Labour’s Plans For Confiscation of Shares and Rail System Renationalisation

Jeremy Corbyn made it clear in a speech last night that the rich will be under attack if Labour gets into power. John McDonnell, Shadow Chancellor, will present his plans today to give 10% of shares in all larger companies to employees over a period of years. The Daily Telegraph described it as a Marxist plot to control businesses while Carolyn Fairburn of the CBI attacked it as a “new tax that adds to the impression that Labour sees business as a bottomless pit of funding”. The proposal seems to be based on setting up a trust for employees into which the shares would be deposited and from where dividends would be paid to employees.

Comment: It will certainly dilute existing shareholders so readers of this blog might find they and the pension funds that invest in shares are proportionally poorer. Although it sets a bad principle, if the numbers being proposed are enacted it might not have a major impact on companies or investors. Enabling employees to have a financial interest in the profits of a company is quite a sensible idea in many ways. But it might simply encourage companies to take their business elsewhere. If they are registered in another country, how will the UK Government enforce such legislation?

Last week Chris Grayling, Transport Secretary, announced a review of the privatised rail system. That follows the recent problems with new timetables where the regulator concluded that “nobody took charge”. John McDonnell said that he could renationalise the railways within five years if Labour wins the next election – it’s already a manifesto commitment. Perhaps he thinks he can solve the railway’s problems by doing so but this writer suggests the problem is technology rather than management, although cost also comes into the equation.

The basic problem is that the railways are built on inflexible and expensive old technology. There has never been a “timetable” problem on the roads because there are no fixed timetables – folks just do their own thing and travel when they want to do so.

Consider the rail signalling system – an enormously expensive infrastructure to ensure trains don’t run into each other and to give signals to train drivers. We do of course have a similar system at junctions on roads – they are called traffic lights. But they operate automatically and are relatively cheap. Most are not even linked in a network as train signals are required to be.

Trains run on tracks so they are extremely vulnerable to breakdowns of trains and damage to tracks – even snow, ice or leaves on the line cause disruption – who ever heard of road vehicles being delayed by leaves? A minor problem on a train track, often to signals, can quickly cause the whole line or network to come to a halt. Failing traffic signals on roads typically cause only slight delays and vehicles can drive around any broken-down cars or lorries.

The cost of changes to a rail line are simply enormous, and the cost of building them also. For example, the latest estimate for HS2 – the line from London to Birmingham is more than £80 billion. The original M1 was completed in 1999 at a cost of £26 million. Even allowing for inflation, and some widening and upgrading since then the total cost is probably less than £1 billion.

Changes to railway lines can be enormously expensive. For example, the cost of rebuilding London Bridge station to accommodate more trains was about £1 billion. These astronomic figures simply do not arise when motorways are revised or new service stations constructed.

Why invest more in a railway network when roads are cheaper to build and maintain, and a lot more flexible in use? At present the railways have to be massively subsidised by the Government out of taxation – about £4 billion per annum according to Wikipedia, or about 7.5p per mile of every train journey you take according to the BBC. Meanwhile road transport more than pays for itself and contributes billions to general taxation in addition from taxes on vehicle users.

So here’s a suggestion: scrap using this old technology for transport and invest more in roads. Let the railways shrink in size to where they are justifiable, or let them disappear as trams did for similar reasons – inflexible and expensive in comparison with buses.

No need to renationalise them at great expense. Spend the money instead on building a decent road network which is certainly not what we have at present.

Do you think that railways are more environmentally friendly? Electric trains may be but with electric road vehicles now becoming commonplace, that justification will no longer apply in a few years’ time, if not already.

Just like some people love old transport modes – just think canals and steam trains – the attachment to old technology in transport is simply irrational as well as being very expensive. Road vehicles take you from door-to-door at lower cost, with no “changing trains” or waiting for the next one to arrive. No disruption caused by striking guards or drivers as London commuters have seen so frequently.

In summary building and managing a road network is cheaper and simpler. It just needs a change of mindset to see the advantages of road over rail. But John McDonnell wants to take us back to 1948 when the railways were last nationalised. Better to invest in the roads than the railways.

It has been suggested that John McDonnell is a Marxist but at times he has denied it. Those not aware of the impact of Marxism on political thought would do well to read a book I recently perused which covered the impact of the Bolsheviks in post-revolutionary Russia circa 1919. In Tashkent they nationalised all pianos as owning a piano was considered “bourgeois”. They were confiscated and given to schools. One man who had his piano nationalised lost his temper and broke up the piano with an axe. He was taken to goal and then shot (from the book Mission to Tashkent by Col. F.M. Bailey).

Sometimes history can be very revealing. The same mentality that wishes to spend money on public transport such as railways as opposed to private transport systems, or renationalising the utility companies such as National Grid which is also on the agenda, shows the same defects.

The above might be controversial, but I have not even mentioned Brexit yet. Will the Labour Party support another referendum as some hope and Corbyn is still hedging his bets over? I hope not because I think the electorate is mightily fed up with the subject. In politics, as in business, you should take decisions and then move on. Going back and refighting old battles is not the way to succeed. All we should be debating is the form of Britain’s relationship with the EU after Brexit.

Roger Lawson

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

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AIC Calls for KIDs to be Suspended

The Association of Investment Companies (AIC) have called for KIDs to be suspended. KIDs are those documents devised by the EU that were aimed at giving basic information on investment funds – and that includes investment trusts which the AIC represents.

It was a typical piece of badly implemented EU regulation even if the motive was worthy. But KIDs give a very misleading view of likely returns from investment funds. Whoever designed the performance rating system clearly had little experience of financial markets, and neither did they try it out to see what the results would be in practice. Similarly, if they had bothered to consult the AIC or other bodies representing collective funds, or experienced investors as represented by ShareSoc, they would have realised how misleading the results might be.

It also imposes costs on investment managers and on brokers who have to ensure their clients have read the KID before investing – even if they are already holding the fund/shares or have invested in it previously. This means for on-line brokers we now get a tick box that we have to click on which is simply tedious. I just click on them automatically because if I intend to buy an investment trust there is a great deal of information available elsewhere in the UK and the KID does not add anything of use in my opinion.

I think KIDs should be scrapped rather than just suspended. They serve little useful purpose and just add a costly bureaucratic overhead. This is the kind of nonsense that Brexit supporters are keen to get rid off when we do finally get out of the EU monster. But will we if Mrs May gets her way?

The AIC press release is here if you want more information: https://www.theaic.co.uk/aic/news/press-releases/aic-calls-for-kids-to-be-suspended

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

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Trump Impeachment and No Deal Brexit Planning

Donald Trump has suggested that if he was impeached the stock market would crash and everyone would become poorer. And make no mistake, if the US market crashes then so will other worldwide stock markets including the UK as there is a high correlation between international stock markets.

Is that likely if he was impeached? No it is not. Stock markets can be remarkably immune to political crises. Just look at the negligible impact of the turmoil in the UK as politicians debate Brexit and there is the major threat of a very left-wing Government. What moves stock markets is economic crises, not political ones. Changing the US head of state would have little impact on the US economy.

In any case, the chance of impeachment looks relatively low. Paying hush money to past contacts is not a crime unless campaign funds were misused which currently appears unproven.

In the short term there is perhaps more threat to the UK stock market from a “no deal” Brexit. Having had a quick read of the papers published yesterday by the Government on planning for such, I am not panicking (see https://www.gov.uk/government/collections/how-to-prepare-if-the-uk-leaves-the-eu-with-no-deal#money-and-tax ). The regulatory issues can be accommodated without too much difficulty. What concerns me more is that if customs facilities are not improved well in advance, we might have long queues of vehicles on the motorways here in Kent.

Meanwhile Chancellor Philip Hammond has been stirring the Brexit debate pot with a letter to the Treasury Select Committee which includes this statement: “This January provisional analysis estimated that in a no deal/WTO scenario GDP would be 7.7% lower (range 5.0%-10.3%) relative to a status quo baseline. This represents the potential expected static state around 15 years out from the exit point.”

Anyone who thinks they can forecast the economy so far as 15 years ahead is plain bonkers in my opinion. Economists don’t manage to accurately forecast the UK economy one year ahead let alone 15. Such long-range forecasts are always based on numerous assumptions, most of which are undermined by unforeseen events which have not been taken into account. The Chancellor also forecast that Government borrowing might increase by £80 billion a year because of the reduced GDP by 2033 unless spending or taxation was changed. All this looks like scaremongering to me of the worst kind.

I may favour doing a deal with the EU along the lines of Mrs May’s proposals to assist with trade, but having a no-deal Brexit does not scare me.

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

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Shareholder Voting and Financial Times Generosity

Anyone using an on-line investment platform will be aware that your shares are normally held in a nominee account (i.e. you do not own them, your broker does – you are only the “beneficial owner”). ShareSoc has long campaigned for reform of this system because it usually results in you not being able to vote your shares at General Meetings, and you are unlikely to be sent information such as Annual Reports. You are effectively disenfranchised and the lack of voting by private shareholders undermines good corporate governance. Platforms can enable you to vote by submitting proxy votes on your behalf, but many do not offer this facility.

Last week the Association of Investment Companies (AIC) published some information that helps you to get a vote. They showed which platforms provide such voting facilities. See https://www.theaic.co.uk/aic/news/press-releases/aic-releases-information-to-help-shareholders-vote-on-platforms for the details. Note though that some may permit it but often without providing an easy to use system of voting.

Ian Sayers of the AIC had this to say: “We need all platforms to offer a simple, online solution that means that shareholders get the information they need on resolutions affecting the company and can exercise their democratic rights at a click of a button. In the meantime, investors should consider whether and how they can vote their shares as part of their decision over which platform to use.”

One can only agree with his sentiment on this. The solution is to reform the laws and regulations in this area, and ideally have all shareholders on the share register of companies. But in the meantime, it’s worth reviewing the AIC list when choosing a platform to use.

Another item of news last week was a report from Reuters that a group of Financial Times journalists have complained about the pay of their CEO John Ridding. He earned £2.55 million pounds in 2017. The group led by an NUJ representative have written to their colleagues around the world saying the pay was absurdly high and that he should give some of it back to lowly paid staff.

Comment: Pay is escalating all over in the business world and this is just another example of outrageous pay inflation among senior management. The journalists’ initiative is to be applauded. As a daily reader of the Financial Times, I also have concerns that the CEO is not doing a great job either than might justify these gazillions. In the last couple of years, since the acquisition of the FT by Nikkei, the content of the paper has substantially changed.

It still publishes very good in-depth analyses of financial issues – for example, the review of accounting and audit standards headlined “Setting Flawed Standards” on Thursday which is well worth reading. But it has taken a very pro-EU and pro-Remainer political stance with numerous articles and published letters with a highly political slant. At the weekends we have to suffer from ex-sports journalist Simon Kuper’s views on that subject. He may know a lot about football but his views on UK politics and those who support Brexit seem very ill-informed.

Coverage of hard news on companies is also now very patchy, with more on the politics of foreign nations and on social issues. The FT needs to get back to reporting on financial matters and cut back on the political polemics.

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

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Learning Technologies AGM and Brexit

I went to the Learning Technologies (LTG) Annual General Meeting yesterday, only to find my son Alex was there also (we both hold the shares). So we did a joint report which can be found on the ShareSoc Members Network. What follows are a few particularly interesting points from it.

LTG was a workplace digital learning solutions provider up to the beginning of last month when it announced it was to buy PeopleFluent – a cloud based talent management platform. Chief executive Jonathan Satchell described the deal as “transformative” for LTG’s US presence and that is surely the case. He also noted that “learning and talent are closely aligned” with cross-selling opportunities adding possibilities for further growth.

When the formal business was considered the first resolution was to accept the annual accounts and directors report. This had a surprise vote of 56 million proxies against (12%). I asked why the large vote against a resolution that normally gets a high percentage “yes” vote. Chief exec Jonathan Satchell replied that ISS (a proxy advisory firm) had recommended shareholders vote against the resolution on the grounds that there was insufficient disclosure in the Directors remuneration report, and shareholders had not been given a chance to vote on directors’ remuneration. Jon felt the complaint by ISS was overblown, but that LTG had discussed the issue with ISS and will look to improve disclosure next year. Jon noted it was not necessary to hold a vote on remuneration although I pointed out it was preferable to do so and many AIM companies did have remuneration votes. ISS had also noted that the Chairman Andrew Brode was on the remuneration committee, which they didn’t like. Jon did say that Andrew would be more than willing to give this role up and so in the coming year Jon said to expect a change on this committee.

A shareholder asked if the £13.3m Civil Service contract was a one off. Jon replied that there is scope for a one year extension to the contract but at the moment the accounts are based on the contract ending with no extension.

I asked about the PeopleFluent acquisition and questioned the use of a “cash box” transaction as this ignores shareholder votes in prior resolutions. A cash box placing allows a company to issue new shares by bypassing pre-emption requirements – meaning without shareholder approval. It works by a company forming a new subsidiary into which it puts cash via a placing and then buys that shell, paying with shares priced at whatever level it deems suitable. In effect it sidesteps the legal requirements of Company Law, and the resolutions previously passed by shareholders re share issuance.

Jon replied that LTG was up against US private equity and it was felt this was the best way to get the right amount of funds needed in a timely fashion to give the highest quality offer LTG could make. Comment: with the Chairman and CEO holding over 45% of the shares any vote would have surely gone through so it may not be so prejudicial to shareholders interests. But it sets a bad legal precedent as I think such transactions should be made illegal. Apparently Numis, their Nomad/Broker, suggested they do this. Otherwise it was a placing with no open offer which prejudices private shareholders although the discount to the previous share price was minor.]

Jon talked about the recent Pluralsight IPO, a similar US business. The company lost $90m on $160m revenue. Valuation $2Billion. Comment: this is obviously a “hot” sector for investors.

Summary: The enthusiasm of the CEO for the future prospects of the business were very evident and this seems to have been communicated to shareholders in recent weeks. The share price has been motoring upwards so it’s now on a prospective p/e of 44 according to Stockopedia. Certainly the high recurring revenue feature of the PeopleFluent business is positive as I always like companies with high recurring revenues and I said that in the meeting. However there are significant risks in such a major acquisition of a US business where there may be cultural and management style differences. The business also seems to have some difficulties and they have already be making some management changes.

In addition to that the large civil service contract in the UK will probably not be extended – or at most by a year – so historic revenue may not be representative of future revenue, and in addition the change to adopt IFRS 15 (see page 12 of the Annual Report) will impact 2018 financial figures. The corporate governance and the way the placing was done are also negatives. In summary there are a number of negative aspects in this business and potential high risks from the acquisitions that have been made (not just the latest one). The enthusiasm of investors for this business might be ignoring the substantial risks now associated with it so investors should keep a close eye on the progress of the acquisitions and their associated restructuring.

But as always, I learned a lot about this business and the individuals involved from attending the AGM. There were less than a dozen ordinary shareholders at the meeting which is disappointing given the opportunity it provides to quiz the management.

Brexit: I have not said much on the hot topic of Brexit of late although it’s no secret that I am generally in favour of it. The regulations that have come out of Europe such as MIFID II, the Shareholder Rights Directive and GDPR might have had good intentions behind them but in practice the detail regulations that result have been horribly complex and bureaucratic. The result has been very high costs imposed on many businesses and often with ineffective results. The key problem has been bureaucrats in Brussels with little knowledge of the real world and the business environment in the UK designing regulations without adequate consultation (or ignoring feedback submitted) and producing gobbledygook which few people understand. GDPR had positive objectives but the law of unintended consequences has resulted in people receiving hundreds of pointless emails.

The latest example of ridiculous claims of the cost of Brexit was the statement by Jon Thompson the head of HMRC that the “maximum facilitation” (Max Fac) option could cost UK businesses as much as £20 billion per year. This is apparently based on the cost of filling out customs declarations (200 million per annum at a cost of £32.50 each, plus other form filling according to the FT). This seems to assume that forms are filled out manually when in reality that can be done by computer software surely. Business might also look to reduce the costs by bulking up orders, or simply choosing not to export or import, i.e. to do business in different ways or with different people.

Whether Max Fac is a sensible option it’s difficult to say without a lot more evidence but staying in the Customs Union simply to avoid a hard border in Ireland does not seem to make sense because it means our trading policies and practices will be dictated by the EU. That’s not what people voted for in Brexit. People voted for political and governmental independence. Many people accept there may be some extra cost involved as a result but scare stories about the costs are not helpful.

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

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Solving the Irish Border Problem, Harry for King of Ulster

On this bright sunny day, with crowds out for the Royal Wedding, my thoughts turned to a simple solution to the Irish border problem. That is the problem faced in the Brexit negotiations on how to maintain a frictionless border with the Irish Republic (Eire) from Northern Ireland.

Surely the simple solution is to make Northern Ireland an independent country while still retaining its connection to the UK by appointing Prince Harry and Meghan Markle as the King and Queen of Ulster. The latter has strong Irish connections in her ancestry so this could appeal to many. Such titles are surely more impressive than the Duke and Duchess of Sussex which they are otherwise going to be endowed with.

As an independent country Ulster could retain all its traditional ties with the UK including use of the Union Jack in some form, and all the existing UK legislation. It could negotiate free trade agreements with the EU and the UK to sidestep the border problem. If there is any border control required, it would solely be on the sea ferry crossings, not on the Irish land border and therefore much easier to manage.

Those sceptics in this world will no doubt think of numerous objections to this plan, but it’s surely worth considering.

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

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Good Growth and Why the London Plan is Strategically Flawed

NHS in crisis (queues in A&E, operations postponed and delays getting to see your GP), road network suffering from worse congestion, overcrowded trains and underground in London, air pollution still a problem, not enough schools to accommodate growing numbers of children and simply not enough houses to meet the demand for homes. These are simply symptoms of too many people and not enough infrastructure.

For those concerned about the future of one of the major financial capitals of the world, namely, London, here’s an editorial I wrote for the Alliance of British Drivers on the subject of the “London Plan” – on which there is a recently launched public consultation:

The population of the UK has been growing rapidly and particularly in London and the South-East. The latest figures from TfL show that the number of trips by London residents grew by 1.3% in 2016, up by 19.7% from the year 2000. The population of London grew by 21.4% in that period.

Forecasts for the future are for it to grow from the level of 8.8 million people in 2016 to 10.8 million in 2041 according to the Mayor’s London Plan, i.e. another 22%.

More people means more housing demand, more businesses in which they can work, more shops (or more internet shopping deliveries) to supply them, more transport to move them around and more demand on local authorities to supply services to them.

In addition more people means more air pollution – it’s not just transport that generates air pollution and even if every vehicle in London was a zero emission one we would still have major emissions from office and domestic heating, from construction activities, and from many other sources.

The London Plan and Mayor Sadiq Khan talk about “good growth” but unfortunately the exact opposite is likely to be the case. It will be “bad” growth as the infrastructure fails to keep up with population growth even if we could afford to build it.

In London we have not kept up with the pace of population growth for many years and the future will surely be no different.

London residents have suffered from the problems of past policies which condoned if not actually promoted the growth of London’s population. Indeed Mayor Khan insists London should remain “open” which no doubt means in other language that he is opposed to halting immigration – for example he opposes Brexit and any restrictions on EU residents moving to London which has been one source of growth in the population in recent years.

There are of course several policies that wise politicians might adopt to tackle these problems. Restrictions on immigration and the promotion of birth control are two of them that would limit population growth. China is a great example of how a public policy to discourage children has resulted in dynamic economic growth whereas previously China suffered from population growth that outpaced the provision of resources to support them – result: abject poverty for much of the population; that is now receding into history.

The other answer is to redistribute the population to less crowded parts of the country. It is easier and cheaper to build new infrastructure and homes in less populous parts of the country than London. Back in the 1940s and 1950s there was a national policy to encourage businesses and people to move out of London into “New Towns” such as Bracknell, Basildon, Harlow, Stevenage, Milton Keynes and even further afield.

Government departments that were based in central London were moved to places such as Cardiff or the North of England. The population of London fell as a result.

One way to solve the problems of traffic congestion and demand for housing in London would be to encourage redistribution. This could be encouraged by suitable planning policies, but there is nothing in the proposed London Plan to support such measures. In the past, businesses and people were only too happy to move to a better environment. Businesses got low cost factories and offices. People got new, better quality homes and there were well planned schools and medical facilities.

Despite the attitude of many non-residents to the New Towns, most of those who actually live in them thought they were a massive improvement and continue to do so. It just requires political leadership and wise financial policies to encourage such change.

These are towns with few traffic congestion or air pollution problems even though some of them are now the size of cities – for example Milton Keynes now has a population of 230,000.

It is worth pointing out that past policies for New Towns and redistribution of London’s population were supported by both Labour and Conservative Governments. But we have more recently had left-wing Mayors in London (Ken Livingstone and Sadiq Khan) who adopted policies that seemed to encourage the growth in the population of London for their own political purposes, thus ignoring the results of their own policies on the living standards of Londoners. So we get lots of young people living in poor quality flats, unable to buy a home while social housing provision cannot cope with the demand.

The Mayor’s London Plan is an example of how not to respond wisely to the forecast growth in the population of London. His only solution to the inadequate road network and inadequate capacity on the London Underground or surface rail is to encourage people to walk, cycle or catch a bus. But usage of buses has been declining as they get delayed by traffic congestion and provide a very poor quality experience for the users.

The London Plan should tackle this issue of inappropriate population growth. The rapid population growth that is forecast is bound to be “Bad Growth”, not “Good Growth” as the London Plan suggests. Population growth and its control should underpin every policy that needs to be adopted in the spatial development strategy of London.

For more background on the London Plan, see: https://abdlondon.wordpress.com/2018/01/07/london-plan-abd-submits-comments/

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

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