Everything Must Go!

Everything Must Go!

A recent study* of the continuing car-boot sale of British assets has serious negative implications argues Frank

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. Mr Micawber (Charles Dickens - David Copperfield)

Question: how is it possible to run current account deficits year-on-year as evidenced in the UK s balance of payments figures and seemingly get away with it?

Answer: By borrowing on the bond markets or selling national assets, usually both. This will provide a surplus on the capital/financial account which will balance the deficit on current account.

No problems then? Sorry, no free lunches I m afraid. The surplus on the capital/financial account is the amount of monies borrowed through selling Treasury debt (gilts) to investors, or raised through the direct sale of physical UK assets. It is a policy consisting of little more than borrowing from your bank and/or selling the family silver to cover the shortfall. The long-term outcome of this will be bankruptcy as we sink deeper into debt and as our asset base is irreversibly depleted. But hey, what politician or central banker ever worried about the long-term implications of their policies they ll all be gone by then and it will be somebody else s problem further down the road.

The unregulated sale of UK assets has been a key feature of the Blatcherite (Thatcher and Blair combined) settlement which began 30-odd years ago. It was a typical piece short-term financial opportunism and juggling very similar, it should be said, to the much vaunted PFI/PPP hare-brained schemes that John Major and Gordon Brown were so keen on.

Mr Brummer raises the question prompted by the take-over of Cadbury s, a successful UK firm of many years standing, by the US giant food conglomerate Kraft. He comments: ... the whole affair raised important questions about UK attitudes to home grown industries, about foreign involvement in British industry and about the future shape of the British economy that are highly pertinent today.

Indeed, but don t runaway with the idea that any brain-dead UK politician particularly those with career aspirations - is going to raise the issue. The asinine notion that ownership and control of a national economy didn t matter was part of the whole Thatcherite ideological baggage a set of idiotic notions taken up with frightening alacrity by the Blair/Brown/Balls axis after 1997. Inward investment was the greatest thing since sliced bread. Well actually inward investment, particularly the flogging of UK assets, will always lead to negative income outflows. Just as outward investment will lead to positive income inflows. That is the whole point. Foreign investors in the UK are not, to the best of my knowledge, registered charities.

But let s start at the beginning. The prerequisites for the asset-stripping of the UK were the policies of privatisation, deregulation, and the existence of an ocean of easy credit. Former state enterprises in utilities and transport once privatised became sitting ducks for aggressive foreign investment. So much so that French and German energy and water companies EDF, RWE, E.ON - now effectively operate a cartel. Their British assets are simply cash-cows generating guaranteed profits but starved of investments, all the better to serve investment opportunities in their home countries. Price rises have been consistently above inflation with the regulators, OFGEM and OFWAT, either unable or unwilling to take effective action to restrain them. This is the worst type of coupon-clipping rentier capitalism, with little or no investment and an absentee landlord content to simply collect the economic rent. A licence to print money.

In the manufacturing and retailing sector all the major companies were also in play . The list is far too long to enumerate, but included, Fortnum and Mason, Pilkington Glass, British Oxygen, Debenhams, British Airports Authority, PO, Manchester Utd FC, Alliance Boots, Corus Steel, ICI, O2, Harrods, House of Fraser, Rowntree Mackintosh, Terrys of York, Land Rover, Merrill Lynch Investment bank, Asda, London Electricity, Thames Water, Courtaulds, Amersham pharmaceuticals, Abbey National, Alliance and Leicester and Bradford and Bingley (all swallowed up by the Spanish giant Santander). Westinghouse, UK lottery operator Camelot, Tate and Lyle ... and on and on the list goes and also includes basic national infrastructure, the archetypal public goods such as bridges, ports, and even sewage disposal.

But all of this was only possible with the explosion of easy money which was a function of financial deregulation. Many of these takeovers were in fact leveraged buy outs (LBOs). A leveraged buy-out occurs when the predator borrows funds well in excess of their capital base in order to buy another company or enterprise. Leverage can be as high as 30:1, that is to say actual capital was £1 million but this was leveraged up to £31 million with borrowed monies. The takeover of Cadbury s by the US food conglomerate Kraft was such an acquisition. Disgracefully it emerged that the Kraft buy-out had involved the Royal Bank of Scotland a bank with an 83% government shareholding which was helping to finance the Kraft bid via a £630 million loan facility. There are also specialist firms private equity companies which engage in this particular practice. KKR the US private equity firm bought out Boots with borrowed money and the Glazer family did the same to Manchester Utd.

These buy-outs by private equity firms is an asset-stripping exercise involving acquiring the asset, sweating the asset by a ruthless reduction of costs (including wages of course) and dumping the borrowed monies onto the asset itself. After the cost reductions the asset may then be resold at a handsome profit. According to David Conn, a leading expert of the economics of English football:

To date the Glazers` takeover has cost United more than £500m in interest, bank charges and fees, after they borrowed £525m to buy the club, then made it responsible for servicing their debts. (Guardian 04/04/12).

In addition to the pillage visited upon the UK economy by foreign investment banks, private equity funds, hedge funds, and overseas companies engaging in leveraged buy-outs, we have the emergence of Sovereign Wealth Funds (SWFs). These investment vehicles first came into existence in the oil-rich gulf states when the petro-dollars were still pouring in, and try as they may the governments in these little energy enclaves could not spend these euro-dollars fast enough. They therefore set up state sponsored vehicles consisting of these surplus monies with a view to overseas investment. This practise has spread beyond the Middle East and Russia to involve a number of surplus countries ranging from Norway to China. And it is no longer just oil monies which are involved: Pension Funds and Sovereign Investment Corporations are now also involved. For example the California Public Employees Retirement System (CALpers) now has a share of 12.7% in Gatwick airport, and the UK National Lottery went to the Ontario Teachers State Pension Fund for £385 million.

It is argued that this is not a matter to be unduly concerned about since the UK buys overseas assets which yield positive income streams and that this balances the outflow. The trouble is, however, it doesn t balance. And this is understandable since the Brown/Balls ascendency at the Treasury saw manufacturing as a percentage of GDP fall from 20% to 12.4% from 1997 to 2007. During this same period foreign ownership of UK assets rose from 30% to 50% of national output. In 2009 UK companies acquired £22 billion of overseas assets whist foreigners acquired £30 billion UK assets. One year later foreign companies acquired £86.8 billion of UK assets, whilst UK corporations acquired £54 billion of overseas assets.

Moreover foreign ownership of UK companies has lead to an erosion of the national tax base as these companies move their operations overseas or engage in tax scams such as transfer pricing. Also eroded is the UK s skills base as support and supply functions and companies are replaced by their own suppliers, as is the case with Japanese companies present in the UK. In the meantime the UK is turned into a branch plant economy with a small and uncompetitive manufacturing base.

It is truly amazing how this state of affairs has come about, and how the theoretical gibberish which provided it with a pseudo-intellectual rationale, was simply swallowed by our politicians and civil servants. But then the United Kingdom is, notwithstanding its claims of being practical and pragmatic, the most ideological of all countries. A terrific book.

*Britain For Sale Alex Brummer Random House 2012.