17 May 2018
Lens on the Week
UK
BREXIT: The debate within the Cabinet over the best form of customs partnership to pursue rumbles on, the contenders being the system which combines the collection of tariffs at EU rates with a repayment of the excess over UK rates where goods are consumed here (a system branded by Boris Johnson as “crazy”), and “Max-fac” under which only the UK’s tariffs would be collected (but this would be done as lightly as possible). Currently there are two ministerial working groups developing the models. One might have thought that this was a job for the civil service, but these are not ordinary times. It is not easy to tell what the thinking really is.
Meanwhile the Attorney General is to examine both systems for compliance with international law. The possibility that the “crazy system” breaches the WTO rule that imported and locally produced goods should be treated equally was first mooted by David Davis. Presumably he thinks not, but then as a Brexiteer he would say that, wouldn’t he?
ERDOGAN VISIT: President Erdogan of Turkey has paid a visit to the UK, a trip which included an audience with the Queen. That is particularly contentious because he is in the middle of an election campaign and is accused of jailing opponents. Germany, Austria and the Netherlands have all banned him from holding any rallies in their countries although he is due to hold a large rally in Sarajevo. Sir Vince Cable said that the government should use the visit to speak out against his “unacceptable disregard for liberal, democratic values.”. If they had been proposing to do that they would have done better not to have asked him in the first place.
International
IRAQ’S NEW LEADER: Surprise, surprise. Last week, Shaw Sheet’s “Lens on the Week” said that prime minister Haider al-Abadi was likely to win this week’s elections in Iraq; in fact, he lost. We also suggested that prime minister Najib Razak was expected to win this week’s elections in Malaysia; he lost. And the week before, prime minister Saad Hariri and his Future Movement party were expected to win the election in Lebanon; they lost. It’s a good job Shaw Sheet doesn’t give horse-racing tips.
Does this mean that we can expect similar upsets in the forthcoming elections in Venezuela and Turkey? Is it possible that the favourites Maduro and Erdogan won’t romp home miles ahead of the rest of the field after all? Surely not…
Of all the election results this week, Iraq’s is the most interesting and possibly the most consequential. Its neighbour Syria might be dominating the headlines, but Iraq is still there, having survived one disaster after another: the brutality of Saddam Hussein’s dictatorship; the chaos following his overthrow; sectarian violence as Sunni/Shia conflict escalated into civil war; the rise of Isis; the problems of Kurdish independence. There was a feeling that the election might open up a new chapter, could help the country put these crises behind it and move on, even before its surprising results.
In one corner, there was prime minister Haider al-Abadi, backed by the West and supported by the USA, but adept at keeping their opponent and his influential neighbour Iran on-side as well. He also had a good record as a non-sectarian; although a Shia (as is 60% of Iraq) he had made great strides in healing the country’s Sunni/Shia divide. In the other corner, there was Hadi al-Ameri, a ex militia leader, backed by Iran; his Conquest Alliance mostly consists of militant Shia anti-Isis volunteer fighters. The election was supposed to be a face-off between these two, which prime minister Haider al-Abadi was expected to win. The system in Iraq prevents any one party from winning an outright majority, but the West was hoping that a third party such as that led by the populist cleric Moqtada al-Sadr would help him to form a coalition government.
In the event, the pro-West prime minister came third. The pro-Iran Hadi al-Ameri and his Conquest Alliance came second. And Moqtada al-Sadr came first.
Moqtada al-Sadr is a very significant figure. His father, an ayatollah, was killed by Saddam Hussein twenty years ago. Following the chaos and conflicts precipitated by Saddam’s overthrow, Moqtada al-Sadr was considered to be “the gravest threat to western interests in the Middle East” (The Times); he formed and led the Mahdi Army, the force of working-class Shia militants which killed thousands of UK and US soldiers, and which was accused of widespread atrocities against Sunnis in the civil war. He then went into exile in Iran.
On his return to Iraq, however, he renounced violence, called for an end to armed conflict, demanded the eviction of foreign armed presences and political interferences (including that of Iran), and proposed a secular and technocratic government. He led an anti-corruption drive, which included attacking MPs in his own party, and put together a pluralistic and diverse group of parties – including communists, liberals and secularists – to fight the election.
His victory has surprised everyone. Neither the West nor Iran seems to know what to make of him. A plague on both your houses, he seems to be saying. He could be just what Iraq needs and deserves, after the traumas and dangers of recent decades. We wish him and his country well.
Financial
INTEREST RATES: The Monetary Policy Committee of the Bank of England reacted to lower than expected growth figures (0.1% against the 0.4% expected in February) for the first quarter by holding Bank Rate at 0.5%. They were encouraged to do so by CPI inflation figures for March which came in at an annualised rate of 2 ½%, again, less than expected. The target to which they have to work is, of course, 2%.
The decision is disappointing for those who are anxious to get the economy back onto a normal footing. At the moment, as explained in the Shaw Sheet last week, low interest rates are suppressing investors’ returns, putting upward pressure on house prices and impeding new investment. On the other side, higher interest rates would boost sterling, putting pressure on exporters. The next meeting of the Monetary Policy Committee is on 21 June.
RBS: The likelihood that RBS’s $4.9 billion settlement of its liability to US regulators for mortgage mis-selling will enable the Government to restart the sale of its stake, which will result in the licking of lips in the Treasury. Sales in August 2015 recovered around £2.1 million of the £45 million spent by the public in rescuing the bank, but since then realisations have been on hold. The remaining 71% is thought to be worth about £22 billion, not enough to make it a profitable investment. Still, it would be nice to get something back.
CARILLION: A report into the collapse of Carillion published jointly by the Work and Pensions Committee, chaired by Frank Field, and the BEIS Committee, chaired by Rachel Reeves, makes grim reading. Almost everyone involved comes in for criticism, their performance attracting the level of approbation normally reserved for the British entry into the Eurovision Song Contest. Perhaps that is not surprising with 2,000 jobs lost so far, £7 billion of unfunded liabilities, and the biggest ever hit on the Pension Protection Fund. All this from a company with a string of vital government contracts.
Nul points then for management who took the company down a path of boosting market share by buying its competitors, cavalier as to the responsibility for direct benefit pension schemes and debt which it was taking on to do so. No points either for using accounting tricks to cover the mess and deferring payments to suppliers to retain cash and create an extra level of credit. The timing doesn’t look too good either, with a dividend being paid just before the write-down in goodwill which set the alarm bells ringing. With the exception of Emma Mercer, senior management generated the dividend led culture which lead the company to its ruin. The report suggests that the possibility of disqualifications be considered.
Nul points for the non executives who failed to understand what was going on, for the auditors KPMG and for Deloitte who as internal auditors were responsible for risk management and financial control. In relation to accountancy, the report notes that the liquidator had to give the job of administering the business to PwC because the other big four accountants were “more conflicted”. There is a recommendation that the position of the accountancy market be referred to the monopolies commission.
Nul points for the pensions regulator, the financial reporting council and those responsible for the stewardship code, all dogs that didn’t bark in the night. Clearly they will have to be strengthened.
In the end though, what strikes the reader of the report is how hard it is for outsiders, be they non executives, auditors, investors or regulators, to put the spoke in sufficiently hard to curb the aggressive management of an apparently successful company. This report will lead to tinkering with powers and duties, perhaps even to the disqualification of directors or the break up of accountancy firms. But that basic inequality of power is likely to persist.
