiflora. Its home is in the American south and it did not arrive in west country gardens until the early 18th century (although another fine evergreen, Virginia, got to England before 1700 and can still be seen in quantity in Florida, even on swampy ground).

Grandiflora also migrated to the Mediterranean. Perhaps it occurred only in the 19th century. It certainly suited the migrant. In England, a grandiflora may produce one flower to every square yard of greenery. In Italy, they are mesmeric, growing freely in the open to the height of tall trees in the parks of great villas from the Veneto to Tuscany.

In England, we have to wait for flowers until summer and, even then, they appear only if you have observed an essential warning. Grandifloras grow freely from seed, but seedlings vary and, in Britain, most refuse to flower. Christopher Lloyd referred in 1970 to one seedling, probably aged 50, which had still to flower for the first time.

The only way to buy a grandiflora is to buy one grown from a cutting off a proven flowerer. Cheap stock is useless. I had often suspected that the Italians would simply sow seed and get away with it in their hotter sunshine. But as you drive from Pisa airport into Florence your first, fine foreign impressions are the nurseries which grow big grandifloras, trees which the great Italian artists never saw.

I did my homework six years ago. In his useful book Three Gardens, the great plantsman, Graham Thomas, prefaces his usual lists of plants with chapters of brief reminiscences. He describes the evergreen magnolia which had been picked for his new garden: it was a newcomer, called Maryland. Even in its second year, it was bearing several flowers.

'There was I,' says Thomas, 'revelling in the lemon fragrance of great globes of cream, with no need to administer potash or any other plant medicine.'

In 1988, I ordered my Maryland, paid a suitably high price and put it, facing south, between two windows. Maryland is not a pure grandiflora but it has the best of both American bloodlines. One parent is grandiflora, the other Virginia. It is a southerner on both sides of the blanket but, nonetheless, it is supposed to flower before all others.

After three years, I started to notice growth, not flower. Thomas did refer to 'great bulk' for Marylands of the future, although his check-list indicates only 'eight feet by seven feet.' In its sixth season, mine is 10ft high already, bulging forwards, branching sideways, and grating testily against the windows whenever the wind moves the side branches. Everybody is adamant that these magnolias should not be pruned, and Lloyd even says owners should sit indoors in gloom rather than cut their way out.

In the fifth year I had one flower, and this year we have gone ex-dividend at three, which I would represent as a tripling of output if I was writing a report for the market. But this result is not Maryland as Thomas describes it.

Like many others, I think I have bought Exmouth, although they asked for it and I did not. Exmouth is a respectable senior citizen: the first batch of grandifloras in England all died in frost late in the 1730s, and one of the few which re-established was in an Exmouth garden in Devon. At the time, nurserymen travelled happily to pay five guineas for a slice of the tree.

Exmouth is supposed to flower within seven years, so I suppose that mine could be warming up. Meanwhile, what can we all do about that persistent problem, reluctance to flower on this great evergreen?

Perhaps you own a seedling from the past which has virtually no intentions of flowering. If so, you should curse the previous owner and decide if you are sufficiently fond of leaves alone. Otherwise, you can try heavy dressings of potash, applied in springtime, or some artful pruning.

It is no use cutting back the top growth because you will only stimulate more growth and delay its ripening into wood for flowers. Instead, you might try ringing. You should cut away a strip of outer bark, about a 1/2 in wide, near the base of the tree and run it three-quarters of the way round the trunk.

The job is best done early in the year as its aim is to prevent too much sap from rising and forming leaves, not flowers, above. The strip should not be taken too deeply, and on no account should you continue the ring right round the trunk and allow the ends to meet. Otherwise, you will cut off sap altogether.

The final option is to be more insistent than I was and to profit from the intervening years of demand. Maryland is scarce but sometimes available, and if you insist on seeing it and having it verified, you might be looking at cream globes in 1996.

If you start the hunt, do not let the price deter you: if you track the right variety, you are saving yourself between five and 20 years' delay. It is no use complaining at the price of a short-cut to one of the best scents in the world.

HOUSE SALES completed in July showed a predictable seasonal decline from June levels, according to the Corporate Estate Agents Property Index, but the market is still gaining strength.

Contracts exchanged in July for later settlement were at a peak for 1993, with a 3.2 per cent increase over June, and sales were 3.4 per cent up on July 1992 when the imminent ending of the chancellor of the exchequer's stamp duty holiday provided an artificial boost.

Sensibly priced property will sell quickly to eager buyers. In the Cotswolds, the Old Forge at Windrush went recently for a little over the asking price of Pounds 190,000 (through Hurley Lloyd Thorpe, at Stow-on-the-Wold). The Lewes office of Strutt & Parker sold two houses at East Hoathly, Sussex, for more than Pounds 400,000 on the same day: the Gate House (asking price over Pounds 425,000) and Spring Place (Pounds 395,000 for the house, with 37 acres extra).

Further north, however, joint agents Blenkin, of York, and DTZ Debenham Thorpe, of Wetherby, report that the Hambleton House racing stables near Thirsk, Yorkshire, with 25 loose boxes and 175 acres of gallops where Noel Murless and Jack Calvert have trained, did not make the Pounds 400,000 asked. The stables will be back in business soon.

CENTRAL LONDON has led the consolidation of the British property market since the pound was devalued on Black Wednesday in September last year and interest rates fell. Now, the market is suffering from a distinct lack of prime properties.

This has, however, not stopped Lassmans from selling 6 Farm Street, Mayfair, near the Jesuit church, for near the asking price of Pounds 1.7m for a 95-year lease.

The country market is more difficult. What is the right price for the handsome Buxted Park near Uckfield, East Sussex, now a country house hotel?

The electrical trades union EEPTU bought the 1726, Grade II-listed mansion in 1987 for Pounds 6m for the use of its members and others. Before that, it had been a health hydro and the UK home of the ruler of Abu Dhabi.

The EEPTU, now part of the Amalgamated Engineering and Electrical Union, refurbished it lovingly and opened it as a country house hotel in 1989. But it started in difficult times.

Buxted Park has yet to show a profit despite having conferences, a health club and all the conveniences guests/comrades could wish - such as a ballroom; private cinema holding 53; large, heated outdoor pool; park with a herd of fallow deer, and scintillating chandeliers. Inquiries to Savills (071-499 8644).

LITERARY HOUSES put a gleam in agents' eyes. You never know who will apply.

On the north side of Hyde Park, 46 Albion Street is a typical London terrace house with four floors, a garden, and a blue plaque in honour of the novelist William Makepiece Thackeray. It was his mother's and stepfather's house and he went to live there in 1837 with his bride Isabella (and, soon after, their child Anne). Chestertons Residential (071-262-5060) offers it for Pounds 525,000 freehold.

LOVE LIFE in the Bloomsbury Group was more complicated. Savills in Ipswich (0473-226191) and Durrants of Halesworth (0986-873797) are selling the half-timbered Grange at Wissett, Suffolk, where Vanessa Bell lived in 1916 with David Garnett and Duncan Grant after separating from Clive Bell. Her sister, Virginia Woolf, wrote: 'Wissett seems to lull asleep all ambition - don't you think they have discovered the secret of life?' Available for Pounds 250,000.

WOOLBEDING GLEBE near Midhurst, West Sussex, a splendid 1747-cum-1877 old rectory with a garden running down to the river Rother, has links to a minor Victorian literary figure. The Rev. Francis Bourdillon, author of 'The night has a thousand eyes' (in the Oxford Book of Victorian Verse), lived there as rector from 1855 to 1875.

His successor enlarged the house, adding a substantial library. Now, it boasts a swimming pool as well. Set in glorious country (much of which is owned by the National Trust), Woolbeding Glebe is on sale from Jackson-Stops in Midhurst (0730-812357) for Pounds 1.25m.

WESTWARDS, in Hampshire, Jane Austen and her brother Edward lived at Chawton, near Alton, from 1809. Her house on the estate belongs to the Jane Austen Memorial Trust and is open to the public but the big house, Chawton House, is in poor condition.

Its sale last week (with the adjacent Old Manor House and 275 acres of park and farm land) to the Leonard X. Bosack and Bette M. Kruger Foundation of the US should, however, ensure its survival. The foundation will restore house and gardens as a centre for the study of women writers. The asking price with agent Humberts Leisure was Pounds 1.25m.

ONE FAMILY has farmed at Wested Farm at Crockenhill, near Swanley, since 1908. Its 719 acres are 20 miles from London and a mile from the M25 and M20, Now arable, it used to be in fruit, vegetables and dairy cattle and could easily return to them. A tithe barn incorporates a cold store holding 80 tonnes and there are the necessary cottages and a farm manager's house. One of the lots is a ground let for Pounds 1 a year to the local football club. Knight Frank & Rutley (071-629-8171) looks for more than Pounds 2m for the property as a whole.

THE FALL IN prices since the 1980s, cuts in interest rates and inflation, and higher earnings for people with jobs have made houses more affordable than for many years. One unexpected consequence, says the Royal Institute of Chartered Surveyors, is that some buyers are ignoring the usual first step on the housing ladder - studios and one-bedroom flats. They are going straight to flats with two and three bedrooms and houses big enough for children.

DO YOU FANCY your very own tax haven? Then try Brecqhou, which lies just off Sark, in the Channel Islands. It is 1,000 yards long, 600 yards wide and rises to 240 feet with a manor house, dower house, four cottages, paddocks, helicopter pad and small harbour. Supplies arrive by an aerial cable trolley from Sark, useful in bad weather.

The price from Knight Frank & Rutley and Lovell and Partners (0481-723 636) is over Pounds 3.5m (at least some of which surely could be recouped from the tax savings) and the new owner gets the whole 80-acre island.

He also qualifies for a seat in the Chief Pleas, Sark's parliament, as well as joining its government (known as the Quarantine).

STALIN and Mao never trusted one another, even when China and the Soviet Union were allies. So their plan to link China and the Soviet Union by rail through central Asia was never realised.

Not, that is, until the 1980s. By then the Sino-Soviet dispute was history, and people on both sides of the frontier were thinking more about trade than politics. So the Chinese revived the idea of a central Asian rail link. They went further, and proposed a new trans-continental rail link joining Europe with China, the North Sea to the Yellow Sea.

The proposal involved building a railway line across the mountainous border between the city of Urumqi in the far west of China and Kazakhstan: the railway Stalin and Mao never built. Last December 1 the rail link was inaugurated, and amid much pomp and ceremony the first freight train left the Chinese port of Lianyungang on the Yellow Sea, bound for Rotterdam.

There is not yet a trans-continental passenger express on the route. But there is a good second-best: a new express train from China to Kazakhstan, leaving Urumqi for Alma Ata every Tuesday morning. This train ride along the old Silk Road is irresistible - for us, anyway.

To travel on the Urumqi-Alma Ata express, our first step was to get to Urumqi. We had a choice between flying from Peking or stopping off along the old Silk Road en route. We chose the second.

We flew from Peking to Dunhuang, site of the world's finest Buddhist cave murals, and then took a train across the desert to the oasis town of Turfan. There we visited mosques, bargained for Uygur carpets, rode camels and climbed sand dunes (harder than it sounds). Then we hired a car and drove north-west to Urumqi.

For three hours we sped through the northern outskirts of the Taklamakan desert, the most awesome and barren mass of land in Asia. Then we wound through the pass between the gaunt and forbidding Tian Shan, the Mountains of Heaven. At last we drove down into the suburbs of modern Urumqi, now a bustling centre of frontier trade and tourism.

In the railway station at Urumqi the following Tuesday morning a sign in Chinese proudly pointed the way to 'International Trains.' There was only one train from Urumqi fitting that description. That was our express.

The carriages were smartly painted in green with yellow clover-leaf friezes. According to a plate on the undercarriage, they were made in Halle, eastern Germany.

Our compartment was spotlessly clean - an echo of the immaculate days of Chairman Mao - and contained two couchettes, a table and a teapot. Every so often our Kazakh carriage attendant would replenish the pot from a state-of-the-art samovar at the end of the corridor. He wore a stiff peaked cap and stood to attention outside his carriage when the train stopped at stations. Otherwise he lay on his bunk in his vest.

The journey was a leisurely trip through space and time.

The Han Chinese faces of city people in Urumqi gave way to the more homely features of the minorities - Uygur, Kazakh and others - to be found in western China away from the main urban centres. Portraits of small-town frontier life passed our train windows.

Gradually, more and more Russian faces could be seen, rough-hewn at first, then more finely drawn. The landscape began to change, too. The land became more fertile, and vistas of barren mountains and brown stone wastelands gave way to fields of cotton and grain.

Our neighbours in the next compartment were too busy to observe all this. They were a delegation of Chinese railway workers earnestly preparing for a visit to the railway ministry in Moscow. Their interpreter was a warm-hearted Chinese woman who had learned Russian in the 1950s, in the heyday of the Sino-Soviet alliance. She had not spoken or read the language for years, and now she was eager to brush away the cobwebs and start again.

With this in mind she helped us get to grips with the timetable posted in the corridor of the carriage. This was not so easy to do. It was not at all clear why the train was scheduled to take 10 hours at the frontier going one way, and four hours the other. Finally we worked out the answer: the timetable, issued by the government of Kazakhstan and printed in Russian, showed Moscow time.

From Urumqi to the border the train carried a Chinese dining car. By the time we found our way there the car's stock of local beer had been consumed, as we could see from the ruddy complexions of the diners. So we washed down our spiced meats and vegetables with a pink fortified wine from the Turfan vineyards.

Later, across the border, we found a Kazakh dining car in which we drank Russian champagne and dined on a banquet for the princely sum of Dollars 1 (our first experience of the collapsing rouble).

The border crossing from China to Kazakhstan was an elaborate affair. Mercifully, it took place at night, so we slept through most of it. There was much bumping and grinding as the carriages were adjusted to the broad Russian gauge, and much striding and searching as frontier guards and customs officers examined every inch of the train. Clearly they had been brought up to exercise authority the old way. At the same time they were trying to adjust to their changing role in the new era.

'Passports] Papers]' the Chinese customs officer snapped officiously as he flung open our door. But then he sat down and chatted for 20 minutes about China's open-door policy and investment prospects.

We received much the same treatment from the intent-looking Russian woman who rushed in waving a sheaf of forms. 'Kazakh Aids certificate - government regulations]' she declared grimly. When we shook our heads and explained our ignorance, she smiled sweetly and hurried into the night.

As we approached Alma Ata on the second day, the white mountain range beyond the city made a glorious backdrop against the winter sky. When we drew into Alma Ata station we parted reluctantly with our travelling companions.

The carriage attendant beamed, but looked wary when we asked him to recommend a good hotel. How was he to deal with such innocents at large? He probably wanted to warn us about the perils of life in a market economy, or at least tell us how to bribe our way into a hotel room. In the end he said very little. As a result we learned the hard way, and found rooms very late that evening, only after lining our passports with large dollar bills.

As for my friend from the Chinese railway department, she turned up once more in an unexpected setting. On the way to London from Alma Ata I stopped off in Moscow, where I lost my luggage at the domestic airport. She was on the same flight, and lost hers, too.

But she knew at once what to do. 'Follow me', she said, and led the way out on to the tarmac. There, far away in the snow, was a pile of abandoned suitcases, including mine. 'How did you know where to go?' I asked. But I knew the answer before she replied. Who better than a Russian-speaking Chinese, nurtured on the Sino-Soviet alliance, to understand how the Russian bureaucracy works, even today?

Travel from Peking to Urumqi and on to Alma Ata by air and rail can be arranged through the China International Travel Service (CITS). Much the most comfortable hotel in Urumqi is the Holiday Inn, which can be booked through CITS or direct, tel: (0991)-218788, fax: -217077. There are several large hotels in Alma Ata. We stayed at the Hotel Otrar. Hotel bookings as well as bookings for internal Aeroflot flights can be made through Intourist. For these services local Intourist offices take payment only in USDollars .

A STRANGE and mournful wail filtered up from beneath our feet as if some lost soul was crying in despair from the depths of the earth. The only light came from the flickering flames on the dark horizon and a slight glow from the stars as we stumbled forward. Something flopped away from us, struggling over the uneven grass like a grounded spirit of the night.

Black and white, with wings outstretched, it made pathetic but vain attempts to take to the air. No effort was required to catch the bird; as I lifted it skywards, it spread its long wings and, returned to its true element, glided away with ease.

It was a Manx shearwater, a short-term occupant of one of the old rabbit holes on Skomer Island off the Pembrokeshire coast, in Wales. More than 100,000 come here every spring to nest in the shelter of their underground bunkers, safe from the predatory intentions of gulls.

Flying aces, they glide over the stormy oceans with grace, dipping an occasional wing-tip in the water as if to belittle its power. On land they are all but helpless, staying hidden under ground during the day and only venturing out under cover of darkness. Their half-eaten corpses strewn on the rabbit-cropped turf, particularly around full moon, tell of a successful night's hunting for the gulls.

In spite of the proximity of Milford Haven and the burning beacons of its oil refineries, Skomer is a diamond in the Welsh wildlife crown. In addition to shearwaters, it has large colonies of nesting sea-birds including puffins and guillemots. Choughs swirl around its cliffs while short-eared owls hunt its special Skomer voles. Skomer is also one of the most important breeding sites for grey seals in southern Britain: about 100 pups are born there every autumn.

Wales is well-blessed with wildlife islands. Further off-shore from Skomer is Skokholm, which has storm petrels as well as many of Skomer's species; even more remote Grassholm supports one of the largest gannet colonies in the northern hemisphere.

Ramsey Island, off St David's Head, has been purchased recently by the Royal Society for the Protection of Birds. A number of rare birds nest there including peregrine falcons; there is also a large grey seal colony and a herd of red deer. Also noted for its birds is Bardsey, accessible by boat from Pwllheli, which has its own bird and field observatory.

All these islands, along with Anglesey and various headlands on the Welsh coast, are good spots from which to watch for passing cetaceans, although less-dedicated whale watchers might have more luck with the resident bottle-nosed dolphins which live in Cardigan Bay and can be seen off New Quay Head.

In less rocky areas there are outstanding examples of salt marshes and estuaries of national and international importance around the Welsh coast, notably the Loughor estuary north of the Gower peninsula, the Cleddau, the Dovey and the Dee, Conway and Taff. The last three are under considerable pressure from development, and the main wildlife interest of the Taff estuary is likely to disappear if the Cardiff Bay barrage is constructed as planned.

All have large populations of wildfowl, especially in the winter when they are important feeding grounds for significant flocks of waders such as godwit, redshank and oyster catcher, and ducks like pintail, widgeon and goldeneye.

More picturesque than mudflats at low tide are the sandy beaches and their flower-rich dunes which are found, notably, around the Gower and nearby Kenfig and at Newborough Warren on Anglesey. Fine orchids grow in these unlikely places, including the southern marsh orchid, fen orchid, marsh helleborine and green-winged orchid. If it is an unusual beach you want, then try Shell Island south of Harlech where the empty shells of more than 70 different crustaceans may be found.

The Snowdon massif makes a magnificent backdrop to this area and the summits of these, the highest mountains in Wales, have a flora that dates from the last Ice Age. On the most exposed tops you can find dwarf willow and reindeer moss, while in more sheltered spots are other Arctic-alpine species including cushions of purple saxifrage, mountain avens, Snowdon lilies and globe flowers.

On the slightly lower slopes are sheets of heather which support both black and red grouse. The latter, startled by your approach, cries out 'Go back, go back' as it leaps into the air and glides away. In river gorges you may spot a ring ouzel, a shy relative of the blackbird with a white bib, not to be confused with the smaller, tubbier and more confiding dipper.

There are feral goats up here, too: animals that have probably roamed the hills for centuries. At present there is conflict between the goats and local agricultural and conservation interests because of the damage they do to young trees and seedlings; selective culling takes place. But while you are quite likely to see the goats of Snowdonia, the gwyniad will almost certainly evade you. It is a small, herring-like fish - an Ice Age remnant - which occurs only in Bala lake.

Unlike Bala lake, many of Wales' inland waters are man-made, tapping into the high rainfall of this hilly country to bring water to drier parts of Britain. Some of these reservoirs, especially in the Elan Valley and at Llyn Brianne, appear to be strongholds for the red kite. A success story for the work of the RSPB, the red kite has made a significant return, particularly in the past decade. While the RSPB's Dinas and Gwenffrwd reserve is the main centre for these birds, they range widely, and seeing one is a matter of keeping your eyes peeled for a fine chestnut bird with a forked tail.

There are good chances of seeing otters in Wales, both on lakes and in rivers, while its relative, the polecat, is a Welsh speciality. This ferret-sized creature was persecuted to extinction in England, but has been hiding out in the Brecon Beacons and Tregaron Bog, a notable national nature reserve, and is now making successful incursions into its old haunts in the English west midlands.

Countryside Council for Wales, tel: 0248-370444. The Welsh office of the Royal Society for the Protection of Birds (0686-626678) can tell you how to reach Ramsey Island and other reserves. The Brecknock Wildlife Trust runs weekend country breaks that include badger watching, looking for otters and spotting red kites (0874-625708.)

To stay on Skomer or Skokholm islands you must book through the Dyfed Wildlife Trust (0437-765462). To reach Skokholm and Skomer, book a place with the Dale Sailing Company (0646-601636). Day trips to Skokholm can be booked in advance through any national park tourist information centre. Thousand Islands Expeditions runs exciting trips around Ramsey in large inflatables (0437-721686).

Just published in paperback: The Summits of Snowdonia by Terry Marsh, a guide to all the 600-metre summits in Snowdonia national park and the Berwyn Hills which straddle the park boundary. (Robert Hale, Pounds 6.99).

GO TO the end of the earth, turn east, and what do you find? Answer: a gem of a collection of art deco buildings.

Napier, a city of 50,000 or so on the east coast of the North Island of New Zealand, is the home of a remarkable example of town planning: half-a-dozen blocks, most of its commercial heart, built at the same time and in the same style - a Bath for the 20th century.

There is a melancholy reason for this. Early this century, Napier was a Brightonesque seaside resort, noted for its bracing sea air and its long marine parade looking out towards. . . well, Chile is the next stop. Its buildings were characteristically Victorian, several storeys high, lined with fretwork verandas.

Then on February 3 1931, the region was struck by an earthquake. In effect, the whole country is a fault line rising from the Pacific, but this was by far the deadliest of its many 'quakes, 7.9 on the Richter scale. The death toll was 258 and the subsequent fires razed the middle of Napier.

So it all had to be rebuilt at once, and the city fathers decided that the new art deco look was the one best suited to a community trying to overcome tragedy and turn firmly towards the future. It was not the only style used - you can see hints of classical, Spanish mission (the main influence in the rebuilding of nearby Hastings) and Frank Lloyd Wright - but it was the main one, and Napier is clearly, as it claims, Art Deco City.

The architects - Louis Hay, a Wright devotee, and E A Williams were the busiest of them - learnt lessons from the disaster. Buildings were to be low-rise, with less masonry to fall on passers-by; two storeys is standard. Services went underground.

Many of the street-level shopfronts have been renovated, but turn your eyes up and the city's uniqueness becomes apparent. Everywhere you look you see the straight lines and sharp angles of art deco.

Typical decorations involve sunbursts, chevrons, zigzags, even stylised Maori motifs. Most have been sympathetically painted in soft pastels, standing out against the bright blue sky.

The best are to be found on the Countrywide Bank and the Daily Telegraph buildings, in pinks and oranges, the latter looking vaguely Egyptian, and on the Midland hotel, with a long, low, almost flat facade. But there are lots of small shops and offices, their architects often unknown, which go together to make up this unique cityscape.

Europeans often think of art deco as an art form of the north. It was first unveiled at the International Exposition of Modern Decorative and Industrial Arts in Paris in 1925. But it has flourished best in the sun: fine collections of apartments and shops are on show in Miami and Los Angeles.

Napier's collection is not as big as those, but it is notably compact: half-an-hour's stroll will take you past most of it.

Oddly, it was only a decade ago that the locals realised just how unusual their town was. By this time, some buildings had already been pulled down, a process which is still occasionally going on, though today's replacements usually make a feeble attempt at the art deco look themselves. Since then, books and TV programmes have alerted New Zealanders to the value of Napier.

Visitors can take guided tours of the town, while the museum offers audio-visual displays about the 'quake of '31. Information from Art Deco Trust, PO Box 248, Napier. Art Deco Napier, by Peter Shaw and Peter Hallett (Cosmos Publications, Napier, NZDollars 26.95), is a short, well-illustrated guide to the town's treasures.

HEAD TEACHERS are always quick to assert that A-level league tables do not tell the whole story about a school's performance, and they are, of course, right.

However, the story they do tell is growing increasingly clear. For most independent schools, the FT now has data for the last six years. The tables on this page and the next show the rankings for each of 501 independent schools both for this year, and, where the figures are available, the average position for the previous five.

There is a marked and unmistakable trend at the top. Of this year's top ten, all bar two were in the top ten averages for the previous five years. The only newcomers were Withington Girls School in Manchester, ninth with a previous a average of 18th, and King's College School, London, which came tenth after a previous five-year average of 21st place.

The two to drop out of the top ten scarcely suffered serious falls from grace, with Haberdashers' Aske's, Borehamwood, now 12th, and Wycombe Abbey 16th.

Close though the margins between different schools' results can often be, the league tabling has revealed a hard core of consistent performers - a 'Carling Premiership' of schools as one educationalist has put it.

A closer look at the schools which made it into the premier league does however cast some question over whether the exercise is measuring the quality of a school's tuition, or just its success in attracting able pupils.

The top ten this year include two internationally renowned and highly prestigious boys' boarding schools, Eton and Winchester, for both of which applications will always be high. The remaining eight are predominantly day schools, based in large conurbations, and therefore have a catchment area which enables them to select from a broad range of pupils.

Deciding between mixed and single-sex education involves more than academic criteria. But these results also seem to provide an academic argument for single-sex education - all bar one school in the top thirty are single-sex up to the age of 16, using the FT's definition of single-sex schools (see footnotes to our top thirty table). Leicester Grammar School is the highest-placed fully coeducational school at 29th, although Westminster has a mixed sixth form.

John Trevis, schools consultant with the Gabbitas, the London-based educational consultancy, further points out that the few boarding schools among the top academic performers are unusual in that they have special houses for scholars, where the ablest pupils can feed off each other.

This calls into question the concept of 'value for money'. Schools such as St Paul's in London, top of the tree this year, may have excellent results, but it may not necessarily follow that they offer better value for money. It could be argued that pupils bright enough to prosper at St Paul's would also shine anywhere else. Further, the standards required by the academic elite schools are so great that it could be argued that many parents should ignore them in any case.

Stephen Baldock, highmaster of St Paul's, admits that his school is working on 'good material'. However, he points out that this year's results included good grades for some of the boys who were not naturally among the most gifted.

Trevis suggests that parents with children who are lacking in academic self-confidence might deliberately avoid the top schools because the pace of lessons may be too much for them. Schools lower in the standings may be much better equipped to cater for their needs.

He points, for example, to Stanbridge Earls School, in Hampshire, which finished 501st. The school specialises in teaching dyslexics and children with other learning difficulties, and, according to Trevis, ranks as highly as St Paul's in the job it does for its pupils.

Another issue is the effect the league tables will themselves have on schools' performance. The government's motive in publishing them is to reveal under-achievement and give the schools a powerful incentive to improve standards. The 2.2 per cent overall improvement in pass rates by the independent schools surveys suggest that the tables may have had this effect.

The objection to the league table concept that individual positions are too strongly influenced by minor fluctuations in results seems unfair. Compare this year's score with the average for the previous five, and you will find a remarkable degree of consistency. While this is most evident at the top, significant deviations are still rare lower down.

A few significant jumps were recorded - for example Croydon High School came 32nd, compared with a five-year rank of 103, and Francis Holland school, in Clarence Gate, near Regent's Park, London, leapt to 50th following an average placing of 229. Further down in the tables, Cobham Hall School, near Gravesend, Kent, rose to 194th from a previous average of 409th.

Consistency in league tables has been helped by the rigorous approach taken by the FT's statisticians, using data supplied by the Independent Schools Information Service. These tables are based on total UCCA points, which include both A-levels, and the new AS-levels ('Advanced Supplementary') which were introduced to add breadth to sixth form curriculums, and are intended to be as difficult as A-levels, but with syllabuses only half the size.

By taking this approach, all grades achieved, not just As and Bs, are taken into account, giving a full picture of a school's academic strength. Schools which provide extra options such as AS levels will be credited.

General studies A-levels, offered by many schools as an extra option but often without any devoted tuition, has been derided by employers' organisations. It is usually ignored by university admissions tutors, and so it has been excluded from all the FT's calculations.

Schools with less than ten candidates in total have also been excluded, as these are likely to be highly specialist, while the grades achieved could lead to statistical distortions - as was shown by last year's government league tables for state schools which saw the tiny Scilly Isles in first place.

The FT has also aimed to avoid over-simplification by ranking schools using two separate scores - UCCA points per entry, and UCCA points per pupil.

The former gives the average grade in each exam taken, while the latter gives the total grades each pupil has on average accumulated.

Either could be argued to be preferable. The former can be manipulated by deliberately withdrawing pupils from A-levels where they do not seem likely to do well, while the latter rewards schools where pupils commonly take on more than the standard three subjects.

League tables compiled using the two measures would be different, as a glance down the columns headed UCCA points per entry and UCCA points per pupil show. Instead the two have been combined to give the ranking score.

As the bald ranking can unfairly accentuate what are often marginal differences between schools' results, the figure in the second column gives an 'FT score' which shows by how much a school has varied from the norm. This is calculated so that an average school will score exactly 1.00. This was achieved by the schools ranked from 263 to 269, and is equivalent to roughly 18 UCCA points, or three Cs per pupil.

A more profound problem is whether A-level grades themselves are the true 'gold standard' of educational excellence which many teachers and university admissions tutors assume.

Difficulties with university entrance this year, and wide discrepancies in the grades awarded by different A-level examining boards, have brought serious questioning of the A-level system for the first time.

In Scotland, most schools prefer to do the broader Scottish 'Highers' rather than A-levels - which is why only two Scottish schools appear in the table.

Further education colleges in the state system have reported significant increases in demand for new 'vocational A-levels', in which some exams will be replaced by work experience and coursework. In the independent sector, International Baccalaureate is also gaining in popularity.

Sevenoaks School, in Kent, has been in the forefront of introducing the IB, which forces pupils to do a broader range of subjects, and has wider international recognition.

Richard Barker, Sevenoaks' headmaster, believes that the IB allows greater diversity, and the abler pupils are encouraged to take it. IB candidates account for the majority of the school's Oxbridge entrants this year. The school's figures in the table have been derived using a complicated formula to convert IB results into an A-level UCCA points equivalent.

THE PERFECT holiday traveller is a magician. She arrives without fuss carrying one small suitcase from which she apparently pulls an endless stream of clothes so that she looks elegantly and appropriately dressed on every occasion. You do not believe she exists? Then read on and find out how anyone can turn themselves into her.

It may not all be done with mirrors but it is a matter of illusion. This paragon knows how to get a gallon of clothes into a pint-sized bag. The secret, of course, is interchangeability based on a narrow range of colours, giving the maximum number of permutations from a limited number of pieces.

The successful packer knows that the easiest colour combinations around which to work are neutrals because they all go with each other and you need only a few accessories to go with all of them. The black, white and cream combination chosen for the wardrobe on this page is ideal. She also knows that clothes pack more tightly and emerge less creased when rolled rather than folded, and that anything which will not fit into the largest acceptable aircraft cabin bag (55cm x 24cm x 31cm according to Louis Vuitton, which makes one) is not worth taking. This applies just as much to two as one week holidays; the laundry bills or, for the parsimonious, a few minutes' washing, are minor inconveniences compared with lugging a larger suitcase.

If a short-notice invitation to the south of France arrives just when she thinks her summer is over, the perfect holidaymaker will already know (as the FT photographic team discovered) that an easy way to get there is with Air UK from Stansted, which has a speedy check-in to help you go from central London to your hotel in the Nice area in about 3 1/2 hours.

She will also know exactly where to go to replenish her holiday wardrobe in the dog days of summer when many stores have already decreed that autumn has arrived. As efficient a shopper as she is a traveller, she will home in on Whistles, Jaeger, Ronit Zilkha, Dorothy Perkins, Jeffrey Rogers and The Hot Shop at Harrods and top House of Fraser stores, all of which are joining the trend for an extra 'transition' collection of high-summer separates to fill in the awkward period between ever-earlier sales and serious autumn arrivals.

Some fabrics such as the textured viscose which Ghost use year-round, are non-seasonal, and smaller-scale designers who work to order, such as Amanda Wakeley, keep their summer styles going longer. If she has more notice, the traveller may order one of the pale silk dresses, pyjama-style trousers, waistcoats or loose shirts re-created from original 1920s patterns by the Gallery of Antique Costumes and Textiles. These take about two weeks to make and are available all year round, so the really organised are ordering now for their winter holidays.

The ideal holidaymaker's glory is that she is the perfect guest, with the appropriate outfit for whatever she is invited to do, although even she would probably not make so many changes in one day as we show here. Coupled with all the extra combinations that these pieces make, this wardrobe should supply enough fresh looks for a week's warm-climate holiday.

Each item can be used in several different ways. Both pairs of shorts go with each swimsuit and the striped body. The swimsuits themselves can also be used as bodies, while the velour robe, minus its belt, doubles as a grand evening coat.

The fitted linen shirt-jacket adds a touch of formality to the longline shorts, the silk dress or the crushed silk skirt, while the loose linen shirt gives these same pieces, or the black trousers, a more relaxed mood.

It is also useful as a beach cover-up, as is the printed georgette shirt which, worn loose with the trousers, makes an informal evening outfit. The silk skirt dresses down when worn plainly with a body or swimsuit but looks more evening-style with a scarf and the crepe top, which also goes with the trousers. The crepe skirt looks slim and sophisticated with a body while the cream knit looks good with everything, especially the silk dress, for cooler days.

Subtract from these clothes one non-crush outfit to travel in - perhaps the black trousers, the body and the knit - and add the jewellery we show, a roll-up hat, three pairs of shoes (deck-shoes, espadrilles and smart sandals), a nightdress and a modicum of lingerie and you should still have room in that hypothetical bag for an extra top and a sarong. The only piece of poetic licence is, perhaps, the robe. Carry it over your arm - it could be useful on the aircraft.

As you are also allowed a handbag, take advantage of a large, squashy style to hold your toilet bag, suncream, sunglasses, paperbacks, tickets, money, passport and embroidery or other anti-delay device.

And as you stroll calmly through the most crowded and frenetic of airport lounges, no-one will know that, as perfect travellers go, you are merely a novice.

PLAYING RAP music very loudly or encouraging Rover to yap all night might be efficient ways to annoy the neighbours, but there is nothing to beat smoking them out with a badly burning barbecue.

Clouds of acrid smoke supplemented by that evocative smell of vaporised fat from the chump chops is a sure-fire way of getting the occupants of No 20 in full retreat.

That this is a common occurrence has more to do with the quality of charcoal than the incompetence of the chef. Nearly all the 45,000 tonnes of charcoal imported into Britain each year is badly made and environmentally dodgy.

This is what the embryonic home-produced charcoal industry want us to believe and they are probably right.

The black lumps we buy to fuel our summer cook-outs come mostly from developing countries in Africa, South America and the far East. The charcoal is made in the traditional way, either in a pit dug in the ground or in a huge mobile metal oven. Both methods allow the wood to burn slowly until only the charred remains are left.

Good charcoal should be about 90 per cent carbon. At that level it will not smoke because there is little, if any, wood left. Much of the imported charcoal is not much better than blackened wood and that is why it smokes.

Furthermore, the chances are that the charred lumps were originally a tropical hardwood or part of a mangrove swamp. This is hardly the fuel for the environmentally conscious 1990s, especially when the exporting nations rely mainly on wood-based fuels for their needy populations.

Europe could make its own charcoal and in the process provide better management of its woods. This is specially true of the UK which has the raw materials, the know-how and the demand. In some rural areas you can buy local charcoal - made in the traditional way - but there is not enough supply to meet the demand from large retailers, such as petrol stations and DIY stores.

Christopher Irwin wants to change this. He is a Suffolk farmer, in the timber business and regional secretary for the Timber Growers Organisation, which represents owners of private woods in the UK.

'Charcoal is the offal of logging. It is badly and wastefully produced from virgin forests in west Africa, South America and the far East. We've got the resources and the market here - why can't we put the two together?'

Irwin says the market for second quality home-grown hardwood - which was once used for mining and paper making - has disappeared. Mines no longer use the wood and the paper mill in Kent which used to consume most of the county's coppiced wood, has been converted to use waste paper.

'We've got huge areas of neglected woodlands in the UK and nothing positive is being done about it,' he says.

Irwin wants to harvest the woods - as they were since the middle ages - and use the cuttings to make high-quality charcoal in an environmentally sound way. There would be enough, he says, to supply the domestic market which is estimated to be growing at 5 per cent a year.

Plenty of people and organisations are enthusiastic. Farmers who own woods, which are now commercially worthless, like the idea. The Forestry Commission - the government agency in charge of the UK's state-owned woodlands - wants to see the woods pay their way. The World Wide Fund for Nature supports the idea too.

Irwin's problem is how to keep the costs down. The wood has to be cut and transported. The charcoal has to be made in high-tech ovens equipped with the latest pollution-control equipment and then it has to be bagged in sizes suitable for the supermarkets.

When Irwin does his sums he finds that his costs are marginally higher than the imported product, mainly because the imports exclude the environmental costs. Nevertheless he is confident that his idea could work and he is building a pilot plant to prove it.

He might get some help from the supermarkets and DIY stores which constantly assure us of their environmental credentials.

The UK's biggest DIY chain, B & Q, is the most environmentally aware. Alan Knight, its environmental co-ordinator, says the store is committed to stock only timber from sustainable sources by 1995 and charcoal falls into that category. B & Q gets its charcoal from Portugal where it is made from saw-mill off-cuts.

He says B & Q will consider a UK-made product. 'But just because it has a Union Jack on it does not mean that it will be stocked. It has to be well produced and competitive in price.'

Irwin is disdainful of the UK attitude towards the quality of charcoal. 'The Germans, for example, are very particular about their charcoal and they would never buy the sort of rubbish that the British buy.'

The Germans have an official standard for charcoal and this helps shoppers choose good from bad. A similar standard should be available throughout the EC by the end of next year.

This should aid domestic producers if their quality is indeed superior to imports. A shift to better fuel will help some of the UK's depressed rural communities, produce better barbecues and certainly go some way to alleviate the discomfort of those poor smoked-out people at No 20.

POLO IS NOT an easy sport to get started in. The game itself is so exciting that any spectator would be tempted to climb up on a pony, swinging a stick with HRH and the best of them. Deep pockets are an initial requirement. A basic equipe of two ponies, trailer, clothing and membership of a UK club would probably cost around Pounds 10,000.

Even if the cash is available for a debut - and plenty of complete beginners buy expensive boats to go yacht racing in - there is the ghastly ordeal of being a highly visible novice in a team of only four. As the summer polo season reaches its height there would quite possibly be a sizeable crowd on the touchline, their passing interest in polo fuelled by Jilly Cooper's 'jodhpur-ripping' best-sellers.

'I have an occasional nightmare of being on stage in an orchestra, in front of a large audience, with a violin in my hands which I can't play. That must approximate to a first game of polo at a member's club,' laughed Anthea Hartley of the Chiltern Polo Centre, based at her home, Lower Bassibones Farm, near Great Missenden 30 miles north-west of London.

Last year she began to turn the family hobby (four Hartley children aged 12 to 19 all play Pony Club polo) into a business. Her concept was to use the barns, stables and 65 acres of pasture at the farm to open polo's equivalent of the golf driving range.

'Beginners and people who can't afford the grand end of polo give us our market,' said Anthea. Three evenings a week in the summer there are group classes where anything up to 15 people pay Pounds 40 for two hours instruction, including the use of a pony.

Polo has to be safety-conscious. The possibilities for calamity with horses colliding at 30 mph is very real. So one of the earliest classes is a rules session on a green table-top - complete with plastic ponies - marked out as a polo field.

In a barn that also doubles as a dormitory during residential courses for younger players, a mixed group of pupils ranging from a local builder to a Peat Marwick accountant, pore over the display and discuss tactics with New Zealand instructor and professional player Simon Hill.

But even at a first lesson our tyro player gets to mount up and a play a chukka, one of the seven-minute spells of intense action which make up a match. In the gossip columns it may be the Princess of Wales waiting behind the goal line, chez Hartley it is more likely to be son Toby, 17, patrolling with a hockey stick to stop the ball being lost in a nettle bank.

While after-work tuition on Mondays, Wednesdays and Fridays is the backbone of the business, Chiltern Polo Centre has its bespoke side. One northern businessman, challenged to play by a colleague but without any previous experience, recently booked three days of one-to-one tuition. A team from the Quorn, challenged to polo by another hunt, took a crash course.

Other healthy sources of revenue are affluent Nigerians and Ghanains sent to England by indulgent fathers and anxious to learn polo for the social status it confers in west Africa.

'Word of mouth is important but we advertise every week in Horse & Hound (the weekly magazine that is a bible in equestrian circles) and that is our primary source of new clients,' said Hartley, adding that she spends just under Pounds 3,000 a year with the magazine.

Referrals from polo clubs themselves are increasing. 'I doubt the really grand clubs even know we exist but the others are beginning to send one or two beginners to us,' she said.

Instructors are paid on a freelance basis but the yard has two full-time staff during the season. They undertake a small amount of livery and schooling for more experienced players looking for a place to keep polo ponies.

Using these, plus her children's mounts, gives Anthea Hartley the ability to maintain the large number of ponies a school requires at relatively low capital cost.

An additional bonus is that as the polo bug bites deeper into its victim, a pupil often becomes a pony-owner with an animal to be kept at livery, creating more revenue for the centre. These people are far from plutocrats. One regular arrives on summer evenings with his polo sticks (Pounds 55 each) strapped to his motorcycle.

'My son played via the Pony Club and I got talked into having a go,' said Malcolm Stirling, 39. 'Now it's become a terrible obsession, I've bought a pony, and I have to come here for these weekly therapy sessions.'

Robert Colin, a loss adjuster from Ealing, west London, booked a lesson on impulse last summer, after browsing through Horse & Hound. Now he admits, in the confessional tones of a compulsive gambler, that polo takes up all his spare time and money - around Pounds 700 in an average month.

'It's just all-consuming,' says Colin, 35.

Geoff Hartley, Anthea's husband is a successful businessman and a committed non-equestrian. He does the books for the polo school and declares it to be 'already breaking even, with the potential to be profitable.'

From the family's point of view it enables them to enjoy a passionately loved - and very expensive - hobby at no direct cost.

'Polo and kids is a bit like school fees,' said Hartley. 'If you thought about what it was going to cost overall you'd never educate them at all.'

Chiltern Polo Centre, Lower Bassibones Farm, Lee Common, Great Missenden, Bucks. Tel: 0494-837798.

BUCHAREST is a city replete with the usual eastern European contrasts: the luxury hotel - well, by Romanian standards it counts as a luxury hotel - where a largely foreign clientele pays what it considers to be rock bottom prices for food and drink; and, across the way, the little street market where pitifully small quantities of food change hands for what locals consider to be intolerably inflated sums.

The hotel is called the Buchuresti. The market is on the other side of the Calea Victoriei behind one of Bucharest's loveliest small Greek orthodox churches. It is called the Piata Amzei. A market will generally give you a good idea of the local diet; but you will get only a limited impression of what an inhabitant of Bucharest eats from the Piata Amzei, for it sells only fruit, vegetables, flowers and cheese.

I was there in the spring when the only fruits to be seen were a few bruised apples and pears. The vegetables were more interesting. They were arranged in little lots on newspapers: posies of spring garlic which Romanians chew with their soup as if they were spring onions; and an early spring speciality, a reddish-blue leaf which is used to make a meatless Lenten soup called ciorba de loboda.

Muddy parsnips were set beside little heaps of chicory. In a far corner of the market a salesman was doing brisk business selling excellent acacia and 'poliflori' honeys at 1000 lei and 800 lei a jar.

When a lorry turned up loaded with fresh eggs the driver was virtually mobbed by old women in headscarves. Eggs were clearly a rarity.

Not so cheese. This was sold from a covered building by dour men wearing white aprons and trilby hats. The best is a hard ewes' milk cheese called brinza. Some wheels are sold smoked.

A soft, fetta-style ewes' milk cheese was also available as was a cows' milk curd called telemea. In some places you may buy a whey cheese called urda, but I could not find it here.

As I walked back to the Calea Victoriei, a drink shop caught my eye. There was a whisky for sale called 'Big Boss' which purported to come from 'the Highlands'. Later I discovered that it came from the highlands of the Lebanon. Dodgy as it was, it cost 2,600 lei (about Pounds 2.50), which is a lot for a Romanian.

Seventy per cent of this is taken by the government in tax. Whisky is chic, but the local spirit drunk in the country is tzuica, a plum schnapps similar to slivovitz. It can be coarse stuff.

I personally preferred the version made from quinces in Transylvania which is tempered for a year in Mulberry wood casks and sold at a more modest price.

Meat is the most important part of the Romanian diet. The gustare, or first course, of a typical meal is all meat. In spring you might get drob, a cake of lamb tripe which was translated for me as 'mixed organs'.

It was liberally sprinkled with pepper and bound with an egg. Another Wallachian delicacy is babic: a mutton sausage made in horseshoe lengths and flattened under stones. It is hard on the teeth. Romania's national soup is ciorba de burta. This, I was told, was what used to sustain the Christian janissaries, elite troops, in the Ottoman army.

It translates as 'sour stomach soup' and is made from tripe. It can be an alarming sight if you are unused to tripe. You blend the soup to your own liking by adding garlic sauce, vinegar or cream and eat it with green chillies and spring garlic. Another popular soup is a puree of stinging nettles.

After the excitement of the first two courses, the main course might come as a disappointment: sarmate are similar to Greek dolmas, with vine leaves often replaced by cabbage leaves.

The basic blend can change from region to region but basically it is meat and rice. Sarmate are eaten with mamaliga, polenta made into a cake the size of Christmas pudding and cut with a string. Little meat balls are also popular. These are also eaten with ferociously hot chillies.

Sadly, to eat such authentic Romanian dishes you may need to be asked into someone's home or entertained on a farm. The face of Romania which is reserved for foreign tourists is rather different.

In the restaurant Velvet, on the other side of the Hotel Buchuresti, you will have difficulty finding any Romanian dishes whatsoever: the food is all western. There is no cheese and no Romanian spirits. The vodka is neither Russian nor Polish, but comes from Finland; and for the privilege of feeling you might be just about anywhere, you will pay the equivalent of a Romanian citizen's monthly salary.

IN EVERY large tasting of a supermarket or off-licence's wine range this year, I have been surprised by the value offered by Hungarian wines in the heavily populated Pounds 2.50 to Pounds 3.50 per bottle bracket. And, once the country's privatisation ferment has settled, we should see an even more interesting range of fiery whites and clean, fruity reds.

The pioneer, as usual, was Bordeaux-based, Australian-trained Hugh Ryman, whose response to the frost damage to France's 1991 crop was to install himself in a well-equipped but under-utilised winery in Gyongyos, east of Budapest, and vinify lorryloads of bargain Sauvignon and Chardonnay grapes.

Gyongyos Estate wines, Pounds 3.35 from Sainsbury's and Pounds 3.39 from Thresher, are still at the cutting edge of Hungary's white wine output - although its 1992 Semillon has been commercially hampered by the fact that the Hungarians forgot to register Semillon as an approved Hungarian variety in Brussels.

Two colourful rival importers are at the heart of extracting wines to suit British palates from Hungary's excitingly varied but under-achieving vineyards. Both of them laugh much more than seems appropriate in view of the confused state of Hungarian wine production, which has suffered from a lack of motivation and is now suffering from the disappearance of its old Comecon markets.

About half of all Hungarian wine exports to Britain are imported by Eva Keresztury and her associates, who include Ryman. 'I'm a strange creature,' admits this jolly Hungarian. 'I came to England as decoration when my husband came to work in the City for one of those strange foreign trading organisations.'

Drawn in to the Hungarian wine business by the need for translators, she now runs Interconsult, a strange foreign trading organisation of her own, from her dining room in Barnes, south west London, and shepherds inceasing numbers of professional wine buyers around wineries and vineyards in the throes of privatisation.

'One of the most pleasurable trips of my life was soon after I started in 1991 when I took the two Safeway buyers around the wineries. What a revelation] The winemakers blushed and had tears in their eyes when they made blends that pleased them. We worked 18 hours a day and never seemed to sleep.'

Her determination to sort the wheat from the chaff, and make the most of some very exciting fruit, which can yield 'brilliant' wine only if handled properly, has led her on one occasion to buy and install her own bottling line. She is now directing a team of antipodean and local winemakers in various temporary locations. It all sounds suitably Romany.

Hemant Kotecha, of Manchester, is her main competitor in exposing the best of Hungary to western palates. A Ugandan Asian, he took a master's degree in crop control at Reading before immersing himself in business. He went to Hungary in 1989 looking for general commercial opportunities, and wine was one of the commodities offered.

He too started up his company, Myliko, in 1991 and applied antipodean technology to a well-equipped Balaton winery, in this case to produce the Chapel Hill range of white international varietals at Pounds 2.99. The Chardonnay, at Sainsbury's, is a snip; the Rhine Riesling, at Victoria Wine, is racily fruity (although not dry); only the overripe Sauvignon disappoints.

Safeway, particularly open to suggestion from the east, has the most genuinely interesting selection of Hungarian wines, which reflects its genuine interest in what distinguishes the country and its very different wine regions.

Oddbins has the fine Volcanic Hills range. Its moody label was designed for Eva's company by a 19-year-old who has never left Hungary. The eerily Alsace-like Pinot Gris 1992 at Pounds 3.49 is my favourite, and I can reluctantly understand why they did not use the grape's Hungarian name, Szurkebarat.

Some of the crispest, liveliest red wines selling anywhere at Pounds 2.99 are Eva's Villanyi Hills Cabernet Sauvignon and, even fruitier, Merlot, stocked by Thresher, Bottoms Up and Wine Rack - and miles better than these shops' Hungarian whites at the same price. The Tuscan firm, Antinori, has invested in the Bataapati estate in the country's south west and the lively red Kekfrankos and spicy white Zoldveltelini are available at about Pounds 4.50 from Great Northern Wines of Leeds.

Other more expensive wines are, inevitably, in the trans-Danubian pipeline, although I have yet to be thrilled by them. It is heartening to note, however, that both major importers are planning to introduce some of Hungary's rich gene bank of indigenous vine varieties. Look out for 1993 Harslevelu.