Fraud squad may have bungled the bung rap

Could it be that certain members of the City of London fraud squad are dead from the neck up? It's a serious charge, but nevertheless it was effectively levelled yesterday by Colin Skellett, the Wessex Water chairman and chief executive, who was arrested on Thursday morning on suspicion of trousering a £1m bung.

The implication on the day was that he had taken the money for smoothing the takeover of Wessex - which until May was part of Enron - by YTL, a Malaysian firm keen to break into the western energy sector.

But yesterday Mr Skellett was out of police cells and back at his desk, insisting - in a persuasive sort of way - that all this talk of bungs was a dreadful mistake.

Sure, he received the thick end of £1m from YTL. It was an above-board incentive payment which the Malaysians insisted he took up front. And, in any case, Mr Skellett declared, he had nothing to do with the sale decision.

Until the last moment he, like everyone else, thought the buyer of Wessex would be either Royal Bank of Scotland or Hutchison Whampoa. The first the executive knew of the bribery allegations was when a vanload of police officers turned up at his house first thing in the morning.

A bout of shyness had come over the City of London police yesterday afternoon, with a spokeswoman only able to say that the force did "not want to get involved in what he said".

So we'll have speculate as best we can here.

In the regular world it is common for companies involved in takeovers to make incentive payments. They tend to take two forms: "focus" payments, designed to buy compliance from management at the company being taken over, so that value is not destroyed; or golden handcuffs, designed to retain staff who would otherwise leave.

Both these types of payment are well-known and entirely legitimate.

Any British public company involved in such payments would be required to disclose the detail to shareholders. Wessex was a British subsidiary of an American company being sold to a Malaysian enterprise; there was no immediate need to disclose any executive rewards being made.

But there is no reason why Mr Skellett, or YTL or Wessex would not be open about the matter to the British police - who, perhaps as part of post-September 11 financial checks, may have come across an unexplained £1m cash transfer from a Malaysian bank to a British individual.

Which is where this whole affair becomes unexplainable.

Did the police ask? Did Wessex and/or Mr Skellett offer an explanation? Was there a thorough consideration of the possible repercussions of accusing a senior corporate executive of such an extreme crime ?

It is unimaginable that one of the country's premier fraud investigation units would make such an elementary error as to mistake a regular business payment for a bribe.

If they have, senior heads should roll.

Forgotten sector
Some people seem to believe that manufacturing does not matter any more. The sector is now in its longest recession since the war, but its plight has provoked remarkably little public discussion.

Hi-tech manufacturing, which was the great shining hope for revival in the sector, has largely evaporated with the bursting of the dot.com bubble.

Bob Rowthorne at Cambridge University says that, as employment in Britain's factories has fallen over the past two decades from around a third of the workforce to just one seventh, it has lost its hold on the public imagination.

Many people now apparently believe that manufacturing is of only historical interest now.

Like agriculture, it is regarded as an activity which advanced economies gradually grow out of.

It is certainly true that the services sector has done a better job than expected in contributing towards paying Britain's way in the world. Mr Rowthorn admits that forecasts he made 10 years ago about the ability of service sector firms to earn foreign exchange have proved too pessimistic. He and his Cambridge colleagues failed to anticipate the increasing weightlessness of Britain's trade. The returns on knowledge - inventions, patents, and the creative component in the design of products and services - turned out to be a nice little earner, while British investors have proved better at making a buck out of foreign investments than vice versa.

But Mr Rowthorn questions how long this happy situation can continue. Unless foreigners agree to fund our balance of payments indefinitely, the gap between what Britain spends abroad and what it earns must eventually close.

While the UK's situation is nowhere near as grave as America's - our current account is around 2% of GDP while in the US it is above 4% - the danger is that it could continue to deteriorate.

If foreign investors lose faith in Britain's ability to repay its growing foreign debt, it could lead to a sudden and damaging collapse in the currency.

With manufacturing still accounting for 60% of British exports, the health of the current deficit depends on the strength of industry.