Jeremy Warner's Outlook: Don't hold your breath as 'Concordesan' gets go-ahead

BCCI's legal gravy train rolls on; PartyGaming: a case of too good to be true
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I shouldn't perhaps grace such a ludicrous idea with the lead piece in business commentary, yet the signing of some sort of memorandum of understanding at the Paris airshow between France and Japan to design and build a new generation of supersonic airliners cannot be allowed to pass without being subjected to a liberal helping of ridicule.

I shouldn't perhaps grace such a ludicrous idea with the lead piece in business commentary, yet the signing of some sort of memorandum of understanding at the Paris airshow between France and Japan to design and build a new generation of supersonic airliners cannot be allowed to pass without being subjected to a liberal helping of ridicule.

The last such collaborative effort, Concorde, ended up as a textbook study in white elephantry. Costing tens of billions of pounds in taxpayers' money, only 18 of them were ever built and two of those never flew. Concorde was a technological triumph, but a complete waste of money. Unlike the American space programme, virtually nothing of commercial value came out of it.

On closer inspection, the Franco-Japanese understanding to develop a son of Concorde - or Concordesan as it might be called, after the Concordski - turns out not to be all it seems. Both Airbus and Eads expressed bemusement that their names had been linked with the idea. In fact the signing was a government sponsored PR stunt between the French aerospace trade association and its Japanese counterpart, and the initial commitment of money was $1.84m a year. This is scarcely enough to fund the airfares, let alone a design..

The truth is that this is just another piece of posturing by an increasingly desperate French government. Why embark on painful free-market reform when there's the distraction of another industrial folie grandeur to engage with?

BCCI's legal gravy train rolls on

The cost to the Bank of England of defending itself against the charge of dishonesty over the collapse of BCCI continues to clock up at an alarming rate. A further £23.5m is being budgeted for this year, putting the Bank on track for spending of more than £100m by the time the case concludes. Even for the holder of the nation's gold and foreign currency reserves, this is no small sum.

With characteristic understatement, Mervyn King, Governor of the Bank of England, remarks in the Bank's latest annual report that the action "continues to give us new insights into the legal system". In his view, this is a case that should never have been brought, and he remains confident of eventual vindication. Yet the liquidators believe they owe it to the creditors at least to try. Legal action, real and threatened, has so far been extraordinarily successful in restoring the BCCI billions. Creditors have already had 75 per cent of their money back. If the liquidators succeed in wringing the claimed £850m out of the Bank of England, it would bring them close to full repayment.

The nub of this case is that the Bank failed in its duties as the prudential regulator and should therefore be liable for some of the losses thereby incurred. Yet if it were really that simple, the whole thing would have been settled out of court long ago and the lawyers would have been denied their gravy train. The difficulty faced by the regulators is that it has never been sufficient just to demonstrate regulatory negligence, a failure which in any case has been virtually conceded by the Bank.

Law makers have always taken great care to surround Government regulators with all manner of legal protections, so as to prevent any case of failure from rebounding on the taxpayer. The result is that it is virtually impossible successfully to sue a regulator. In the case of the Bank of England, malfeasance, tantamount to deliberate dishonesty, has to be demonstrated in order to bring a successful claim.

This has made it impossible for the Bank to settle the case out of court. It's one thing to admit negligence, but for the Bank of England to concede dishonesty is quite another. Yet to pay over even so much as a penny in a without prejudice settlement would amount to just such an admission.

Indeed, one of the curiosities of this case is the absurdity of the allegation - that the Bank deliberately went out of its way to disadvantage the depositors of BCCI. What possible reason would it have for doing that? True enough, supervisors knew BCCI was rotten to the core and still they failed to act until it was too late. But this was always more cock-up than conspiracy. Common sense alone dictates that this is not a case the liquidators can hope to win. Still, the law is as often an ass as not, so you never know. Further insights may await Mr King yet.

PartyGaming: a case of too good to be true

There are 27 pages of risk factors to read in the PartyGaming prospectus, which must be something of a record. Can even online poker be this risky, or have the founders truly hit upon the proverbial licence to print money? For Michael Jackson (no, not that Michael Jackson), the chairman, and Brian Larcombe, senior non-executive director - both brought in to add a veneer of respectability to this somewhat dodgy enterprise - it's very much the latter. They collect £1.5m and £1m apiece for simply lending their good names to the flotation.

PartyGaming generates oodles of cash from it's online poker tables and if this were any normal company, its current earnings would more than justify the £4.4bn to £5.1bn valuation the sponsors are hoping to achieve. Only, of course, this is not a normal company. PartyGaming has come from nowhere in just eight years, with most of its growth taking place in the last two.

What's more, the company doesn't need to float at all. There's no new money being raised. All possible business expansion can be easily funded from cash flow. All the proceeds of the float go instead straight into the pockets of the founding shareholders. The question that must always be asked in such circumstances is: "if this is such a great business, why are the founders selling?"

The obvious risk for investors is that a bit like the Spice Girls, PartyGaming will disappear as quickly as it arrived. The chances of this happening are quite high even if you think online poker is a here to stay phenomenon with continuing explosive growth potential. Great tracts of the prospectus are devoted to the possibility of a regulatory crackdown in the United States, where online betting is arguably illegal.

With nearly 90 per cent of PartyGaming's revenues coming from the US, the company is plainly highly exposed. Directors draw comfort from a relatively recent court ruling which seemed to draw a distinction between online sports betting, which is definitely illegal, and other forms of online gambling. Be that as it may, the prospectus bluntly admits that "the group's activities are considered illegal by relevant authorities". This may be the first time a company of such magnitude has been floated on the back of an overtly illegal activity.

Yet the bigger threat to PartyGaming is actually the other way around.

The fact that online gaming is legally dubious in the US is what has given PartyGaming and other fly-by-night, Gibraltar-based upstarts their opportunity. Paradoxically, it has created a formidable barrier to entry in an industry where such barriers would otherwise be non existent.

If online gaming were indisputably legal, then a whole host of American internet content providers would by now have steamrollered PartyGaming and its coterie of imitators out of existence. The company's sky high return on sales of more than 50 per cent would already have been competed away. The longer the legal status of online gaming remains uncertain, the better it is for Britain's newest stock market sector. Yet to gamble on your company's core activity remaining illegal doesn't look a sensible investment strategy to me. PartyGaming is just too good to be true. Best stick to poker.