Month: November 2010

We are lucky today to have a copy of Dame Lucy’s reply to Dr Spendlove:

Dr Roy Spendlove

Division for Miscellaneous Projects

Whitehall SW1

Dear Roy,

             Thank you for your letter. You seem to be doing excellent work to ensure full compliance with best practice and world procurement standards. I do think you are right to wish to introduce real terms adjustments into your appraisal of past apparent cost overruns on projects. I am glad to say Whitehall thinking has pressed on rapidly in the last few months in this very area.

          Firstly, you should study carefully the improved presentation we adopted for total current public spending. As you know, some outside commentators  have foolishly suggested the overall apparent cash increase of 15% or £92.5 billion a year is the significant figure over the five years. Ministers have been right to equate this to 25% cuts, taking year 5 compared to year1 and adjusting it for public sector forecast inflation and concentrating on DEL spending rather than AME spending. They were also right to exclude the ring fenced areas of Health, EU,  Overseas Aid and Pensions. Leaving in areas of spending that are going up as a result of policy decisions would clearly distort the overall figures, especially when they are large areas.  I think we may have underdone the inflation factor, but we had to allow for a possible pay freeze in years 2 and 3.  We also assume, of course, that the pay freeze relates only to rates and will still permit seniority and responsibility enhancements to avoid the bad effect on morale of an actual  cash freeze in  pay. We may also need to tweak the bonus system for presentational reasons, but keep it to reflect all the extra stress and work the cuts impose.

          Secondly, you are right that capital projects have their own extra inflationary pressures. I like your idea of linking the true price to  SDRs to get away from the weaker pound. Linking to gold might be even more helpful and realistic, given the recent performance of the gold price as a true store of value in a world of depreciating paper currencies. Ministers might like a gold base, as some outside might unfairly remember the previous government’s gold sales, but that of course is not a proper consideration for us and should not be used in emails or public  correspondence.

          I think it most important that you include the Contingency allocation in the base cost, as that was always there to allow for the very drift you are concerned about. It may also be necessary to adjust Contingencies upwards. Indeed I would ask your Division to review all Contingencies retrospectively and suggest to Ministers upgrading them all to avoid future embarrassment. I am sure no Minister in this climate would want to report a cost overrun to Parliament, and with the new transparency rules the overruns may be clearer sooner should they occur.

          I will be shortly sending out further guidance to all departments on Quangos. As you know there has been some suggestion we have too many. I do not think we should fight this notion. There is a lot to be said for assimilating more of them into Whitehall. It will give us more direct control, and will allow more flexibility over job titles and remuneration levels than we have been used to in the core service. We should willingly help implement a policy of fewer quangos whilst ensuring the much good work they do is retained. I hope improving our grip over quangos will also allow more of the honours that were kept for quango Chairmen to be available for hard working senior officials who have undertaken to do this work. It will also make it easier to justify pay comparable to private sector levels for tasks that previously were performed by quango heads. We should tell Minsiters to claim that the aim of the reform is improved accountability, which we can deliver to our own special standards through taking possession of the information.

            I think you also study the rear end loading of some of the cuts in public spending. There are some which we advised against which ended up in the 2013-15 period in the final figures. I have always found that past governments become less keen on fiscal stringency the closer an election comes. I strongly suggest that anything you need to sacrifice should be surrendered for the outer years of the five year plan. That will leave Ministers more time to come to see the advantges of what we do and how we do it in good time before any irreparable damage is done.

           I am finding that this new approach is very helpful insofar as I have much less to do recruiting more people for additional quangos. I fear you are right we will need more translators for our Overseas Aid and Trade strategy. I will see if I can spare a few people to work out a proposal for a new capital projects tender translation service to support your excellent work.

          You should also remember that the EU is our friend and longstop. There is usually a Directive or Council requirement to cover most of the things we need to do and keep. We are under a duty to report non compliance to Brussels for enforcement. You should of course warn Ministers when they are in danger of straying outside their permitted area of decision that there could be infraction proceedings. I think you should anyway check the question of tender documentation with UKREP to make sure we have not slipped up and to stress to Ministers the very real constraints we work under.

Yours

Lucy

Dame Lucy Doolittle

Director

The following correspondence has come into my hands. I am sure it is meant to be confidential, so please be careful with it. If we do not publish it, there might be more where it came from. It appears to be internal correspondence amongst senior officials in  government departments  I cannot trace .

Dame Lucy Doolittle,

Director,

Unit for co-ordinating cross cutting initiatives and partnerships

Whitehall SW1

Dear Lucy,

            I was relieved to hear your Unit has survived the reorganisations. I had feared that as its title seemed redolent of the last government you might be a casualty. I understand you successfully deployed the arguments that you will be needed for a bit to wind up old cross cutting initiatives and to supervise the reorganisations, spreading best practice. I suspect new Ministers will soon come to see how handy cross cutting is as a means of blurring responsibilities and creating a sense of joined up government. Your unit, after all, has launched a thousand press releases on its own.

                I need your assistance  for our Division of Miscellaneous Projects. So far we are OK. We have pointed out that capital spending is a necessary part of any economic growth strategy. We were greatly helped by the decision to increase transport capital spending compared with the previous government’s figures. We have been able to argue that as capital overall is not taking such a big hit it would be a false economy to wind up a Division which has so much general expertise at project management.

               However, we are getting some probing questions about past performance over cost and timing. As you will be aware, special factors in recent projects displaced the original understated  budgets and optimistic timetables. We were of course asked to bid low to ensure they passed the Treasury tests, and to set tight deadlines to meet media requirements.  I wondered if you had done any work on best practice for Ministerial submissions to adjust base costs and original timetables for more realistic figures without having to say these were errors or upward revisions? What is latest thinking on real cost bases, price escalators and raw material adjustment factors, for example? Should we introduce a devaluation of the pound factor and say the original estimate was based on sterling translated to an SDR equivalence, given how much of Special Project materials and work is imported these days? That way we could add back in the devaluation of the pound. Wasn’t it always clear that timetables did not include reaching the final tollgate on the project when it was up and running, but were internal and partial targets for norm referencing complex projects?

             We also need policy guidance on overseas procurement. We do of course comply with the full range of EU requirements, and have explained to new Ministers that these in themselves increase costs. There is, however, a trickier issue about advertising for a main contractor outside the European Area and the European Journal space as well. What do you think the new government would say if our new procurement for better value scheme which we are working on resulted in substantial procurement from Emerging Market contractors? The scheme is already 170 pages long and will entail some increase in bidding costs as we seek full compliance with global standards  in the documentation and auction process. We need to decide how many languages each tender invitation should appear in, and may need to hire some additional language speakers to complete each set of documents. It is most important not to discriminate against smaller countries with less well known languages. We will of course keep the Overseas  Aid and Trade people fully informed of progress. We do wish to support the new government’s India and China trade initiatives.

                I did think the recent senior businessman  review was most helpful. The conclusions in favour of more centralised purchase and decision taking are just what we need. I have started work on how we might co-ordinate the buying from all departments better, and am designing suitable forms and procurement requests for everything from paper clips to vehicles. I will make sure I give full weight to security issues in the light of the recent dreadful ink cartridge discoveries.

Yours

Roy

Dr Roy Spendlove

Deputy Secretary

Division for Miscellaneous Projects

Whitehall SW1

One of the promises of Conservatives in Opposition was to remove needless or burdensome regulations, to allow more people to set up and grow businesses.Such general promises are always popular, and many in business feel they do have to spend too much time and money on compliance with regulations which do not help them be safer, better or more honest.

I drew up a set of policies before the 2001 election as Shadow DTI Secretary. I did it again for Michael Howard as his Shadow Deregulation Secretary, a post created to stress the importance of the task  by giving it a seperate voice around the table. I did it again for David Cameron as part of the Economic Policy Review. Indeed, that single chapter swamped much else in the report, as the media thought it more interesting than the advice on general economic policy,  transport, education and training, energy or pensions.

Alan Duncan undertook another review as Shadow DTI Secretary in the last Parliament. He concluded with a number of proposals to set up procedures in government to cut down the burden.

The Coalition government  said  it too was committed to deregulation. It announced a Freedom Bill, which some of us thought would include deregulatory proposals to help the economy as well as measures to restore lost civil liberties. I sent the proposals from the Economic Policy Review to the Deputy Prime Minister, but have since learnt that his Bill is being transposed into a Home Office civil liberties Bill only. Meanwhile Nick Hurd is busily consulting on what could be done by way of deregulation. This week David Young has been asked to review the topic again from the perspective of small business.

You can overstudy a topic. If all are agreed  that we have too many rules and regulations, if all accept that many of these rules do not deliver what they promise or even do the opposite, the task ahead is to repeal and amend to cut the burden and improve the effectiveness where  regulation is needed.

In the Economic Policy Review we presented 33 specific areas and measures where we thought repeal and amendment could cut costs and improve effectiveness where needed. The  working party which studied the issue in more detail made 65 specific proposals for repeal, amendment and improved process.

Doubtless the government  will have good reason  not to adopt all these. However, the work was done and the list is long. It contains enough ideas that should be acceptable to a government keen on enterprise to make up its first Deregulation Bill. The sooner it does so, the better. If it wants a strong private sector led recovery it needs to make it easier for business as soon as possible. As we said at the time of the launch, deregulatory cost reductions are as good as a tax cut for business, without losing the state revenue. They may even cut the state’s costs as well.

The good news is that those proposals which required action from the Local Government Department have been pursued with alacrity. We argued for the removal of the Best Value regime, the Comprehensive Performance Assessments, regional targets and planning, and Home Information packs. They are doing this.

Ministers should not spend more time consulting business about the general question of what should we deregulate. Exisiting businesses can handle existing regulations and often see them as allies to keep others out of a market. They should move straight to proposals, and consult on those concerning the implementation.

 

             The tea party movement had to explain to the Republicans as well as to the Democrats that a government  can spend and borrow too  much, and print too much money. If you do those things to excess, far from  having a more prosperous economy and a fairer society you have an economic crisis. Greece, Iceland and Ireland have shown us variants of that.

           Now of course the Washington politicians will get to work. Both sides will claim to be co-operating, but they are divided by such a fundamentally different view of what makes a successful economy. They are split over what kind of people Americans are, and what kind of society they wish to live in.

          Tea party Congressmen and women will find it difficult to turn round both major parties, or win votes for smaller government and lower taxes given the huge inertia of traditional politics. Democrats will still want to defend their cherished programmes and fight their overseas wars. Some Republicans will be in  the long tradition of bigger Republican government.  It is good to know there will at least and at last be voices in Washignton that want less spending as well as lower taxes, something that has eluded both Bush and Obama. The bail out boys have been in charge for years and have made a mess.

 

              This week’s main economic  event will not be the US elections, but the decision of the Fed to print more dollars. In expectation of more electronic greenbacks government  borrowing rates have been driven lower, assets generally have risen a bit in price, and money has flowed strongly into the emerging market economies of the world. Today’s US quantitative easing – or the prospect of it – seems to do more to speed the growth of China, Brazil and India than it does  back home.

                Money growth is expanding a bit anyway in both the US and the UK. The banks are less distressed than a year ago. They have made some profits, paid off some debts and reduced the size of their liabilities. Both economies are still digesting the large sums printed in QEI. In the US it has not yet proved inflationary, partly because a lot of it has not been lent on to the private sector, and partly because high levels of unemployed labour and excess property and capital is keeping domestic prices down. In the UK QEI did add to the high inflation we have, as it drove the pound down further, adding to imported inflation.

             There is a case that  neither the US nor the Uk should carry on with their money printing policies. There is arguably enough high powered money around. Instead the authorities need to allow a sensible amount of it to be lent on to the private sector, to pay for the next round of infrastructure, R and D and capital investment we need. Company profits and cashflows are much stronger in both countries now, making business lending a better risk again.  

                   The authorities claim to be relaxed about the prospects for inflation. Many others are not. Many are buying inflation linked bonds on tiny or even negative real yields. Others are buying gold and commodities. Emerging market economies are keeping controls in place to prevent large inflows of money or are thinking of erecting barriers.  They have to raise interest rates to control their inflations, whilst at the same time not wanting to make it more attractive for people to deposit hot money with them.

                  Quantitative easing is  in danger of not helping the adjustments the world economy needs. It needs the west to borrow, spend and print less, and export, save and invest more. It needs to east to save and export less, and spend and import more. If the US decides to print too much it could drive the dollar lower and exacerbate the rows over currency rates with China and the other emerging markets. The US might find that even their economy in the end suffers inflationary consequences from too much money printing. That is a nice call for them to make.

                       Meanwhile,I am sure  the Uk should not be considering any more quatitative easing. We have quite enough inflation to be getting on with. Our open economy is very vulnerable to imported inflation as soon as the authorities let the pound slide. Money supply is expanding anyway. We do need more investment capital including  bank financed capital, but that is a story about regulation and bank management, not about the need to buy government bonds with created money.

                      The Uk needs a supply side revolution to power faster growth. That is not abour printing more money, but following pro enterprise policies. We will return to  these soon.

Several bloggers have asked what I am going to do about the EU. I will continue to do what I have been doing for years. Set out the facts. Make the case to change our relationship. Put the Eurosceptic position in the Commons.

I explained before the Election that if we did not have a Eurosceptic majority in the House after the Election it would be difficult to achieve what we wish. I set out after the Election that once again a Eurosceptic country (according to issue polls) had voted for a Pro EU Parliament. That means there is no majoritry in the Commons to do many of the things bloggers would like us to do.

The decisions of recent years in giving so much power away to European institutions are becoming very visible. Today the government announces that prisoners will be given the vote. This was a policy they opposed strongly in Opposition, but now accept the international court will make them do it. This week we hear of moves towards greater defence collaboration with the French, whilst being assured that we will keep our sovereignty. Yesterday Parliament was reminded that the UK cannot stop increases in the EU budget even when it wishes to and needs to.

The Foreign Office shows no signs of wanting to use the Franco-German request for a new Treaty to demand powers back. It is only when we have a veto, as we do on this, that we have real leverage and should use it. The Foreign Office is going along with a major expansion of the EU diplomatic service and its budget. We are not being offered a referendum on the transfer of powers under the Criminal Justice decision.

Meanwhile in the Commons Labour predictably offers help to any Coalition MPs who want more powers for Europe, leaving those of us who want to stop the juggernaut once again with far too few votes.

On Thursday night I went to the LSE to hear a lecture by ProfessorHuerta  De Soto followed by a dinner discussion with interested parties including Douglas Carswell MP  and Stephen Baker MP. They  have tabled a bill to outlaw fractional reserve banking, the practise that allows banks to lend most of the money they collect in deposits and only keep back a fraction of it to repay depositors on demand.

I agreed with much of the Huerta De Soto analysis of what had gone wrong in the bubble and Credit Crunch. Like him, I have argued that bad Central banking lay at the heart of the crisis. I found it more difficult to agree with his remedies, which envisage a completely different structure of banks dependent on a currency linked to gold.

The conversation included some barbed and interesting exchanges between Austrian school devotees and UK establishment neo Keynsian and neo classical economists. The Austrians worship at the shrine of Hayek and are angry at the way in which conventional economics faculties ignore their great man’s work. Their thinking can take them to the point where they want to abolish fiat money, Central banks and much of  the apparatus of the present democratic states. The Establishment economists are happier arguing over relatively minor adjustments within a system which may be collapsing, reluctant to see that their chosen remedies may be washed aside by the huge structural and monetary changes unleashed worldwide.

The Austrian bank reformers want every pound of deposits backed by a pound of cash. This removes the need for a Central Bank acting as lender of last resort, and makes a run on a bank impossible or pointless. It would also mean a big contraction in credit, and more difficulties for the small saver in getting a decent return on  his savings. They seem a little light in thinking through how they would accomplish such a huge change without too much economic disruption.

If you link this reform to a restoraiton of the Gold Standard, as Professor Huerta  De Soto recommends, you add another layer of complexity and change. You enrich countries like South Afirca which mine the metal, and countries like France and China which have been buying it up. Inflation or recession are then linked to how much gold is mined compared to the natural growth of the world economy. You replace the capricious judgements of governments over how much money to issue with the cycles and business plans  of the mining industry.

Banking reform is in the air, and rightly so. I don’t think the UK establishment is about to welcome Mr Carswell’s Bill, nor about to seek the gold standard just a few years after the Uk foolishly sold a lot of its gold reserves. We need to discuss  improvements to UK and world banking that can deal with some of the manifest problems of poor Central banking 2005-9 that could take root and be adopted.