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The more we introduce regulatory structures and oversight to make sure finance is run sensibly, the more people we employ whose primary concern is to cover their backs. Their aim is not to stop things going pear-shaped — when that happens, it is “an unprecedented turn of events no one could have foreseen”. Rather, their aim is to make sure they don't get blamed for any such disaster after the event.
In a thought-provoking speech yesterday, one of the brainier front-bench Tories, Oliver Letwin, came to a similar conclusion, though at rather greater length. He contrasted ineffective regulation with effective regulation. The former is characterised by a love of box-ticking and back-covering, and an insistence that all rules are complied with even as the structure being supervised sinks beneath the waves. The latter has no rules but requires a person to use his or her judgment to decide whether the right outcomes are being achieved and the purpose of the organisation is being met.
This brought to mind a recent conversation with the good people at Hawkpoint, the mid-market investment bank that is engaged in a lot of corporate restructuring work these days. They worry about pension-fund trustees refusing to co-operate in efforts to salvage companies that have got into financial difficulties.
The purpose of a restructuring is to sift through the corporate wreckage to identify a business that could be viable if it had the right capital structure, and then to persuade those who are owed money to take a hit in the interests of allowing the business to survive, and hopefully prosper in the future.
It works when the creditors see the phoenix business as offering the only hope of getting any money back. However, a problem arises when one of the creditors is a pension fund, because its trustees face an uncomfortable choice. They can embrace the creative solution, which allows the business to survive and jobs to be preserved but requires them to go out on a limb and agree that pension benefits are trimmed, this being their share of the losses spread across all the creditors. Or they can refuse to co-operate, play by the book, refuse to discuss dilution of member benefits, and let the business collapse.
Logic would suggest most pension-fund members who are also employees would prefer the chance of keeping their jobs. But the pension trustee who agrees to trim benefits risks being sued. Trustees who refuse to co-operate — even if it means nothing is saved — have no such legal risk because they have followed the letter of the law. Guess which route trustees prefer!
Thames Water under pressure
There is probably no such thing as a recession-proof business, but if there were to be one, the water industry would seem to be a good candidate — and particularly where it has a strong residential franchise rather than being dependent on big industrial customers who obviously would suffer in a downturn.
But one of the things which makes this recession different from most that have gone before is the interaction of an economic slowdown with a financial crisis. This to some extent has taken its toll on Thames Water, and is at least part of the reason for the cost-cutting drive that this morning resulted in 300 people, or 6% of the workforce, losing their jobs.
In what seems to be something of a pattern, the cull is in the back office rather than the frontline staff — in finance, human resources, IT and so on rather than in those parts of the business that face the customer.
There has been a slight fall in water usage which, to the extent that people are on meters, means reduced revenue. There has been a small increase in bad debt, reflecting the financial distress among the customer base, and that has also reduced revenue.
But the key issue is that this is a business carrying a large amount of debt, partly because it is a utility that is driven in that direction by regulation, and partly because it is owned by private equity.
As a result, it is very sensitive to changes in cashflow. With a mountain of debt to service, it has to react the moment the flow turns down — or risk running foul of its banking covenants.
Maintaining sufficient financial headroom on the existing debt is at least part of the reason for today's action, which will save about £7 million in a full year. The other is to underwrite Thames's credibility in the financial markets, where it is in the throes of raising €500 million (£465 million) in its most serious money-gathering exercise for some months. To maintain its £1 billion-a-year investment programme, it needs a more or less continual presence in those markets.
Money is, of course, hard to come buy, and costs a lot more than it used to — and that means belt-tightening right across the business. That pressure is not going to go away soon.
