Coulson: Now in the departure lounge?

When prime minister David Cameron appointed Andy Coulson,  former editor of the News of the World, as the Conservatives’ head of spin in June 2007, it was always seen as a bizarre appointment (and this was only partly because Coulson had left the paper under a cloud, resigning because of the phone-tapping scandal which led to his royal correspondent and a private investigator being jailed).

Following the lengthy investigation into the “hackgate” scandal by the New York Times Magazine — which revealed the practice was endemic at the paper under Coulson’s editorship (which didn’t quite chime with Coulson’s claims of blissful ignorance) and that the Metropolitan Police had failed to properly investigate it — I think Cameron has no choice other than to dispense with Coulson’s services.

The inevitability of Coulson’s departure was further reinforced by today’s revelations from Paul McMullan, a former features executive and then member of the NoTW’s investigations team, who told the Guardian that phone hacking and other illegal reporting techniques were rife at the Sunday paper while Coulson was deputy editor and editor. He said:

“How can Coulson possibly say he didn’t know what was going on with [private investigators]? He was the brains behind the investigations department [to which McMullan was transferred by Coulson]. How can he say he had no idea about how it works?”

The pressure on Coulson mounted further today when the Commons speaker, John Bercow, paved the way for a second, powerful committee of MPs to investigate the scandal.

An article in The Atlantic explains why Cameron will be tarnished if he unwise enough to retain Coulson’s services. Having won power through promising they would sweep away the “surveillance state” installed by Tony Blair and Gordon Brown and restore individual freedoms, the Conservatives cannot give safe haven to a man alleged to have carried out (or at least sanctioned) illegal surveillance on a grand scale at the NoTW.

In the article, Jonathan Tepperman, managing editor of New York-based political risk consultancy Eurasia Group and a former senior editor at Newsweek, writes:

Too often under Blair and Brown, scandals like this were swept under the carpet, dealt with perfunctorily, with the disgraced politician (often Peter Mandelson) being dismissed, only to be quietly hired back a year or two later. The best way Cameron can show that things have really changed is to get rid of Coulson and stay rid of him–and then to press forward with changes that should keep this kind of thing from happening again, such as his government’s promises to return more power to individuals and communities, and to limit the authority of the British state.

Published: Sunday Herald

Date: August 29th, 2010

Martin Gilbert, chief executive of Aberdeen Asset Management, has declared that big institutions that straddle the investment and mainstream banking divide should be broken up.

Echoing the views of Scots economist and author John Kay, who coined the widely used “casino” and “utility” banking analogy for the divide, and Business Secretary Vince Cable, Gilbert claimed the UK’s banking sector must undergo radical structural change in order to become safer, serve the customer better and be less prone to blow-outs.

“The banks should be split up. That’s our view,” said Gilbert. “Now the banks will argue that it’s very complicated. But they’ve got to decide what they’re going to do. Lloyds Banking Group is a good example of a utility, but it should not be engaged in things like proprietary trading or private equity.”

“If you’re a big deposit-taking bank you shouldn’t be punting the money on a prop trading book on the other side. The banks that the Government should support, and bail out if necessary, are the ones where public go and deposit their cash.

“Where the [banks with large investment banking arms] have got to reinvent themselves is that they were previously making the bulk of their money in proprietary trading. They’re going to have decide whether they want to service their clients or just be giant hedge funds.”

Aberdeen Asset Management, which Gilbert bought out from an Aberdeen law firm in 1983, is the world’s largest independent asset management group with £165 billion under management. It is also the biggest asset management business of any type in headquartered in Scotland, with about £20bn more in assets than SWIP and Standard Life Investments.

Gilbert, who sits on the board of industry/government initiative the Financial Services Advisory Board (FiSAB), said the UK Government and especially Cable would “love” to break up the banks in this way.

However, Gilbert added: “Cable has a problem. He’s got stakes in the banks. It’s a political nightmare for him.” He added that he awaits the findings of the Banking Commission, chaired by Sir John Vickers, with interest. Overall he said it is essential that “banks get back to much more sensible behaviour”.

Gilbert also stressed that the Government must ensure that banks are better regulated. “I believe the old-fashioned Bank of England would have had the common sense to have asked why HBOS was dominating the property lending market in the way it was. They should also have looked at the 40% funding gap it had.”

The AAM chief executive expressed support for Lloyds Banking Group chief executive Eric Daniels. “I think that in five years time the takeover of HBOS will look like a very good deal. I’ve got a lot of respect for Eric. I think he’s done an extremely good job. No-one will know how much he was leant on to do the deal.” Gilbert does not believe Lloyds will be forced by the Government to offload HBOS. It will, however, have to sell off 600 branches by 2014 as a condition of state aid.

Until now, industry lobby groups Scottish Financial Enterprise and FiSAB have played down the effects of the financial crisis on Scotland’s reputation for financial services. However, Gilbert conceded the banking crisis of October 2008 has done “huge harm, a lot of damage” to Scotland’s position.

“The real damage is not the fact we no longer have HBOS headquartered here. The real pain is being felt in property development and housebuilding. The bulk of the £200bn contraction of Lloyds balance sheet is coming in property. There is a lot of pain still to be felt in that sector and that’ll go on for a few years.”

Gilbert told the Sunday Herald he believes Scotland should have fiscal autonomy. “Scotland does not know where it stands at the moment. I think Alex Salmond’s doing as good a job as he can within the very tight constraints that he’s got.” Salmond will address Aberdeen’s annual investment conference in Aberdeen this Friday. .

Owen Kelly, chief executive of Scottish Financial Enterprise, said: “The debate about ‘narrow’ and ‘universal’ banking, and the advantages and drawbacks for customers of the various options, continues in the UK. The chief vehicle for this is the Banking Commission, which is to report in several months’ time. However, the US, China and other major economies have already made some of these decisions and whatever we do in the UK will have to take account of them. We can’t decide these things in isolation.”

Speaking in Glasgow last week, Stephen Hester, chief executive of RBS, said: “The essential element is to ensure that financial institutions can be safely resolved and if bailed out it should be by shareholders and creditors, not the state. My analysis of what has just happened and my experience of banking tell me that size is probably not the key issue.”

• This article was the business splash in the Sunday Herald on August 29th, 2010. To read on Herald Scotland website click here

Living the high life

[Editorial Note: This article was written in June 2010 but has not previously been published in its entirety. An edited version was published in The Sunday Times on June 27th, 2010]

Directors of an aviation business that went bust owing HBOS £113 million in September 2007 were allowed to buy the business back from administrators Price Waterhouse Coopers for an initial consideration of just £7.

A few months later they paid an additional £49,999 but were unable to pay the additional €10m they were supposed to pay by February 2008 to secure ownership of the most profitable subsidiary, a Germany-based maintenance company.

The administrative receivership enabled directors of Corporate Jet Services to avoid paying millions of pounds to unsecured creditors, including airplane lessors and Her Majesty’s Revenue & Customs. HBOS was forgiving, writing off £60m of CJS’s outstanding overdraft of £81m in March 2008.

Directors who benefited from the deal include David Mills, who had a close relationship with HBOS. As chairman of Quayside Corporate Services, he either advised or sat on the boards of scores of the bank’s “mid market, high risk” corporate clients, many of which went bust between March and October 2007.

Other directors who participated in the phoenixing included Robin Southwell, chief executive of defense and aviation group EADS UK and a close business associate of Mills, and Tony Shakesby, a former PwC accountant.

In early 2007, HBOS asked PwC – the ‘big four’ accountancy firm that is defending charges that it “facilitated” the alleged $2bn Baugur fraud – to investigate CJS.

PWC’s review, completed in May 2007, confirmed that CJS was insolvent and recommended administration. PwC administrators David Chubb and Michael Jervis decided against auctioning CJS’s assets – which included several airplanes and part shares in luxury ‘yachts’ Powder Monkey and Invictus – on the open market.

Instead, they put CJS into administration on September 26, 2007 selling the business to Quest Aviation Services the same day.

In a report to creditors Chubb and Jervis said they did this since the company “insufficient funds to support the trading subsidiaries for a prolonged marketing campaign, which would also have been detrimental to customer confidence in the chartered and regional airline businesses of Club and Euromanx.”

Quest was an off-the-shelf company created by the directors who had caused CJS to collapse under the weight of unserviceable debts – Mills, Southwell, Shakesby and Dave Jackson (who formerly ran a CJS subsidiary). Using it, they were able to acquire the CJS assets virtually debt free. Each owned a 25% stake in Quest.

Despite its failure to stump up the €10m needed to secure ownership of CJS’s German subsidiary, 328 Support Services GmBH, based at the former Dornier aircraft factory at Oberpfaffenhofen in Bavaria, Quest continues to run the company on a day-to-day basis.

Asked whether PWC and Lloyds had exempted Quest from making the payment, Quest chief executive Dave Jackson said: “Terms of consideration continue to be implemented.”

In a statement PwC said: “The transaction was completed, and deferred consideration is still being received.”

Southwell said that, at the time of CJS’s 2007 demise, “I would have been happy to have fallen on my sword but I was asked to stay on in order to provide some continuity”.

“The easy way out would have been to write it [CJS] off but instead PwC and the bank chose to grind it through to the next level, and drive it forward in the anticipation of getting some of its money back.”

Mills, Southwell and Shakesby built Corporate Jet Services into a debt-laden aviation mini-conglomerate on the back of deals funded by generous loans from HBOS, led by the bank’s disgraced former head of corporate Peter Cummings.

It was loss-making throughout its five year life and made estimated losses of £21m in the year to December 2006. By the time of its collapse, the Southampton-based aviation group owed HBOS a reported £113m. Within that was an overdraft of more than £60m, despite an official limit of only£800,000.

In the period 2002-07 CJS acquired a number of smaller aviation businesses including Club 328 (formerly Bookajet, a provider of private jets to celebrities including footballer David Beckham) and the Isle of Man-based scheduled carrier Euromanx.

After the CJS administration, Isle of Man-based Euromanx was allowed to limp along for seven months with the support of the Manx government. It collapsed in May 2008, with the loss of 70 jobs and leaving some 40,000 passengers who had made bookings out of pocket. The Isle of Man government lost £1.5m as a consequence of the Ronaldsway-based airline’s demise.

Further details of the CJS administration are expected to come to light as a consequence of the compulsory liquidation of the business, approved in the High Court on November 25, 2009.

The petition for the winding up of CJS came from an unsecured creditor, Guernsey-based Corporate Aircraft Leasing Ltd (Call), which half-owned by HBOS and half-owned by Channel Islands-based Exxtor Aviation Group. Call is understood to be owed £324,000 by CJS in unpaid leasing fees.

Lloyds insiders said that Truett Tate, who last year earned £1.8m as Lloyds’ head of wholesale business,  is “hopping mad” that, even though it is half-owned by the bank, Call was allowed to push for and secure the liquidation of CJS.

One insider said: “Heads are going to roll [inside Lloyds] because of this. The big bosses are demanding to know how this was allowed to happen.”

Elliot Green, of Slough-based accountants and solicitors Oury Clark, was appointed as CJS’s liquidator on March 1. A forensic liquidator, he has a reputation as a “bulldog” who leaves no stone unturned in pursuit of creditors’ cash.

Green has a track record of using litigation to ensure that creditors retrieve their cash. He is understood to be reviewing the 2007 CJS administration to establish whether or not CJS creditors were defrauded.

Green would not comment on the specific case. However commenting generally about compulsory liquidations on LinkedIn, he says:

“When defrauded by serial debtors who have engaged in transactions to defeat creditors, I will engage the transactional avoidance provisions in the insolvency legislation to return money to creditors.”

The CJS liquidation is expected to shed some light on systemic irregularities within HBOS’s corporate department, which are currently being investigated by an enforcement team from the FSA.

The regulator wants to establish why the bank forced some 50 customer firms to use the services of Mill’s self-styled turnaround consultancy, Quayside Corporate Services. An FSA spokesman declined to comment. A spokesman for Lloyds Banking Group said: “We cannot comment on individual circumstances.”

At the time of its collapse, CJS’s main subsidiaries were Club 328, which provided private jets for celebrities, maintenance group Jet Engineering Technical Support (Jets), Isle of Man-based carrier Euromanx, and some of the German assets of Avcraft Aerospace.

• An edited version of this article was published in The Sunday Times on June 27th, 2010

Mills might now have more time for yachting in the Med

The founder and owner of Quayside Corporate Services — a self-styled turnaround consultancy that was pivotal to the Bank of Scotland Reading scandal – has lately been stepping down from a surprising number of boards.

In June David Mills, 53, quit the board of Cardiff-based revolving credit company Clode Group Holdings, as well the boards of subsidiaries Clode Retail Finance, Clode Holdings, Clode Funding, Medi-Fi, DMA Finance and V-12 Holdings.

Intriguingly auditors PriceWaterhouseCoopers slapped a “going concern” health warning on Clode Retail Holdings in inaugural financial statements for the new holding company.

In accounts for the four months ended March 31, 2009, PWC said there was no certainty Clode could survive the next 12 months owing to uncertainty over its ability to renegotiate its borrowing facilities. As at March 2009, the company said it had net debts of £41.45m, the bulk of which is understood to be owed to HBOS/Lloyds Banking Group. The auditors said:

“This indicates the existence of a material uncertainty which may cast doubt about the group’s and the company’s ability to continue as a going concern.”

In the four months to March 31 2009, Clode Group Holdings and its subsidies paid £85,640 to Mills in “directors and consultancy fees” (=£21,410 per month). The company also paid service and rental charges of £34,000 (=£8,500 per month) to Red Flower Property, a business 42%-owned by Mills. Clode also paid a “rental deposit” of £124,550 to Red Flower and the accounts stated that Clode is owed £125,000 by Red Flower Property.

Other companies from which Mills has recently resigned include the Aim-listed surveillance specialist Petards Group PLC. He left its board at the time of a capital reorganization on June 24, 2010.

He has also resigned from the board of international business risk consultancy Greymans (now in liquidation, according to Companies House) on December 31, 2009. Intriguingly Mills only joined the board of the Theale-based company in July 2009. Mills also left the board of Creditworks UK on June 28th, 2010.

Hmmm. All very intriguing.

The only companies on whose boards Mills remains a director are The Sandstone Organisation, Core Enterprise Management, Mint Partners, Knightingale Investments, Monkey Puzzle Developments, Red Flower Property, S&D Realisations (in administration) and Cop Realisations (in administration).

Mills may also remain as a director of Quest Aviation Services, which was permitted by HBOS and administrators PWC to acquire the assets of bust aviation group Corporate Jet Services, where Mills was also a director, for a derisory sum in September 2007.

Mills’s exact role at Quest — whose directors include Robin Southwell, Tony Shakesby and Dave Jackson — remains unclear. It appears that he was a Quest director in 2008, though the role was not recorded at Companies House.

CJS is now the subject of a compulsory liquidation, with insolvency practitioner Elliot Green, a partner in Oury Clark, poring over the details of a September 2007 administration organized by PwC which was surprisingly forgiving to a failed management team and potentially unfair to major creditors including Guernsey-based plane leasing company CALL Aircraft Leasing.

On David Mills’ page on the FSA Register website, the “disciplinary history” section remains a blank canvas. Bizarrely, given he stepped down two months ago, Mills is still recorded as an active director of Clode Retail Finance on the same website.  As usual, the FSA is remarkably on the ball.

With more time on his hands, one wonders if Mills will be spending more time messing about in boats (such as the one pictured above, or perhaps a similar vessel called the Powder Monkey) in the Mediterranean?

Published: The Sunday Times

Date:  August 22nd, 2010

The Hebridean island has teamed up with energy giant Scottish Power to tap a reliable source of electricity with underwater turbines

When the MV Eilean Dhiura ferry crosses the Sound of Islay, passengers often think she is heading in the wrong direction. The small roll-on, roll-off vessel has to contend with a fierce tidal current as it makes the journey from Port Askaig, on Islay, to Feolin on the neighbouring island of Jura.

“It is such a fast-flowing piece of water, the ferry has to crab its way across,” said Andrew Macdonald, tidal energy project officer at Islay Energy Trust.

Macdonald has spent years trying to find a way to harness that natural energy, and now Islay Energy Trust has teamed up with Scottish Power to generate tidal power from the sound.

A planning application was lodged last month for a 10-strong array of 1MW underwater turbines, which will generate the power for Islay’s 3,500 residents and all its whisky distilleries, for 23 hours a day. “A lot of hot air has been talked about tidal energy but this project is something tangible that is already bringing real money and real jobs to Islay,” said Macdonald.

“This is the very start of the marine renewables industry, and I’m sure Islay will be able to capitalise on that. Experience gained here will almost certainly bring opportunities elsewhere.”

When the Islay Energy Trust sent a robotic submarine (ROV) into the Sound of Islay in July 2008, it thought it had the waters to itself. The trust had examined various renewable energy sources, including wind power and biomass, but had been unable to find ways to make them work, and so decided to have a serious look at tidal power.

“Within a month Scottish Power was doing the same,” said Macdonald. “We are a small organisation with a voluntary board of eight people. Scottish Power is Britain’s largest renewable energy producer. It was always going to win. So we said, how about working together?”

Scottish Power Renewables, a subsidiary of Iberdrola, the Spanish energy giant, was already heavily involved in the European Marine Energy Centre (Emec) test site off the coast of Orkney. But Keith Anderson, the director of renewables, said the power company wanted to keep its geographic options open.

Scottish Power had examined a number of sites round the coast but was leaning towards Islay. The ROV survey confirmed that the narrow straits had near-perfect conditions. A tidal stream flowing at three metres per second was complemented by a predictable, linear flow. Also, the sound, which runs north-south, is sheltered from high winds and waves.

Scottish Power Renewables and Islay Energy Trust struck a working agreement, with the trust acting as subcontractor to provide local services, including community liaison.

Scottish Power will install the tidal turbines, made by the Norwegian company Hammerfest Strom, in 2012 in a trench running for about 1.5km south from Port Askaig. They are expected to be operational by the following year.

Alex Salmond, the first minister, has often said that Scotland has the potential to be the “Saudi Arabia of marine renewables”. Critics have questioned whether this can become reality.

Obstacles include the need to fund an offshore electricity grid, estimated at up to £10 billion, and whether generous subsidies for renewable power will continue in the climate of austerity.

Tidal power enjoys more generous government subsidies than other forms of renewable energy. Under the renewables obligation scheme, which encourages electricity suppliers to switch from traditional sources, an onshore wind farm receives one Renewables Obligation Certificate per megawatt, while offshore wind farms receive two and tidal projects get three.

The Hammerfest Strom turbines, which resemble stockier versions of wind turbines, will rise 30m from the sea bed. The three blades rotate slowly — 10 times per minute — to minimise danger to sea life.

Hammerfest installed a 300kW prototype off the Norwegian coast in 2003, the first in the world to be connected to a national grid. This has generated electricity with minimal maintenance ever since, giving Scottish Power sufficient confidence to commission last week the first 1MW version for a trial at Emec.

Keith Anderson concedes, however, that some doubts remain over the commercial viability of tidal power. “The aim of the Islay array project is to demonstrate how these machines work together, how they interact on the sea bed, and how they link into the grid,” he said.

“You won’t get to the true commercial reality of tidal power until you get to the next step, which is our project for the Ness of Duncansby.” That 95MW project will see several arrays of up to 20 turbines each embedded in the floor of the Pentland Firth from 2015. Anderson added: “Once you have got to that level, you can make more realistic cost comparisons with other forms of generation.”

Fishermen were initially opposed to the £50m proposal for the Sound of Islay. However, the site of the array will be limited to a narrow stretch of water, where the sea is too deep to fish for crabs. Macdonald added that the trust was discussing possible mitigation with lobster fishermen, including seeding young lobsters elsewhere.

Diageo, the drinks group, has already signed a deal with Scottish Power to take the Islay electricity to four of its distilleries. It believes tidal power is likely to be “more resilient” than existing supplies, which can be disrupted by storms.

• This article was published in the  energy and environment pages of The Sunday Times business section on August 22nd, 2010. To view it on The Sunday Times website, click here (may require subscription).

The Camp for Climate Action, which was set up on parkland behind the Royal Bank of Scotland’s world headquarters at Gogarburn in Edinburgh on Wednesday night, is deploying spectacular tactics to make what in my view is a valid point.

The campers, including my nephew, wrongfooted the police and RBS security by arriving a day earlier than expected. So far the campers’ protest against the bank’s continuing support for environmentally-destructive industries, including Canadian tar sands projects (pictured above), is proceeding peacefully and well.

In a Herald article published today, climate camp spokeswoman Ruth McTernan explained what the campers are about:

“It’s been a dramatic start to what will be a week full of workshops, sustainable living and direct action against RBS’s crimes against the climate. We’re in a beautiful location here at Gogarburn. People should come down, have a cup of tea and check out what’s going on for themselves.”

I’ll soon be doing just that to assess the mood, and am looking forward to seeing how Monday’s “day of mass action” — in which the climate campers will try to shut down RBS’s Gogarburn world headquarters — goes.

There are people in Edinburgh and elsewhere who resent the climate camp, dismissing the protesters as a bunch of misdirected middle-class students and wastrels with too much time on their hands, or accusing them of being hypocritical since they too are consuming fossil fuels, burning propane gas, using mobile-phones and laptops etc.

There also seems to be a degree of resentment about the cost of the police presence around the camp. Read the comments on this recent Camp for Climate Action blog post to get a flavour. However much of this sniping and knitpicking misses the bigger picture.

I admire the climate campers for having the balls to challenge the (almost certainly unsustainable) economic and environmental status quo – and believe they have probably picked a good target in RBS. As well as becoming the world’s biggest purveyor of subprime-infected timebombs (CDOs etc) under chief executive Sir Fred Goodwin, the bank also became the world’s leading funders of fossil fuels and carbon-intensive industries including Albertan tar sands. If nothing else the campers are doing alot to raise awareness of such issues, even inside the bank itself.

A 2009 report titled Royal Bank of Sustainability written by Nick Silver, a senior honorary visiting fellow at Cass Business School and  fellow of the Institute of Economic Affairs, concluded by saying:-

“There is a clear case for UK Financial Investments to engage actively with the board and management of RBS to ensure effective consideration and analysis of environmental, social and corporate governance issues. UKFI should pursue higher standards than industry good practice because it is representing the wider interests of taxpayers, and defending the credibility of government policy and its own UK Low Carbon Transition Plan.”

A more recent report titled A Bank for the Future: Maximising public investment in a low carbon economy, written by former PWC consultant James Leaton and tax economist Howard Reed, also called for a radical rethink of government policy in this area.

“The UK can’t afford another meltdown, yet short-term, high risk, carbon-intensive investments are still business as usual for the banks. The government must reform RBS into a Green Investment Bank (GIB) and provide a low carbon policy framework to create a sustainable economy.”

I have consistently believed that, after taking control of 83% RBS’s equity in October 2008, the UK government had a once-in-a-lifetime opportunity to “tame” RBS, and force through radical behavioural and structural changes to make this bank more sustainable. However, Gordon Brown’s government did nothing of the sort.

Instead they created UKFI, a quasi-commercial buffer between the Treasury and the bank. As I’ve said in earlier blog posts, UKFI is the most absentee of “absentee landlords”. Basically, it has no interest in policing or refocusing what RBS does.

All it is interested in is: (1) Short-term profits growth (2) Short-term share price performance and (3) The swift reprivatization of RBS.

As long as the bank achieves these goals, UKFI doesn’t seem to give a damn how they are achieved. Astonishingly, UKFI, and by extension the UK government, is pursuing the same flawed and unsustainble thinking that led to the global financial crisis in the first place!

I suspect the bank’s recent claim that it is a “strong supporter” of renewables projects is “greenwash”. Of the $15 billion raised for the energy sector by RBS, through underwriting of debt and equity, since its October 2008 bailout, only $83m has gone into renewable energy projects – that’s less than one per cent. See this blog from the San Fransisco-based environmental charity, Rainforest Action Network, for more.

NOTE (added 8.30am on Monday August 23rd). While I don’t fully subscribe to the climate campers’ “dark green” views, I support their right to express them and protest as spectacularly as they choose (Brendan O’Neill made a similar point in Spiked in 2007). However, I do not condone mindless vandalism or any violence.

• To read my recent report on the warped priorities and environmental naivete of RBS’s effective parent group, UK Financial Investments (UKFI), led by chief executive Robin Budenberg, click here

Published: Sunday Herald

Date: August 15th, 2010

Interview of the week: Angus Macdonald (image from Sunday Herald)

A little over three years ago, Angus MacDonald saw the future… and he decided it was rubbish. This was nothing to do with his outlook on life, though. The Highland entrepreneur, fresh from selling his 25% stake in the publishing and recruitment business eFinancial Group in two successive deals to Dow Jones and recruitment group Dice Inc for £20m, was looking for a new challenge.

Suspecting that the world of finance might be hitting the buffers, the 47-year-old former Queen’s Own Highlanders officer weighed a number of options. He remembered an important lesson from his days as a small-cap analyst at City stockbroker Laing & Cruickshank and small-cap fund manager at Martin Currie in the 1980s to, “focus on a sector that is on a long-term growth trajectory”. After some research, he decided waste management fitted the bill.

The UK’s £12bn-a-year waste sector is dominated by multinationals such as Veolia, Biffa, Viridor, Shanks and Sita, who own virtually all the UK’s landfill sites and make their money by disposing of waste in them. But MacDonald realised there was scope for niche players that made money out of recycling at a time when landfill is becoming even more expensive thanks to the Government’s landfill tax, which will rise from £48 per tonne to £80 per tonne in 2014. Inspired by Connecticut-based Oakleaf, a waste management group formerly owned by the London-based private equity group Charterhouse, he would differentiate himself from the other fledgling recyclers by focusing on all areas and all types of waste.

He acquired Guildford-based Oakside Environmental out of administration for a nominal fee via a new company, Specialist Waste Recycling (SWR), having heard about it from a local business angel network that had decided an investment wouldn’t suit them. He believed Oakside had had a sound business model and mainly failed because of inadequate access to capital. At the time of its collapse, the company had been turning over about £1m but making losses of the same amount. It had no debts and employed 20 people, who MacDonald said “really knew and cared about recycling.”

Another attraction was that the company was focused on the motor trade, where he believed there was massive scope for improved waste management practices. And unlike Oakside’s rivals in the sector, it was able to handle all types of waste, providing a sort of outsourced environmental compliance solution.

On acquiring the company, MacDonald injected £750,000 of his own cash to keep it trading. Then he raised £4.4m mainly from equity investors and family offices who had been investors in eFinancial Group and trusted his knack for turning around ailing businesses.

As executive chairman he has since been focused on re-energising SWR, hiring new people, expanding its geographic footprint, hiring chief executive Giles Whiteley (formerly of Redstone Telecom) and making major investments in things like new trucks and equipment. Today he owns a 45% stake in a wider group that is registered in Scotland, has 70 staff and six depots, including one in Larbert, although it relies on England for the majority of its business. With the other depots in Alton, Peterborough, Burton-on-Trent, Bristol and Wetherby, a seventh will open imminently near Manchester.

The company breaks down waste into 19 different streams, including metal, cardboard and plastics. Once it has collated a batch of upwards of 20 tonnes of one substance, it sells it on to whoever can use it. Regular customers include scrap metal dealers and specialist glass recycling companies.

Annual sales have reached £6m and grew 80% in the half-year to June 30 despite the deep recession in the UK motor trade. This has been assisted by contracts from the likes of Lookers, Inchcape, Marshalls of Cambridge, Cameron Motors (Perth), Macrae & Dick (Inverness) and most recently Arnold Clark. And while motoring remains the core business, other UK-wide contract wins in recent months have included Dobbies Garden Centres, Klondyke Garden Centres and Perth-based Sidey windows. Motoring is still responsible for 80% of turnover, but only 50% of new business.

“If anything, the recession has accelerated our growth,” he says. “Our sales pitch of taking your recycling levels way up and reducing your waste cost is clearly appealing.”

The company is still making losses, but he predicts that it will reach month-to-month breakeven by mid-2011 and produce a pre-tax profit of £2m on sales of £25m by 2012 or 2013. Asked how he will achieve this, he points to his record for stellar growth at eFinancial Group (sales rose from £0.9m to £30m in 11 years) and his belief that when you cut someone’s waste costs, you are likely to retain their business.

When wooing prospective customers, MacDonald says the secret is to, “persuade them to recognise that their waste can be someone else’s raw material.”

It requires a mindset change and MacDonald says this does not always come easily. He is regularly stunned by the practices he encounters in the motor sector, where the average executive is a 55-year-old male whose scepticism about global warming has parallels with that of Jeremy Clarkson.

“They happily sell eco-hybrids out the front door and landfill everything out the back door. It’s astonishing,” he says.

He is surprised that the Scottish Environmental Protection Agency (SEPA) does not do more to police environmental regulations – particularly rules that hazardous waste must not be dumped in landfill sites.

“For our business really to lift off, we need the legislation to be better policed. A great many motor dealers are simply ignoring it,” he says.

Most of the prospective car industry customers seen by SWR currently recycle a mere 30% of their waste. SWR’s sales pitch is that it can help them raise this to 80%.

There is also a convenience factor, in that SWR takes a business’s entire waste management and environmental compliance needs off its hands thanks to its ability to track down buyers for the unlikeliest of substances. One customer was paying £60,000 a year to get rid of a “sticky rubber residue”, for instance. Now SWR is removing it for free and selling it for £20,000.

MacDonald, who lives near Blair Atholl in Perthshire, is also the biggest shareholder in Helius Energy, an Aim-listed biomass company, where he is a a non-executive director after investing £4.5m. He is acquiring a waste wood aggregation company in London’s East End. This chips broken palettes and wooden construction waste for the biomass sector and may become a supplier to Helius in due course.

Having also bought 3000 acres of forest in south west Scotland with his eFinancial dividend, MacDonald also manages to bring up his four sons, all of whom play the bagpipes. Whether these instruments might one day go the same way as all the car bumpers, engines and exhausts, he is not saying.

“The better segmented the waste is, the more valuable it is,” he concludes. “What we’re bringing is the ability to change the way staff work.”

• This article was the interview of the week in the business pages of the Sunday Herald on 15th August 2010. To read it on the Herald Scotland website, click here

If, in our western capitalist economies, we think of profit-hunting banks as being like a pride of lions hunting, non-financial industry is comparable to lionesses who often do the actual work. The banks are the males who spend all day lazing in the sun, but get the first pickings of any kill, and all of the second helpings if they want too.

This (more or less) is how Robert McDowell, the Edinburgh-based banking consultant and author, begins his latest, somewhat disturbing, blog post on what the future holds for banks and whether regulators will ever be able to rein in their excesses.

I urge anyone who is interested in the future of banking and financial regulation to read the full blog post — originally titled “Regulators’ Get Tough But Will They Change Banks’ Profiteering” and published on both Robert’s Banking on Economics blog, and on the Asymptotix blog. Above all else, the piece demonstrates why Barack Obama’s much trumpeted Dodd-Frank-Act is bound to fail.

Here are some (unannotated) excerpts:-

The Fed’s supervision manuals are a groaning bookcase-worth written by legislators for other attorneys into a jungle of verbiage impenetrable except by the most intrepid legalistic risk experts, geeks, nerds like myself and my colleagues ….

There is also the question of insider lending, and for every $ of incestuous lending how many $ are to ‘outsiders’ with over-close connections that negate standard pricing and risk assessment, a commonplace issue in property development lending, as everyone in the property industry knows well — the type of matters that brought down Anglo Irish Bank and fatally wounded many others? …

It took 80 pages of explanatory material before summarising what US Fed supervisors must first do before anything else when risk auditing a financial services firm: “Consider whether the financial-contract activities are closely related to the basic business of banking; that is, taking deposits, making and funding loans, providing services to customers, and operating at a profit for shareholders without taking undue risks.” ….

Lifting the carpet to check what’s underneath, begs some questions, mostly about how risk-taking could be hidden among layers of risk aggregations and how these risks are more exposed when disaggregating?

It seems to me that the real risk measures are those that understand the external financial markets and macroeconomic context factors, because riskiness is rarely obvious in a balance sheet however detailed only by looking at it in the context of itself.

… and something was surely hugely amiss in profit-accounting by the financial sector reliant on booking unrealised profits that were unsustainable.

Regulators before the credit crunch paid little attention to the increase in the amount of mortgage-backed securities on banks’ books. Now, bankers complain that regulators are putting pressure on them to be much more pessimistic in stress tests about their ability to respond to economic shocks. What they are complaining about is that regulators are edemanding more detailed realism. None of the stress tests and results show a capacity to reproduce the events of the recent past, for example, and that should be the first test of the realism of forecasting models ….

If any bank can show me that it has macro-models that can roughly emulate the events of the the shocks of the past four years I will buy its shares and its bonds.

Published: Sunday Herald

Date: August 8th, 2010

Three years after the onset of the credit crisis, when several British banks narrowly avoided bankruptcy thanks to Government intervention, it seems the prescribed regime of management clear-outs, capital rebuilding, global retrenchment, cost-cutting and a more considered approach to lending is beginning to bear fruit.

The half-year results for Britain’s banks were well ahead of expectations and even prompted talk that part-nationalised institutions will soon be reprivatised through “Tell Sid”-style extravaganzas. The four major banks – HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland – unveiled combined profits of £13.7 billion.

The Lazarus-like recovery of two “Scottish” banks – Lloyds, which swallowed up HBOS in September 2008, and RBS – is particularly remarkable.

At Lloyds, chief executive Eric Daniels piled on the superlatives as he unveiled first-half profits of £1.6bn, a significant turnaround given the bank made a £3.96bn loss in the same period last year. The difference from February 2010, when Daniels was so ashamed of the bank’s 2009 performance he dodged BBC business reporter Joe Lynam in the street, was marked.

RBS managed a respectable pre-tax profit of £1.14bn, up from £15 million a year earlier. “We are making good progress with disposals and overall business restructuring,” said a cool, calm and collected chief executive Stephen Hester. But he conceded that rebuilding RBS is “a marathon not a sprint. There is, of course, plenty left to do”.

However, it’s only by analysing the fine detail and the macroeconomic backdrop against which the turnarounds have been achieved that the sustainability of the UK banks’ recoveries can properly be gauged.

Colin McLean, chief executive of SVM Asset Management, points out that Lloyds has benefited from the recent watering down of the Basel III proposals relating to the size and scope of future capital buffers. The emasculation of the Basel III regime, which followed powerful lobbying from the banking sector, has “relieved Lloyds of the necessity to sell its insurance arm, which includes Scottish Widows”, says McLean.

Also, there is a danger that the macroeconomic foundations on which the banks’ return to profit are based may be ephemeral. They include an unprecedentedly benign interest rate regime, £300bn of “soft loans” from the UK Government, and the effects of a less competitive marketplace. None of these crutches is going to last for ever.

Lack of competition, which intensified following the merger of Lloyds and HBOS and the melting away of foreign competition during the credit crisis, has enhanced what the bankers euphemistically call their “pricing power”. In other words, it enables them to charge higher interest on loans and impose more onerous terms on their retail and corporate borrowers.

The net interest margin at Lloyds – the difference between average interest on deposits and average interest charged on loans – rose from 1.83% in December 2009 to 2.08% today. At RBS, the net interest margin at its retail division rose to 3.77% from 3.57% one year earlier.

The return to profitability at RBS and Lloyds was also fuelled by massive cost savings, largely accomplished by headcount reductions. Lloyds has slashed annual running costs by £1.1bn, with about 17,000 job losses since the HBOS merger, and is well on the way to achieving its target of £2bn in cost savings by the end of 2011. RBS has dispensed with the services of some 28,000 people since its near collapse in 2008.

The banks have also been helped by the current, more benign economic backdrop, itself a consequence of the Government’s now suspended quantitative easing programme. This has helped stabilise the commercial property market, a major factor in the reduction in provisions for bad debts (ie loans they believe will turn sour).

Provisions at Lloyds halved from £13.4bn one year ago to £6.6bn today, while at RBS they have fallen from £7.5bn to £5.2bn now. (Exposure to massive losses on loans to the Irish commercial property market, where both Scotland-based players were active in the boom, continues to overhang the bad debt provisions.)

So what are we to conclude from this picture? Edinburgh-based Stewart Hamilton, emeritus professor at Lausanne Business School IMD, warns that the banks have not turned the corner. He points out that much of their current success is dependent on ultra-low interest rates, held at 0.5% by the Bank of England’s monetary policy committee last Thursday. He says any rise in base rates would present the banks with a major headache.

“The rate has never been this low in my lifetime. If base rates were to rise, loan impairments would increase dramatically,” he says.

Refinancing short-term wholesale funding is the most obvious challenge faced over the next 12 to 24 months. In the noughties, the banks got round the old need to match loans and deposits through borrowing from the global markets, but the rates of borrowing are going to look far uglier as they refinance post-economic crisis. Lloyds is seen by analysts as having the biggest mountain to climb, with £160bn of financing falling due for renewal in the next 12 months.

Hamilton warns that when circa £300bn of “soft loans” currently being provided by the UK Government through the Special Liquidity Scheme is withdrawn, as Bank of England governor Mervyn King says will happen in 2012, the banks will struggle to replace the funding at reasonable rates and their ability to generate profits might desert them.

“That can’t help but have a significant impact on their profitability, because in the open market they will never be able to raise finance on the same terms,” says Hamilton.

Bruce Packard, analyst at stockbroker Seymour Pierce, highlights the fact Lloyds has seen an outflow of customer deposits in recent months, which is concerning given the wholesale funding problem. Packard says: “If the last few years have taught us anything, it is that banks can report healthy profits in any one reporting period but at the same time be storing up trouble for the future.”

Simon Maughan, analyst at MF Global, warns the price Lloyds would have to pay to replace the wholesale funding remains a “huge question mark” over its entire business. He says the bank’s management is “keeping its fingers crossed that the wholesale markets return to normal”. This is the hang-on-and-hope-something-will-turn-up school of management.

Another cloud on the horizon for the banks is a more hostile government. The Labour government could have made the £1.6 trillion support package of October 2008 conditional on structural changes such as breaking large banks up to make them less risky, less oligopolistic and no longer “too big to fail”; or on behavioural changes including barring them from the payment of bonuses that reward reckless short-term thinking.

With Nick Clegg and David Cameron in Downing Street, the mood has changed. The Coalition Government has launched a Banking Commission, chaired by Sir John Vickers, which has been given a year to deliver a framework for making the sector more sustainable and responsible.

The body may recommend a forced split of “utility” functions – retail and commercial banking – from “casino” activities such as investment banking. Such a split, along the lines of the Volcker Rule in the US, would be particularly painful for RBS, which has so far been allowed to retain its investment banking arm, and Barclays, which has threatened to move abroad if such a change is introduced.

The Government is also replacing the regulatory system introduced by Gordon Brown in 1997 with a more unified regime under Bank of England governor Mervyn King. It is also forcing the banks to pay a banking levy equivalent to 0.04% of qualifying liabilities from January 2011, rising to 0.07%. Albeit that this is not quite as onerous as some analysts had feared, this levy still tightens the regulatory screws and is expected to raise £8bn over four years.

There are meanwhile numerous class actions and regulatory investigations overhanging the banks. These mainly relate to alleged wrongdoing in the final years of the credit bubble, including that bank boards duped investors into supporting rights issues by presenting a misleading picture of their institutions’ financial health.

And there are still bigger potential problems coming the banks’ way. There is the economic fall-out from Government austerity measures. These will lead to 750,000 public sector job losses, of which 60,000 will be in Scotland. This surge in unemployment will jeopardise the UK’s economic recovery and reverse the downward trend in provisions for bad debts.

Meanwhile, one of the most vexed political questions, and one on which King and Business Secretary Vince Cable have been particularly vociferous, is whether the banks are doing enough to lend to SMEs.

There have been persuasive cries of pain from the small business sector with horror stories about banks behaving abominably, seizing assets, arbitrarily imposing more onerous conditions, removing overdraft facilities from longstanding creditworthy clients on a whim, and demanding much more robust guarantees and stronger collateral.

The banks are adamant they have done nothing wrong. They insist they are still lending to viable businesses and that, if there is a drop in supply, it is a reflection of reduced demand. Lloyds’s Daniels last Wednesday said: “It’s not a question of being mean and turning customers away. We are seeing very little demand out there.”

One senior global banker says many British SMEs came to regard easy credit as their birthright during the credit boom. “We now know that all the UK banks were dramatically mispricing such risk in 2000-08,” he says. “All that’s happening now is that it is being realistically priced.”

The banks will have to hope they win that argument with the authorities, however. The nightmare scenario for the banks part-owned by the Government is that it loses patience over lending and uses its shareholdings to force them to change tack.

In short, the banks’ two steps forward in the past few days seem merely that. There are still any number of factors that could derail their progress in the coming months. And this is about far more than whether the likes of Eric Daniels will keep their seats in bank boardrooms in future. As Edinburgh-based banking consultant and author Robert McDowell says, the risk is that once the soft loans are repaid and the wholesale funding becomes unaffordable, the banks are driven back to their old position of having to match loans and deposits. Without the credit that we have all become used to, there would be dire economic consequences.

He says: “In a private, highly leveraged, debt-based economy, there can be little or no private sector growth with bank lending contracting at 5-8% of private sector GDP.”

That’s the dragon around the corner we had better hope we don’t meet.

• This business focus article was published in the Sunday Herald on August 8th, 2010. To read the article on the Herald Scotland website, click here

In an interview with the Sunday Telegraph (which is different from the video interview above) Eric Daniels, chief executive of Lloyds Banking Group, has at last started to talk some sense.

Daniels told the Torygraph’s Damian Reece that Lloyds TSB did us all a tremendous favour by taking over HBOS in September 2008. The not-so-quiet American said:

“I think we did the country a great service [buying HBOS] by not costing the taxpayer a bomb.”

I’m not sure how well this will go down with Lloyds TSB shareholders, who got shafted as a result of the Lloyds board’s surprising generosity to the UK government, however the claim is undoubtedly true. Indeed it is one of the few reliable things I’ve heard Daniels say since the deal was announced.

Daniels’ insistence that HBOS will eventually come to seen as a good deal — “Why am I not apologising about HBOS? Because I believe this will turn out to be a very, very good deal” — is far less credible.

A great many skeletons are going to rattle their way out of HBOS’s closet in coming months, including the fallout from the Bank of Scotland Reading scandal, a matter that is finally being investigated by the FSA under section 168 of the Financial Services and Markets Act 2000, and by other authorities.

Daniels, 59, also seemed sorely deluded in his belief that he an enduring government guarantee that the anti-competitive Lloyds Banking Group will never be broken up by the government.

The Lloyds boss seems to think that, in exchange for taking HBOS off its hands, the UK government provided Lloyds with a guarantee that the merged entity would be immune to competition law in perpetuity. The claim has already been challenged by the UK business secretary, Vince Cable, who told Reece:

“I’m not aware of any such reassurance. If Lloyds has it in writing, I would like to see it. That would change the framework we’re operating under. It’s never been raised with me, either by Lloyds Bank or anyone.

“This needs clarifying. My position is that the Banking Commission will operate from a clean sheet of paper and produce a set of proposals to make a safer banking system and provide maximum competition. If Daniels says he has an agreement, he’s got to produce some evidence.”

• To read the Telegraph article in full click here