Corbynism -Attack on the Wealthy

Jeremy Corbyn/John McDonnell have announced their brave new world of far-left socialism. What will be the impact of trying to tax the rich and business to engage in unaffordable social engineering and to destroy the UK economy? Let us illustrate this in terms that Labour supporters should understand. It’s a sobering message.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the Corbyn expects to collect our taxes, it would go something like this:

  • The first four men (the poorest; out of work, zero hours, etc) would pay nothing
  • The fifth (labourer) would pay £1
  • The sixth (skilled worker) would pay £3
  • The seventh (professional) would pay £7
  • The eighth (management) would pay £12
  • The ninth (executive) would pay £18
  • And the tenth man (richest) would pay £59

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a dilemma. “Since minimum wage, corporate and income taxes have been increased” he said, “I have to increase the cost of your weekly beer by £20.” Drinks for the ten men would now cost £120.

They realised that £20 divided by five is £4 but if added to everybody’s share then not only would the first five men be drinking for free, but the sixth man would have his contribution increased by 133%!

The group still wanted to pay their bill the way we pay our taxes. The first four men were unaffected. They would still drink for free but what about the other six men – the paying customers? The fifth member was employed by a small business which could not cope with the increases so was made redundant thus joined the first four and paid nothing. How could the remaining five divide the £20 increase so that everyone would pay his fair share?

The bar owner suggested that it would be fairer to increase each man’s bill according to the principle of the new tax system and he proceeded to work out the amounts he suggested that each should now pay.

The result was that the fifth man, like the first four, now paid nothing (a 100% saving).

  • The sixth man now paid £4 instead of £3 (a 33% rise)
  • The seventh man now paid £9 instead of £7 (a 28% rise)
  • The eighth man now paid £15 instead of £12 (a 25% rise)
  • The ninth man now paid £22 instead of £18 (a 22% rise)
  • And the tenth man now paid £70 instead of £59 (a 16% rise)

Each of the last five was worse off than before with the first five now drinking for free.

But, once outside the bar, the paying men began to compare their rises.

“I paid 33% extra; double the tenth man,” declared the sixth man. He pointed to the tenth man, “his share was much less than mine!”

“That’s true!” shouted the seventh man. “Why should he only pay 16% when I paid 28%? The wealthy get all the breaks!”

“Wait a minute,” yelled the first five men in unison, “we can’t get a job because of this new system. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up demanding a greater contribution from him.

The following week the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important – they didn’t have enough money between them to pay for even half of the bill!

And that, ladies and gentlemen, is how the Corbyn/McDonnell tax system will work. The people who already pay the highest taxes will naturally consider their position. Tax them too much, attack them for being wealthy, and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier, and take their business with them. This happened in the late 1970s when higher rate tax rates were 83%. Didn’t work then; won’t work now.

Lest we forget when Labour lost the General Election to the Conservatives in 2010. Liam Bryne, Chief Secretary to the Treasury under Gordon Brown, left a note for his successor stating, ‘I’m afraid there is no money.’ This has been the case with every Labour Government since the war.

Any political promises more than 5 years away are pure fantasy because they exceed the term of a Government and thus why spades of such promises are put out there to woo the gullible. As for free broadband (re-nationalise BT with 5G driving future internet access??  – whoops), there is no such thing as a free lunch. Even the air you breath leaves you exposed to pay taxes. Anything for free will be abused, as we see in the NHS. Someone has to pay at the end of the day.

There is also an assumption by Corbyn/McDonnell that the financial community will agree to fund an additional £55 billion p.a. for 10 years – not likely, not least because much of this funding is not directly linked to increased productivity. A more likely consequence of a Corbyn Government would be a downgrade in the UK credit rating which would increase the cost of any available borrowing thus negating the McDonnell argument that borrowing will be cheap. The more modest extra £20 billion p.a. for 5 years spending pledged by the Conservatives will raise eyebrows in the financial markets; even with a majority Conservative Government.

It is only possible to spend if you have a strong underlying economy. Without the rich, and wealthy businesses to provide jobs and generate profits upon which the Government depends to accumulate tax revenues, there is no money to spend.

Is the NHS using BREXIT to hide its own Social Engineering in the limiting of drugs to save costs?

We are currently facing a constant barrage by the NHS through the media regarding the supply of drugs. But for those already experiencing the scarcity of prescription drugs they know that this has been occurring for some time. I have experienced the lack of supply of a particular brand of Omeprazole for some months now. My partner has also experienced the lack of supply of her HRT drugs and, indeed the supply issue is likely to get worse – but not because of BREXIT in any type of exit deal or no deal.

Any self-respecting biochemist will tell you that all drugs with the same name, but different manufacturer, are not the same as small differences in the manufacture process can lead to significant differences in the way the body metabolises the drug. And I’m not suggesting that generics are worse than the original. What matters is that a patient finds the version of a drug which best suits them. Thus, when I found myself needing Omeprazole as a result of the impact on my stomach of an over-prescription of analgesics a few years back, I tested the available versions to see which left me with the least aftereffects. When I changed surgery there was an attempt to wean me onto a generic form which I already knew had uncomfortable aftereffects, but I resisted and stayed with my preferred brand.

Some months ago, when in need of further supply, I was told that there were manufacturing difficulties and thus my brand was in short supply. This situation persists to this day. However, in April this year I underwent heart surgery in a private hospital in London. They wanted to ensure that my gastric acid was kept under control so put me on Omeprazole – the same brand I preferred. I asked the pharmacist if she was aware of any supply difficulties – none.

My partner is on HRT and was told that her preferred version was again experiencing supply difficulties. She has travelled far and wide around pharmacies to fill her prescription with modest success. It was suggested to her that she should come off HRT because of the increased possibility of cancer, using antidepressants as an alternative should the need arise. The NHS have stormed the media with fear propaganda for the past few months to deflect people away from HRT. But why?

My partner is Swiss, and still consults with her gynaecologist in Zurich, who happens to be the top gynaecologist in Switzerland. He provides her prescriptions. She consulted with him regarding the shortage of these drugs. No such shortage; and sent her a supply arriving a few days later.

Coincidence, or social engineering by the NHS purely on a cost basis. Whereas I agree there is a liberal wastage of drugs in the UK, not least in hospitals whose banal pharmacy procedures must waste considerable sums of money every day issuing drugs before need is established. I was in hospital a few years back where I witnessed the wastage of some £3,600 of drugs prescribed for me over just 8 days because of ridiculous pharmacy process.

So what has this lack of supply got to do with BREXIT – NOTHING. It is social engineering in an attempt to curb NHS costs.

BREXIT – The Use and Abuse of Political Statistics

The European Elections delivered a fragmented wake-up call to Brussels; a comfort in political terms, but hardly a vote of unity. As per usual politicians from all factions engaged with the use and abuse of statistics to shed some light on the outcome in their favour, even if only to say their message needs to be clearer.

Within the UK it would be laughable as these inept politicians squirm if the issue upon which they have failed the electorate is not such a challenge to the UK constitution.

What we saw in the UK was a fledgling BREXIT Party who platformed honouring the 2016 Referendum vote to leave Europe with or without a deal. They polled 32% of the vote and won 29 MEP seats. By far the winner. General Elections have been won at this level of vote.

Then we have the Liberal Democrats who platformed a single message of scrap BREXIT and remain in the EU. How a so-called democratic party can ignore a clear democratic referendum outcome is beyond me, but they polled just 20% of the vote and won 16 seats.

Following them we have the Greens which I think is a singular, more idealistic vote. I would suggest, based on the fact that all interviews I witnessed with Green Party officials and candidates regarding BREXIT reverted to climate change within 30 seconds of the interview, that the issue of political remain or leave was not a factor in such votes. If one believes the commentators, the Greens attracted predominately younger voters who may not have a political view/understanding of BREXIT, or are more preoccupied with climate change and want a voice. Thus, I don’t think it statistically robust to consider the Green vote in the leave/remain argument.

I think that the above parties all profited from a unifying sense of belonging to a singular cause.

Of the remainder there will always be the hardcore Labour or Conservative voters who have always voted in a singular way. We don’t know with any reasonable accuracy where any such voter stands on the leave/remain argument.

The remainder of smaller parties are a mix of rebel causes on the fringes of the system. If there is an argument to put any one of these parties in either camp, then you would also argue that the UKIP vote should be added to the BREXIT Party vote. The sum of these votes does not change the political landscape, so again not relevant to the argument.

In 2016 the result of the Referendum was 52% in favour of leaving the EU. The polarised nature of this result has fragmented and frustrated politics since – a clear demonstration that UK politics is neither democratic nor fit for purpose. Why ask for the majority will of the people who turned out in numbers never before seen in any election, and then ignore it? The European Election results would suggest that Nigel Farage is right. Leavers have hardened to some 60%.

Since then the anti-democratic remain side of the argument has tried everything to scupper BREXIT bolstered by Teresa May’s deal that cannot possibly be approved whilst it challenges the sovereignty of the UK. No true, blue-blooded Brit will allow sovereignty to be under the control of Brussels. It is clear that the backstop agreement is fully intended to be activated with the only way out for the UK is to concede Northern Ireland back to the Republic of Ireland – the game that Leo Varadkar has been playing all along. It will be interesting to see how he feels when staring into the face of a no-deal with the consequences to the Republic losing its largest trading partner. Ireland’s economy decimated again? For sure Teresa May will go down as one of the worse Prime Ministers ever, even worse than Tony Blair.

The motion passed through the House of Commons taking a ‘no-deal BREXIT’ off the table was a shambolic demonstration of abuse of the political system. The EU will only capitulate to a sensible deal when they are faced with ‘no-deal’ as the real alternative. As professional negotiators well know all options must be on the table, and it is certain that the EU will capitulate at the eleventh hour if no-deal is the option facing them – with most of the EU either in or approaching recession they cannot afford this outcome. There is no such person as a hardliner Brexiteer. They are the people who understand the protocols of negotiation.

Jeremy Corbyn has always played politics with BREXIT pushing for a General Election rather than respect the BREXIT result, relying on the younger, gullible voter who will believe promises that cannot possibly be delivered. Opportunist indeed, but I think be careful what you wish for. Climate change has captured the imagination of this younger voter so they can easily drift to the Green Party as throughout Europe. Then we have the hardcore Labour constituencies who voted for BREXIT and demonstrated their disdain with their party by voting for the BREXIT Party. If the BREXIT Party do indeed contest a General Election, I would reasonably expect Labour supporter to move to the BREXIT Party thus decimating the Labour Party. Justice indeed.

As for the Conservative Party the ill-consider snap election called by Teresa May without any understanding of her failings in the Party Manifesto find themselves in a difficult position and need to bring their own MP’s fully into line and then attract dissenting Labour MP’s in fear of losing their seats if they are not seen to support BREXIT to restore order to the BREXIT process. Perhaps it’s time to ask local constituency party association officials to encourage their MP to back the party or surrender their seat to someone more understanding of collective co-operation and respect democratic outcomes.

The UK now need a capable Prime Minister who understands how to negotiate with the EU. A no-deal option must be on the table, and a hard position taken with the EU with the certainty that no-deal will be the outcome should the EU not take a more reasonable stance.

Unifying the UK is best addressed once the people see that all the remain fear tactics are nonsense, even with a no-deal outcome. The UK is the fifth largest economy in the World and has global influence the EU can only dream of. The EU cannot ignore the UK.

The European Elections have pushed the real statistics back in support of BREXIT with, or without a deal, knowing an agreeable deal will most certainly be forthcoming from the EU at the final hour. The other statistic that will be interesting to watch is how many of our current MP’s are serving their final term as in the next General Election voters express their wrath with them for failing to respect the majority will of the people.

 

BREXIT: A Pragmatic Message to the EU

The intransigence of the EU, no doubt fuelled by the traitorous people of the UK attempting to overturn Brexit, now requires a firm, but British pragmatic approach. I would propose the following:

Ladies and gentlemen of the EU we find ourselves at an impasse that could lead to unnecessary harm to our great nation States. Today we are faced with the opportunity to show why our nations have survived great turmoil in the past, and that we have learnt the lessons of failure to achieve equitable relationships. During the past two years the UK has been more than conciliatory in its attempt to smooth an orderly exit from the EU. The imbalanced level of consideration provided to the EU has clearly caused irreconcilable division in the UK Parliament resulting in many difficulties for the UK Government. In order to achieve an orderly exit this must change. Having given great thought to what needs to be achieved before the 29th March 2019 I would agree that reopening the Exit Agreement would not achieve the required progress in the time remaining. I propose we bin it. Of course, there are aspects of this Exit Agreement that can amicably and equitably be transposed to a new agreement.

Let me be clear that we will not extend the leaving date as I’m sure that we all consider that enough time an expense has been expended on this project. Other distractions such as revoking Article 50, a further referendum in the UK, any reference to Norway plus, or Canada plus plus are not considerations on which the EU can rely. The only surety is that the failure to achieve a reasonable and, above all, equitable settlement before 29th March 2019 is that the UK will leave the EU and that the £39 billion demand by the EU will then be subjected to International Court of Arbitration scrutiny and ruling. Failure to agree an equitable way forward will certainly cause short-term economic turbulence throughout the member states and the UK Government could better apply the exit amount to smooth such turbulence within the UK economy. During this exit process the UK economy has shown itself to be resilient and indeed buoyant and I fully expect this to continue regardless of what happen on the 29th March 2019.

From the start of the leaving process the UK proposed negotiation based upon a Strategic Alliance. The EU rejected such proposal insisting that the divorce settlement be agreed before any future relationship. This has proven to be a failed approach. Now we must proceed with an inclusive agreement including a future trading relationship as proposed and submitted to the EU in March of this year. As we are looking to replace an existing trading relationship none of the usual procrastinated negotiation of trade deals is either desirable or necessary. We may have to agree to further refinement during a transition period, but this is the nature of the strategic alliance process. Importantly, within the existing proposal are terms that with the installation of additional electronic surveillance on the Irish, Northern Ireland border as proposed by HMRC and declared as workable by the technocrats in Brussels we can completely illuminate the most contentious issue facing us today; the backstop agreement.

No doubt you will resound with protestation that such an agreement cannot be achieved in the time available. We disagree. Most, if not all, of the required components are at our disposal. All we need is the essential component of any Strategic Alliance; the will and commitment to achieve an economic and political relationship in the spirit of friendship and co-operation, and above all of reasonable and equitable benefit to both parties. Any financial settlement will be fully subject to such parameters.

To the heads of the EU member States I would add the following invitation. Should no agreement be achieved and ratified by both sides before the 29th March 2019 then the UK is fully prepared to continue to trade with any member State on existing terms and give priority to such trade over alternate sources if delivery and reciprocity can be assured. Further political posturing will not solve this problem and thus we must each address the realities of no deal in regard to the best interests of the people we each represent.

Why is the UK Government Shambolic?

Well, well, well, the UK Parliament has now completed their demonstration of irrelevance to the people of the UK. IN 2016 the people provided the most conclusive referendum result in British history instructing our politicians to leave the EU. What have our politicians done about it? We have politicians who claim that 17 million people were completely duped into a decision to leave – what an arrogant lack of respect for the people. They further argue that Brexit will make the UK poorer by 3.9% over 15 years. Such economics is not only irrelevant once projections exceed 5 years, but also assume the remainder of the World remains stable – most unlikely. These people are so deluded that they think people care about such minimal projection compared with maintaining their English way of life.

Then we have Teresa May’s idea of a negotiated exit. She tried to be all things to all people and was duped into an exit deal which is meaningless to all with the first attempted sacrifice of national sovereignty in UK history with the so-called backstop. As an experienced negotiator with some 30-years of experience of negotiated deals throughout the world had I been David Davis and found out that she had been agreeing terms counter to my strategy behind my back I would have ripped her throat out. A negotiator goes to the table with a mandate to agree a deal, not play puppet. She should listen to her own words when she has often said that no deal is better than a bad deal. Then she should understand that united, her enemies stand; divided they fall. Her isolationist approach allowed her enemies both in the UK Parliament and the EU to unite against her. About time she studied Sun Tzu’s ‘Art of War’. She listens to civil servants (who were probably remainers) rather than seasoned negotiators. When have such people ever negotiated a good commercial deal – think PFI and MoD procurement over the years. Her track record with the recent Conservative Party Manifesto which so obviously would lose her votes speaks volumes about her approach. Then she tries to apply a hard line by regularly stating that her deal is not only the best deal but the only deal that can be obtained. What an amateur. Who does she think she is kidding? She gives her very soft Brexit stance away when she insists that she is honouring the 2016 Referendum result but safeguarding economic interests. You cannot go to the negotiating table with one foot in each side of the argument and expect to satisfy anyone other than the EU.

We have a Parliament populated by a few who understand pragmatic democracy, the remainder being either traitors to both democracy and the people they are elected to represent, or opportunists who care only for power at any cost. Even seasoned politicians such as Ken Clarke fail to respect the 2016 Referendum result. Whatever happened to integrity, honour, servitude, and loyalty to the democratic process? The mandarins in Brussels must be laughing their socks off.  I sincerely hope that the people of the UK remember these traitors at the next General Election and cast then aside.

There is no escaping that the weak position adopted by Teresa May in these negotiations means that the UK has very little substance to show after two years of negotiation. Her stance of an amicable, soft Brexit settlement has led to concession after concession and a large exit bill without so much as a letter of intent regarding a future trade deal when such a deal could so easily be on the table today if the EU wanted such a deal. Whatever happened to “nothing is agreed until everything is agreed”? Had M. Barnier arrived at the negotiating table with a contained mandate that no trade deal could be discussed until the exit terms have been agreed a seasoned negotiator would counter with the proposal that exit terms will only be agreed when a trade deal is part of that process. The EU played well. They used the emotive Northern Ireland border issue with great effect, and May’s secret team fell for it hook, line, and sinker forgetting that it is the EU who are insisting on a hard border, and which is not necessary in any event with a suitable trade deal. The UK is not obliged to install a hard border leaving the Irish Government, hence the EU in a difficult position. And the EU’s stance; the UK wants to leave so it is their problem, and May’s team swallowed it. Negotiation is a war where dignity and respect are maintained throughout, but never accepting any responsibility or compassion for the other side’s position.

The collaborative position of the EU and the UK traitors against an ill-equipped negotiating position have manifested itself into the shambles we have today.

It is perfectly clear that the EU will do anything to avoid losing the control they currently enjoy over the UK. It is devastating to the EU both politically and economically to lose the second largest economy within the EU and to lose the influence that the UK provides in the global arena. And they want to avoid having such a large successful trading nation as a neighbour without any influence over such a nation. And off course they want to avoid losing any other major countries of the EU so must make the UK exit as difficult as possible. And we must include vested national interests such as the opportunist Irish Government seeking to use Brexit to re-unite Northern Ireland with Ireland. The contra of this is that the UK is a significant trading partner in the EU with a net surplus of Euro 1 billion per week in favour of the mainland EU. The UK is the third largest trading partner of Germany in the world, and the largest exporting partner for the German automotive industry. France exports some Euro 37 billion of produce to the UK each year. We have just witnessed how a few thousand angry demonstrators react to (needed) social and fiscal reform in France with President Macron being forced to retreat. Think about the impact of some one million farmers, trucker, and other associated business interests on the streets if told that they can no longer deliver such produce to the UK tariff free. Spain have already declared that their close relationship with the UK predates that with the EU and they have no interest in damaging such relationship. And I think Italy will just ignore Brussels. Therefore, reality will be far more powerful than political posturing. What a strong position for a Brexit negotiation. So why is the UK negotiating team sympathising with these EU realities. They are powerful weapons, and I don’t see the EU having concerns over the impact to UK citizens of their proposed stranglehold over the UK with the current deal.

As much as a no deal scenario is not desirable in the short-term because of the inevitable disruptive impact I have to agree that no deal is better than a bad deal. However, I am equally certain that the more devastating consequences to the EU of no deal would instil a needed dose of reality into this situation with the EU coming to the table with a far more reasonable and conciliatory attitude within weeks, if not days. The EU cannot afford a no deal Brexit, so the negotiating position is still wide open if the UK Government wake up and instil some British backbone into these negotiations. The Lithuanian Prime Minister has inadvertently indicated that the EU expects to concede more.

Does the UK Party Political System need a ‘Night of the Long Knives’?

 

Brexit has amplified blatant dissension amongst politicians of all persuasions. This not only creates difficulties getting anything done but also makes politics irrelevant as there is no longer the discipline within any party to fulfil manifesto pledges under collective responsibility. As politics in its disciplined form functions on mediocrity what we now have is treacherous chaos.

Having recently watched the ‘Darkest Hour’ account of the challenges faced by Winston Churchill during those dark days of May 1940 dealing with the plotting shenanigans of the fearful pacifists headed by Neville Chamberlain and Lord Halifax (whose view was essentially that he knew better than the people what was good for them). They completely undermined any attempt to deal with the fundamental reality that Adolf Hitler was hell-bent on conquering the whole of Europe, including the UK. Any hope of a peace deal as proposed by Halifax was pure fantasy based only on irrational fear. These people were the remoaners of today. Churchill’s ‘Night of the Long Knives’ came after speaking personally to the ordinary people on a tube train to Westminster and which prompted the courage to deliver his famous oratory to the Houses of Parliament on 4th June 1940. He mobilised the people of the UK to save the UK army stranded on the beaches of Dunkirk and to fight for the British way of life in the face of the overwhelming odds within mainland Europe, and in the face of certain members of UK politics. Sound familiar?

Our party-political system is based on people agreeing a basic ideology and creed regarding how to run a country. Like-minded people then form a party, select constituency representatives to stand as Members of Parliament under an agreed manifesto who, having achieved the majority of MP’s, select a leader who then forms an executive in the form of a cabinet. This cabinet is obliged to execute the manifesto upon which the people voted them into power with the full support of back-bench MP’s.

Think of the UK as a major corporate (UK plc) with a CEO (Prime Minister), Board of Directors (Cabinet), Line Managers (back-bench MP’s) and departmental workers (local constituents). Successful corporates will have competent and capable management resources who co-operate to secure their place in the market. Such corporates have a circular information flow in which strategy is fed from the Board down the ranks, and the ranks feed back the merits of such strategy in terms of execution and benefits. A competent Board will consist of Directors representing different factions of the company each expressing their own views without fear within the confines of the Boardroom. However, once a majority vote has been taken as to strategic direction then each Director, irrespective of their own personal view, is obliged to either diligently implement the agreed strategy, or find another job. Likewise with the Line Managers and departmental workers. Anyone expressing dissent or failing to comply will be quickly dispensed. A successful corporate needs allegiance and loyalty of all involved or it will surely fail.

So why do our politicians think that UK plc does not need the same corporate discipline to be successful? Why is it possible within UK plc to have a small band of Conservative back-bench MP’s who, in spite of their rhetoric to the contrary, are hell-bent on sabotaging Brexit – and think it entirely acceptable to attempt to hold the Prime Minister to ransom if she does not comply with their wishes. These people clearly think they know better than more than 17 million constituents and thus believe they have the right of treachery both to their political party and to the people of the UK.

In the case of Brexit David Cameron asked the people where they stand on UK membership of the EU. They responded in numbers never before witnessed – the majority wanted out. The people have spoken. The Executive has their instruction to leave the EU; the obligation of the back-bench MP’s to support the executive in the process regardless of their personal preference or how their own constituents voted – this was a national referendum; not regional.

So why are these rebels not dismissed? There must be a mechanism to dispense with these people. They are on the wrong side of the argument and are naphtha to the politicians in Brussels fighting to hold their power over the UK including extracting continuing contributions to its failing economy. Complex negotiations for Brexit are difficult enough without having the enemy within your own camp. As a trained negotiator the fundamental mindset is that life is simple, only people make it difficult. Unfortunately, the Churchillian orator powers of Socrates are a scarce resource at present so I fear we need an alternative ‘Night of the Long Knives’ to rid us of this treacherous few so that the people get what they expect. I would certainly like the opportunity in open debate to expose their lack of understanding of the EU venture to the UK people. When do these people wake up to the fact that the UK economy is robust despite the politically motivated propaganda of the likes of OECD and IMF. Of course the EU will trade with the UK on fair and reasonable terms – the trade deficit alone in favour of the EU is Euro one billion each week! Of course the most important centre of Global banking will remain in London (the USA have made several unsuccessful attempts to move this influence to the USA). And history has shown that the UK prospers better when it controls its own destiny.

Just a brief note on the antics of the House of Lords remoaners. Anyone familiar with the Corn Law of 1932 will understand the vested interests of hereditary peers in their fear of losing substantial subsidies under the Common Agricultural Policy that should have been scrapped years ago.

If we go back to 1940 Clement Attlee, the leader of the opposition Labour Party understood the realities within Europe and proposed a grand coalition, but absolutely not under Prime Minister Neville Chamberlain. Today we have a Labour Party in disarray regarding Brexit. Last week demonstrated that the rebels in the Conservative Party could easily be countered by the Brexiteers in the Labour Party. Thus, one remedy to rebels against Brexit would be a grand coalition of MP’s committed to the majority will of the people specifically for Brexit to achieve the best possible terms for Brexit putting Brussels on notice that the UK is united across the major parties in responding to the mandate of the British people. This would change the whole dynamic of negotiations with the EU and result in the effective beheading of the remoaners as would be the case under that greatest of Generals, Sun Tsu. Furthermore it would neutralise irrelevant but mischievous minority parties such as the Liberals and the SNP.

Has Democracy As A System of Government Run Its Course?

 

In a speech in the House of Commons on 11 November 1947, Winston Churchill said: No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time. Since then democracy has shown itself as a far from perfect system in that the inherent assumptions are that every voter has the capability to understand the issues, and the people elected to deal with the issues have the appropriate experience and wisdom to conduct the majority view of the people. Recent elections throughout the World demonstrate that neither assumption is reasonable. The result is a range of governments derived from populist to unwitting authoritarian.

My attention was drawn to the breakdown in democracy in Europe during the ratification of the Maastricht Treaty, and later the Lisbon and Nice treaties, where various EU member Governments were unable to achieve ratification of these treaties on a free vote but were instructed by the Brussels apparatchik to continue to poll until they achieved the required result, i.e. undemocratic attrition.

In the UK we have two clear examples. The BREXIT referendum attracted the largest turnout of any election in recent times by percentage of votes, and numbers who voted, thus should be deemed to be compliant with the fundamental principle of democracy. Using the fundamental principles of democracy the outcome should be accepted by all, and the Parliament of the day thus mandated by the people to conclude the exit process. Yet the remainers, or remoaners as I prefer to call them, are so vehemently opposed to the democratic result that they continue to attempt to thwart the BREXIT process without any consideration of the damage that they inflict on achieving a good divorce settlement for both the UK and the EU. To these people I say that you have no regard for democracy, the history and future of the UK, and the turnout for this important vote, but are instead far too consumed with blinkered argument with little concern regarding the damaging consequences for the people who voted, and subsequently respected the outcome of the referendum. I can assure these people that if this referendum were to rerun the vote would be more overwhelming.

Who are these people who cannot accept a democratic majority, and why do they think that they can abandon the principles of democracy in favour of a minority? I noted during the Andrew Marr show last Sunday that Labour MP, Chuka Umunna, was stating that BREXIT is so important that it should ride above party politics or personal ambition of Government members but every sentence he uttered was both party political and promotion of his own ambitions. During this week he has furthered both by stating that Parliament should have a legally binding vote on the BREXIT deal before it can be ratified – yet another attempt to thwart the process, and thus the will of the people. What a hypocrite. For balance I can also identify a Conservative MP, Anna Soubry who caused eyes to roll on the Conservative benches in the House of Commons this past Monday when she continued to vent her vehement attack on BREXIT and her party leaders. If she does not understand the principles of democracy why is she in Government?

Then we have the devastating miscalculation of the recent General Election. Short-sighted and blinkered arrogance in the extreme.  My thoughts on reading the Conservative Party (latterly described as Presidential) Election Manifesto are already published. Why did no one with political clout in the Conservative Party face down Teresa May and alert her to the inevitable consequences of such a poorly considered manifesto? I can suggest that study of the ‘Art of War’ by Sun Tzu is required study by her in future campaigns.

Of course, Jeremy Corbyn understood such consequences and saw an opportunity to seize power. He used the rise of a populist vote, especially with younger voters more consumed in their smart phones than in the real world. He promised them anything for their vote even though it was clear from the outset that none of these promises were remotely deliverable, as per populist socialist governments in South America and Africa. His was a particularly exaggerated socialist agenda that had none of the subtle argument proposed by the likes of Tony Blair. This was blatant abuse of process with the certain outcome of bankrupting UK plc. But why did these voters not see the inevitable outcome?

Today Jeremy Corbyn sees himself as the socialist saviour and although verbally supporting the BREXIT outcome he is using it as a party-political football in an attempt to unseat the Conservatives to seize power for himself. For the remoaners who think that BREXIT will be bad for the UK economy I ask them to consider the devastating consequences of a Corbyn led Government. The centre left government under Tony Blair left the Treasury coffers empty (as with all previous Labour Governments since WWII) – but this will be nothing compared with bankruptcy as Corbyn pursues a left socialist agenda. Perhaps his followers should consider the irony in my past blog ‘General Election 2015 – A Sorry Tale’.

The BREXIT campaign was bruising but, from my dialogue with people, they understood why they wanted to vote as they did irrespective of the blindingly aggressive rhetoric from both sides. My view is that the politicians were so outrageous that their words became an incoherent noise. The doom-and-gloom merchants such as David Cameron and George Osborne hid behind rigged outpourings from the likes of OECD and IMF clearly geared to frighten voters, but subsequently found to be completely false and unfounded. The UK economy has prospered post-BREXIT, and the EU is beginning to understand that THE UK is not about to bail out Europe for the third time in the past one hundred years. Teresa May has offered what the International Court of Arbitration would likely deem as legally obligated under the Lisbon Treaty. Any more requires valuable reciprocity from the EU. The second largest contributor to the EU is obviously a real loss to them, but they had the opportunity to address the needs of the UK people, but chose in their blind arrogance, to ignore such needs. Now they want to put valuable trade for both parties at risk to continue to prop up a failed system which is blatantly undemocratic. My instinct tells me that there will be substantial turmoil within the EU countries if trade is not maintained with the UK. The interview with the Foreign Minister of Spain, Alphonso Dastis, by Andrew Marr last Sunday was very revealing as he clearly stated that the close relationship between the UK and Spain pre-dates the EU. He argued that seventeen million UK visitors to Spain each year plus some 750k of UK citizens choosing to retire in Spain is not something they intend to put at risk.

So, what does all this say about our current form of democracy. We have politicians who choose the ignore the majority will of the people. We now have far too many career politicians who clearly lack the experience and wisdom needed to execute their office. We have an unelected powerhouse in Brussels who have no regard for the will of the people when it does not concur with their agenda. We have multiparty systems in many countries that govern by painful compromise (rather than strong leadership). We have too many politicians who have little regard for the ability of people to think for themselves and thus govern by fear tactics. And we have an electorate who feel disconnected from the process and thus disinterested. Instead of democratically thinking about an issue in the interest of all, they concern themselves with what matters only to themselves. Is democracy about to implode, and what phoenix will rise from the ashes?

 

 

BREXIT – 120 days on

univestBREXIT – 120 days on

It has been some 120 days post-Brexit, so where do we find ourselves when measured against the doom and gloom of the Remain campaign. We have a new PM, Teresa May who appears clear on what Brexit means, discovery that global organisations such as the IMF knowingly misled the British people, even the principal architect of the Eurozone claiming that it is now a ‘House of Cards’, and churlish self-interests trying to scupper Brexit with no regard for the democracy that they claim to cherish.

It is really sad for me to see that, amongst a significant number of people spanning all classes, there are elements of the British character that do no justice to our heritage of the UK great explorers and inventors that shaped this World of ours. I watched in disdain the current and excellent TV costume drama ‘Victoria’ recounting the trials and tribulations of Queen Victoria who reigned during the Industrial Revolution as scaremongers, vested interests, self-righteous, and ‘not-invented-here’ jealousy tried to stop the introduction of the steam locomotive. Thankfully, Prince Albert saved the day. Even today I hear eco-warriors stating that the Industrial Revolution was the beginning of the end of mankind, but where would these people, or even the World be without trains. India thrives on the railways, whereas Brazil, without much needed rail infrastructure, has serious transport and thus economic problems – look at the speed of rail infrastructure development in China.

Then I am reminded of the Neville Chamberlain pacifist era before the second world war when Winston Churchill, with his worldly experience, could see the ambitions of Hitler but, in spite of his fine rhetoric, could not persuade enough people that we needed to prepare ourselves for the inevitable. Indeed, according to Boris Johnson in his captivating book ‘The Churchill Factor: How One Man Made History’, had the war been delayed by some two weeks Churchill would already have been hounded out of office!

We are told that we must learn from the past, but do we? During the referendum debate we had the David Cameron, George Osborne and Nick Clegg elite, all from privileged schooling, all career politicians with ideologies not supported by any worldly experience, and easily persuaded by more scurrilous and self-serving influences, preaching doom and gloom if we did not stay part of the EU project. They rallied any vested interest they could find including the IMF, the OECD, and President Obama – an embarrassing chapter for all of them. But history will not record any of them as good, let alone great politicians. David Cameron was clear in his Bloomberg address that if the UK did not get significant Treaty changes for the UK then he would vote out, yet like Chamberlain he returned from Berlin with a worthless piece of paper. He will be remembered as someone who readily changed his mind on substantial matters – not good leadership. But he has realised the errors of his ways and will fade quietly away. Osborne still finds occasion to try to placate his ego, and Clegg is now trying to rally support for a blatant counter-offensive to Brexit on the basis that people do not know what Brexit means. Let me assure him that the core ‘middle-England blue-blooded Brits’ that always save the day in times of need know precisely what it means – a clean exit from the EU in all respects, returning to a Sovereign State, just like most other countries in the World. As has been shown since Brexit, the UK is a major player in this World, and when we sneeze the World coughs. The EU needs the UK far more than the UK needs the EU.

So what has happened since Brexit. I would suggest that the most significant outcome is the clear demonstration of how the elite politics of today is so out of touch with reality, as is being played out in the USA today. What did go on behind closed doors that caused Cameron to accept that the UK should be sacrificed for ‘the greater good of Europe’? How many more times does the UK have to make significant sacrifices for Europe before Europe (mainly Germany) learns from it?

Let me take some words from a Telegraph article summarising a post-Brexit report from the IMF’s Independent Evaluation Office (IEO). This report goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system. It states:

‘The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.

This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.

It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking break-down in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.’

The IEO Report states that since 2011 some 80% of all IMF lending was secretly used to support the Euro – not within the mandate of the IMF, and why Asia and Latin America are so incensed. Add to this the recent publication by Prof Otmar Issing, the first chief economist of the ECB and principal architect of the Euro, in which he states that the rules laid down for the Euro have been so debased by politicians that the currency, and thus the Eurozone, is but a ‘House of Cards’ waiting to collapse. Thus the desperate need to keep the fastest growing economy in the Western World, the UK, inside the EU, not least because of the unique capital raising power of the City of London – thus the lies to the British public by both the IMF and the OECD during the referendum campaign.

By far the biggest everyday loss to the EU is the City of London. With the City inside the EU it could claim to be the most significant financial power on the international stage. Without it the Eurozone does not even have the capacity to clear its own currency. The EU desperately needs the capital raising powers of the City. All of this posturing regarding passporting can be put into perspective by ING announcing last week that it is moving some 40 of its prominent traders from two locations within the EU to London. The worst case scenario is we will return to the days before passporting whereby, under the rules that international banks can only engage in business in countries in which they have a physical presence, banks will re-establish little more than a rep office through which transactions will be directed to London. As for moving banking to Frankfurt and/or Paris it should be noted that during my more than 35 years in the City this has been muted on a number of occasions. Paris is a non-starter for a number of technical reasons, and Frankfurt for even more including that no self-respecting high flier banker would consider living there.

As for corporate business I think that the recent announcement by Apple, the largest company in the World, that it is moving and consolidation its European headquarters in London, with all of the tax implications included, states the blindingly obvious – London is the gateway to Europe.

In a recent French Presidential Campaign speech by Nicolas Sarkozy he clearly stated that his first day in office (if elected) would be spent in Berlin (note: not Brussels) putting a new EU Treaty together that would address the concerns of the UK to encourage them to stay within the EU. He knows that there will be revolution in France if the farmers got even a whisper that tariff barriers were to be imposed on the UK.

In Germany we also have elections on the horizon. I am certain that the elite of Germany will resign themselves to the inevitable Brexit and thus quietly encourage election results that will ensure that no harm comes to the valuable existing trading relations with the UK.

The principle voices of Angela Merkel in Brussels, Donald Tusk, Martin Schulz, and Jean-Claude Junker, are synonymous with the problems faced by the EU. On the one hand they are stating that the EU will survive Brexit. On the other that are issuing instructions to member states to clamp down on rising nationalism.

The good news is that GBP has depreciated from its over-valued level by some 17% causing the UK Stock Market to regain some of its lost value over recent years, and provide the stimulus for the return for a much increased manufacturing base – jobs, prosperity, less dependency on imports. It should be remembered that Germany pushed through the Eurozone project to devalue the over-inflated Deutshemark by some 30% – great for Germany, but a disaster for most other members.

This devaluation will mean price increases to the UK consumer of imported goods and thus stimulate much needed, but controlled inflation reducing the need for QE and restoring interest rates to more normal economic levels. Some of this increase could be artificial as EU Governments put pressure on their major suppliers to increase prices to the UK as per the much publicised Unilever to Tesco increases which resulted in an embarrassing climb-down by Unilever. The real price increases will put upward pressure on wage demands – good for the workers who generate the wealth but contained to 2% pa or less wage growth over recent years, but not so good for fat executives who have enriched themselves with wage growth of around 10% pa during the same period. Also we can be competitive manufacturers and return to the days of ‘Buy British’. We can even return to eating our own delicious apples, currently outlawed by the EU to force import from the likes of France. The UK Government could easily buffer the increased price of fuel and energy (increases not EU related) by reducing, or indeed eliminating all of the absurd anti-competitive eco taxes on UK energy prices.

Trading with the World, including Europe will certainly not get worse, but is likely to improve. The intransigence of the EU Commission regarding trade with the EU is legion – ask the Americans. Our global relationships will prosper far more after the dust of Brexit has settled.

The issues we face today are the posturing, petulance, grandstanding, etc by both a dying EU and those die-hard remainers in the UK who have jettisoned democracy in favour of their own self-interests. This causes turbulence in the markets, no doubt exacerbated by the more influential remainers. The professional financial markets love such turbulence as they use it to generate good profits. The losers are the general public in whose lives the media relish creating uncertainty, and which impacts their cost of living resulting in understandable protest. How many media outlets have directly associated recent fuel price increases with Brexit? Oil prices are recovering from two years of global turmoil, and should settle around US$60 per barrel. The UK has a much needed currency devaluation regardless of Brexit. De facto prices will increase from their extraordinary lows over recent months regardless of Brexit. I can remember when oil prices were US$16 per barrel, and more recently US$120 per barrel – but neither to do with the EU or Brexit.

Brexit has not yielded doom and gloom, not even a technical recession. The UK is now projected as the fastest growing Western economy. Just as with the resistance to the steam locomotive in Victorian times it is time to ignore the doomsayers and grasp the opportunities that now present themselves so that, as with the proliferation of railways, the UK will again rise be a major and great player in this World in its own name.

 

BREXIT – What Deal?

univestBREXIT – What Deal?

When David Cameron elected to engage in a referendum regarding UK membership of the EU his pronouncement was that he would seek much needed fundamental reform to the EU, or support an ‘out’ vote. These reforms included substantial issues such as curtailing the role of the European Court of Human Rights in UK determinations, to scrap the Human Rights Act, reclaiming sovereignty for both our parliament and our judicial system, and to have sanction over immigration into the UK.

What he achieved is zero reform; only some tweaking at the fringes which, until written into Treaty are no more than what the Courts call mitigating circumstances in determinations, the existing Treaty being the fundamental basis on which they will make determinations. Few, if any of the EU leaders who agreed this tweaking will be in office when the next Treaty is discussed, and the European Parliament can most certainly vote down any, if not all of the concessions. Thus why the ‘deal’ is already in the dim past of the EU referendum debate.

As a trained negotiator I have an unease about the lack of any substance to the ‘deal’ as Germany most certainly needs to keep us within. Did Cameron not have the heart for such a negotiation? Is there a deal behind the scenes regarding the future of Cameron? Was he the wrong man to negotiate? History may tell us the answer, but until then we must accept that the ‘deal’ does not remotely meet with the initial basis of the referendum.

I am not going to debase my discussion by using speculative monetary values, or the use and abuse of statistics. As it is clear to see in the media the business and financial community are divided on opinion based on their specific vested interests – thus irrelevant. As argued in previous blogs this debate is about the future of the people in the UK. All of the economic and political arguments pale against the right outcome for the British way of life. Business and finance will continue regardless of the choice made in June. As one dear lady so elegantly put it in a Jeremy Vine interview last week, ‘so-called experts built the Titanic, but not the Ark’.

I do not believe the people of the UK will engage with the current political and business debate. So let us bring the argument down to a reasonable comparator argument that anyone can understand. Our base will be a recently new golf club where the charter debenture holders (the people who essentially financed the building of the club) sought preferential treatment as part of their contribution. This creates a two-tiered system of membership even though much of their initial investment has been redeemed through subsequent debenture sales. What will happen over time is policy committee members will change, and privileges of the charter members will become fuzzy, and erode, until they have no more privileges than any other member, i.e. harmonising rights to all members. This is what will most certainly happen in the EU. Fuzzy memberships such as Norway, the UK, and Switzerland will be tolerated in the short-term, but over time the boundaries will be eroded until they are eradicated. In Political Risk parlance this is called creeping expropriation. If the UK elects to remain an EU member it will most certainly not retain any special status over time.

The generally accepted current situation of the EU is fragile, and in need of serious reform. So what is the future if the UK votes to remain within – uncertainty. What is the future if the UK votes to leave the EU – uncertainty. So what is the difference – control of the uncertainty. The UK is not a Switzerland or a Norway. The UK is the 5th largest economy in the world – and carries much power and influence in the world in its own right (as endorsed by the German Foreign Minister on Radio 4).

Let us look at uncertainty, again in an easily understandable form. Uncertainty is as much part of life as day and night. The obvious relevant examples are life-changing decisions to get married, have children, or God forbid – divorce. They all require uncertain adaptability, but are all undertaken with the hope to a better future. For a while they can be a struggle, but the outcome is generally worth it. Ask any woman who has gone through labour, but yielded a healthy baby – the pain of labour is soon forgotten. A BREXIT includes a 2 year ‘grandfather clause’ where all of our existing relationships with the EU continue giving time to agree alternatives such as free trade agreements. The UK will see some immediate benefits in that the irksome elements of the Human Rights Act can be ignored, immigration can be brought under control, and our transport infrastructure can quickly progress without the interminable interference of Brussels. Therefore, our uncertainty has a short-term safety net which negates the scaremonger argument that the short-term will be turbulent; but does have some valuable upsides. The UK successfully recovered from 2 World wars without help, so a relatively simple exit from the EU should be a breeze. I would suggest that most people will not feel any immediate difference.

There is one element of the uncertainty that I have yet to see any comment. What is likely to happen to the EU without the UK as a member. There are a number of relevant uncertainties. Other net contributor countries could see the UK exit as a sign that the current EU model is really broke, and thus elect to do the same – especially as the EU will have to increase contributions of other member States to fill the vacuum left by the considerable contribution by the UK. The right-wing elements of France could rise and depose the French Government. France has much to lose by a UK exit. Where were these concerns in the deal negotiations – or wasn’t the threat of the UK leaving a serious consideration?

If Germany can find the means to support the Eurozone then it will more rapidly consolidate its hold over the Euro countries – and the people of the UK will be thankful that they departed. Of course we still have the Greek issue which will most certainly be a thorn in the side of Germany – will this lead to conflict within the Eurozone? We have seen that the poor response by Germany to the economic situation in the Eurozone when they refused quantitative easing some 4 years ago. The too little – too late plan by the ECB yesterday was greeted with derision by the markets.

The UK has a proud history as the banking centre of the world boasting excellence in financial capability (even when Labour are in Government), and the ability of the UK to rise from both the irresponsible spending of the last Labour Government and the financial crisis lays testimony to the intelligent and speedy response to such events. Should this be sacrificed to the incapable Eurozone mandarins who clearly do not have the experience, or the global market understanding?

In summary BREXIT will yield uncertainty whichever way it goes. Therefore, the issue is whether or not the people of the UK want control over such uncertainty, or do they want to surrender decisions to Brussels – unaccountable to the people of the UK, and not so interested in preserving the British way of life.

 

 

The superior nature of Syndicated Insurance for Project Finance

univest

The superior nature of Syndicated Insurance for Project Finance

Syndicated Insurance for construction projects is well defined for projects throughout much of the world. However other types of project require a tailored approach depending upon the defined risks involved. But the principle of syndicated insurance for project finance is not just an insurance solution – but a global comprehensive risk management tool for qualifying projects.

 Integrating comprehensive event risks into loan/bond documentation was initiated by myself with invaluable help from Dennis Parker (from Aon in London), and Clifford Chance (law firm) both in London and New York. It took 7 months of negotiation with bankers and underwriters to achieve a wording consistent with formal offering documents such as Trust Indentures in order for acceptance, albeit that it was the important endorsement of investors that finally achieved acceptance.

 It might be helpful to define the diverse range of insurance products available to the project finance specialist to understand the problem with the conventional approach to adding event risks to a financing, whether public or private placement, syndication, or bond issue. I would also include quasi-equity products such as convertible debt structures into this group.

Types of Insurance Products Available for Project Finance

Insurance products for project finance can be conveniently discussed from two different perspectives, i.e. those that require Political Risk insurance (developing and/or politically unstable countries), and those that do not. However the crossover point can be fuzzy as the need for such political risk is not only applied to developing or emergent economies but can vary depending on the term of a transaction for so-called industrialised countries. The fortunes of countries wax and wane, both through domestic political situations, and adverse effects of global economic conditions. The normal determinant is whether or not a country has an acceptable credit rating from Standard & Poor or Moody for the term of the proposed transaction, albeit  such ratings can adversely change for any country very quickly as we have seen in the Eurozone countries.

Just by way of example of how fuzzy the parameters for determining whether or not political risk cover is required in any of its various forms we only need to look at how many major countries or cities in the world would now require civil disruption, riots, or terrorism insurance cover for certain types of project.

Add to this the general myth that a corporate within a country cannot borrow at cheaper interest rates than the Government (sovereign debt) of that country then it is easy to understand why there can be confusion. Utilising insurance-based risk mitigation, which has the effect of credit-enhancing the transaction by effectively moving the domicile and credit rating of part of the risk, can easily result in lower costs of borrowing than the project country risk would otherwise dictate.

The general classifications of insurance products used in project finance are:

  • Investment Risks – Inconvertibility, Expropriation, Creeping Expropriation, War, and other Political Violence
  • Collateral Deprivation Risks – Asset Repossession and Deprivation, Civil Disruption
  • Non-payment Risks – Commercial and Political Causes, short medium and long-term credits, leases, Documentary Credits, Promissory Notes
  • Contract Frustration Risks – Including Wrongful Calling of Guarantees, Non-Delivery
  • Transportation Risks – In-transit risks
  • Credit Enhancement – Third Party credit, asset securitisation, cash flow securitisation
  • Business Disruption – Third party commercial disruption e.g. utility and transportation disruption
  • Transfer Risks – Repatriation of Investments, Debt and Leases payments, etc.

 

Project Finance Requiring Political Insurance

This is a specialised area of insurance as, by definition, the project is in a territory that has less certainty of political stability and/or appropriate legal structure than one would like in order to secure an investment or lending position in the event of problems. Such political insurance is available to cover a whole host of possibilities such as:

  • Confiscation, Expropriation, and Nationalisation
  • Forced Abandonment
  • Transfer Risk
  • Refusal of host Government of Repossession and Disposal Rights
  • Contract Repudiation
  • War, civil war, civil unrest,  and terrorism

However there can be a number of interested parties that need cover within any one project, and there can be a number of different scenarios that require the security of a political insurance wrap in order that they are effective. This is further complicated by the fact that it is not always possible for any one insurer to assume the total insurance package thus various legal platforms for each insurable risk need to be interpreted and reconciled.

Bonding

One of the prevalent features of international commercial life is the need to issue on-demand guarantees to satisfy advance payment, performance, and warranty obligations. Bank bonding has been the traditional source of such bonding but this is another area where insurers can provide a far more reasonable and appropriate instrument.

If we consider conventional bank demand bonds it is easy to understand why they are an onerous burden on the provider, and gross overkill on the part of the receiver. The onerous burden on the provider includes the capability of the receiver to call the bond at will without declaration of default, and the burden is then upon the provider to prove whether or not there is good and reasonable cause, and if not then the burden is upon the provider to reclaim their money which is both time consuming and expensive. Banks do not generally accept any responsibility for payment under an invalid presentation of such bonds. Although such risks as invalid presentation can be covered through insurance this is yet a further unnecessary and avoidable cost.

Having studied this problem for some years it became apparent that it is frequently possible to clearly define the conditions that would reasonably justify a call on such a bond. Therefore it has been possible to negotiate with insurers the development of a demand bond that is more reasonably aligned with the purpose of its existence, and callable on demand by the receiver given a specific event of default by the provider. This bonding has a number of significant advantages over bank bonding namely:

  • The bond is an off-Balance Sheet instrument for the provider and thus no adverse gearing implications;
  • It does not consume valuable bank facilities that might otherwise be better utilised;
  • They are more flexible in that there can be a number of callable events with different levels of monetary penalty;
  • It is usually cheaper.

The practical application of such bonding is fundamentally unchanged other than the bond will be defined in a contract which will also define the events under which the bond can be called, and the associated amount. In the event of a claim by the receiver the only change is that the receiver must lodge a formal notice of specific default with the insurer to invoke the demand for payment. Such payment will be made upon presentation of such claim. In the event that the claim proves invalid then it is the insurer, not the provider, who will pursue recovery. This takes the burden from the provider and imposes a more disciplined attitude to default claims by the receiver.

There are a small number of specialised brokerage houses in London that specialise in the arrangement of such bonds.

Problem Summary

Albeit that there is a whole spectrum of insurance-based products available that can be beneficial to a project financing the problem is that we have a multitude of insurers/underwriters using different types of wording on different platforms, and even in different legal jurisdictions. This does not make lenders very comfortable as they do not know which insurer is assuming what risk, or whether there are gaps between the various wordings that potentially leave the borrower, thus lender, exposed. Furthermore many of these products are annual renewable whereas a typical project will involve 5 – 10 years of debt service. The downside for the project promoters is that they would not benefit from the potentially large discounts from consolidated premiums, nor the benefit of reduced debt pricing because of the lack of confidence in the event risk integrity.

A Practical Example Using Syndicated Insurance to Credit Enhance Capital Risk

One of the major problems encountered with developing economies is that long-term capital for business development would be a preferred solution under normal circumstances, but the political risks dictate short-term exposure. For a lender or investor to consider long-term capital the event risk cover must look like an integral part of the asset risk financing, and be of a quality that the integrity and robustness matches that of the financing terms. Thus we need, at the very least, the matching concept of a single underwriter assuming the lead in the event risk package, i.e. syndicated insurance.

Rather than consider how to build a syndicated insurance product for a generic project I would like to demonstrate how this product was derived for the very first complete application of syndicated insurance. I had already used a subset of this idea for previous projects in Eastern Europe, and successfully applied it for an Interest Only financing that I devised and structured for a capital financing in the former Czechoslovakia written by Deutsche Bank, Frankfurt (look out for ‘Interest Only financing’ as a future blog).

The project presented to me was a requirement of USD 100 million for an oil & gas development and production project in Western Siberia, Russia and in which Deutsche Morgan Grenville was already an equity investor for the exploration phase, and a solution would have a co-lead of HSBC and Deutsche Bank. It was in the Yeltsin era in Russia and no-one wanted to invest or lend for Russian projects. The company was a joint venture between a USA company (provider of finance and drilling expertise) and a Russian company (owner of a valuable Exploration, Development, and Production Sharing Agreement (EDPSA) negotiated by the USA company). Even though the assets (oil & gas) were proven and considerable they were in the wrong place at the wrong time and thus conventional funding did not arouse any interest. At that time no public bond offerings had been successful.

An overview of the primary criteria that needed to be considered:

  • The terms of the EDPSA stated, as a condition, the need for evidence of the availability of all of funding needed to develop the field. Funds were needed for 3 years with repayment within 5 years.
  • The joint venture company was Russian (this was not safe then, and recent problems encountered by BP in Russia confirm that not much has changed). If USD 100 million was injected into the joint venture company it could easily disappear.
  • All oil had to pass into the state-owned Transneft pipeline as Urals blend and could be diverted to Russian refineries (payment issues & business disruption if otherwise sold)
  • Western Siberia is a frozen wasteland in the winter, and a swamp in the summer thus sand pads with interconnections would be required (transportation issues)
  • There was only one power station in the region – very old, and the workers had not been paid in over 3 months (business disruption risk as surface equipment such as separators and compressors need energy supplies)
  • Third party transportation risk of piping crude oil to Novorossiysk on the Black Sea.

In spite of the considerable proven oil reserves even the hardened oil & gas investors had no appetite for this financing unless the risk profile could be dramatically improved. It was obvious from the outset that merely attaching a number of insurance products to the investment would still not attract interest. The conventional source of a political wrap for this financing, MIGA (the insurance arm of the World Bank), wanted a 3 – 6 month review period and a large amount of money in fees with no commitment to provide anything.

Thus a different approach was needed if we were to credit enhance this offering to make it attractive. It was clear that we needed, at least, to tap into just about every insurance product in our tool chest, and which ordinarily would provide a complex mix of wordings, platforms, and jurisdictions.

Some of the primary considerations were:

  • This financing could not be a conditional debt structure as this would not satisfy the terms of the EDPSA.
  • Asking investors to provide equity (conventional financing for oil & gas for pre-production activity) would not work. Thus a convertible debt structure would be needed through a public offering to capture the largest market of investors available, and providing an element of liquidity to investors.
  • The USD 100 million could not be placed into the Balance Sheet of the Russian j-v company. A trustee arrangement would be needed where a credible third party acceptable to all parties, and especially the Russian partners, could provide confirmation of available funds, but only release funds against confirmation of agreed deliverables. This trust arrangement would also have to provide unconditional comfort to the investors that their money was safe from unauthorised call by anyone, including a Russian court.
  • In order to achieve the comprehensive range of event risk protection needed we would need to convince the underwriters that every risk that could be mitigated through good corporate governance has been identified and addressed, e.g. placement of a generator on the field to satisfy the energy requirements of the array of separators and compressors needed to keep the oil flowing to the pipeline.
  • A secure off-take of the oil from Novorossiysk by a trusted Western company well placed in that arena.
  •  All oil payment receipts would need to be directed to the trustee with the full co-operation of the Russian j-v partner, and the Russian authorities (payment of their share of the oil revenues plus any taxation due from the j-v company)
  • Managing cash flow to keep the fields producing in the event of any third party business disruption

Having agreed these requirements in principle with all relevant parties, Dennis Parker and myself prepared a single event risks policy inclusive of all political risks and bonding requirements (irrecoverable political disruption, i.e. forced abandonment, would trigger a full refund to all investors). Insurance risks had never previously been included in the main body of a Trust Indenture but I knew that if we could achieve inclusion for this issue the financing would be significantly more attractive to investors. Clifford Chance provided oversight to this process to ensure that the drafting was consistent with Trust Indenture requirements. This process was complicated by the fact that the chosen trustee was Bank of New York who wanted their obligations written under US law, and specifically New York State law, whereas the main body was under English Law with Norwegian Arbitration.

Whereas I was concerned that we would not find a suitable single lead underwriter for such a comprehensive package I have the competence of Dennis Parker to thank for a relatively easy task.

Both HSBC and Deutsche Bank agreed to put the package to the appropriate authorities for consent to launch the issue. The road show would be the litmus test. We organised presentations to investors in 14 cities in just 28 days. We were oversubscribed after the eleventh city, Toronto – we had a product that satisfied the most hardened of investors.

This project financing demonstrated that event risks and asset risks can rank pari passu with each other providing integrity into project finance that fits the requirement in difficult environments, and at an affordable price. The credit enhancement meant that we could set a coupon yield at 10% against sovereign debt of 14.75% for Russia at that time, and with a total insurance premium of just 1.75% per annum of actual exposure for the term of the issue. This is the power of syndicated insurance for project finance.