Right or wrong, Labour is offering a solution to the legitimacy crisis of our privatised railways

As I wearily forked out for my monthly rail travelcard this morning I felt the pain of hundreds of thousands of other commuters around the country over the latest round of price increases.

Does it have to be this way? Labour has been touting its promise of train company nationalisations as the solution to this miserable January ritual.

Alas, nationalisation would not, in itself, be a free lunch for passengers and commuters. The UK railway – its maintenance, refurbishment and expansion – needs to be paid for. The central question is whether we pay for it through rail fares or through general taxation.

The coalition government decided back in 2010 that passengers should bear much more of the burden. Some will agree with that decision, given regular train passengers, on average, tend to be wealthier than those who don’t use the service.

Others will argue, legitimately, that we should have a European-style funding system, where the taxpayer pays more through subsidies and that train travel ought to be vigorously promoted as a more environmentally-friendly alternative to the car. You pay your money and take your choice in that debate.

Yet that’s hardly the end of the discussion over rail fares. And the ownership question is not, in fact, irrelevant. Ask people about rising rail fares and it is clear the problem is not simply the above-inflation increases, but the quality of the service provided by the private operating companies too. 

Paying more for an improved service is one thing. Paying more for an experience that is getting no better, or even getting worse, is quite another. And in some parts of the country the rail experience really is deteriorating.

Southern Rail, the blight of Surrey and Sussex, deserves to be a case study in bad management. The disaster is, in large part, a consequence of under-staffing. The franchise relies on almost all its drivers working overtime.  There’s no slack in the system so when drivers don’t volunteer, for whatever reason, it breaks down.

Yet Southern is also a case study in the pitfalls of a disingenuous privatisation. The franchise is being run on a special “management contract” with the Government. This allows relatively little financial autonomy for its parent company, Govia Thameslink. Meanwhile, the terms of the management contract require Southern to introduce controversial driver-only operations, forcing a predictable showdown with the train guard and driver unions. Privatisation here is actually a fig leaf. The Transport Secretary, Chris Grayling, exercises a considerable degree of hidden control. And the terms of the contract create incentives for excessive management cost cutting. The Government then blames the private company for the consequences. This is essentially power without responsibility for ministers. And they appear to like it that way.

In November, the Government announced plans to effectively bail out with public money the Stagecoach/Virgin East Coast rail franchise, which had overbid for the right to operate the line. As Lord Adonis pointed out in his resignation letter as chair of the National Infrastructure Commission last week, Grayling apparently refused the option of taking the franchise into temporary national ownership, something that the last Labour government did in 2009 when National Express similarly failed on the same line, with notable success. This is part of a pattern. Grayling also refused an offer from Transport for London to take control of Southern in 2016.

This is a government that seems to regard the principle of private ownership as more important than the practical interests of passengers. Sizeable fare hikes are fuel on the top of that already smouldering fire of distrust.

The public anger over rail fare hikes reflects something deeper than traditional seasonal grumbling at the rising cost of living. It reflects a fundamental legitimacy problem for the privatised train operating companies. There is majority support in polls for rail re-nationalisation not because Britons are all foaming Trotskyists but because of these underlying trust issues.

Privatisation’s defenders are, of course, correct to say that there are no guarantees nationalisation of train operating companies would produce the more efficient and passenger-focused UK railway that we all desire. That would depend on the competence of the new management and their degree of insulation from political pressures. There are decent grounds for suspecting that things would actually get worse.

Yet what Labour is offering is a solution to the legitimacy crisis of the privatised railway. Those who believe privatisation is an experiment worth persisting with should dispense with the facile lectures about the evils of central planning and get their thinking caps on about how to make the railway work far better for passengers than it is at the moment.

This article was published in The Independent on 02/01/18

#Labour #legtimacy #privatisation #railways

The charmed life of these failed auditors and accountants without accountability

Based on a quick inspection of the books, there doesn’t seem to be a great deal of accountability demanded from the British auditing profession.

In March 2017, the giant audit firm KPMG signed off on the annual accounts of the construction giantcum-outsourced services provider Carillion, saying they gave a “true and fair view” of the state of the company’s affairs.

For this work, KPMG received a fee of £1.4m. This followed £1.4m of fees recouped the year before. In fact, KPMG had been Carillion’s auditor every year since it was founded in 1999. You don’t need to be an accountant to work out that that adds up to a very lucrative client relationship.

But in July 2017, just four months after the annual accounts emerged, Carillion announced to the stock market that its contracts to provide services were worth a remarkable £845m less than they had previously been valued on its books.

That bad news shattered Carillion’s share price and, ultimately, led to the collapse of the entire company earlier this month, dumping pensioners into the official state-run lifeboat scheme, leaving tens of thousands of employees facing redundancy and forcing civil servants to scramble to pick up hundreds of dropped contracts to provide school dinners, maintain prisons and a host of other services.

How did KPMG not identify this massive overvaluation of contracts? Was it because they took Carillion’s estimates at face value? If that’s the case, what’s the point of the external audit? Are the auditors merely called in to rubber stamp what the company tells them? Moreover, KPMG was not the only auditor of Carillion’s numbers. 

Its 2016 report relates that it had a special “internal” auditor too, in Deloitte, with which it worked even more closely than with KPMG. So why didn’t Deloitte pick up on the dodgy contract numbers? When two blue-chip auditing firms apparently can’t detect a near £1bn overvaluation of assets (financial difficulties that many hedge funds without access to Carillion’s books had apparently identified since they were placing big bets on the stock price going down) there’s a problem.

There’s nothing unusual about these spectacular auditing failures. KPMG signed off on the books of HBOS multiple times in the years before the bank’s bad loans eventually blew it apart in 2008. The auditor was even invited to investigate allegations of excessive risk-taking from an internal HBOS whistleblower, Paul Moore. It dismissed them. Indeed, all the UK’s big banks were thoroughly audited before their balance sheets tore like tissue paper before a tsunami during the 2008-09 financial crisis.

The Financial Reporting Council, which after intense political pressure was brought to bear, announced this week that it will investigate KPMG’s performance over Carillion. Yet the lessons of experience of this regulator are anything but encouraging.

Previous probes by the FRC have produced nothing but clean bills of health for auditors. “In nearly every major financial scandal we’ve had since the financial crisis, the FRC decides none of its charges have done anything wrong,” notes Jim Armitage, city editor of the Evening Standard. Worse, these rulings come with no reports or published evidence, making a mockery of the FRC’s claims to “promote transparency”.

Many have pointed out that such indulgence in the face of failure might have something to do with the fact that the board of the FRC is dominated by former auditors and the big corporate customers of auditors.

Perhaps it’s naive to imagine it could be otherwise given the need for professional experience in such a body. Yet the plain fact is that this model of self-regulation for this industry has failed.

The life of an auditor seems to be a charmed one. You pick up large fees for “checking” the books of your client. But when the company collapses you don’t share any of the financial pain or blame. 

Yet what is the point of audit without accountability? It’s no use to shareholders. It’s no use to employees and pensioners of the company. It’s no use to other stakeholders, such as suppliers and customers. The only value, at least the only value that’s discernible from a glance at the dismal past decade, is to the senior managers of the client firm and, of course, to the auditors themselves.

#KPMG #FinancialReportingCouncil #Deloitte #accountancy #Carillion #audits

Does the economics profession need a ‘reformation’?

Economics, we’re told, requires a reformation, just as Christianity needed Martin Luther’s revolutionary door-nailing challenge half a millennium ago. An “unhealthy intellectual monopoly” in mainstream economics, rather like corrupt medieval Catholicism, must be torn down.

Self-described “heterodox” economists have been making the case for years now; for decades in some cases. But is it right? The problem with such revolutionary demands, it has always seemed to me, is that they generally tend to be annoyingly and unhelpfully inexact in their definition of “economics” and “orthodox economists”.

Who are they talking about? Academics? Civil servants? The staff at multinational organisations such as the IMF and the OECD? Wall Street and City of London analysts? Think tank number-crunchers? Lobbyists? Consultants? They are not all the same. All perform different functions and practice economics in different ways. If a chef sends you to the market to buy him a red snapper he won’t be pleased if you bring him back a sardine, even if they both come under the rubric of “fish”.

Reading the list of “33 Theses” affixed to the door of the London School of Economics (a wry echo of Luther’s apocryphal Wittenberg bit of DIY in 1517) by the Rethinking Economics group earlier this month, two things stand out.

First, it’s a vigorous assault on what James Kwak has called “economism” – the idea that supply and demand curves are the only analytic tool one ever needs and that issues such as imperfect competition, missing information, psychological biases and institutional complexities, and myriad other wrinkles in the free market ideal, can be safely and confidently brushed to one side. This nonsense is generally promoted by right-wing think tanks funded by rich libertarians who want to pay less tax.

Second, the thesis-nailers are attacking a particular branch of macroeconomic theorising and forecasting, which tends to make simplifying assumptions for the purpose of creating tractable models. These assumptions include a single “equilibrium” for the economy and “rational expectations” among a homogeneous collection of economic actors.

On both counts the critique has some justification, especially the first. Economism really is distressingly common in public debate. Yet the problem comes in conflating these kinds of approaches with the work of the entire profession. As a group of distinguished and eminent academic microeconomists (people who generally conduct empirical analyses of labour markets, tax policy and consumer behaviour) associated with the Institute for Fiscal Studies and University College London have written, it’s simply untrue to imply that they and hundreds of thousands of their mainstream colleagues are guilty of the sins of economism outlined in the 33 Theses.

And many mainstream macroeconomic theorists and forecasters (who, it should be stressed, only account for a minority of academic economists) are well aware of the pitfalls of the basic “neoclassical” modelling assumptions.

The intellectual monopoly charge made by the heterodox group is grossly overblown, as is the claim that there exists a quasi-religious intolerance of dissent among most mainstream practitioners.

Academic economics is far from perfect, of course. The top-journal publication process, with inordinate delays between submission and acceptance and often unreasonably doctrinaire grounds for rejection, feels unfit for purpose. And given the importance of publication in such journals for a young scholar’s career advancement, this is a genuine problem.

It’s not totally outlandish for the heterodox to claim that a conservative caucus within the academy sometimes uses its power here to stifle contrary perspectives and methodologies, or, at least, to maintain a rather regressive grip on the economics faculties of the most prestigious and wealthy universities.

There have been specific problems with the undergraduate teaching too, where too little of what’s in textbooks has been relevant to the subjects students are actually interested in. Though it’s a shame those who want a pedagogical reformation generally fail to acknowledge the first-rate new CORE textbook, put together by a team of practising mainstream academic economists led by Sam Bowles and Wendy Carlin. A student who absorbs the CORE would struggle to recognise the caricature of the profession outlined in the 33 Theses.

There are deficiencies and blindspots among policymaking economists too. But, again, the thesis-nailers are out of date, in as much as they claim that issues such as inequality, financial bubbles and environmental sustainability are ignored. Researchers at the OECD and the IMF have, in recent years, produced some influential work on the economic perils of excessive inequality. There’s some tentative evidence of a more pluralist approach from the Bank of England too (as anyone who has read the speeches of the Bank’s chief economist, Andy Haldane, will know) though much more needs to be done.

It’s worth pondering why any of this matters. Rival schools of thought and intense methodological disagreements are common in many subjects. Yet calls for a reformation in mathematical research, say, or the teaching of English literature, rarely generate much of a stir outside the academy’s corridors and seminar rooms.

A big part of the explanation is the umbilical link between economics and policymaking. Economics is politically influential in a way that other social sciences are not. But, again, it’s essential to be precise here in what the problem is. As the IFS/UCL economists point out, we surely want policymakers to make judgements about benefits reforms and spending plans based on rigorous evidence on the likely impact. We should want high quality empirical and theoretical research on international trade relationships to influence politicians and political debate when it comes to momentous decisions such as, for instance, the UK leaving the EU’s single market.

Specific problems, it is true, attend macroeconomic policymaking (the setting of monetary and fiscal policy) which inevitably requires some forecasting. Our current level of knowledge over how to measure economic “slack” in an economy, the behaviour of the labour market and the roots of our national productivity malaise leaves a lot to be desired. And policymaking economists should probably be more open-minded here to fresh ideas.

Yet that does not (despite the impression given by an unfortunate amount of mainstream political news coverage over the past decade) apply to fiscal policy, where, as Simon Wren-Lewis of Oxford University ceaselessly stresses, the consensus among serious mainstream academic macroeconomists is that state spending cuts when economies are mired in recession and when interest rates are zero, generally does more harm than good.

Fiscal mistakes have generally been made where politics and ideological zealotry have overridden impartial and mainstream economic advice, not when politicians have bowed before some kind of malevolent neoclassical academic monopoly.

To give them their credit, the heterodox thesis-nailers make many good individual points about how economics should, and should not, be done. More pluralism would indeed be welcome. Some of these economists are often engaged in interesting and important research themselves. The heterodox deserve a break. Yet they would also do themselves a favour if they were to rein in the daft generalisations about the state of mainstream economics.

This article appeared in The Independent on 26/12/17

#economics #economism #heterodox #mainstream