Wednesday, 28 November 2012

Waste: A Panic Closer To Home Than Foreign Taxes

It never stops
As the moral panic over taxing foreign companies continues, MPs and other politicians must be increasingly relieved not to be focusing on far bigger problems closer to home.

For a start, the UK government has a lot of trouble keeping track of its own finances, which must suit those on the inside very nicely. While France, the U.S. and Australia can produce a comprehensive set of government accounts in less than nine months, it took 20 months to produce the UK’s first set of “Whole Government Accounts”, covering 2009-2010. Worse, the Public Accounts Committee was “surprised to find that Treasury did not have a grip on trends in some key areas of risk or plans for managing them.” 

Now you might be worried that the government wrote off £10.9bn in unpaid taxes, and perhaps a bit personally alarmed that it expected to pay out £15.7bn for clinical negligence claims. 

But let's get this into perspective. According to the Institute of Fiscal Studies, the government spent just under £700bn in 2010-211, up £30bn on the year before. At about 50% of GDP, that alone explains why our economy has ground to a halt. Of the total, 60% went in just 3 areas: social welfare (30% or £200bn), health (18% or £120bn) and education (13%). After that came defence (6%), public order and safety (5%), personal social services (4%), transport (3%) and housing (2%). Spending on trade, industry, energy, employment and the environment together only add up to 3% of total spending.

The UK government has never received tax revenues above 40% of GDP, and by far the majority of what it does receive comes from individuals. In 2008/09, the UK government collected £41.8bn in corporation tax and £149.6bn in income tax. Together, we and the corporations paid about another £180bn in National Insurance and VAT.

So we need to forget about taxes if we're to have any chance of turning around the public accounts. 

Public infrastructure projects and government consumption are great places to start. And they provide plenty of big corporate scalps to go after.

The Private Finance Initiative (“PFI”) was invented in 1992 as a way of funding the construction and operation of public infrastructure using private funds, so that the cost could be kept neatly off the public balance sheet. While initially attacked by the Labour government, the programme was massively expanded once they came to power in 1997, after the Health Secretary now infamously remarked, "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust." 

As a result, there are 717 PFI contracts in the UK with a total capital value of £54.7bn. The woolly "Whole Government Accounts" put the present value of payments due to private financiers at £131.5bn. However, the true cost to taxpayers has since been discovered to be about £300bn, including running costs and interest payments at rates well above what the government could command directly. Yet the Treasury have trumpeted savings of only £1.5bn so far.

Government also tends to reward bidders who over-estimate the utility of large scale procurement projects, and under-estimate their cost. This "Planning Fallacy" is explained in Daniel Kahneman's book Thinking, Fast and Slow, and the recent West Coast railway fiasco is a case in point. Such a tendency can only suit the public and private institutions involved. It certainly isn’t benefiting commuters or taxpayers. Costs are about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, have reached approximately £7 billion per annum. Approximately 10% of trains don’t arrive on time. Only 42% of rail customers are satisfied with value for money for the price of their ticket. Only 69% say there is sufficient room for all passengers. And only 80% of rail customers are satisfied with punctuality. 

But if you really want to indulge yourself in a good panic, you need go no further than the government's own expense accounts and the suppliers who benefit. 

In his review of government financial efficiency in October 2010, Sir Phillip Green found that “the government is failing to leverage both its credit rating and its scale” in its expenditure of £166bn on goods and services. He attributed the inefficiency to poor data, fragmented procurement activity, the lack of motivation to save money, the absence of budgeting processes and inconsistent commercial skills across departments. 

The Green review estimated that the government could save up to 40% on its telecommunications bills by acquiring its own telecoms capacity. Travel savings were harder to get at. Two widely varying estimates were put on central government travel, before the real figure of £551m emerged. No figures could be discovered for the wider government travel bill (I'll bet it's those pesky railways again). There were also 71,000 central Government buyers with payment cards that had a monthly spending limit of up to £1,000, none of which was monitored. Railways again?

Phillip Green declined to estimate the total waste or the corresponding savings opportunity, but said rather ominously: 
“There is a huge opportunity that has been clearly identified both in central Government and beyond, but without a clear mandate, energy, focus and commitment, this cannot be delivered.”
Sadly, however, notwithstanding this "huge opportunity", it seems our MPs would rather focus on the amount of tax paid by foreign corporations. Even where those corporations are abiding by UK tax law and the sums to be gained (if any) are paltry by comparison to wasted expenditure that might be saved. 

What a waste.

The Bumper Book of Government Waste is available here.

Monday, 26 November 2012

Feel The Fear And Forego Child Benefit Anyway

The Inland Revenue is busy cleaning up part of Gordon Brown's poisonous legacy by clawing back Child Benefit payments made to households earning more than £50,000. Either you decline it, or you'll pay the equivalent in tax as a "Child Benefit Charge".

Given that you paid the government to pay you Child Benefit in the first place, you would be insane (or extremely passive aggressive), not to simply decline it. 

But if you do decide to hold onto the benefit undeservedly, the Child Benefit Charge means you know exactly which tax is being used to repay any Child Benefit you receive. Screwy, but it should teach you a lesson.

This also exposes Gordo's trick.

In paying child benefit to higher earners, Brown was trading on their greed, as well as their fear. He knew higher earners would feel justified in receiving the benefit because they already paid so much in tax and felt they should get something back. The stupidity of paying the government to receive a needless benefit would not dawn on them because it was all done indirectly, by stealth. There was no tax labelled "Child Benefit Charge", as there will be going forward (at least for undeserving recipients). As a result, he knew higher earners would struggle to believe that taxes would ever be reduced if they voted to restrict Child Benefit only to deserving families. The government would always find another sneaky use for the tax money.

The current government has had no alternative but to lift the lid on this nonsense. Public spending must be narrower and more targeted if the government is to spend less, get rid of the structural deficit, and release the tax drag on the economy.

Ideally we would seeer clear links between taxes and what they're used for - like crowdfunding public services.

Clearly income tax cuts are a long way off. But rather than shoot the current government as the messenger, we should blame Gordo and his Nude Labour cronies, including Balls and Milliband, for this predicament. None of those people must ever be allowed anywhere near the nation's coffers ever again.

Wednesday, 21 November 2012

Does Ana Botín Have Any Clothes?

In a fawning interview in Monday's Telegraph, Ana Botin, CEO of Santander UK and billionaire's daughter, is lauded for having run a start-up and quoted as saying she will be “accelerating” the expansion of the bank’s small business lending. But does this really justify such fawning tributes, or does the emperor have no clothes?

According to BIS, the stock of lending to UK non-financial corporate businesses was £506bn in December 2011.  The department estimates a potential credit gap over the next five years of between £84bn and £191bn for the business sector as a whole, of which between £26bn and £59bn is estimated to relate to smaller businesses. BIS says bank lending may grow, but the ability of bank lending to increase may be constrained by the ability to raise capital and meet higher funding costs. The big four banks control over 90% of the business finance market, leaving the likes of Santander with very little indeed.

At any rate, the important factor here is not the amount that Santander actually dedicates to small business lending. It's the proportion that its small business lending activity represents of its overeall credit creation. Richard Werner, the economist, estimates that UK banks generally dedicate only 10% of their credit creation activity to productive firms. He says that it's critical to grow that proportion because credit aimed at productive firms is the only signficant driver of economic growth as measured by GDP - which is flat. Credit that goes to consumption only fuels inflation, and credit for the purchase of non-GDP assets simply drives up the prices of those assets. In Germany, by contrast, 70% of banks (about 2000 of them) only lend locally and supply about 40% of SME finance.

Against this backdrop, Santander's claims don't merit much attention at all. To achieve it's proposed 'acceleration' of lending to small businesses, Santander UK suggests it will use some of the £2bn capital allocated to its failed acquisition of 316 RBS branches and some of the £1bn it has drawn down as part of the public subsidy given to banks in the form of the Funding for Lending Scheme. The bank announced £500m additional asset financing last Thursday. Yet its gross business lending only stands at £10bn, even having grown 20% year on year since 2009. “This is net new lending,” claims, the CEO, but then says this represents switching from other banks. So it may not be net new lending to SMEs generally, i.e. funding that is going to SMEs who can't otherwise get it.

So, while she talks a good game, Ana Botin and the bank she runs have no clothes. 

Image from ElaineByrne

Will Midata Turn Institutions Into Facilitators?

The government's warning shot over Midata presents an interesting challenge for some of the UK's institutions. But will it make them focus on solving consumers' problems - transforming them into 'facilitators'? Or will they merely continue to solve their own problems at consumers' expense?

The government wants the suppliers of energy, mobile phones, current accounts and credit cards to provide each of their consumer and small business customers with the records of what they bought, where and for how much. That transaction data must be released in computer-readable format to enable it to be analysed, either by the customer or the customer's authorised service provider. This would help prevent those suppliers from gaining an unfair pricing advantage over consumers, for example, and make it easier for consumers to figure out the product right for them.

Factors the government might consider in deciding whether to expand the programme to other sectors include: 
  • the market is not working well for consumers, e.g. consumers find it difficult to make the right choice or their behaviour affects pricing it's difficult to predict that behaviour;
  • there's a one-to-one, long-term relationship between the business and the customer, with a stream of ongoing transactions;
  • consumer engagement is limited, e.g. low levels of switching or competition; and
  • suppliers don't voluntarily provide transaction/consumption data to customers at their request in portable electronic format.
Yet these factors merely hint at the characteristics that an organisation should display if it is to succeed in the future economic environment. In broad terms, the targeted institutions will need to be organised to solve their customers’ problems, operate openly, adapt well to changing circumstances, remain committed to transparency and take responsibility for the impact of their activities on the wider community and society. I've explained these themes in more detail here.
The current targets of this programme have a long way to go!
I should add that I am involved in the Midata programme, as a member of the Interoperability Board and on the working groups considering issues related to data transmission and law/regulation.

Monday, 19 November 2012

Unload The "Digital Wallet" Before Someone Gets Hurt

And that's not all...
The term "e-wallet" or "digital wallet" has always caused a physical reaction. But what started as a small twitch over my left eye in November 1999 now involves diving under a table. The term has become so loaded with giant concepts like 'identity', 'privacy', 'authentication', 'security', 'payment' and 'funds' that it's simply too dangerous to wave around in meetings.

We need to focus on more of the detail if business presentations are to have any meaning and projects are to deliver anything.

The term 'digital wallet' is impossible to define, anyway. The Oxford English Dictionary has no home for it, and it's wise to ignore suppliers' self-serving, product-specific definitions. Th'internet merely yields a confusing mish-mash: [my emphasis] "a system that securely stores users' payment information and passwords..." (investopedia) and "encryption software that works like a physical wallet during electronic commerce transactions." (webopedia). Unhelpfully, the Free dictionary explains "the wallet data may reside in the user's machine or on the servers of the wallet service. When stored in the client machine, the wallet may use a digital certificate that identifies the authorized card holder." 

Such definitions are confusing because they keep jumping the rails from party to party, feature to feature and function to function, each of which has different implications for transaction flows, data flows and funds flows (to the extent payment is even involved). 

Perhaps the only consistent aspect in the use of the term 'digital wallet' is the sense that it refers to a specific individual, or at least it should be capable of doing so. Otherwise, the term means so many different things that it's useless. FinVentures defined it to mean, "A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc." Indeed, a 'digital wallet' could be a feature within an application or service, or an entire application or service, a database, a set of permissions and so on. It could reside on virtually any digital device, including a smart card or just a microchip. It could enable a specific person to initiate or conclude any kind of transaction, or merely be used in the course of intiating or concluding such a transaction.

So when you next hear the term 'digital wallet', seek cover behind a large, heavy object and try to defuse the situation by asking: 
  • which parties are involved;
  • which party is agreeing to do what, how do they agree, what actions are taken as a result and by whom;
  • where the related data is stored and where it flows; and
  • where any related funds are and where they flow.
It could save a lot of time and money.

Image from Tenets in DM.

Monday, 12 November 2012

Stop The Moral Panic Over Corporation Tax

MPs and the media have a responsibility to put the corporation tax issue into proper perspective.

The outrage is not how 'little' corporations pay. It's how much tax the rest of us pay, and how much the public sector wastes while failing to improve services. The media, MPs and campaigners should be focusing on how to make domestic spending programmes narrower and better targeted, rather than second-guessing international tax treaties over which the UK has little control.

Similarly, we can't lose sight of the need to incentivise foreign private sector corporations to operate in the UK. They employ people, generate income for local UK suppliers and compete with UK-based businesses to keep them from charging us whatever they like for goods and services.

But this is not 'the big story' either. 

The real story on the growth and employment front is that the government must do more to foster an environment in which entrepreneurs can thrive and expand their businesses. According to the Institute of Economic Affairs, just 6% of new firms create over half of all new jobs in the UK. Compliance costs, product market regulation and employment protection have remained a constant drag on the ability to grow businesses, despite efforts to eliminate red tape.

Attacking a few foreign corporations over their tax affairs won't help the government spend tax revenues more effectively or enable UK entrepreneurs to thrive. Especially when, ironically, those same foreign companies happen to provide British start-ups with plenty of meeting space, low cost server capacity, online marketplaces, software and customers...

Old Lady Suffers From Undue Deference And Group Think

In March I related a story about the unduly deferential meeting protocol at the Old Lady of Threadneedle Street, and hoped it was more welcoming of critical thought than the rule suggested. However, three recent reports have confirmed the worst.

Not only were the terms of reference for those reports criticised for being too narrow and avoiding contentious issues. But, according to the FT, Bill Winters also found a "tendency [among less senior staff] to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable." And David Stockton "criticised the bank for its opacity and a culture that discourages independent thought."

Naturally, I detect a certain lack of enthusiasm in the Governors' response:
“We welcome these three Reviews. The Reviewers have given us an independent perspective on some of the key challenges the Bank has faced in responding to the financial crisis and have given us a great many ideas to consider that could improve the Bank’s performance. We are starting programmes of work to evaluate the recommendations and to plan changes.  We will report regularly to Court." 
At least they aren't alone. The IMF suffered from 'groupthink' for years, and auditors have been struggling to understand the meaning of 'scepticism'.

Come to think of it, Auntie seems to suffer from the same maladies, along with most of Britain's institutions.

In fact "maladies" is strangely apt to describe two ailing institutions called 'Auntie' and the 'Old Lady'. It also sheds new light on the reason for the apostrophe in m'lady…

Sunday, 11 November 2012

Auntie's Fall From Grace: Death Of Another UK Institution

The resignation letter of the BBC's latest director-general reveals deep flaws in yet another of the UK's self-serving institutions.

One assumes the document was the product of some discussion, and that the "unacceptable journalistic standards of the Newsnight film that was broadcast on Friday 2 November" was carefully chosen as the narrowest possible reason for the top bureaucrat to go. Some care was taken not to mention the mishandling of the Jimmy Savile revelations, for example, or the seismic cultural implications of the BBC choosing to spike a story about his criminality in favour of a series of fawning tributes. But isn't it simply the case that a cosy insider is incapable of cleaning the place up? After all, Lord Patten said he only hired Entwistle to make the BBC "10 or 20% better" and it's now a vastly bigger job than that.

This tendency to cover up, to obfuscate, defend and deflect is the stuff of mere politics. It should not feature in the management of a public organisation in the public interest. 

Yet it's what we've come to expect from the British establishment. It permeated the Parliamentary expenses scandal and the conduct that led to the bank bailouts. It resurfaced in the failure of UK banks to honour Project Merlin, their Libor-fixing activities and attitude to international money laundering. It was present in the activities of GlaxoSmithKline that yielded a $3bn criminal settlement. It's there in the evidence to the Leveson Inquiry, the handling of the Hillsborough disaster by South Yorkshire Police and the systemic cover-up of child abuse.

And you can be sure we have not seen the last example. It seems that Britons are fascinated to learn just how rotten the country's institutions really are.

Wednesday, 7 November 2012

Rise Of The Facilitators: Big Society Capital

Last night, at a ResPublica event, I heard Nick O'Donohoe, CEO of Big Society Capital, outline a pragmatic vision for a social investment market in the UK. Critically, BSC's role is not to hand out £600m in cash to well-intentioned social entrepreneurs. Instead, it's focused on creating the capability for deprived communities to identify, manage and finance projects that will have a mainly social impact, but with the expectation of some financial return. 

Let's say you want to introduce 'makerspaces' for local people with expertise in operating machinery to invent stuff and make individual items to order. It seems reasonable to believe this could help regenerate some industrial towns. Consider the adventures of Chris Anderson, who recently announced his departure as editor of Wired to run a drone manufacturing business he built as a hobby, as described in his latest book

How would you make it happen? How would you establish the feasibility of such a project, identify the right equipment, locate an appropriate building, obtain any necessary planning permission and so on? 

This takes time and expertise, not to mention seed money. Numerous intermediaries must be available to help entrepreneurs co-ordinate and finance their project locally. It can't be done by Big Society Capital from its offices in Fleet Street. It can't be done by civil servants from Westminster, or even by the local council. This has to be a distributed effort all around the country, leveraging online resources where that makes sense. Such intermediaries - or facilitators - will include social banks, active social investors, professional and other support businesses, as well as platforms that enable funds to flow directly from people with cash to social entrepreneurs. The role of Big Society Capital is to invest in the development of a strong network of these social investment intermediaries.

But maybe we shouldn't be too definitive about what is 'social'. I think this approach will be truly successful when facilitators and entrepreneurs aren't necessarily conscious of the fact that the positive social impact of their activities is far greater than the scale of their financial results. To this end, we should factor into all our corporate and project objectives an obligation to take responsibility for somehow improving the community to which the corporation or project relates. In this way, all businesses would have an overlapping social purpose as well as a financial one. 

Similarly, financial services need to support this broader responsibility. Of course it's critical that investors know exactly whether they are donating money, receiving interest payments or getting a share in a company. But if I'm putting £20 directly into any project, my customer experience shouldn't be different depending on whether I'm offered a ticket to a concert, interest at 3% per annum or 2 shares in the project operating company - in fact the same project should be able to offer me all three, seamlessly. That's the sentiment behind efforts to proportionately regulate peer-to-peer finance. All types of enterprise should be able to offer all kinds of instruments over a proportionately regulated digital platform, within an ISA.

Now that would generate some serious big society capital.

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