11 January 2012

Are the RMT going all predator capitalist on us?

Kieron Merrett (@kieronam) has raised an interesting question regarding the RMT's latest analysis of the decision to give the Thameslink fleet contract to Siemens, rather than Bombardier. If the contract was agreed in euros and the euro is now losing value, shouldn't the contract now being costing us less?

Now I'm not an economist or a Forex expert (forgive me), and so I'm perfectly prepared to blog corrected here if a more knowledgeable commenter can help out. But I don't think the RMT have got their sums right and even if they had got them right, I don't think they could describe the result as an increase in the cost to the taxpayer. The only way I can see that they can claim an extra £140 million must now be spent is as folllows.

Let's say that when the contract was awarded in June, £1.4 billion was worth €2.1 billion. So an exchange rate of €1.5 to £1 (for argument's sake).

6 months later, as the Eurozone's woes have escalated, the euro has devalued by 10%. So in our universe, £1 is now worth €1.65 and £1.4bn is worth €2.31bn. Siemens is therefore getting €210m more than it was expecting in June. €210m at the new exchange rate (€1.65 to £1) is just under £127.5m. At June's exchange rate, it's £140m.

Can we really describe that as an increase in cost to the British taxpayer? Probably not. Which is why even the RMT appears to row back slightly and call it a "subsidy". Let's say the euro had gone up in value by 10% so that we were now paying £1.4bn for €1.89bn worth of Siemens' services, would the RMT be praising a "saving" of £140m? No.

Given that the RMT's argument is based on the assertion that the contract was agreed in euros, the only way that this could be costing us more is if the original deal was struck at, say (to use our example), €2.1 bn, the euro had increased in value to, say, €1.35 to £1, and we now had to pay £1.54bn (an extra £140m). 

But the RMT can't have it both ways. Either it's a euro sum we're paying and the euro's gone down in which case it's costing us less; or it's a fixed sterling sum we're paying, in which case Siemens took on the exchange rate risk and have benefitted without us losing out. Fact is, Siemens probably (or certainly? anyone cleverer than I able to confirm?) mitigated the exchange rate risk through some sort of insurance or hedging, or had it underwritten by the German government, so that overall the exposure was flat.

Which brings us to the question of what exactly are the RMT asking for in such circumstances? Let's say that it is wrong that Siemens are getting their extra - but worth less against the pound - €210 million. Or that if the euro had strengthened, we would be shelling out more. What would the solution be? As this all comes down to exchange rate uncertainty, the solutions are as follows:

1. Only purchase from within your own currency zone. As the UK's currency zone is only the UK, this could only be guaranteed by putting out to tender in the UK, in flagrant breach of EU rules. So we would have to radically renegotiate our treaties with the EU or leave altogether. Can we expect RMT funds to be supporting the parties most closely associated with those policies at the next election?

2. Join a wider currency zone, which in our case would be the Eurozone. How's that worked out for the workers of, ooh, I dunno, let's say Greece?

3. Hedging foreign exchange risk through something like a currency pair in the spot markets. 

I guess we should look forward to some desk space being cleared in Chalton Street for a decent Forex broker.

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