www.warrenevans.net

Photograph of Roger Warren Evans

You are in the company of Roger Warren Evans

  Subject Index >>   My biog >>   New Participative Democracy? >>   My Universal Theory >>   My Welsh socialism  


Diary Note Archive


My publications


My key sources

COPYRIGHT > The originating content of this website is my own work, and subject to my copyright. But on one condition only, I hereby give my con-
sent to its unrestricted reproduction for any purpose: the condition is that its source is subject to proper ack-
nowledgment, giving my name, my assertion of copyright, and the name of this website as it source, namely >
www.warrenevans.net

 

Diary Note /0028
Tuesday 26 February 2002
For yesterday's thoughts

STOP PRESS
How best to charge for road use

Creative accounting,
Public Sector style

Much is known about private-sector “creative” (i.e. deceitful) accounting. Whistles are blown over it, best-sellers written on how to do it, good fees are paid to get it done. But Paul Murphy has opened by eyes recently. That’s not the Welsh Secretary of State but a journalist, writing in The Guardian. “Treasury’s creative accounting unravels” is one of those ground-breaking articles which suddenly opens up new perspectives. He draws new and perceptive parallels between private and public accounting.

Is Enron being criticised for off-balance sheet accounting? Does not the Treasury do the same all the time, with the Private Finance Initiative? Does not the true cost of long-term contracts simply get left out of the Government’s balance-sheet? What about the near miss with National Air Traffic Services? A few months ago, the Government parted with 51% of the new company, only to find that it has had to find £30m to bail the company out anyway , and could be forced to do so again. Where does the Government’s provision for the “NATS Failure Risk” appear in the Government books? You can bet your bottom dollar it’s not on the balance-sheet. [ If you know the answer, please drop me a line ]

Paul Murphy ruthlessly exposes the paucity of thinking behind the Government’s use of PFI. Because for many major contracts, the much-vaunted “transfer of risk” is a fiction. “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… When the City deals with Labour, it suspends the everyday rules of capitalism.”. The private sector merely wants to get its claws into the sweet flesh of tax income, where default is impossible. The Government is left holding the baby every time, and the private-sector creams off risk-free profits.

Bob Kiley Ken Livingstone’s Commissioner of Transport for London, delivered a devastating critique of the Treasury’s London Underground analysis, in the Financial Times. He writes - “The Government claims that under its PPP scheme £16bn will be invested in the Tube, with £4bn coming from private sources. But it neglects to mention that the private funding is contingent on a governmental guarantee to pay the money back. (my italics) . Compare this with Enron’s absurd assertion that entities financed, owned and guaranteed by Enron were economically independent and entitled to separate accounting treatment.” Enronitis, while targeting company management, begins to threaten Government management.

These are serious charges against Labour. And these charges must be answered. Now, you will know my position by now: I favour the use of PFI albeit within strict limits and restricted principally to the provision of property facilities. But I recognise that the scope for fiscal dishonesty is great.

My suggestion is that the Treasury should publish regularly a running forward total of the annual liabilities accruing to future generations, under PFI deals already signed. I want to see a net liability figure, for each of the next fifty years, updated and published every six months. It should be child’s play to do that, because the Treasury retains approval-rights for all major PFI projects – indeed, it would be shocking if that calculation were not already done.

A touch of open government would clear the air, Gordon, and help us get the issue into perspective.

Cool it, Helen

New Zealand PM Helen Clark wants to remove Our Dear Queen as New Zealand sovereign. “The idea of a nation such as New Zealand being ruled by a head of state some 20,000 km away is absurd” she recently told an LSE audience. And to prove her point, she left the country at the start of the Queen’s Commonwealth Durbah [ see Jubilee: One Palaver too far ]

But Helen will be hard put to find a better alternative. As she searches, she will find that an elected president would clip the Prime Minister’s wings, to little practical advantage. Mary Robinson had to get out of Ireland, it was too small for two leaders. No president can entirely escape the entanglements of Party politics, as Jospin and Chirac testify, under De Gaulle’s awful Constitution.

My advice to Helen Clark is “ODQ remains your best bet – stick with the hereditary principle, because politically it’s trouble-free - keep ODQ in a greenhouse to encourage flowering – bring out for ceremonies – give the Monarch absolutely nothing to do, except conduct Honours ceremonies – cut down on maintenance, but otherwise, don’t try to fix it – you’ve got a Republican system already.”

Poor litigants,
bad Management,
and terrorism

Q. What do these three subjects have in common? A. They are all mired in “insurance” problems. In all three, a fragile private-sector insurance industry is calling the shots.

This week I discussed the new contingency fee system with a Labour solicitor friend This New Labour system has all-but replaced Legal Aid for civil actions (i.e. for damages, civil remedies). The Solicitor, in return for the promise a much larger fee if successful, carries the risk of failure: no-win, no-fee, that’s the theory.

Except it doesn’t work like that, in practice. It has rapidly become a matter of trial by insurance. Because few Solicitors can afford to take on a case unless they can get insurance cover for themselves, against the possibility of loss. That means that the insurers’ lawyers must assess the plaintiff's prospects of success, and fix a premium. If they are sceptical, the premium will be prohibitive. Borderline or unconventional claims will never get through. "Matters of principle", with only minor damages attached, are bound to get short shrift. Solicitors will be forced to turn down borderline briefs, for want of insurance cover. The wronged citizen will have to lump it, without redress.

There must be a better, and fairer, way. I suspect that the former system of state-payment will have to be substantially re-introduced, as the injustices mount up.

 Back to top 		   

Management v. Shareholders

Directors’ & Officers’ insurance is another murky little corner of corporate life. Organisations (as artificial persons in their own right) can pay to insure their business against the incompetence or dishonesty of their own management. The company, as an artificial person run by its Management, pays out premiums to another company (i.e. insurer) to protect the company against the very Management who are arranging the cover. Clever, or what? The Management effectively forces the Shareholders to pay for Management’s own legal immunity – another example of the unchallenged ingenuity and power of modern management.

But the Enron debacle threatens to blow that cover. Because it will make that insurance much, much more expensive. In the US this year, there will be gigantic claims-for-damages against the Enron managers personally (fifty lawsuits filed already, in the US). But the deceitful and negligent managers will not meet those costs themselves: the tab will be picked up by Enron’s insurers. The Managers should get off scot-free, if they have been skilful in the negotiation of their own insurance cover.

But following Enron “D&O” insurance premiums are set to soar. Because US companies paid “only” $3,000m in D&O premiums last year, and the Enron claims alone are already assessed at $5,000m. The collapse is so huge that the very practice of D&O insurance will be called in question. Many companies will find it impossible to buy “Directors’ and Managers” insurance cover at all, and will have to trade on without it. Indeed, why should the shareholders pay to insure managers against the risk of their own personal failings? Why should the Managers not be forced to take out such insurance themselves? We haven’t heard the last of this.

Finally, terrorism is unravelling the insurance industry. Terrorist threats are prompting many insurers to exclude “damage from terrorism” from their policies. For many client companies, the terrorist threat will simply be uninsurable, even at a high premium. The industry is already lobbying for Governments to carry the risk, and to bail-out the insurance companies. That is what the UK Government had to do, after the IRA attack on the Baltic Exchange in London. The scheme was mysteriously called the “Pool Re” system [ if you know why will you let me know? ] You may rest assured that, behind the scenes, the lobbying will be intense. If you have any insights into this process, please drop me a line.

Socialists will have to re-visit these murky corners of the insurance world. Because there are other problems, such as injustice in the computation of genetic risk. As genetic data proliferates, insurance companies will be able to tailor insurance policies to individual genetic risk, generating prohibitive premiums for some citizens. Should not the state step in, to provide just and even-handed insurance cover, at pooled rates? If Government is required to carry the risk of terrorism to assist business, why should not a socialist Government offer fair and even-handed insurance cover for the genetically disadvantaged? My hunch is that, for a wide range of difficult risks, the only viable insurer may eventually be the State itself. Now that would be a real turn-up for the socialist, and the capitalist, books…

News from the
Corporate Jungle II

see News from Corporate Jungle I

As the Enron effect reverberates, the UK-based company Energis faces severe difficulties. The company was formed by National Grid to develop new telecommunications systems, using the Grid’s already wired-up network. Indeed, the National Grid is still the largest shareholder, owning one-third of if the shares in the stricken company.

Yet the National Grid is legally entitled to wash its hands of its failing subsidiary. National Grid can simply walk away from the mess, allowing the staff and the other shareholders to suffer the losses. That is because, as a shareholder, the National Grid can rely on the principle of “limited liability”, enshrined in the original Companies Act of 1856. Many conventional corporations do precisely the same thing, every day of the corporate week.

But why should that be? The idea of limited liability was conceived by the Victorians as a means of encouraging ordinary natural persons like you and me to engage in business, using our savings to fund new ventures. We would not do so, the Victorians reasoned, unless our risk was firmly "capped". That was a correct perception, and it was on the rock of limited liability that the success of modern capitalism was based.

Yet the Victorians never dreamt that artifical persons (i.e. companies, or corporations, as the Americans called them) would own other artificial persons. Nor did they ever imagine that ordinary citizens would become shareholders. The system was designed to manage business participation, on the part of the wealthy classes. All that is clear from the documentation of the time.

Yet as artificial personality flourished, and massive hierarchies and networks of artificial persons proliferated, they automatically succeeded to the privileges enjoyed by natural persons. And that included “limited personal liability”. But why should that be? No Parliament has ever voted to create such an exemption. It has just happened automatically, as artificial persons have displaced natural persons in the conduct of all business, large and small.

Socialists should query that principle. For my part, I would retain the protection of “limited liability” for natural persons, but I would remove it for artificial persons. The National Grid should not be entitled to walk away from the havoc that its creature has wreaked upon the investing public. Quite contrary to the great Victorian perception, the system now enables artificial persons to shift risk to natural persons (employees, pensioners, small shareholders) who can ill-afford to bear them. That cannot be right.

Fancy a renminbi?

FT Footnote The Financial Times has a special knack. Unique among UK newspapers, it succeeds in reporting on other economies in a completely objective way, as if dealing with a routine corner of the UK economy. Even the Chinese economy is even-handedly reported – “The Government plans to spend 150bn renminbi in fiscal stimulus this year, the same as in 2001. Foreign direct investment and the trade surplus were strong in January”. All quite routine, from James Kynge in Beijing. By the way, there are 12.5 renminbi-to-the-£ - so that’s £12bn-worth of fiscal stimulus. The name of the Chinese currency is bound come up on Who Wants to be a Millionaire…
What do you think? Drop me a line.

Back to today's Home Page  

You are in the company of Roger Warren Evans