[A-List] UK state turf wars

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Aside from the obvious rivalries between Blair and Brown, and resentment
at what must be seen as overweening Treasury influence throughout the
policy apparatus of the state, there is the other significant matter of
Britain's effort to pioneer the latest rounds of privatisation so that
it is ready for the inevitable widening of the General Agreement on
Trade in Services (GATS), which will be a central issue of the Doha
trade round. However, with the obvious failure of Railtrack and now the
collapse of the air traffic controller NATS, the policy is facing a
large credibility gap. It will take much more than these little local
difficulties to derail the main thrust of New Labour's economic
policies, but some convenient bloodletting may be just around the corner
as personalities get the blame for what are profoundly contradictory
policies. And while the personalities come and go, the policies will
remain, short of a major crisis.


Treasury's creative accountancy unravels

Paul Murphy
Wednesday February 20, 2002
The Guardian

Some will say it had to happen: the Labour government has contracted
Enronitis.

The whistle is being blown on the Treasury's creative approach to
accounting - the off-balance sheet-financing, the special purpose
vehicles and other gizmos of financial engineering which sounded smart
when the good times rolled, but which are parting at the seams at the
first sign of trouble.

Spooked by the collapse of Enron in the US, large banks and big
institutional investors worldwide have been questioning the basis on
which they have been lending or investing money.

Balance sheets and executive competence have been queried, opaque
accounts have been questioned - and quite a few supposedly well
established companies have been brought to their knees.

Now it has spread to the government, whose voodoo financing habit is
getting stress-tested by the money men. The furore over the suspect
funding of the national air traffic scheme threatens to expose the way
Labour has been spoofing its stakeholders these past few years.

There are two ways in which this affair can be viewed. The pre-Enron
version has a modernising government owning up to the fact that its
public sector management is ill-equipped to manage the fiendishly
complex and extraordinarily expensive business of organising the flow of
air traffic across Britain's skies.

Mindful of its duty to avoid wasting the public's money, the government
arrived at a modern, pragmatic solution. Private sector management and
money would take over, under the astute gaze of an industry regulator,
the Civil Aviation Authority.

Fees from airlines using British airspace would pay the debt incurred in
modernising the system, and eventually costs would fall all round. And
air safety would be paramount.

The post-Enron view is more complex and sinister. Faced with escalating
costs and a trenchant, unionised workforce, the Treasury demanded that
the Department of Trade privatise Nats.

The private bit of this partnership, in the shape of institutional
investors and investment banks, was leery of the business proposition.
It looked too risky. So the risk was "managed". Nats would borrow
£1.4bn
from four banks - Abbey National, Barclays, HBOS and Bank of America.

Half of this money would buy a 51% stake in Nats from the government, 5%
of which would go to employees and management. In return for a nominal
payment (£50m), the remaining 46% shareholding would go to a
consortium
of airlines headed by British Airways.

The fact that a good portion of Nats' customers were also its
shareholders was not addressed. Historically, 40% of Nats' revenues have
come from 15% of its customers - those operating transatlantic routes.
These flights are down 10% since September 11, and air traffic control
faces a cash crunch.

This is where Labour's creative accounting comes unstuck. A regular
business would cut costs and/or raise prices or risk going bust. Its
lenders would provide more money if it was thought that the management
could deal with the changed business environment and eventually repay
the money. But under this new public private partnership there is no
clarity about the responsibilities of each of the parties involved.

The shareholder airlines enjoy ownership, but they have cash flow
problems and certainly do not want to have to start paying higher air
traffic fees. The banks have a big liability, but no ownership, except
that if Nats fails to meet its interest payments they can seize the 46%
stake in the hands of the airlines.

The government has minority ownership, but has unwittingly burdened
itself with the role of underwriting the entire financing of the
venture, since it cannot risk the air traffic system failing.

In trying to pretend that it has transferred concepts such as "risk" and
"cost" to the private sector, when the risks and costs remain, the
government is guilty of the Enronesque crime of hiding its true
exposure.

Like Railtrack, the part-privatisation of Nats was a piece of
off-balance sheet financing - on the surface the mechanism met the
government's funding requirement, yet in reality the need for funding
remains, because this key service has to be kept going.

It does not seem to have dawned on the Treasury that when the City deals
with Labour it suspends the everyday rules of capitalism. It happened
with Railtrack, it has now happened with air traffic control, and it
will most certainly happen with the tube.

If an important government project is being financed in the City then it
carries an effective government guarantee, since the political cost of
failure will be too great to bear.

Full article at:
http://politics.guardian.co.uk/byers/story/0,11320,652970,00.html

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx