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QUEST MEANS BUSINESS

Unrest in Bahrain; Qantas Flying High; U.S. States in Debt

Aired February 17, 2011 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, HOST: It's a show of force. Bahrain's army takes control of the streets. In a financial state, Wisconsin's budget bill sparks anger. And the Qantas chief exec says the A380 accident cost them dear.

I'm Richard Quest. I still mean business.

Good evening.

Tanks on the streets of the capital. At least three people have been killed, and there's a tide of international criticism. And now a credit downgrade on debt could come next.

Tonight, Bahrain is the latest flashpoint in the Arab world. The implications for the business world could be serious indeed.

At least three people were killed when police stormed a protesters' camp in the capital, Manama. Tear gas and rubber bullets were fired as officers moved in on the mostly-peaceful demonstrators in the middle of the night. As you heard in the news, hundreds more people have been injured.

The UN Secretary General says those responsible must be brought to justice. The Secretary of State of the US has expressed her concerns. Army vehicles are patrolling the streets of a country that's now positioned itself as a business hub in the Gulf Region.

On the business front, the ratings agency Fitch says it's considering downgrading Bahrain as these protests intensify.

That's the situation as it stands at the moment, or at least as we're looking at it. Our senior international correspondent Nic Robertson is on the line from the capital, Manama.

Nic, the -- they are doing their utmost, if you like, to restore some sort of civility and norm. But what is the -- what are the protesters doing?

NIC ROBERTSON, CNN SENIOR INTERNATIONAL CORRESPONDENT (via telephone): Well, at the moment, they seem to have been beaten off the streets, and they have withdrawn from their protest. And it's not clear what their next move is going to be.

The foreign minister described the situation where the country was staring into a sectarian abyss, and it was to save the country, he said, that they had to crack down in the way that they did. And he explained it this way: he said that the resources in Bahrain are limited. It's taken a long time for the country to build itself to this economic position. And he felt, as other government ministers felt -- he said that if they let this situation continue, then it would hurt the economy of the country.

So the protesters right now are considering their next move. The government has clearly taken a step, as the foreign minister said, to limit the economic damage that may come from this ongoing protest.

QUEST: In Bahrain's case -- and we'll talk about this with John Defterios in a second -- but in Bahrain's case, the way they position themselves as a banking, insurance -- and a haven of stability for business, Nic, the protesters must realize the damage that's being done. So I'm wondering, they don't clearly want to bring the house down 'round their ears, do they?

ROBERTSON: Well, for some of the protesters, they feel, to use that sort of metaphor, they feel they don't really have a house to bring down around their own ears. They don't feel that they are getting the economic advantage that other members of the community are feeling.

The sheer majority population here feel marginalized from better jobs, marginalized from powerful positions, marginalized from influence in the country, marginalized from security -- positions in the security services, so their house is a much smaller house, they feel, than the house that is owned and run by the leadership of the country, and many Sunnis (ph) in the country. They don't have, simply put, as much at stake as the regime does, Richard.

QUEST: And on the regime front, I mean -- I suppose the blunt question that we can dance around to our heart's content -- but let's get straight to it, Nic. I mean, how secure tonight is the monarchy now?

ROBERTSON: I would say the monarchy right now feels very secure.

There's just been an emergency meeting of the foreign ministers of the GCC, the Gulf Cooperation Council. They have come out with a joint communique, which essentially said, one for all and all for one. If the security of any single nation is threatened, then that means the security of all the nations are threatened. And as we know from the way -- this is the same type of language that NATO uses -- this means that one nation will come to the -- one Gulf nation will come to the security aid of another Gulf nation.

So the king tonight knows that he can count on the support of countries like Saudi Arabia -- big, solid, secure countries. Richard?

QUEST: Nic Robertson in Manama for us tonight.

Bahrain may be tiny when compared with Egypt. But it is hugely important in the business world, as we were alluding to that very point. And I'll show you -- I'll show you why.

As Nic was saying, it is part of the GCC, the Gulf Cooperation Council. Now, if you look -- there you have a sort of little Bahrain. But the GCC includes Saudi Arabia, it includes the UAE, Qatar, Oman, and Kuwait.

Now, Bahrain's own Web site says it's the Gulf's most liberal business environment. The Heritage Foundation ranks it 10th in the world of economic freedoms. All kinds of foreign businesses operate there. Although it's more of the diverse economies in the region, it's still heavily dependent on oil.

Let's put this to John Defterios from "MARKETPLACE MIDDLE EAST."

Good evening, John.

JOHN DEFTERIOS, HOST, "MARKETPLACE MIDDLE EAST": Good evening.

QUEST: You and I were in Bahrain exactly this time last year talking about the liberalism of the economic environment. Doesn't look that way tonight.

DEFTERIOS: Well, things have changed dramatically. It's worth saying that protests are not unusual, though, Richard, in Bahrain. There've been flare-ups two or three times a year over the last five to six years. King Hamad's been in power since 1999, and has been able to manage that along with the Crown Prince, who've been looking to open up the economy.

They like to the position themselves as the Switzerland of the Northern Gulf. They flank the eastern province of Saudi Arabia where all reserves are. They have the Fifth Fleet, which has always provided security. Now with these tensions, it does, you know, change the equation as a business proposition, no doubt.

QUEST: Let us pause for one second, because as I was alluding to, we were in Bahrain where QUEST MEANS BUSINESS came this time last year, and I got a chance to speak to the Crown Prince and discuss the changes that were being made in the economy.

(BEGIN VIDEO CLIP)

SALMAN BIN HAMAD BIN ISA AL KHALIFA, CROWN PRINCE, BAHRAIN: Let's think of it as growing the private sector and replacing the fundamental role that the government takes with a virtuous cycle that spreads wealth and develops productivity for all of our citizens.

QUEST: Why? Why are you doing it?

AL KHALIFA: We have to. I mean, we're not in any danger of running out of oil in the next 10 years, but for the future generations that expect a better future than their parents had, we have to build an economy that is based on productivity. And in order to do that, we need to invest in education, we need to get them skills, new technologies -- it gives them a better life. I mean, is there any other reason to develop an economic program?

QUEST: No. But as you diversify, you've got to do decide where you're going to diversify.

AL KHALIFA: We have a good idea where we're going.

QUEST: And you're going financial services?

AL KHALIFA: We're going financial services, we're going manufacturing , we're going into niche products so that we specialize and do what we do well.

(END VIDEO CLIP)

QUEST: Now, the Crown Prince there -- Bahrain saw a lot of its lunch eaten by Dubai when Dubai came along. But it has clawed some of that back.

DEFTERIOS: No doubt about it. In fact, it has a very good track record when it comes to growth. They're expected to grow about 5 percent this year, according to the IMF. They produced better than 4 percent growth last year. Richard, they even grew during the recession in 2009 by 3 percent. Their unemployment rate -- unemployment's always been a very big issue with Egypt, for example, big issue with Tunisia. That's not been the case with Bahrain.

Now, one of the criticisms here -- and the Crown Prince is a very sensible man. You saw him last year when we were in Bahrain together -- is that the focus has been on the middle class and the upper middle class.

You heard Nic talk about the fact of marginalization of the Shia majority. That's the big issue here. They've always targeted the high end of the market: financial services, insurance -- Kraft is there, American Express is there, Federal Express is there, right?

QUEST: And what are those companies saying tonight? I mean, they're not saying anything publicly, but privately, what are those companies believing tonight?

DEFTERIOS: Well, we didn't hear a lot from the US investors or the foreign investors there, but I did speak to a couple of the Bahraini CEOs . And one of them said, like, we could be entering a permanent state of sectarianism. Everything they've wanted to avoid in the past, everything that Bahrain has been able to avoid in the past of having this divided population, 80 percent Shia, 20 percent Sunni, and having those tensions on the ground, that could change as a result of this.

So it's interesting, as I did talk to the Crown Prince of at one point for "MARKETPLACE MIDDLE EAST," and he said, "Change is never easy -- " this is a quote from him -- "but it must be tackled with the right ambition ." That's the right ambition that he talked about in the interview a year ago. But investors, it's fair to say, are looking to the Crown Prince and looking to King Hamad to say, what is next?

QUEST: John, many thanks.

Now, one side issue to this, but perhaps not as side as you may think. In three weeks, the Grand Prix in Bahrain was due to take place. This is more than just a motorcar race. It's a symbol, a status symbol, for Bahrain, not to mention one of the biggest dates in the sporting calendar.

The season's opening race on March 13 is under threat . The F1 boss, Bernie Ecclestone, says a decision will be made one way or the other next week, and we'll talk to Don Riddell on the F1 decision and what it would mean if Bahrain was cut from the calendar.

Coming up in a moment, how to overcome adversity. Now, Qantas certainly knows about that. The stock rose very sharply, despite the fact the airline had a pretty horrible year. In a moment.

(COMMERCIAL BREAK)

QUEST: Qantas Airways has signaled their very upbeat outlook. Australia's largest carrier says it is looking forward to even stronger profits in the second half. Now, this is after it posted soaring first- half results, earnings quadrupled to $242 million.

Now, of course, this is all even more remarkable because Qantas came back from November's accident when one of the A380 engines exploded in midair, causing that emergency dramatic landing in Singapore.

The engine problems, although it had an effect on the results, clearly has not been as devastating as we thought initially. Despite the surge, Qantas has not brought back dividends to shareholders.

Chief Exec Alan Joyce told Sky News Australia he's got more work to do on the carrier's international business.

(BEGIN VIDEO CLIP)

ALAN JOYCE, CEO, QANTAS: You know, people that for business purposes that were traveling first class, business class, decided not to travel, or to travel in economy. That had a big impact on our yield. And every long- haul carrier around the world went into losses.

Now, Qantas was one of the few carrier groups that during the GFC (ph) didn't produce losses during that period. We maintain a profitability. So it is across the board -- this has had an impact on the entire industry.

The Australian market was particularly impacted because at the same time as that yielded the ratio (ph), we saw a big increase in capacity from Middle Eastern carriers, from Asian carriers, and that capacity increase as well yielded a ratio (ph) has resulted in a significant issues for our international business.

UNIDENTIFIED FEMALE: The A380 disaster -- there was obviously damage to the plane itself. There was some damage to the brand, although most people feel you came back very strongly because of the way you handled that. What is the cost, though, to the airline?

JOYCE: Well, there's been a cost -- obviously, we lost a lot of international capacity when we grounded the aircraft. We had disruption to a large number of customers, which we apologized for, and as a consequence of us taking that action. The total cost to Qantas this financial year will be $80 million.

And our results would've been better in the first half by $55 million if it wasn't for the grounding of the aircraft. What we're also seeing is the damage to the aircraft in Singapore is going to be over a hundred million dollars. That cost is fully recovered by insurance by the agreements that we have with the engine manufacturer.

UNIDENTIFIED FEMALE: And the damage, that hundred million damage, is just to that one plane?

JOYCE: Just for that one aircraft. So altogether, this will be well over $180 million, of which a hundred is completely covered by insurance. And the $80 million -- we're in negotiations with Rolls-Royce -- the compensation, because this was -- have absolutely no doubt -- this was not a Qantas issue. This was a design problem and a manufacturing problem, on an engine, that could have happened to any carrier. And it's because of the way Qantas handled it that I think our safety reputation will be enhanced by this in the long run.

UNIDENTIFIED FEMALE: You said it's Rolls-Royce's fault because of a design fault, but could a technician of yours actually get to see that fracture when they're doing their checks? Could they have seen it?

JOYCE: No. Because of the way this works, it's in a part of the engine that you need very sophisticated equipment to actually see that part of the engine. And other carriers did have the same problem. Lufthansa and Singapore Airlines took off more engines and replaced those engines than Qantas did. So this applied to every operator.

It meant that there was over 46 engines that had to be removed from aircraft around the world, so significant issue for everybody. And Qantas was the only airline that did ground its fleet, because we took safety so seriously; we weren't willing to take any risks, and make sure that we were fully comfortable before we took the aircraft back in the air.

(END VIDEO CLIP)

QUEST: Alan Joyce, the Chief Executive of Qantas.

Running Egypt for more than 30 years guarantees certain perks.

And suspicions are now running rampant in Egypt that former president Mubarak was in a position to amass a fortune. We'll consider that in just a moment.

(COMMERCIAL BREAK)

QUEST: In Egypt, the military has begun the task of putting a new government in place. The revolution that overthrew the former president has come at a price. An official told state media 365 (INAUDIBLE) were killed in the uprising.

So as Egypt looks forward to electing a new president, questions are swirling about how much money the last one is actually worth.

Our correspondent in Cairo, Ben Wedeman, reports.

(BEGIN VIDEOTAPE)

BEN WEDEMAN, CNN INTERNATIONAL SENIOR CORRESPONDENT (voice-over): The papers in Cairo are full of sordid tales of theft, greed, and skullduggery, where almost every member of the former regime and businessmen with special access to the corridors of power stands accused of participating in 30 years of nationwide kleptomania. But much of the focus is on the dealings of Egypt's first family, with some claiming they made off with a fortune that would make Midas blush.

UNIDENTIFIED FEMALE: Even if the estimate was far off the mark, even if it was half that, even if it was 1 percent of that, it's still 1 percent too much.

WEDEMAN: Egypt's finance minister, Samir Radwan, dismisses the tales of mind-boggling sums.

SAMIR RADWAN, FINANCE MINISTER, EGYPT: I frankly, honestly don't know about these news we hear about, you know, 60 million, 70 million. I really don't know about these things. But what we know -- there has not been (INAUDIBLE) of those people, from the country, according to the central banks.

WEDEMAN: The wealth the Mubarak family may be far more modest, says veteran Egypt watcher Max Rodenbeck.

MAX RODENBECK, JOURNALIST: We're talking -- I mean, and this is real big ballpark figures -- we're talking, you know, perhaps in the very low 1 billion, 2 billion. We're not talking vast fortunes. We're not talking Bill Gates at all. They didn't need it.

I mean, you know, Hosni Mubarak himself was never really interested in money. He lived a pretty simple lifestyle. And all the fancy stuff that he might have wanted came with being Egypt's president. You know, fleet of planes, palaces all over Egypt, rest houses here and there.

WEDEMAN: The real corruption, say those who follow the regime, was in the tight circle of politicians, businessmen, and retired army and intelligence officers around the Mubaraks who benefited from sweetheart contracts , low-interest government loans, and shady land deals.

RODENBECK: It was very much a tyrannic system. So your proximity to the seat of power of the president could translate into money, influence, whatever. And so there were many people who for one reason or another were either close friends of Mubarak himself or close friends of his son or close relatives, relatives of his wife, who all profited in one way or another from their proximity to the center of power.

WEDEMAN: What is clear is that corruption under Mubarak was endemic. According to Transparency International, Egypt in 2010 scored 3.1 in its Corruptions Perception Index, zero being the most corrupt, 10 being the least.

(on camera): For 30 years, the Egyptian government did precious little to crack down on corruption, says Transparency International's Omnia Hussein.

OMNIA HUSSEIN, IN-COUNTRY PROGRAMME COORDINATOR, TRANSPARENCY INTERNATIONAL: There are anticorruption agencies in Egypt. But of course, they had their own independence issues, OK? They had their own resource issues. They had their own deficiencies in, and limitations in mandate and capacity to work on corruption issues.

WEDEMAN: So basically, what you're saying is they were two-faced?

HUSSEIN: Exactly.

WEDEMAN (voice-over): Egypt's new military rulers say corruption will no longer be tolerated. The authorities have frozen the bank accounts of many of the figures from the old regime and banned dozens from leaving the country and have requested that foreign governments freeze assets of key former officials.

No action, however, has been taken against former president Mubarak or his family. Their wealth, whatever it may be, has not been touched. Yet.

Ben Wedeman, CNN Cairo.

(END VIDEO CLIP)

QUEST: The issue of freezing assets may be one thing. But of course, there's been a fascination with how Egypt virtually severed the nation from the Internet during the protests. Indeed, is this the first time that a government has quasi-successfully cut off a country in the middle of a crisis?

Well, I've posted a fascinating article from the New York Times on my Twitter page. It's twitter.com/richardquest. It goes into chapter and verse. It says, like oil pipelines, the government controlled the information pipelines. Twitter.com/richardquest . I suggest you have a quick look at that one. And also, why don't you follow me and I'll follow you, and we'll have a nice chat.

On "PIERS MORGAN TONIGHT," overcoming trauma and adversity. Women share personal stories that I promise you you won't forget soon. Thirty minutes from now, "PIERS MORGAN TONIGHT."

(COMMERCIAL BREAK)

QUEST: Hello. I'm Richard Quest, QUEST MEANS BUSINESS. This is CNN, and here the news always comes first.

Protesters in Bahrain have not regrouped since police used force to break up their demonstration early on Thursday. Bahrain's foreign minister says the crackdown was necessary to provide security, but international pleas for restraint are now pouring in. At least three people were killed and more than 200 were injured in the overnight clashes.

A day of rage in Libya also reportedly turned violent, with chaotic scenes being uploaded onto social media Web sites, labeled as various cities outside Tripoli. Its human rights groups report serious clashes between protesters and security forces. There are reports of 16 deaths, but CNN has not been able to confirm that number.

An Egyptian official has now confirmed that Iran has asked if two of its warships can cross the Suez Canal. Iranian state TV reported earlier that its vessels are already on their way, and that Egyptian authorities believe there's nothing wrong with the request. Israel's foreign minister is calling Iran's plan a provocation.

President Obama is to visit Britain in a state visit in May. Buckingham Palace says Barack Obama accepted an invitation from the Queen. Mister Obama and his wife, Michelle, will be there for three days ahead of the G8 Summit of world leaders in France.

Governors across the United States have been unveiling their project proposals for the coming year, and as expected, it's tough, if not brutal.

These are just some of the thousands of protesters gathered in Madison, Wisconsin. They were demonstrating against plans by Governor Scott Walker to cut the state's budget deficit. He wants to introduce legislation that will strip government workers of their collective bargaining rights.

Now, Governor Walker is asking legislators to do the budget repair bill to cover a $137 million shortfall. And an upcoming two-year budget must address a $3.8 billion deficit. It means employees will be forced to contribute more to their pensions and to their healthcare.

But there is more. In neighboring Illinois, Governor Pat Quinn has unveiled a $35 billion budget. Its success depends on lawmakers approving on borrowings of $8,750,000,000. Illinois is one of the worst-situated (INAUDIBLE) and states. Quinn's debt restructuring will close -- but it slashes programs for the elderly, poor, and the disabled.

And in Connecticut, one of the hardest-pressed states, Governor Dan Malloy wants to increase state's income tax by $1.5 billion. And to do so, he's proposing to raise taxes on everything from income to cigarettes and even pedicures.

As the budget ax falls across the US, state and local governments are being hit especially hard, and that means civil servants, everyone, is feeling the effects and could be hurt. Employees across the country complained they're being treated unfairly. Officials say they must cut hard or cut out.

Maggie Lake is in New York.

MAGGIE LAKE, CNN INTERNATIONAL CORRESPONDENT: You know, Richard, it's striking. On the very week -- at the beginning of the week, we started talking about the fact that austerity really hadn't really come on a federal level. There's not a lot of really hard work that's being done to rein in the deficit. The difficult decisions are being put off. But it's a very different situation when you get down to the state level, where officials and workers are grappling with it, and the pain is very deep, as we found ourselves.

(BEGIN VIDEOTAPE)

LAKE (voice-over): Cleophas Bell is a young father with an uncertain future until last month he was a firefighter in Orange, New Jersey. A job he hope to hold for life then the ax fell in a major round of budget cutting.

CLEOPHAS BELL, LAID-OFF ORANGE, N.J. FIREFIGHTER: Never in a million years that I'd think that I would be laid off because that is one of the - of the job is job security. If you're not greedy public employee, we want to contribute. We want to give up more and you know, it didn't work.

LAKE: Orange Mayor Eldridge Hawkins Jr. himself a former police officer acknowledges the union concessions, but said they must give up even more.

ELDRIDGE HAWKINS JR., ORANGE, NEW JERSEY MAYOR: Police and fire make up 77 percent of our salaries and wages so there's no way to close this gap without their cooperation. We just cannot keep phase with the skyrocketing cost of health care and pensions, and the salaries that these unions are contractually entitled to. And I say that because they are entitled to them, which is why to give actually.

LAKE (on camera): There are no easy solutions in Orange, New Jersey and unfortunately, this is a scene that's playing out across the United States. Painful cuts need to be made and no one can agree on where or how. Some say only drastic changes are going to solve this budget crisis.

(voice-over): One idea for distressed states that gaining support bankruptcy.

UNIDENTIFIED FEMALE: To allow for federal bankruptcy -

LAKE: The subject of recent congressional hearings.

JOHN HENES, KIRKLAND & ELLIS LLP: To me when I think about a bankruptcy regime for states, I don't think about it as it's radical. I think about it as just a process and a process to allow states to work out their issues and I think that can be done.

LAKE: John Henes says the recent experience of GM is a good example of how bankruptcy proceedings can force unions and management to strike a deal. States are currently not allowed to file for bankruptcy and it is extremely tough for cities and towns to do so. Officials like Mayor Hawkins call it a risky option.

HAWKINS: And when you do things like declare bankruptcy, it can destroy your bond rating, which means you're going to be paying for this money at a much higher premium and a much higher interest rate.

LAKE: State deficits are shrinking slightly at the overall U.S. economy strengthens. Even so, current estimates show 44 states and the District of Columbia with budget shortfalls totaling some $125 billion.

And clean up cost after this year's brutal winter storms are putting in added strain on the bottom line. Meanwhile, nervous municipal bond investors have exited the market driving up borrowing cost. (Inaudible) officials are running out of options and time.

HENES: Whether there's a bankruptcy or no bankruptcy, there's pain coming. There's compromise that will have to come. The question is, how do you do it in a rational way without (inaudible) municipal bond market? How do you protect parties by having a process in place? It's not just for the states to have a news hanging over the unions' heads, but to have the unions being able to say this stage and get through this barely.

LAKE: For now unions and their laid off employees feel betrayed by their local governments and fearful of new pain to come.

(END VIDEOTAPE)

LAKE: You know, Richard, when I was talking to the firemen, it was really striking because they say, you know, after 9/11, we were heroes. Everyone will come up to us and now it's like we're the bad guys (inaudible). That's the very difficult thing about this story.

Everyone is right and as you heard that analysts say it's difficult because there's going to have to be massive pain that's shared trying to figure out how to do that in a rational way is really the key. I'll also say that idea of bankruptcy still so radical to so many people.

Both the state officials, city officials are against it. Unions hate the idea, but a lot of analysts say it is gaining speed because many people think a restructuring is the only way you're going to come to terms with this.

QUEST: Maggie Lake who is in New York with that side of the story for us tonight and now let's focus our attention on Wisconsin, the site of some of those protests by state workers and their supporters.

In the words of one state representative cuts are needed because we are broke. Union supporters said the cuts would destroy the very fabric of Wisconsin society. Joining me now is the state treasurer from Wisconsin, Kurt Schuller. He joins me from Madison, Wisconsin.

Mr. Treasurer, many thanks for joining us. Let me just ask you, straight out to begin with, are you broke? How bad is the situation?

KURT SCHULLER, STATE TREASURER OF WISCONSIN: Well, if you have a $3.5 billion structural deficit, I would say you're broke.

QUEST: And if that is the -

SCHULLER: The situation is dire and that's why -

QUEST: Well, if that is the case, if it is that dire and it is going get worse, clearly taxes have to go up, spending has to be cut. It has to be done from both sides of the economic equation.

SCHULLER: Well, actually, I and the governor of the state of Wisconsin, Governor Walker and the legislature would disagree with that. We are firmly against raising taxes. What we are asking, what has caused all the -- the turmoil in Madison over the past week is for modest concessions from our public employees.

Because there are going to be deep cuts all down the line to the local communities and we need this bill so that they can have a flexibility to maintain jobs and manage their budgets. Our goal is no layoffs. That firefighter in New York, I feel very badly for him. But under Governor Walker's plan, we are going to tackle our deficit and lay no one off.

QUEST: Now we know a lot about austerity in Europe and other parts of the world which, of course, are suffering. Do you think Americans have quite woken up to the fact that it's time to start paying the bills and making the cuts?

SCHULLER: Well, here in Wisconsin, I believe we have. I know we have some 20,000 demonstrators who all of whom are public employees, most of whom are teachers who are currently not in front of their students, an illegal job action. But there are 5.5 million other people living in Wisconsin whose voice was heard very clearly in November.

They completely changed the power in the government from Democratic to Republican, and we ran on a platform of reducing the deficit, getting our spending under control, bringing Wisconsin's fiscal house back into order, and that's exactly what we're doing.

QUEST: So explain to me, why would you not have an element of targeted tax increases on the very wealthy, bearing in mind that your spending cuts traditionally hit the very poor?

SCHULLER: In Wisconsin, we are one of the highest taxed states in the nation. The wealthy are also the job creators. Our property taxes are higher than almost any other state in the nation. We are, pardon the expression, a tax hell, and there will be no tax increases under this administration. And there will be definite slashing to other programs, and the attention (ph) is we're not going to kick this can down the road again.

QUEST: Right.

SCHULLER: We're going to solve this budget deficit problem now and not leave it for our children.

QUEST: Would you be in favor of some form of congressional change in the law that would allow states to go bankrupt? Now, I know that there are various provisions that can be interpreted one way or the other, but fundamentally, you should be able to go broke.

SCHULLER: I would strongly disagree with that, because that would roil the bond market, municipal bond market, just -- it would be a cataclysm. All it takes is the political will and the courage, and we can handle these problems. There are four states in the country where we have a budget surplus. Indiana has a budget surplus. It can be done. It takes political will and courage, and so far, Wisconsin is hopefully in the way to that. And I would hope that the president would watch Wisconsin very closely as he talks about trimming the deficit. His last budget though did very little.

QUEST: Finally, as we look at this from the other side of the globe, we see -- I mean, it doesn't matter whether we talk about the federal budget, whether we talk about your state budget, New York City budget. And the -- ideologically, the two sides are very far apart and there's an air of Rome is burning while a lot of you are arguing amongst yourselves?

SCHULLER: Well, that's -- it appears that way, but trust me, if you could do a poll in Wisconsin right now that the people who actually live and pay taxes in Wisconsin, who have been suffering three years of paying - - three years of medical insurance increases, three years of hours cut -- do not share the public employees' sympathy right now. They feel it's time that they join the rest of us in the pain of this economy. They are Wisconsinites just like us. They're not special just because they serve the public unions.

QUEST: Mr. Treasurer, I've been to Wisconsin, a wonderful state with beautiful weather. You could do pretty much on either side, in the very cold or the very warm. Many thanks and we look forward to talking to you again in the future. Many thanks. Kurt Schuller joining me from Wisconsin.

And I do assure you that this battle within the U.S. states as they try to balance their budgets will never be far from our agenda.

Into that traffic, pays how much and who should pay? It's the question that stirs plenty of heat in the world of the wireless networks. Here's a view from the man behind the mobile chipmaker, Qualcomm just after the break.

(COMMERCIAL BREAK)

QUEST: Google and Apple are squaring off again. Google is out with a new subscription service for its digital content. Now the idea is to please publishers because of the difficulties in getting regular subscription income from people who are using things like iPads and iPhones, it's for tablets and small phone users.

It seems to be a warn off rather than a repeating, recurring subscription basis, but Google's one pass plan comes the day after Apple unveiled its new service. So we have once again, Google with one pass, Apple with its inapp service. They both let publishers charge for recurring subscription based content.

Apple is being criticized. It's taking up 30 percent cut. Google just takes a 10 percent cut. They both still face the same problem getting consumers to pay for content of one way or the other. Everybody knows that the big question is who's going to foot the bill for whatever content you and I download on the internet.

Should people who download more have to pay more? Should wireless companies adhere to this principle net neutrality are all equal in the world of the web. Subscribers seems how much they download, there's no common view. Qualcomm makes the hardware for the wireless networks.

Jim Boulden spoke to the chief exec, Paul Jacobs in Barcelona at Mobile World Congress.

(BEGIN VIDEOTAPE)

PAUL JACOBS, CEO, QUALCOMM: The operators are sort of experimenting. They're trying to understand what do they charge versus how much do you use. The issue is that spectrum is not infinite. It's not like I can put another fiber to your phone and you carry it around behind you. There's always so much spectrum. The systems work at a certain rate. You can get so much data download and the operator has to deal with that fact.

JIM BOULDEN, CNN CORRESPONDENT: That's all net neutrality, isn't it? I mean, there are a lot of questions about should some of the -- for people who provide all these great contents to take charge of it more? What do you think about that or be charged something?

JACOBS: Well, the one issue that we have with the systems is the application developers today don't really have any incentive to be very efficient. So we have seen cases for example where you use Voice-over Internet Protocol on an Internet style, and it's 50 times more data to transmit your voice that it is the way that the operator and we optimized it to run over the cellular network.

So there needs to be some way to push back that cost, which right now is external to the application developer, so that they have incentive to be more efficient. And that's really I think where a lot of the debate comes around when people talk about wireless systems and net neutrality, is that we really don't have the, you know, infinitely extendable bandwidth.

BOULDEN: Right, and that's what everyone's facing at the moment. Is that going to get solved in 2011? Are we pushing that off of it (ph)?

JACOBS: Well, I think the people are taking steps towards it and I think really one of the key ideas that's going around the wireless industry right now is what's called quality of service. So if you use a lot of data, then during the busy time, your service might get degraded a little bit relative to somebody else who hasn't used as much data. It's sort of a way of trying to make things more fair share, this common spectrum more fairly.

BOULDEN: Because you say it's not infinite?

JACOBS: It's infinite. Governments are trying hard to free up more spectrum, and then we deal with exactly where that spectrum is so the phone has to have more different radios in it, more receivers, a lot of complexity.

Now, of course, for Qualcomm, that's OK. We build chips that deal with all these complexities, but still it adds a little cost for the operator, adds a little cost to the device manufacturer to add more band.

So everybody is trying to drive the cost down as much as possible so that consumer can get the coolest phone with the best service at the lowest price.

BOULDEN: Well, we don't actually know the price point yet where the consumers are going to say enough is enough, do we? That's what they're still trying to figure out?

JACOBS: That's right. I mean, they're still playing around with experiments on at this price and this amount of data. Does that really get adopted? And there have been some experiments we've seen, you know, a lot is going on in the United States in terms of pockets of bits, and then you deal with the fact of does anybody really know how many bits they're using.

BOULDEN: It sounds like energy use in a home, where you've realized that you don't need to be using the air condition at this time or something. So you're going through the same kind of process.

JACOBS: You know, that's a really good analogy. We actually term it digital brownouts when you can't get enough data down to your device, so you can't do what you want to do with it. And the analogy to electricity where you think, you know, if you add an application that had a little sign on it that said, your expected data usage is such and such. Like you have on your refrigerator, that might give a consumer a little bit more sense of, hey, what's this is going to do to my bill or to my data bucket or whatever.

(END VIDEOTAPE)

QUEST: The CEO of Qualcomm talking to Jim Boulden at Mobile in Barcelona. Now, I want to once again refer you back to an article that I've read. Normally we wouldn't twice bring it up for you, but this really (inaudible) to the whole question of net neutrality, the whole internet and particularly (inaudible) of course, with Tunisia, Egypt and now with Bahrain.

It's an article I've read in the "New York Times," which discusses the - shed light on the question, how you physically turn the internet off. How do governments control the pipe that there is in the internet runs through? And ultimately if they do, the unintended consequences, twitter.com/richardquest.

I make no apologies for having referred it to you twice. I think you'll find this as interesting maybe - well, I hope you'll find it as interesting perhaps as I did now.

The weather forecast, yesterday, we were telling you. Darwin, Australia has experienced one of its wettest weeks in history. Pedram is at the World Weather Center.

Wet weather is bad, but why is this so bad?

PEDRAM JAVAHERI, CNN: You know, this cyclone here, Richard, is partly in place for a couple of days. There's a large scale feature has remained rather stationary and here on satellite imagery you can see it. And anytime you have storm systems that refuse to move, stay in place, of course, that's going to cause a lot of problems.

In this area, to answer Richard's question, it's out there towards (inaudible) Sea and Darwin, more beautiful places there in Australia and it's not really a small population, about 125,000 people call it home. So when you get this much rainfall nearly a meter now in just a couple of days, it's going to cause problems out there.

And the old record for the February, you can see, already shattered that at 814 mm back in 1969 there. But take a look at the video coming out of Australia right now. Show you the devastation in place, the wind 60, 70, 80 kilometers per hour, but really not excessively strong when you consider how much moisture has been accumulating on the ground.

When you saturate that soil, it's very easy to topple trees. It's very easy to cause problems and that's exactly what's been happening. Let's switched to the back graphics here, the storm system still in place, going to remain stationary and slowly move south and as it does, still looking at a rainfall here, excessive amounts possible.

But most of it has fallen, but still up to 15 to 20 more centimeters certainly likely right along the (inaudible) Sea as the storm system begins to fall apart. Speaking of storm systems, a couple of them, (inaudible) towards the Mid Sea beginning to work its way to the east as it comes that way around portions of the higher elevations of Italy.

Some snow showers possible, but mainly around northern north central, north Western Europe. Clearer as it gets right now as far as travel delays are concerned. We do have storm systems in the area, some few showers possible, but it could get far worse.

Look at these temperatures, Glasgow that's the current temperature at 6 degrees, London currently at 5. So that's a temperature that should put a smile on your face out there, Richard, because look at these readings out of Moscow right now, minus 20 degrees. That is very cold even for the folks out there in Russia.

The average for this time of the year about minus 11 or so that's 10 or so degrees below average. Into the south, of course, a storm system going to bring in some rain showers over the next couple of days. But leaving earth, going out there to the solar system talking about what's been happening above us.

A few solar flares to pick in place there on the sun the last couple of days, but one of them, this is one an X-Class flare and that basically puts it as one of the stronger flare the sun - the solar storm that actually occurred about the size of Jupiter and it shows you a very large feature.

And this could cause - certainly could cause problems on earth, could affect the communication on earth, some radio blackouts that were possible associated with this and what's really fascinating about this is of course, could be very destructive.

But NASA for the past few weeks or so has developed a NASA stereo, which basically twin satellites that observe both sides of the sun, gets you a nice 360 perspective. So next time we have any solar flares, gets you a better perspective and more warning, more (inaudible) time for these events as these (inaudible) certainly possible and Richard, take a look at this.

Over the next 24 or so hours, the higher latitudes even portions of the U.K. could have a chance here the southern extend of it at least to see a few solar areas of Aurora's borealis out there the next couple of days. A nice evening event across parts of the higher latitudes on earth there, Richard.

QUEST: Now, let's just talk about the borealis for one second because I was reading in my newspaper this morning that this could be one of the best times for years to see it in parts of northern Europe. When you do see the northern light, they are very spectacular, but you're saying that this is a phenomenon this time.

JAVAHERI: It is, this is the strongest solar flare we've seen since 2006. So certainly it is possible that we get some of the areas within those areas the lower latitude that typically don't see it. Of course, the brightest and you can see the categories, Richard, from the strength of one to nine.

It is a four so it's right around the middle part, get a little stronger than it typically is so it should be a pretty good sight there in the higher latitude if you have a chance.

QUEST: All right, I could tell you having flown across the Atlantic some nights as you go across the northern parts watching the borealis is really quite extraordinary. Quite an amazing fact. Pedram, many thanks and I should be out this evening - to see.

Now all eyes in Bahrain, of course, on CNN. Formula One's current racer is under threat. Time is running out to make a decision on that, will it take place in three weeks' time?

(COMMERCIAL BREAK)

QUEST: Let's return to events in Bahrain and Formula One (inaudible) says he will make a decision next week as to whether the opening race of this year's season will take place in a few weeks' time. Teams are due to arrive in Bahrain in two weeks for testing.

I spoke to World Sports Don Riddell about what's clearly a tight deadline.

(BEGIN VIDEOTAPE)

DON RIDDELL: It's very tight. (Inaudible) are going to make a decision by either Tuesday or Wednesday of next week and if things stay as we are, they're probably going to have to cancel. And they really are up against the clock on this one. It's not just the first race of the season we're talking about on the 13th of March.

But there are also due to hold the fourth and final testing session, which is very, very important for the 12 teams in Formula One in the first weekend of March. So this is why they've got to make a decision pretty soon because logistically getting to these destinations and these venues is a huge challenge for these teams and much of the equipment is already on its way in containers to Bahrain.

QUEST: See that's the point isn't it? The troops are on the train in the sense of their equipments on its way. So if they do decide to cancel, they can't suddenly have the race somewhere else or can they?

RIDDELL: I think it would be very difficult. I mean, they have been rumors today that the (inaudible) circuit in Abu Dhabi was taken and replace Bahrain. This circuit is saying that is quite frankly rumors that there's no further comment that can be made.

But it would be very, very difficult. I think the most likely scenario is that if it's canceled, the season will just begin in November, which was due to be the second race of the season.

QUEST: Through Formula One, what is their consideration? Are they worried on commercial grounds, moral grounds, safety grounds?

RIDDELL: All of it.

QUEST: Which do you think is behind it?

RIDDELL: Well, I mean, earlier this week, Mr. (inaudible) was saying that one of his concerns was the anti-government protesters could basically hijack his event, destroy the grand prix and get themselves global publicity.

But I think with the events that we've seen earlier today, three people killed, hundreds of people wounded, there are now genuine safety and security concerns and of course, the image of the sport - Formula One for example in recent years has taken great strives to improve its reputation with, you know, regards to its green image and the environmental impact of Formula One.

So I think it does care very much about its image and to a certain extent in bed with Bahrain. I mean, Bahrain pays Formula One $40 million just to have a race, $20 million more dollars for it to be the first race of the season. Bahrain has invested $250 million in the tracks. So if it goes really, really horribly bad in Bahrain, it doesn't look for Formula One to be going there.

QUEST: You and I have know for a long time that, well, Formula One might look good and it's an exciting sport to watch, there is business out of (inaudible). Now, business, Formula One and geopolitical concerns go head to head.

RIDDELL: Very much so, very much so. And you know, this was going to be a really exciting season for Formula One. Now we're going to be to 20 races. It was going to be going from Bahrain to Brazil. It looks like they may now be going back to 19 races, really serious impact for Formula One and the first race of the season is considered to be one of the show piece events of the global sporting calendar.

QUEST: Don Riddell of World Sport on the F1. I'll have a problem a moment on that very question after the break.

(COMMERCIAL BREAK)

QUEST: Tonight's profitable moment. Formula One has a tough decision to make. Rather to cancel the grand prix on Bahrain on March the 13th because of the latest violence and unrest. Now the logistics of Formula One as you probably realized are formidable.

After all, it doesn't just turn up on race day. Tons of equipments and cars, they're all shipped from around the world so a decision cannot be made at the last moment. Of course, there are issues of personal safety for the drivers, the teams, the officials.

There's a virtual certainty that the protesters will use the event to promote their cause and of course, there's the question of whether it is even seemly to have a Formula One event in a city that has recently witnessed such things involving serious injury and death.

Bahrain has spent millions of dollars and has used the occasion to varnish its image. Sure, the rulers have bigger issues to worry about at the moment than that fast car race, but make no mistake. If F1 does cancel, for Bahrain, it will be another serious blow.

And that's QUEST MEANS BUSINESS for tonight. Thank you for your time and your company. I'm Richard Quest in London. Whatever you're up to in the hours ahead, I do hope it's profitable. Here's "MORGAN TONIGHT" just ahead after I'll have the news headlines.

END