Learning from the BBC

How many senior managers does it take to run the BBC?

Apparently it’s quite a lot less, 18% less to be precise, than previously thought according to the BBC Trust which has agreed to proposals from the Executive to cut the senior management pay bill by around 25% over the next three and a half years.

Other savings will come from freezing pay and bonuses for senior management until 2010 as part of a larger plan to cut a whopping £1.7 billion from costs between now and 2013.

Wow.  18% less senior staff!  Savings of £1.7 billion.  What a veritable feeding trough this must have been in recent years; a perfect illustration of how the interests of senior staff can diverge from that of the organization and its shareholders (the public in this case). 

Actually the salary and bonus savings are likely to be just the tip of the iceberg.   The primary cause of inefficiency is not too many staff and an inflated wage bill, bad as that is, but the organizational constipation they cause as they get in each other’s way.  All those staff have to do something, and when there are too many of them they invent work, creating endless and pointless meetings and paperwork, hoarding information, diffusing responsibility and playing (company) politics.   Trust me, I’ve been there, I’ve got the tee shirt.

But if the BBC is top-heavy and over-managed, what of central government?   I suspect the BBC is positively slimline by comparison.  Think about it; most long-established major industries have in turn experienced an existential crisis which has forced root and branch reform – think shipbuilding, coal, steel, motor manufacturing, telecoms and so on.   Some have failed to make the change, others have gone on to thrive (though often under foreign ownership).  The one obvious holdout, protected until now by the endless generosity of the taxpayer, is government.

Well, this party is about to end.  A country needs a government just as a large and diversified company needs a head office but it must add value and it can only do this if it is small and efficient.  If it gets too large it becomes inefficient and self-serving and subtracts value.  That sadly, is what HMG too often does.

Which is why I have always disagreed with the plan to save $20 billion from government spending.   It’s simply too small; it implies leaving the system basically unchanged and making it just a bit more cost-efficient round the edges.  For heavens sake!  If the BBC can find £1.7 billion after a few months what is the potential across government?  £200 billion is probably nearer the mark because that implies a root and branch change in the way government works.

It’s long overdue.

 

Lessons from London

According to the Wall Street Journal the US House of Representatives is to start posting expense reports online at the behest of Speaker Nancy Pelosi after the WSJ began publishing stories based on combing through the existing paper records.

It is not proposed that records from earlier years will be published online.  My guess is that quite a few congressmen have been reading reports from London and are keeping their fingers crossed that no-one digs into past expenses.

What a difference it would have made if Speaker Martin had opted for disclosure at an early stage.

However, it seems that the Senate still doesn’t ‘get it’ even though their expenses typically cost millions of dollars per year so there could still be fireworks from Washington.

Doing the fair thing is doing the right thing

Today’s cut in base rate to just 0.5% is horrible (though not unexpected) news for savers.  Anyone who has been prudent and saved to build a nest egg for their retirement or against a rainy day is getting hammered by the loss of  income; many retirees will be forced to dip into capital to survive.

But, apart from the obvious point that Gordon Brown’s once-vaunted reputation for prudence is now deader than the proverbial parrot, what does this tell us about his government’s priorities.  How is he proposing to spread the pain about, who will loose most and who will loose a little.  Will there even be some winners?

Forget all the economic jaw jaw.  We need a debate explicitly and in terms about what is fair and what is not fair.  If, as most Lib Dems fondly believe, ‘fairness’ is a core principle of their party then NOT having this debate is a gross dereliction of duty.

Moreover, it has become abundantly clear that most mainstream economists don’t have a clue about how the economy works, or they would have seen it coming – which they didn’t (with remarkably few exceptions).   The proposition that we should leave it to those who got us into this mess to save us from it is laughable.

This matters because I have an old-fashioned belief that doing the fair thing is in fact doing the right thing.

So, what is the government doing – and what should they be doing?

Their approach was and is to get lending restarted so we can all go back to where we were – carry on as before – no lasting harm done - trebbles all round.   But many banks have so much bad debt that they are bankrupt - zombies kept alive only by government guarantees of billions.   This will be a burden to taxpayers for decades to come – a massive inter-generational transfer.   Is this fair?

But the banks winnings are not limited to the immense cost of capital injections and guarantees.   Their gross margins (the difference between the interest rates they pay savers and the rates they charge borrowers) have gone through the roof.    So both savers and borrowers are also loosers.  Is this fair?

(An anecdote illustrates this.  A friend who runs a high quality small business with a strong balance sheet was recently looking for a modest loan.   Several banks quoted 10.5 – 11.5% for a secured loan.  Until recently he could get loans at around 9% unsecured or 2% over base rate secured.  Multiply the gross margin they are getting – say 10% – by all their loans and this is a LOT of money).

The government’s clear policy is to thus to fill the black hole in the banks’ finances thorough a combination of government cash injections and rolling up bumper profits (those monster gross margins) over many years.  (At the moment we are not ’seeing’ these profits because they are being cancelled by write offs of bad debt).  Unfortunately we just don’t know how big the banks’ eventual losses will be nor therefore how long this will take.  At least a decade is a reasonable bet but an ongoing capital famine – for that is what would result - would be a disaster for businesses and would-be house buyers alike with opportunity costs that would be incalculable.  Is that fair?  

Also today the Bank of England has announced that it is to begin ‘quantitative easing’ (aka printing money) to boost liquidity in the banking system and therefore – hopefully – demand.   No-one, least of all the Bank, seems to have any confidence that this will work.   Neither do I  for it fails to address the core problem of too much debt.   What it may well do is stoke inflation that would wipe out the capital value of any remaining savings.  Is that fair?

This crisis started when debt was allowed to balloon to unaffordable levels; it will end only when debt is once again affordable.

The tragic truth is that there is no painless or even fully fair way to get debt down.  Realistically, killing the zombie banks that carry most of the bad debt is the only way to go and is less unfair than any alternative.   (Their branch networks and supporting systems would continue as before but under new management – they are the ‘Money National Grid’ and a vital part of the economy).  Killing zombie banks whose greed got the better of them is entirely fair.

(Interestingly, this is the solution that the private sector has come up with for rescuing firms that have been coaught out with unaffordable levels of debt.  Recent weeks have seen a slew of  ‘pre-pack’ administrations (i.e. bankruptcy) where a new company emerges the next day purged of its accumulated mistakes).

In the meantime the government should not pour taxpayers money into propping up bankrupt institution that have collapsed themselves by their own greed.  If it continues to prop them up there is a high probability that it will bankrupt itself – any that would be the ultimate unfairness.  That’s the scenario we shouldn’t have to face.

Clever stuff on PFI

The current edition of Private Eye (No 1229) makes a couple of  good points about the Private Finance Initiative.

Firstly, the labyrinthine processes necessary to tee up any project will inevitably slow down any economy-boosting investments to the point where they are too late to be fully effective.

Secondly, even the pretense that the private sector was shouldering some of the risk is unsustainable; with the government now explicitly underwriting the banks that provide the finance.

So what we are left with is a plan worthy of Baldrick at his cunning best whereby middlemen take a fat cut of public funds in return for making slowing developments down and making them more expensive.  Clever stuff!

The real driver behind PFI is, of course, New Labour’s desire to fiddle the books.  In the short term it can look like a winner if no-one notices (and by and large they don’t!) but in the longer term it comes back to bite you on the bum.   It is straight from the same stable of delusional finance that the banks have been living in for the last few years.

I have always been viscerely opposed to PFI, not because of any ideological opposition to public-private partnerships per se, but simply because it is a crazy idea – guaranteed to increase costs and complexity (the two usually go together).  Has no-one in government heard of the KISS principle (Keep It Simple, Stupid)?

Whatever savings may be found will almost certainly be more than offset by the high cost of financing (a big cost for capital projects even in ‘normal’ times) and the inflexible lawyer-defined relationships that result. 

If there is a case for improveing project management when building schools and hospitals etc. (and I am inclined to think there is), then address this issue directly and don’t imagine that involving private sector players with very different motives will somehow – magically – solve the problem.  The really serious problems more usually arise from the government’s habit of being a bad client – for instance by chopping and changing specifications in mid project.  PFI does not help with this – indeed it can only make it worse.

 But the biggest problem of all with PFI may be that in embracing it the state sets itself up as a honeypot.  Many of the most successful and fastest growing UK companies of the last decade have been those that set themselves up to exploit this growing market which depends on old-school-tie networks, on revolving doors and secret deals. 

As George Monbiot argues in Captive State: The Corporate Takeover of Britain, what PFI actually means is virtually no democratic control or accountability (under the convenient guise of  ”commercial confidence”).   Moreover, cost savings are illusory – financing costs are through the roof and FPI hospitals typically have substantially few beds than the ones they replace.  His account of the Skye Bridge PFI debacle is one of the scariest things I have ever read.

It was always a bit of a mystery to me why, judging by the Party’s relatively low profile on PFI, other Lib Dems did not apparently feel as I did about  it.  Could I be so far from the mainstream?   Then I stumbled across Vince Cable’s call for views on PFI dating from July 2007.   Some trolls of course, some not sure, but plenty of contributors who see PFI very much as I do.

Lets kill PFI off now before it does even more damage.

Britain: an Economic Sahel

Gordon Brown used to trumpet his success in banishing the ’stop-go’ economy though he’s been strangely quiet on this recently.  Could it be that the difference between real fitness and pumping up with credit steroids is now painfully obvious to all?

Actually, even in his glory years there was another story in the real economy, happening largely beneath the media radar and so mainly unseen.

A friend is a robotic engineer.  He used to be part of a world-beating team of decommissioning experts working for British Nuclear (or whatever it was called at that stage).  His particular expertise was in robots that could decommission old nuclear facilities, going where no human could live – expertise that just has to be transferable to marine, space and goodness knows what other sectors.  I thought that he was well positioned career-wise and told him so only to be proven (temporarily) wrong when he was made redundant in one of the govt’s periodic cost-cutting drives.  The team is now split up and he works abroad.

The govt meanwhile is wondering why it is that young people don’t seem to want to go into science and engineering.  Could it be because they have more sense?

My friend’s experience is only one tiny part of what has happened to the entire UK nuclear industry on both the building and decommissioning sides with the inevitable result that the whole lot has slid into foreign hands.  As the BBC puts it:

…both clean-up and new-build will be dominated by large French companies, which are themselves controlled by the French state.

Something similar happened to railway rolling stock manufacturers under the Conservatives.  During all the prevarications, delays and changes of tack during the privatisation process, orders for new rolling stock dried up causing one of our oldest manufacturing industries to close. 

That is why when Virgin wanted new trains it had to go to Italy to buy the Pendolinos.

I could go on but already the pattern is clear.  Whatever is happening to the economy as a whole, individual sectors have all too often experienced unsurvivable swings in demand that are the industrial equivalent of repeated long droughts.  And it is these frequent draughts that make places like the Sahel so chronically impoverished.

My conclusion: govt needs to raise its game dramatically.  It talks the talk but doesn’t actually deliver.  Am I wrong to think that there are lots of votes in this and that people are far better at detecting BS than the politicians give them credit for?