BP has finally sealed its Macondo well in the Gulf of Mexico. This is a time to celebrate and salute the unsung heroes who have been working diligently for months to tackle one of the most urgent and difficult engineering challenges of our time. We all hope that the ecosystem of the gulf can recover without lasting damage.
‘Macondo Prospect’ is now the most infamous well in history. The well’s formal reference is Mississippi Canyon Block 252 (MC252). The code name allows the oil company to refer to the well in the early stages without disclosing the exact location. Whoever selected this code word must be regretting their choice. The name ‘Macondo’ is the name of the cursed town in the novel "One Hundred Years of Solitude" by Gabriel Garcia Marquez. The fictitious town of Macondo is frequented by unusual and extraordinary events that involve the generations of the BuendÃa family, who are unable or unwilling to escape their periodic (mostly) self-inflicted misfortunes.
How avoidable and self-inflicted this disaster was, investigations will discover. The high profile characters involved in this real-life story have had mixed fortunes. The CEO of BP has lost his job. This was always likely, but speaking out, whilst the crisis was still unfolding, to plea for his life back, ensured that he would be axed. Barack Obama fared better. His strong demands for action were what the public wanted to hear. We forget that neither Tony Hayward nor the US President have solved this crisis.
The heroes were the engineers. The water is 5,000 feet deep (1,500m). This is too deep for divers to operate. The workers are the submersibles and their robotic arms. The engineers have had to devise new methods and design and build new equipment all in the space of weeks. They do not appear on the cover of Newsweek or fronting press conferences. They have worked long hours and succeeded to deliver extraordinary solutions to an unusual event. I salute the unsung heroes – the engineers.
Monday, 27 September 2010
Monday, 20 September 2010
The Economist's Trap
There is a fundamental rule used by economists that is accepted almost without question. That rule is any new process must cost less. If it costs less, then the process should be adopted; if it does not, then it should rejected. I have heard senior respected economists using the argument and to question it is regarded as heresy. People without qualifications as economist or accountants are told that they just do not get it. It is some economists who do not get it; putting the narrow parameters of their profession before more fundamental issues.
An example is the mantra that any new energy source must be cheaper than coal. This puts an impossibly high barrier against many renewable energy sources. You can argue that it is not the economists who are at fault. It is society that must decide that coal is a dirty fuel and demand that cleaner sources are found. One dramatic approach, through regulation, would be to ban coal. Another approach would be to provide subsidy to other energy sources to bring the cost down to less than coal.
As we discuss the options, the economist reminds us again that it must not cost more. Their assurances are that energy need not cost more through a range of measures. This is economics used as politically convenient fudge. If you carry out a real economic analysis you discover that the transition to clean energy will lead to higher energy prices. If the transition is made quickly (in accord with the advice of climate scientists) then energy prices need to rise quickly. This is the economic reality that needs to be reported, debated and then acted upon.
The economists who insist that energy should not cost more are setting a trap for politicians and bring their profession into disrepute.
An example is the mantra that any new energy source must be cheaper than coal. This puts an impossibly high barrier against many renewable energy sources. You can argue that it is not the economists who are at fault. It is society that must decide that coal is a dirty fuel and demand that cleaner sources are found. One dramatic approach, through regulation, would be to ban coal. Another approach would be to provide subsidy to other energy sources to bring the cost down to less than coal.
As we discuss the options, the economist reminds us again that it must not cost more. Their assurances are that energy need not cost more through a range of measures. This is economics used as politically convenient fudge. If you carry out a real economic analysis you discover that the transition to clean energy will lead to higher energy prices. If the transition is made quickly (in accord with the advice of climate scientists) then energy prices need to rise quickly. This is the economic reality that needs to be reported, debated and then acted upon.
The economists who insist that energy should not cost more are setting a trap for politicians and bring their profession into disrepute.
Monday, 13 September 2010
The Accountant's Trap
Three months ago Connaught, a construction company, was in the FTSE 250 with a market capitalisation of over £600m. Now it has collapsed, its shares are worthless and the administrators are picking through the books to see what can be salvaged. Many private investors who piled in towards the end to pick up cheap shares in this once strong company have lost their money. The firm’s founder, Mark Tincknell also bought more shares earlier this year in confidence that he could turn the company around. This was a company founded by hard working people who brought in external experts and became caught in the accountant’s trap of massaging the figures instead of running the company.
Connaught was a family firm started by Bill and son Mark Tincknell in 1982 with £10,000 of their own money and operated from a shed. Their expertise was in construction and repair. They did not have business training and employed business professionals as the company grew. In 1998 it floated on the AIM with a £14m market value. Under the continued leadership of Mark Tincknell as chief executive the turnover grew to £300m with profits of £20m. Mark may have left it the experts to put together the accounts but he was driving the business he knew, repairing properties.
In 2004, Mark Tincknell stepped down and handed control to a business professional. Turnover took off and debt jumped from zero to £200m. Loading the company with debt is what the accountants and financiers like because of the tax advantages. According to the Sunday Times, these figures were further pumped by my capitalising bid costs. This means that the money that is spent preparing a tender is shown as an asset on the accounts. This is an accountant’s wheeze that can reflect reality if the bid is ongoing and there is a good chance of the company securing the contract. If the contract has gone elsewhere then this is a loss and should be shown as such in the accounts.
I make the assumption that as the company grew it could afford more expensive advisors and employ more business savvy executives. The result: a pumped up set of figures totally removed from the business reality.
It is a sobering thought that Connaught would be worth more today if the founders had kept operating from their shed rather than hand control to the accountants and business professionals.
I suggest that there are three lessons to draw from this:
1. Business leaders should focus on running a sound core business.
2. Listen to accountants but do not let them take control.
3. Complicated accounting to massage the figures and pump the share price are skilful dodges. The more expensive the advisor the more wary you need to be of the advice.
Connaught was a family firm started by Bill and son Mark Tincknell in 1982 with £10,000 of their own money and operated from a shed. Their expertise was in construction and repair. They did not have business training and employed business professionals as the company grew. In 1998 it floated on the AIM with a £14m market value. Under the continued leadership of Mark Tincknell as chief executive the turnover grew to £300m with profits of £20m. Mark may have left it the experts to put together the accounts but he was driving the business he knew, repairing properties.
In 2004, Mark Tincknell stepped down and handed control to a business professional. Turnover took off and debt jumped from zero to £200m. Loading the company with debt is what the accountants and financiers like because of the tax advantages. According to the Sunday Times, these figures were further pumped by my capitalising bid costs. This means that the money that is spent preparing a tender is shown as an asset on the accounts. This is an accountant’s wheeze that can reflect reality if the bid is ongoing and there is a good chance of the company securing the contract. If the contract has gone elsewhere then this is a loss and should be shown as such in the accounts.
I make the assumption that as the company grew it could afford more expensive advisors and employ more business savvy executives. The result: a pumped up set of figures totally removed from the business reality.
It is a sobering thought that Connaught would be worth more today if the founders had kept operating from their shed rather than hand control to the accountants and business professionals.
I suggest that there are three lessons to draw from this:
1. Business leaders should focus on running a sound core business.
2. Listen to accountants but do not let them take control.
3. Complicated accounting to massage the figures and pump the share price are skilful dodges. The more expensive the advisor the more wary you need to be of the advice.
Sunday, 5 September 2010
Organic and Local
We spent Sunday afternoon with Iain Tollhurst as he guided us around his organic farm just outside Whitchurch-on-Thames on the other side of the river to us. From here we have a supply of organic fruit and vegetables delivered to our door every Thursday. The carrots are often crooked and earthy but we carried out a blind taste test within the family. There is no doubt that this food tastes better - and is better for us.
Most organic suppliers deliver in boxes because they stack well in the back of a van. Tollhurst Organics deliver in bags because – apparently – they can be carried more easily on a bicycle.
Iain Tollhurst manages his farm with incredible insight into how nature operates. There are no fertilizers or insecticides – as you might expect, but also he does not use animal manure. He does not rear animals so cannot be sure that manure from other farms would match his high standards. Instead, on a seven-year rotation, two of the years are used to grow green compost. These crops are simply used to recharge the organic content of the soil, trapping nitrogen and other nutrients.
Iain Tollhurst’s commitment to working as part of a sustainable system is impressive. He only supplies the local area avoiding food miles. He tells a story that when approached by people outside his patch he not only will not deliver but he will not sell to people that travel from outside the local area to collect. For someone who has to live on the income from his business this is putting his sustainable principles before commercial logic.
Every community should have an Iain Tollhurst to feed their local community not only for high quality food but also to conserve the biodiversity of the local countryside.
Most organic suppliers deliver in boxes because they stack well in the back of a van. Tollhurst Organics deliver in bags because – apparently – they can be carried more easily on a bicycle.
Iain Tollhurst manages his farm with incredible insight into how nature operates. There are no fertilizers or insecticides – as you might expect, but also he does not use animal manure. He does not rear animals so cannot be sure that manure from other farms would match his high standards. Instead, on a seven-year rotation, two of the years are used to grow green compost. These crops are simply used to recharge the organic content of the soil, trapping nitrogen and other nutrients.
Iain Tollhurst’s commitment to working as part of a sustainable system is impressive. He only supplies the local area avoiding food miles. He tells a story that when approached by people outside his patch he not only will not deliver but he will not sell to people that travel from outside the local area to collect. For someone who has to live on the income from his business this is putting his sustainable principles before commercial logic.
Every community should have an Iain Tollhurst to feed their local community not only for high quality food but also to conserve the biodiversity of the local countryside.
Wednesday, 1 September 2010
What is Sustainability?
Nearly a decade years ago I attended a seminar convened by the South East England Development Agency (SEEDA) – an organisation soon to be wound down as the government’s spending cuts bite. The subject of the seminar was “Sustainability”. There were presentations on a range of issues around the three legs of sustainability: ‘people’, ‘planet’ and ‘profit’.
The person sitting beside me complained quietly in my ear, “What is all this talk about the environment?” He expected to hear about financial sustainability. He wanted information on balance sheets and how to secure financial stability for his company. He could not be persuaded that embracing the broader agenda of sustainability would have long-term financial benefits, reduce risks and set the circumstances to ensure long-term survivability of the business.
The term ‘sustainability’ is now much more widely known but deep understanding of what it means remains elusive. All too often ‘sustainability’ consists of a superficial assessment of environmental and social impacts to be used as a thin veneer over decisions taken overwhelming under the influence of economic factors.
Sustainability is people, planet and profit – in that order of priority.
The person sitting beside me complained quietly in my ear, “What is all this talk about the environment?” He expected to hear about financial sustainability. He wanted information on balance sheets and how to secure financial stability for his company. He could not be persuaded that embracing the broader agenda of sustainability would have long-term financial benefits, reduce risks and set the circumstances to ensure long-term survivability of the business.
The term ‘sustainability’ is now much more widely known but deep understanding of what it means remains elusive. All too often ‘sustainability’ consists of a superficial assessment of environmental and social impacts to be used as a thin veneer over decisions taken overwhelming under the influence of economic factors.
Sustainability is people, planet and profit – in that order of priority.
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