Transport Crisis in London

Both Sadiq Khan, Mayor of London, and Andy Byford, London Transport Commissioner, have warned that unless they get more money from the Government then there are going to be savage cuts in public transport and on major infrastructure projects. The latter might include the required repairs to the Rotherhithe Tunnel, the A40 Westway and A12 Gallows Corner flyover leading to their closure.

Some 100 bus routes face the axe and frequencies may be cut on 200 other routes. Other proposals are no more electric buses, no more step-free stations, no more “Healthy Streets” cycling and walking schemes and no more 20mph zones or safer junctions.

Now some readers might welcome some of those things and clearly the Mayor is trying to scare the Government into providing more funding within weeks. But some of those suggestions like closure of the Rotherhithe Tunnel and the Westway would be disastrous for the functioning of the road network in both east and west London.

How did TfL get themselves into such a mess? It all stems from the policies adopted by Ken Livingstone which was for massive subsidies to buses and commitments for large expenditure on Crossrail and other underground projects. The bus network has certainly been greatly expanded but at a cost that was never justified and Crossrail has been a financial disaster. Over budget, over schedule, and never justified on a cost/benefit basis. The Mayor was relying on income from it to cover TfL’s future budgets which it never has.

Boris Johnson never tackled the problems created by Livingstone when he was Mayor while Sadiq Khan has actually made matters worse by spending enormous amounts of money on cycle lanes, LTNs, and other schemes that have damaged the road network. He has also encouraged the growth in the population of London while the infrastructure never kept up with it despite massive central Government funding.

A report in the Express shows that £515 more per person was spent on transport schemes in London than on the North of England. A new report from the IPPR North think tank has published an independent analysis of transport spending over the past decade. Between 2009/10-2019/20, the North received just £349 per person in transport spending. In comparison, the UK as a whole received £430 per person, while London received a staggering £864 per person. Where did it all go one might ask? On pointless and generally uneconomic schemes not justified by any cost/benefit analysis is the answer.

The daft transport schemes such as the Congestion Charge and the ULEZ have actually encouraged people to move out of London and the cuts to public transport that are proposed will expedite that trend. With falling income from bus and tube fares already caused by the pandemic, the outlook is certainly bleak. But failing to maintain the infrastructure such as bridges, tunnels and flyovers while the Major prefers to spend money on other things is surely a sign of gross incompetence.

London needs a new transport plan where expenditure is matched to income and needless subsidies removed. In other words, people should pay the cost of the trips they take on public transport and free riders should be stopped. But will a socialist Mayor ever take such steps? I doubt it. So London is likely to go into further decline and more people will move out.

But London is at the heart of the UK economy so there is some justification for central Government stepping in once again to reform London’s governance. We need less populism (which generally means hand-outs to win votes) and more financial acumen in the leadership. Certainly the current arrangement where you have a virtual dictator in the role of Mayor and a toothless London Assembly is not working.

The key to improving the London transport network is not to have it all (both public and private transport) under the control of one body (TfL) which leads to lack of competition and perverse incentives. For example, encouraging cycling to relieve pressure on public transport while causing more road traffic congestion and introducing schemes such as the ULEZ to help subsidise public transport while increasing the cost of private transport.

Perhaps we need a new Dr Beeching to put the London transport network back into a cost-effective structure as he did for British Rail. But at least the Government seems to have taken some rational decisions by cancelling the eastern link of HS2 to Leeds. Just like Crossrail in London, HS2 was never justified in terms of benefits achievable and the money would have been better spent on smaller projects. But politicians love grandiose schemes. Reality seems to be finally sinking in on the national scene even if not yet in London.

Roger Lawson

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Two High Fliers Back Down to Earth

This week saw a couple of high-flying digital automation suppliers move back into more realistic pricing levels. On Tuesday DotDigital (DOTD) announced their preliminary results for the year to June. The share price fell sharply on the day and is now down over 25%, possibly prompted by negative comments on Stockopedia.

I won’t go into detail on the issues because this blog post would otherwise be a very long one. But I did attend the results presentation on the Investor Meet Company platform this morning when some of my questions, and others, were covered.

One question raised was about the reporting of “discontinued” revenue from the Comapi business. It was stated that this was definitely closed down completely by June this year so won’t appear in future. There was also concern that SMS business was impacting revenue and profits but it was stated that it was not cannibalising email revenue. But SMS business is at lower margins and there was clearly a spike last year in SMS business (if you are signed up for NHS services you will have realised that they are now tending to use that communication channel which I find quite annoying).

There was a good review of the competitive landscape and it seems there is good growth coming via partners with “connectors” such as Magento, Shopify, Big Commerce and MS Dynamics.

In summary my comment would be that I think this is still a fundamentally sound business which can grow some more, but I would prefer to see the accounts presented in a simpler way. However the share price had grown very rapidly in the last year and in my view was overvaluing the business. It’s now at a more realistic level.

The other company whose share price has taken a big knock is GB Group (GBG). Yesterday they announced a share placing at a price of 725p to raise money to enable them to acquire a similar US business. It looks to be a sensible acquisition. But the share price was at a discount of 17% on the market price and involves substantial dilution of existing shareholders.

Again I would suggest that this has reset the share price to a more realistic level. Retail investors may be able to participate via the Primary Bid platform.  

As I hold shares in both DotDigital and GB Group, these events have not done wonders for my portfolio valuations but I had been reducing my holding in these companies (top slicing) in recent months as the valuations did seem to be departing from reality. They are now back down to earth.

The Covid epidemic has certainly driven more digitisation of processes which both companies have benefited from but the valuations of such businesses have become strained in my view. Can the growth continue at the same rate in the next couple of years? Perhaps so but that is not certain.

Readers should of course form their own view on the valuations of these businesses and not rely on my comments. But they are both key players in the automation of marketing and financial services so are well placed for the future.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Death of Coal Mining and the Nuclear Alternative

Boris Johnson has said that the Glasgow climate deal is a “game-changing agreement” which sounds “the death knell for coal power”. Let us hope so. My father worked down a pit in Nottinghamshire in his early life and was all for replacing coal power stations by nuclear power. Coal mining is not just a great creator of pollution but is also positively dangerous for the miners.

China is one of the largest consumers and producers of coal and in 2019 there were 316 deaths of coal miners in that country. That was an improvement on previous years but it is still a horrific number.

Nuclear power is considered to be dangerous by some people but in reality it is remarkably safe. For example the Fukushima event in Japan in 2018 only directly caused the death of one person. For a very good analysis of the safety of various energy sources go here: https://ourworldindata.org/safest-sources-of-energy

One problem with nuclear power is that it tends to be produced in plants that have very high capital costs and take many years to build. They are also vulnerable to faults when in operation. This often results in very expensive costs in comparison with coal or gas. But that might be solved by the development of small modular reactors (SMRs) where Rolls-Royce (RR.) has a potential technology lead from their experience in building nuclear reactors to power submarines.

They have recently obtained more funding from the Government and from partners to develop this business – see the Rolls-Royce press release here:  https://www.rolls-royce.com/media/press-releases/2021/08-11-2021-rr-announces-funding-secured-for-small-modular-reactors.aspx

Will that enable Rolls-Royce to recover from the dire impacts of the Covid epidemic on its aero engine business? Perhaps but not for some years in the future I would estimate. Developing new technology and new production methods is always vulnerable to hitches of various kinds which tends to mean that it takes longer than expected.

There are of course alternatives to nuclear power such as wind power, hydroelectricity and solar. But wind power is intermittent thus requiring investment in big batteries to smooth the load and in the last year there was less wind that normally expected in the UK. This has impacted the results of companies such as The Renewables Infrastructure Group (TRIG) and Greencoat UK Wind (UKW).

Which technology will be the winner in solving the clean energy problem is not at all clear but I would bet that coal is definitely on the way out for electricity production although it might survive for use in steel manufacturing. UK coal fired power stations are scheduled to be closed down by 2024 and already the UK can go for many weeks without them being in operation.

Whether you accept the Government is right to aim for net zero carbon emissions by 2050 or not, we must surely all welcome the replacement of coal power generation by other sources.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Crown Place VCT AGM Report and AIC Survey of ESG Interest

I attended the Crown Place VCT (CRWN) Annual General Meeting today via the Hopin platform. This worked well with no technical hitches.

I have held the shares in this company for a very long time. It was one of those VCTs with a difficult history originally when it was formed from three Murray VCTs. After Albion took over management it has had a good track record. Total return in the last 5 years has been 14.0%, 14.6%, 11.2%, -0.6% and 15.9% last year.

Emil Gigov, representing the manager, gave a useful presentation. Like some other VCTs I hold, it has been focussing on late on software, fintech and digital health companies which now comprise 77% of the portfolio (excluding cash) and has been selling off its asset-based investments such as care homes. It is holding a large amount of cash in the portfolio (35% of assets) and this raised a question from the audience. Why so much cash? Answer was primarily because they need to keep that to exploit future opportunities, particularly follow-on investments to existing holdings.

I asked a question which I submitted in writing during the meeting which was: “What do you think of the Chancellors announcement that all listed companies will have to state how they expect to achieve net zero, enforced by regulation?”. But I did not get an answer.

All resolutions were passed with over 90% of support. In summary there seemed to be no contentious issues at this VCT and charges are reasonable (although raised to 2.6% of assets last year due to a big performance fee).

Note that an interesting aspect on the question I posed was revealed in a survey that the AIC has published of private investors. This is what it said: “When asked what was important to them in choosing an investment, respondents ranked ESG as the least important of five factors. Among all respondents, the most important consideration was an investment’s performance record, followed by fees and charges, the fund manager’s reputation, and the asset management company’s reputation.

But one female respondent aged 59 said: ‘In my personal life I do give consideration to these things, I drive an electric car, I have a plant-based diet, I definitely have quite strong feelings about that – but hand on heart when it has come to my investments, the first thing I would look at is returns.’

ESG is more important to women than men, and more important to investors under 45 than those over 45”.

The AIC don’t give the actual numbers who responded so as investors tend to be male and over 45 perhaps this affected the outcome. Such investors are less likely to adopt extreme life styles I suggest.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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COP26, Regulatory Arbitrage and Greenwashing

COP26 finished last week and many readers may have lost interest in the issues it discussed long before it closed. There is just so much one can take from the scaremongers of global warming when most of us have more immediate concerns about health and wealth. But there was one announcement by Chancellor Rishi Sunak that could be seriously damaging to your wealth in the next few years.

This was his announcement that the UK will be the world’s first net zero financial centre. This will not just be political gestures but he is proposing the following to quote from his Treasury statement: “Under the proposals, there will be new requirements for UK financial institutions and listed companies to publish net zero transition plans that detail how they will adapt and decarbonise as the UK moves towards to a net zero economy by 2050”.

“To guard against greenwashing, a science-based ‘gold standard’ for transition plans will be drawn up by a new Transition Plan Taskforce, composed of industry and academic leaders, regulators, and civil society groups”.

In other words, this will not be another “greenwashing” exercise but impose specific obligations on companies. The fact that meeting net zero carbon is an impossible task for many companies in any realistic timescale it seems is likely to be ignored. Even attempting to meet that target will impose enormous costs on companies even those who are not big generators of carbon emissions. If you extend it to Scope 3 emissions (those include all indirect emissions that occur in a company’s value chain) then the reach will affect all sectors of the economy.

This will certainly put the UK in the lead in the attempt to restrict global warming whether you believe it is practical or not. But if such regulations are introduced in the UK one can imagine exactly what will happen as it seems unlikely that other major economies will follow that lead. China, the USA, Russia and India are very unlikely to impose such draconian measures. As many UK listed companies have an international focus they have no great need to be listed in the UK. They could just as easily be listed in the USA or other countries with more friendly or easy-going regulatory frameworks.

You might think this is just an attack on oil/gas and mining companies but it will have a much wider impact in reality. For example, one of the big consumers of oil are ships transporting goods around the world so anyone importing products for sale, such as retailers, would need to persuade the shipping companies to avoid using oil.

One thing is certain. Companies such as BP and Shell may simply consider that it is easier to move their listing to another jurisdiction or accept a bid from a private equity player who does not have concerns about their environmental credentials.

This is what Jeremy Warner had to say in the Daily Telegraph: “However much we might wish it otherwise, oil and gas will long remain our primary source of life enhancing energy. And yet the industry is being driven underground by politicians and regulators too cowed to stand up to the hysteria of the climate change activists. The enemy within is almost as bad as the holier than thou pressures from without; oil company boards, together with those of their bankers, are these days stacked with well meaning do-gooders more focused on bowing to the campaigners than the demands of shareholder value”. If you are a shareholder in BP or Shell (I am not) you may sympathise with such comments.

Such moves of listing may already be evident from the decision of BHP to move to a single listing in Australia rather than the dual listing at present.

Unfortunately with such companies being the bedrock of the dividend paying FTSE-100 companies there are few alternatives for some investors such as big pension funds to choose.

Personally I have been investing in alternative energy generating companies and battery companies because the latest announcements from the Government tell me that the hysteria over achieving net zero is now so widespread that it will have a big impact on the financial world. In addition the Government plans to spend many billions of pounds in financing green initiatives and not just in the UK. We have already contributed £2.5 billion as the biggest donor to Climate Investment Funds. Such funding imposes a heavy burden of taxation which will add to the above woes of companies domiciled in the UK.

The irrationality of the general public over climate change in the UK has no bounds. For the last 30 years the young have been taught in schools an extreme agenda which has also been promoted by the national media, particularly the BBC, and politicians are now pandering to the mood of the public. This scenario is going to make the UK a poor location for investment funds in comparison with other countries. Private investors should surely rebalance their portfolios to have less emphasis on the UK. At least that is the case while the mania continues.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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General Meeting Requisition at Edge Performance VCT

I am glad to see that ShareSoc is supporting a General Meeting at Edge Performance VCT to remove three existing directors and appoint a new one.

I have never held shares in this company or the multiple funds it has managed but as it regularly came up in conversations at ShareSoc I have watched from the side-lines. I considered it to be a basket case of the first order from what I learned some years ago – particularly the large investment in Coolabi and the valuation of that holding plus the general standard of corporate governance and management of the company. The performance of the funds has generally been the exact opposite of what the company name was intended to suggest.

In such situations I generally consider it best to aim for a revolution including a complete change of the board and a change of manager. But it’s never too late to start anew as I have learned from other VCT problem cases in the past. Although Robin Goodfellow was appointed to the board last year to bring a fresh voice it remains dominated by others. This needs to change so I hope readers who hold the shares will support the proposed changes.  

Incidentally there is a good article on VCTs entitled “VCT lessons I have learnt” by Paul Jackson in the latest edition of Investors’ Chronicle. It covers some of the wrinkles of investing in VCTs which is certainly a complex subject.

VCTs are complicated enough without the complex structure of multiple share classes embodied in the Edge Performance VCT.

For more details see https://www.sharesoc.org/sharesoc-news/edge-shareholders-requisition-general-meeting-to-remove-3-directors-and-appoint-richard-roth-as-a-director/ . It is good that ShareSoc is actively encouraging and supporting action in such cases.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Open Letter re New FCA Chairman

An open letter to Rishi Sunak, Chancellor, has been created by the Transparency Task Force concerning the appointment of a new Chairman of the Financial Conduct Authority (FCA). That body has clearly been ineffective in recent years in protecting retail investors from fraud and scams. The letter calls on any new appointment to be not another City insider but someone with true independence.

You can read the letter here: https://www.transparencytaskforce.org/wp-content/uploads/2021/11/Open-Letter-regarding-regarding-replacement-to-the-Chair-of-the-FCA-3.pdf

I ask you to support the letter by adding your name to it as I have done. Just send an email to the contact person at the foot of the letter confirming your support.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Alliance Trust Resets Dividend

An announcement this morning from Alliance Trust (ATST) says that the board has concluded that an increased dividend “will benefit existing shareholders and enhance the attractiveness of the Company’s shares”. They expect the overall annual dividend to increase by 32.5% over the 2020 dividend. The proposed increase will be well covered by distributable reserves and income it is suggested although no doubt some of the extra dividend cost will come from capital.

ATST had a reported yield of 1.43% last year according to the AIC which is the figure a lot of private investors look at when identifying good investments, when they should be looking at total return and overall performance. So far as the tax position of most private investors are concerned, turning capital growth into dividend income is a mistake as they will end up paying more tax. If they need more cash income they could simply sell some shares.

As with City of London Investment Trust I recently commented upon, and as very evident at their AGM, the emphasis on dividends paid by the trust, and growth in them, is apparently aimed at pleasing investors when investors are being fooled by the cash they see coming in when total return including capital growth is what they should really be paying attention to.

There are some interesting comments on Alliance Trust by Mark Northway in the latest ShareSoc Informer newsletter published today. He points out that the change to a “best ideas” portfolio approach managed by Willis Towers Watson since 2017 has not returned significantly above average performance after costs as anticipated. A huge amount of effort has been put in with little benefit he suggests. But perhaps that just shows how difficult it is to beat index benchmarks consistently particularly when the trust’s portfolio is so diversified. At least the trust’s performance is no worse than its benchmark as used to be the case before the revolution and appointment of a new manager.

As part of my “barbell” portfolio I am happy with the performance of Alliance Trust but I would have preferred them not to increase the dividend. I barely need to the cash as household expenditure is sharply down in the last year due to self-isolation from Covid. I’ll end up reinvesting the dividend cash after paying tax on it, when Alliance could do that for me tax free!   

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

It’s a Champagne Budget

It’s a champagne budget – or at least one to celebrate for investors as there are no really negative changes in it that were widely rumoured. At least that is apart from the rise in dividend taxes and freezing of allowances previously announced.

Here’s a list of the key points:

  • The National Living Wage is being increased.
  • The Government is substantially increasing funding for R&D.
  • The bank corporation tax surcharge is being reduced.
  • There will be some relief for business rates.
  • R&D tax relief will be focussed on domestic expenditure.
  • There will be more investment in tech skills and in schools.
  • Alcohol duties will be reformed and simplified with lower rates on lower alcohol products – champagne and beer will be cheaper.
  • Proposed rises in fuel duty are cancelled.
  • There will be minor changes to the taxation of REITs (details not yet clear but probably positive for investors) and there will be a levy on property developers to finance a fund to remove dangerous cladding.
  • The economy is now expected to grow by 6.5% this year (up from 4%) hence the generally positive tone of Rishi Sunak’s speech and new spending commitments.
  • Borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next, then 2.4%, 1.7%, 1.7% and 1.5% in the following years.

Comments:

This is generally a sensible budget with no abrupt changes in taxation, which are always to be deplored.

The emphasis on more education spending is surely wise, and on the NHS of course although whether the extra money will be wisely used remains to be seen.

Cancelling the rise in fuel duty may please some car drivers but it does not seem consistent with the aim to reduce carbon emissions and certainly will not help reduce congestion on our roads. Is this a two fingered gesture to Insulate Britain protestors who were active again this morning? But more prisons are being build to hold them if the courts put them away for a stretch.

It does not look like there will be any big impacts on particular sectors. The share prices of REITs have risen this afternoon so the changes may be positive but the rise in the National Living Wage will hit large employers such as retail store chains. There may be some benefits to large banks in the reduction in the bank surcharge on corporation tax but that will be offset by the general rise in corporation tax previously announced.

The changes in alcohol duties are a welcome simplification and may be of some benefit to pubs while encouraging healthier drinking. But it might negatively impact wine and spirits producers.

The UK stock market has not reacted significantly to these announcements although gilt prices rose on anticipated reductions in Government borrowing.   

More details are present in this document: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1028813/Budget_AB2021_Print.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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