Thursday, June 17, 2010

What is BP really responsible for ?

Yesterday was a theatre that has now become a regular feature of US political life. A self righteous and pompous Committee of the US House or Senate “summons” a CEO of some company and harangues him. Political windbags fall over themselves to misbehave with a foreign national. Yesterday was the turn of BP’s CEO Tony Hayward. It got so bad, that one of the Representatives in the Committee, Joe Barton, actually apologised to Hayward and then the howls from the lynch mob made him recant the apology.

The White House and the US Senate and Congress has forced BP to fund a $20 bn escrow account for “damages” with regard to the oil spill and for it to be administered by an “independent” third party and pay out claims. What they have essentially done is to ask BP to write a blank cheque. BP has no choice really; and it duly has written a blank cheque.

Make no mistake. BP is at fault. For taking safety too lightly. For not having a backup plan at all – in the companies I have worked in, you get sacked for not having a Disaster Recovery Plan. BP had clearly short circuited disaster recovery. You don’t think of alternate recovery measures after the disaster has happened. That’s virtually a crime in business. They have to suffer the consequences. If companies are allowed to get away with it lightly, they’ll take more and more short cuts. They cannot be allowed to.

But what is BP really responsible to pay for ? The cost of plugging the leak. Sure. The clean up; without a doubt. Some penal damages for all this mess; absolutely.

But then wait. This is after all the US of A. All sorts of claims are likely to emerge. More uncertain , but credible, claims are fishermen whose catch is affected. Oil workers who don’t have a job because drilling is stopped. There’s a strong case to be made for compensation to both.

But then loud claims are being made for much more. Because the beaches are closed, tourism is falling. So the hotel operators are suffering. Shops catering to tourists have seen decreased sales. Entertainment clubs are doing slow business. What about them ?

Even better – The Governor of Alabama is claiming that the state's tax revenues are down because tax revenues from tourism are down. The consequence is that he has to cut funding for schools. Some teachers will lose their jobs. BP must pay them. Next I am sure will come the airlines. Not enough people are flying to the area. They should be compensated.

This is the problem with creating such a fund which will be managed by somebody “independent”. Whoever manages this, will have to cater to “public opinion” which at the moment is little better than a lynch mob. As the saying goes, if you give a flower garland to a monkey, don’t be surprised at the consequences. Handing $20bn to politicians to manage is deadly stuff.

Now, BP can afford this. Very likely its final bill will be way in excess of $20 bn. Even that won’t kill the company. But this is a dangerous trend. Just because somebody can afford to pay, demanding the money is not right. Establish who is to be compensated and by what amount. Determine it by just and fair evaluation, not because paying everybody wins you an election. Don’t accept a claim from everybody under the sun. Once this is established, make BP pay.

Creating a slush fund and then inviting everybody to dip his snout in the trough is no way to run anything.