There are guidelines as to what constitutes an "arrangement". Both the cat and nose-flute versions could be separate and distinct arrangements - or, as Richard points out, one could substantially reproduce the other. The point is that an arrangement of a traditional song generates its own copyright, distinct and separate from the song itself. The other point is the question of how the owner of that copyright is to be rewarded.

I entirely agree that the PRS is inefficient and its systems are weighed heaviliy in favour of the "big boys" (although I know folk musicians who receive royalties, so they are not entirely ignored). I also agree that the way it treats traditional music leaves much to be desired, and its tactics can sometimes be heavy-handed. However, what is the alternative? Without an organisation like PRS to represent composers, anyone holding an event would have to negotiate royalties with the individual composer (and possibly the arranger as well) of every piece of music played (unless it was wholly public domain).