THE PERILS OF PFI -- COMING HOME TO ROOST

PFI -- Should we now be renegotiating these arrangements

There was always something phoney about PFI and it was not just the accounting. Bodies made a stream of unitary payments to a pfi provider over a thirty year period. These payments were made so that this third party ( usually a special purpose vehicle company) -- would design an asset, build it,obtain the finance for building it, then operate it and repair and renew elements of it over say a 30 year period of the arrangement -- after the end of this period, this asset could revert back to the body which commissioned it in the first place but not always so. 

The body commissioning this asset would have made annual unitary payments over the contract period and these covered the principal repayments for the required financing, any associated  financing costs, runnning costs (employees supplies services etc), repairs, maintenance and programmed replacements of part of the asset in question. In some instances if the asset was an income generating one like for example a sports centre, the unitary payment could have been reduced if specific client numbers and income target levels relating to the asset had not been met,conversely it could be increased if certain client and income targets had been exceeded. This all sounded very interesting and novel.

The other beauty of this approach was that no liabilities were to be included on public sector balance sheets. Isn't that strange when the public sector was committed to making thirty years of payments to a third party? No apparently the risk of failure had supposedly been transferred to the third party away from the public sector and wasn't the private sector better at geting these projects finished on time and to the desired budget and specification -- Much better than the decrepit old public sector. These schemes were frequently of byzantine complexity and the breakdown of the unitary payments into the elements relating to financing running costs etc was extremely difficult and more of an art form than anything resembling something logical and scientific.

For many years, if any public sector capital projects needed to be undertaken, PFI was the only show in town. In local government,authorities received (and some still receive) -- specific government grants to help fund the unitary payments they had to make to PFI providers. It was difficult if nigh impossible to ignore these mechanisms. The public sector balance sheet looked a lot healthier than it should have done -- given that these PFI liabilites were hidden -- but that was alright -- because the risk of failure had been transferred to the private sector,hadn't it? The previous approach relating to PFI and whether these schemes were to be kept off balance sheet related to making a judgement about whether a genuine risk transfer from the public to the private secotr had taken place. Subsequently this was to change but not for the moment.

So where are we now? -- Funding of public sector bodies has shrunk -- however they are still committed to making these unitary paments over the long term. This has caused severe problems in the South London Healthcare trust which had to be taken over by the government last week and 22 other trusts are in similar straits. These trusts will be paying for their PFI hospitals long after they have become obsolete. According to the Spectator, NHS Trusts will have to shell out £70bn to PFI companies over the coming years whilst the hospitals themselves will be worth only £11.4bn -- Is this hire purchase gone wrong? The government can borrow at circa 2% -- would it have been better to do so than to go down the pfi route in any case?

In the private sector, facilities management contracts are for 3 years and not 30 years. Civil servants are not the best people to negotiate these deals -- they will succumb to pressures from the PFI providers but are not strong enough to put the PFI provider under similar pressure in terms of renegotiated deals. The specifications are also resticitve -- Changes to these arrangements e.g. building extensions or increased opening hours of these facilities incur huge charges from the PFI providers. This cannot and will not continue.

PFI companies always knew that in the final analysis the government would pick up the responsibility and any transfer of risk to them was in all practical purposes a sham. We are paying the price of this. When private sector PFI contracts are in trouble -- the providers re-negotiate. It is now the turn of the state to do the same or else PFI driven budgetary problems may transmit themselves to other parts of the public sector. The accounting for PFI contracts has been largely sorted out -- the budgetary pressure arguments still need to be addressed and quickly.

TAX AND MORALITY -- WE NEED TO DO GOOD

Jimmy Carr - Did he consult his conscience?

How much tax should we pay and who should pay it? The recent Jimmy Carr case illustrates the approaches that can be followed. Certain people with clever advisors and a gullible HMRC can set up schemes to try and avoid paying tax on the income they earn whether through a company or themselves working for an employer. Everyone wants to pay less tax however is it just that those under PAYE should shoulder a proportionately higher burden than those who may be richer but are smarter at re-defining their job roles and income streams? Tax evasion means not paying the taxes that you owe - whereas tax avoidance means minimising your tax liability as much as is possible. Such an action can be legal but is it moral? Is such an action judged to be right or wrong? Is such an action virtuous or not.

An individual earns a lot of money, deposits it in an offshore bank which loans him back the money. His income magically transforms itself from earned income into a loan where he may not need to repay the principal for a number of years hence and may pay an interest charge on that loan ( will that be tax deductible or not?). Sounds great -- but what if everyone did that? Would we have enough revenue for the government to run the country? The government is now looking to differentiate between "aggressive avoidance" and normal avoidance. David Cameron stated that aggressive avoidance was morally questionable. How does he know this to be so? Is there a moral crusade against tax avoiders in the offing? Will politics and economics develop a moral dimension? Probably not.Perhaps it should?

When we are faced with an opportunity to minimise our tax burden in moral terms we should be able to distinguish whether we are undertaking a moral (good) action from an immoral(bad) action. People possess reason and a conscience which should enable them to make clear judgements irrespective of the laws which have been enacted. These judgements often stem from a religious belief. Clearly the actions of Mr Carr are legal but there is a strong case for saying that they are immoral,particularly when this comedian,as part of his comedy shows, has pilloried rich people who have entered similar schemes. He has now decided to leave this scheme - possibly because he thought it was poor judgement on his part or possibly because he thought it would destroy his credibility as a comedian who needs to be in a position to challenge society's status quo through humour. We will never know the real reasons for his conversion but it may also be the case that he reflected and listened to his conscience. Some very intelligent people dream up these clever schemes and if they applied 10% of their talents to solving society's problems we may all be in a much better place.

The state itself is not immune to these moral judgements as well. If it has been excessively profligate and has increased the financial burdens on all members of our society -- then it has also acted immorally -- It has done things that it should not have done and has not assessed the future outcomes of its actions in a proper way. 

The tax burden needs to be modified on certain classes of individuals -- especially the very rich in our society and the very poor. To encourage different work structures like co-operatives and other profit and not for profit ventures involving risk taking then the tax charges on these ventures -- especially in the early years,should be minimised so they encourage growth and development.

Similarly, investment in capital and people needs to be treated in a related way. There need to be tax incentives to individuals\companies on their willingness to do good for society. This does not mean just giving to charity but would capture individual\company schemes to improve our society's economic and social capital. Lending your own money to yourself through the instrument of an offshore bank would not qualify for these expressions in my book. Other schemes and approaches which are intended to increase the common good might qualify here -- We need to be creative in what we embark upon -- Ensuring of course that in a moral sense we are doing good.

BRADFORD FIGHTS BACK AGAINST UNEMPLOYMENT - WILL OTHER COUNCILS FOLLOW?

Don't worry -- Bradford is trying to help you

The town where I  live  is taking a real stand against unemployment. which has been traditionally high in this local area, especially in inner city Bradford. The Council has unveiled its plans for a four-pronged £7.7 million programme to Get Bradford Working, creating more than 1,000 jobs, apprenticeships and work placements in a bid to tackle the high levels of unemployment in the district.

The ambitious plans are intended to create 390 new jobs, 400 new apprenticeships, and 300 work experience placements across Bradford over the next two years. They will also include the creation of studio schools where young people would be taught the skills that employers really do require. Get Bradford Working is made up of four elements – a job creation fund, industrial centres of excellence, a routes into work scheme and a proposed apprenticeship training agency. There is the intention of introducing paths to 600 new qualifications and 5 new industrial training centres catering for 1,500 people.

The largest portion of the funding, £4.5m – approved in the Council’s budget earlier this year – would be for the employment opportunities fund which would see an estimated 350 temporary jobs created over the next two years. Hopefully these can be sustained and turned into permanent jobs.

The £1.8m industrial centres of excellence scheme would focus on key business growth sectors, such as health care technologies and advanced engineering, and make sure 14 to 19-year-olds are being taught the skills wanted by employers.

Barriers to getting work such as mental health issues, disabilities, English language problems and age are also intended to be addressed. Bradford  University graduates will be offered internships with local firms to stay in Bradford.

Unemployment in the district is currently higher than the national average, at 5.9 per cent compared to four per cent in the UK. Youth unemployment (people aged 18 to 24) in Bradford is 10.7 per cent compared to 8.9 per cent in West Yorkshire and 7.9 per cent in UK. With the recent closure of the Thomas Cook Office in Bradford with the loss of 468 jobs such a scheme is a critical requirement.

How many other councils will follow? To tackle the key issue of youth unemployment such similar and possibly bolder schemes will need to be introduced elsewhere in the UK. Austerity will not turn Britain around on its own  Schemes like this could make a big difference to youth unemployment and other councils need to be braver and pursue some similar initiatives to alleviate the problems of young job seekers. We do need to assist this jobless generation to achieve something. I am proud of what my former authority is trying to achieve here. For once it is showing great leadership in difficult economic times.

Please see:

http://www.thetelegraphandargus.co.uk/news/9762984.__7_7m_scheme_for_new_jobs_by_Bradford_Council/

DOES PUBLIC SECTOR ACCOUNTING STILL LEAVE NORMAL CITIZENS BAFFLED?

Do Public Sector Accounts Make you feel like this?

Most definitely yes according to a new article written in the Journal of Finance and Management in Public Services on statutory financial accounting in the UK public sector, Donald Harradine and Roger Latham from Nottingham Business School, argue that public sector accounts should clearly present information in which the public is really interested, such as the legality with which public funds have been used and the financial and operational viability of the public sector organisation in question.  Their focus is one in which it is necessary to confirm that public funds have been used to deliver an agreed spending  plan and to purchase assets and services which optimise value for money for the tax payer, They argue that accounting practices in the public sector have “blindly” followed those in the private sector. That is not entirely the case as the public sector in central government terms needed to shift to accruals based resource accounting for public expenditure thus moving away from a largely meaningless reliance on cash accounting.

There have been criticisms of the moves in UK Local Authority accounting, firstly to UK GAAP and then to IFRS adapted specifically for local authorities. It is undoubtedly so that UK local Authority accounts have become more complex and the associated notes to the accounts much greater in length than previously, but there have also been benefits as well. These benefits include much more realistic accounting for non-current assets and a greater focus on the fair value of those assets. There has also been a much greater intensity on the classification and levels of local authority reserves and these are now classified as usable and unusable – these approaches do increase transparency for the citizen and make it clearer than before. The request for authorities to publish details of spending over £500 has not proved to be as successful as first thought. Citizens need to understand the scale, context and classification of public expenditure to properly comprehend it. The real challenge for accountants is to find new ways of explaining complex elements of public expenditure to citizens so that meaningful decisions about future public policy and even choosing between different political parties in future elections can be made.

The private sector approaches are not always correct but nevertheless they can and should be examined and applied where they can be judged to be relevant. Too long in the public sector simplified approaches have hidden the true story of costs and revenues associated with specific services. Such approaches need to change. The proposition that accounting firms and the profession itself has a vested interest in making accounts complicated should be soundly rejected. The related argument that practitioners and more so policy makers find the accounts “difficult” to understand is true – but that is a challenge of interpretation and explanation.

Public sector accountants perhaps need to make greater efforts to explain these complexities by for example the production of simplified and summary accounts for stakeholders and much progress in this area has already been made. Too often accountants finish off the debits and credits of final accounts and see that as their mission accomplished when in reality they need to put much more effort into engaging with the public and explaining what is happening to key stakeholders so those stakeholders can make informed decisions.

The role of the public sector accountant as a facilitator and interpreter of public sector financial complexity will grow and grow – especially when the UK electorate will need to make tough choices through the ballot box on how future austerity might need to be delivered and applied. The challenge for public sector accountants will be to move beyond the debit and credit straitjacket to engage with stakeholders more effectively. Life is difficult however the job of the public sector accountant will be to make stakeholders understand it a little better.

 For a full copy of the article please see the following web link:

http://cipfa.org.uk/thejournal/download/MalcolmJProwle_DonaldHarradine_RogerLatham.pdf

GEORGE SOROS AND THE EURO CRISIS

Euro Crisis - Does Mr Soros have the answers?

This is a really succinct explanation of the Euro Crisis where a speech by George Soros the International Financier, has been interpreted by National Public Radio of America into a distinct number of phases as follows:

1. The Convergence

Convergence of 10 year government bond interest rates when the Euro was created.

2. The False Dream

Borrowing costs for all countries in Europe should be identical.

3. The Crisis - ( Originating in 2008)

After the 2008 financial crisis, it eventually dawned on everybody that the countries that shared the euro are, in fact, a bunch of different countries, with vastly different economies — and that, despite what the officials said, not all eurozone government bonds are identical.

Bonus -- Why a Euro Break up would be bad for Germany

Firstly Germany's central bank would never be able to recover a huge amount of money its owed as part of Europe's current system.

Secondly, the end of the euro would make German exports much more expensive in the rest of Europe. That would be a big blow for a key part of Germany's economy especially the medium sized engineering companies that export so much and especially the car companies as well.

The deep problem facing the euro zone isn't just debt. It's the vast gap between the economies in the struggling countries and the economies in the stronger countries.

Plesase view:

http://www.npr.org/blogs/money/2012/06/04/154282337/the-crisis-in-europe-explained

MANAGEMENT MISFIT? -- THERE IS STILL HOPE FOR YOU YET!

Could the Ipad have really been delivered without him?

Perhaps you have an obsessive interest in a particular area or you may be a bit socially awkward or suffer a bit from dyslexia. Is that a problem for your career progression? Not necessarily according to the Economist -- indeed it can be a positive advantage to be a bit geekish and not just a company man or woman.

Julie Login from Cass business School surveyed  a group of entrepreneurs and found that 35% of them were dyslexic as opposed to 10% of the population and 1% of professional managers. Some famous dyslexics have included Steve Jobs, Richard Branson, Jamie Oliver and John Chambers of Cisco.

These managers gravitate towards jobs where few if any formal professional qualifications are required and there is a high degree of delegation to talented co-workers. They are especially good at delegating to talented individuals and letting them get on with things under the umbrella of broader business deliverables. Meddlers and micro managers they are definitely not. How refreshing that is because whatever we may think, one person cannot do everything but one person can ensure that everything which is required gets done by other talented people.

ADD (Attention Deficit disorder) is another affliction apparently common in entrepreneurs. Although ADD sufferers get bored easily, procrastinate and find it difficult to focus; these people are good at taking risks, thinking outside the box and are highly creative. There is still a place for the ordinary organisational person within an entity who is well rounded, polite and hard working, it is just that there is perhaps a more important need for a creative soul and a spark. No serious organisation can prosper and be creative without these semi-dysfunctional individuals playing a key role.

Apparently in 1956, William Whyte, argued in his best seller "The Organisation Man"that companies were so in love with well rounded executives that they fought a battle against genius. So next time your colleagues come to you with some ideas which appear to be off the wall, please ask yourself is it their unorthodoxy or your lack of vision and understanding that is not moving your entity forward in the realms of business progress?

THE PAIN IN SPAIN -- COMING TO THE REST OF EUROPE SOON?

Spain - Can it keep on saying no to cuts?

The collapse of the Spanish property market has left its banking sector exposed in the sense that many loans on Spanish Banks' balance sheets are now considered to be pretty worthless. On the 26th of May Spain's Bankia Group requested a 19bn Euro bail out on top of the 4.5 bn Euros it had already received from Spain's banking bail out fund. This new funding is intended to cover half of the Group's real estate exposure and nearly 13% of its entire loan book. The pertinent question which needs to be asked is whether there are further holes in the balance sheets of other Spanish Banks and what can be done about them? Nomura believes that most Spanish banks will need to find more capital (with the exception of Sanatander and some others). Private capital will not bridge the gap and it is expected that Spain will need to go to the bond market in some way  to secure this funding. It is understandably nervous about doing this given that the latest interest rate on its 10 year government bonds is 6.4% the equivalent rate for the UK is 1.8%.

If the trickle of deposits leaving Spanish banks turns into a flood then appropriate action will be needed. Presently the Euro Zone's bail out funds cannot directly re-capitalise banks.There has been debate that the Spanish government could give Bankia sovereign bonds in exchange for Equity and then Bankia could exchange those sovereign bonds for monies from the ECB -- This would be a form of indirect capitalisation of Bankia. It does look extremely likely that external support will be required to keep the Spanish banking sector afloat.

In general economic terms, the Spanish budget deficit in its 2011 accounts was larger than expected ( 8.5% of GDP instead of 8.9%). The key element of this was the lack of budgetary control of its regional governments The regions increased their deficit last year and are now finding it difficult to raise funding.Spain's central government can now control the budgets of regional governments who cannot control their deficits. It is these health,education and infrastructure cuts which are impacting so significantly on Spain's economy which now has 24% unemployment with over half of it comprising of  the young unemployed. Sending in commissioners to run poor performing regional governments will be difficult (This sounds familiar?) -- having elections to throw out the poor performing regional administrations will take a lot of time which Spain may not have much of.

Easing the pain in Spain will require much effort in not only securing international funding but also in improving the budgetary performance of Spanish regional government.