Theresa May prepares UK rail franchising shake-up
PM seeks to improve the railways without abandoning the use of private operators
Theresa May is drawing up plans for what Downing Street is billing as the biggest review of the UK’s rail franchising system since the 1990s privatisation in the wake of the collapse of the East Coast main line earlier this year.
The prime minister is understood to have authorised a major review — likely to be headed by an external figurehead — to examine how to improve the railways without abandoning the use of private operators. The consultation is expected to last until well into 2019.
The plan was raised in a meeting at Number 10 on Tuesday morning hosted by Gavin Barwell, Mrs May’s chief of staff, and attended by ministers from various departments. One person familiar with the conversation said the plan was being driven by Chris Grayling, transport secretary, with the authorisation of Downing Street.
However, the policy still needs approval from the Treasury, which is not entirely supportive.
The proposals would be the second major review of the franchise system in five years. The government-commissioned “Brown Review”, triggered by problems with the West Coast franchise, reported in 2013 that the system was “not fundamentally flawed”.
That conclusion was jolted in May when the government was forced to take back control of the East Coast franchise after it collapsed for the third time in 12 years — prompting fears that other operators could walk away from contracts.
The opposition Labour party plans to nationalise the entire rail system, although the 25 private franchises would only return to public hands as they come up for tender.
Number 10 will not countenance following suit, although it is understood to be otherwise open-minded about the review. A Department for Transport official confirmed the plan was “being looked at” but declined to comment further.
Stagecoach and Virgin Group had only been operating the London to Scotland line for two years when they breached a key financial covenant.
Mr Grayling originally supported an alternative plan that would have allowed the two private companies to keep running the line under a management contract. Instead he stripped them of their contract five years before it was due to end, in part because of Number 10’s fears about a potential public backlash.
The government had run the line from 2009 to 2015 after a previous operator, National Express, walked away from the contract.
Mrs May has also expressed frustration about mass delays and cancellations of rail services across the country in June following the botched introduction of new timetables, describing the disruption as “absolutely unacceptable”.
Meanwhile the public accounts committee of MPs issued a report in April warning that the rail franchising system was “broken” at the expense of customers. The PAC accused the DfT of failing to learn the lessons from previous failures when it allowed Stagecoach and Virgin to overbid for East Coast.
The May government has already sought to overhaul the railways by trying to bring the running of trains and track much closer.
Under those reforms, announced at the end of 2017, there will be greater collaboration between private train operators and state-owned Network Rail, which maintains infrastructure, in an effort to make services more reliable.
The rail industry has said it would prefer power and responsibility to be devolved to regional “routes”, potentially with concessions lasting two or three decades, rather than franchises for seven years, allowing for long-term investment.
The railways were first privatised by the John Major government in 1994, with Network Rail maintaining tracks and train operating companies competing to run the trains.
Capitol Hill tech hearings must focus on algorithms
US senators should probe on how the platforms manipulate users
The role of the world’s largest technology platforms in the spread of political propaganda, extremism and disinformation is extremely complex. That fact will be on display once again on Wednesday, as executives from Facebook, Twitter and possibly Google undergo another grilling by the US Senate intelligence committee over Russian meddling in the 2016 presidential election.
American politicians have so far struggled to ask the sort of pointed questions that would shed light on the role. The committee’s quizzing of Facebook CEO Mark Zuckerberg several months ago felt very much like a four-hour tech support call.
Meanwhile, Donald Trump has, in typical form, muddied the political waters by accusing Google of burying conservative news.
The president is wrong. While Silicon Valley leans left politically, Google and other platform technology companies do not employ evil geniuses to suppress Republican voices. Nor is it likely that executives from the top platforms were personally complicit in election manipulation.
But that does not mean that Google, Twitter, Facebook and other such companies do not have algorithmic biases. Indeed, their algorithms — which are designed to keep people on their sites for as long as possible — should be probed by senators on Wednesday.
While the word “algorithm” is now part of our common lexicon, few of us really understand what they are in the context of the websites we use every day. Algorithms are mathematical formulas that control how a site works — what search results come up, or what pieces of content are recommended to viewers. While users are online, their activities and preferences can be tracked and then monetised via targeted advertisements. The more time spent on Google or Facebook, the more the firms know about you. That detailed knowledge can then be sold to companies, individuals or even state actors. It is a highly effective business model, which is why those two companies alone now capture 85 per cent of digital advertising growth.
It is also a reason why the platform technology companies have been reluctant to open up the black box of their algorithms to allow the public and politicians to see how they work. Transparency would illuminate the disproportionate economic power they hold. It might also allow the public to see how the spread of unsavory content is part of the platform’s business model.
Platform firms are not trying, in some purposely nefarious way, to drive you towards cat videos or racist propaganda. But their algorithms are pushing many in exactly that direction.
That should be the focus of senate questioning. Facebook, Google, Twitter and others have responded to the outrage provoked by the spread of “fake news” and propaganda on their platforms by increasing the number of humans that police their sites for problematic content. That is an unsatisfactory solution.
The scale of the internet makes it impossible for humans to police everything. Moreover, these are technology firms, not media organisations. Their strength is not in curating content; it is in figuring out how to program algorithmic systems. Senators should ask how and why these algorithms are designed to keep us online longer, and whether that model might be fixed.
The answers may be complicated or vague. But complexity should not be a vehicle for obfuscation. The time has come for Silicon Valley to open the black box and reveal how the algorithms work. Trust in democracy, and capitalism, depends on it.
Coke’s Costa deal is a taste of things to come
Global brands are taking divergent approaches in response to changing consumer habits
Alistair Gray and James Fontanella-Khan in New York SEPTEMBER 2, 2018 Print this page11
Coca-Cola’s £3.9bn deal to buy the Costa Coffee chain has highlighted the lengths to which food and drinks companies are going to keep pace with rapidly changing consumer habits that are upending business models across the sector.
Although the purchase price is small in the context of Coke’s $191bn market capitalisation, some bankers described the acquisition as among the most important strategic moves the US beverage maker has made in its 132-year history.
The Atlanta-based group’s decision to take on Starbucks, Nestlé and JAB Holdings in the fast-growing yet highly competitive coffee market capped a busy dealmaking fortnight in consumer industries.
A series of proposed transactions has shown how established western brands are taking divergent approaches in response to demand for fresher and healthier products and the transformative rise of digital marketing.
“Companies are grasping with how to deal with the changes,” said Ali Dibadj, analyst at Bernstein in New York. “There are a lot of weird combinations happening.”
Many consumer companies are expanding into territories or products with brighter growth prospects. Ten days before Coke reached its agreement on Friday to buy Costa, its arch-rival PepsiCo struck a $3.2bn deal to buy Nasdaq-listed SodaStream, which makes sparkling-water dispensers.
Some other consumer goods stalwarts, however, are doubling down on traditional strengths.
The day before the Costa deal, Campbell Soup announced a strategic about-turn. After stumbling in a push into refrigerated products, Campbell now plans to refocus on packaged foods such as its eponymous canned soup. The New York-listed company set out plans to sell its portfolio of fresh brands, from carrot snacks to hummus, along with overseas assets.
Given such mis-steps, those companies that are branching into new areas are encountering inevitable scrutiny.
In Coke’s case, the acquisition of UK-focused Costa prompted questions on Wall Street about how the consumer goods company will manage a shift into bricks and mortar retail, where it lacks experience.
Costa will increase the group’s headcount by about a third, adding another 20,000 or so employees on top of its existing total of about 62,000, and require it to maintain an expanding network of 3,800 stores.
James Quincey, Coke’s chief executive, said the acquisition of the coffee company from London-listed Whitbread had a “very compelling strategic rationale”.
“There’s opportunity for great value creation, through the combination of Costa’s capabilities and Coca-Cola’s marketing expertise and global reach,” he said.
Its purchase of Costa is part of the fizzy drink maker’s effort to reposition itself as a “total beverage company”.
Gapping down
In reaction to disappointing earnings/guidance:
- WPP -7.3%
Select metals/mining stocks trading lower:
- FCX -3.8%, RIO -3.5%, MT -3.3%, AG -2%, GOLD -1.8%, SLV -1.1%, KGC -1%
Other news:
- TAHO -10.2% (Constitutional Court reverses Supreme Court's decision to reinstate the Escobal mining license of Tahoe's Guatemalan subsidiary)
- CVRS -6.4% (entered into $300 mln Sales Agreement with Cowen with respect to an at-the-market offering program)
- RIG -1.1% (Ocean RIG UDW to be acquired by Transocean (RIG) for $32.28/share)
Analyst comments:
- FN -7.2% (downgraded to Neutral at FBR)
- ANET -3.4% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- TKC -2.9% (downgraded to Neutral from Overweight at JP Morgan)
- STX -2.9% (downgraded to Underperform from In-line at Evercore ISI)
- ING -2.8% (downgraded to Neutral from Overweight at JP Morgan)
- SIG -2.7% (downgraded to Sell from Neutral at Citigroup)
- TLYS -2.4% (downgraded to Hold at Pivotal Research Group)
- IIVI -2.3% (downgraded to Neutral at FBR)
- CTSH -2.3% (downgraded to Underperform from Buy at BofA/Merrill)
- WDC -2% (downgraded to In-line from Outperform at Evercore ISI)
- SHPG -1.8% (downgraded to Mkt Perform from Outperform at Bernstein)
- VZ -1.2% (downgraded to Equal Weight from Overweight at Barclays)
- BBVA -1% (downgraded to Neutral from Overweight at JP Morgan)
- FB -0.9% (downgraded to Neutral at MoffettNathanson)
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Gapping up
In reaction to strong earnings/guidance:
- CONN +8.2%
M&A news:
- BLDP +5.4% (to divest non-core power manager business; Deal valued at up to $16 mln)
- TA +2.3% (announces definitive agreement for the sale of Minit Mart convenience store business for approximately $330.8 million to EG Group)
Other news:
- MNKD +47.3% (Mannkind & United Therapeutics (UTHR) enter into worldwide exclusive licensing and collaboration agreement)
- REPH +30.1% (provides regulatory update following receipt of the official meeting minutes from July Type A meeting with the FDA relating to a path forward for intravenous meloxicam)
- BCRX +8.9% (reports positive results across multiple endpoints in ZENITH-1 Trial of Oral BCX7353)
- LOCO +3.8% (authorized $20 mln stock repurchase program effective on Nov 6, 2018 that will terminate on June 26)
- WIT +1.9% (receives 10-year, $1.5 bln contract from Alight Solutions)
Analyst comments:
- PCG +4.1% (upgraded to Buy from Neutral at BofA/Merrill)
- UPS +1.5% (upgraded to Strong Buy from Mkt Perform at Raymond James)
- AMD +1.3% (target raised to $30 at Cowen)
- BSX +1.2% (upgraded to Buy from Hold at Jefferies)
- QCOM +1.1% (upgraded to Outperform from Neutral at Macquarie)
- ROKU +1.1% (initiated with a Buy at Guggenheim)
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The Chinese Profits Puzzle
Threats to Chinese growth are multiplying but some big companies are still posting their best results in years. What’s going on?
What Chinese growth slowdown? Some of China’s biggest companies, particularly its banks, have been posting their best earnings growth in years, despite all the gloom around a trade fight with the U.S. and rising bond defaults.
The buoyant results don’t mean all is well for the world’s second-largest economy.
Chinese listed companies’ average earnings per share have slowed from peak double-digit growth rates in late 2016, but were still 8% higher in the first half, according to Wind Info. That, though, mostly reflects the health of state-owned firms: the top three Chinese sectors by market capitalization—finance, industrials and materials—are heavily backed by Beijing.
The government has given two huge shots in the arm to the country’s biggest public companies in the last 18 months—largely at the expense of non-state-owned companies, largely at the expense of the non-state-owned companies, often unlisted, which account for about two-thirds of economic output.
Beijing’s crackdown on shadow finance has given an additional boost for the big state-owned banks—and another slap in the face for small, private firms, which often have trouble securing bank loans at reasonable rates through official channels.
As shadow bank lending evaporated in early 2018, weighted average lending rates for traditional bank loans hit nearly 6%, their highest since mid-2015. With deposit rates still low and wholesale funding costs drifting down, bank profits have roared back: Their average earnings per share rose over 4% on the year in early 2018, according to Wind, the best performance since 2014. Meantime, the private sector’s financing problems have worsened: Private industrial firms’ profits were equivalent to nine times interest payments in late 2017, but had shrunk to just seven times by mid-2018.
Chinese stock markets now look cheap on the fundamentals, but better finances for state-owned companies have come at a steep cost for the economy as a whole—by crimping the more vibrant private sector. That bill is still likely to come due in the form of significantly slower growth in the quarters ahead.
Early premarket gappersGapping up:
- HAIR +11.4%, CMCM +8%, ATRS +7.1%, BLDP +6.8%, RADA +5.7%, UIS +5.4%, TORC +5.1%, OLLI +4.9%, WIT +4.9%, CHU +4.2%, INGN +3.8%, ROKU +3.2%, SBGL +2.5%, JKS +2.1%, ORLY +2%, CTL +1.8%, AMD +1.6%, OAS +1.6%, SNAP +1.4%, SGMO +1.4%, QCOM +1.3%, CS +1.1%, ETSY +0.8%
Gapping down:
- WPP -8%, TKC -3.4%, STM -3.1%, AG -2.9%, RIO -2.8%, MT -2.7%, SSL -2.6%, FCX -2.5%, WDC -2.3%, GOLD -2%, SLV -1.8%, RIG -1.7%, CONN -1.7%, NLSN -1.6%, VOD -1.4%, VIPS -1.1%, KGC -1%