26 April 2023
Big Economic and Strategic Issues: Two Incompatible National Strategies
Strategy one is to achieve Australian net zero carbon emissions.
Strategy two is to prop up the Australian economy with massive population growth via heavy immigration.
It will be extremely challenging to meet our stated carbon reduction targets when major emitters India and China show insufficient interest in meeting theirs. Australians will dump politicians who lower their living standards in pursuit of targets if they perceive that the biggest global emitters are not making parallel efforts.
Bringing in hundreds of thousands of immigrants per year requiring housing, roads, public transport, hospitals and schools means massive continuing building. This requires vast amounts of steel reinforced concrete which is counter to reducing carbon reduction targets.
No amount of political weasel wording is able to make both these two major government policy outcomes achievable. Either the carbon reduction target or the immigration target would be extremely challenging in isolation but in conjunction they are impossible to achieve. Have our politicians taken their eyes away from what is overall best for our nation? Vested interests have captured government ministers who are pushing their separate interests in opposing directions.
Recent reports that our foreign student entry to universities is being misused by a large proportion of students who immediately drop out in favor of doing some low-level course such as hospitality management as a backdoor way of getting into Australia need to be stamped out quickly. We must preserve the integrity of our immigration entry requirements.
Victorian Government Debt
The Victorian Government debt relative to population is the worst in Australia and it is now an open secret that the state’s treasury has written to all departments telling them to find large savings. Since 2018 Victorian taxpayer debt has exploded by $119 billion to $165 billion this financial year. Since Dan Andrews’ government came to power in 2014, Victorian government debt has increased by 194 percent, substantially more than NSW (116 percent), Queensland (60 percent) and Western Australia (45 percent) All the nice-to-have projects have swollen the debt and with interest rates rising sharply even the most spendthrift politicians are being forced to face a dose of financial reality. Victoria has been borrowing as much, if not more than NSW, notwithstanding that NSW has 35 percent larger economy and 23 percent larger population. Pretending that the state is well managed feels good for a few years but turns into a horror with a multitude of state projects running heavily over budget and over time. Victorians with long memories can remember the financial disaster created by the Cain/Kirner Government and the huge cost cutting drive together with sale of assets needed to restore its finances. There is always a painful price to pay for substantial government deficit spending.
Displaying More Front than Myers
Victorian premier Daniel Andrews who has presided over a hugely increased state debt of with greatly expanded public service numbers and massive cost overruns in state projects as well as credit ratings downgrade is reported to be asking the Commonwealth government for a financial bail out!
If federal treasurer Chalmers is up to his job the request will be refused.
Highrise Office Towers Facing Biggest Value Collapse Since 1991
It takes a minimum of several years to plan and build an office tower in a major city. When a number of developers produce vast amounts of new office space into a market where work spaces are being squeezed to save costs it is only a matter of time before a collapse in rental income occurs and lots of space lies vacant. The preceding conditions are different but what is occurring at present resembles the property collapse of 1991. Some buildings in Melbourne’s CBD did not regain their pre-1991 value for over 20 years. The project lead times are so great that developers and property funds are committed to builds long before market disruption is apparent. In the present case the various new projects were underway before Covid and work from home squeezed the demand for office space. Shiny new buildings have to attract tenants by offering huge rental incentives to persuade tenants to move from inferior accommodation thereby setting off a chain reaction.
While major REITS (real estate investment trusts) have revalued their property downwards industry superannuation funds have been reported as being slow to act which makes their TV advertising questionable.
Is Sanjeev Gupta the New Allan Bond?
The Australian Financial Review of 11 April 2023 reports that Sanjeev Gupta rolled into Whyalla recently promising to spend $500 Million on an electric arc furnace in the steel mill and additional works to produce green steel if the SA state government gives him $50 million.
Gupta made the same promise in June 2020 with construction to start in 2021 but it never happened.
In 2017 Gupta acquired the Whyalla steelworks out of administration and announced that he would spend $1 billion upgrading the facility. That never happened either.
Gupta’s Huge Outstanding Scottish Debt
In Scotland in 2016, Gupta acquired the uneconomic Lochaber aluminium smelter and two adjacent hydro power plants for 330 million pounds ($615 million) from Rio Tinto promising to build a new wheel factory and create 1000 new jobs. In return, Gupta was provided with 586 million pounds borrowing guarantee by the Scottish government. Gupta personally only contributed 5 pounds (yep—less than $10) with, subsequently failed, financier Greensill Capital providing the money raised against the government’s guarantee. The debt is outstanding and the wheel factory was shelved.
Gupta Dalzell Steelworks Debt Not Repaid
In 2016, the Scottish government also gave Gupta a three-year 7 million pound loan on commercial terms to prop up the Dalzell steelworks. As of December2022 none of the principal had been repaid.
Gupta Unfulfilled Welsh Newport Steelworks Undertaking
In Wales, Gupta promised a major expansion (including an electric arc furnace) at the Newport steel facility in 2016 but there is still no sign of it.
Gupta Related 55 Million Euro Debt Disappeared from Escrow Account at Greensill Bank in Germany
In Belgium, at the Duffel aluminium plant, €55 million Euro ($90 million) of funds for capital investment (as required by order of the European Commission) disappeared from an escrow account at the (now collapsed) Greensill Bank in Germany. Gupta’s local company defaulted on its debt secured against Duffel. Administrators sold the plant last year to American Industrial Partners who are seeking to have the €55 million euros returned. They may find that impossible.
US Circus Promoter Phineas T Barnum Famously Observed “There is a Sucker Born Every Minute”. But Senior Australian Politicians Line Up to Applaud Gupta!
All of the above is on the public record, but this did not stop Industry Minister Ed Husic, together with South Australia Premier Peter Malinauskas and SA Energy Minister Tom Koutsanonis flying to Whyalla to appear alongside Gupta. In a sign of another government hand-out coming Gupta’s way, the politicians were up for the photo opportunity but will SA’s $50 million be matched by Gupta’s promised $500 million investment? Gupta’s history suggest that his promises are risky.
Bank of England Censures Gupta’s Bank
On April 4—the very day that these dignitaries were lauding Gupta in Whyalla—the Bank of England issued Gupta’s Wyelands Bank with a censure for “wide-ranging significant regulatory failings”. At its peak, Wyelands Bank had more than 700 million pounds in deposits from British savers that were on-lent into Gupta’s wider empire. The Bank of England ordered Wyelands to repay customer deposits in 2021 and it began winding down with almost its entire loan book in default.
UK Serious Fraud Office Investigating Gupta Family Group
The Australian British Chamber of Commerce also featured prominently in Gupta’s Whyalla event. It was unmindful that Gupta had not set foot on British soil since the UK’s Serious Fraud Office commenced its investigation into the Gupta family Group Alliance for “suspected fraud, fraudulent trading and money laundering”. This would include the alleged fraud by which GFG provided Greensill with fake receivables, i.e. invoices for work not done, in exchange for loans. No charges have been laid but it is likely that investigation is continuing.
Gupta’s Abuse of British government Coronavirus Large Business Interruption Loan Scheme (CLBIL)
GFC incorporated new business entities for the sole purpose of circumventing the 50 million pounds cap CLBIL support, borrowing 400 million pounds from Greensill that was 80 percent guaranteed by UK taxpayers. Last July, the UK government terminated the guarantee because those loans were malfeasant. According to the Financial Times, the Serious Fraud Office is also investigating this.
Financial Trail Includes Gupta Borrowings Financed via Greensill from Credit Suisse
Greensill is the business formerly operated by Australian Lex Greensill which is now in liquidation having been financed by the recently failed Swiss bank Credit Suisse. Greensill collapsed when it could no longer secure insurance for its financial activities, which considering that it was on-lending its borrowings against fake receivables was understandable, and indeed inevitable if the insurer learned that the receivables generated by Gupta companies were faked.
Gupta has not visited UK for two years
According to the Australian Financial Review Gupta has not visited the United Kingdom for at least two years despite his extensive business interests there. Possibly he fears that if he were to set foot in the UK he might have his passport seized and be required to give evidence at one of the enquiries! He apparently prefers to do business from Dubai, which makes remarkable his visit, together with Australian politicians, to Whyalla! This raise the question of the naiveté of the Commonwealth and South Australian politicians and also makes us wonder whether the $50 million of SA government support mentioned has been handed over and whether the Commonwealth government has volunteered to assist Gupta with his promised $500 million spend at Whyalla?
Gupta’s Debt
Gupta owes about $5 billion to his creditors, including Credit Suisse (now UBS) and the multiple administrators of Greensill. Rather than file for bankruptcy, Gupta has been touting an in-principle deal with creditors to refinance his debt. No deal has been agreed. Even if his creditors agree to settle for less he will still need to find a substantial portion of the $5 billion debt. It is unlikely that anyone is going to lend it to him but he is still able to stage a spectacle of re-announcing a $500 million investment in Whyalla.
Yes. Gupta has as much front as Alan Bond!
“There is No Such Thing as a Free Lunch”
This quote was attributed to renowned economist Milton Friedman. Friedman indicated that artificially low interest rates are followed by inflationary break outs and raised interest rates. Stimulatory funding by deficit budgets lead to longer term inflation and corrective measures increasing unemployment. Too much government spending with too little control leads to increased government debt, lowered credit ratings, reduced services and higher interest payments leading to increased taxes and charges. There is always a price to pay, albeit delayed.
Various state governments, particularly Victoria’s, have hugely expanded debt and a great deal of their spending has involved major projects running over time and usually well over budget and a greatly expanded public sector. They are now facing increased interest payments dictated by lowered credit ratings and much larger debt servicing costs. There are reports of departments being directed to slash expenditure and reduce staff numbers. The lessons of the past when Victoria’s Cain/Kirner Government made similar errors followed by years of job cuts, asset sales and tight spending to restore Victoria’s finances including its credit rating have not been learned.
Do Mortgage Brokers Have a Conflict of Interest?
In the past home loans were sourced through the managers of local bank branches. The banks were often rigorous in their lending criteria because managers who arranged bad loans found their careers at a dead end or worse. As the banks closed vast numbers of branches and downgraded the services at many more, they cut their staff and outsourced loan origination to mortgage brokers. The brokers provided a service to intending borrowers but were paid via trail fees from banks. Rather than be over rigorous they had a strong incentive to obtain loans for their clients, often by coaching them in what information to present in support of loan applications. Sometimes corners were cut, or the truth distorted. The mortgage brokers have a financial conflict of interest. Rather than tell some borrowers that they do not meet lenders criteria they have an economic interest in helping them window dress their financial information. This leads to a proportion of borrowers becoming insolvent and forced home sales.
Are We Heading Toward Recession?
As the saying goes, if the US sneezes the rest of the world catches a cold. A couple of months back I came across a report that the cost of shipping containers from China to the US west coast had plummeted, indicating a slump in demand for imported goods. This week I noted a report that the demand for diesel fuel in the USA was down by 5 percent, indicating lower demand for trucking freight services. Higher interest rates in the US are hitting business and consumer budgets. With further interest rate increases by the US Federal Reserve predicted expect to see weakening employment in the US.
Directors of the Reserve Bank of Australia have warned that further interest rate increases are likely, and it will not want to be too far out of step with the Fed. The building industry is experiencing failures typical of the onset of an economic downturn. Meanwhile the overspending and debt blow - outs of State and Commonwealth governments are leading to suggestions of harsh budgets including public service cutbacks as rising interest rates and lowered state credit ratings.
There are also early indicators of home borrowers unable to meet repayments and a sharp increase in business insolvencies.
All of the above are indicators of a significantly weakening economy.
The Strongest Businesses in a Recession
During the “recession we had to have” of the early 1990s, so dubbed by then treasurer Paul Keating, small animal veterinary practices stood out as being unaffected by the recession with its million unemployed. Clearly in tough times people made the care of their pets a high priority.
Is the Government Able to Unwind the Costly Errors in the National Disability Insurance Scheme, NDIS?
The NDIS was set up in the dying days of the Rudd/Gillard government. Knowing that it was facing defeat, the Labor Government set up the NDIS with too few controls, thus setting a trap for the about to be elected coalition government. Attempts by the coalition to bring discipline to NDIS access and expenditure by the Morrison government were politically attacked by the then Labor opposition. Now the wheel has turned full circle with Labor NDIS Minister Bill Shorten searching for ways to control NDIS expenditure. With consultants earning fees helping marginal applicants shop for doctors likely to be favorable to their application including an explosion in Autism based applications the expected peak NDIS coverage has ballooned from an expected peak of 400,000 to a forecast 900,000 by 2030. There are an army of ticket clippers helping the rapidly rising numbers of users to navigate it and lawyers to appeal it. There are hefty increases in costs that families could not buy without NDIS. Doctors get people into the scheme to “help” people sitting in front of them. The numbers indicate that over-diagnosis is rife. Appropriately Minister Shorten is charged with winding back NDIS costs created by Labor’s faulty design of the scheme.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
Independence And Disclosure
I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.
General Advice
The above is ‘general advice’ and individuals are urged to undertake considerable personal research of companies in which they are investing as well as demanding of their advisers that they tailor advice toward their best outcome after demonstrating an understanding of their position in detail. Be cautious about accepting advice unless you are certain that your adviser has a thorough knowledge of your situation. If in doubt the best decision is often to make no investment changes.
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. My website is now available at grahammiddleton.com.
Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all readers
Graham Middleton
