Ring-fencing can mean creating financial and legal barriers between a utility company and its parent group, moving assets to another country, or allocating tax revenue for a specific purpose. It is commonly used to separate a regulated utility business from its parent company to ensure the supply of service is not threatened if the parent company experiences financial difficulties. It can also protect customer data and make utility bonds safer. Another use is transferring assets to protect them from creditors or reduce tax liabilities. Governments can also use ring-fencing to allocate tax revenue for specific spending purposes.
Ring-fencing is a financial phrase that can have different meanings depending on its context. It may mean placing financial and legal barriers between a utility company and its parent group, or moving assets to another country, placing them beyond national controls and regulations. It can also mean “allocation” tax revenue for a specific stated purpose.
One of the most common uses of “fencing” is to describe a regulated utility business that is financially separate from a parent company that is engaged in other activities. The main reason for doing this is to ensure that the supply of the service, such as electricity or water, is not threatened if the parent company experiences financial difficulties or even becomes insolvent. In most cases, fencing will be done at the request or demand of a regulatory authority; This is usually done by individual state governments in the United States. One of the most prominent examples of ring fencing was local power companies that had been fenced off and were therefore able to continue supplying power after the collapse of parent company Enron.
There are other benefits to this form of fencing. For example, a sheltered company may have to keep customer data separate from that available to the parent company. This reduces the chances of customers being subjected to spam marketing or even exposed to increased security risks. Protection against “contamination” with financial distress from a parent company also means that the utility’s bonds are seen as safer and therefore easier to sell for financing.
Another use of the phrase “fenced” is when assets are transferred from one place to another. Typically this will mean moving them from one account to another, with the latter in a different jurisdiction, usually a different country. This will most often be done to protect assets from a claim by a creditor or to reduce tax liabilities. Such protection can be done legally and illegally, and most countries have restrictions on how many assets can be protected and through what process.
Ring protection can also refer to a government agreeing to use the revenue from a specific tax to pay for a specific area of spending. This is also known as a mortgage. The tactic is often used when trying to make a potentially unpopular tax more palatable to the public. For example, a new tax may be more acceptable to the public if they know it will be spent on a product that has broad support.
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