Financial Times Europe - 08.08.2019

8 ★ FINANCIAL TIMES Thursday8 August 2019

Liberalising trade will power Asian economies Gideon Rachman observes that Asia’s economic miracle depended on peace and stability (“The Asian strategic order is dying”, August 6). It also relied on trade surpluses with the US. The American locomotive could pull the Asian train until China hitched its car to it. To sustain prosperity, Asia needs to become its own engine of growth. It can do this by liberalising trade. Ratifying the Regional Comprehensive Economic Partnership and eventually including China and Korea in the Comprehensive and Progressive Trans- Pacific Partnership would multiply trade in the region. Politicians in Asia should pursue this agenda rather than following president Trump into a protectionist morass. Willem Thorbecke, Senior Fellow, Research Institute of Economy, Trade and Industry, Tokyo, Japan

Limit the backstop to

Northern Ireland alone Your editorial (“Britain needs an agenda beyond the Brexit trap”, August 6) caused me to re-read thepiece in the Irish Times on July 31from Professor James Anderson of Queen’s University in Belfast. The Irish backstop can easily be resolved by following the guidance of the affected people — those in Northern Ireland — who voted in June 2016 to remain aligned to the EU single market. Is it beyond Westminster to correct the strategic error made by Mrs May of broadening the backstop to apply to the entire UK? The union of Northern Ireland with Great Britain would more likely endure if the backstop was narrowed to Northern Ireland as originally sought by Dublin and Brussels. Conor McCoole Singapore

Take the Brexit deal

back to the EU As the FT says (“The week that Johnson’s Brexit plan met reality”, August 3)Mr Johnson couldemerge from his short honeymoon period less optimistic but more pragmatic. And he may draw the same lesson you drew from last week’s difficulties: that before charging ahead with a no-deal Brexit, he must take the issue back to the country. But before doing so, he should first take the issue back to the EU. The EU has made it clear, on many occasions, that while the withdrawal agreement can’t be renegotiated, it’s willing to

discuss and possibly modify the political declaration on the future relationship between the EU and the UK. A renegotiated declaration, accompanied by a legal codicil pertaining to the applicability of the provisions in the withdrawal agreement in regard to the Irish backstop and conveying the commitment of both parties to ensure the Irish border remains open in all future circumstances, could make it possible for the House of Commons to approve the deal by October 31. And if that happened, Mr Johnson could go back to the country, and in all likelihood win a sweeping victory. Professor David R Cameron Department of Political Science, Yale University New Haven, CT, US

Is the UK ‘just crazy

enough’ to do it? Just as Voltaire’sCandideoffers insights into the value of unfounded optimism, so too Mel Brooks’ classicBlazing Saddlesillustrates the government’s tactics in talking up its readiness to leave with no deal (August 1). In the film, Sheriff Bart, facing a lynching by the hostile citizens of Rock Ridge, holds a gun to his own head and threatens to kill himself. The townsfolk recoil. “Hold it men. He’s not bluffing!” shouts one. “He’s just crazy enough to do it!” interjects a second. The credulous citizens lower their guns, and Bart smuggles himself to safety. “They are so dumb!” he says in amazement, congratulating himself on his unlikely escape. But the question posed is this. Does the prime minister believe that the leaders of the EU are as gullible as the good people of Rock Ridge? Alec Burnside London W1, UK

Bioethanol can fuel shift to a greener economy Professor Bauquis (“BP’s bioethanol ambitions are sadly misguided”, Letters, August 5) criticises bioethanol for being energy intensive to produce, grown on land that might otherwise be used for the production of food and contributing to deforestation in Brazil. This is incorrect. Bioethanol has full cycle emissions around 70 per cent lower than traditional transportation fuels, including the use of the sugar cane waste to generate biopower — over two-thirds of which is exported to the Brazilian power grid. The cane is grown on degraded pasture land that has limited alternative agricultural use and is located a significant distance from ecologically sensitive areas. Furthermore, sugar cane feedstock, combined with the expertise developed in the Brazilian industry, delivers higher ethanol yields than any other form of biofuels. We are proud of our recently announced plans to form BP Bunge Bioenergia, which will lead to a 50 per cent increase in BP’s biofuel production. We believe it is an important step in progressing the decarbonisation of transportation and is an example of growth in a genuinely low carbon business. Mario Lindenhayn Chief executive,BP Biofuels, São Paulo, Brazil

Only navy orders can buoy

shipbuilding strategy The collapse of the Harland and Wolff shipyard is the inevitable outcome of a toothless and confused “shipbuilding strategy” (“Belfast Shipyard set to file for insolvency”, August 6). I have pointed out on numerous occasions in the House of Lords that a shipbuilding strategy needs ship orders. Without them it is as pointless as ferry companies without ferries. For example, the three new Fleet Solid Support Ships should be ordered now and built in the UK. They are clearly military vessels. The desperate shortage of surface ships in our navy should be addressed by speeding up the Type 26 frigate build programme and ordering all eight planned. The Type 31e frigates need to be ordered as soon as possible. Admiral Lord West of Spithead House of Lords, London SW1, UK

A levy to lower frequent flyers’ carbon footprint Your correspondent, Niall Macdonald (“Radical climate action will curtail personal mobility”, Letters, August 8) prompts the observation that air flight taxes should be radically overhauled. Here’s a way for the UK to lead: charge individuals at an increasing rate for each trip in any calendar year taken from a UK airport. A modest levy for the first flight would be, say, 5 per cent of the fare. That would ensure social justice. But this percentage would double for every successive journey. Taxpayers would have a duty to declare their flights to HM Revenue & Customs which would be tasked to make random checks. Frequent flyers would think carefully about taking multiple flights. Steven Fogel London NW11, UK

German law is not

subordinate to the EU’s While Paul Horne is right in pointing out that, in principle, EU law takes precedence over national legislation, even national constitutional law, he is wrong to state (Letters, August 5): “even Germany’s basic law”. EU law is not above Germany’s Basic Law (Grundgesetz). This is a much more complex question which has not been finally settled. Simply put, there is no subordination or superiority between the German constitutional system and the EU legal order, which issui generis. both bodies of law stand side by side and both (highest) courts co-operate on issues of legal and or constitutional importance, neither claims to be above the other, no cause for concern here. Ingeborg Kühling-Garfield Managing Director, Europa- Wirtschaftsschulen, Vienna, Austria

How to boost care

in ageing societies There are many ingredients in fixing the social care agenda with radical intervention; you identify one, of David Prowse giving up his employment in order to care for his mother with dementia (August 1). Instead, perhaps the tax system should enable Mr Prowse, aged 57, to remain in his employment and deduct as an expense against his income tax the cost of employing carers? Better economics and better for Mr Prowse’s longer-term financial position. Michael Wade London SW1, UK

On a recent summer evening, New Delhi’s socialites gathered at Bikaner House — the erstwhilepied à terreof Rajasthani royalty — for a fashion show of Tarun Tahiliani, a feted Indian designer, whose lavish bridalwear ranges from $17,000 to $21,000 for a single outfit. Guests were served flutes of pink champagne sprinkled with jasmine petals, lychee wantons, pulled pork tacos and tuna squares. They clapped appreciatively as models strutted past in glittering saris and full-skirted lehengas, embellished with elaborate embroidery and Swarovski crystals. Mr Tahiliani’soutfits are beloved by India’s super-wealthy business elites who, since the end ofsocialist austerity in the1990s, have revelled in displays of their riches, boosting an indigenous luxury industry once believed to be recession proof. Yet as the designer unveiled his collection, top Indian industrialists, entrepreneurs and executives were enveloped in a cloud of gloom, worried about thefaltering economy — and the government’s adversarial attitude towards private enterprise. India’s gross domestic product growth has slowed for four quarters in a row and shows little sign ofpicking up. At the same time, Narendra Modi’s government appears to view the business community with deep suspicion, if not outright hostility. “I’ve been working for 35 years, most of it in the financial industry, and I’ve never seen so much gloom anddespair,” one Mumbai-based

executive says. Few top industrialists are willing to express their unease openly, fearing retribution from a government that is notoriously sensitive to criticism. ButKiran Mazumdar-Shaw, founder of the Bangalore-based biotech company, Biocon, says Mr Modi’s public promises to eliminate the ills of “crony capitalism” seem to have left him wary of engagement with the corporate world. “They want to distance themselves from crony capitalism, with the result that they don’t talk to business people,” she says. “As far as the common man is concerned, every businessperson is a crook and stealing taxpayers’ money. That is how sentiment is being inflamed.” The recent suicide of India’s “coffee king”, VG Siddhartha, was seen by the business world as symptomatic of a wider malaise. “If you look at India Inc, they are not in an ebullient mood. They are concerned. Alarm bells are ringing. We need to hear them,” Mrs Shaw says. After Mr Modi’s landslidere- election victoryin May, some Indian industrialists were cautiously optimistic that the prime minister would turn his attention torevivingan economy showing signs of trouble. That hope was not realised. Instead of new stimulus measures or a fresh wave of bold structural reforms, the new government’sfirst budgetin July set an aggressive target of increasing tax collections by 20 per cent. Businesses fear the ambitious goal will

exacerbate what some call “tax terrorism” by officials under pressure to meet unrealistic targets. The budget also levied a steep new tax surcharge on the super-rich, raising the effective tax ratefor those earning more than $285,000 to 39 per cent, and nearly 43 per cent for those earning around $700,000. Nirmala Sitharaman, the finance minister, said no more than 5,000 individuals would be affected and that they should be willing to contribute to the nation. “The signal she sends is that rich Indians deserve to be penalised,” wrote the columnist Tavleen Singh. Ms Singh believes the latest tax rise will encourage more rich Indians to follow in the footsteps of the more than 23,000 dollar-millionaires that Morgan Stanley estimateshave left India since 2014. The new taxes have had other unforeseen consequences, hitting foreign portfolio investors, who pulledabout $5.5bn from thestock marketsin Ju ly. As the mood sours, the luxury industry is feeling the pinch. Footfalls in Delhi’s most upmarket shopping mall are said to have fallen 11 per cent last year, as the rich feared they would be under surveillance there. Once blistering sales for designer wear have tapered off. “The feelgood factor is extremely low — the lowest I’ve seen in decades,” Mr Tahiliani told me after his show. “There is such unease. Nobody is investing. People are just nervous about spending.”

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India’s rich party

under a growing

cloud of gloom

New Delhi

Notebook

by Amy Kazmin

Letters

THURSDAY8 AUGUST 2019

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‘We stockpiled snacks and ate them’

Three years after its introduction by then chancellor George Osborne, the government has announced it will reviewthe so-called pension taper and its impact on the public sector. The decision is amost welcome one. An investigation by the Financial Times and other media reports have found that the Byzantine tax arrangement was leading tosenior doctorsavoiding taking on extra shifts. The impact has not been restricted to the medical pro- fession, however. Across all industries, those on higher incomes have found themselves facing nasty surprises. The rationale behind the taper was that much of the £25bn annual net cost ofpensions tax reliefgoes to top earners. To counter this, the taper reduces workers’ tax free annual allowance throughout the year as their earnings rise. For those on the highest rate, with a yearly income ofmore than £110,000, the allowance falls to just £10,000. Exceeding these limits can be costly, with some doctors facing marginal tax rates of more than 100 per cent. The taper has proven to be poor public policy. Those with incomes close to the limit, which is based on pension contributions, salary and other factors, have to predict how much they will earn at the beginning of the year to see if they are within the arbitrary bounda- ries — creating a tax system which only really works for clairvoyants. Scrap- ping the system would both incentivise earners to put money into their pension savings, and ensure a smoother running of both public and private provisions. The most vocal anger at the effects of the taper has come from the public sector, where the government sets rigid pension contribution levels. The National Health Service has been par- ticularly badly hit, with many consult- ants and GPs choosing to either reduce their working hours or take early

retirement in order to avoid hefty tax bills. In July,NHS Providers, which rep- resents English hospitals, said this would create far longer waiting times for treatment — one more burden in a badly stretched service. They warned the government that it only had a mat- ter of weeks to act. Judges and other high-earning public servants have also been feeling the pinch. A generous government pension, with no risk of defaulting, was once an incentive to stay in the public sector. The introduction of the taper has turned it into a liability. This risks driv- ing talented high-earners to the private sector, where more flexible arrange- ments are possible. Some employers have reduced pension contributions while increasing salaries, encouraging their workers to invest in ISAs and other measures. Nevertheless, high- earners in the private sector have also faced problems as a result of the taper. Annual earnings can vary far more than in government employment. The taper cannot account for large bonuses, for example, treating them as sudden salary rises and reducing the annual allowance accordingly. Beyond the taper, the UK’s tax system is not a poor one. There are argu- ments around the current level of the current pension savings lifetime allowance, set at£1.055mas of this April. The general mechanism works well to incentivise worker contributions into the pension pot. Tax is deferred until retirees begin drawing on their pen- sions. Earners on higher incomes will receive between 40 and 45 per cent tax relief. Predictability, rather than radical experimentation, should be a central pillar of the tax system. As such, reversing Mr Osborne’s reforms is a pri- ority. This is no time for tinkering. When it comes to fairer taxation, half- measures will not do.

Complex arrangement has contributed to staffing crisis in the NHS

A long overdue review

of pension taper policy

Succession planning is rarely easy, always essential. The abrupt exit of HSBCchief executiveJohn Flint, removed by the board after just 18 months in the job, shows what happens when it goes wrong. The company now has the opportunity to correct course, break with tradition and look for a can- didate who can change the bank’s culture and articulate a new strategy for the Chinese mainland. Mr Flint’s departure on Monday came after the breakdown of relations with the board, dominated by chair Mark Tucker, a former insurance executive. Mr Flint was the preferred candi- date of the previous chief executive Stuart Gulliver, who left in 2018 after a tenure that focused on fixing legacy issues related to the subprime mort- gage crisis and money-laundering scandals. Mr Flint, who had spent 32 years at the bank, was a loyal ally of Mr Gulliver, another “lifer”. Outgoing bosses should ask whether the company needs a radical break with the past.So-called insiderswith experience at the company tend to excel at keeping an already thriving company ticking over. Outsiders, however, can bring a new perspective and challenge corporate orthodoxy. Mr Gulliver’s departure offered an opening but the recently appointed Mr Tucker opted for the known quantity instead. That risk-averse choice has not paid off: colleagues pay tribute to Mr Flint’s intelligence but say he lacked vision. The board complained he was to slow to make decisions. An introvert, he found it difficult to get along with the forthright Mr Tucker and lacked other strong allies within the bank to speak up on his behalf. Many of the problems, however, reflect the position he found himself in. Mr Flint had to be an effective captain not just for a single ship but for an entire fleet spread across Britain, the

US, Hong Kong and Asia. With a strong presence in China as well as a London headquarters, he faced not only a man- agement challenge but a physical one as well. Reportedly, Mr Flint found the travel schedule and working hours punishing. He complained he was having trouble sleeping. All four of the bank’s major markets face storm clouds. As the biggest retail bank in Hong Kong it is exposed to the political turmoil raging in the territory; its business lines are mature and unlikely to deliver anything other than marginal growth. Its other home market, Britain, faces a possible downturn in the event of a disorderly Brexit. The US operation, which it acquired in 2003, has never turned a profit, while in China itself the bank risks being caught in the middle of the trade war. It faces accusations of aiding the US government in its investigation of tele- coms companyHuawei, which is sus- pected of having close links with the Chinese military establishment. The next chief executive needs vision and operational excellence. They must eitherfix the US operationsor leave the market completely. In Hong Kong, the bank needs a better digital offering. It is the dominant retail bank in the former colony but faces competition from new, nimbler online outfits. Whoever takes over will need to prioritise their relationship with the hands-on Mr Tucker and form an effective team. Critically, however, the next chief executive faces two key challenges. First, they must change the culture at the bank, which can be old-fashioned and comes with a bloated hierarchy. Second, they must respond to the changing climate in China, ensuring they have the right people to make the most of their status as a bridge between east and west. Most importantly, the new chief executive will have, at some point, to consider their own successor.

Fate of former chief executive provides a cautionary tale for bosses

HSBC shows the need for

succession planning

Your article on Argentina and shale gas (August 7) rests on a faulty premise. The shale revolution is not a boom, but a big bust of epic proportions. There is no denying that there has been a production boom in both fracked oil and fracked natural gas in the US but it has been a financial disaster for producers and investors. Cash flows from fracking-focused oil and gas companies across the country have been negative for decades — even when oil and gas prices were higher than they are now. Frackers, in fact, have spilled billions of dollars in red ink. A recentanalysis

of 29 fracking-focused companies produced by the Sightline Institute and the Institute for Energy Economics and Financial Analysis showed aggregate negative cash flows of $184bn between 2010 and early 2019. This red ink has spilled from companies fracking for natural gas in Appalachia, and for oil in the Permian Basin. Bankruptcies have mounted. Since 2015, 174 North American oil and gas producers have filed for bankruptcy protection, according to law firm Haynes & Boone, restructuring nearly $100bn in debt largely through write-offs.

Bankruptcies will continueas oil and gas borrowers must repay or refinance several hundred billion dollars of debt over the next six months. Meanwhile, natural gas production has boomed, creating a glut, and deepening the financial distress for oil and gas producers around the world. There is also a glut in natural gas produced in the Permian fields that frackers either burn off (flaring) or pay to have transported. Gas producers throughout the world are desperately seeking to export their product overseas, primarily to Asia. Part of the glut has been blamed on infrastructure

issues in the Permian basin. But, as the article notes, Argentina’s infrastructure problems are far greater. Given the failure of frackers to create a viable business model, Argentina should not seek to replicate the shale boom. It should instead look towards innovative new models of sustainable energy and economic growth such as those being pursued in neighbouring Chile and Uruguay. Kathy Hipple Professor, Bard MBA in Sustainability; Financial Analyst, IEEFA.org; Partner, Noosphere Marketing, New York, NY, US

Stranded shale assets send a warning to Argentina and others

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Financial Times Europe - 08.08.2019

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