Birmingham – We Know Zero

Carolian Radicals

20. October 2024 · Write a comment · Categories: Birmingham, Economics, Regulation

The Stonebreaker is an 1857 oil-on-canvas painting by Henry Wallis. It depicts a manual labourer who appears to be asleep, worn out by his work, but may have been worked to death as
his body is so still that a stoat has climbed onto his right foot — *The Stone Breaker, 1857 Artist: Henry Wallis. Creative Commons 0 – Public Domain. Photo by Birmingham Museums Trust, licensed under CC0*

The Europe of the 1830s and 1840s was a place of extreme political ferment which led to long-term changes to the way in which all Europeans, including the ones across the English Channel, saw themselves. According to Christopher Clark’s excellent Revolutionary Spring – Fighting for a New World 1848-1849: “parallel political tumults broke out across the entire continent, from Switzerland and Portugal to Wallachia and Moldavia, from Norway, Denmark and Sweden to Palermo and the Ionian Islands. This was the only truly European revolution that there had ever been.”

However you wouldn’t know it from the current Radical Victorians exhibition at the Birmingham Museum and Art Gallery. This explores three generations of progressive British artists working between 1840 and 1910: the Pre-Raphaelite Brotherhood and their circle; the second wave of Pre-Raphaelite artists who gathered around Rossetti from the late 1850s, including William Morris and Birmingham-born Edward Burne-Jones; and a third generation of designers and makers associated with the Arts and Crafts movement, working from the turn of the century to just before the First World War.

It’s a very good exhibition, but the only painting I could find in it which referred to the economic crises of the 1840s and 50s at all was the one above, of a stone breaker worked to death. There was also the famous one of a couple emigrating to Australia (shown below) which may be a response to domestic economic circumstances although, based on a self portrait of Madox Brown as it is, it may just as well be a response to the lack of art appreciation in the UK:

*The Last of England, 1852-1855 Artist: Ford Madox Brown Creative Commons 0 – Public Domain. Optional attribution: Photo by Birmingham Museums Trust, licensed under CC0*

But that is it! Despite the Victorian Radicals’ believing that art and creativity could change the world and be a real force for good in society, their gaze rarely moved from “realistic” depictions of their friends posing in rustic or suburban landscapes at a time of massive social upheaval.

At the time Britain was rather smug about having avoided revolution, but the evidence suggests that it could have easily been very different were it not for the measures taken by Robert Peel’s Government: the reintroduction of income tax on upper middle class incomes in 1842; the Bank Charter Act of 1844 which suppressed financial speculation by restricting the right to issue bank notes to the Bank of England only and creating a maximum ratio between notes issued and the Bank’s gold reserves; and the repeal of the Corn Laws in 1846 which considerably weakened the landlords’ grain monopoly and allowed for grain imports which did reduce prices but fundamentally changed the structure of the UK economy. This was explosive stuff which brought down Peel’s government and split the Conservative Party.

Policing in the UK was also very muscular. 15,000 Chartist activists were arrested in 1843 and a meeting of 150,000 Chartists at Kennington Common in 1848 was met by 4,000 police, 12,000 troops and 85,000 special constables (volunteers with clubs, including the future Emperor Napoleon III who was in exile from France at the time). There were so many transportations to the colonies that there were mass protests in Australia and the Cape. There were riots in Jamaica and British Guyana when sugar tariffs were dropped to reduce prices back in the UK and when, rather than burdening British taxpayers further, taxes were applied in Ceylon (now Sri Lanka), a protest movement numbering 60,000 was created.

In June 2024, Michael Marmot and Jessica Allen published A programme for greater health equity for the next UK government. In it they say the following:

Much of what went wrong with respect to the social determinants of health equity in the period after 2010 comes under the rubric of austerity, imposed by a Conservative Party led coalition Government. In the 2020 Marmot Review, we reported that in 2010 public sector expenditure had been 42% of GDP. Over the next decade, public sector expenditure went down year on year. By the end of the decade, public sector expenditure had become 35% of GDP. An annual reduction of 7% is enormous. In 2023, total UK GDP was £2·687 trillion. 7 7% of that is £188 billion. At today’s prices, annual public sector expenditure in 2019 was £188 billion less than it was in 2010. It is then not a surprise that relative child poverty went up— the steepest rise among 39 OECD countries; 8 absolute measures of destitution increased; welfare payments apart from pensions did not keep pace with inflation; spending on education per pupil went down; the housing shortage became more marked and homelessness and rough sleeping increased; and increases in health-care expenditure fell sharply compared with historic trends. Alongside these major changes, came the slowest improvement in life expectancy in the UK during the decade after 2010, of any rich country except Iceland and the USA.

We have a new Government, 100 days in, in our new Carolian era. What will future generations say about who this government answered to? Will it turn out to have been our modern stone breakers, working themselves into sickness and early death below the radar of a modern media at least as divorced from the concerns of ordinary people as the Victorian Radicals were? Or will their hard decisions turn out to necessitate other priorities? Time will tell.

Sleaford-upon-Sea and the future none of us wants

05. July 2023 · Write a comment · Categories: Birmingham, Climate Change, Demographics, Economics, Prediction, Science Fiction

https://coastal.climatecentral.org/map/9/0.0491/52.7048/?theme=warming&map_type=decadal_slr&basemap=roadmap&contiguous=true&elevation_model=best_available&esl_model=ipcc_2021&percentile=p50&refresh=true&slr_year=2100&temperature_rise=2.7&temperature_unit=C

The year is 2100. Earth is approaching a peak population of 9.5 billion people. Despite some notable progress in decarbonising our activities and more progress on carbon capture of various types than expected 80 years ago, overall we have not managed to shift much off the Intergovernmental Panel on Climate Change (IPCC) middle-of-the-road shared socioeconomic pathway (SSP2). Some countries have done much better than others, with income inequality a problem both within and between them. Carbon emissions stayed fairly level until 2050 before starting to fall, but net zero has still not been achieved.¹

Temperatures have risen by 2.7 degrees compared to pre-industrial levels. Africa has split between a north which has seen a recovery of rainfall and a south which is no longer habitable for humans. The Indian monsoon rains have failed. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers have reduced by 90% from their pre-industrial levels.

The Amazonian rain forest basin has dried out completely. In Brazil, Venezuela, Columbia, East Peru and Bolivia life has become increasingly difficult due to wild fires. Drought is now permanent in the sub-tropics and Central America. Australia has become the world’s driest nation.

In the US Gulf of Mexico high sea temperatures drive 180+ mph winds.² Flooding is widespread with sea levels having risen by 0.6 metres on average compared to 2020.³ Many plant species have become extinct as they were unable to adapt to such a sudden change in climate.

Food prices continue to soar, with temperatures, droughts and the inundation of arable land adversely affecting many crops. Massive migrations have led to increasingly severe military and police responses from the most popular destination countries. There is fear that we have not yet seen the end of the terrible costs of climate change, with temperatures continuing to rise.

England has a new Eastern coastline, which became a certainty once the decision was taken that the cost benefit analysis did not justify the expense on the massive coastal defences which would have been required to prevent it. Sleaford is now a seaside town. Birmingham is the only major city which has not been significantly affected by sea level rise⁴ and there are calls for the capital to be moved there. However London hangs grimly on following the failure of the Thames Barrier in the 2040s. An Intertidal Property Pricing Index (IPPI) has sprung up, which sucks in money as investors bet on the development opportunities in the aftermath of the catastrophe.⁵

This, or something like it, is the future we are currently on track for but none of us wants. So let’s change the trajectory.

Notes:

The IPCC’s SSP2 narrative description.
Mark Lynas, Six Degrees: Our Future On A Hotter Planet, Harper Perennial, 2008 for the scientific consensus at the time on the consequences of 3 degrees warming
https://sealevel.nasa.gov/ipcc-ar6-sea-level-projection-tool?type=global (accessed 5 July 2023)
https://coastal.climatecentral.org/ (accessed 5 July 2023) for the maps of England following 2.7 degrees warming by 2100 following current trajectories
IPPI borrowed from Kim Stanley Robinson’s depiction of a future New York after two pulses totalling 15 metres (50 feet) of sea level rise in New York 2140, Orbit, 2018

The Parable of the Boiling Frog

28. April 2023 · Write a comment · Categories: Birmingham, Climate Change, Economics, Science Fiction

Source: https://commons.wikimedia.org/wiki/File:Green_frog_(Pelophylax_esculentus_complex)_Danube_delta.jpg by Charles J. Sharp, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons

It has been quite a year for reading great books and being inspired by them for me: from An Immense World by Ed Yong last April, to Regenesis by George Monbiot and The Lathe of Heaven by Ursula Le Guin in October, to a great trio of reads in 2023 of The Capital Order by Clara Mattei, When The Lights Went Out by Andy Beckett and The Left Hand of Darkness by Ursula Le Guin. And that is just the books I have blogged about.

However, my stand out book this year is none of these. I have often heard people say they wish they had written some book or other, and I have never understood it until now. This is the book I would hope that a better version of me might have written in a parallel universe. Fortunately for you, Simon Sharpe has written Five Times Faster in this universe, and I am so glad he has.

Five Times Faster is funny, constantly surprising and has reframed my entire attitude to the climate crisis and what can be done about it. Perhaps it had more intensity for me as I read most of it aboard the XR bus from Birmingham down to London last weekend, but it has given me more hope for what Kim Stanley Robinson calls “dodging the mass extinction event” than I have had for some time.

Amongst the many wonders of this book is to reframe the time-worn story of the frog sitting in water which is slowly coming to the boil as a series of conversations with its science adviser, its economics adviser and its diplomatic adviser. To do it full justice you will need to read the book, but the gist of it goes as follows:

First of all, the frog asks its science adviser to investigate whether the water really is getting warmer. The science adviser confirms that it is, and also predicts that, in 5 minutes’ time, it will be a further 2^o warmer, plus or minus 1^o. The frog says it didn’t want a prediction, it wanted a risk assessment. It takes a while to get the science adviser to understand what this is but then, when asked what’s the worst that could happen, the adviser blurts out “That’s easy. You could boil to death.” In response to the question of how likely that is to happen, the adviser says that it would be very unlikely after 5 minutes, more likely than not after 10 and after 15 a certainty. So the frog now realises it needs to jump out of the pot.

The frog now turns to its economics adviser to ask how it should go about it. The economics advisor does a cost benefit analysis by first calculating the energy cost per cm of moving up the pot away from the water, converting this first into food consumption and then money, and equating this with the frog’s willingness to pay for not being boiled, which is derived from its air conditioning bill. The most efficient solution turns out to be to climb 4.73 cm up the side of the pot. Worried that it would just be replacing the risk of being boiled with one of being steamed to death, the frog ignores its economics adviser and jumps out of the pot.

Finally the general problem of the frogs and the relentlessly boiling water is put to the negotiators for a diplomatic solution. The sides of the pot are too high by now for most of them to jump out. The negotiators tell them they just need to raise their ambition and that this is the only game in town. The consequences of not accepting that analysis and looking at alternative salientian strategies make up the final third of the book.

I cannot recommend it highly enough. If enough people read it and act upon it, perhaps we can avoid this:

Source: https://commons.wikimedia.org/wiki/File:2012_Froschschenkel_anagoria.JPG Anagoria, CC BY 3.0 https://creativecommons.org/licenses/by/3.0, via Wikimedia Commons

This actuary and science fiction

28. March 2023 · Write a comment · Categories: Actuarial, Birmingham, Climate Change, Economics, Science Fiction

I was looking through my old blog posts the other day and came across something I wasn’t looking for. Actuaries and Science Fiction told the story of a one-off visit I made to the Birmingham Science Fiction Group (BSFG), when the guest speaker had been the late great Brian Aldiss, who told the story of a time Kingsley Amis had had dinner with Margaret Thatcher. He told her what his book Russian Hide and Seek was about, to which she had responded that he needed to get himself another crystal ball.

By coincidence, I have just joined the BSFG nearly 10 years later (well I needed to think about it!), attending my first meeting online (Anna Stephens – really good about writing for Warhammer and Marvel in particular) and now very much looking forward to seeing Alastair Reynolds at my first in person meeting next month. I now have a bit more context for the Kingsley Amis story, as Andy Beckett has an account of a dinner Amis had at Thatcher’s Flood Street house in the late 70s (before she became Prime Minister). He wrote at the time:

I was rather overcome with the occasion and the fairly close propinquity of Mrs T…very much a new face to me as to most people, too much so to take in a lot about the fare except that it was properly unimaginative, and, as regards drink, ample enough. The hostess wore one of those outfits that seem to have more detail in them than is common, with, I particularly remember, finely embroidered gold-and-scarlet collar and cuffs to her blouse…[she was] one of the best-looking women I had ever met and for her age…remarkable.

And he also attributed the following quote to Thatcher herself:

People have always said that the next election is going to be crucial. But this one really will be, and if it doesn’t go the way Denis and I want then we’ll stay [in Britain], because we’ll always stay, but we’ll work very hard with the children to set them up with careers in Canada.

Anyway, back to Aldiss. He had told the story as he felt it showed how Thatcher (and he was not just picking on her as he felt this was a view held by many) misunderstood science fiction. It was not about prediction of the future, but for people who “liked the disorientation” of portraying an unfamiliar landscape.

Ursula K. Le Guin goes further in her introduction to The Left Hand of Darkness (just finished it and, if by any chance you haven’t read it already, it is an amazing piece of immersive world building which will leave you never feeling the same way about gender again). As she says:

Science fiction is not predictive; it is descriptive.

Predictions are offered by prophets (free of charge), by clairvoyants (who usually charge a fee, and are therefore more honoured in their day than prophets, and by futurologists (salaried). Prediction is the business of prophets, clairvoyants and futurologists. It is not the business of novelists. A novelist’s business is lying.

The weather bureau will tell you what next Tuesday will be like, and the Rand Corporation will tell you what the twenty-first century will be like. I don’t recommend that you turn to the writers of fiction for such information. It’s none of their business…All they can tell you is what they have seen and heard, in their time in this world, a third of it spent in sleep and dreaming, another third of it spent telling lies.

And, my favourite bit:

In reading a novel, any novel, we have to know perfectly well that the whole thing is nonsense, and then, while reading, believe every word of it. Finally, when we’re done with it, we may find – if it’s a good novel – that we’re a bit different from what we were before we read it, that we have changed a little, as if by having met a new face, crossed a street we never crossed before. But it’s very hard to say just what we learned, how we were changed.

The artist deals with what cannot be said in words.

The artist whose medium is fiction does this in words. The novelist says in words what cannot be said in words.

Who wouldn’t want to do that? It struck me while I was reading those words how the pandemic was something which changed all us survivors a little (and some a lot of course) and in ways that are often hard to put in words. But we are changed and there is work to do to try and understand how, even if that cannot be completely put in words.

The other thing from the introduction which has stayed with me is Le Guin’s contention that, while we read a novel, we are bonkers: believing in people who have never existed, hearing voices, perhaps even becoming other people. As she says:

Sanity returns (in most cases) when the book is closed.

But what about when you can’t close the book? Are we, to a greater extent, condemned to some level of future insanity? As William Faulkner said:

The past is never dead. It’s not even past.

In 2013 I tried to suggest that actuaries might also be about portraying an unfamiliar landscape and trying to work out what would hold true under different circumstances, and that they should therefore put themselves about a bit more, even if they sometimes made themselves look a bit foolish in the process. As William Hynes reminded me at yesterday’s excellent An introduction to alternative economic thinking event (recording available soon from the Institute and Faculty of Actuaries), the group of economists responding to the Queen’s question as to why noone saw the 2008 crisis coming, concluded:

In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

If a failure of imagination is the main problem, I would suggest that science fiction must be at least a part of the solution. Looking a bit foolish at times is a bit of a speciality for me, so you probably won’t be surprised to hear that I am devoting most of my time from here on in to an almost certainly doomed attempt to write what Le Guin might regard as a good novel. I have been here before, way back in my pre-actuarial past, and have a nice back catalogue of unpublishable books and rejection letters to look at whenever I forget that I have no idea what I am doing. But if I find myself shouting to noone in particular that what I am trying to say cannot be said in words, I might dare to believe that I am on the right track.

Hypocrite!

14. December 2022 · Write a comment · Categories: Birmingham, Climate Change

I am installing a gas boiler.

“What’s that?” some of you may say. After all I have certainly banged on about climate change quite a bit in the past. Some of you might assume that “Swampy Dave”, as my wife sometimes refers to me in conversation, would be installing a heat pump or solar panels or wind turbines or perhaps all three. Am I not a total hypocrite?

To which the answer is yes. I am a total hypocrite. And I must say the episode has left me chastened and a little bit reluctant to discuss it. It is, as Stephen Fry describes it very well here, one of the strongest reasons that people amongst the 1% like myself do not campaign more about the climate emergency.

But I have begun to think that this is all a massive piece of self-indulgence on my part (and of course, by making it all about me, it is). So, instead, I have decided to make it all about me, by talking you through the Gas Decision or GD for short, because it has certainly clarified for me why we are not transitioning from fossil fuels more quickly.

Our gas boiler has been on the blink for a bit, but coaxed along by our local gas engineer who, I think out of concern for minimising costs to us, was reluctant to suggest any major action if it could be delayed. Then it started to leak water, slowly at first, and then faster, before giving up the ghost altogether in early November. I had during the boiler’s demise had one or two conversations about what we might replace it with. Raising the idea of heat pumps got me puffed out cheeks and rolling of eyes and the opinion that it was very complicated.

I looked online. There is a page called “Find a heat pump installer” on the gov.uk website, with long lists which you can search by distance from your postcode. I chose a couple of nearish ones and contacted them. No response. I then tried Octopus (our supplier, OVO, were not offering heat pump installation), who said they were run off their feet trying to install heat pumps and had a 6 month waiting list. However they did have a referral system, where you could enter your details and installers on their list would contact you.

I tried this and got a couple of calls. Neither local. We chose one who sounded particularly helpful on the phone and made an appointment for their sales person to come round. They were very persuasive, and we subsequently arranged to have the energy performance survey necessary to proceed. This established that about half of our radiators would need replacing, but that our piping was fine. We had had quite a bit of discussion about where the heat pump should go, and were thinking possibly between the first floor windows so that it wouldn’t be humming (or whatever noise heat pumps make) whenever we went out in the garden. We even had the National Grid come round to check that our connection could cope with the additional electricity demand (they had assumed at first that this was for an electric vehicle charging point, as this is apparently the most common reason for calling them round).

The cost of installation, even with the £5,000 Government grant, is at least £5,000 more than a gas boiler. We had been told that we would save money on energy once it was installed, but the savings turned out not to be significant (if there were any at all) once the full calculations had been done. The reason for this is how much more you pay for each kWh of electricity compared to gas. OVO currently charge us 9.83p per kWh for gas (with a standing charge of 27.12p per day) and 32.11p per kWh for electricity (with a standing charge of 46.8p per day). So, despite the heat pump being massively more efficient than the gas boiler alternative, it would really have to be going it some to overturn these price differences.

But, at that stage, we were still prepared to go ahead with the installation (I refer you to the “Swampy” comments above), we just needed to speak to some previous customers to reassure ourselves about their overall experience, perhaps see (and hear) it in situ, etc. And then it unfortunately started to unravel. Despite describing themselves as the number one heat pump installer in the UK, the company we had engaged were unable to provide us with anyone in or near Birmingham willing to tell us about their experiences (they eventually produced one name, but we couldn’t get a reply from them). So we started looking at the reviews on Trustpilot, etc, which were decidedly mixed and talked a lot about poor after sales service, and which seemed to be very dependent on the particular engineer doing the work. And the ones for the heat pump they were planning to install were full of stories involving the installers and the manufacturer pointing the finger at each other when things went wrong. Suddenly it seemed like too big a risk to take.

Meanwhile, the unseasonably warm autumn had slid into a very seasonably freezing December and we needed to get working radiators again. And so we decided we didn’t have time to go out to the heat pump market again, with more surveys etc, and plumped for a replacement gas boiler for our existing system. I am not particularly proud of the decision, and perhaps we were just unlucky with our experience, but it does seem to me that we are not making it easy for people to choose heat pumps in the UK currently. This appears to be borne out by the Department for Business Energy & Industrial Strategy’s UK Energy in Brief 2022 report (p13), which shows that, of the 19.4% of energy supplied from low carbon sources in 2021, only 0.7% was from heat pumps. As Chris Stark, Chief Executive of the UK’s Climate Change Committee, has tweeted recently: “THE MOST IMPORTANT THING is to make electricity cheaper than gas for consumers. It should be a key objective for Treasury’s tax policies and BEIS energy market reforms. It will transform the economics of low-carbon heat.” I certainly think it would have transformed our decision.

And today is the day! The weather outside is frightful (it hit minus 6 as the installation vans arrived and needed the doors thrown open to let in all the gear), but our new piece of fossil fuel infrastructure is being installed as I type. I will at least be a warm hypocrite.

Actuaries and the Green New Deal

20. September 2019 · Write a comment · Categories: Actuarial, Birmingham, Climate Change, Economics, Legal, Pensions, Regulation, Risk

Images from the Birmingham Climate Strike on 20 September 2019

On the day millions have taken to the streets across the globe to demand a more urgent response to the climate emergency, it seems a good time to write about the crossbench Decarbonisation and Economic Strategy Bill, originally tabled by Caroline Lucas and Clive Lewis in March this year, which has now been formally launched. This “Green New Deal Bill”, as it has been dubbed, sets out a legislative framework for the changes that are needed to make the Green New Deal (a programme of action neatly summarised in the Green New Deal Group’s fifth report here) a reality. The impacts of these proposals would be far-reaching and radical, changing the way our economy operates and what we value. As well as revolutionising the way we live, this would also significantly affect the current work of actuaries and provide many opportunities for people with the actuarial skill set to be centrally involved.

The main proposals which I think would impact actuaries are as follows:

Bring offshore capital back onshore to make sure that government, not markets, can make the big economic decisions. This would obviously impact all businesses operating in financial markets. There would also be large movements in the value of some businesses as a result of economic decisions which have previously been left to the market now being made by government. Modelling the impacts of such changes and helping businesses manage the transition are examples of where actuaries can add value here. We are already seeing increasing disinvestments from coal, but this would seem to be just the start of a much wider realignment (one possible view of the potential is discussed here).
Greater coordination between the Bank of England, the Treasury and the Debt Management Office. This means the end of the independence of the Bank of England by the look of it, with monetary policy and fiscal policy run in much closer cooperation with each other. It also means more regulation for banks and the supported emergence of local banks and a new national investment bank.
New bonds, nationally and locally, and new pension arrangements targeted at the green renewal of our infrastructure. For instance, tax rules on pension schemes could be changed to require a minimum percentage of assets invested in such bonds in order to continue to qualify for tax relief.
New objectives for business, and new kinds of businesses. For instance, the UK-based Corporate Accountability Network argues that the whole focus of corporate reporting will have to change, and so too then would corporate behaviour because there is very strong evidence that what is reported by any organisation is what becomes important to it. The Green New Deal Bill provides for changes to both company law and accounting to embrace the need for legally required and enforceable reporting on progress towards any company becoming carbon neutral. This will certainly lead to new business structures as a result and, I would imagine, many new business opportunities for those with actuarial skills as a result.
Replacing our measures of progress. This is something I have long supported. The main problem is that there are many possible candidates for this, but that also means that there is a great opportunity for actuaries to be involved in constructing appropriate indices which are globally respected, thereby helping to change what we value away from our current GDP and FTSE fixations.

Of course there are also opportunities for those with actuarial skills to block the transition to an economy that isn’t constructed in such a way as to make environmental destruction inevitable. Employers like these would probably make those with the actuarial skillset very lucrative offers to use their skills. I hope that most of us, and particularly those just at the start of their careers, will resist such offers. We now know that tobacco firms hid the evidence of the damage done by their products for decades and firms such as Exxon have done the same in denying the science on climate change for over 40 years. Please don’t be part of the problem when you could be such a valuable part of the solution.

At Leicester, we intend to launch a new module on our MSc Actuarial Science with Data Analytics programme next year, specifically on the ideas behind the Green New Deal and focusing on the areas where ideas still need to be developed (one of the most exciting things about the Green New Deal is that it is still an area of live discussion, with many of the policy details still being developed). I would welcome any input from members of the Green New Deal Group or those with research interests in this area who would be interested in helping us develop the detailed curriculum of this module before launch.

This is an exciting time for those who are comfortable working with data and communicating what they have found in it. Let’s make sure that those skills are applied to the needs of 99% of the global community.

Two views of Park View

09. June 2014 · Write a comment · Categories: Birmingham, Regulation

Whatever you think about the risk of extremism being incubated in Birmingham schools or the political battles going on at the top of the Conservative Party, the contrast between the two Ofsted reports into Park View is startling to say the least. Just look at the key findings from the report issued today and compare them with comments from the 2012 report:

Park view Ofsteds

Are these really the same schools? The only summary findings which do not have a direct and emphatic rebuttal from the report two years earlier are those from a section of the current staff who appear to be concerned about leadership, feel the governors are involved inappropriately, and complain about unfair recruitment practices and feeling intimidated against speaking out. So are these courageous whistle-blowers, who were still summoning up that courage two years ago, or merely resentful staff?

What has changed? The new report refers to “considerable staff changes since the academy opened almost two years ago”. It then continues as follows:

The substantive principal, who was appointed in Spring 2012, is currently seconded to Golden Hillock School as acting principal. A Park View vice principal is currently the acting principal. The former academy principal is now the executive principal of the trust, she is due to retire at the end of the Spring Term 2014. She is being replaced by the substantive principal of Park View, who will continue in this capacity in addition to the post of executive principal of the trust. Other leaders have transferred to, or work part of their time in, the other two trust academy schools. A new vice principal and a new assistant principal have been appointed to start in April 2014.

One thing that has definitely changed is that in 2012 the school, Park View Business and Enterprise School as it was then, was a school. It then converted to academy status in April 2012, Park View School Academy of Mathematics and Science, the trust being managed by Park View Educational Trust, which then expanded into a multi-academy trust that includes Nansen Primary School and Golden Hillock School. All three have now been put into special measures.

So is it the academy programme which is the problem here rather than anything to do with extremism? A school subject to special measures can be subjected to further Ofsted inspections at very short-notice (although now we hear that no-notice inspections for all schools are being considered) to monitor its improvement. The senior managers and teaching staff can be dismissed and the school governors replaced by an appointed executive committee. This sounds very much like Park View’s recent history. It is unclear what benefit more short-notice inspections are likely to have, when their findings can differ as radically as this.

It seems fairly clear that something has gone wrong in the governance of these schools during the process of moving to a multi-academy trust, and that at least some of the school community feel that they have not had their views properly taken into account during that process. Raising the bogey of hardline Muslim extremism stalking the city’s schools, as Michael Wilshaw has done today, does not help anybody tackle this.

What also seems fairly clear is that the Ofsted inspection regime is considerably less objective than it would have us believe. Whatever changes may have occurred at this school over a two year period, at least some of the vertiginous decline from outstanding with no concerns to inadequate with few redeeming features (they came up with three in their summary) can ultimately only be explained by the last team liking the school and the new team (admittedly working in a very different climate) disliking the school. Those “likes” and “dislikes” appear to be what passes for a regulatory framework for the education of our young people. It is not nearly good enough.

Investment consultants and value

15. May 2014 · Write a comment · Categories: Birmingham, Pensions, Regulation, Risk

I was introduced to a great piece of research by Tim Jenkinson, Howard Jones and Jose Vicente Martinez this week (Tim was speaking at the Workplace Pensions Live event in Birmingham). It looked at the performance of US active equity products recommended by investment consultants (a large sample covering 90% of the investment consulting market worldwide) compared to those not recommended by them over the period 1999-2011.

What they found was that:

Investment consultants’ recommendations seem less heavily influenced by return-chasing strategies than by more intangible personal assessments, eg of the capabilities of fund managers, the consistency of their philosophies and the usefulness of their reports (any of those explanations for recommendations sound familiar?);
People tend to follow the recommendations they are given; and
There is no evidence that investment consultants’ recommendations add value to plan sponsors.

The underperformance of recommended funds compared to unrecommended was 1% pa on average when all funds were given an equal weighting, falling to an underperformance of 0.26% pa when weighted by the size of fund recommended. This suggests that when investment consultants move away from recommending larger funds they are doing even worse.

There may be other reasons for using an investment consultant other than higher returns of course. People may appreciate “a narrative that provides comfort” (similar to the placebo effect in financial advice I previously discussed here) and which gives them ready-made explanations for their own stakeholders. However, bearing in mind the consistent underperformance, why do they follow the recommendations they are given?

One reason may be that the recommendations provide cover for decisions made. Another may be regulatory pressures, eg the Pensions Regulator in the UK requires pension scheme trustees to take professional investment advice (a requirement Tim Jenkinson believes is unhelpful) and it may be viewed as odd to then ignore it.

But the report concludes that a more likely reason is that people are generally unaware of how little value is being added. Certainly studies like this one that set the problem out in such stark terms are fairly thin on the ground. The investment consultants’ world is a very concentrated one (of the $25 trillion funds under management: $4.4 trillion are managed by Aon Hewitt, $4 trillion by Mercer and $2.1 trillion by Towers Watson) and the necessary information can be difficult to get hold of.

Another reason that the underperformance may be less obvious is the impact of the recommendation itself. As John Allen Paulos explains in his classic A Mathematician Plays the Market, for an over or underperforming stock you both need the performance itself and for someone to pick it. If you always pick what the investment consultant recommends the second condition is automatically met. Sometimes that will be the lucky stock and sometimes it won’t, but you will always choose it when it is, whereas a random choice of stocks will choose it in its lucky weeks less frequently.

What all this tells us is that you cannot assume that the additional complexity investment consultants’ appear to be biased towards is adding any value to your pension scheme or business. Tim Jenkinson suggests there should be a presumption of passive investment unless a very persuasive argument for active management can be advanced. And at the small end, as he says: “if you’re not big, be simple”.

The Phoenix has landed

14. October 2013 · Write a comment · Categories: Birmingham, Cartoons, Economics, Regulation

Mention the Phoenix Four in Birmingham and you are likely to get a strong reaction. Most people knew someone who worked at MG Rover’s Longbridge plant, and many local families supplied workers for generation after generation. A huge rally brought tens of thousands onto the streets in 2000 when BMW put MG Rover up for sale, protesting against what had appeared at the time to be the most likely outcome of Alchemy Partners buying it and turning it into a low volume car manufacturer with only 2,000-3,000 of the 6,500 jobs there remaining. So there was jubilation when the ‘Phoenix Four’ group of businessmen (John Towers, John Edwards, Peter Beale and Nick Stephenson) stepped in to take the business off BMW’s hands for £10 with a further £500 million accompanying the business from BMW to sweeten the deal. By 2005 all the jobs had been lost.

A Government inquiry into Phoenix Venture Holdings (PVH – the Four’s company) reported in 2009 that The Four had managed to extract £42 million in salaries and pensions by this time. The inquiry spent 4 years and £16 million getting to grips with the convoluted machinations by which this was achieved. No criminal charges resulted. The Four were not even disqualified from being company directors. Instead, in 2011, they belatedly agreed voluntarily not to serve as directors for 3 (Edwards), 5 (Towers and Stephenson) and 6 (Beale) years respectively.

In January last year, the Executive Counsel to the Financial Reporting Council (FRC) finally turned to the advice The Four had been receiving during the whole saga, from Deloitte and specifically their head of UK corporate practice Maghsoud Einollahi, alleging that their conduct fell short of the standards reasonably expected of them in relation to Project Platinum (the project to put a deal together) and Project Aircraft (the specific deal to transfer MG Rover Group’s (MGRG’s) accumulated tax losses to a subsidiary of PVH). The tribunal ruled on these allegations last month. It makes entertaining reading unless you happen to be a former MG Rover employee.

One of the issues was that Deloitte had muddied the waters about who they were representing (MGRG or PVH) in order to mask a massive conflict of interest. As the tribunal states:

If the identity of the client is not known it is not possible to identify and consider whether there is any conflict existing or potential. That is the real importance of identifying the client. Here the client was known to the Respondents (ie Deloitte and Einollahi) a substantial time before the final existence of a letter of engagement and nothing was done about it.

The Phoenix Four were always the client. Deloitte were at all times acting on their behalf. We know too that the Respondents were represented at an MG Rover Group Limited Board Meeting and made a presentation to the Board thus suggesting that they were acting for MG Rover and not the Phoenix Four.

But my favourite bit is the extract of Einollahi’s testimony on who his client was:

Q: (reading his previous testimony) “…you did not think you had a client…”
A: (Pause) I think that is fair, that I didn’t believe I contractually had a client.
Q: Exactly
A: But
Q: And the problem is the one that I have alluded to already, that you would be holding yourself out to third parties as acting for, in this case, the group (ie MG Rover)
A: (Nods)

Following this Pinteresque dialogue, the tribunal moved on to Deloitte’s fee of £7.5 million. Part of the defence case had been that £7.5 million was not a very large fee within the context of Deloitte’s annual fee income, that contingency fees (ie which were paid only if a given result was achieved) were common and that clients were not prepared to accept different arrangements. The tribunal was not impressed:

It seems to us that Mr Einollahi would charge a contingency fee of a size he thought that he would be paid by the client without considering whether it was appropriate or not. Again when he gave evidence he was cross-examined and we refer to one question and answer.
Q: …you did not like to negotiate fees downward?
A: I didn’t – I didn’t act for people who wanted to negotiate my fees downward. I didn’t need to.

The tribunal concluded:

He wanted that fee of £7.5 million and realised that his best prospects of achieving that fee were by a deal between the Phoenix Four and HBOS rather than between MGRG and First National Finance or MGRG and HBOS

Project Aircraft, the scheme involving moving around MG Rover tax losses, had been attempted before under the title Project Salt/Slag and rejected by the Inland Revenue. Aircraft succeeded where Slag failed largely because the Revenue believed this time that MG Rover would benefit from the profits generated by the scheme.

Mr Towers said “frankly, for us, what mattered was there was a possibility here of creating cash, additional cash for the group and most particularly, for the cash-consuming part of the group which was the car company”. Mr Beale’s evidence was to the effect that MGRG benefited from the transaction because “it gave the group additional cash reserves which it could lend to MG Rover as and when required”. The Inspectors (from the Government inquiry) said at Chapter XI paragraph 17 “in practice, much of the money which the group generated from Project Aircraft was used to fund a payment to the Guernsey Trust”. (The beneficiaries of which included Messrs Beale, Edwards, Stephenson and Towers.) The Inspectors continued “immediately before Barclays Bank made its £121 million loan (which also paid off a previous loan and some other creditors), PVH had credit balances on its bank accounts totalling £2,184,083. The loan increased the credit balances to £14,736,629, enabling the company on 26 June 2002, without having received any money from any outside source in the interim, to pay £7,905,125 to the Guernsey trust (as well as paying £2,261,875 to Deloitte in respect of fees for Project Aircraft). No payment was made by PVH to MGRG at this stage, or in fact at any time before November 2003.

The tribunal continued:

Mr Einollahi undoubtedly played a significant part in Project Aircraft. He must have been aware, and admits that he was so aware, that the Phoenix Four were on holiday in Portugal in 2001 and while on holiday agreed between themselves to pay themselves very substantial bonuses. They in fact paid themselves collectively about £7 million after the conclusion of the Project Aircraft transaction. These sums came essentially from assets of MGRG and were used to make these very substantial payments to the Phoenix Four. They received the whole of the proceeds and MGRG received none.

In conclusion, the tribunal said:

They (ie Deloitte and Einollahi) placed their own interests ahead of that of the public and compromised their own objectivity. This was a flagrant disregard of the professional standards expected and required and was in each individual case, and of its own, serious misconduct.

The Executive Counsel, who had made the complaints, asked for a severe reprimand and a fine of between £15 million and £20 million. They also requested that Einollahi be excluded from membership of the Institute of Chartered Accountants in England and wales (ICAEW) for 6 months and fined an amount based on an assessment of his financial resources. Deloitte suggested instead that the fine should only be £1 million and Einollahi should not be fined at all.

At this point, in my view, the tribunal lost its way a little. They decided on a severe reprimand and a fine of £14 million for Deloitte. This was calculated as follows:

We have assessed the financial gain from the fees attributable to both Project Platinum and Project Aircraft with a deduction for the total amount of recorded costs against these projects. We have added interest at 1% over base rate to deny Deloitte any financial gain from the misconduct.

This raises an interesting question about what calculations other firms might make in the future about the chances of ending up in a tribunal like this and the likely consequences against the rewards of the deals themselves. If worst case scenario is that they won’t make a profit, I remain unconvinced that this will prove much of a deterrent.

They added:

We have borne very much in mind that Deloitte is not insured against the imposition of a fine and has undertaken to indemnify Mr Einollahi against any fine imposed upon him.

It is heartwarming to see them looking after their errant employee in this way, but their insurance arrangements should be of no interest to anyone.

Einollahi himself was excluded for 3 years rather than the 6 months requested by the Counsel, but only because he was not prepared to voluntarily relinquish his practising certificate. He also refused to cooperate with the assessment of his financial resources, leading to the tribunal to put a bit of a finger in the air and opt for a fine of £250,000.

So what now? The tribunal made much of the public interest in the hearings:

It was particularly important in the case of both Project Platinum and Project Aircraft that the public interest be considered because of the concern of inter alia the Government, employees, other employers, particularly in the West Midlands, creditors and the general public about the continuation of large scale car manufacturing in the West Midlands.

The importance of considering the public interest is further emphasised because both the Projects resulted in very large sums of money that might have been utilised for the benefit of the MG Rover Group in the running of its business instead, being used for the benefit of individuals, including the Phoenix Four.

But what is the public interest? My assumption would have been that it must primarily be about the portion of the general public which was most damaged by all this, namely the MG Rover workers who lost their jobs and their communities. The local MP, Richard Burden, agrees. The Trust Fund for former MG Rover workers, which John Towers had at one point said would have over £50 million in it, was finally wound up earlier this year when the £23,000 actually available was donated by the workers to a local hospice.

The £14.25 million awarded in fines would normally go to the Consultative Committee of Accounting Bodies (CCAB), an umbrella group for several professional bodies, which pays the costs of FRC disciplinary cases. However in this case the costs of the proceedings of just under £4 million have already been charged to Deloitte on top. Is the case for meeting the costs of future disciplined accountants really greater than the public interest in making some contribution to the communities that the FRC’s members have facilitated into the ground?

There will be some time to make this decision in. Depressingly, Deloitte and Einollahi filed formal notice on 1 October that they are appealing the decision, as indeed they have contested everything that wasn’t nailed down throughout the process. Their joint statement read as follows:

“We recognise the general desire to move on from this case but do not agree with the main conclusions of the tribunal which we feel could create significant uncertainty for individual members and member firms of the ICAEW.”

After all, if it ever became accepted that consultants had any responsibility to the most vulnerable people affected by their less-than-professional manoeuvrings, where might it end? There is no time limit on the tribunal member hearing the appeal to make a decision on whether an appeal can go forward.

Enough is enough. Deloitte should do the right thing and drop their appeal now.

The Antifragility of Restaurants and Terrorism

15. August 2013 · Write a comment · Categories: Antifragility, Birmingham

I have been thinking about the turnover of restaurants in Birmingham recently. There have been a number of new launches in the city in the last year, from Adam’s, with Michelin starred Adam Stokes, to Café Opus at Ikon to Le Truc, each replacing struggling previous ventures.

Nassim Nicholas Taleb makes the case, in his book Antifragile, for the antifragility of restaurants. As he says: Restaurants are fragile, they compete with each other, but the collective of local restaurants is antifragile for that very reason. Had restaurants been individually robust, hence immortal, the overall business would be either stagnant or weak, and would deliver nothing better than cafeteria food – and I mean Soviet-style cafeteria food. Further, it would be marred with systemic shortages, with, once in a while, a complete crisis and government bailout. All that quality, stability, and reliability are owed to the fragility of the restaurant itself.

I wondered if this argument could be extended to terrorism, in an equally Talebian sense.

But first, three false premises:

1. Terrorist attack frequency follows a power law distribution.

Following on from my previous post, I thought I had found another power law distribution in Nate Silver’s book The Signal and the Noise. He sets out a graph of the terrorist attack frequencies by death toll. The source of the data was the Global Terrorism Database for NATO countries from 1979 to 2009. I thought I would check this and downloaded an enormous 45Mb Excel file from the National Consortium for the Study of Terrorism and Responses to Terrorism (START). I decided to use the entire database (ie from 1970 to 2011), with the proviso that I would use only attacks leading to at least 5 deaths to keep it manageable (as Nate Silver had done). The START definition of terrorism is that it is only committed by NGOs, and they also had a strange way of numbering attacks which, for instance, counted 9-11 as four separate attacks (I adjusted for this). I then used a logarithmic scale on each axis and the result is shown below. Not even straightish, so probably not quite a power law distribution, it has a definite downward curve and something else entirely happening when deaths get above 500.

In my view it certainly doesn’t support Nate’s contention of a power law distribution at the top end. On the contrary, it suggests that we can expect something worse, ie more frequent attacks with high casualties, than a power law would predict.

So what possible link could there be between terrorism and the demise of the Ikon café (there may be other restaurants where the food served met one of the other definitions of terrorism used by the Global Terrorism Database, ie intending to induce fear in an audience beyond the immediate victims, but not the Ikon)? Well, for one thing, they do have a made up statistic in common:

2. 90% of new restaurants fail within the first year.

This is a very persistent myth, most recently repeated in Antifragile, which was debunked as long ago as 2007. However, new business failures in general are still up at around 25% in the first year, which means the point that the pool of restaurants is constantly renewed by people with new ideas at the expense of those with failing ones remains valid. This process makes the restaurant provision as a whole better as a result of the fragility of its individual members.

3. 90% of terrorist groups fail within the first year.

Now I don’t know for certain whether this conjecture by David Rapoport is false, but given my experience with the last two “facts”, I would be very sceptical that the data (i) exists and (ii) is well-defined enough to give a definitive percentage. However, clearly there is a considerable turnover amongst these groups, and the methods used by them have developed often more quickly than the measures taken to counter them. Each new major terrorist attempt appears to result in some additional loss of freedom for the general public, whether it be what you can carry onto an aircraft or the amount of general surveillance we are all subjected to.

So what else do restaurants and terrorism have in common? What does a restaurant do when public tastes change? It either adapts itself or dies and is replaced by another restaurant better able to meet them. What does a terrorist group do when it has ceased to be relevant? It either changes its focus, or gets replaced in support by a group that already has. However, although individual terrorist groups will find themselves hunted down, killed, negotiated with, made irrelevant or, occasionally, empowered out of existence, new groups will continue to spring up in new forms and with new causes, ensuring that terrorism overall will always be with us and, indeed, strengthening with each successive generation.

The frequency of terrorist attacks, particularly at the most outrageous end, over the last 40 years would suggest that terrorism itself, despite the destruction of most of the people practising it amongst the mayhem they cause, has indeed proved at least as antifragile as restaurants. So, in the same way that we are all getting fed better, more and more people and resources are also being sucked into a battle which looks set to continue escalating. Because the nature of terrorism is, like the availability of pizza in your neighbourhood, that it benefits from adversity.

This suggests to me:

a. that we should rethink the constant upping of security measures against a threat which is only strengthened by them; and
b. that you shouldn’t believe everything you read.

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