Category Archives: Financial arcana

Disruptive illegal migrant gets come-uppance

I’ve tended not to blog here about my migration status in Australia, for reasons that are probably obvious. But to my great delight and relief, earlier this month I was sworn in as an Australian citizen [1].

The process, from tourist to citizen, wasn’t super-easy. However:

  • it was a hell of a lot easier for me than for most would-be migrants to Australia because of my nationality, age, education/skill level and income/savings.
  • it was a hell of a lot easier for me to do in Australia than it would be even for someone with my privileged status and position in most mid-to-high-income countries [2].

The first is obvious, I hope. My nationality and age gave me access to Australia’s Working Holiday Visa scheme, which gave me a year of almost-unrestricted work rights (and the option to have a one-off 12 months extension, if I took 90 days of manual labour in remote Australia during the first 12 months. EDIT: I chose not to do this and also not to pretend to the government that I had done it. This digression will become important later).

My education allowed me to navigate a complex system and was directly helpful for certain later migration hurdles, and my access to money allowed me to  study at an Australian university, pay government fees, hire a migration agent, meet various other administrative costs, and pay living expenses during periods when my work rights were limited [3].

The second is perhaps more surprising to people who haven’t tried living across non-EU borders, especially if they’re aware of Australia’s barbaric offshore concentration camps internment camps detention centres for refugees and reputation for being horrifically racist. But compared to most plausible countries outside the EU – certainly the US, Canada, Japan and Singapore – and to most EU countries for non-EU nationals, the path from arrival to Australian citizenship for a skilled migrant [4] is relatively easy.

My particular experience was more bureaucratically difficult than that of many skilled migrants, who are sponsored by an external employer, because I spent most of the time running my own business. In the US or UK, it would have been straight-up impossible for me to get a visa on this basis [5]. In Australia, it was a complex and often expensive but entirely legitimate process, and I’m very grateful for it.

Why am I talking about all of this today? Because of this idiot, and his incompetent and dishonest boss, who amusingly ran a company named Disrupt.

In short, a UK citizen came to Australia on a Working Holiday visa and got a job working for a small technology company.

Once the 12 month period during which he was eligible to work in Australia was over, instead of moving to a legal visa class or leaving the country, he lied to the Department of Immigration and Border Protection that he had completed the 90 days of rural labour and was eligible for another 12 months.

All of this was done with his boss’s knowledge, and quite possibly (it reads from the piece) at the boss’s instigation.

Not unsurprisingly, during the second 12-month period, as he tried to return to Australia from a US business trip, DIBP discovered he was lying and deported him.

This would be a straight-up case of illegal immigration, carried out by someone nowhere near in dire enough financial or personal circumstances to justify it, even if it were true that he had no way of legally staying in the country in his status.

But the really particularly dumb and annoying thing is that he did. 

The rules for which companies are eligible to sponsor staff for Class 457 skilled four-year employee visas are complicated, and the DIBP website doesn’t let you link directly to them, but they’re under the ‘sponsors’ tab here.

The very short version is that if you are a real company that isn’t taking the piss, and you can put documents together to show this, then you can sponsor staff for this visa, even if your company is a start-up. A quote from the website:

If your business is new, you can still satisfy this requirement [to be legally operating in Australia] if you can provide evidence that your business is in fact operating, even if this has been for only a short period of time.

I can confirm this is true because I’ve done it. The company had to provide a whole bunch of evidence that it was operating legally, that it had a business plan, that it had a plan to meet training benchmarks, that it paid any existing staff legal wages, and so on. Which it did.

Overall, achieving this required a 10-page document roughly equivalent to what you’d need to get a small business loan from a local bank to buy a van or a café, and took a couple of days to put together.

Meanwhile, at Disrupt (this is shown as a fact rather than a quote in the SMH article, but I’m 99% sure it’s verbatim from the company’s boss):

As a start-up, Disrupt is not recognised as a “business” under the Migration Act for the purpose of sponsoring skilled individuals on temporary work visas.

This just isn’t true. It is nonsense. It is made-up bollocks that any competent migration agent would have told the company was made-up bollocks, suggesting that the CEO didn’t even bother to get a migration agent’s advice before encouraging his deputy to go ahead with his hare-brained illegal scheme.

Which… well, as we’ve seen with many tech start-ups, particular in the financial sphere, tech bros are not exactly renowned for seeking the advice of local experts or for not launching hare-brained illegal schemes, are they?

Generally, but especially in the context of this post, I acknowledge and pay respect to the traditional owners of the land on which I live, the Wangal people of the Eora nation.

[1] And almost immediately, sworn at as an Australian citizen, because Twitter is glorious and this country is glorious.

[2] Except for EU ones, of course. Hurrah for the raging Brexit idiots who want to abolish their own right to do that and the rest of ours along with it.

[3] Paid working hours for full-time overseas students in Australia are limited to 20 per week.

[4] The largest sources of new skilled migrants in Australia are now China and India, with the UK in third place.

[5] Unless you have enough financial wealth to count as a wealthy investor, which in both cases is a hell of a lot more than I do.

Time to sue Henry Ford for complicity in car bombings

There’s an absolute stinker of an article in today’s New York Times, emotively talking up an terrible lawsuit. When stripped of irrelevant interviews with soldiers’ widows and scary quotes from showboating neoconservative lawyers, here’s the actual story.

The US didn’t take the news very well when its puppet state in Iran had a revolution in 1979. The affront was exacerbated by Iranian revolutionaries’ decision, after the US gave asylum to their murderous and corrupt ex-Shah, to take the remaining US diplomats in Iran hostage. This created a diplomatic crisis which wasn’t resolved until 1981 [1], and more importantly made the US look silly and impotent.

As a direct result, the US government, much as with the Cuban regime that followed a similar drill 20 years previously, has a hatred for Iran that far exceeds its actual wrongdoing [2]. This includes the (completely lawful, although ridiculous) imposition of sanctions on US companies trading in Iran, and the (questionably lawful, and ridiculous) imposition of sanctions on foreign companies trading in Iran.

So banks in Europe – in this suit, HSBC, Barclays, Standard Chartered, the Royal Bank of Scotland and Credit Suisse – continued to trade with companies in Iran. Whether or not you like its current rulers [3], Iran is a nation state with a better human rights and terrorism funding record than many US allies (notably Saudi Arabia, which funded Al Qaeda and the exceptionally inept Islamic State) and non-enemies (China still leads the world in executions). There are no moral grounds for claiming that westerners trading with Iran are more complicit in evil than the westerners who traded with authoritarian China to make the device that you’re reading this on [4].

Next up, in 2003, US launched a humanitarian mission to neighbouring Iraq. You may have heard of it, somewhere, along the way. I chose the picture at the top of this post to remind us all of the mission’s humanitarian nature.

The Iranian government reacted to the collapse of its Iraqi enemy by funding Shia militias (many of which were also funded by the US government at various points, and without which the Sunni militias who later became Islamic State would have been unopposed in ethnically cleansing the Shia). In the course of the humanitarian mission, quite a few US servicemen, who had previously volunteered to sign up and fight whenever the US decided to have a humanitarian mission, were killed or wounded [5], some by Shia militias.

Now, the families of some of these people (the American volunteers, obviously, not the Iraqi victims) are trying to sue the European banks who traded with normal companies in Iran, on the basis that somewhere down the line, the money that was traded might have found its way via the government into the Shia militias’ pockets. As Dsquared notes on Twitter, this is roughly equivalent to suing Kellogg’s because the July 7 bombers had Coco Pops for breakfast, or suing Henry Ford because you were blown up by a car bomber in a Cortina.

One of the piece of evidence in the lawsuit, gleefully seized upon by the New York Times as highlighting the banks’ depravity, is a quote that actually highlights the opposite:

The Times’s editorialising here is a great illustration of the US’s total vanity. Its leading centre-left news outlet – and quite possibly its courts, who ruled for the plaintiffs in a similar, although less farcically indirect case – simply don’t understand that they aren’t the God-ordained rulers of the rest of the world.

[1] Possibly delayed due to incoming president Reagan’s backroom deal with Iran, although I’m sceptical he was bright enough to pull off quite such an intricate conspiracy.

[2] A hatred which has more or less guaranteed the survival of the unpleasant regimes in both countries by undermining local opposition and providing the ruling party with a plethora of patriotic rallying opportunities.

[3] Although if you do like Iran’s current rulers, it seems likely that you are a fairly terrible person.

[4] If you’re reading this on a device which has no components manufactured in authoritarian China, then I am very impressed by your dedication.

[5] Alongside several orders of magnitude more Iraqis, who hadn’t been quite so blessed with the opportunity to choose.

The death of the banana republic

US-based banana producer and importer Chiquita, the world’s largest banana company, is almost certain to be bought by a Brazilian consortium, after the collapse of its attempted tax-dodge reverse takeover of Irish-based banana importer Fyffes.

In some ways, this is an entirely normal business story.

It features the collapse of the easy, painless [1] tax revenues that the US government could once reliably collect from US-based multinationals’ overseas ventures, as companies move their formal registration and a couple of dozen accountants and lawyers to low-tax jurisdictions like Bermuda, Ireland and the Netherlands whilst keeping management control in the US. It features the growing importance of Brazil’s highly competent and often highly cash-rich middle class, whose flagship was Brazilian-controlled InBev’s takeover of Budweiser brewer Anheuser-Busch.

But that isn’t the whole of it.

The full story takes us back to the tail-end of the 19th century, when advances in shipping made it viable, for the first time, to ship bananas from South America to urban consumers in the northern US.

The United Fruit Company, founded in 1899 by the merger of banana pioneers in Boston and New York, owned and operated plantations in the Caribbean and Central America, and introduced refrigerated sea transport to provide New Yorkers and New Englanders with the freshest fruit.

The UFC [2] found itself building complex logistics networks in countries that had previously lacked any real communications capacity. And as the US became the world’s leading power, and US consumers became richer and hungrier for bananas, the UFC found itself far richer than any of the governments that nominally ruled the Central American countries where it traded [3].

Which is how the term ‘banana republic‘ was coined. Even before WWI, the UFC controlled telecoms and postal networks in Guatemala, Honduras and Costa Rica. With politicians in the company’s pockets, it dominated the US banana trade. It kept costs low by dispossessing peasants of their lands through crooked legal systems, and then employed them as cheap labour on the grounds that serfdom was mostly better than starving to death.

If this sounds familiar, then you’re probably aware of the history of British India.

The main difference between the United Fruit Company and the East India Company is that the former never even required a show of US military force to protect its interests. The implicit threat was so clear, it never needed to be carried out. Besides, bribes are cheaper than wars.

So why am I blethering on about the United Fruit Company? Well, in 1990, it was renamed to Chiquita Brands International. The same one mentioned above. That’s right: the ultimate US imperialist multinational, the inventor of the banana republic, is about to be bought by South Americans.

In the long run, all empires fall and all companies collapse. And often enough, it’s the people they oppressed who take over. The East India Company brand is now owned by an Indian business. There’s nothing new under the sun, and so on.

But I don’t think I’ve seen a quicker shift from colonial corporate power to re-appropriation than Chiquita.

[1] For US consumers and the US economy in general. I’m sure US CEOs were deeply pained.
[2] The best wrestling abbreviation coincidence since Pandas vs Hulk Hogan.
[3] There is some extremely good development economics work on this; this paper is a great start.

A Qantas of solace

Qantas announced its financial results today. Predictably, they were a car crash (Qantas still hasn’t had a plane crash [*], but they’re definitely a crash). $646 million operating loss, and $2.6 billion in one-off write-offs from revaluing the company’s aircraft fleet. No rock and roll fun.

Fiddling and burning

As Qantas CEO for the last six years, and about as many restructuring programs, much of the blame has fallen on Alan Joyce. “Alan Joyce is to Qantas what Caligula was to the Roman Empire”, said independent Senator Nick Xenophon, who never met an exaggeration he didn’t love.

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Qantas CEO Alan Joyce chairing a board meeting

And it’s true: while he hasn’t yet made his horse a board director, Joyce’s strategy has been something of a disaster. His approach to a long-term structural weakening in Qantas long-haul, combined with an epic boom in domestic demand, was to ignore the former (leaving the long-haul airline with a fleet of fuel-guzzling 747-400s, highly-efficient-when-full-but-hard-to-fill A380s, and senescent 767s up to the end of 2013), and deal with the latter by starting a price war with its only real domestic rival, smaller, lower-resourced, lower market share Virgin Australia. Although at least the domestic airline’s ageing planes were replaced with efficient new 737-800s.

Under Joyce, Qantas’s investment has been focused on expanding pan-Asian short-haul budget airline Jetstar, which has had modest success in Australia and Singapore, less success in Japan, embarrassment in Vietnam, and dismal failure to even get an operating license everywhere else (including Hong Kong, for which the airline bought six brand new A320s that have been sitting idle). Much of the failure has been due to Qantas’s and Joyce’s failure to understand the Asian operating environment, where the perception that the airline is controlled by local partners is vital to local regulators.

More recently, as long-haul became predictably loss-making, the airline has slashed services, cancelled further A380 deliveries, life-extended 747-400s up to the point where they’ll be welcomed in museums on decommissioning, postponed 787 deliveries (despite the fact that, due to Boeing’s program delays, the airline is due an exceptionally good price on its 787s), made no effort to lease 777s in order to decommission 747-400s, and negotiated a codeshare with its biggest international rival that hands over most of its long-haul services out of most Australian cities.

And rather than attempting to either blitz or alleviate Qantas’s troubled relationship with staff and their unions, Joyce ratcheted the tension up to maximum, closed the airline for a day to hold a lockout, and then stuck a band-aid over the wound.

So, yes, Joyce has been inept. But what about the environment he’s facing?

They can’t be better than us, so they must be cheating

A lot of cant is talked about this, partly because local airlines in rich-people countries are very good at placing PR stories in the media, and partly because it’s the only area where rich-people country airlines and airline staff have aligned incentives. The general story is that it’s grossly unfair that airlines like Qantas are losing out, because their rivals in less-rich-people countries are “government sponsored foreign airlines with unlimited piles of cash”.

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A highly subsidised government-controlled airline stealing Qantas’s passengers

Anyone using this lie should be banned from aviation commentary. It is a bullshit excuse used to defend the incompetent management & overpaid staff of legacy airlines in rich-people countries from profitable foreign rivals.

Looking at airlines that could be considered Qantas’s competitors, Emirates is immensely profitable; it does not have any state subsidy. Singapore Airlines and Air New Zealand, both major shareholders in Virgin Australia, and Cathay Pacific are all slightly less profitable, but also unsubsidised. The remaining foreign government-controlled airlines that run on subsidy are basket cases that can’t fill their seats anyway: Malaysian Airlines, Air India, Alitalia.

The alleged indirect subsidies that critics like to pretend Qantas’s rivals receive are also illusory. Yes, fuel is cheaper in Dubai than it is in Sydney. But the economics of long-haul air travel are such that you have to refuel every time you land, so a Qantas flight that goes Sydney-Dubai-London has exactly the same fuel cost as an Emirates flight that does the same. It’s also true that company profits are taxed less in Dubai than they are in Australia, but you need to be making a profit in the first place before anyone taxes it.

The problem is, if you are an airline with new planes, new IT systems, and staff recruited on current contracts, you have a hell of a cost base advantage over an airline which doesn’t. This is highlighted by, um, Jetstar and Virgin Australia, never mind the foreign rivals. The foreign rivals also have the advantage of being on the way between somewhere and somewhere (with the exception of Air New Zealand, which really doesn’t).

The “cheating” narrative exists, of course, because it’s a first step in the one cause that unites unions and management everywhere: extorting money from the taxpayer to preserve unviable business models. Once you’ve established the trope that it’s unfair of Emirates and Cathay Pacific to steal all of Qantas’s international passengers using their home advantage, a subsidy to ‘level the playing field’ is a logical next step. To the current Australian government’s credit [**], it doesn’t so far seem to be showing any signs of playing ball.

Portrait of the CEO as a doomed man

Alan Joyce said in the results statement, “We expect a rapid improvement in the Group’s financial performance – and a return to Underlying PBT profit in the first half of FY15, subject to factors outside our control”. Note that ‘factors outside our control’ here means whatever he wants it to, like Humpty Dumpty. And note that he has said variations on this theme at almost every results announcement so far.

Etihad CEO James hogan
Etihad CEO James Hogan

Things should be less terrible for the airline going forward. The various doomed attempts to forge new Asian carriers seem to have been dropped; Qantas has addressed some of the terrible usage patterns of its international fleet (no longer leaving $300m aircraft parked up in London for 20 hours a day), 2,500 of the 5,000 layoffs in February have actually been made; and the write-off to aircraft values will save about $200m a year in depreciation charges. If not quite profit, that would seem to be enough to keep the airline’s loss manageable given its cash in the bank.

But while Qantas’s future is reasonably secure, Alan Joyce’s surely can’t be. The results today were greeted with near-universal incredulity that he hadn’t been sacked already, given the sheer number of times he’s come forward with another round of sorry apologies, another insane unworkable Asian solution, and failed to save money on the core business. He’s a hate figure for the airline’s staff and the Australian public.

So why hasn’t he been, then? There are two possible alternatives:
1) As with the sacking of BP CEO Tony Hayward following the Deepwater Horizon disaster, there is no point in bringing in the untainted CEO until the worst of the disaster is over. Joyce’s head needs to roll, but this might as well happen in six months when the current cost-cutting program is complete and it’s time to make longer term strategy decisions again; or
2) Australian business is utterly nepotistic and corrupt, with supine boards made up of drinking buddies who cosily tolerate each other’s incompetence no matter how gross.

We’ll see which it is over the next 12 months. Meanwhile, if I were the chairman at Qantas, I’d offer the Australian CEO of Abu Dhabi carrier Etihad, James Hogan, all of the money in the world and total free reign over all decisions to come home and repeat some of the magic he worked out in the desert.

[*] Fatal or hull-loss accident since the start of the jet era.
[**] Given the current Australian government’s performance at literally everything else, you have no idea how much this pains me to say.

$27 million a year is a bargain price to buy a government

It’s been Good Times Online as Crikey gets hold of a copy of News Australia’s detailed management accounts for fiscal year 2012-13 (I’ve uploaded a copy here, since the Crikey version, hilariously, is paywalled).

As a way of demonstrating its commitment to journalism, News has threatened to sue anyone who reports on the topic. The fact that The Australian loses $27 million a year (almost as much as the Guardian, despite being a barely-read Canberra local paper rather than a major global news organisation) has been noted as particularly hilarious.

If you try and frame The Australian as a newspaper in the traditional sense, of using content to sell readers to advertisers, then the level of fail here is baffling. News is a private company, not a charitable trust dedicated to furthering the cause of journalism. The continued existence of The Australian (and the continued employment of its coterie of gibbering morons at an average wage of $174,000) is a mystery.

But I don’t think that’s what’s going on. The News Australia accounts show that the actual value in News Australia comes from its pay-TV businesses.

News Australia’s profit for FY12-13 was $367 million. Its share of profit from pay-TV (Foxtel, Fox Sport and Sky New Zealand) was $230 million. Add in REA (which runs realestate.com.au)’s $146 million profit, and you’re already above total group profit. The newspapers in total – even including the profitable regional tabloids – contribute less than nothing [*].

That breakdown isn’t entirely fair, since it ignores $75 million of parent company costs – which are mostly, but not wholly, newspaper focused – and also $40 million of amortisation costs related to the Foxtel stake (whose accounting treatment I don’t understand). But it makes clear where the financial heart of the business lies, and it’s not in dead trees, or even their digital equivalents. It’s in having a monopoly on pay-TV delivery in Australasia.

Hell, it’s probably the only business of any real worth in the whole of News Corporation, since its assets outside Australia now consist solely of dead-tree businesses.

What are the ongoing risks and opportunities for pay-TV? Well, the biggest opportunity is in gouging people out of even more money for it, and the biggest risk is that people stop subscribing to it. Both of these depend mainly on government: the more draconian copyright legislation is, the more stringently it is enforced, the harder it is for you to just get things from Netflix and iTunes, the more crippled the ABC is, and the slower your broadband Internet is, the more value Foxtel has.

So that’s what The Australian is for. When you’re defending $230 million of annual profit, paying $27 million a year to shape the opinions of Very Serious People in Canberra regarding copyright law, competition law and telecoms policy isn’t a bad investment at all.

[*] per pages 3, 13 and 14 of the accounts. These are complicated by the fact that stakes in the various businesses changed over the year, with some some Fox Sports revenue counting as operating income and some as income from investments.

Only sentimentalism could have saved the Australian car industry

There is much wailing and gnashing of teeth over the news that Toyota will follow its fellow foreign-owned carmakers GM Holden, Ford and Mitsubishi in ending car assembly in Australia. But at least from an economic point of view, there shouldn’t be.

The basic problem for the Australian car industry has nothing to do with unions or pay rates, despite the government’s outrageous lies to the contrary. It’s far simpler than that. Australia is a country of 23 million people, with a new car market of just under a million a year, while car manufacturing is an industry with massive economies of scale where the most efficient factories have annual production levels of more than half a million a year.

Less than half as many cars per worker…

Nissan Motor Manufacturing UK in Sunderland, which is famed for being one of the most productive plants worldwide, is about to increase production from 500,000 to more than 550,000. To knock out those half a million cars, NMMUK employs 6,000 people, and supports around 23,000 jobs in the UK supply chain. So that’s about 80 cars per worker (labour is not the whole story, but it’s a tolerable proxy, and accurate job data is easier to find than full input cost data at plant level).

Toyota Australia employs 2,500 people to produce 100,000 cars year, which is about 40 cars per worker. In the rest of the industry (as of now-ish, before Ford and Holden begin their shutdown), 1200. So carmaking in Australia employs 6600 people directly, for a total of 220,000 cars per year, or about 33 cars per worker (as you might have expected, Holden and Ford are less efficient than Toyota).

Scaling the supply chain in line with NMMUK employment (i.e. assuming Australian suppliers are as inefficient as Australian carmakers) would suggest that about 25,000 supply jobs will be lost when the Australian industry shuts down. Scaling it in line with Nissan output (i.e. assuming Australian suppliers are just as efficient as UK suppliers), you’d assume about 10,000 jobs will be lost.

…and 21,000 jobs, not hundreds of thousands

Data from IBISWorld suggests the actual number of jobs in the industry at risk is about 15,000, somewhere in the middle. So the total number of job losses when the car industry shuts down, including knock-on effects, will be about 21,000 [*]. This is roughly equivalent to the number of public servant jobs the federal government is currently cutting.

(the number of Australians in employment is 11.6 million, as of December 2013; the number of unemployed Australians is 716,000).

These 21,000 jobs are being lost because the Australian car market isn’t large enough to support an efficient domestic carmaking industry, even if every single car Australians bought were manufactured domestically. A large, remote, resource-rich and wealthy island of 23 million people has more productive uses of time and resources than subsidising industries that require greater scale than can possibly be achieved domestically, and where we’ve never excelled at exporting. Economically speaking, we would do better to buy new cars from South Korea, import second-hand cars from Japan, redirect the labour and capital involved towards things we are good at, and spend the subsidy money on things that we actually need.

But whence will come the V8 Supercars of the future?

Economics isn’t the whole story. It’s possible that having a carmaking industry is so important to Australia’s wider culture and self-image that it is worth protecting, whether by direct taxpayer subsidy or by higher import tariffs (which are a tax on everyone who buys a car, whether it is domestic or foreign-made). If Australia agrees as a society that this is the case, then continuing to subsidise carmaking is a completely legitimate decision – just as is the case for the large subsidies that go to farmers.

But if you think that the car industry has closed because wage rates are too high, you are wrong, and you believe the toxic bullshit the Liberals are seeking to peddle in order to erode everyone’s employment conditions. If you think that the decision to stop subsidising inefficient lossmaking industries will cost Australia money, you are wrong, and you believe the economically illiterate bullshit Labor is seeking to peddle in order to bash the Liberals. The only grounds on which to support a domestic car industry are sentimental grounds.

[*] Wider estimates of up to 200,000 job losses have been published in various ‘newspapers’. These are lies.

Why the G4S Olympics screw-up proves that outsourcing is good

Everyone seems very upset about the fact that private security firm G4S has not delivered as many guards as contracted to police the white elephant that is Sports Day 2012, with many people suggesting it’s an example of why outsourced contracts are terrible . I’m not sure they should. Let’s rewind on what’s happened here…

G4S was contracted by the London Organising Committee of the Olympic and Paralympic Games (LOCOG) to deliver 2,000 security guards, as part of total security staffing of 10,000 people. The requirement for private security was increased to 10,400 out of 23,700 in December 2011 for reasons that were left obscure at the time, but can be presumed to be down to some combination of fear of imaginary terrorists and the desperate need to prevent people bringing in off-brand merchandise.

The company agreed to the increase, having its existing GBP86m contract value increased to GBP284m. It then carried out 100,000 job interviews over the following six months for staff, but failed to find enough people available at the right time and willing to take the work. Eventually, it had to admit that it had massively screwed up by taking on a near-impossible task, was not able to meet the 10,400 requirement, and LOCOG (presumably with government help) has instead brought an unspecified number of police and 3,500 soldiers  in to make up the shortfall.

While detailed contractual arrangements for the G4S deal haven’t been published, people familiar with LOCOG say that its Olympics contracts generally contain two separate contractual penalty elements: 1) payment by results, so if you don’t deliver, your pay is scaled back; 2) reimbursement for the costs of getting someone else to finish the job if you can’t.

So we can reasonably assume, in the absence of evidence to the contrary, that G4S is getting its pay scaled back and paying for the police and soldiers to step in. There’s a standard rate of GBP55 per hour at which cops are billed out to festival organisers; while I’m not sure the Army makes itself available for hire on quite the same basis [*], the soldiers presumably should command something similar.

This double hit – less pay and much higher costs, offset by much smaller savings on wages for the staff that haven’t been hired – is reflected by G4S’s statement to the London Stock Exchange last Friday, in which the company said it expected to make an overall net loss of GBP35-50 million on the Olympics contract. According to FT Alphaville, the total profit for G4S if everything had gone according to plan would only have been in the region of GBP10m, or 4% of the revenue from the deal. In the best-case scenario for G4S, 96% of the GBP284 million paid by LOCOG to the company would have have been paid out in costs [**].

Net result:

1) Sports Day will still be going ahead with a full security contingent;

2) the net cost to LOCOG of the deal will be lower than if G4S had delivered, because of the impact of the penalty clauses;

3) the police and the army will also get decent reimbursement from G4S, so the taxpayer will win out to an even greater degree;

4) G4S will make a significant outright loss on the LOCOG contract, which is at least four times the size of the profit it would have made had everything gone well.

Had security staffing been carried out directly by LOCOG, there’s little reason to assume it would have gone appreciably better. G4S is probably the organisation in the UK with the most experience in recruiting security people for events, and this is one hell of an event; if the task were easy, they wouldn’t have stuffed it up so badly. Unlike G4S, LOCOG has a million other tasks to focus on to the same deadline, and no direct experience of recruiting security people.

LOCOG perhaps could have made the cops and the army part of the original plan – but then the taxpayer would be paying the full billing rate, rather than having G4S picking up the tab. Or it could have massively raised wages for everyone (including the people already hired, not just the extra people at the margin – I’m fairly certain this is why LOCOG and G4S didn’t go down that route once problems arose) – but again, the taxpayer would then be paying the full rate for everything.

In other words, the risk of failing to deliver on the contract was successfully transferred from the taxpayer to the private sector, without being significantly elevated. For just 4% margin, G4S was willing to assume the entire financial responsibility for the staffing project. The consequences of the epic failure fell entirely on their shareholders, and not on the taxpayers.

Conclusion:

The outsourcing model [***] has won the day, and the wicked private capitalists are the only ones to lose out. Hurrah!

[*] although I suppose this could be one way to offset the impact of military cuts in future.

[**] the only reason to take such a low margin on such a high-risk contract is as a loss-leader, with the whole world watching G4S’s performance as a contractor. Which has admittedly happened, although not quite as planned.

[***] when combined with tough contracts that have decent enforceable penalty clauses. Without them *cough*Metronet*cough*, it’s a terrible model and people who use it should be horsewhipped.