Friday, November 03, 2006

Can Government save R&D?

Apparently today our PM got all warm and fuzzy about Science and Technology - reportedly, the British Government is keen to have more of it. A lot, apparently.

There are reports that ASBOs (those are Anti-Social Behaviour Orders, for the non-British readers: essentially, the British Government response to hapless parenthood) were considered against youngsters wishing to go into media studies and refusing to take Maths. That was deemed excessive, for the time being anyway.

Then, they considered dumbing down Science and Maths curricula (dumbing down exams, apparenly, seems not to be enough to convince the hard-core dimwits to take up the subjects). That was ridiculed by quite a few, aging, scientists - they, clever guys as they are, spotted the flaw that had escaped our valiant Education Ministry bureacrats: you can dumb down exams and curricula, Nature however is a tough nut and won't quite bend to being dumbed down.
You can't quite solve a differential equation using only your ten fingers and a ruler - nor would you want someone designing a nuclear reactor who can't quite get the hang of Nyquist stability circles...

Running out of ideas, the Government resorted to the usual solution they choose when taxes can't be used (you can't quite tax a kid for being none too bright, now, can you?): throw money at the problem. A lot, apparently. "We've got to invest in science far more as a country." said yesterday Tony Blair, "The government is tripling investment in science - to recruit better science teachers - which is why we're offering all sorts of incentives for that to happen." (source: the BBC)

Currently, Britain's investment (private and, much smaller, public) is at around 1% of GDP - set, apparently, to increase to 2.5% by 2015. That does not compare well with the US's 3%, but, seeking consolation where one can, it is at least a lot better than the rest of Europe (Italy, close to my heart as it is, at somewhere around 0.2% is a dismally pathetic basket case).
Unfortunately, the way the Public Sector goes about funding R&D is a particularly perverse way: instead of rewarding ingenuity, success and efficiency, most grant funding mechanisms encourage waste and over-management.

A case in point, the R&D Grants - once called SMART awards.

I have personal, direct experience having being granted one in 2002 for the princely sum of £45,000 (it turned out as a lot less than that, but we'll come to that). Apart from the re-branding and having taken them away from the hapless, hopeless, pathetic SBS (see the Financial Times, here) it is my understanding that they remain essentially unchanged.

The fundamental flaw in such schemes is that, instead of saying "Ok, mate, here's a pot of cash, those are the expected results, now you go and make them last!" as any investor worth its salt does, public sector grants are based on "Costs incurred" - ie, you create a budget of all expected costs, the grant is awarded "in principle," you then go off and spend the money (usually as quickly as possible) and then claim for a refund based on costs incurred.

I am grossly over-simplifying here, but you get the general drift. Can you spot the flaw?

It gets even more amusing - generally speaking, these grants are awarded only to cover a fixed percentage of costs incurred (it used to be 75% for a Smart Feasibility Study, it is now 60% and down to 30% for a Development grant): the entepreneur, scientist, mad inventor is expected to fund the rest. Which is fine as far a company is concerned, much less so for your "inventor in a shed" kind.

In fact, one cannot even contribute "in kind," eg by not paying oneself a salary: remember, costs have to be "incurred" to count.

Unfortunately, whilst this would not matter in the "old" economy (where costs are mostly related to capital and equipment costs and less for staff) it does matter a lot for 90% of today's early stage ventures: typically developing a software product or online service, where more than 95% of the costs are staff-related, and a close-knit small team of individuals could go very far with very little.

With a bit of belt-tightening, one could safely assume that three committed, experienced professionals could go about 12 months about with £45,000 - probably more -and achieve a lot for it. A big bang for your bucks, as our friends across the pond would say.

Here's how it works instead if you do get a Grant: you get £30,000 from the Government (well, not upfront, but will eventually) put up another £20,000 from your bank account (or, more likely, from re-mortgaging the house), and go about spending it about as fast as you can.
Assume that around 20% are in general costs and associated capital and software costs (this is probably a lot more than actually needed in these days of cheap computing and open-source software) and pay the rest out as staff salaries.

Because of NI costs (12.9% - thanks, Mr. Brown) and PAYE charges (assuming a marginal personal tax rate of about 30%), the £40k work out at around £24,400 - because you had put up £20,000, this is a net income of £4,400, which added to the £10,000 of genuine costs incurred work out a total of roughly half the original grant value.

Development grants, because of the much lower percentage funded (30%) actually are even worse and are really only worth for organisations who have already funding means and plans in place for innovation.

It is also worth noting that, as Government grants must be accounted for as Revenues, if one is not so keen on surviving on £4,400 annual salary and decides to augment income by, for example, providing consulting and/or contracting, those will be additional and the company will incur also a tax bill on profits (well, assuming there are any, that is).

Rather obviously, the "fix" would be rather simple: Government Grants should be tax-exempt, payments should be staged, against pre-agreed, demonstrable results
achieved, and not driven by costs incurred.

Ideally, staff salaries should be either taxed at a lower rate or, even better, be free of income tax - the way they work at present, it is like the Government takes away with the left hand what, inefficiently, gives with the right.

Unfortunately, the Treasury does not quite believe that "science will, in my judgement, today and for future generations, be as important as economic stability" (Tony Blair, again) - they only care about raking in as much money as they possibly can.

Tuesday, October 31, 2006

Are they gone off their rockers?

"The costs incurred are potentially huge and are likely to be passed on to the consumer." (source: Times Online)

Did you guess?

Yes, we're talking environment taxes (again!)
This is really annoying, as it is not only leading the main topic of this blog astray, but it also risks make me sound like someone who doesn't care about environment.

I care about environment, I really do.
Sadly, however, unlike Labour politicians (and in particular Mr. Milliband - isn't he a bit too young be a Minister, by the way? or is this "ageism"?) I am unable to switch off my brain when considering possible solutions.

Ok - let's use the same trick as in my previous post and suspend belief: let's assume, this once only, that politicians know what they are doing, and that, indeed, raising hefty taxes on all sorts of businesses will lead to lower carbon emissions.

As far as the UK is concerned, this might actually work: those businesses with a multinational presence will simply move out of UK and choose places where conducting their trade is simpler/cheaper.

Those businesses that cannot "emigrate" will either lose competitivity and go bust, or will pass on (if they can) increased costs to consumers who will have to reduce consumption (working harder to maintain a half-decent standard of living would not be an option in such a spiralling downturn).

The net outcome would be, in either case, a reduced economic activity leading, by definition, to lower carbon emissions (either directly or indirectly).

Objective achieved?

Well, rather not - as I mentioned, a large proportion of businesses will simply choose to conduct their business elsewhere (China and India spring to mind, but Eastern Europe, or even France, God forbid! could start to look like attractive destinations) while at the same time, those businesses that are already "polluting" elsewhere without too much trouble (USA, anyone?) will carry on doing so.

Had this Country a responsible Government, instead of planning out-of-control taxation policies, they would exert serious and meaningful pressure on their international counterparts for some form of concerted action: sadly, we can't really bash the USA for having dumped Kyoto (we stand shoulder-to-shoulder, don't we?) or China for being the largest world consumer of energy and commodities (we are "engaging" the Commies, not "confronting" them, aren't we?) nor India for having the worst environmental record (the Colonial past being what it is).

It is also worth noting that the UK, with its less than 60m population, counts for less than 1% the global population - and even taking into account our larger share of economic output, even assuming we were to go "totally green" the world would barely notice.

It is worth mentioning, in passing, that reducing United Kingdom to a pre-industrial economy would achieve approximately the same effect, so I would strongly urge our politicians to consider this alternative too.

Or mabye not, they may miss the sarcasm, go ahead and do it.

Monday, October 30, 2006

After Richmond, Cambridge?

Oh, dear - apparently congestion charges and hikes in parking fees are coming to Cambridge too!
Although I mentioned in my previous post that councils around the UK were looking into this, I wasn't really expecting the bomb to hit that close to home... I guess this must have been what the Sellafield residents felt, after they dismissed talks about nuclear reactors with the usual "they won't do that here, now, would they?"

Obviously, they are making all the right noises that congestion charges and parking fees increases will be part of a "strategic plan" (yep, those were the words) including "improved public transport, viability and overall demand management" (the latter meaning, I'd guess, yet more taxes - now, you go ahead and call me cynic).

Now, let's see: on one side, introduction of congestion charges and raising parking fees - a relative no-brainer, especially with so many firms eager to help our public sector environmental warriors to install cameras, supporting IT infrastructure, various roadside gadgets, collecting fines and all the paraphernalia that comes with it.

On the other side: a long and painful re-assessment of viability needs, yet more roadworks, infusing some sense into Cambridgeshire broke public transport system, increase incentives to firms to have yet more home-based workers, etc. etc.

Which one would you expect the particularly car-hating, hapless Cambridge City Countil to go for?

Thursday, October 26, 2006

Can Taxes save the Environment?

If you live in Richmond (and have thus been daft enough to vote Lib Dem into power at the Council) and drive a 4x4 (and have thus been daft enough to spend upwards of 30 grand on a car that has the visual appeal of a tractor) it is likely that from next year you'll face up to £300 for the privilege of parking the monstrosity in front of your house.

"Serves'em well," I hear the world at large say – and I can't but agree, really.

However, plight of Richmond residents aside, a wider issue lurks: are the earnest Richmond councillors on to something, or is it just desperation for more tax revenues?

This is relevant: other London boroughs, as well as politicians farther beyond are rumoured to be considering similar schemes – undoubtedly, waiting to see first what happens to the Richmond earnest councillors at next polling day.

The two questions one must ask are: first, what is the purpose of the tax levy and, second, given the means and the amount, is the stated objective likely to be achieved – and, if so, over what time frame.

The objective, has been widely stated by the policy proponents, is primarily to encourage more “environmentally responsible behaviour” and not to raise more tax revenues – mentioning evidence of the fact that for some, parking tax charges will be substantially lowered (the fact that the mechanism acts in a way that tax revenues do increase should not be however dismissed so lightly).

“Climate change is the single greatest challenge facing the world today," said council leader Serge Lourie. "We can no longer bury our heads in the sand and pretend that it is not happening, or that dealing with it is up to somebody else.” (source:

In this respect, I consider some of the arguments put forward by commentators to be entirely spurious: for example, whether the tax is "progressive" is, in my view, entirely irrelevant.

A “progressive” tax is levied approximately proportionally to one’s income, so that “wealthy” households are charged more than less well off ones – income tax is progressive, VAT is not.
In the matter at hand, it is clear that, regardless of income, if the objective is to encourage (or force, depending on which side of the argument you sit) more responsible, environmentally friendly behaviour, then “progressivism” of the tax is entirely irrelevant.

Indeed, if one follows the argument through, and assumes that polluters are equally distributed over the social spectrum, then the “wealthy” who can still opt for environmental behaviour by “choice” (buying, for example, a Suzuki Verso instead of a Land Rover) require less “convincing” than someone not so well off (able only to afford a 20-year-old, rusting, polluting Ford Fiesta), who has then to be “forced” to buy instead a Vauxhall Agila (pictured top).

In any event, the tax “would rise […] 50% under band F - affecting owners of Ford Mondeo saloons and BMW 3 Series E90 diesels respectively.” (again, from the BBC’s website).

Whatever, let’s suspend belief for a little while, and believe politicians (really) when they say that they really care about the environment, and this is the best way they come up with to save it.

Which brings us back to the second point: namely, is this going to work?

The short answer, I believe, is no.

Put it simply, in percentage terms, the impact of the tax is such that the it will not deter enough people from buying expensive 4x4s, nor, at the other end of the scale, will it be sufficient to offset the higher costs and (much greater) inconvenience of owning a hybrid or electric car.

Let's see: a Renault Espace (band G – taxed at £300 pa) costs in the region of £20,000 (I am not even considering toys such as BMW X5 or Porsche Cayenna: people who can afford such cars at 50 grand+ spend £300 in a month's worth of sun dried tomatoes and Parma ham).

Even at its highest, the tax is less than 2% of the cost, and around 6% the yearly depreciation value plus running costs (estimated at above £5,000 per annum per average UK motorist). I honestly doubt one would be swayed either way by such relatively minor amounts.

So, no biting there – people who are bent on polluting the environment, clogging our roads with monster vehicles, and make generally a nuisance of themselves, will just carry on doing so – minus 200 quid.

Sorry, earnest Lib Dem councilors of Richmond – cunning plan ain't gonna work there.

At the other end of the spectrum (those 15-year-old rusting Mondeos or fumes-spouting Minis) are not let off the hook either: they will see around 30% increases in tax.

But is saving around £150-£250/year going to be sufficient for people to buy instead a Toyota Prius or a crappy electric car? Which isn’t crappy because it’s electric, but because it’s been designed by a Japanese 6-year-old who was unwell the day they explained how to draw at school (it looks that way anyway).

You can buy (on eBay) a P-reg Mondeo for about £2,500 – and with a bit of patience possibly less. One can, for simplicity, assume that in three years' time the value will be approximately nil. Add pollution taxes (at £130 pa) and one gets (linear approximation) roughly £1,100 yearly costs.

A Toyota Prius retails at between £17,000-20,000 and probably depreciates non-linearly over the first 3 years, to let's say around £8,000 – at the proposed Band B tax level of £50, spread depreciation linearly and one gets roughly £3,050 pa

I am ignoring running costs here – and it is well possible that those might reduce the gap further, but we are not looking here to split the hair: we are just trying to assess whether a not-too-sophisticated buyer would be swayed one way or the other to buy an environmentally friendly car.

Let’s see: I save £80/year, but it ends up costing me more than £2,000 more each year: “not a chance, mate.”

As it happens, a much more sophisticated study, conducted by folks whom I can only assume more knowledgeable than myself in such matters (Commons environmental audit committee), has come up with the conclusion that current road tax charges (tax disc) ought to raise to £1,800 for the most polluting vehicle, before they can start affecting behaviour. Given the political courage currently shown by our Government, I would not hold my breath to see this one implemented any time soon.

Which leads one to the only possible conclusion: either our earnest Lib Dem councillors haven't got a clue (which is, indeed, quite likely) or, even more depressingly, this is only yet another “stealth tax” that local councils (squeezed by Whitehall policies and tax raising restrictions) have resorted to, just to make a few more quid.

So much so for the Environment.

Monday, October 23, 2006

There you have it: my first post!

I suppose it was only a matter of time, having thought long about doing something about it, I have now decided to take the plunge and start posting.

This blog is really aimed at fighting what I consider to be the worst enemy of innovation, enterprise and free thinking in general: the bureaucrat - that faceless, spineless, parasitic figure that lurks in any government or public office, but also in large (and not so large) corporations.

They are the life forms that make our lives miserable, without, ever, suffering the consequences of their irresponsible acts, ever!
But also, ever so occasionally, providing that unexpected burst of laughter with their non-sensical approach to life - an approach that is completely detached from the reality of running a business, going about a normal daily life, or just making an honest buck...

Because, yes, the Bureacrat is that rarest of species: they needn't worry about job security, profits or even being accountable for their actions - they live forever the aeternally happy days of irresponsibility and unaccountability: teenager forever, they suck life out of us all, lesser mortals.

It is high time for us to take back our lives!