Blog 2023 Malcolm Blair-Robinson

BP

There are now many threads to this. First let us deal with what the tabloids call anti-British rhetoric. This is the American style to round on people to blame. They do it with each other and they do it to outsiders. It is their culture. Their history shows them on the one hand generous, caring, supportive and pioneering and on the other it shows them to be confrontational and demanding. They are sometimes better at making enemies than they are at making friends.

At this moment they have an environmental catastrophe on a scale we cannot comprehend with consequences and costs which nobody can begin to estimate. They are angry and hurting and spoiling for a fight. We must not give them one. Cameron knows this. In public he has been restrained. He should ignore the tabloids and carry on that way.

In private and it must stay private, he can, if he thinks fit, say to President Obama when he talks to him on the phone tomorrow that BP is an international company originating and based in Britain but with a big block of US shareholders amounting to about a third of the equity (and therefore the dividends), that the companies contracted to do the drilling which went wrong were all American and that it was US regulators that sanctioned drilling beyond the limits of technological control and they did so to meet the ever increasing demand for gasoline to feed the excessive consumption of American motorists in their giant cars who refuse to change their ways. Finally he should warn that the British as a nation are slow, near impossible, to anger, but when they get angry they get very angry indeed.

On now to BP itself. It contracted out without proper supervision a dangerous project and had no plan in place should the worst happen. When it did it was slow off the mark. It under-estimated the scale of the leak, now believed to be around 30,000 barrels a day, at 5000. Thus it tried initial capping and blocking processes that would not and did not work. Finally it managed to tap the flow and capture about half, amounting to 15000 barrels a day, but had no suitable vessels in place to receive such a volume, so now is having to discharge some of it back into the ocean, pending the arrival of tankers. We are now over 50 days in to the crisis and it goes on. Meanwhile an environmental disaster is becoming a calamity.

This is not a good report for BP. On the plus side it has taken full responsibility for the event and promised to pay the cost of the clean up. The chief executive has taken the flack and worked round the clock. The Chairman has been in near hiding and has been flushed out by a summons to the White House. Meanwhile pension funds in the UK relying to an excessive and imprudent degree on the dividend power of one share, face a potential problem of liquidity. There are complaints that BP compensation arrangements to the stricken fishermen and others are both slow moving and too mean.

Before this leak can finally be stopped by relief wells, more weeks will pass. By then things for BP are going to begin to look ugly. It must defer payment of any dividends until the extent of its liability is known and the leak is stopped. It would be wise, to forestall a gusher of law suits unknown even in the prolific legal economy of the U.S, to offer to the US authorities a massive cash  fund for the authorities to administer and distribute of something in the order of several billion dollars in return for some ring-fencing from open ended law suits lasting generations. Cleaning up the Gulf of Mexico, making good the damage and compensating everybody whose livelihood has been compromised directly or indirectly is a mammoth project of a scale not yet evaluated.

The alternative could be far far worse. According to a Texan oil expert and former Bush adviser, the potential costs of the clean up and all the contingent liabilities which BP has pledged to meet and which the fuming Obama administration has asserted it will pay, might very well drive the company into Chapter 11 as the only route open. In other words if the total picture of actual, developing, potential and contingent liabilities is taken in sum,  BP may be technically bust.

Cameron in Afghanistan

I fear we can expect nothing new or bold or radical from the Prime Minister’s visit to one of the most corrupt regimes in the world, for whom our native blood is constantly spilled in a fruitless endeavour to enable its authority to fuction outside a few fortified enclaves. This enterprise can never work because it was flawed at the start.

Planners, including and especially the Generals, were blind to history, to culture and to experience not only of the British Empire but also the Soviets. None had ever tamed this  region, which is a composition of self organised war lord dominated tribal localities with a basic economy reliant on illegal production of opium for export and a social structure which has majority local support, but which is to our eyes medieval. 

Add to this the supreme incompetence of the old War Office, now the Army department of the Ministry of Defence, which cannot even organise proper equipment and resources for what is in world terms a tiny army, which ironically is made up of maybe the best troops in the world today. These brave service men and nowadays women, give their lives attempting to do what can be done only in the dreams of Whitehall delusion.

The only question outstanding now for Afghanistan is how to make a dignified withdrawal as we did from the disgraceful war in Iraq. If the Americans want to carry on they can. In the end they will come home too. The streets of London and the towers of New York will neither more nor less safe as a consequence.

Child Protection

Another review has been ordered into the way Social Services carry out the function of child protection. I have no doubt that there can be improvements in the operating practices of social workers to give them more time with children and less time with paper. This is welcome because so far I do not think the inherent problems have been tackled. 

I strongly believe that at the core of any reform should be a change in the legal structure under which all this operates from an adversarial system to an inquisitorial one, of the type generally favoured on the Continent and practiced by Coroners in England. The delicate and emotional nature of family crisis at all levels involving children should not be subjected to the additional strain of a battle between opposing lawyers. Rather it should be subject to painstaking and careful inquiry by properly trained court officers working directly to the investigating Judge.

In this way social workers would have fully trained professional support when investigating suspected cases of child harm, which would be more direct and better suited than the police. Parents under suspicion for whatever reason would not have to fear loss of their children without just cause. 

It would be hugely more efficient and cheaper and would release social workers from their investigative responsibility while leaving them with their welfare role. In the end this is what their calling is and where the greatest social need arises.

Health

I suspect that it will be Health and Education which cause, in the long term, problems for this coalition government. Both have got off to a doubtful start. Eduction is sidetracked by the desire of a few parents to set up their own schools and all schools being invited to become Academies pronto, without a clear definition of what resources will be left for those who do not.

Now the new Health Secretary has announced that Hospitals are to be fined if patients are discharged then have to be readmitted. This is an utterly ridiculous policy betraying a shocking ignorance of the working and objectives of healthcare provision, which will encourage yet more defensive process and clogging of the system. It is the kind of Whitehall directive so favoured by the last government but which should be anathema to this new one.

Think again, please!

Cuts – The Sums

There has been a curious reluctance of politicians to offer a joined up explanation of the task ahead. It may be daunting but it is doable.

Using current estimates total government expenditure this year is expected to be around £650 billion. Total revenue is projected at somewhere under £500 billion, leaving a gap around £160 billion. That means there is a 23% shortfall currently covered by borrowing.

The Government has to put this right. It can cut expenditure by 23%, or it can cut less but increase taxes to cover the difference. It has to be careful to calculate net savings as unemployment costs increase if the cuts put people out of work. However it must be stressed that if you put private sector people out of work you introduce a new cost with their unemployment benefit. But if you put public sector workers onto the dole, the benefit is in most cases a lot less than their salary and therefore there is a net saving. This means that the public sector is the place for a major cull of numbers and actual government functions. In the end there will be a leaner and keener economy.

Benefits are thought by many to be sacrosanct and for those who need them they should be. For those who do not need them they should be stopped. There is no point paying the state old age  pension to people including civil servants who already have occupational pensions sufficient to give them a comfortable retirement. It would make sense to pay the OAP in full up to a total retirement income of average earnings and then fade it down from that point. Likewise child allowances and so on, including the winter fuel allowance. By protecting those with need and turning away from those who do not, a lot can be done.

Next we need to consider tax rates. In relation to our expectations of service provision, income tax and vat are both too low. When Thatcher left office in 1990 the basic rate of income tax was 25%. Hers was a low tax, low spend policy, but her governments knew that there had to be enough revenue to pay the bills. Whilst there has been a constant increase in spending over the years we have tended to expect lower taxes as well. The sums do not add up as we can see. To avoid cuts bearing all the weight of the adjustment we may have to increase basic rates of income tax and vat. By taking the lowest paid out of tax there is scope to do this. It will cause some discomfort but not real hardship.

Finally there is economic growth. This is hoped for, but may be delayed because of spending cuts here and in all the indebted countries of Europe. We cannot rely on this potential growth playing any part in the reduction of the fiscal deficit. We might just allow ourselves to look to it to generate budget surpluses.

If we can generate surpluses after paying all the interest each year on the national debt at its current level, (projected to be just short of £0.8 trillion at the end of this year) even with a huge surplus of  of 15% of current levels of income (ie £75 billion annually), it will take ten years to pay off the balance so far accumulated. You can  get better economic growth, increase taxes or cut more to shorten the timescale or extend the repayment years to ease the pain, but one way or another the job has to be done. Inflation can help, but excessive inflation accelerates decline.

The challenge is just not just living within our means from now on, by closing the structural deficit of £150 billion plus. It is also to pay for and pay back in excess of £1 trillion which is where the total national debt is likely to wind up if we start right now.  But the job is just doable now. If we wait it may not be. Then we will go bust.

The Labour theory, supported still by a dwindling number of professional economists, that economic recovery can be bought on borrowed money not only overlooks the relatively straightforward arithmetic but also the ever rising cost of the  increasing pile of national debt, which becomes an unmanageable burden on the entire economy, paving  the route from recession to depression to decline.

Getting Real

There has been a strange period over the last twelve months when politicians of all parties tried to pretend (or knew no better) that if your expenditure is way above your income and you borrow every month to pay the bills, the solution is to borrow yet more still. This flight of financial fancy is explained by eminent, but shortly to be discredited, economists, as well as politicians peddling their errors, as a way to avoid a double dip recession. The debt mountain will be paid off by the surge of taxation when growth returns. This is the most utter nonsense for several reasons.

The first is the arithmetic at housekeeping level. To avoid mounting debt leading to bankruptcy, every household knows that you must bring your expenditure down to the level of your income. The second is that if you have been living on borrowed money for a long time your standard of living is an illusion and cannot be sustained. Borrowing more cannot take you back to something that was never there in the first place. Too much of the economic boom was an illusion. It was funded by plastic and built on debt. The real economy was much smaller. This is why we have the second largest overseas debt in the world, which is 4.5 times the world average.

Finally the argument about double dip recessions is drivel. The size of the debt and the amount of interest required to service and reduce it will shortly lead to a huge slice of taxation, the biggest, being needed each year to pay it. The effect on jobs, services and the economy will not only guarantee another dip, but will herald a continuing decline in a downward spiral from which there is no escape beyond a ruined standard of living, even national bankruptcy. The social implications of such a process are very hard to predict.

Cameron and Osborne have now seen the books and realize this. Clegg and Cable are facing sums with which they cannot argue. So over the next few days we are going to be told what is to come. It will, we are warned change our whole way of life. There are two things that have to happen. The first is that expenditure has to be cut until the budget is in surplus. The second is that several years of that surplus have to be used to pay off the debt.

Then and only then will the economy be on a sound footing structurally. Organically there is much to reform. At least a third of government needs to disappear. We have to earn what we spend and make what we buy. The dominance of the City has to be reduced and manufacturing must increase. Europe has many problems of its own and will be a stagnant market for some time to come. The eastern economies are powerig ahead. We need to send our salesmen there to root out the manufactures, goods and services we can provide and then to get on and do it. Some of those vast reserves of cash have now got to start flowing our way.

Canada will be used as an example to follow. It took the pain. The consequence was that it did not suffer in the global financial crisis and has one of the fastest growing economies in the world. This never was a global financial crisis. It was always a western debt crisis. Until countries get out of debt there will be no end to their pain. Canadians will explain.

Big Bang Instability

The argument developing over whether BP should withhold its next dividend payment while the oil spill crisis is ongoing highlights the underlying structural faults in our financial system following Big Bang de-regulation in 1986.

Evidently the BP dividend accounts for something like 17% of all pension payments in the UK. This is of course ridiculous. No one company should ever account for more than 5% of the equity or yield of a balanced portfolio and in days of financial probity and strength long gone, this was the rule. Big Bang created a much freer market which has generated an enormous amount of trading activity. This in turn has made speculation and growth the driver, causing significant over valuation of a very large group of otherwise sound shares. The knock on effect is low average yields which in turn cause fund managers to speculate to gain profits for the payouts. Soon we hear of pension black holes.

As part of the re-balancing of the economy we must re-appraise the purpose of the City. Yes it is a market but it must also provide the foundation of wise long term investment based upon earnings. Only thus can we have the stability at the core which is critical to future progress. Once investors predominated, with speculators seen as a rather vulgar minority. Now everybody seems to be at it. The applecart is now too easily upset.

Oil Spill

President Obama and the American people are very angry. They are watching more or less helpless as one of the most important and interesting Eco systems is damaged and part destroyed by events unfolding under the sea which should not be taking place and should never have happened. There are rumours of corners being cut and regulations ignored, even bribes.

At the centre of the storm is a flagship British company which offers as an excuse for this calamity the unique and untried nature of the strategies in action to cap the oil leak. Nobody has ever had to do this is such deep water. The Americans do not think this is good enough. If  BP drills this deep, it should know what to do. Clearly it does not and is learning on the job. Meanwhile there unfolds an oil Chernobyl. 

Looming on the horizon is the matter of dividend payments to shareholders. Pension funds are getting jumpy. They should not. If they ran their funds properly, they would have no more than 5% of assets in any one share. Moreover if they valued those assets on a yield, not market basis, they would have enough cushion to cope.

The plain fact of the matter is this. In a modern world various issues vie with each other for primacy of treatment, but among them the environment stands proud above all others. Companies engaged in activities which contain inherent environmental risk are vulnerable to unforeseen consequences and both their directors and their shareholders know this. In a market which could value by measure rather than greed, the price would allow for this.

There is no way B.P can pay dividends whilst this crisis unfolds. When it has shown that it is able to bring the disaster under control and is willing to pay the vast costs and compensation without haggling and quickly,  it can resume the dividend stream. Not before. This will be another salutary lesson for the City, which has shown in the last two years that it has much to learn. It is also a lesson for the American people. If they used less energy, it would not be necessary to drill this deep in the first place.

Cumbrian Horror

It is impossible to imagine the shock, grief and trauma of the people of one of the most beautiful and peaceful parts of England, as they struggle with the consequences of an armed taxi driver rampaging on a mission of death, including his own. The whole country is now focused on this picturesque area with a mixture of sympathy and dismay. As one would expect there have been calls for tighter gun laws and the Prime minister has rightly responded with words of caution.

We already have robust gun laws. There may, however, be an issue about how they are administered. The last two mass killers held valid licences for their armoury. After Dunblane hand guns were banned for private ownership and use. Sporting guns are allowed to people who apply on the basis that they wish to shoot vermin, game or clays. It clearly makes sense for farmers, gamekeepers, members of pheasant shoots and so on to have suitable guns. It is not clear why loners living in urban or suburban environments need them.

It should not be enough to declare a wish to shoot this and that. It should not be possible to get a licence unless a member of a shoot or engaged in some other wildlife professional activity. This concession is so that the balance of the rural ecology and economy can be sustained. It is not, or should not be if it is, there for the asking. 

Whatever is done will never be enough and someone will always suddenly snap somewhere. Nevertheless we should have in place a system that does not inadvertently deliver a disturbed loner staring at a rack full of legally held guns as he sits isolated in his living room becoming increasingly unhinged.  The more that emerges of the circumstances and state of affairs surrounding this everyday bloke turned killer, the more there is cause to wonder and worry.

Three Cheers for Michael Gove. But….

As regular readers of this Blog will know, I do not like aspects of Michael Gove’s education policy. In particular I believe there is a role for LEAs to run schools with full control of their budgets and I am not convinced of all aspects of the set up your own school idea. On the other hand I think Academies, Trust and Foundation schools bring strength to the system and allowing good schools to join rather than only those which are challenged makes sense. 

There are dangers and in the end we will have some very good schools, but there will be some very bad ones too, as not all will use their independence well. It is not clear who then will be in charge of sorting things out. Neither is it clear what will happen to the schools left in the old system which do not become Academies, for whom resources are to be reduced. Nothing is ever perfect, but  all things in public policy have to be workable and they have to be fair. If not there will be political damage.

What is very good news indeed is that the new Eduction Secretary’s (bravo for returning to the real name for the department rather than the folksy rigmarole of the Balls era) announcement  that three education Quangos are to be shut down. Never mind their names, all of them are a badge of futility. Everyone, except the Quangos themselves, welcomed this news, which not only saves money, reduces meddling and shortens process, but also sends the message to the whole of Quangoland that the whistle is starting to blow time. 

The very worst aspect of New Labour was its support of this unnecessary, expensive, inefficient and draining system of public supervision. For some reason it was intellectually unable to imagine any group of people, most of them dedicated professionals who know what to do, be allowed to get on with it, without one of these useless bodies in attendance. Let us hope all Mr Gove’s Cabinet colleagues wield axes in their patch of the forest with equal vigour. Let us also hope that their many plans are not so exposed to possible difficulty as those so far announced in Education.