Northern Rock- A Warning From History

January 17, 2008 3:15 PM

e Decommissioning kit for the Crock

As Brown and Darling dither over nationalising Northern Rock, still trying to find some fudge that will avoid outright nationalisation and hide the costs (eg see this blog), taxpayers should remember the dismal precedent of British Energy.


British Energy is the nuclear power producer which hit the rocks in September 2002 (see this blog). But it wasn't put into administration, and neither was it nationalised. Instead it was simply bailed out by the taxpayer.


It was in fact a classic muddle through Third Way: a taxpayer supported restructuring, leaving a significant slice of the assets with the existing owners and bond holders. According to the subsequent National Audit Office drains-up, the creditors received "new bonds and 97.5 per cent of the share capital in the restructured company", while the remaining 2.5 per cent was left with the original shareholders.


Why was the government so generous? After all, according to the NAO, "given the prevailing low wholesale electricity prices and the scale of British Energy’s nuclear liabilities no credible and qualified purchaser existed".


And what about those nuclear liabilities? The estimated £5.3bn cost of dealing with all BE's nuclear waste and eventual plant decommissioning was parcelled up and pushed over to the taxpayer.


The truth is that the BE bail out was fudged so that the government could avoid a repeat of the bungled Railtrack confiscation the previous year. That had received horrendous press, massive compensation claims from dispossessed shareholders (yes, including legal action from a private equity firm under European Human Rights laws), and had ultimately led to the resignation of Stephen Byers. The government didn't have the backbone for nationalisation.


So instead- and just to hammer the point home- the government bailed out the company using taxpayers' money, it lumbered taxpayers with the company's literally toxic liabilities, yet it left the bulk of the equity with private investors. All taxpayers got was a share in future net revenues, convertible into shares if those future revenues actually materialised.


Now, in the case of British Energy, taxpayers have been bailed out to some extent by the subsequent sharp increase in energy prices, boosting the company's net revenue and triggering the share conversion. But that was luck: nobody was predicting such a recovery in 2002, which was why there were no private sector buyers. And however you spin it, taxpayers have still been left with the toxic liabilities.


Lessons for the Crock situation?


Once again, we have a bust company being bailed out by a bungling back-foot government anxious to safeguard its own political interests, rather than to cut the best deal for taxpayers. And once again, we have a company with liabilities it's incapable of managing, and which it wants to palm off onto the taxpayer: deposit and bond guarantees might not be nuclear waste, but they can easily turn out to be just as expensive. And once again, there are no credible and qualified private sector purchasers.


But this time, taxpayers should be better prepared. Nobody would start from here, but in current circumstances we should insist on nationalisation without compensation (see here). Yes, of course the Tories are trying to make political mischief with it, but that doesn't stop it being the least bad course.

e Decommissioning kit for the Crock

As Brown and Darling dither over nationalising Northern Rock, still trying to find some fudge that will avoid outright nationalisation and hide the costs (eg see this blog), taxpayers should remember the dismal precedent of British Energy.


British Energy is the nuclear power producer which hit the rocks in September 2002 (see this blog). But it wasn't put into administration, and neither was it nationalised. Instead it was simply bailed out by the taxpayer.


It was in fact a classic muddle through Third Way: a taxpayer supported restructuring, leaving a significant slice of the assets with the existing owners and bond holders. According to the subsequent National Audit Office drains-up, the creditors received "new bonds and 97.5 per cent of the share capital in the restructured company", while the remaining 2.5 per cent was left with the original shareholders.


Why was the government so generous? After all, according to the NAO, "given the prevailing low wholesale electricity prices and the scale of British Energy’s nuclear liabilities no credible and qualified purchaser existed".


And what about those nuclear liabilities? The estimated £5.3bn cost of dealing with all BE's nuclear waste and eventual plant decommissioning was parcelled up and pushed over to the taxpayer.


The truth is that the BE bail out was fudged so that the government could avoid a repeat of the bungled Railtrack confiscation the previous year. That had received horrendous press, massive compensation claims from dispossessed shareholders (yes, including legal action from a private equity firm under European Human Rights laws), and had ultimately led to the resignation of Stephen Byers. The government didn't have the backbone for nationalisation.


So instead- and just to hammer the point home- the government bailed out the company using taxpayers' money, it lumbered taxpayers with the company's literally toxic liabilities, yet it left the bulk of the equity with private investors. All taxpayers got was a share in future net revenues, convertible into shares if those future revenues actually materialised.


Now, in the case of British Energy, taxpayers have been bailed out to some extent by the subsequent sharp increase in energy prices, boosting the company's net revenue and triggering the share conversion. But that was luck: nobody was predicting such a recovery in 2002, which was why there were no private sector buyers. And however you spin it, taxpayers have still been left with the toxic liabilities.


Lessons for the Crock situation?


Once again, we have a bust company being bailed out by a bungling back-foot government anxious to safeguard its own political interests, rather than to cut the best deal for taxpayers. And once again, we have a company with liabilities it's incapable of managing, and which it wants to palm off onto the taxpayer: deposit and bond guarantees might not be nuclear waste, but they can easily turn out to be just as expensive. And once again, there are no credible and qualified private sector purchasers.


But this time, taxpayers should be better prepared. Nobody would start from here, but in current circumstances we should insist on nationalisation without compensation (see here). Yes, of course the Tories are trying to make political mischief with it, but that doesn't stop it being the least bad course.

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