The Reality Of The Mea Saga....

[LoneWolf]

My personal tax / car tax / rates etc have quadrupled in the past few years Joe blogs will pay for zero rate company tax and MEA cockups and pay dearly!

 

Finlo, my friend, none of this is on topic but I do think it needs an answer.

it would be best addressed in another thread. Why dont you start one ?

Your personal tax rate has fallen not increased.

Your car tax has increased but it has not quadrupled.

Joe Bloggs will not pay for zero rated company tax it is intended to increase, not reduce, the amount of tax revenues coming into Government.

The MEA costs (on topic at last !) are something we will all have to bear over the next decade or so.

The upside to the MEA situation is the fabulous energy infrastructure Mike Proffitt has delivered.

The downside is the incredible cost which has to be shared by such a small number of people.

Other capital projects will be delayed because of the MEA situation. That is going to be a problem but only a short term one.

[finlo]

My personal tax / car tax / rates etc have quadrupled in the past few years Joe blogs will pay for zero rate company tax and MEA cockups and pay dearly!

 

Finlo, my friend, none of this is on topic but I do think it needs an answer.

it would be best addressed in another thread. Why dont you start one ?

Your personal tax rate has fallen not increased.

Your car tax has increased but it has not quadrupled.

Joe Bloggs will not pay for zero rated company tax it is intended to increase, not reduce, the amount of tax revenues coming into Government.

The MEA costs (on topic at last !) are something we will all have to bear over the next decade or so.

The upside to the MEA situation is the fabulous energy infrastructure Mike Proffitt has delivered.

The downside is the incredible cost which has to be shared by such a small number of people.

Other capital projects will be delayed because of the MEA situation. That is going to be a problem but only a short term one.

 

 

Ok i grouped them all together to arrive at that figure but my personal tax is deff well up and my rates have gone from £230 to £700+ in 4 years!

[LoneWolf]

Ok i grouped them all together to arrive at that figure but my personal tax is deff well up and my rates have gone from £230 to £700+ in 4 years!

I have started another thread in General chat area It might be better than discussing here.

The Mods may shout at us for being off topic !!

[Gladys]

Finlo, I can't understand how your personal tax is up, has the rate changed (direct and indirect rates haven't changed in the last four years as far as I know)? Your tax may be up because you are earning more!

 

Back on topic though, I am interested in Lone Wolf's view of the MEA borrowing through its subsidiary. What was the money borrowed for and is the subsidiary that borrowed the money carrying out that activity?

[LoneWolf]

Back on topic though, I am interested in Lone Wolf's view of the MEA borrowing through its subsidiary. What was the money borrowed for and is the subsidiary that borrowed the money carrying out that activity?

 

Nothing new here sorry. Its what all the fuss has been about. The money was borrowed by Manx Cable Company without gaining the consent of Tynwald or Treasury or DTI or anyone else for that matter.

It was then transferred to MEA. There is a question raised by the MEA auditors, KPMG, as to whether the transfer of the money to MEA was legal. The money was used to keep MEA afloat during the life of the gas project , the rest is history.

[Gladys]

Back on topic though, I am interested in Lone Wolf's view of the MEA borrowing through its subsidiary. What was the money borrowed for and is the subsidiary that borrowed the money carrying out that activity?

 

Nothing new here sorry. Its what all the fuss has been about. The money was borrowed by Manx Cable Company without gaining the consent of Tynwald or Treasury or DTI or anyone else for that matter.

It was then transferred to MEA. There is a question raised by the MEA auditors, KPMG, as to whether the transfer of the money to MEA was legal. The money was used to keep MEA afloat during the life of the gas project , the rest is history.

 

Thanks Lone Wolf, but that wasn't the point of my question. One would assume that the entity borrowing would have to give a reason to the bank for its borrowing; build a new power station, lay a gas pipeline, lay a fibre optic cable, etc and that it would use the money for that purpose. If, on the other hand, the entity that took out the loan went to the bank and said we want to borrow squillions and the bank then asked for what purpose, to which the reply is to prop-up the parent, then surely it would be reasonable for the bank to ask that the parent make the application and take out the loan? Banks normally like to take out security for borrowing over the asset that the borrowing has been used to purchase.

 

Develop the hypothetical scenario further; the parent then says it can't make the application because it needed some external consent which would be far too difficult and not likely within the timeframe in which the funding was needed, but it would happily guarantee the loan to its subsidiary (which did not need that consent because it is a separate legal entity and not itself directly subject to the parent's incorporating constitution) and offer its own assets as security.

 

Do you see where I am coming from? If MCC did not use the money for its own activities but merely passed the money up to its parent, then what purpose other than being able to secure the borrowing did the subsidiary have? There may have been a Nelsonian eye from IOM Govt, as has been hinted elsewhere, but from the outside, it does look like a bit of a contrivance.

[Chinahand]

Glad to be Back. I realize you'd probably prefer if Lonewolf answered this, I hope he does. But I think I can answer some of your questions. Sorry as always my posts are so long, but these issues are complex and difficult to explain!

 

The PKF report stated that Barclays offered a lower rate for the loans if they were approved by Treasury. The board have stated that this was rejected because it was expected that applying to Treasury would cause a delay to the project and risked the relationship the MEA had with its external subcontactors if it became known that the MEA was having cash flow problems.

 

The fact that Treasury and the MHKs have all reacted the way they did when the scandal broke tells me the MEA were very wise not to ask permission right in the middle of the project.

 

The repayment of the initial Barclays loan was only approved in the July 2005 Tynwald, but had been raised as an issue by the MEA since the previous November. IE it took 9 months. This was after all the bills had been paid and the creditors were no longer knocking on the door. If these two things had happened simultaneously I dread to think what would have happened.

 

If work had stopped or being delayed the MEA has stated that this would have cost approximately £50K per day as the loans were being discussed and this rapidly increased to 100K per day as the work came fully on stream later in the year. The MEA were under massive time pressure as the project ramped up.

 

To be blunt it seems to me that the MEA knew a scandal would develop and wanted to delay it for as long as possible!

 

However I really don't think that the MEA expected the scandal to develop the way it has, or the Treasury to be on the other side of the fence during this scandal ... as I've said many times before the MEA had been providing information into Treasury all along on the size of their capital spending. As far as the MEA were concerned Treasury had been fully informed of how much more expensive the project had become compared to what was originally expected.

 

The board have stated that these loans were seen as being interim loans and expected them to be paid off via a Treasury/government backed long term loan. The one area of this affair that hasn't been made public is what work the MEA did to get the private sector to provide these funds ... I strongly believe they did an awful lot, but Treasury rejected this and paid it off out of the existing budget ... IMHO this was madness and has cost the IOM tax payer dear.

 

My take on it is that the MEA fully believed that they acted legally in using MCC to take out interim financing and that they expected that Treasury would agree to rolling over the temporary loans into a long term package. I think the MEA expected there to be anger from Tynwald over the fact that the project had cost more than expected, and probably expected a detailed investigation as to why the initial costings had been so far out, but I’m pretty certain they didn't think anyone was going to say they acted illegally, deviously or immorally. Everything had been lawyered, they’d had quarterly meetings with the Treasury and reported the overspend to them and had delivered the project as required by Tynwald.

 

If you read chapter 12 of the PKF report it states that the Banks were informed of what the money was going to be used for: Powerstation, gas assets, developing the fibre optics etc. IE the set of projects the MEA had been tasked by Tynwald to do.

 

Here I think a series of figures will help explain things:

 

The MEA Group of Companies owns a series of assets (the left hand side of the balance sheet): The old power assets, the cable, the new powerstation and the gas pipeline.

 

 

The way accounting works the assets are backed up by the debt and equity in the Group (the right hand side of the balance sheet).

 

This consists of the old financial arrangements of the MEA, its reserves etc; plus the HSBC loan that was taken out by MCC in 1999 to pay for the cable (which was later rolled over into the first barclays loan), the £185 million bond provided by the Treasury and the second barlcays loan .

 

 

So the assets and the debt and equity match each other. The lines I've drawn aren't exact and obviously this is a simplification BUT IT IS APPROXIMATELY CORRECT!

 

 

BUT the MEA isn't a single company; its a parent and its subsidiary MCC [there is another subsidiary PGT, the company that built the powerstation, but its financing has no effect on this analysis].

 

The board of the MEA which was sacked has always maintained that the assets of the group were split up as follows:

 

 

MCC has taken out a loan for a purpose relevant to MCC's operations and no loans exist between the MEA and MCC. All the cable and gas assets are owned in MCC, all the electricity assets are owned in the MEA.

 

This makes ALOT of sense. Both the cable assets and the pipeline could create very substantial liabilities for the MEA outside the Isle of Man if there was an industrial accident. Say for example the cable trips out and disrupts the National Grid, or an explosion in the gas pipeline blows back to either Scotland or Eire. By ring fencing the non-IOM assets it stops the MEA's IOM based assets ie the powerstation and grid, being siezed or drawn into any claim from the UK or Eire for compensation. The MEA has crown immunity on the Isle of Man, but doesn't have it any where else. Ensuring its main generation assets are protected is a very good idea!

 

However the Treasury etc say no the arrangement of assets is as follows:

 

 

The Gas Assets are owned by the MEA and as well as the loan between MCC and Barclays there is also a loan between MCC and the MEA.

 

As far as I am aware even the Attorney General has admitted that MCC borrowing money from Barclays is fine. The issue is whether the MEA has borrowed from MCC … this is what this arrangement of assets shows and as the MEA cannot borrow without approval from Treasury then it’s an illegal act.

 

KPMG is spending £1 million pounds trying to agree whether the arrangement is as the sacked board says or Treasury.

 

If it’s as Treasury says it’s very dangerous because any industrial accident involving the gas pipe line could result in the MEA rather than MCC being found liable and have to pay for the damage. If this happens the new power station assets, by far the most expensive assets the MEA owns, could be seized.

 

Hope this helps! Sorry its so long!

[Gladys]

Thanks Chinahand, nothing of what you say is a surprise. It is difficult for people not involved with companies to understand exactly what that means; they are separate bodies and the fact of their ownership means nothing. The MEA may have been pushed into this corner, but I do still believe that the structure of the loans was intended to circumvent the constitutional requirements of the MEA.

 

Whether it made commercial sense depends on what you would expect from an organisation that will, come hell or high water, be bailed out by the IOM Govt!

[Grumble]

We need a new vote thread for the MF Awards...'most detailed explanation', which should of course go to Chinahand for the above. Absolutely fascinating use of visual aids.

 

Maybe (for example) Rhumsaa will do an online Powerpoint presentation next time he wants to call someone a cock, to explain his rationale.

[lisner]

The whole explanation was fascinating. I am now wiser - thanks Chinahand.

 

It seems this is all about "Creative Accountancy". They know well that it is dodgy ground but as long as their backsides are covered somehow then these people supposedly sleep well at night. It is much the same as creative law whereby those in Athol Street and such are able to swerve, manoeuvre and talk their way in and out of anything.

 

The rest of us are of course hampered - by morals.

 

MEA 1

Isle of Man 0

 

Final score.

[Gladys]

I have re-read your post and, again, thank you Chinahand, but I think your explanation needs more development.

 

Hiving-off certain risky activities to a subsidiary is standard practice in the commercial world, but when a public operation is involved, it becomes very difficult for that to work. If that is the reason for MCC etc. then it is, in itself, dubious. We can all understand isolating commercial risk, but not the risk that you are talking about (i.e. a massive failure affecting the National Grid). It is accepting that kind of risk which comforts counterparties when operating with public bodies.

 

If the worst did happen, is it really conceivable that IOM Govt/MEA would say, sorry, but it's a subsidiary, separate legal entity, no legal liability attaches, so we are not culpable? I very much doubt that would be the response, and would hope not as it would be the kiss of death for the IOM.

 

I am very interested in this matter as I worked for a long time for a similar organisation, that had to obtain Ministerial approval for almost any commercial activity falling outside of the incorporating statute (in fact, that was a large part of my job which did involve representations to UK Ministerial level). Sometimes, the consents and approvals were quick, other times it was like drawing teeth. But in no circumstances would the incorporating statute be circumvented; no nifty footwork, no clever structures to avoid a liability. It was a public corporation which had to conduct itself with the integrity that that entails.

 

When all is said and done, the MEA is a public body and the fact remains that having tried to create a clever corporate structure (which works very well in the private sector), it would never work in the public sector. All the creative accountancy in the world will not help a public sector organisation become a private enterprise; better to recognise that and deal with it!

[Not the Comfy Chair]

When all is said and done, the MEA is a public body and the fact remains that having tried to create a clever corporate structure (which works very well in the private sector), it would never work in the public sector. All the creative accountancy in the world will not help a public sector organisation become a private enterprise; better to recognise that and deal with it!

 

Even in the private sector, at frequent times, and certainly when there was a major change in project cost, basic project management principles apply. Whether you follow Prince 2, or other processes, you must review the project costs, as they are now known, against the project benefits, and, potentially, you may cancel the project. In this case, the MEA CEO had gained a massive amount of personal credit from his commitment to deliver significant changes, beneficial to the IOM public. Within the MEA, I am sure that any backtracking on these commitments was not acceptable because of the loss of face that the CEO would suffer.

 

I am sure that all the initial intentions were honourable, but I believe that the risk of personal embarrassment to the CEO, overwhelmed the need for a realistic review and an open debate beetween Treasury and the MEA.

[LoneWolf]

In reply to ChinaHand The differences between Treasury and MEA versions

of events is very well documented and probably didnt need a lengthy explanation here.

 

The main issues as previously stated are

 

1: MEA via its special purpose vehicle procured enormous loans without gaining the consent of Tynwald.

Agreed there was no legal requirement on MEA to gain consent but it is absolutely ridiculous to

imagine a public sector body should even contemplate the course of action MEA took.

No one should be in any doubt MEA treated Tynwald with astounding contempt in doing what it did.

 

2: The subsequent transfer of money between MCC and MEA is the subject of a legal challenge by KPMG,

MEA's auditors. This may or may not proceed to the courts but, again,it was a scandalous

course of action probably an act of desperation.

 

3: The whole sorry saga has had a severe impact on the ability of Government to fund new capital

projects. This is likely to be the case for at least 5 years or more.

 

There is also another issue as to why the whole project strayed so far from plan. Again everyone should

appreciate this wasnt a slight overspend it was an enormous overspend. What the hell happened to tight project management ? The Enron collapse is not an excuse.The whole relationship between Enron, MEA and the Enron owned contractor needs close examination. Its almost a model of how not to manage risk. Why the hell MEA then chose to pick up the pieces itself is another mystery, as is the apparent consent of DTI to this bizarre course of action.

 

There is an upside to all this and its a big one.

Regarding the project deliverables the Island is now in possession of a first class energy infrastructure which

if used correctly will deliver savings amounting to many millions of beer tokens in the future. MEA and Mike

Proffitt especially should be congratulated by one and all for their vision and foresight in delivering what they did.

According to both Treasury and MEA (in agreement for once) electricity demand will continue to grow at about 4% every year. This means more generating capacity will be needed in about 12 - 15 years time.

This can only be provided by another power station or another cable. Suss it out, we will be able to build a new power station at relatively low cost because MEA have aready installed the infrastructure.

 

This brings us nicely to ChinaHand's point about the Treasury preferred method of financing the loans.

I agree with ChinaHand it is incomprehensible as to why Treasury have decided to front load the payment

schedule when it all could have been done so much cheaper.

After all, the infrastructure is there for the next 50 years or more.

[Gladys]

 

Even in the private sector, at frequent times, and certainly when there was a major change in project cost, basic project management principles apply. Whether you follow Prince 2, or other processes, you must review the project costs, as they are now known, against the project benefits, and, potentially, you may cancel the project. In this case, the MEA CEO had gained a massive amount of personal credit from his commitment to deliver significant changes, beneficial to the IOM public. Within the MEA, I am sure that any backtracking on these commitments was not acceptable because of the loss of face that the CEO would suffer.

 

I am sure that all the initial intentions were honourable, but I believe that the risk of personal embarrassment to the CEO, overwhelmed the need for a realistic review and an open debate beetween Treasury and the MEA.

 

Following any project management model (such as Prince, which I have seen in action in one IT project that more than doubled its original budget) is fine. The real problem with any project is, often, that you get so far down the line that when the overspends are identified, there really is little choice but to continue; the resource commitment (money and management) is too great to then stop and start all over again. This is very often the reason for vast overspends in any project; they are usually foreseen but the resource commitment inhibits how you deal with the overspend, other then just stay with it!

 

However, my comments were not aimed at how the project was managed, but rather at the response to the financial repercussions! There should have been a mature debate between MEA and IOM Govt. on how to deal with the problems (let's face it, Enron's demise was a shock to the whole world, not least Andersen Consulting) rather than the MEA embarking on a "folly of its own". Now, where the fault for that lies between Government and the MEA has yet to be established, but there is nothing, ultimately, more costly than a public sector entity losing sight of its responsibilities to the public purse.