Archive for novembre, 2010

Euro-Zone Tensions

Jeudi, novembre 25th, 2010

William Hague, the British foreign secretary and known as a Euro-sceptic, should still have been able to have shown more confidence on behalf of the UK in the future of the Euro-zone, when interviewed recently on the BBC Radio 4 Today programme. Speaking from Lisbon during a NATO summit, he saw it as very much in the British national interest for the Euro-zone to be stable (some 60% of British exports are towards Euro-zone markets). There was also a specific although separate (from the Euro-zone) case for assisting Ireland with its current financial problems (British and German banks are amongst its biggest creditors). However, he failed to reject the suggestion that the Euro-zone was in danger of imminent collapse, pointing out instead his own view over the years of the inherent tensions in having a Euro currency zone which essentially locks together the exchange rates and interest rates of countries with very differently functioning economies.
The problem for the UK is perhaps encapsulated in the opinion of Dominique Strauss-Kahn, at the head of the International Monetary Fund (IMF) and a potential challenger to Nicolas Sarkozy for the French presidency, who considers the only solution to the financial crises now facing Ireland and impacting Greece, Portugal and Spain, is for more centralisation within the European Union, especially in financial, economic and social policy.
However, the German chancellor Angela Merkel also did not build confidence in the financial markets when, in response to political pressure from voters opposed to bailing out weaker countries, she increased nervousness amongst lenders by suggesting that banks and investors should in future not just be bailed out by taxpayers but take some of the losses themselves. This drove lenders to charge more for their loans to reflect their perception of added risk and increased the pressure on Ireland, where a run on its crisis-hit banks was essentially already underway as companies quietly withdrew their deposits.
Being outside the Euro-zone has allowed the UK the same flexibility in monetary policy it has used in the past to allow the pound sterling to depreciate against the Euro and other trading currencies in an effort to stimulate growth in the economy particularly from exports. However, a break-up of the Euro-zone would hurt not only the UK but also seriously undermine the current global recovery, given the major trade imbalances and talk of currency wars between the major trading nations.
Within the Euro-zone, Germany has followed through with its normal, correct economic discipline and maintained its competitiveness by only allowing its unit labour costs and pay per employee to rise by 10% or less from 2000 to 2009. Today, therefore, it is showing a healthy trade surplus as customers have continued to buy the German-made quality goods they value, despite the appreciation of the Euro. Over the same period, however, most of the problem-hit economies such as Greece, Spain & Ireland have allowed labour costs to rise by 20- 30% compared with Germany and are now suffering the consequences. Other European countries such as Italy and France have also lost significant competitiveness compared with Germany over the 11 year existence of the Euro. There is a need, therefore, for greater economic discipline by the weaker members of the Euro-zone.
If we consider the options, one view is that Germany cannot expect these very different but weaker economies to be able to emulate its own very low inflation, weak domestic demand and export driven model for the Euro, based on the Deutschmark experience. Germany, therefore, has to find a more middle way with its Euro-zone partners by reducing its current account surplus and stimulating its own domestic demand for imports, in an effort to generate more stability in the Euro-zone. Otherwise the only other solution would appear to be that proposed by Dominique Strauss-Kahn for more centralisation and fiscal consolidation within a viable single currency union, backed by a European federal budget to enable e.g. the poorer, less competitive regions to be supported by the richer ones, an option not likely to be popular with German voters (see Categories/Chairman’s Blog/Federal EU? In the right hand index column) or indeed the UK.
In the meantime, a monthly Reuters poll has 34 out of 50 economists questioned, predicting that Portugal will likely follow Greece and Ireland in requiring bailout funds. Already 10-year bond yields in Portugal and Spain are increasing rapidly, with Spanish banks also major holders of Portuguese bonds. The tension between the Euro-zone periphery and the core is then demonstrably clear with the German and French economies having been performing well, now indicating the case eventually for higher interest rates.

Social Welfare & Benefits

Mercredi, novembre 17th, 2010

The government budget cuts and the expected associated job losses particularly in the public sector, will put pressure on the social welfare budget due to the increased payments in unemployment benefits. This makes the recent announcement by Ian Duncan Smith of his proposed radical reform of the benefits system in the government white paper - Universal Credit: Welfare that Works - even more important.
This is another measure introduced under the umbrella of fairness. Put another way, the current system must seem unfair to ordinary working people on low to moderate incomes obliged to pay what appear to be high taxes to support certain people who, it is commonly believed, could work but choose not to. In Britain today some 7.2 million adults and children live in homes entirely reliant on benefit, according to the Office of National Statistics. In parallel the total welfare budget has increased by almost 40% since 1996 to £87 billion in 2009/10. Over the same period, some 4 million jobs have been created but 70% went to immigrants with unemployed British people either not able/qualified or not willing to do such jobs.
In essence the government is proposing a Universal Credit System which will bring together the existing work-related and out-of-work benefits into one payment by 2013/14. Disability living allowance and child benefit will not be affected by these measures. The aim is to ensure that people will always be better off working and better off for every hour worked, the latter particularly important in the case of part-time workers. It is also intended to reduce fraud and make claiming/paying out simpler & fairer, whilst applying sanctions where necessary to encourage the less responsive unemployed back into work (excluding of course the really vulnerable with disabilities, mental illnesses and other issues severely limiting their activities).
There will of course be problems, first of all from the current lack of opportunities in the job market. There will also be difficulties experienced by people trying to fairly administer the new system. By what criteria for example will a job offer be judged reasonable in the case of a claimant refusing to take it up? What evidence will be required to demonstrate a continuous and serious search for employment? The current economic downturn is also severely restricting the ability of job seekers to move to where employment prospects are better, when they find their homes are worth less than the mortgage (even in the United States where the job market has been traditionally more flexible due to the mobility of the American worker). It will be easier to log actual attendance at mandatory courses and serious application to the retraining opportunity presented. However, an efficient and countywide IT system would appear essential to back up all this effort and keep track of all the individual cases and any changes of location aimed at trying to circumvent the system.
There is talk of the development of a pernicious welfare culture which, together with the disappearance of the jobs associated with the old industrial base in the UK, has eroded the traditional working class family pride in gainful employment and increased the reliance on state benefits. Instead, many people seem to have no shame in claiming unemployment benefit whilst avoiding work or alternatively working in the black-economy whilst still claiming benefits. Such an attempt to reform the current unemployment benefit system which now supports nearly 2 million children growing up in workless households and at the same time detrimental to their general social mobility (see Categories/Chairman’s Blog/Social Mobility in the right hand index column), can only be welcomed.

Jobs in Biotech and R&D.

Mardi, novembre 16th, 2010

Continuing with the themes of job creation together with creative financing & where Britain has a competitive edge (see Categories/Chairman’s Blog/Fairness/ Job Creation & Creative Financing in the right hand column index), there are major players in the pharmaceutical industry with important Research & Development (R & D) facilities in the UK, such as GlaxoSmithKline (GSK), its biggest drugs company and the Swedish-British merger of AstraZeneca. However, job redundancies result when local research budget funds are diverted to other lower cost parts of the world e.g. GSK has now opened a research facility in Shanghai, China where there is then the additional prospect of major higher-value sales. The industry is also under financial pressure when governments worldwide are expecting to pay less for medicines to cut their health budgets and lucrative drug patents are expiring allowing competition to sell cheaper, so-called generic copies. Pfizer,the largest pharmaceutical company in the world, will now work with Biocon, the largest biotech company in India, to market “biosimilar” (i.e. genetic impersonations but not identical generic copies) insulin treatments designed and manufactured by Biocon. Here in France, Sanofi-Aventis announced the closure of four research facilities last year. The problem is global for the industry with the financial hurdles to successful medical drug innovation becoming ever higher and then the regulators to convince before final launch.
The UK is said to be one of the most conservative countries in Europe when regulating clinical drug trials and, with a separate body NICE - the National Institute for Health & Clinical Excellence – responsible for advising the NHS on drug supplies, considered one of the slowest adopters of new medicines. There is also not the final prospect of major sales in the local market. Indeed, GSK spent 39% of its R & D budget in the UK last year but the country only represents 5% of its worldwide sales. However, in an effort to become more efficient the industry is looking to focus internally on fewer areas and to also buy in other work from an increasing number of smaller Biotech companies, often backed by the big drugs companies themselves e.g. GSK with its 18% participation in Convergence Pharmaceuticals, a Cambridge Science Park start-up. This offers a potential source of financial backing for R & D scientists looking to launch new businesses in the field of biotechnology.
There is seemingly room for improvement in Britain which to date has been nowhere near as successful as e.g. the US in producing successful biotech companies. However, there is a market there in the major pharmaceutical companies for such products and the opportunity to exploit the innovative benefits of spreading such creative work over a much larger number of smaller laboratories, when the likelihood of coming up with something new could be enhanced. This is why it is important that the government is considering a so-called patent box to foster R & D in the UK. If introduced the system would provide tax breaks for revenues from ideas patented in Britain and, together with the right regulatory and economic environment, provide a boost for the development of more innovative companies and their associated jobs.

Creative Financing

Mardi, novembre 9th, 2010

Following on from the article on Job Creation & Fairness (see Categories/Chairman’s Blog/Fairness/Job Creation in the right-hand index column of the opening blog page), something further on the related development of the necessary private sector financing of job-creating projects for public services seems appropriate, when government funds are severely limited as in the austerity climate of today.
One method has been via the so-called Private Finance Initiatives (PFIs), when sources of finance such as banks & investment companies have got together with the required project management, planning, engineering, implementation and operating companies in consortia, and been contracted to Build, Operate and ultimately Transfer (BOT) back into full public ownership, key capital assets such as schools and hospitals. The private consortia are paid back over the operating life of the contract through interest on the investment capital and service charges on the operation; the benefit for the government is to reduce its front-end capital expenditure by spreading the payback over a number of years e.g. until 2041 in the case of the Coventry University hospital PFI. Indeed, by 2041 this hospital will have cost the taxpayer £3.3 billion in interest and service charges, according to Treasury figures, some 8 times its value today (as quoted in the Times of last Sunday).
Many of the over 650 of such PFIs in the UK were set up under Labour to fund the building of new schools and hospitals, using private sector money, to thereby reduce government capital spending at the time by diverting it to future generations of taxpayers, even in the then period of relative prosperity compared with today. It raises questions on the political motives of the government behind such building programmes, as well as their number and necessity during this period.
As Sir Philip Green suggested in his recent Efficiency Review (see Categories/Chairman’s Blog/Sir Philip Green/Efficiency Review in the right-hand column index of the opening blog page), the government needs to improve in its negotiations with the private sector. This can be particularly so in the case of such long-running contracts when e.g. the escalation clauses associated with the on-going service charges for operating a hospital complex, can sometimes lead to levels considered exorbitant over the long term. MPs have apparently, therefore, now formed a 50-strong cross-party group to try and renegotiate PFI contracts because of their total accumulating costs to try and secure taxpayers a rebate which could save up to an estimated £500 million. Although it is said that at the moment PFIs are contractually protected from government cutbacks, there is often the case of major companies in the private sector calling on their suppliers to reduce their contracted supply prices to them, when times are tough. Today there is even a secondary market trading in PFI equities with school and hospital ownership passing from one company to another and e.g. Innisfree the contractor for the Coventry University hospital is now the biggest owner of British schools after the government!
The above is not to say that the private sector should not make a decent profit; profitable companies are key for growth and job creation. It is also all too easy for the media to pick up and colourfully quote things the general public can relate to such as seemingly excessive service charges for items such as car parking for hospital staff, patients and visitors, hanging pictures and installing TVs, school computer equipment and desks etc. This can tend to trivialise the matter somewhat and cloud the overall issue. The government might also find this the case with its plan to put on-line for the general public, the annual budgetary spending details and progress against associated milestones (instead of the previous and so-called Labour targets) of its various departments, in order to reduce the role of central government and quangos. The announcement of the release of such a mass of detail to the media and an anxious, unhappy public (without sufficient selling of the idea in advance and rather akin to the approach for the Big Society - see Categories/Chairman’’s Blog/Big Society in the right-hand column index on the opening blog page), cannot be considered democratic management or a suitable substitute for the management responsibility of representative government.

Job Creation & Hope

Mardi, novembre 2nd, 2010

The Coalition government justifies its claim to fairness with respect to the effects of its overall cuts and tax rises (when also adding in the 50% upper tax rate of Labour) and it could also be said that progressively the top 2% of earners lose out most of all. Certainly there has to be a limit on how much the top earners are taxed before it becomes too much of a disincentive for both companies and individuals, effectively reducing overall tax take by perversely encouraging further tax avoidance schemes and relocation to more favourable tax regimes such as in Switzerland. Already the top 1% of earners in the UK contributes over 24% of total income tax paid, the top 5% over 43% and the top 10% over 53%.
The greater emphasis on cuts by the government (70%) compared with Labour (60%) has the opposition claiming a fairer approach to the public sector where the cuts will be felt in terms of job losses (although the planned increase in VAT will also hit private sector jobs if consumers reduce spending as a result). It is then all too easy for an opposition to say let us wait (until we are sure a fragile economy is really recovering), instead of facing up to the need for austerity to give the global financial markets confidence in UK government borrowing and its support for the critically important (to the economy) financial sector in the City of London. There is a corresponding human need to offer hope to those facing the prospect of unemployment by also growing the economy together with the accompanying job creation, noting that the wealth created by the private sector in a healthy economy is considered by economists as better able to support a public sector representing 40% or less of the total.
As a kick-start to growth David Cameron, in his speech last week to the Confederation of British Industry (CBI), has promised a £200 billion revitalisation of the road, rail, power and telecommunications networks in the UK. This also addressed the long standing complaints from the business community about the negative effects of such poor infrastructure on their operations. Since there is not much government money available for such grand projects, there is an associated plan to identify and overcome the obstacles to private investment to attract e.g. major sovereign wealth and infrastructure funds from the Middle East and Asia. Such funds, however, are wary of risk and the sale of the high-speed rail link between London and the Channel Tunnel provides a good example. Indeed the private sector consortium that started to build the link had finally to be rescued by British government funds in order to complete the project. Now the rail link is successfully up and running, pension and sovereign funds from around the world are bidding to buy it up.
Britain also needs to raise some £200 billion to spend on energy infrastructure just to meet its obligations under the Kyoto Climate Change Agreement and which would again create jobs. However, currently the initial £1 billion proposed by the government for the Green Investment Bank (to be established in 2013), to raise debt from the private sector by leveraging this taxpayer money when invested in green energy projects, is considered by experts as too small (in terms of mutual risk sharing when trying to attract private investment) and too late (by 2013) to make much of a difference. In addition, the Office for National Statistics (ONS) is concerned that such debt would have to be added to the National Debt. It has again been suggested that the renewable obligation tariff scheme for low-carbon technologies such as wind should alternatively be transformed into a low-carbon obligation instead. This would then provide for example the same support for private investment in nuclear power stations, where apparently there is still confusion in the industry over government policy. It seems though that the latest changes to the Carbon Reduction Commitment mean that the levies raised from big polluters will now go straight to the Treasury instead of funding bonuses to the better-performing companies, again not encouraging for the private sector.
The Prime Minister has also appointed Lord Young, the former Trade & Industry Secretary, to look into the problems facing smaller companies (Small & Medium Enterprises or SMEs) and e.g. how to make it easier for them to win government business or have more flexibility (compared with large companies) in not only hiring staff but also in reducing the number on the payroll when the level of business is down. Responding on BBC Radio to a question concerning the Efficiency Report on central government by Sir Philip Green (see Categories/Chairman’s Blog/Sir Philip Green/Efficiency Report in the right-hand index column), where Sir Philip is concerned that the government is not fully leveraging its purchasing muscle in offering its suppliers payment within 5 days when the commercial norm is 30 days or more, Lord Young considered government different from big business. This questions somewhat the overall purpose of the Efficiency Report. In this radio interview Lord Young did make the suggestion when asked about his ideas that e.g. for small businesses a single prequalification for a Local Authority could serve as a prequalification for all such entities across the country. In France there is a plan for the growth of employment in SMEs based on the American Small Business Act, in which regional government authorities would restructure their purchasing into separate types of business/industry lines, to allow SMEs to compete better with larger companies which have more resources. SMEs will also be supported when prospecting for export business in international markets.
Export markets provide opportunities for job creation in sectors where the UK has a competitive edge such as in financial services, advanced defence equipment, the creative industries, pharmaceuticals, design & engineering, fashion, comedy, the environment and the cream of its universities. Emerging markets offer the best prospects, accounting for one-third of the world economy but two-thirds of its growth. There is certainly room to grow business, the UK having exported in 2009 more to Ireland (£15.9 billion) than to China, India, South Africa, Russia and Brazil combined (£14.8 billion). One very visible and successful example of such a British company is Dyson with its efficient, modern and pleasing designs of top-of-the-range, bag-less vacuum cleaners, public hand-dryers and Air Multiplier fans. Dyson manufactures the products in Malaysia but is actively recruiting some 350 plus engineers for its design centre in the UK. In advanced semi-conductor technology there is also ARM an original start-up from the Cambridge University Science Park and still headquartered in Cambridge. ARM is now the leader in the design and licensing (but not the manufacturing) through a network of independent partners, of application processors for the fast growing market in mobile devices such as advanced smart phones and handheld/ pocket computers. It has 1700 employees, design centres also in France, India, Sweden and the US and makes its money from the licence for the original intellectual property, together with the royalties on every semi-conductor chip and wafer produced by its licensees.