Bluegrass Consulting: Blueblog

So it took a little while to sort out, but we now know, Labor lost the 2010 election (72 seats to 73) but pulled off a win in the post election negotiations. Despite the ‘win’, 5 months later, Labor still look like losers. And the now infamous ‘Real Julia’ moment, Gillard’s apparent rejection of spin and a risk adverse campaign model, is to blame.

It was a catastrophic and painfully uncomfortable election campaign for Labor, ‘worst in history’ according to prominent Labor identity Graham ‘Richo’ Richardson, with both he and National Secretary Karl Bitar agreeing ‘Real Julia’ was a grave strategic error, in the top three mistakes of the election.

“Labor ran the worst campaign in history. No doubt about that. When Julia Gillard said this was the real Julia, no, this wasn’t a slip of the tongue. It was planned; it was thought to be clever. It wasn’t. It was just plain dumb.” (Graham Richardson)

A founding rule of spin is don’t declare what you are not. Such as Nixon’s famous I’m not a crook. As everyone then thinks, that’s exactly what you are.  In the same way, saying I am the ‘real Julia’, leads everyone to believe you ‘aren’t', or if you are now, you weren’t then. As Bitar said, “(it) was not really about a real Julia and a fake Julia. Unfortunately, that’s the way it came across”.

Statements of this nature, also feed the media beast, providing great material for headlines and analysis.  Mostly sceptical and unfavourable - to be expected.  You don’t have to look further than Four Corners’ first program for 2011, “The Real Julia?”, and this introductory statement “…one of the most remarkable moments was watching Julia Gillard as Prime Minister in an election campaign struggling to explain who she was, having to reassure us she was real, not manufactured”; to see this political hangover continues to hurt.

As this blog goes on to describe, the explanation for why ‘Real Julia’ failed and the consequent lesson for political communicators, is: be careful of saying what you are and aren’t. If you do, make sure you have an agenda, ‘the filling’, action and conviction, not just an empty statement.

Words just words

The strategic error was when Julia stood up and said I am real, but then failed to explain who that was, and what she stood for. “When a leader stands up and says this is who I am, this is about my leadership, they need to follow it up with action,” says online political blog, Pollytics.

Pollytics research shows how former PM, Kevin Rudd’s leadership went up with the Grech affair, because Rudd stood and said, ‘this is about my leadership - this is bullshit’ and went for the jugular. The result, he “destroyed Malcolm Turnbull and was unassailable until he couldn’t get his governance together.”

In comparison, Gillard stood and said ‘this is about my leadership, and I have nothing really to say about it’, the result, an election which delivered a weak government and a hung parliament.

The conviction politician

Till this day we are still asking who is Julia? We know she’s a former lawyer, considered one of ‘Australia’s foremost Parliamentary debaters’, she cares about education and “came into politics predominantly to make a difference to opportunity questions“.

One ‘opportunity question’ is industrial relations, and her work in rolling back Work Choices was well executed; but she remains opposed to other ‘opportunity issues’ i.e. same sex marriage, preferring to sit on the fence, proving more ‘consummate politician’ then thinking, feeling, real. She believes in climate change, but established a “Citizen’s Assembly” to consider it, and she’s a republican but won’t lead on the issue.

In the end, much of this debate comes back to an already familiar political notion, that of the ‘conviction politician‘. John Howard is most famous for embodying this. How often did we hear everyday voters say, ‘even if you hated him, at least you knew what he stood for’.

Policy by polling

As outlined in post 1 of this series, the reliance and often incorrect reading of polling, is causing all sorts of problems for politicians, and has seen the apparent end of the conviction politican. As the article ‘Who are you Julia‘ says: “It’s hard to escape the conclusion that if Julia Gillard has an ideology, it comes from the Labor party’s market research company. The ambivalent feelings she publically presents….reflect the mixed feelings through the community”.

Surely, being the country’s ‘leader’ can’t simply mean ‘following’ the people. Conviction, real or fake, is essential for a politician.  As illustrated by an adviser’s comment to the former leader of the National Party New Zealand; “the secret to success is sincerity and conviction. Once you can fake that, you’ve got it made”.

Summary - the future is Bligh

The first blog on this topic, written prior to the election, focussed on the need to evolve the art of spinning, believing it increasingly out of date, so much so it could lose Labor the election.  It looked at Gillard’s public rejection of this ‘traditional campaign model’ including ‘real Julia’, and posed whether this would work.

In finalising this series, we recognise attempts being made to evolve spinning techniques, to strive for honest communication, i.e. ‘Real Julia’. But when only half thoughts, lacking action and content (essential to effective political communication) they fail. Proving in the end, to still be spin. And worst still, ineffective spin which backfires.  Gillard need heed the advice of this cricket fan, “bowl straight at the wicket. Don’t try any fancy tricks.”

However, not all is lost! In recent weeks, we have witnessed political communication at its best. Some even call it a new template. It is indeed the evolution this blogger believes not only more integrious, and for those at-any-cost, hard head spinners, more effective.

According to David Penberthy, this new template is: “Based around honesty, decisiveness and plain speech. It’s been based around saying what government can do, and what it cannot do.” We speak of none other than Premier Anna Bligh, and her handling of the devastating floods in Queensland.

Social media was quickly followed by the mainstream in reporting the contrast between the two leaders in their ability to communicate appropriately throughout the disaster, boosting one’s leadership, and hurting another’s.

No prizes for picking the winner. Gillard, watch and learn. For ‘real’!

It’s 3am. Lawyers and advisors of a takeover target sit squashed in a downtown hotel suite, empty coke cans and coffee mugs litter the room while reams of paper are poured over. Across the hall in a bigger suite the acquirer’s team of lawyers and advisors check emails and wait for phone calls from across the hall for more documentation. This is the mergers and acquisition (M&A) process as described by a bank lawyer friend of mine.

Call it what you will - a friendly takeover, synergy or absorption, this is one of the most exciting areas in business. M&A experienced a massive slump as a result of the global financial crisis when the CFOs clung onto their balance sheets like castaways on a raft. Now as we move into the “new normal” (thank you McKinsey &Co) where money is more expensive but more available, M&A is again on the rise - and a good a communications strategy around the practice can mean short and sharp success.

There have been many cases where poor communications on a merger has led to its near collapse or value depreciation. Financial journalist Steve Lipin uses the examples of Hewlett-Packard’s acquisition of Compaq, Conseco’s acquisition of Green Tree Financial Corp. and Newell’s takeover of Rubbermaid Inc as examples earlier this decade.

These companies’ employees and shareholders experienced long periods of uncertainty with minimal communication from management, executives or the board. They filled the void by circulating rumours and myths about the situation, which either led to the transaction’s collapse or dramatically reduced the acquirer and takeover target’s value. The above organisations relied on their lawyers and advisors to contract out communications. No offense to lawyers but they are best to stick to the detail and shouldn’t be concerned with top line positioning and key messaging.

It is absolutely vital that both the acquirer and takeover target have in place a co-ordinated communications plan months before any announcement to help fill the vacuum and begin to influence the decision makers.

Treat it like a political campaign. You are dependent on a group of stakeholders on your survival - and if you don’t convince them that your way is the right way you will be forced to abort your mission.

At the centre of the campaign are a few must haves:

1.     Do you have a credible story, with clear targets, that can be communicated, accomplished and monitored, over time, by the acquirer and investors?

2.     Does your story remove uncertainty and give direction to the organization so that employees can effectively deliver?

3.     Does your story link post-merger integration plans to the economics of the transaction?

(Thanks again to Steve Lipin for the checklist)

Takeover targets want to know one thing: what is in it for them? Will my job be safe? Can I get a pay out? Will my shares go up or down?

A communications plan will help executives and the board answer these questions from stakeholders. They will uncover issues that are usually an afterthought in the heat of due diligence but are typically the ones that can make or break a merger. These issues usually come from concerns from employees and shareholders so they must be top priority in any communications planning. And don’t forget, most employees are shareholders too!

M&A communications is a beast all onto its own. It can be aggressive or subtle, yet always highly strategic. Getting good advice and a good plan early is paramount for any successful transaction.

Heather Gilmore

Heather is a communications consultant, former Senior Manager at Westpac and media advisor to a NSW Premier and Treasurer. She is also an Associate Account Director with Bluegrass Consulting. Heather’s blog is at hgcommunication.com

After endless negotiations Julia Gillard has finally been elected Australian Prime Minister. The Australian political ocean is apparently calm, but for how long?

The answer to this question may be partially found depending on whether Australian politicians are going to remember two important outcomes of the elections.

The fortunate memory loss illness of politicians

Even if it is common knowledge that politicians do not always keep their promises, they should at least try to keep their most important ones.

For instance, in his 2007 campaign, Kevin Rudd promised that he would lead a strong green policy. However, after his election, the promised policy turned out to be a real failure.

If politicians may suffer from chronic memory loss in post-election periods, voters do not and end up making politicians pay for their fortunate lack of memory.

This is surely what happened during the last election and probably represents one of the main reasons why the Labor lost so many votes. Indeed, a 2.1% national swing occurred during the previous elections. To drive a point home, a poll by the Climate Institute since the August 21 election revealed that nearly 33% of Green voters acknowledged that their vote would have gone to the Labor if it had not postponed its emissions trading scheme.

By not keeping its promise, the Labor clearly shot itself in the foot. Unfortunately, it was not the only time.

Politics’ inherent gangrene: ego and power

Indeed, Julia Gillard’s “coup” in becoming Prime Minister last June was the testimony of major conflicts within the Labor Party. The existence of internal conflicts was confirmed during the negotiations period when a former national president described the atmosphere in the Labor Party as “poisonous”, and calling for the eviction of national secretary Karl Bitar.

If this situation appears to be somewhat pathetic, the Australian Labor Party does not seem to be an exception in the international political landscape. The French Socialist Party also suffered from this inherent gangrene: overblown egos and too big an addiction to power accounted for its defeat at the presidential election in 2007. However, it seems that in anticipation of the next French presidential election leaders of the party have learnt their lesson and appear more united than ever.

Ultimately, these two issues have always existed; Australian elections are just the latest example of an always more bitter reality.

The novelty is that the media - sensational ego-makers, but also breakers - are nowadays a mirror to the dark side of politics and stress how unkept promises and over-inflated egos regularly occur in democracies. This is highly worrying because the more the mirror reflects reality, the more it weakens democracy.

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.

This is part 2 of a 4 part series which uses Julia Gillard and the current Federal Election to examine whether spin techniques effectively developed for the 20^th century media model are now outdated and ineffective in the 21^st century.

Gillard’s declaration she’s “going to discard all of that campaign advice and professional or common wisdom and just go for it” (in regard to “risk averse” election campaign communication) highlights the fact that old spin (controlling information by restricting journalist access, staying ‘on message’, an over-supply of information {e.g. renouncements of announcements} and over emphasising the positive) hasn’t been working.

These spinning techniques, which 10 to 20 years ago were largely a hidden and unknown art, are now a notion so familiar to the public, they no longer work. The extensive criticism and coverage of the much overused ‘moving forward’ slogan is just one example of that.

In addition, Channel 7 reporting political news, with the by-line, ‘cutting through the spin’, is another example of how widely spin it is now ‘accepted’.

You can’t be tricked when you know the tricks.

Nothing new in blaming the media

Much has been written on the role of the media in the challenge for straight forward authentic communication. The 24 hour media cycle, the demand for ‘new’ news, means journalists fail to properly cover policy due to a lack of time, and as Bernard Keane also points out, a lack of specialist skills: “The result is too much cynicism and not enough scepticism.”

Despite politicians and their advisers knowing the media is likely to misrepresent them, “gratifying them” remains the “primary purpose of the professional politician (who acquire) a crippling self-enfeeblement driven by their dependence…”

Keane also explains, and as we all know, it’s in the media’s interest for politics to remain in a “permanent cycle of spin, conflict and commentary, while actual problems are never resolved”. Good news doesn’t sell papers and conflict is essential to a ‘good’ news story.

But this is something spinners have known for a long time! That we haven’t found better ways of dealing with this is positively amateur.

Worse still…we have a major trust deficit

Spin can be defined as a type of propaganda, providing an interpretation of an event or issue to persuade public opinion in favor or against. It is between the two World Wars that spin was really pioneered, with Joseph Goebbels using it to great effect for the Nazis. Post war America refined his approach, with Eisenhower’s Republicans bringing professional propagandists into their inner circle for the first time, ensuring a decisive win.

Later, Bill Clinton and chief spinner James Carvelle mentored Tony Blair and Peter Mandelson/Alastair Campbell as they reinvented the Labour Party. And it is perhaps with Blair that we saw the beginning of the decline of 20^th century spin. Alastair Campbell, Blair’s former Press Secretary, while still in that role, spoke publically of how this new communication had become a hindrance to good government and had cost them dearly in terms of trust.

“We did make a concerted effort to get a better dialogue with some parts of the media…this was of course about reaching their readers. …but therein lay the seeds of spin. The consequences were greater than we anticipated. People stopped trusting what we had to say.”

A lack of trust virtually makes spin ineffective, as can be seen in the 2005 UK general election. The Government thought services were improving in heath and education. Polling showed the public also thought their schools and hospitals were improving. But they also thought they were lucky and that nationally things were getting worse.

They discounted their own personal experience because it was in agreement with the government line, and they were almost programmed to disbelieve anything the government said. (This example was found in Ivor Gaber’s paper Too much of a good thing: the ‘problem ‘of political communications in a mass media democracy)

Post 1 in this series began to examine the PR spin techniques of the NSW ALP Right and their role in the current campaign, as well as whether the declaration of the ‘Real Julia’ was actually just part of the strategy and part of managing perceptions around Australia’s first female leader and the way in which she took power. It concluded by questioning whether publicly rejecting the”very risk averse standard campaign model” was just more spin…

Post 3 will examine whether social media can help build trust and how the future of spinning lies in losing control. The final and fourth post will examine Ms Gillard’s apparent rejection of the “very risk averse standard campaign model” in the context of the election result.

Ruci Fixter

Julia Gillard’s political woes shine the light on the failure of modern day spinners clinging desperately to a political communication technique invented for the 20^th century model of mass media. In the 21^st century, these techniques are proving increasingly out of date and so dangerously ineffective it could lose Labor an election when spin, ironically, should be key to winning elections…

Standard and well known spin techniques such as the ’seven second grab’, key messages, catchy slogans and carefully controlled media management have all backfired spectacularly for Ms Gillard. All of a sudden, these tricks look very dated prompting her to publicly reject this “very risk averse standard campaign model” and re-introduce herself as the “real Julia” in a desperate search for authenticity.

This move was a somewhat startling acknowledgment that the usual spin simply wasn’t ‘cutting through’. Techniques designed to win were, in fact, conspiring towards losing Labor the election.

Focus groups - unfairly dumping leaders for false infidelity?

So how is it the ALP’s crack campaign team, seasoned professionals whose job it is to know the business inside out, couldn’t predict that this ‘old spin’, on its own, wouldn’t work? They should have been even more aware of the dangers, given the current levels of cynicism around how Julia assumed office.

In fact, one almost wonders if there was even a communication strategy in place to deal with how the electorate may have responded to Rudd’s unprecedented and brutal assassination. Or was it so clever we almost missed it…?

Many people place the bulk of the blame for the campaign’s rocky ride at the feet of NSW Right leader Mark Arbib, who both secured and destroyed Rudd’s leadership. It is not only the role he is believed to have played in convincing Rudd to dump the ETS, a turning point for voters, but the risk averse, poll-centric, NSW Labor Right strategy, that he along with long term friend and campaign director Karl Bitar have continued to push as the best campaign model.

But it appears that the result has been panicky politics driven by focus group research, which has seen leaders dumped like 20-somethings dump lovers over false infidelities. Many argue their use of the focus group results is not accurate or effective.

Former staffer in the Carr and Iemma Governments, Mark Aarons, explains their technique involves targeting the least politically committed voters in marginal seats. Their theory is that “…these people determine who win government and their views should therefore predominate in policy-setting. In a bizarre reversal of conventional political wisdom, leadership is redefined as following such people by pandering to them.”

Aarons’ experience was that this strategy “led the (Iemma) government up a blind alley”, not reflecting mainstream voters who hated the policy idea” (in this instance the Kurnell desalination plant).

However, most say there is little wonder the Arbib-Bitar partnership believe in this model. Arguably it has won them office in NSW since 1995 and, maybe, even the Kevin 07 election. Why fix it if it ain’t broke? But election 2010 seems to have broken the mould. Time will ultimately tell.

Old spin doesn’t work for ‘real Julia’

These campaigns have been largely stage managed spin-fuelled fiestas, and none more than Kevin 07. And as Michael Gawenda points out in Business Spectator, Gillard 2010 is in many ways no more or no less stage managed than Kevin 07 was.

However, what is different is that she has only been PM for six weeks and the way in which Rudd was deposed. Going to the polls seems rushed…standard NSW campaigning?

What is interesting and maybe very clever spin, is this point made by Gawenda:

“Gillard had two major problems coming into this campaign: she had been involved in the assassination of Rudd and she was a woman. Gillard and her advisors, it seems, decided that any sign of aggression, of passion or even vision, would be turned against her - she would be seen as an angry, pitiless, female, political executioner. So for the first two weeks of the campaign she behaved as if she was on Prozac.”

So maybe this strategy was deliberate all along.

Play the standard orchestrated campaign cardboard cut-out; let it look like you are being played by the ‘faceless men’, because anything else would make you look like “an angry, pitiless, female, political executioner”.

And then announce the arrival of ‘real Julia’, who it now looks like has been brave enough to stand up to said men, and indulge the electorate with a soft, approachable and benevolent female leader.

Maybe sexist attitudes towards women in power have been grossly overlooked in how this campaign could and needed to be played.

It might actually be very clever indeed - an all together cleverer ‘new’ spin, a planned emergence of the real Julia as a natural evolution of the Gillard personality.

But then, the long term damage to the Labor party, brought about by the scary power of the faceless men, now emblazoned in the psyche of the electorate, still seems a high price to pay for this approach.

Using Julia Gillard and the current Federal Election as a case study, this is the first in a 4 part series examining whether spin techniques effectively developed for the 20^th century media model  are  now outdated and ineffective in the 21^st century. Post 2 looks at the ineffectiveness of ‘old spin’, the role of the media, and the trust deficit. Post 3 examines whether social media can help build trust and how the future of spinning lies in losing control. The final and fourth post will examine Ms Gillard’s apparent rejection of the “very risk averse standard campaign model” in the context of the election result.

After 2 months of fierce struggle, highly expensive ads and the election of a new Prime Minister (PM), the Federal Government and the resources industry have finally reached an agreement on the now scrapped RSPT.

One can wonder if it has resulted into a win-win situation or, given the new neutral name of the tax, if the resources industry is not the main winner of the deal. Is the glass half full or half empty?

From a political point of view, the MRRT appears to be the first victory of Julia Gillard’s new role as Prime Minister. Her ability and her efficiency in leading negotiations surely took a weight off the Labor Party’s shoulders for the election now being held on August 21.

The original RSPT was definitely too disconnected from the way market works whereas the MRRT shows far more respect for market conditions.

However, it appears that former PM Kevin Rudd was close to an agreement and that Julia Gillard only had to seal the deal, probably with larger concessions. So her victory has somewhat of a bitter taste for taxpayers.

From Rio Tinto’s, Xstrata’s and BHP Billiton’s point of view, the MRRT is a genuine victory. Indeed, Gillard’s Government has conceded on:

-          Lowering the rate of the tax from 40% to 30%.

-          Raising the rate at which the tax applies from 6% to 13%.

-          Removing the retroactivity of the tax.

-          Applying the MRRT only to iron ore and coal mining companies.

This is good news for big mining companies - especially for those that extract gold and base metals - and testifies of their strong lobbying power on the Federal Government.

On the other hand, medium and small mining companies have lost out given that they were not part of the negotiations.

In the end, the resources industry will have to share a bit more of its colossal profits, logically enough for the Federal Government to help, finance its flagship projects (the national broadband network, climate change, etc.) and lay down a stronger tax base during the resources boom.

The MRRT will enable a better distribution of wealth among Australian people, which was the primary goal of taxing the resources industry. But picking who won the debate seems a fairly simple task - just ask Rio Tinto or BHP. They can hardly contain their delight to have, again, emerged into positive territory.

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.

If ever a social and political issue was so completely driven by the power of imagery as opposed to fact - it is that of ‘boat people’.  We are manipulated and cajoled by a potent combination of pictures, fear laden political catch phrases and an absence of hard facts.

Most of us have heard it at some point - boat people are only a tiny fraction of the ‘illegal immigrants’ coming to our country. In fact virtually all come by plane. Every day, at least 13 asylum-seekers penetrate our borders through airports, by using traditional visa options, a hefty 30 times those who come by boat, according to this report. Furthermore, Amnesty research shows that 96.6 per cent arrived by airplane whilst only 3.4 per cent by boat.

But still the arrival of a new boat and its passengers, its picture sprayed across the front pages of our newspapers and TVs, spells such panic that it dominates the national agenda, the national conscience and national elections, time and time again.

Perhaps the sophisticated nature of aeronautical transport and an established gateway - compared with leaky boats and unwashed passengers - makes one group look safe and the other not? Or perhaps it’s simply because those using our airports, coming in one by one, elude that potent ‘group photo’ that gets everyone so flustered.

Boat people, according to Tony Abbott, pose a threat to “keeping our borders secure and our country safe” . I wonder, how exactly is our safety being jeopardised by boat people and not plane people? In fact, the research says plane people are much less likely to be genuine refugees, only about 40-60 per cent compared with 85-90 per cent of boat people.

Is Abbott piggy-backing off the fear still simmering from Howard’s political opportunistic legacy of ‘children overboard’, and the oh so loose and intangible connection between terrorism, Muslims and boat people?

And whereas boat people are detained while their claims are processed, plane people live in the community and are allowed to work; a Rudd Government initiative. Where is the fairness there?

The truth is, having boats rock up on our shores is not a ‘good look’ politically. It looks like we have no control, when in truth the evidence shows we have far less ‘border control’ through our airports.

Julia Gillard, whilst also guilty of cleverly ‘handling’ this political hot potato, deserves credit for being the first of recent Prime Ministers to point out the real numbers, saying “…the number of asylum seekers arriving by boat is very, very minor. It is less than 1.5 per cent of permanent migrants each year; and indeed it would take about 20 years to fill the MCG…”

So, despite my initial thoughts, she doesn’t seem to be swinging as hard to the Right as may have first appeared.

This can also be seen through her acceptance of the ‘push’ vs. ‘pull’ factor as to what drives the number of boats. “It has less to do with what we do here and more to do with the conditions people are escaping - like war, genocide, imprisonment without trial, torture…” Read here for some interesting research on push/pull factors.

Finally Gillard’s key policy plank that has media headlines pointing to Howard’s Pacific Solution, although scant on detail, is not really like the previous government’s ’solution’ at all. As explained by credible political blog Pollytics.com:

“The creation of a well resourced, properly administered regional refugee processing centre that has UNHCR participation, regional government cooperation, a fair, efficient and consistent refugee status determination process, clearly defined legal rights for appeal and, most importantly, a well functioning resettlement program…was one of the most important long standing goals of most refugee organisations in Australia.”

The post goes on to explain that the Pacific Solution was canned by refugee organisations - because it was exactly none of these things.” It’s also why comparisons between the Pacific Solution and some possible East Timor solution are pretty superficial and lazy.”

Former Liberal Prime Minister Malcolm Fraser, a vocal, committed and harsh critic of the Pacific Solution and politicisation of refugees, agrees it is different and has given the plan “his provisional approval“.

If you want to see more on how this could actually work, and be a benefit rather than a burden to East Timor, check out some of the comments here.

In the meantime, as we wait to see Gillard flesh out the policy, let’s remember to not let the pictures of another boat make us panic, look at the stats, the facts, and remember last year Australia took only 0.6% of the world’s asylum seekers. We are after all just a little fish…in that big blue sea.  And if you still want to get upset, think of the planes.
Ruci Fixter

Lately, there has not been a week without a warning or a cut in the credit rating of European countries, worsening their financial situation and bringing the reform of credit rating agencies back under the spotlight.

After having been accused of being largely accountable for the global financial crisis (GFC), Moody’s, Standard and Poor’s and Fitch (the ‘big three’) have simply and unapologetically returned to their daily grind with seemingly intact legitimacy, their usual aura of infallibility and -above all- influence remaining in. It is as if they had never contributed to what has been the most important financial turmoil since the Great Depression!

In his column in the New-York Times Paul Krugman stresses that the examination of e-mails exchanged by employees of credit rating agencies reveals a ‘deeply corrupt system’, in which issuers of debt hired the credit rating agency which gave the best rating to their debt. The ‘big three’ consequently distorted their notations to satisfy their clients, and 93% of the subprime-mortgage-backed securities that were rated AAA in 2006 were in fact ‘toxic assets’.

It did not take more for some scholars and politicians to argue that the ‘big three’ work in favour of Wall-Street and, more generally, in favour of the United States. On Tuesday 15^th June the members of US Congress did not ratify the Franken amendment, which resulted into a terrible status-quo as the purpose of the amendment was to implement conflict interest rules for the rating agencies industry. This non-ratification clearly shows the huge influence of financial industry lobbyists on Congress.

While arguing that the ‘big three’ work in favour of Wall-Street may be considered extreme, it is true that they are maintaining a climate of uncertainty over financial markets at a time when the latter are afraid of their own shadows.

In the early stage of the European debt crisis, Standard and Poors’s downgraded Greece’s rating and put the already weakened country into a highly critical situation. At the end of May, Fitch in turn cut Spain’s rating. On 15^th June, Moody’s downgraded the sovereign debt of Greece to junk status just as Greece had concluded a macroeconomic policy agreement with the European Commission, the European Central Bank and the IMF.

The timings were rather well-chosen - or badly-chosen, depending on which side of the Atlantic you stood. Good times for speculators of the US financial sector indeed mean bad times for Greece, Spain and Europe in general.

Lately there has been a will both in the US and Europe to break the oligopoly of the ‘big three’ and to increase the transparency of their functioning.

In early June the US Security and Exchange Commission introduced the rule 17g-5, which requires that the information used for rating be available to all rating firms.

The European Commission took a similar decision in order to increase competition and plans on creating a new pan European Union regulatory body that would supervise the operations of agencies.

However, it is still unclear who should funds rating agencies or how ratings should be assigned. The key issue remains unchanged i.e. issuers of debt will continue to pay for ratings, and it is unlikely that investors will be the ones to pay.

Reforming credit rating agencies is crucial, and urgent. In the short- to medium-term, the absence of any restructure could threaten the economic recovery of Europe and could compel countries to leave the Euro-zone. In the long-term, it could possibly generate another GFC.

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.

The Australian Government’s RSPT proposal

The Federal Government’s proposed ‘Resource Super Profits Tax’ (RSPT) announced in the May 11^th Budget seeks to tax ’super’ profits by resource companies made from all non-renewable resources at a rate of 40% from July 2012. Super profits are defined as profits that exceed a relatively low threshold rate of return, essentially the risk-free rate of return. In its Budget proposal the government sees the risk-free rate in this case equal to the yield on a ten-year Government bond (LTBR), which is currently 6%.

The RSPT would, if approved, supplant the crude oil tax regime and function in conjunction with State/Territory royalty regimes.

Through the RSPT the Australian Government proposes to become in effect an associate of mining companies by crediting 40% “of accumulated project losses and undeducted capital expenditure even if a project should be closed”.

However the Government does not immediately fund the joint venture. It is the mining company which holds 60% of the joint venture that has to “lend the Government its share of capital costs” (40% at the LTBR).

Since the Government holds 40% of the joint venture, it proposes taking 40% of the mine’s exploitation profits. These profits will nevertheless be reduced by RSTP allowances.

Because 40% of the project is guaranteed by the Government, mining companies should borrow 40% of the total capital of the project at 6% (LTBR = risk free rate). Based on this assumption, the Government starts taking profits as soon as the rate of return on the project outstrips the LTBR.

In theory, the Government believes that, even if the RSTP “reduces” profits, it should not have a negative impact on investment; and that the return on funding needed to finance the balance of the project remains identical.

According to KPMG if this tax is implemented “Australia will have a higher effective tax rate” than those of Canada, Brazil, China, Indonesia, India, South Africa, Argentina.

Current debate

1.       The Australian Government’s position

• The Government, supported by a range of economists, argues that “the RSPT will provide a more appropriate return to the Australian community from the exploitation of its non-renewable resources compared with the current charging arrangements.”
• Treasury claims that RSPT will be a more efficient means of collecting a rightful share of the returns to the community and of removing obstacles to mining investment and production. Treasury says the RSPT will foster greater investment and employment in the resource sector.
• According to the Australia’s Futures Tax System Review’s Consultation Paper, Australia is currently shifting towards profit-based royalties in the resource industry. Other OECD countries with important resources endowments have already adopted profits-based taxation, which has influenced the standards for Australia.
• According to Econtech, a prominent economic modelling agency, under the RSPT scheme mining investment should in the long run rise by 4.5%, jobs by 7% and mining production by 5.5%.
• According to Treasury Secretary Dr Henry, the resource industry has enough projects on the agenda for the next 30 to 40 years and investment should continue, despite the claims of the miners.
• The introduction of the RSPT is supported by 20 Australian leading economists. They emphasize that “the existing royalty system reflects the fact that it is desirable to levy a charge for access to publicly owned mineral resources, in addition to normal corporate income tax.” However they admit that the finer details still need to be negotiated.
• According to S&P’s associate director, “the mining tax would have no implications on Australia’s credit rating, which is a barometer for a nation’s sovereign risk.” Australia has been rated AAA since 2003. He adds that “the revenue projected to be earned by the tax, $12bn in the first two years, could strengthen the rating given the positive influence on net national income.” In 2009 Australia reached its 19^th consecutive year of growth, with a GDP above 2.7%.
• According to the Coface (a French country-rating agency), “Australia has without doubt the prize for excellence in all categories, as much in terms of its debt or deficit.” The International Monetary Fund predicts that in 2010 Australian national debt will stay below 20% of the GDP.

In the face of strong opposition from the mining industry to RSPT, the Government has embarked on a controversial $38 million advertising campaign to counter what it sees as misinformation. However at this stage, voters are strongly divided on the issue, with most against the measure in its current form.

2.       The Australian mining industry’s position

The major players in the mining industry have reacted strongly against the tax and have monitored a major political and advertising blitz. This includes the release of studies and reports.

• In a study commissioned by the Minerals Council of Australia, the Radar Group said that “institutional investors believe the implementation of the RSPT will have a highly detrimental impact on both the Australian equities market and the Australian economy over both short and long term.” Between the announcement of the proposed tax on May 2^nd and May 29^th, Rio Tinto shares have dropped down 5.5%, BHP 4.8% and Fortescue Metals 9.17%.
• The report also emphasizes that no less than 66% of investors surveyed believed that the proposed RSPT would have a significant impact on future institutional investment in the Australian resources sector while 33% believed it would have a moderate impact.
• In another report commissioned by the Minerals Council of Australia, KPMG argues that “capital markets and in particular debt markets, will be unable to price funding at the LTBR due to risk and pricing issues.” For instance, the bankers of Fortescue Metals - one of the leading producers of iron ore - withdrew from Fortescue’s outstanding projects on this basis.
• The KPMG report also stresses that a higher effective tax rate and funding costs above the LTBR aim at reducing net present value returns of mining projects. Because of risk and pricing issues, the capital market, and more specifically debt markets, will not be able to set the interest rate the same as the LTBR. In the end the report is positive the RSPT at 40% will severely impact the mining sector. Recovery for the sector is only expected to be on the long term.
• The mining industry’s arguments have been strengthened by poor communication and industry consultation by the Australian Government which has led many financial and economic experts to claim that investors seeking to buy Australian assets or sell Australian holdings could be faced with uncertain tax outcomes. This lack of transparency has generated what investors regard as “change law risk”/ Sovereign Risk, which creates uncertainty. Some observers though question the term “Sovereign Risk” as it is more generally linked to company asset expropriation by government, breakdown in the rule of law etc.
• The prospect of tax grabs with no prior consultation or warning - and, worse, the prospect of retroactive tax grabs - has generated uncertainty. It takes mining corporations years of investment before making any actual returns and now, in addition of the risk associated with their operations, they also have to take into consideration the possible decisions the government might take about them.
• The industry argues that profits trigger future investments. The higher the risk, the greater the expected return to justify the risk. Overtaxing profits maintains low productivity, low risk and low pay industries. The interest charged on the Government’s unpaid contributions is based on the risk-free rate, which means interest payments will be too low to prevent risks and costs from being borne by miners, and therefore too low to encourage investments.

My view

Such a major change at time when Australia and the world is emerging from the global recession has surprised many. The RSPT appears as an improvement on the current approach but in some areas the proposal made by the Treasury appears to be too theoretical and disconnected from the reality of the market.

In the end negotiation will be necessary to reach agreement between the government and the mining industry. At the moment, both sides have deeply entrenched positions, and a short term solution is not expected.

However, I believe that political pressure and the looming federal election later this year is likely to see a compromise achieved. This is likely to take into consideration the risk incurred by mining companies and the need for clarity for those institutions to fund more projects.

Any compromise or new scheme will also need to better balance the drivers of future growth and a better return to the Australian people. Australian voters will be watching closely. In the end, perhaps at a reduced level, the RSPT appears as a fair and necessary measure but the timing of its implementation and the way it currently works is definitely not ideal.

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.

As the wheels on the Rudd train rattle and loosen and the destination once so bright now looks foggy and unknown, the pressure is not just on the train driver, but his top engineers and navigators, whose youth have many asking, do they know what they’re doing or are they just on for the ride?

Is someone’s age a genuine indication of their professional ability and skill or is it just an easy target? Take Adam Boland, Channel 7’s boy wonder who at just 24 began steering Sunrise to “national dominance 10 years ago”. Clearly his age wasn’t a hindrance.

On the other hand we have the Primer Minister’s top advisers Alister Jordan, Lachlan Harris (both 30) and Andrew Charlton (31) who featured in Tuesday’s Australian newspaper under the title Novices at the wheel of state. (Note: Peter van Onselen the journalist who wrote the story is only 34).

Whilst running the country vs. running Sunrise may seem an inequitable comparison, what is it that makes one young manager a ‘wonder boy’ and the others ‘novices’?  It may simply come down to how they tackle the challenge.

Age discrimination - or simply too young?

With more and more young people ascending to management positions, it is often these young highly capable managers and advisers who face roadblocks because older people use their ages against them.

In the case of the PM’s three young guns, are we simply seeing an older caucus speaking out because they are struggling to accept the tremendous power these youthful advisers have, and now that things have gone bad, looking for the easiest excuse?

Then again, it makes every sense to ask, especially as the wheels are coming off, is there a lack of experience here which needs to be addressed? And, are these young advisers doing what they should to ensure their short years do not translate into a lack of experience or strategic ability?

Politics not friend nor mentor

Adam Boland took steps to counter his young age. “Being so young, I had to become a student of TV, because I wasn’t around for the first 20 years of television… I’ve also surrounded myself with people such as Graeme Rowland who has been there for most of that time.”

Rudd’s advisers appear to really only be surrounded by Rudd, and the nature of politics is such that adopting experienced Labor party mentors to tell them the political lessons of 20 years ago…is not really possible.

The ‘trust’ and ‘confidentiality’ inherent in the role of a political adviser, spurned by the ever present threat to their boss’s leadership, leaks, and the need for the PM’s office to look like it knows what its doing, makes it hard to see how they could engage a mentor to bounce their ideas off and learn from.

And there is the obvious point, that Rudd would also be worried that asking the advice of others would be perceived as a sign of weakness on his part, and no doubt there would be those who would like to interpret it that way.

Learning on the job

So while a mentor may be out of the question for Rudd’s young men, there is no limit to these three advisers becoming ’students of politics and public affairs’. As Bernard Keane said in Crikey last week, talking more directly of Rudd, “there is no shame in learning on the job…John Howard almost managed to make himself a one-term wonder, but went on to do OK.”

A point made in yesterday’s Sydney Morning Herald was that van Onselen ‘forgot to mention’ that Bob Hawke had many successful ‘young buck’ advisers, while John Howard’s chief of staff in his first term, Grahame Morris, “was a man with years of experience when he was forced to fall on his sword.”

Maybe if Rudd’s three advisers were older they would have remembered first hand when in 1987 the Hawke Government introduced a 40 per cent profits tax on off shore petroleum and the industry’s response was by all accounts similar to that of the proposed super profits tax, one of the main issues behind all this finger pointing.

If they had worked around government then, would this be an example of how they would have had the ‘experience’ critics say they lack? No doubt this experience may have helped, but ultimately the challenge is as Keane says”…communicate effectively the case for reform, detail the flaws in the arguments of your opponents, and show you’re determined to achieve what you set out to do.”

What you don’t know - the past and human behavior may tell you

Communicating effectively and detailing the flaws in the opposition is in essence the crux of Alister and Lachlan’s job and on a positive note where they actually have proven they can do it; Lachlan through developing and managing the media strategy for Rudd in the 07 election, earning him his job today, and Alister through his years working by Rudd’s side in shadow government, most effectively and expertly causing political damage to the Howard Government over the AWB “wheat for weapons” scandal.

Showing that you’re determined to achieve what you set out to do may be something they have less experience with, and something they need to man up about when dealing with ‘the man’, who’s ultimately responsible for this.

Experience isn’t everything, and years passed do not guarantee a pay off in the rise of one’s intelligence, especially in the areas of social and public affairs, where instinct and generational understanding is key. But if young advisers look to the past to manage the present and future political challenges, their chance of success will no doubt improve.

For as we know, human behaviour and responses are more often than not predictable. This is the very reason the Kevin 07 campaign was designed and built around Abraham Maslow’s ‘hierarchy of human needs‘.

You are never too old to ask for help

The lesson to take away may be that you’re “never too old to ask for help“, something Rudd was told recently by Jack the Insider. He tells the PM that Hawke and Keating are real assets for him and the fact that their advice is not sought “is staggering”. “If a government finds itself in trouble as this one has, it would be sensible to go first to the caucus and then place a call to the old salts; the combat hardened political men of yore to seek advice.”

At the end of the day, its safe to say, no one is ever experienced enough, but how they manage that, whether they ask for help or not, is what proves are they driving the train or should they get off at the next stop?

Ruci Fixter