Just for once, the Tories are right

Last month, Enron. This month, Lakshmi Mittal, the Indian-born businessman. There may be no brown envelopes, but "cash for access" allegations are beginning to haunt this government in the same way that they did the last Tory administration.

Did Labour do some kind of under-the-counter deal with the billionaire? The allegation could hardly be clearer or more damaging. Mittal gave £125,000 to the party: Tony Blair signed a letter urging Romania to sell its nationalised steel industry to Ispat International, a subsidiary of the LNM Group, owned by Mittal, which Romania did, for £300m, in November. The press and the Tories argue that Blair's letter was the consequence of the money paid to Labour.

It adds up to "sleaze". No 10 says Blair merely signed a letter drafted by the Foreign Office and didn't know when he signed it that Mittal had donated money to his party. Further, Mittal says the contract had actually been won before the Prime Minister's letter was sent. In other words, no corruption.

In a quasi-legal sense, there is still a lot for the critics to prove. It is unlikely, I believe, that Blair specifically set out to win the order for Mittal because he wanted to pay back a donor to the Labour Party. It would be a suicidal act: someone, from the DTI or the Foreign Office would have known and complained; there was already too much suspicion about big business and new Labour. It would have been incautious to the point of wildness, and Blair is a cautious man.

But wider political questions billow around this. Blair's first line of defence was that it was his duty as Prime Minister to back Mittal's steel group because it is a British company. Answer: actually it isn't a British company.

The PM's letter to his Romanian counterpart says: "I am particularly pleased that it is a British company which is your partner." But Mittal isn't British. His company is based in a tax haven (the Dutch Antilles) and employs a tiny proportion of people in this country - about a hundred out of 75,000. Why did Blair not know that? If he was acting on Foreign Office advice, why didn't the department know?

Someone has blundered.

Next, we are assured that the Prime Minister had not met Mittal and did not know he was a big donor. People from Mittal's side say he had met Blair socially - but let's give him the benefit of the doubt, maybe Blair didn't know of the donation.

Yet this "blind trust" system for donations just doesn't work. If Jonathan Powell, Blair's chief of staff, is involved both in soliciting donations for Labour, and in deciding who the Prime Minister sees and what goes across his desk, then the alleged barrier between paying money to Labour and getting action does not really exist. The Prime Minister is kept out of it, but the link is simply transferred down one rank to Powell. This is a problem that existed with the Ecclestone affair and the Hindujas. The Tories are focusing on it, and I am afraid they are right.

Blair might very well protest that if no one senior in the party or government is allowed to be involved in soliciting money for the party, it won't come in from business at all. He has made the system transparent and that is all he should reasonably be expected to do.

But transparency has increased the worry, not lessened it. We know more today about these things than we did in the Tory years, which is to Labour's credit; but it doesn't simply wipe away the suspicions that some businesses try to buy access and action. And we cannot really know whether they have succeeded: if a minister backs a firm for a whole string of reasons, and it happens to be a Labour donor, who can ever prove what was uppermost in the minister's mind?

Private funding for Labour is good, some ministers tell me, because it forces the party to keep in touch with the real world. But this is nonsense. Big cheques from billionaires do not force Labour to keep in touch with the crime-ridden streets or lousy housing. They force Labour to keep in touch with the needs of billionaires. There is a club of the super-wealthy and the super-powerful - the world's major business leaders and the politicians who count - and they are getting too close.

It seems that Blair has a blind spot about all this, that he simply does not get it. When he was in Africa, I'm told, he said he could not move towards state funding of political parties because there was no consensus for it. Presumably, he means that the Tories would attack him and the public might side with the Tories.

Well, of course the Tories would attack him. Any signs of sleaze or corruption are the most important weapons in any opposition's armoury these days. To make things not only transparent but beyond suspicion would spoil the game. It is presumably only a minor matter that, in continuing this game, politicians are destroying all trust in our political system. Tony Blair may look at state funding for political parties, but is unlikely to back it until there is a consensus. That doesn't grow on trees, or emerge fully formed from the op-ed pages of the newspapers.

Consensus only comes after an argument has been had and won; someone needs to lead such an argument; Prime ministers are in a pretty good position to do so. But, yes, Blair has a choice. He need not strive for a new form of political funding, free of the stain of mixed motives and suspicion of corruption. He could shrug and carry on. But if he does, he will find a new Mittal, a new Hinduja, a new Ecclestone popping up. "Labour sleaze" is becoming part of the common currency.

After this week, it's reform or sink. There is no third way.