The TaxPayers' Alliance - Burning our Money

Balls On Raising School Leaving Age

Balls in his last job

"Raising the participation age 'has potential economic benefits of £2.4bn per year group'

THE BIGGEST REFORMS TO EDUCATION, TRAINING AND SKILLS IN A GENERATION

Ed Balls and John Denham today published the Education and Skills Bill and outlined their plans to boost the skills and education of young people and adults... "

Thus begins today's propaganda release from the State Schools Commissariate on their disastrous plan to raise the school leaving age to 18.

Naturally, what caught our eye was the promise of economic benefits. The release says:

"Independently verified research also published today estimates the economic benefits of raising the participation age to be around £2.4bn per year group over the course of their lifetime. This is because staying on longer improves the skills and employability of young people and raises their earning potential."

Now given everything we know about the real world- disenchanted teenagers, dysfunctional irrelevant classes, intimidated teachers, large-scale truanting, etc etc- this "independently verified research" sounds incredible. We're very keen to read it.

Unfortunately, having Googled high and low, we can't find it. There are no links from the press release, and no links from the Department for Children, Schools and Families website.

We wonder why.

For the real facts on prolonging the agony of school, see this blog. There we discovered that the Local Government Association reckons raising the leaving age to 18 will entail set-up costs of at least £200m and ongoing costs of £750m pa. The latter includes £50m pa on "tracking, attempting to engage and enforcing the duty (including bringing any prosecutions)". What a dismal prospect.

The costs are certain.

The benefits are yet another helping of pie in the sky.

PS The non appearance of the paper hasn't stopped Balls getting the headlines he wanted, although in fairness, the BBC does put it in quotes- Staying on to 18 'boosts economy'. So they clearly haven't seen the paper either.

Hidden PIRLS

We slump to 19th

According to the Progress in International Reading Literacy Study (PIRLS), English primary school pupils have slumped in the international league table of reading skills. The authoritative study of 40 countries showed them falling from third place in 2001 to 19th place in 2006.

Yesterday Ed Balls blamed parents for allowing their kids to play computer games:

“Across the country we should be getting our kids to play computer games a bit less and to read a bit more. Most of them have their own TVs and mobiles, and 37 per cent are playing computer games for three hours or more a day."

You can't trust those parents with anything, can you. Thank goodness they're not allowed school vouchers.

But there were some very interesting bits in the PIRLS report that never made the headlines.

To start with, when Balls goes on about computers, he overlooks the fact that it was his government that really pushed computers into schools. One result is that they are now widely used in teaching reading: PIRLS says 32% of English pupils now regularly use school computers for reading lessons, three times the international average of 11% (table 6.6). Many experienced teachers always reckoned that unfashionable traditional methods involving human beings were far more effective. But the Commissars knew better.

And also according to PIRLS, most of those hopeless parents actually seem to do a cracking job in preparing their children for school. In England, 56% of primary children attend schools where at least 75% of them enter with good basic literacy skills. That's nearly three times the international average of 20%.

So how come they enter school with good literacy skills? Could it by any chance be down to the parents at home?

The big picture seems to be that most parents do a pretty good job with their kids up to school age. They then have to consign their heirs to schools which do a relatively worse job now than they did five years ago.

Brilliant.

Of course, there is another theory about why our schools are performing worse than they used to in teaching reading. And it's a factor not mentioned in the PIRLS report, or the mainstream media coverage.

According to Schools Minister Jim Knight, there are now three-quarters of a million immigrant children in English schools. And many of them do not have English as a first language. Worse, in places like Slough, increasing numbers can't even speak English when they first arrive in the classroom.

Which may go some way to explaining why PIRLS finds our rural schools performing so much better than our urban schools. A pattern which is the exact reverse of experience in other countries:

Of course, the mass immigration of the last ten years was also the result of government policy.

Ed Balls was quick to blame parents for the decline in reading achievement. The truth is that it's his education system and his government's policies that are the real culprits.

'Liberals' conspire against the Public Sector Rich List

This post by Gracchi on the Liberal Conspiracy website attacking the Public Sector Rich List has plenty of phoney 'gotcha' moments.  Fortunately, none of them remotely stack up:

"Firstly its noticeable that on their website, they claim the need for this survey because these public sector workers are paid so much more than teachers, soldiers and policemen. The politics of envy resurfaces and is evident in many of the comments! Such an argument presupposes a commitment of some kind to equality- and acknowledges the injustice of directors of the Royal Mail sitting in plush offices earning millions whilst soldiers sit in Basra risking their lives earning thousands. I’m not sure how that sits with the reductions in taxation that the TPA advocates elsewhere- nor am I sure that the only inequalities are within the public sector."

Let's look at the actual reasons why we said the Rich List was needed:

• "Transparency.  People and organisations that receive large amounts of taxpayers’ money should be accountable to the public they serve.  Taxpayers should be able to judge for themselves whether the remuneration of senior officials represents good value for money.
• Rewards for failure.  People in the public sector should be paid well for good performance.  But in far too many cases senior public sector officials are being paid over the odds for dreadfully poor performance, which in some cases would warrant a sacking in the private sector (see Table A1.2 for 10 examples)."

We did include the wages of soldiers, nurses and policemen in our report but as a comparison.  Some of the bigger salaries are so high that the numbers can almost become meaningless.  Just like the £101 billion of waste figure in the Bumper Book of Government Waste they need to be compared to something so that people can get their heads around them.

"Secondly they argue that the salaries of public officials should be justified- and they are right. Lets take Adam Crozier, chief executive of Royal Mail. He is paid a ridiculously vast amount of money, but he was recruited from being Chairman of the FA- and before that was a leading advertiser. If the TPA believe in the efficacy of private markets setting wages then Adam Crozier is probably being paid at about the market rate for a chief executive- and so are many others amongst these fat cats in the public sector. Ultimately the cause of the pay of the public sector fat cats is the pay of the private sector fat cats. If you want to get your hands on these types of people you have to pay these types of salaries. So if you want to take a look at public sector people being paid too much for these jobs, perhaps you have to either settle for rubbish directors (of which more in my third point) or you have to think about private sector pay scales."

Firstly, private sector Chief Executives often make far less than even the average in the Public Sector Rich List never mind Adam Crozier.  This was pointed out by Chris Dillow in his response to a Comment is Free piece making a similar point to Gracchi's:

"The Institute of Directors reports (pdf) that the  average managing director of a firm with turnover below £5m gets a basic salary of just £65,000. One with a turnover of £50-500m gets £141,440. These are decent professional salaries, but not a fortune. And the survey also finds that public sector bosses are already paid more than private ones, at least outside financial companies (which are managed so much better, of course)."

Of course, the Royal Mail is a big company and Crozier doesn't, necessarily, represent bad value.  However, the Royal Mail's performance this year has been far from brilliant.  Gracchi doesn't have the slightest clue whether he is being paid the right amount and the idea we should just trust the judgement of the Royal Mail's Remuneration Committee to get it 'right' is palpably ludicrous.

In the private sector when a senior manager is paid too much shareholders should be up in arms.  The revolt over Jean Pierre Garnier's deal at GSK is a classic example that should be emulated more often.  In the public sector the public need to fulfil that role.  They need to fight the temptation for public sector organisations to be run for the benefit of management instead of the public.  Our rich list allows them to do that.

"Thirdly, ah says my Taxpayers’ alliance friend- but the question is whether they have any impact on their organisations. But again that presents him with an ideological problem. Generally researchers for the TPA believe in hierarchy and hence in differentiated pay. There is lots of evidence, just have a look at Chris Dillow’s blog, that company directors don’t necessarily have an impact on their company stock’s performance- and its quite possible that the same thing applies in the public sector but again all the arguments in favour of or against hierarchy apply similarly in both sectors and hence all the arguments for and against large pay differentials and packets!"

The idea that because you believe some managers are good value you should believe all managers are good value is idiotic.

"The ultimate problem with this kind of Daily Mail politics is that in order to establish that well paid bosses don’t make the public sector any better off, the Taxpayers’ alliance would have to accept that well paid bosses don’t have any positive impact on any organisation. Otherwise they are arguing for poorer public services! (Or perhaps that equality is a moral good which trumps efficiency, but again is that a unique truth for the public sector!) All these arguments seem to me to rebound upon their owners."

This is full of non-sequiturs. Just because we think some public sector bosses offer poor value we don't have to be opposed to well-paid bosses in general.  Equally, just because we find big pay packets in the public sector alarming doesn't mean we have to in the private sector.  If a firm in the private sector pays its senior management way too much then they will be hurting their ability to compete in the market.  Public sector organisations, by contrast, are often monopolies and are paid for by money taken from a taxpayer who has little say in the matter.  They don't face the threat of creative destruction if they prove inefficient.

"In a sense this isn’t important- the list they did didn’t really make the national media."

This is utter leftie hubris.  I'm afraid a little boasting will be necessary to refute it.

The report got excellent coverage in the national media.  It was initially an exclusive for the Sunday Times who put it on the front-page, gave it two pages inside the paper and wrote a leader on the subject.  It was then covered by Sky News, BBC News 24, the Mirror, the Express, the Scotsman, the Times, the Telegraph, the Financial Times and the Sun - in many cases quite prominently.  It's hard to think of a recent thinktank publication that has had better national media coverage.

Finally, we had this in the comments:

"Of the top ten on the list, six cost the tax payer nothing at all.

Network Rail, Royal Mail, BNFL, and Channel 4 are not parts of the civil service. They are public owned market bodies. They earn their revenues from business activities, and they pay their from those revenues.

So what do they have to do with the tax payer’s alliance?"

These are organisations either owned or heavily subsidised and guaranteed by the taxpayer.  If they go belly up we will wind up with a hefty bill to pay.  Every penny the Royal Mail pays to Adam Crozier is a penny that will not contribute to the Royal Mail's return on the taxpayers' big investment in owning Royal Mail.

Gracchi's article is a mish-mash of simplistic assumptions and clumsy logic that can't stand up to the slighest scrutiny. 

Non-job of the week

An article in today’s Guardian is suitably entitled “the business of governing is much harder that we would like to believe”.  Although on a completely different topic to what you will read here, it strikes a note especially when you cast your eyes over our non-job of the week.  We’ve chosen a set of “welfare rights” jobs from Lambeth council:

“Welfare Benefits Project Officer
£30,018 – £32,094

Lambeth is building a team to ensure that vulnerable people in the borough get access to welfare benefits advice. If you are passionate about maximising income for vulnerable people and you have excellent skills and experience in welfare benefits work, then this could be the job for you.

This is one of three posts that will work on our new campaign, funded by Lambeth Council and Lambeth PCT, to improve benefit take up. The campaign is called Every Pound Counts and is part of Lambeth’s Local Area Agreement. It is delivered in partnership with local advice agencies and targets older people, people living with ill health and disability, and their carers, including families caring for disabled children.

This is a key role supporting Lambeth in achieving its Local Area Agreement stretch target for benefits uptake. Working with voluntary and statutory partner organisations to ensure excellent co-ordination of benefits support to clients, you’ll project manage the take up campaign. Activities will include monitoring the contracts with local advice agencies, working on the campaign and developing and delivering a programme of outreach and publicity activities.

We are looking for someone with experience in welfare rights advice, managing contracts with voluntary agencies, and presenting and producing information for a variety of audiences at all levels.

Successful candidates will be asked to apply for an Enhanced Disclosure from the Criminal Records Bureau. Further information about the Disclosure can be found at www.disclosure.gov.uk and in the application pack.”

The objection to this job isn’t that it’s providing benefits; it should form as a critique of the complexities within our government.  Referring back to the title of the Guardian article I mentioned at the start, government doesn't have to be as difficult as it is.  Vulnerable people shouldn’t be dumped in a state of confusion within a complex benefits system.  Our taxes shouldn’t be employing bureaucrats to solve a problem created by government in the first place.  Not only are we employing (yes, us, it’s our money) bureaucrats to help those befuddled by the system, but we’re also financing overpayments officers because sometimes the benefits officers get beat by the system too.  Talk about two wrongs making a right…

The solution, clearly, is a simple tax and benefits system.  It’s not as if alternative ideas aren’t out there.  Look at the flat tax phenomenon gripping and propelling the former Eastern bloc into the developed world.  Charles Murray’s plan to replace the Welfare State creates a national minimum whilst doing away with whole swathes of public sector bureaucracy.  It’s becoming a regular feature in debate on this to raise the personal threshold where one starts to pay income tax.  The ideas are out there and we clearly have to change the way our benefits system works.  The complexity burns more of our money whilst leaving vulnerable people in a dire situation.  The cost of a complex benefits system takes funding away from frontline services.  The long run implications of an ever-increasing public sector pay roll will be to swell the size of the state as well as higher tax bills.

Please make this point to the leader of Lambeth Council, Cllr Steve Reed, and ask him what he will do to lower council tax bills in Lambeth. 

Also get a local debate started, send your letters to:

South London Press
2-4 Leigham Court,
SW16 2PD
Email: newsdesk@slp.co.uk (please make your subject ‘for the attention of Hannah Walker re: letter to the editor’)

PFI Millstone

Just stick your head through the hole

Anyone who's ever had building work done knows the Golden Rules of value for money:

1. Get at least three fixed price quotes in writing
2. Make sure they cover all the required work in full
3. On no account alter your requirements once you've hired your builder

Simple, aren't they.

A shame that the Private Finance Initiative doesn't follow them. Especially as PFI is so much more permanent than a here today, gone tomorrow, kitchen extension. Your builder comes, builds the extension, gets paid, and leaves. But the PFI contractor comes, builds the hospital, then runs its "hotel facilities" for the next twenty five years, with taxpayers making an inflation linked payment to him every single year. Mistakes today will be a millstone round our necks for the next 25 years.

And there are now 800 of these contracts, committing taxpayers to total payments of £155 billion over the next 25 years. Which is a lot of money on which not to be getting value.

We've blogged the PFI money-pit many times (eg see here), but the Public Accounts Committee has just given its update on how things are going. And against those Golden Rules, the news is not good:

• Since 2004 the proportion of PFI deals attracting only two bidders has more than doubled - to one-third - with the risk of no competition at all if one bidder is weak or drops out
• One third of public sector teams made changes to PFI projects after they had selected a single, preferred bidder
• The average tendering time for projects is nearly three years, deterring bidders and costing taxpayers more- delays to projects cost us at least £67 million
• Prices for contracted "soft" services (such as catering and cleaning) often get increased during the contract period (by up to 14% so far- and that's on top of the inflation-linked increases already factored in)
• Services are being reduced to contain costs- ie we're getting less for the money

And why's it such a mess?

Partly, it's because private sector suppliers increasingly wary about dealing with our indecisive, half-baked public sector (see this blog on Shunning the Simple Shopper). But more fundamentally:

"There is a continuing lack of PFI skills and expertise across the public sector, particularly in local authorities, NHS trusts, and other locally-based teams where officials are usually encountering PFI negotiations for the first time... Good negotiating skills are essential if public sector officials are to secure good deals from private sector counterparts who are usually experienced in developing and managing PFI projects."

In other words, the same old Simple Shopper story: taxpayers picking up the tab for being represented by incompetents. And we're on the hook for at least the next quarter-century.

There's one other point to highlight for future reference. During the PAC hearing, the inestimable Richard Bacon tried very hard to make the Treasury mandarins tell us how much debt PFI now represents. This is something we've wrestled with on BOM, but it has been treated by HM Treasury and Brown as a state secret, shrouded in Enron accounting obfuscation.

Here's the transcript of how Bacon got on:

Q101 Mr Bacon: I have been trying for several years to get to the bottom of how big is PFI, and it seems to be quite difficult to get an accurate answer. I have been told by various people, including by the National Audit Office, answers such as, “Well, really they do not know.”... you must have some notion of what is the likely amount of debt to arise there from going forward?

Mr Pocklington: The total stock of PFI projects has a capital value of approximately—

Q102 Mr Bacon: We have been through that. £54.55 billion, although if you look on your website it is actually now £58.067 when I printed that off this afternoon, so it has gone up by about £4 billion since you sent your note in...

Mr Pocklington: Table C19 from the Budget document includes our latest estimate for the years 2006-07 to 2033-32 on an annual basis.

Q108 Mr Bacon: If you add it all up what do you get?

Mr Pocklington: We have not published a number and I am afraid I am not able to add them up here...

Q111 Mr Bacon: Mr Pocklington, can you just give me, because funnily enough I have got a calculator, the numbers please?

Mr Pocklington: From 2007-08?

Q112 Mr Bacon: Yes, read them out. I will put them straight into my calculator and this will save us time.

Mr Pocklington: 7.3, 7.8, 8.2, 8.5, 8.6, 8.7, 8.8. etc etc

Q120 Mr Bacon: That comes to £157.9 billion. Is that then a rough proxy for the answer to my first question, Mr Stewart?

Mr Stewart: I think that is the liabilities accruing under PFI.

Q121 Mr Bacon: That is what I am interested in.

Mr Stewart: That is not equivalent to the debt.

Q122 Mr Bacon: Right, so the debt is something different?

Mr Stewart: The debt relates to the capital element so the unitary charges include payments for soft services.

Following the meeting, HMT eventually came up with this Sir Humphryesque statement:

"The total, if one were to add together these future and non-comparable figures without applying any appropriate adjustments, would be £170.8 billion. However, I must emphasise, as I already have to the Committee and to Mr Bacon, that this number has no meaning. To add together a figure in today’s money to a figure in the money of 2030, without making any adjustment for the changing value of money over time, produces a nonsensical number.

A more meaningful exercise would be to take the stream of future payments set out in the table and to aggregate them as a net present value. If one were to do this one would end up with total future payments under the PFI measured in today’s money which aggregate to £91 billion. The discounting methodology applies the Green Book rate of 3.5% to account for time preference and a discount of 2.8% to account for inflation. These two elements are compounded to give an overall discount rate of 6.4%. The inflation figure of 2.8% is HM Treasury’s projection for RPI inflation consistent with CPI inflation remaining at its 2% target."

So now we know. According to HMT, PFI debt may amount to £91bn (although since that ignores all payments beyond 2031-32, we should probably call it £100bn). That compares to BOM's most recent calculation of £90bn, and our updated guesstimate of £100bn. Looks like HMT has cribbed our figures. If they want any more help, we'd be glad to oblige.

PS The CBI has also commented on the poor contracting skills of public sector PFI clients: "In a survey of PFI contractors, the business lobby group found that changed orders, delays and added costs were common. In answer to a question as to what respondents' companies have experienced from the PFI, 69% said they had experienced changed specifications by the contracting authority before contracts were signed; 49% said they had experienced changed specifications by the contracting authority after contracts were been signed; 78% said they had experienced avoidable delays on the part of the procuring authority; and 76% said they had experienced higher than expected bid costs."

Family Silver Going Cheap

OK children- I'm going to explain how not to sell a company

We've blogged before about selling the family silver. In the Earl of Stockton's immortal words:

"First of all the Georgian silver goes. And then all that nice furniture that used to be in the salon. Then the Canalettos go."

Very distressing for all concerned. But even more distressing when you let it go too cheap.

We've just had the National Audit Office report on the bungled sale of QinetiQ, previously the Defence Evaluation and Research Agency (DERA). It confirms our worst fears- taxpayers lost a packet.

Briefly, in 2003 the government sold a stake in QinetiQ to private equity players, the Carlyle Group. Their job was to act as a "strategic partner" to help get the company ready for floatation on the stock market. That duly came in 2006, when Carlyle sold its stake for a large profit.

The NAO's headline findings are these:

• Carlyle got in too cheap, or in NAOspeak, "we consider that more money might have been raised from the 2003 sale to Carlyle, which generated total proceeds of £155 million" (para 13)... "weak competition (see paragraph 2.10) and the negotiated reductions in value (see paragraph 2.26) suggest that greater proceeds might have been achievable from the sale to Carlyle" (para 4.12)
• MOD bungled the sale by failing to agree a key longterm contract with QinetiQ before appointing Carlyle as preferred bidder (cf Virgin's appointment as preferred bidder on the Crock); because of that and other loose ends, Carlyle was able to beat down the price by £55m from their initial valuation after becoming preferred bidder (para 6)
• Senior management got far too much gravy - huge helpings of equity were made available to senior management in a juicy incentive scheme developed by Carlyle, with virtually no input from MOD (see below); in NAOspeak "we consider that the returns in this case exceeded what was necessary to incentivise management" (para 9)
• Wild inequity between taxpayers and "partners" Carlyle- "We have calculated that the Department made a notional internal rate of return of 14 per cent from the privatisation" (para 14).... "Carlyle made an internal rate of return of 112 per cent on their investment in QinetiQ" (para 15)

In other words, the catastrophic combination of politicos keen to raise some dosh, and bureaucrats incapable of commercial implementation has once again cost taxpayers a packet

Their dire performance is really underlined when you read the NAO's recommendations to avoid future problems. They are such statements of the bleedin' obvious that you'd blush to mention them to a six year old. Eg:

"If marketing activity demonstrates that there is limited interest in the opportunity, the public sector should reconsider the timing and structure of the proposed deal. In the public sector the impetus is often to press ahead in difficult circumstances rather than to attempt to maximise proceeds. It is not unusual for private sector deals to be postponed if the market is less favourable than anticipated."

Well, who could possibly have known that?

Clearly, MOD had no idea whatsoever about normal practice in the real world, and in all probability nobody was interested in finding out. The job was not to maximise taxpayer value but to satisfy Whitehall's asset sale target. Whatever the cost.

As for those laughing-all-the-way-to-the-bank senior managers... just like Cedric the Pig and the other civil servants who cashed out when the utilities got privatised, the boys at QinetiQ had the luck of Larry. Not only were they sitting in the chairs when the music stopped, defence and tech stocks performed extraordinarily well between them getting wedged and the floatation. Here's the NAO's table of who got what between the 2003 sale and the 2006 floatation:

As we can see, Carlyle made £332m and the executive directors made gzillions. CEO Sir John Chisholm creamed off £26m, a return on his initial investment of 19,900%. Nice work if you can get it.

So much for the grisly facts, but there's another very interesting aspect of this report. For the first time in living memory, the NAO has produced a report in which it records a serious disagreement between itself and the department under scrutiny.

Whitehall convention has been for the NAO and the department to lock themselves in a smoke-free room until they can agree a "form of words" to appear in the report. In effect, it's a joint report. That can be helpful because it means the PAC doesn't have to waste time trying to pin down the facts. But of course, the danger is obvious, and more than once, the truth has been smothered.

We saw that most dramatically in the case of last year's NAO probe into the NHS Supercomputer, when after a bitter Whitehall fight, the Department of Health nobbled the NAO report (see this blog). And the NAO has picked up a lot of flak about it ever since (eg see the Peter Oborne vid here).

Now, with Sir John Bourn on the way out, it looks like he's decided to throw cozy convention to the wind. Try this:

"4.12 The Department considers that its strategy to introduce a strategic partner maximised overall value and that seeking to achieve greater proceeds from the initial sale could have lowered eventual receipts. We recognise that the strategic partner model had benefits in improving the value of the business in advance of a flotation. We consider, however, that weak competition (see paragraph 2.10) and the negotiated reductions in value (see paragraph 2.26) suggest that greater proceeds might have been achievable from the sale to Carlyle. The Department and UBS Warburg disagree with this assertion. Various other indicators support our view."

The NAO's view is backed by a detailed analysis, including a revaluation of the company at the time of sale, subsequent performance relative to the market sector, and the fact that the net assets of QinetiQ were sold for less than their fair book value.

The MOD's response?

"The Department does not accept that the book value of QinetiQ at incorporation is a robust measure of the value of the business at that time and considers that it is not possible to derive an accurate estimate of the return it has achieved over the whole privatisation." (para 4.13)

It is not possible to derive an accurate assessment of the return it has achieved. Just think about that for a moment.

In effect, the MOD is telling us it sold an extremely valuable taxpayer asset to the private sector without having any idea what it was worth.

Would you do that?

Would a six year old child do that?

No, of course not.

But in Whitehall it's par for the course.

In the case of QinetiQ, MOD gave away £400-500m that rightly belonged to taxpayers. Yet nobody has been fired or resigned.

On 3 December, the PAC will be grilling MOD officials. We're booking our place now.

Virgin On A Solution?

So Sir Richard Branson is about to tow away the Crock. Hurrah! Getting that thing off the front lawn will be a load off everyone's mind.

Although... is this by any chance the same Sir Richard who's famous for being one of Britain's very sharpest entrepreneurs?

Hmm.

According to today's Update on Strategic Review put out by Northern Rock, taxpayers will remain committed even after Virgin takes over. True, Virgin will repay £11bn of the Bank of England loan immediately, but that will still leave £13bn plus outstanding. And we will rank no higher than the commercial banks backing Branson (who may very well be on other sweeteners to ease their troubled minds).

How quickly will we get the rest back? And what happens if the bank gets into difficulties again? What happens in a world of falling property prices? And what happens if it can't attract new deposits without that Bank of England guarantee?

That second point could be very important. Northern rock currently offers some very attractive interest rates to depositors- their Silver Saver instant access account pays a market leading 6.3% and is fully guaranteed by HMG.

But we know that unsecured Rock debt is currently rated as junk. Specifically, its credit rating for senior debt without the HMG guarantee is BB, a junk bond rating.

Now there are all kinds of reasons why you might want to invest in junk bonds, but only if you get paid for taking the risk. As we've blogged before, bank deposits are unsecured senior debt, and 6.3% is most definitely not being paid to take the risk (cf this sleep-at-night Halifax account on 6.25% ).

So as soon as the HMG guarantee goes, a lot of the remaining deposits may well walk out the door.

Of course, Virgin and their backers are aware of this risk. They are going to inject some new capital. The NR Update says it will be £1.3bn, plus the £250m current value of Virgin Money, which will be folded in. Call it £1.5bn, of which £650m will be raised via an issue of new shares at 25p each. Acccording to the Update:

"The Virgin Consortium expects that the Company will quickly re-build a deposit base to drive a more sustainable funding structure and is targeting a credit rating of no less than 'A'."

Single A? Halifax (HBOS), for example, is a strong AA, much more comforting. Why would a rational depositor leave money with a Branson owned, single A targeting, recovering Crock, when she could get virtually the same interest rate from Halifax?

That's right- she wouldn't.

Our guess is that Virgin will find it difficult to rebuild the deposit base. Unless of course, it offers some pretty racey rates. But that undermines profitability, which is not at all what Branson and his backers will have in mind.

So how long before we get the money back? The Update says virtually nothing:

"£11 billion will be repaid to the Bank of England at completion of the transaction - and the Bank of England will have a clear path towards repayment in full."

The reality is that the clear path will meander on for many years. Meanwhile taxpayers will continue to underwrite the enterprise with an open-ended loan commitment. And under the Virgin plan, our loan will be at market rates, not even the penal rates charged up until now.

Good luck to Branson- he's certainly got nerve.

But we taxpayers should not presume the pain is over.

Not by a long chalk.

Weekly Waste Watch 82

Champagne bureaucrats

In the lavish expenses news this week:

Met chief spends £15 grand on drinkies- "Andy Hayman, the Metropolitan police anti-terrorism chief, has been questioned over thousands of pounds spent on hotel expenses and drinks for his staff. He has been asked to explain at least £15,000 expenses that included claims for “inordinate amounts” of drinking with colleagues. “Apart from the money, what happens if they are all out drinking when a bomb goes off?” said one Met official. The married father of two has been quizzed about his relationship with Sergeant Heidi Tubby, his former staff officer. Tubby is said to have accompanied him on foreign business trips at public expense." (Sunday Times 25.11.07)

£330 grand for MOD ducking stools and champagne- "DEFENCE officials entrusted with ensuring troops are properly equipped in Iraq and Afghanistan have spent £7,000 to go on a team-building event, featuring hot tubs, ducking stools and celebratory glasses of champagne... the Defence Equipment and Support division has allocated £330,000 for civil servants to go on courses." (Sunday Times 25.11.07)

Regional quangos blow £8m on boonies- "Nine regional development agencies... free-spending habits are revealed in documents obtained under the freedom of information (FOI) act, which show that expenses claims reached £8m (read the documents: click here and here). Eight of the nine development agencies decided it was essential to send a contingent to a property trade fair in Cannes. Seeda took 13 staff to Mipim, a four-day event based in the Palais des Festivals, spending £24,000 on dinner, brunch and other events at the exhibition. Meanwhile, the LDA flew in 14 people, allowing staff to stay at four-star hotels. The South West of England Regional Development Agency spent £61,000 at Mipim and the body promoting the West Midlands held an £8,000 cocktail reception in Cannes. Claer Barrett, managing editor of Property Week magazine, said Mipim was “basically a four-day party” with “loads of lobster and champagne” on yachts. Staff at Yorkshire Forward had an even more glamorous assignment: to mix with Hollywood actors, including Jean-Claude Van Damme, and Bollywood stars such as Preity Zinta and Shilpa Shetty, at the International Indian Film Academy weekend in Dubai in 2006. It cost £20,000 to fly 15 staff, 10 of whom flew business class, to the four-day jamboree." (Sunday Times 25.11.07)

Quango chief spends £50 grand pa on taxis and limos- "THE part-time chairman of the quango that promotes the southeast of England to business spent more than £50,000 on taxis and chauffeur-driven cars last year. James Brathwaite, who chairs the South East England Development Agency (Seeda) on a three days per week contract, spent £51,489 on taxis and “executive cars". (Sunday Times 25.11.07)

Defra books into £310 hotel rooms- "GOVERNMENT officials sent to contain the avian flu outbreak have enjoyed the luxuries of some of Suffolk's most prestigious and expensive hotels it has been revealed. Critics have rounded on the Department for the Environment, Food and Rural Affairs (Defra) for spending thousands of pounds housing staff at The Ickworth, describing the move as a “grotesque extravagance”. Standard double rooms for bed, breakfast and dinner at The Ickworth, near Bury St Edmunds, cost £310." (Evening Star 23.11.07)

£1.4m Home Office art fiasco- "An annual competition would invite members of the public to describe, in 150 words, what it means to be British. The winning entries would be engraved on the pavement outside the Home Office in Westminster. Yet four years after the "artwork" was dreamed up, at a cost so far of more than £18,000... only three stones have so far been engraved, and the words are almost unreadable. No work has been done for the past 12 months.... Funding has come from a £1.4 million budget for artworks in and around the Home Office's £311 million Marsham Street headquarters, which opened in 2005... This is the second art project to run into trouble at the building... a £125,000 deal to buy a six-storey high abstract sculpture by Eva Rothschild collapsed because it was too heavy to hang in the building's atrium." (Sunday Telegraph 25.11.07)

Total for week- £9,795,310

Brown's Blunderbuss Blows Up

Those HMRC staff cuts

Yes, the PM can blame the junior official who downloaded the data and sent the discs through the ordinary mail. But come on. How on earth was it possible for him to do it? What's to stop a criminal gang member getting a job round at HMRC and just helping himself? How do we know it hasn't happened already? The entire set-up is a shambolic disgrace.

And from what we know so far, it looks like a major factor was the impact of staff cuts. As HMRC's Annual Report shows, since 2003-04, the department has cut over 10,000 staff (net, full-time equivalent), with a further 2,500 going this year.

These cuts are part of the Gershon "efficiency" programme, very familiar to regular BOM readers, and the personal idea of one G Brown. It was his blunderbuss scheme to make government more cost effective by cutting spending and staff so as to "release resources for the frontline".

He launched it amid much fanfare in the 2004 Budget, with the following ambitious targets:

Right from the off, it was a classic top-down exercise visited on departments, with very little practical idea how the cuts could be achieved down at ground-level. So right from the off, departments used every trick in the Sir Humphrey playbook to deliver their targets without necessarily making real cuts. Which is why BOM has always been very sceptical about the overall savings (eg see this blog, and many others).

Since 2004, in every budget and pre-budget report, we've been given an update on supposed progress. By October this year, according to Darling's Pre-Budget (pre-aborted election) Statement, the Gershon programme had delivered "annual efficiency gains of over £20 billion... and is on track to deliver the goal of £21.5 billion by the end of March 2008". Moreover, there have been "gross reductions of over 79,000 civil service and administrative and support related military posts towards the target of 84,150, with over 13,000 of these reallocated to frontline roles" (para 3.28).

But according to the Public Accounts Committee, based on the most recent National Audit Office probe (see this blog), only one-quarter of the reported cuts are "reliable". By implication, the rest are a figment of the commissars' fertile imagination.

So on that basis, of the claimed £20bn savings, real savings are only about £5bn.

But even those "savings" have come at a considerable cost in terms of service quality. For example, the PAC found that "savings" at the Department for Work and Pensions had increased the average time taken to process Jobseeker’s Allowance claims from 11 days to 16 days. And the Department of Health, while reporting over £1 billion of efficiency gains from reducing the average length of time patients stay in hospital, had taken no account the fact that emergency readmissions had risen consistently.

The very worst cases have been where cuts have been imposed in areas already struggling with other changes.

For example, last year, we had the fiasco at the Rural Payments Agency (eg see this blog). There, a quango was attempting to develop and implement a brand new, highly complex, and IT-intensive farm payments system, at the same time as Gershon cutting 45% of its staff (see this blog). The combined effect was disastrous. RPA staff were reorganised into specialisms, rather than the previous "case-working" structure, because that seemed to be more efficient. But it meant that there was no fallback when the new IT systems failed. The old experience and knowledge had simply been discarded.

And taxpayers had to pick up a big tab to put things right- around £0.6bn, including a £436m fine from the EU for failing to meet their deadline (see this blog). In other words, the Gershon "savings" ended up costing us money.

And now we have HMRC.

As we blogged yesterday, the problem goes beyond a simple matter of staff cuts. Just like at the RPA, there are also new IT systems, and there are new "lean production" work patterns being imposed- less case working, and more specialisation (aka dumbed down production line jobs). It's a toxic combination, and staff morale is rock bottom (there is a dedicated chat room for HMRC staff called Disgruntled Lemmings- mysteriously "unavailable" at present).

Now, as taxpayers, we naturally applaud any sensible moves to make government more efficient. But imposing arbitrary staff cuts ahead of securing the IT systems required to support them is a recipe for disaster. And a shortcut to even higher costs.

Let's just think the unthinkable. Let's suppose these data discs have fallen into criminal hands. What will it cost us?

The going rate for bank account details on the international crime market is reportedly around £200 each. We don't know how many of these lost 25m records include bank accounts, but given what we do know, 5-10m seems a reasonable guess. Which means the black market value of these two discs is an extraordinary £1bn - £2bn.

But if their black market value is £1-2bn, you have to believe the likely loss from bank accounts is a multiple of that. We have no idea what multiple, but five-times is as good a guess as any other. Which means a bill of £5-10bn. A ten-times multiple means £10-20bn.

And who do you think will pay? It won't be the banks, despite the impression Bottler and Darling have sought to give. It will be us taxpayers.

And the cost doesn't end there. Everyone will need a new bank account (if you've been claiming Child Benefit in the last five years and haven't switched yet, do it tomorrow). Everyone may need a new National Insurance number. And for the next 18 years children hitting 18 will need to check their credit records to make sure someone isn't applying for credit in their name.

And we taxpayers will have to make good all the losses. Which will hugely outweigh the savings made from the Gershon cuts.

You know, it may be time we stopped politicos playing with blunderbusses altogether.

Non-job of the week

Melting ice caps?  Drought?  Global Warming?  Fear not because Southwark Council are coming to the rescue.  Feel free to roll your eyes at yet another local government non-job using taxpayers’ money to appease a guilty conscience.

Southwark Council this week have four jobs aimed at ‘tackling’ climate change.  I use inverted commas precisely because these jobs will hardly tackle climate change.  More likely these jobs will preach from Al Gore’s green handbook all the while diverting scarce resources from frontline services, listed on the Southwark Council website as street cleaning, flood defence etc. 

Previously we’ve had these green jobs as our non-job of the week because local government won’t stop greenhouse emissions or the like when China is building a coal power station every week. 

So our non-job of the week comes from Southwark council:

“Sustainable Learning Manager
£27,807 - £32,961

Are you ready to conduct detailed analysis and drive high profile projects against climate change? Can you build on the track record established by our Energy Team?

Leading and inspiring a number of Sustainable Services Officers, you will bring our Education for Sustainable Development Strategy to life. This will involve overseeing educational provision within schools, building positive relationships with Junior Streetleaders and “Young Friends Of…” groups and engaging young people from every walk of life to share your passion for environmental issues. So as you can imagine, we need a real self-starter with a great personality and the ability to devise learning experiences that are fun, involving and closely linked to the National Curriculum.

Working with communities, hard to reach groups and external agencies should be second nature to you, and you will be capable of producing world class publicity material, managing high profile initiatives and controlling significant budgets. Most importantly, you’re an innate leader with everything it takes to encourage recycling, responsible waste management and the cultivation of biodiversity – and you’re ready to make your mark from day one.”

Just for comparison sake, a band D property in Southwark pays £1,180.94 council tax a year.  Are you in Southwark, are you getting value for money?  Let us know by leaving a comment below or contacting us.

Also get involved, write to the Southwark local paper and tell them we want our money put to local services, not green ‘education’:

Please send your letters by:
Post: Unit A302, Tower Bridge Business Complex, Clement's Road, London, SE16 4DG
Email: letters@southwarknews.org
Fax: 020 7237 1578
All letters should include a street address.

Equality Shambles

Worth £300 grand of anyone's money

We've blogged the state equality industry several times. In particular, we looked at the amalgamation of the Commission for Racial Equality, the Disability Rights Commission, and the Equal Opportunities Commission, to form Labour's new super equality quango- the Commission for Equality and Human Rights (CEHR). It's time for an update.

As predicted, the chairmanship went to Labour insider Trevor Phillips, and the whole thing finally kicked off on 1 October.

And also as predicted, it's been an expensive shambles.

To start with, Phillips didn't like the name- the Commission for Equality and Human Rights. So he changed it. To the far more expressive Equality and Human Rights Commission. Obviously all the old CEHR branded stationary, calling cards, ballpoints, souvenir back-scratchers etc had to be sent to landfill, and a whole new lot of EHRC branded stuff ordered up. But hey, you've got to get this important stuff right.

Cost? We've no idea, and it's a fair bet they haven't either.

But we do know how much was spent on the branding itself, because the figures were given to the House of Commons Communities and Local Government Committee (see report here). It was a third of a million quid, paid to an outfit called 35 Communications. Presumably they were the ones who came up with the new logo, shown above.

(No, honestly, that's it. Geddit?)

The Committee also highlighted the shambolic and expensive way the three separate quangos were banged into one.

Naturally, consultants were hired to tell them what to do: Ernst & Young, who charged £0.5m for the pleasure. But they were hired before Phillips arrived on the scene, and were reporting to a gentleman by the name of Patrick Boyle. Boyle was the CEHR transitional programme director, put in post in 2006 to make sure the new organisation could hit the ground running.

But when Phillips was appointed earlier this year, he didn't want that. He wanted his own consultants. So he fired Ernst & Young and hired Towers Perrin instead. At a further cost of £0.4m. Oh, and he "exited" Boyle as well.

So the new quango started operations with packing cases strewn all over the floor and many of the posts not permanently filled. Even though they'd had a whole year's lead time. The Commons Committee reported in August:

"It is deeply disappointing that the responsible Minister could, with less than four months left before its launch, offer so little information on the extent to which the Commission will be operational at the time of its launch. It is indicative of a significant failure to manage the transition process.

... indecision, instability and delays in Government’s management of the transition have undermined the ability of the Commission to deliver effectively from day one."

And then of course, having dug that hole, Phillips and his equality quangocrats flip-flopped into digging the other- rushing to appoint just to get the slots filled.

The appointment of a head for the Welsh branch is a case in point. According to the Western Mail:

"THE new “super body” for equality issues undermined its own remit by setting up a panel of three white women to pick its director for Wales.

Kate Bennett, the former director of the Equal Opportunities Commission in Wales, was appointed early last month to an equivalent post with the CEHR.... It has emerged that the interviewing panel which appointed Ms Bennett was composed of three white women...

A CEHR spokeswoman said... “The speed at which we are having to recruit, in particular over the summer months, meant we were not able to assemble as large and diverse a panel as we would have liked."

This all seems to have gone down very badly in Welsh equality circles, with mutterings about Ms Bennett's previous track record, and Phillips' "control freakery". In fact, there's a brand new blog devoted to exposing the full horror: =Real Equality=.

Real Equality also points out that, while the equality quangos have all been banged together under Trev, equality reponsibility at ministerial level is still all over the place. Yes, there is the brand new Government Equality Office (GEO), under Harriet Harman, and that is the sponsoring department for Phillips' EHRC.

But only "gender and sexual orientation are under GEO: race and belief are staying at the Department for Communities and Local Government (or “handling extremism” as Blears puts it), and disability is staying at the Department for Work and Pensions. Age? Who knows!"

So despite all that waffle about a unified approach and a single Equalities Act (still somewhere in the long stinging nettles), it's yet another dog's breakfast of indecision and muddled reponsibilities.

And what's it all costing taxpayers?

Well, Phillips' annual budget kicks off at £70m pa, plus £24m set-up costs (covering among other things the £3.5m so far spent on consultants).

But as we all appreciate, that's just the tip of a very large iceberg.

Subordinated Taxpayers

Junk bonds at least give you a nice certificate to hang on the wall

So following Darling's statement on Northern Rock this afternoon, are we any the wiser?

Not really- "it would be quite wrong to dismiss any option now without proper consideration as some suggest," doesn't really tell us anything.

More to the point, are we all up to speed on subordinated debt?

Because as taxpayers, it looks like we need to be.

In the event Northern Rock goes into liquidation, we will be waiting in line with all the other creditors. Hoping the liquidators can raise enough from selling NR's assets to pay us all out. Our problem is that not all creditors are equal. Some have claims that rank a long way ahead of ours.

At the top of NR's claims tree are the secured creditors. They are people who've lent money specifically secured against a chunk of those high quality mortgage loans we've heard so much about.

Now, Darling tried hard this afternoon to leave us with the impression that all of our exposure is of this kind- debt secured against "quality assets". But that's not true.

First, we need to note that because of the way NR funded itself in the wholesale money markets, a large chunk of its mortgage loans have already been pledged as security against market borrowing. Those mortgages have been ringfenced, most via NR's complex offshore financing vehicle Granite, for the benefit of investors in its Medium Term Notes. Others have been assigned to a presciently constructed "bankruptcy remote special purpose vehicle" as security for NR's Covered Bond programme.

How much of NR's mortgages are so pledged? In its mid-year report, NR said it had £54bn of such secured borrowing, implying that over 60% of its £87bn mortgage loan book was pledged.

Of course, we don't know what's happened since then because we taxpayers have been kept in the dark. But those who've seen the leaked sales memorandum (see this blog) tell us that £74bn of the mortgage loan book is now "encumbered"- ie pledged as security. A chunk is (presumably) pledged to the Bank of England against our £25bn loan , but it sounds like at least £50bn is still pledged to wholesale creditors.

After the secured creditors, next in line come the so called senior unsecured creditors. They get first dibs on any fire sale proceeds left over after the pledged assets have been stripped away. In NR's case, this ought to encompass all the other creditors with the exception of subordinated debtors. That includes the depositors, and the holders of senior debt issues.

Taxpayers have exposure to this unsecured senior debt via our guarantee to depositors, including all wholesale deposits (see HMT statement here). As at mid-year, such deposits were somewhere between £33bn and £48bn (depending on what exactly comprised "deposits" as opposed to other forms of borrowing.

Subordinated creditors come last, ranking just above the equity investors, who of course get nothing in a liquidation.

And for obvious reasons, NR subordinated (or sub) debt is getting riskier by the day. Moodys just cut its credit rating today, while S&P already assigned it a junk rating two months ago.

Now in theory, we taxpayers shouldn't have any subordinated debt exposure at all. But according to the BBC's Robert Peston, the penal element of the interest charged by the Bank of England on our loans to NR is being rolled up as subordinated debt, apparently not to be repaid for five years. Worse, the penal element has been defined as not merely the c 0.5% excess over the normal market interbank rate, but as the c 1% excess over Bank Rate.

According to Peston, it is being held by the Treasury rather than the Bank. More important, it could amount to £500m.

This afternoon, Darling denied it was as much that, but he did not deny its existence. So that's a tranche of unsecured sub debt we knew nothing about until today.

What else don't we know? As Mr Rumsfeld pointed out, we don't know what we don't know.

But it's increasingly obvious that taxpayers are exposed to all layers of Northern Rock's stressed out financial structure. We can take no comfort at all in all those official assurances that our lending is all fully secured. We are at risk all the way down to junk rated subordinated debt.

Spotty And Dizzy

BBC correspondent doubts

We currently spend some £26bn pa on incapacity, disability and injury benefits. We have 2.7m people of working age drawing IB.

Everybody agrees* that many recipients are claiming for pretty dubious reasons (eg see this blog), and this morning we get some more detail:

"Almost two thousand people who are too fat to work have been paid a total of £4.4 million in benefit. Other payments went to fifty sufferers of acne.

More than £2 billion was paid in 2006-07 for mental health complaints, including £518 million to those with what are described as “unknown and unspecified” diseases.

Overall more than £1.1 billion was paid to people suffering from a depressive episode plus a further £276 million to the estimated 116,000 claimants with “other anxiety disorders” and £122 million to the estimated 50,000 suffering from a “reaction to severe stress”.

A total of 15,600 people received benefits for “malaise and fatigue” and a further 8,100 for “dizziness and giddiness”. The figures disclose that 4,000 claimants had headaches, 2,700 migraines and 1,890 suffered from eating disorders. About £100,000 in benefits went to those with acne and a similar amount to 60 people with “nail disorder”. Nausea and vomiting cost £2 million in benefits for 900 people."

The reboubtable Frank Field comments:

“It is a racket, which governments have allowed to exist for far too long. I do not blame people for working the system, it is the job of politicians to stop them doing it.

The big change over the last decade has been into illnesses which largely defy a clear medical classification: depression, dizziness and such. It is a move from the tangible illness to the intangible.”

The proportion claiming for difficult to diagnose mental ailments has doubled over the last decade, to an eye-watering 40%.

Of course, if you were unemployed in the North East, you might claim it too. Because incapacity benefits contine to be higher than the alternative Jobseekers Allowance. Yet another of Whitehall's perverse incentives.

*Footnote- When we say everybody agrees about dubious IB claims, we should exclude Kim Catcheside, the BBC's social affairs correspondent. This morning Humphrys asked her about the one million people claiming IB who are capable of work, and she reckoned she was not familiar with the figure. We think it probably comes from the Department for Work and Pensions 2005 report A new deal for welfare: Empowering people to work. "We should aspire to reduce the number of incapacity benefits claimants by 1 million over the course of a decade" (para 15). True, that doesn't mean DWP reckons it can get existing claimants off IB. It's more a case of reducing the number of new younger claimants coming onto IB to replace those dropping off through hitting pension age (the cohort effect).

Update- Kim Catcheside has been in touch with us following this post. She feels we misinterpreted what she said, and on reflection, we agree. She is of course fully aware of the DWP paper, and its aspirational target of reducing IB recipients by 1m. But that's not the same as DWP saying 1m existing recipients are false claims. And we can see that. Yet at the same time, the way ministers present this figure, they make it sound like they're mounting a massive crack-down to get 1m workshy scroungers off benefits and back to work. Sure, the DWP smallprint explains what's really happening, but that's not the headline ministers apparently want to see in the Sun and Mail.

Weekly Waste Watch- 81

£25 grand brekkie

In the news this week:

Fry up costs us £25,000- "When Denis Breading went for a fried breakfast at his work canteen it was meant to be a short break before getting on with his job. Instead he has been suspended for the past six weeks during an investigation into claims that he tried to avoid paying the £1.60 he owed for the meal. During this time he says his employers, the Legal Services Commission - which runs the legal aid scheme - has spent £10,000 of taxpayers' money attempting to prove he "misused public funds"... In all, the great fry-up fiasco could land the public with a £25,000 bill. Mr Breading insists he has done nothing wrong. He claims no staff were present to take his money and he was still eating in the canteen when he was accused of "thieving". (Mail 14.11.07)

£2.4bn pa on new quangos- "Gordon Brown is creating NINE new busybody quangos costing £2.4 BILLION. That pushes the number of bureaucratic organisations interfering in our lives to 528 with a combined bill of £175billion. The move comes despite Mr Brown vowing in 1995 that a Labour government would ABOLISH most quangos. They land each taxpayer with a bill of £2,000 a year - even more if NHS trusts and the BBC are included... Meanwhile quangos like the Sugar Beet Research and Education Committee and the Home Grown Cereals Authority will continue." (People 18.11.07)

£6m pa to run hollow department- "TWENTY staff are employed at the £6 million-a-year Scotland Office to cope with just three letters a day. The Scotland Office occupies plush Dover House in Whitehall... but its role has shrunk dramatically since devolution in 1999... 20 staff employed to deal with mail replied to 1252 letters in 2006-2007 - just over one per member of staff every week. The letter scandal follows a series of damning reports on money-wasting at the department. Its 50 staff, who work between Edinburgh and Dover House, claimed £75,000 hotel expenses last year and another £8000 on hiring plants." (Sunday Mail 18.11.07)

Another £1.68bn for Euro-satellites- "Serious concerns have been raised about the merits of the Galileo global navigation satellite system... MPs on the transport committee say the European Commission is requesting a further €2.4 billion (£1.68 billion) for the project to continue, effectively asking UK taxpayers to contribute to a spiralling bill for the project... Committee chair Gwyneth Dunwoody said... "The government must stop this folly, and endeavour to bring the European Commission to its senses. The commission is poised to spend billions of taxpayers' money on a satellite system without any realistic assessment of its costs and benefits." (In the News 12.11.07)

Total for week- £4,086,025,000

Rock Crashes Onto Our Heads

As offers to buy Northern Rock come in, a key question for taxpayers is how to minimise our losses from the debacle.

This is a lengthy blog, but in summary we conclude:

• Total taxpayer exposure is already £35-40bn (loans plus deposit guarantees)
• Underlying security is questionable
• NR shareholders are seeking to profit at taxpayer expense
• Taxpayer losses will be minimised by setting a short deadline for full repayment

There was a school of thought that reckoned Northern Rock needn't cost taxpayers a bean. Because it was a liquidity problem rather than a solvency problem, we could even be making money. After all, we were lending at a penal interest rate against the security of a very high quality mortgage book. Once the Rock was sold, we'd walk away quids in (eg see here).

We were never convinced by that rosy scenario (eg see this first blog). In particular, NR suffers from a couple of major problems:

• Questionable asset values- NR has been just about the most aggressive High Street lender, both in mortgages and unsecured loans. True, its mid-year report estimated the overall Loan-To-Value ratio on its outstanding mortgages was only around 60% (ie on average it could afford to see a 40% house price fall before its loans went underwater). But the LTV on its recent mortgages has averaged a rather less comfortable 80%. Moreover, NR has been offering packages of mortgage plus unsecured loan up to a combined maximum of 125% of property value. They might stay lucky in a house price crash. But then again, they might not.
• Funding collapse- At mid-year, its assets totalled £113.5bn. But only £24.3bn (21%) of that was funded by traditional retail deposits, normally by far the cheapest source of money. The bulk came from the wholesale markets, including a whopping £46bn from securitising bundles of its mortgages via various special purpose financing instruments. They are part of what the FT described as a mind-bogglingly complex offshore financing vehicle by the name of Granite Finance Holdings (investigated in detail by the excellent Richard Murphy). The key point here is that in Credit Crunch World nobody wants to buy such murky beasts. Plus, billions of those retail deposits have also fled through the door, despite that "cast iron" HMG guarantee. Which means that NR's "business model" is irretrievably bust.

And that's precisely why after months of faffing round, it's been unable to secure any of those widely mooted white knight buyers. If it hadn't been for Mr Darling opening our wallet, NR would already be lying in the gutter, belly up.

So far, depending on who you ask, we taxpayers have lent NR about £25bn, secured against some part of those supposedly high quality assets. And it's reportedly earning us a penal interest rate of 6.75-7%, compared to a market rate of 6.3% (three month interbank). So that's a premium of about £100-150m pa over what we could earn by just putting the Bank of England's money into the normal market- not a great reward for that £25bn exposure.

But are we ever going to get that extra interest anyway? At present, the whole lot is effectively rolling up, as our loan grows week by week. To state the obvious, we only get the cash if a buyer comes along and agrees to pay it all back.

And just to be clear, we are currently exposed not only through the c£25bn of loans we've made, but also the unconditional guarantee given on all NR's retail deposits (see this blog). We don't know exactly how much of the £24bn mid-year retail deposits are still left, but we'd guess £10- 15bn.

So our total exposure is already £35-40bn.

And the portents are not good. For sure, the whole shebang has now been put up for sale via a formal bid process. And we hear there are at least eight bidders.

But we must remember this key fact- the sale is being managed by Northern Rock itself to maximise shareholder value- not to safeguard taxpayers from loss.

We can see how things are shaping up in the sale memorandum leaked and published by an FT blogsite earlier in the week. After FT publication, the memo was partially suppressed by NR's investment bankers' lawyers getting a court injunction. But not before we discovered the following key inducements for would-be buyers:

• The Bank of England's loan facility will remain in place at least up until 2010- the memo assumes £6bn will still be outstanding at that point, via what it calls a "replacement facility"- still provided by the BoE
• The BoE will reduce the penalty interest rate after sale, allowing NR's profits to rebound to £643m by 2010- which is more than it earned in its record 2006
• A partial sale of NR is possible, with the buyer taking only the more attractive assets, leaving the less attractive rump to run off over time, with proceeds (if any) used to repay the BoE.

Taxpayers should be alarmed and angry. Northern Rock management is offering our continued support to buyers, so that they can find a buyer for their devalued shares (see also this excellent article by Anatole Kaletsky).

The memo's propositions are outrageous. To start with, there's no way taxpayers should get stuffed with rump assets that nobody else wants. The official line has always been that NR's assets are all high quality, give no reason to question the bank's solvency, and have been checked over thoroughly by the FSA. We've always suspected that's optimistic (see above), but any private buyer must be made to take the whole shooting match. Even if it means the price they pay to NR shareholders is zero (or the traditional £1).

Second, we don't want to be funding their bank. It means we have to borrow more ourselves (for a given money supply), and we don't want our bungling government to be a financial intermediary, with all its attendant risks. And dropping the penal rate is out of the question- our instinct should be to increase it (see above).

The Guardian has run an even more worrying story. They reckon that potential NR bidders are pressing the BoE to waive the entire £2bn penal interest bill that will have been clocked up since the bail out commenced. It's such a jaw-dropping idea, you have to think it's true.

But surely you say, surely the government knows all this and will hang tough with these buyers.

Hmm.

Even setting aside the fact that the government isn't actually the seller, Labour may do whatever it costs us to safeguard those precious thousands of jobs up on Tyneside. Plus, they are so scared of the alternatives (ie nationalisation or receivership), they'll bend over backwards to achieve a sale.

Worse, the shareholders now include a number of high rolling hedge fund players attracted by the smell of taxpayers' blood (one now owns 6.2% of the company). They've bought in because they can recognise a politico on a skewer, and they know that spells easy profit (cf G Soros 1992). Worse, they play something called HARD BALL- much much harder than anything our wibbly politicos are used to. It's simply not a fair fight.

The prospects for taxpayers look bleak. We're already in the can for £35-40bn, which may or may not be redeemable against NR's assets, depending on what they're really worth. And now we face the prospect of new owners who will demand further subsidies out as far as anyone can see.

So what can be done?

Nobody would start from here, but Anatole Kaletsky's plan is the least unattractive option: to concentrate minds, the government should give notice that all loans must be repaid in full by end-February (including the rolled up interest); if not, Northern Rock will be nationalised for £1, the depositors paid out, the assets sold off over a period of time, and the operation closed down.

Taxpayers look most unlikely to escape unharmed. But before we shell out a bean, shareholders must lose the lot.

No argument.

Shunning The Simple Shopper

We investigate Government Shopping

The Simple Shopper features regularly on BOM. Every year his antics cost us taxpayers billions. Not only that, he often fails to bring home the actual overpriced bacon at all. From PFI, to GPs' contracts, to military kit, to IT systems, to post-it notes, the Shopper routinely trails waste and chaos in his wake.

There are a number of reasons for this sorry state. First, and fundamentally, there's the all too familiar fact that the Shopper answers to politicos, not to us end-customers. As we know, the principal interest of those rascally politicos is to get elected, not to get our public services working better. And in terms of fitness for purpose, most of them would struggle with that famous whelk stall, let alone a £100bn pa health service.

Second, few public sector shoppers have any meaningful experience of shopping in the real world. The senior ones are there because they want to shape "policy", not to get their hands dirty in the menial chore of implementation. And the more junior ones soon realise if they're any good at shopping they can earn a ton more in the commercial sector, where their skills are properly valued.

Time and time again, the Public Accounts Committee probes into shopping fiascos and comes back to this woeful lack of commercial skill- paying too much, half-baked specs, agreeing contracts that are not fully bolted down, selecting suppliers who aren't up to the job, etc, etc. The Shopper is naive and vulnerable.

True, in recent years, there's been a new emphasis on getting low prices, with Labour's Office of Government Commerce (OGC), and all kinds of whizzo innovations like e-auctions, where suppliers bid online to undercut competitors. But just selecting suppliers on the basis of price is a recipe for non-delivery. Let's just remind ourselves what an IT industry insider said about the bidding process for the NHS Supercomputer:

"The people who stayed in [the bidding] fell into two classes. Those who thought they could do it for the price but didn't understand the complexities of what they were getting into; or those that concluded you couldn't do it for the price but were willing to take the risk that the government wouldn't pull the plug on this and that they'd be able to get their money back from changes downstream."

He said the procurement process lacked sophistication: "So much of this public sector procurement is done on the basis of what is the lowest price and not enough attention is paid to the competence of the people who are actually tendering, what is their track record for delivering."

Now given this naivety, and given a bottomless pit of taxpayers' money on offer, you'd expect the evil capitalists from the private sector would be banging the door down. And indeed, that is the long and sorry history (eg the £3bn pa now spent on management consultants).

But just recently we detect a change in the air, and it could be quite important: mainstream suppliers are starting to shun the Shopper altogether.

We saw that spectacularly demonstrated last year when Accenture walked away from its multi-million NHS Supercomputer contract (eg see this blog). It did so because it recognised the project was so half-baked it could never be made to work. It was much better and cheaper for Accenture to suffer some short-term embarrassment and a $450m charge than to struggle on in the clinches with the hopeless Shopper.

And just yesterday, we heard from the healthcare suppliers who are so hacked off with Alan Johnson's abrupt U-turn on buying private sector care for NHS patients, they may never deal with the NHS again: “There is a trust issue here. We have been led up the garden path. We are not sure we want to go up it again”.

But the whole issue is really coming to the boil over the 2012 Olympics.

As regular readers will recall, the Commissars' plan was to hold a giant competition among contractors, beat them down to get the very best deal, and insist on fixed price contracts. There was to be no repetition of the Dome fiasco.

We were always very sceptical about whether that was a realistic proposition (eg see this blog), and it looks like we were right.

Last month, we learned that both the main 2012 stadium and the aquatic centre only received one tender apiece (see this blog). The result is that, while the Olympic Delivery Authority (ODA) will get its fixed price contract (it seems), the price for both has escalated wildly beyond the original "budget": the main stadium is up 80% and the cost of the aquatic centre has doubled. Plus, both have been massively despecced, with the main stadium now little more than a plastic wrapped pit.

Today, we hear some real 2012 home truths from the contracting industry. Stephen Ratcliffe, the chief executive of the Construction Federation, says:

“There are only a limited number of contractors with the size and experience necessary to tackle the Olympic project. There are plenty of opportunities in the marketplace, allowing suppliers to choose the best opportunities. The Olympics is essentially a one-off project so the long-term opportunities are not there. It is also highly exposed and if things went badly wrong a contractor could damage its reputation irretrievably.”

And Graham Watts, the chief executive of the Construction Industry Council, which represents construction professionals, says:

“The ODA has too many masters. These include the International Olympic Committee, Ken Livingstone, the DCMS, the Treasury, Gordon Brown, the Olympic Board and the five London boroughs.

There are also a whole group of DCMS civil servants without any operational responsibility. They are only there to make sure that other people are doing their jobs, which can lead to complete inertia. There is no clear leadership at the top so no one makes decisions.”

Just read that last paragraph again. It captures so much of what's wrong with Big Government- no clear leadership, nobody trusted with real authority, and thousands of jobsworths demanding multiple checklists and other assorted bumpf.

With more and more media attention now focused on public sector waste and other government bog-ups, no wonder reputation-conscious commercial operators are getting wary of the Shopper. Especially since with fixed price contracts, there's no longer the cozy glow of the old cost-plus system to keep them warm at night (eg BAE Systems are reportedly taking a huge bath over the doomed Nimrod project).

This is bad news for taxpayers. The more wary suppliers get, the more their prices will go up. Commercial companies are not nearly as simple as the Shopper. They won't play the Shopper's bidding games, and given recent experiences, they will make doubly sure they can earn an honest crust from future contracts.

And we will pay the price.

As we've said many times, we would be so much better off if we all dealt directly with end commercial suppliers, just like we do with Tesco and Sainsburys. Having the Shopper intermediate his hopeless blundering presence in the middle is a sure recipe for more cost and less delivery.

Non-job of the week

It’s not a good week for NHS Trusts.  Yesterday the 5 Boroughs Partnership NHS Trust disclosed they spent £6,000 of taxpayers’ money on 1500 annual reports of which only 40 were distributed to residents in the North West.  Today the East London NHS Foundation Trust is in our sights because it advertises for the non-job of the week.

The East London NHS Foundation Trust is advertising for three posts, not for someone medically qualified to perform an essential public service, but for three ‘Equality and Diversity Co-ordinators’.  You may be wondering what an NHS Trust is doing hiring three equality and diversity co-ordinators, so have a read of the job description and judge for yourself whether these non-jobs are necessary:

“Equality and Diversity Co-ordinator (x3)

The Trust provides a comprehensive mental health service to a diverse range of cultures and ethnic groups covering the City of London, Hackney, Newham and Tower Hamlets. Our aim is to provide the very highest standards of care based on strong to partnerships with Social Services and Primary Care Trusts.

Salary Breakdown is as follows:

Basic Salary - £27,622 - £36,416 per annum pro rota plus 20% of basic salary, subject to a minimum payment of £3,383 and a maximum payment of £5,638 per annum pro rota.

Inclusive - £33,146 - £42,054

These 3 posts in total are based across Newham, Tower Hamlets and Hackney provide an exciting opportunity to further develop equalities, diversity and human rights work across mental health services.

As equality and diversity coordinators you will provide clear direction and guidance to others, have responsibility for leading practical project work and managing a variety of work streams that underpin the diversity agenda.

You will help to ensure that local policies and services are Impact Assessed, that equality based training is provided for staff and that you will have a key role in delivering locally, the Department of Health’s Delivering Race Equality in Mental Health programme. You will also oversee the implementation of the Trust’s Equality Schemes and Action plans and support a culture that is socially inclusive and values diversity.

You will be educated to a degree or equivalent level and have at least 3 years experience working on Equalities and Diversity related issues. You will need to have experience of Equality schemes, knowledge of impact assessments and possess a good working knowledge of current equalities and diversity related legislation.

NHS experience is desirable but not essential for this role.”

That’s £100,000 plus for these jobs in salaries alone.  Add in running costs, pensions and other expenses and you could easily get a budget into a quarter of a million.  Feel free to send them a freedom of information request for a more detailed breakdown of the expenses within the Equality and Diversity department and remember every penny spent there could be spent treating ill taxpayers.  You can use the Trust’s online form, or you can write to and contact:

Freedom of Information Act Co-ordinator
Trust HQ, EastONE
22 Commercial Street
London, E1 6LP

Tel: 020 7655 4119
Fax: 020 7655 4118
Email: FOIRequest@elcmht.nhs.uk

Also if you’re not satisfied that the NHS is spending your money on bureaucrats and not doctors, feel free to complain to the Trust:

Jane Quinn
Consumer Relations and Legal Affairs Manager
Trust Headquarters
EastONE
22 Commercial Street
London E1 6LP
0800 085 8354 (you can call free of charge)

The more we hold these public services to account the more they will think twice before wasting taxpay