Margareta Pagano: For Labour's sake, it must try to sell the Rock
Sunday 20 January 2008
Let's have no illusions about why Gorden Brown is so desperate to pull off a private sale of Northern Rock: this is pure politics. The bank employs 6,400 people in the North-east where Labour has 28 MPs, one of the party's strongest areas of support. Northern Rock has its roots in two mutual societies going back to 1850 and, as one shareholder said at last week's extraordinary meeting, was built on "steel and coal". Staff and small investors control 12 per cent of its shares, while the Northern Rock Foundation has given £190m to local charities over the past decade.
Some of Labour's richest donors also come from the region, which has done so well out of generous grants from Labour. Remember David Abrahams, who anonymously donated so much to Labour and won planning permission for a big industrial site outside Durham, and who has mysteriously disappeared from our news pages?
The Government can't afford to wipe out voters' goodwill by destroying jobs and their shareholdings. You can see too why letting Northern Rock go bust – which is what would have happened to any other flawed business in any sector other than banking – would be untenable.
However, a private sale is more likely. Sources close to the Treasury suggest that Brown might even be pushing nationalisation as a way of bouncing shareholders into accepting a less generous offer from private buyers. Many of the bankers I spoke to last week still think that Number 10 and the Bank of England could bang heads with a group of the City's most senior bankers to see if an old-style rescue deal can't be hammered out. Virgin Money and Olivant are still willing to discuss takeover terms and there are other banks that say they are interested. Just because the Lloyds TSB deal was blown doesn't mean others can't have another go, either for all of the bank or bits.
If a sale can't be achieved, what sort of nationalisation will it be and can shareholders be compensated? Will there be a temporary run-down or will Northern Rock be pumped up to sell in a few years? Even if you are ideologically against nationalisation, it doesn't have to be a disaster. Look at Rolls-Royce, nationalised for £1 in 1971.
But unless it wants to upset investors and face lawsuits, the Government will have to find a way to pay the shareholders.
Even Labour must be nervous about a nationalisation. Imagine a situation in which it goes down this road, pays investors 10p, makes money on its loans and then sells the bank on for a few billion in a couple of years' time. Who would this money go to – taxpayers or shareholders? Contrary to reports, taxpayers have yet to lose any money in this affair. Indeed, the Bank of England's £24bn loan to Northern Rock is said to be on such penal terms – 100 basis points above rates – that it is making money on the loans. Finding a private buyer is still the best way for all concerned to get value.
Rose and the three Rs
Sir John Rose, chief executive of the aforesaid Rolls-Royce, the aerospace-engines business, brilliantly describes how wealth is created: you either dig it up, grow it or convert something in order to add value. Anything else is merely moving it about. To prove his point, he points out that, pound for pound, an aircraft engine is six times more valuable than silver – whereas, pound for pound, a motor car has the same value as a hamburger.
But Sir John is worried we are losing our ability to convert wealth because of woeful education. When you have one in 12 young people neither in education, training or work, and seven million adults who struggle with numbers, then that's a crisis.
A look at Rolls-Royce's Derby plant shows just how much value comes from having a hi-tech manufacturing business: more young people in Derby get five good GCSEs than in any of the cities around, average salaries are higher than elsewhere in the Midlands, and its apprenticeship and graduate schemes are oversubscribed. But Sir John has had to go overseas to find people to work in his fuel-cell business – because people with those skills just can't be found here.
His stark prognosis was borne out last week by the Institute of Civil Engineering, which forecast that the construction industry would need 12,300 new professionals to join each year, until 2011, to meet building demands. The institute blames the dreadful level of maths and science teaching in our schools for putting people off wanting to train.
You can't expect teenagers to want to become engineers if they have lost interest by the time they reach 13. Culturally – and for this I blame teachers and parents – we just don't seem able to show how exciting and creative the sciences can be. That's hardly surprising when not even a fifth of physics teachers in the UK have physics degrees.
Finding inspirational teachers is part of the solution. The other is salaries. So long as the City grabs the brightest brains – and most of our engineers – by paying them up to 10 times more – there will be shortages. What should our industrialists do? Either they will have to pay more or send more work off-shore. Or maybe Rose should launch an X Factor-style show – as the Indians have done – to propel young people into engineering.
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