Airbnb and the Right to Discriminate

Over at Samizdata, Perry de Havilland tells us why he’s cancelling his Airbnb account.  Understandably he objects to being told to sign some pledge stating, among other things, that he will commit to:

treat everyone—regardless of race, religion, national origin, ethnicity, disability, sex, gender identity, sexual orientation or age—with respect, and without judgment or bias.

Perry’s objection is to being told he is not allowed to judge that which is entirely voluntary on the part of the other party, e.g. their religious views.

I happen to take the rather extreme view that an individual’s freedom to interact and associate with whomsoever they please is paramount and as such discriminatory behaviour ought to be permitted on this principle.  I’ll write more on this shortly.

Back in 2013 there was a case whereby two Christian owners of a B&B in Cornwall refused to allow a gay couple to stay on their premises, citing to do so would conflict with their religious beliefs.  They were sued and lost.  In their defence they said:

“Our B&B is not just our business, it’s our home. All we have ever tried to do is live according to our own values, under our own roof.”

Many people who took the side of the gay couple held the view that the moment somebody charges money and their activity becomes a business, the state must get involved and they no longer have the right to discriminate.

What I have yet to find out is whether they think this ought to apply to prostitutes.

I genuinely think within five years we’ll have seen a case where an escort or prostitute is sued for discrimination, and dating apps and websites are being put under pressure to remove preferences based on race and other criteria.

More Food for Thought

A friend has pointed out that in yesterday’s post about supermarkets and expired food I overlooked the practice of their deliberately destroying the food that goes into their bins.  The complaint of many seems to be that supermarkets do this simply because they don’t want poor people hanging around their bins.  Taking this at face value, it would sound pretty callous that supermarkets are denying hungry folk food simply because – for whatever reason, but probably because they are just bastards – they don’t want poor folk nearby.  Or maybe they don’t want poor folk feeding themselves for free when they can be forced into paying for it?

But there are valid reasons why supermarkets wouldn’t want this, aside from their just being bastards for fun.  Having anyone regularly rummaging through your bins is probably going to come with additional problems, such as people camping semi-permanently beside them waiting for food to be dumped and being a nuisance for staff and the public.  Private householders wouldn’t want people in their back yard rummaging through their bins, so I don’t see why supermarkets would be happy about it.

But in reality it feeds in (sorry!) to the main point I made yesterday regarding liability.  A company is still responsible for its waste products up until custody changes hands in the collection process.  A supermarket has a duty of care towards the public which includes doing everything reasonably practicable to ensure they are not harmed by its operations and products, which includes the waste food as it lies outside discarded in the bins.  This will also include ensuring nobody will come to any harm if they decide to climb into the bin to eat something: if somebody does so and injures themselves somehow, the supermarket is liable.  Stupid, but this is how the law works.  The supermarkets are also liable should somebody fall ill by consuming waste food which by the supermarket’s own definition is unfit for consumption.  The supermarkets are especially liable because they know in advance that people will try to gather and consume this stuff, so they cannot claim ignorance for not doing more to prevent it.

And this is the issue: the supermarkets are legally obliged to prevent people from eating out of their dumpsters.  If they just leave them open and unguarded, they are being criminally negligent in their duty of care towards the public.  And this is what the campaigners don’t get: those among their numbers have imposed these rules and regulations and set these legal precedents and this is the result.

Supermarkets have two realistic options here: secure the bins in such a way that nobody can get at them, or destroy the food so thoroughly that nobody will try.  This new law will be discarded as soon as a liability case arises, it is pointless posturing by the wealthy middle-classes.  If the welfare programmes that exist to ensure nobody goes hungry are failing, they need to be fixed: but that would likely involve shaking up bureaucracies and firing useless managers, and that would never do.  So instead they take a cheap swipe at the supermarkets for dealing with a set of conditions that they themselves created.

Will Pike and the Costs of Legislation

There’s another video doing the rounds on social media made by a chap called Will Pike, a Brit who was injured in the 2008 Mumbai terror attacks and is now wheelchair bound.  It goes without saying that I have every sympathy for Mr Pike and his predicament, and I can imagine the frustration he feels when he encounters the difficulties presented in the video:

His problems are real, and I take no issue with them.  But I have a problem with his proposed solutions:

The law protecting disabled people from discrimination when accessing goods and services has existed for 10 years and is supposed to be enforced by the Equality and Human Rights Commission. The Equality Act requires that service providers make reasonable adjustments to make sure disabled people are not disadvantaged when accessing their services. However, there are significant flaws with the enforcement of the act. In the majority of cases it is left to disabled people to sue service providers for discrimination. Moreover changes to legal aid have made it much harder to start legal action. Court proceedings can be very time consuming and costly. They are not accessible to all disabled people, many of whom just want to get on with their life.

The main issue here is one of expectations versus reality of what passing a law can achieve.  Since I was a student and I became aware of these things there seems to have been a headlong rush in the developing world to solve every problem in existence by passing a law, as if by doing so the problem merely goes away.  Only if this worked, nobody anywhere would be doing drugs.  Oops.

The key word in the legislation is “reasonable”:

The Equality Act requires that service providers make reasonable adjustments…

What is reasonable or not depends on the individual.  Most viewers of the video would see a flight of steps in a clothing store and think “Why can’t they put a lift in?”  A building services expert hired to testify on behalf of a company defending a case brought before the EHRC would explain in detail the costs and practicalities of doing so, and an engineer would go further, into details of the structural design of the building.  London is an old city, the buildings are old.  Retrofitting a lift or making substantial modifications to a building could well cost as much as demolishing it and building a new one.  Not in all cases for sure, but in some.  It could be that the owner of the shop premises doesn’t own the whole building, or maybe even the floor above.  Whatever the case, it is not immediately obvious that the lack of a lift in a shop means the owners or the tenants have not made all reasonable adjustments to allow disabled people access to their services.

There is one answer to this.  Take away the “reasonable” qualifier and ensure all companies provide full disabled access that caters for every type of individual that might cross their threshold.  This would cost a phenomenal amount of money, which would be passed directly onto customers, and would entail moving almost every business out of city centres and into purpose-built retail parks or strip malls, but it is certainly possible.  Only major complaints I hear from the sort of people who campaign for greater disabled access are: the cost of living in Britain (especially London) is already way too high and we need government intervention to force companies to pay employees a Living Wage; town centres are dying and everything is moving to purpose-built retail parks in the outskirts; and independent “local” shops are disappearing, replaced by endless outlets of multinational chains who “send their profits overseas and out of the local community”.

So which is it to be, folks?  Strip-malls filled with faceless multinationals with full disabled access, or smaller franchises and independent shops in city centres and high streets?  You can’t have both for simple reasons of practicality and economics. And if you insist on having both, you’ll end up with neither: nobody is forced to open a shop, and anyone doing so much be able to envisage an economic return.  Sadly, I suspect people will insist on having both and wonder why their towns look empty.  This has already happened.

I have my sympathy with Will Pike and his video might well have identified companies that could have provided better access at a reasonable cost but didn’t.  But I suspect most people sharing his video on Facebook won’t have thought much beyond the initial, emotional reaction to a guy in a wheelchair struggling through life.

Food for Thought

Earlier this year France passed a law banning supermarkets from throwing away or destroying unsold food.

France has become the first country in the world to ban supermarkets from throwing away or destroying unsold food, forcing them instead to donate it to charities and food banks.

Charities will be able to give out millions more free meals each year to people struggling to afford to eat.

I’m not sure when the ban actually comes into effect, but there has been a recent spate of articles doing the rounds on social media about how wonderful this is and how the US should adopt the same laws.

The narrative is that supermarkets are callously destroying food while the starving, huddled masses are gathered outside their automatic doors pleading for some sweepings from the delicatessen floor.  Why not just give this food away?

I can already think of two reasons why not, with the first being that of liability.  I haven’t visited every supermarket in France, but I know British supermarkets pretty well and if you go to one in the late evening just before closing you see a section filled with produce expiring that day which has been marked down, and further marked down, and then reduced to almost nothing in a desperate attempt to get rid of it before it goes in the skip out the back.  As far as I know this is common practice among supermarkets everywhere, and there are a lot of people out there who have made buying groceries from these sections an art form.  In other words, supermarkets already go to considerable lengths to avoid destroying food.

There is a good reason why expiry dates are put on food, and it’s mostly to do with liability and ensuring the customer is adequately informed.  Present in the contract a customer enters into with the supermarket when he or she buys a product is the expectation that the food is fit for consumption; the onus is therefore on the supermarket to adequately inform the customer when he or she should consume it before it goes bad.  The dates on the products might be a bit conservative and sometimes even silly, but they exist in order to ensure the customer is informed and the supermarket has carried out its duty of care to the best of its ability.  If they fail in this duty of care and a customer gets ill, they can and will be sued for compensation and suffer a loss of reputation.  This is why supermarkets will not take the risk of selling food past its expiry date: customers could get ill, and both parties will suffer.  All of this is entirely sensible across a colossal, multi-billion dollar, international logistics operation – and it remains sensible even if somebody can pick up a can of beans a day past its expiry date and say “Oh, this is stupid, they are still perfectly edible.”

So what’s the supermarket to do with those few items they can’t sell before their expiry date (and as a percentage of overall stock the volumes will be tiny, even if the poverty campaigners will cite numbers which sound large in isolation)?  The most sensible and cost effective thing to do from a business and liability point of view is to toss it into a skip and replenish the shelves with fresh stuff for the hungry customers who come in the next morning, and indeed that is what they do.

But now they are being forced to give away food which they have deemed unsuitable for sale to their customers, several problems will arise.  The first of these is actually mentioned in the article, but being The Guardian they’re too dense to follow through:

The law has been welcomed by food banks, which will now begin the task of finding the extra volunteers, lorries, warehouse and fridge space to deal with an increase in donations from shops and food companies.

Lorries, warehousing, refrigeration, and distribution all cost money.  And by far the best people at doing these operations are supermarkets, as evidenced by their commercial success.  So if the supermarkets, with all their expertise, have decided these operations aren’t worth doing for certain items, maybe they are onto something?

But now the supermarkets have handed over the food, who is going to pay for these operations?  Where is the money for the refrigeration going to come from?  And more importantly, who is responsible for ensuring these products are handled and stored properly such that they are still fit for consumption when handed to the recipient, and that the recipient is correctly informed as to when he or she should consume it?  The expiry date on the package has already gone by, remember?  That was yesterday.  Are a team of volunteers and charities seriously going to be able to manage the receipt, storage, and distribution of thousands of tonnes of food at or near its expiry date such that nobody is going to get sick?  Are these charities and volunteers going to accept responsibility if somebody gets food poisoning and dies?  If not they, then who?

What’s happened here is some (undoubtedly wealthy middle-class) busybodies have decided they can effectively extend a supermarket’s operations beyond their doors at no cost and with no accountability, and now this has become law.  I suspect the liability issue alone will prevent this being adopted in the US, there would be lawsuits within the first month.  Only against Wal-Mart, probably.

There’s also another problem with forcing supermarkets to give away products, one that we’ve seen with food banks in the UK: some people will take the free stuff instead of doing regular grocery shopping.  Supposing a supermarket sectioned off a corner of its floorspace, filled it with free products, and opened it up to the public for an hour after normal shopping hours.  Now repeat across the country.  Very quickly this would be captured by organised third parties who would employ people (of the type you see on nightclub doors in Manchester) to swoop in and collect everything on offer in what would become a large-scale industrial operation: just as charity clothing has become a lucrative, large-scale, international business.  The idea that a little old lady whose pension won’t stretch to three meals per day would be able to get free food is ludicrous.

If people are substituting products they would have paid for with free stuff, the supermarkets (or the wholesalers) will be losing revenue.  Yes, it is true: if supermarkets are forced to give away products they would otherwise have destroyed, they will lose revenue because of the substitution effects.  This will either result in a fall in profits for the supermarkets – which is what the campaigners think will happen – or, more likely, they’ll just distribute the costs of the new law among the sale prices.  In other words, food will get more expensive.  How does that help the poor, again?

Practicalities aside, this whole thing is annoying me on another level.  For the first time in human history we as a species are able to produce and distribute enough food so that real hunger in properly-run countries is something only our grandparents knew about.  We do this so effectively we can feed ourselves and our families without any more inconvenience than a quick trip to a nearby supermarket.  Furthermore, we can obtain our food without worrying if it’s going to kill us if we eat it.  This in itself is one of the most astonishingly, staggeringly, brilliant outcome that humankind has managed in its existence.  We have solved the millenia-old problem of constant hunger.  So what do we do?  We moan like fuck and attempt to sanction those who have brought it about.  Like the attempts to dismantle our reliable energy supply and replace it with one that doesn’t work, historians are going to look back on this era and think we went collectively insane.

People do go hungry in the developed world, I don’t deny that.  This is why we have a welfare system, food stamps, charities, and a whole load of other measures in place to do what we can to alleviate poverty and hunger.  Supermarkets and their stock-management practices are not the problem, by contrast they are the very things that are keeping the majority of us fed so that we have enough surplus wealth and energy to help those who are not.

Finally:

Campaigners now hope to persuade the EU to adopt similar legislation across member states.

And people are wondering why Britain voted to leave.

Ludicrous Indeed

Unsurprisingly, the BBC gives us a puff-piece on Tesla’s latest offering:

[T]his upgrade enables the Model S to travel from 0 – 60 mph in 2.5 seconds, giving it the fastest acceleration of any currently available production car … Like all electric vehicles, that more powerful battery delivers 100% of its dual-engine torque immediately, pushing the four-wheel-drive saloon past records heretofore the domain of million-dollar supercars.

Million dollars? Let’s first be generous and assume this car actually can do 0-60 in 2.5 seconds and will make it into production (visit Streetwise Professor to see why skepticism over Elon Musk’s pronouncements is warranted).  According to Wikipedia, the Porsche 991 can match this which, according to Porsche USA, costs about $188,000.  This isn’t so cheap, but it’s not a million dollar supercar.  And the Tesla is no bargain, either:

The Model S P100D saloon will start at £114,200 and the Model X 100D sport-utility vehicle begins at £117,200, and older Teslas can upgrade their battery packs for a mere £15,000.

£114k is about $150k in today’s money.  That would buy you an awful lot of Porsche.

That’s expensive, but Tesla is taking the Toms shoes model approach to your wallet. “While the P100D Ludicrous is obviously an expensive vehicle, we want to emphasize that every sale helps pay for the smaller and much more affordable Tesla Model 3 that is in development.” In other words, your need to go very far, very fast helps fund the electric vehicle needs of others less fortunate than you.

Hmmm.  As a business model, this doesn’t sound very sustainable.  You could probably expect some cross-subsidising between models in order to maintain a brand and market share, but this seems to be ass-backwards: it’s normally the high-volume margins on the cheaper brands which provide the cash for developing high-end niche products, not the other way around.  Are Tesla really going to be selling enough of these $150k supercars, and the margins high enough, to be able to reduce the cost of the mass-produced models?  I’d love to see the numbers on that.

The holy grail of EV range has long been 300 miles, which would bring electrics into the full-tank range of most petrol-powered vehicles. Now, 300 miles doesn’t make for a stress-free cross-county road trip, but there’s a lot to be said for enjoying a real meal while your Tesla charges rather than buying Slim Jims and Diet Dr Pepper in the 10 minutes it takes to gas up your petromobile.

If sitting and having a meal for a couple of hours is preferable to stopping for 10 minutes, why don’t more people do that already?  After all, there is nothing preventing owners of petrol cars doing so, is there?  What the article is doing is trying to make light of the biggest issue facing electric cars, which I’ve written about before:

The limited range isn’t actually the issue, as petrol cars also have a limited range.  The problem is the charging time, which renders the vehicle unavailable for several hours.  If you run low on petrol, you spend 5 minutes filling up and you’re on your way again.

The whole concept on which the current breed of electric cars is based will collapse as soon as there are more than a handful of stories of people being caught out miles from home – children in the back, howling – and having to wait at a charging station for hours before being able to continue the journey start to appear on the internet.

The author’s glib suggestion that people will be happy to sit and have a nice meal while waiting to continue their journey isn’t supported by people’s actual behaviour.  A decent journalist would have addressed this issue properly, but then this is the BBC: the entire article is simply a puff-piece for the latest darling of the political establishment:

Mr Musk is betting big on batteries. He’s going to make sure we get to the future  — and quickly.

This is what £3.7bn per year gets you.  Couldn’t they at least send Tesla an invoice next time?

Incentives matter, so best not ignore them.

A story was doing the rounds last week that was drawing praise and admiration from various quarters:

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.

If it’s a publicity stunt, it’s a costly one. Mr. Price, who started the Seattle-based credit-card payment processing firm in 2004 at the age of 19, said he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year.

Those doing the praising were generally of a left-wing bent, and some went so far as to say this was a vision of the future and an example for other firms to follow.  Me, I’m not so sure, and I think Mr Price’s company is going to run into trouble over this at some point.

Now I’ll start by saying that Mr Price is perfectly within his rights to distribute his own salary among the workforce in such a manner.  And as I understand he is the owner, hell he can pay them $1m per year to watch TV for all I care.  I just don’t think he’s thought through the implications.  There are several problems which I think will arise, all of them to do with incentives.

The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 a year.

His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.

Firstly, if the lowest paid clerk is now on $70,000 per year there is almost no incentive for anyone to grow professionally by taking on more responsibility, tackling harder tasks, volunteering for the shit jobs, and putting in additional hours to increase their own value within the company.  If the clerk is on $70k, why would somebody from the middle-ranks with marketable skills and a higher education apply themselves if they were on similar wedge, or work extra hard just to earn $80k when by loafing he can earn $70k?  Better to take it easy and spend more time with the family.  And this will be made worse by the plan being phased in over 3 years.  Who is going to be interested in the new night manager role now the main incentive to take the crap hours is gone?  This will be felt even more keenly in sales: how much effort is the junior salesman going to put in now he’s on $70k per year?

Secondly:

Hayley Vogt, a 24-year-old communications coordinator at Gravity who earns $45,000, said, “I’m completely blown away right now.” She said she has worried about covering rent increases and a recent emergency room bill.

“Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it,” she said.

From the above quotation I think it is safe to assume that Hayley Vogt will never leave Gravity of her own free will because she is now paid 55% above market rate for being a communications coordinator.  Nobody above her is going to leave either, so it is an equally fair assumption that as long as Gravity exists, Ms Vogt – currently 24 – will be a communications coordinator.  So by the time she’s 40, Ms Vogt will still be a communications coordinator.  Do you see the problem here?  She’s undergone no professional growth.  She can’t be promoted internally because her superiors – also being paid well over market rate – will hang onto their jobs for all they’re worth.  So if Gravity goes tits-up in the future, Ms Vogt will find herself on the job market not only facing a severe cut in her income but also competing against people much younger from whom she cannot differentiate herself in any meaningful way.  For those on the lower rungs doing jobs which don’t require much skill or training, and thus youth, energy, and flexibility are major selling points, this could be a problem.

Of course, many people doing those kind of jobs aren’t looking for a career anyway, they just want to pay the bills.  Which brings me onto the third problem: with nobody leaving, how do you get rid of the underperformers?  Normally these people would leave because, having been passed over for promotion and higher pay for a few years running, want to try their luck somewhere else.  Now Mr Price is stuck with them.

Finally, how does Mr Price intend to bring new talent into the company?  Nobody is leaving, so that means only newly created positions will bring outsiders in.  Aside from not being a very healthy environment for any company, this creates an additional problem.  If a new position is created and advertised, every store clerk within 200 miles is going to apply for the job if it pays $70k per year.  Having an avalanche of CVs hit your desk is not helpful. When I worked in Dubai we advertised for an assistant accountant position and put an advert up somewhere.  Even though we were a small, unknown company we were receiving CVs by the thousand, mostly from Indians.  The problem was almost all the CVs were from labourers, forklift drivers, and other unskilled workers chancing their arm having seen a “big” salary (and indoor work) on offer.  Sifting through them all, trying to identify who was genuinely interested in the position and had the matching skills was a hopeless task.  Gravity Payments is going to find themselves with a similar problem: how many of the tens of thousands of CVs they will receive are from people who aren’t motivated solely by the incredible pay and couldn’t care less about the actual job?  And even those who are qualified, are they confident they will secure a suitable candidate from a shortlist all of whom are overwhelmingly motivated by the pay above everything else (and know they can likely loaf once they get in)?  HR departments in major oil companies will recognise this problem.

Despite his obvious success in business thus far, having set up Gravity Payments at he impressively young age of 19, I can’t help think Mr Price is still a bit wet behind the ears:

“Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”

Whilst I might be persuaded that executive pay is too high in the US and the disparity between the lowest and highest paid is too wide in some companies, progressive pay scales are used and market rates adhered to for good reasons which might not be immediately obvious.  As Tim Worstall is fond of telling us, incentives matter.  Mr Price might end up learning this the hard way.

This will have Ronald quaking in his boots!

Michael Jennings alerts me to a new business idea in Russia:

Russia has a grand plan to launch its own, patriotic fast-food chain to rival Western burger joints like McDonald’s and rescue its struggling farmers.

The $18-million initiative stems from brothers Nikita Mikhalkov and Andrei Konchalovsky, two of the country’s most famous film directors.

Both have poured scorn on Western influence in the past and are known for their close ties to the Kremlin.

The brothers have already picked a name for their brainchild: “Let’s Eat At Home!” (Edim Doma!)

Andrei Vorobyov, the governor of the Moscow region, has welcomed the project.

“It’s a good idea,” he said. “Small businesses and chains create jobs, and the food produced on our territory is perfectly suitable for these cafes.”

The deputy chairman of the regional government, Denis Butsayev, has already hailed the proposed chain as a “McDonald’s killer.”

“The goal of this project is to promote import substitution and create alternatives to Western fast-food chains,” the brothers wrote in their proposal, quoted by the Kommersant daily.

The brothers want to open 41 cafes in the Moscow and Kaluga regions, all supplied by local kitchens and factories. Up to 40 percent of the menu will be made from regional produce.

This is dumbassed on so many levels.  Firstly, as I mentioned here:

The primary beneficiary of McDonald’s in Russia are those Russians wishing to purchase its products, who number in the millions.

The secondary beneficiary of McDonald’s in Russia are the Russian owners (it is a franchise), managers, employees, and suppliers whose income derives from its operations.

Pinching customers from McDonald’s is unlikely to result in a boost for Russia at the expense of the west.

Secondly, Russians eat at McDonald’s because they like McDonald’s.  They don’t eat at McDonald’s because they cannot find cafes selling pel’meni and borsch to sate their hunger.  As has been proven in any country you care to mention – but let’s take France as a good example – you can easily find an alternative burger which is almost always better.  But something about the whole McDonald’s setup, i.e. not just the food, attracts people.  I suspect eating in McDonald’s for young Russians is, like in France, seen as a cool thing to be doing.  Good luck getting the kidz to buy into the idea that ordering buckweat washed down with kompot is now cool.  As the article points out:

McDonald’s remains hugely popular among Russians, despite a number of recent setbacks amid deepening tensions between Russia and the United States.

Thirdly, given the low probability of being able to compete with McDonald’s, if this scheme gets lanched it will likely take business away from the dozens and dozens of small, independent stolovayas and cafes that already sell Russian food using locally-sourced produce.  The knock-on effect will therefore be felt by their existing suppliers and probably result in some of the current alternatives to McDonald’s going out of business.

Fourthly, if prominent Russians wants to “rescue its struggling farmers”, “create alternatives to Western fast-food chains”, and “create jobs” then they might want to start by getting rid of the brazen gangsterism, thuggery, and corruption that infest the entire country and prevent these things happening of their own accord.  But no, this is Russia so:

The $18-million initiative stems from brothers Nikita Mikhalkov and Andrei Konchalovsky, two of the country’s most famous film directors.

Mikhalkov and Konchalovsky had reportedly called on Russian President Vladimir Putin to help secure government backing for the project in light of its “sociopolitical character.”

According to Kommersant, Putin had personally ordered Deputy Prime Minister Arkady Dvorkovich to “examine and support” the proposal.

Under the program, 70 percent of the sum is provided by banks under a state-guaranteed loan, with the remaining 30 percent coming from private investors.

State-controlled Sberbank has been touted as a potential lender.

[The government] rejected the brothers’ request for direct funding at a government meeting late on April 9, suggesting that the would-be entrepreneurs should instead seek funding through Russia’s existing scheme to support small businesses.

Instead we have two politically-connected multi-millionnaires looking for state-financing of their pet project whose major selling point is that it represents the type of crude patriotism that is currently in vogue with the President.  And although they appear to have had their appeal for direct funding rejected our multi-millionnaires, who were able to meet with Putin in person, have been advised to raid the state fund set up to assist small businesses.

I’m wondering how this project represents anything different in Russia, let alone an improvement.

The Failure of Russian Projects

The Streetwise Professor writes about another ambitious Russian state project which has gone badly off the rails, this time the Vostochny Cosmodrome project.  As usual, the project is way behind schedule, way over budget, and workers haven’t been paid for months.

All of this would seem drearily familiar to anyone who has worked on Russian projects, but outsiders might not know the mechanism behind the failures.  Russian certainly would, but only those who have gotten their hands dirty on a project, i.e. the mal’chiki-mazhory who are the most enthusiastic of grand Russian projects won’t have a clue.

The problem is not in the experience, competence, or attitude of the technical workforce.  Russia has a ready supply of clever, motivated, experienced, and competent engineers and technicians.  These men and women are more than capable of designing and constructing pretty much anything in Russia.  Granted, it might not look too pretty and the design might be a bit dated, but it will work as intended.  The problem is in the management of these skilled resources.

The root cause is that owning a successful company in Russia is a result of your being allowed to do so by virtue of your personal connections or the muscle you can deploy (preferably both).  Without one of these, you are never going to be able to run a company large enough to execute a sizeable project, as you will be shut down or forced out by the local powerbrokers – either government authorities or gangsters – before your business is anywhere near mature enough to bid for large contracts.  Competence, a sound business plan, or good management practices count for nothing if you don’t have connections or the muscle to defend yourself.

As such, all players bidding for a large engineering and construction contract will have achieved and maintained their position by something other than technical competence and delivery.  The problem is further compounded by the fact that those very same connections which allow them to operate are used to determine which company gets the juicy contracts.  The award of contracts in Russia is therefore an exercise in nepotism; the selection of contractors is done not on the expectation of competent execution, but by which company offers the most beneficial kickbacks, favours, counterfavours, and financial rewards to those who have the final say.

This would not be a problem in itself if the winning contractor has within its organisation the skills required to execute a project competently.  Surprisingly, quite a few of these contractors do: they have on their staff the experienced technical resources that I mentioned earlier in the post.  Or even if they don’t, at the beginning a contractor will hire in the competent people and the project will start well.

The problem comes when the cashflow situation goes belly-up.  This always happens for the simple reason that cashflow is very difficult to manage on any project and especially so in Russia.  Whereas normally any contractor will have demonstrated their skill in managing cashflow by virtue of a proven track record and still being in business, in Russia this isn’t a requirement at all: personal connections are what matter.  So on Russian projects there is a strong likelihood that the management of the entity in charge doesn’t know much about cashflow, or indeed any other aspect of running a normal business.

Whereas some aspects of business can be ignored in favour of lies, threats, and pig-headedness, e.g. HR, HSE, quality, accounting, etc. cashflow isn’t so easily ignored.  If your bank account is empty, then you can’t pay suppliers; if suppliers aren’t paid, you don’t get the materials and equipment; if you can’t get the materials and equipment, you can’t make progress; and if you can’t make progress, you can’t invoice for the next stage payment.  Managing cashflow on a project is a very specific skill, and even major oil companies get it wrong and have to rely on the parent company and partners having large cash reserves to keep the project solvent.  Most Russian companies simply don’t possess this skill and probably few CEOs appreciate what it is, not having attained their positions through business acumen.

If a project experiences a problem with cashflow, one of the early signs is the workforce not being paid on time.  This is particularly true in Russia.  In countries like Russia and Nigeria, shafting the workforce by not paying them on time (or at all) appears to be perfectly acceptable behaviour in the eyes of many Managing Directors.  Indeed, some almost seem to think it a very clever way of saving money and engage in this practice even when they are flush with cash.  I knew several engineers and technicians in both Russia and Nigeria who had quit previous jobs having been owed months and months of wages, and given up hope of ever seeing it.  So if the company in question had experienced and competent technical staff on their books at the beginning, the best of these will leave once the pay problems start, with the rest following in a steady trickle depending on how bad the situation gets.  They will be replaced by inferior people, who will also get fed up and leave, to be replaced by even less-qualified people, and so on in a vicious circle until – like I saw in Russia – the site is filled with undocumented, uneducated rural folk from Tajikistan and North Korea working for meagre cash-in-hand wages.  When this manpower drain is coupled with the other side of the cashflow problem – the suppliers not being paid, hence materials not being delivered to site – the situation is almost impossible to reverse without massive cash injections from somewhere.  And this being Russia, the project owners are not the sort to be handing out extra cash even assuming it is available.

So in short it is a management problem, particularly their inability to manage cashflow.  This is compounded by the fact that the sort of people who manage large contracting companies in Russia are the sort of people who would treat the project account as their own personal fund for the purchase of dachas and Porsche Cayennes in the days after the initial advance payment, and also the sort of people who would think nothing of shafting the workforce and suppliers by not paying them for months or years.  Few, even in 2015, seem to understand the concept of a market for skilled labour which enables a skilled Russian welder to walk off the job if he hasn’t been paid and pick up another one elsewhere.  For those managers skilled only in Soviet-style thuggishness and corruption, they have yet to understand the Soviet labour system of being shackled to your workbench doesn’t, for the large part, exist any more.

This is why, despite Russia having easily enough technical resources to complete such a project, the Vostochny Cosmodrome project has been unable to even pay its bill for lighting.  The failure was never about Russian engineers being useless, or lazy, or too few in number, or Russian contractors not knowing how to do complex works.  It was always about that one thing Russia never had in the Soviet times or now, the one thing which they increasingly insist the West cannot help them with: managerial competence.

If somebody in Russia could harness Western management practices with local technical resources, we’d see a vast improvement.  One chap did this once, went by the name of Mikhail Khodorkovsky and had a company called Yukos.  Whatever happened to him?

Meetings in France

Over at Tim Worstall’s gaff, reader Andrew M alerts me to this piece in the New York Times on the subject of French, English, and American conversations.  This bit had me nodding along vigorously:

But many modern-day conversations [in France] make more sense once you realize that everyone around you is in a competition not to look ridiculous. When my daughter complained that a boy had insulted her during recess, I counseled her to forget about it. She said that just wouldn’t do: To save face, she had to humiliate him.

This is probably worse in Paris, and among the professional classes. But a lot of French TV involves round-table discussions in which well-dressed people attempt to land zingers on one another. Practically every time I speak up at a school conference, a political event or my apartment building association’s annual meeting, I’m met with a display of someone else’s superior intelligence.  Jean-Benoît Nadeau, a Canadian who co-wrote a forthcoming book on French conversation, told me that the penchant for saying “no” or “it’s not possible” is often a cover for the potential humiliation of seeming not to know something. Only once you trust someone can you turn down the wit and reveal your weaknesses, he said.

Meetings in France are perhaps the greatest single source of puzzlement in the working lives of expats.  Anyone from the Anglo-Saxon world will sit through a meeting with no agenda that started late and concludes (also late) with no substantial decisions being made and wonder what the purpose of it was other than to offer workers an opportunity to demonstrate how wonderfully clever they are in front of their peers.  The way in which meetings are conducted in France was a major subject covered in my intercultural awareness training when I first arrived, and remains a frequent topic of conversation among the expats.  Apparently, according to the article, this sort of behaviour has a long history:

Life at Versailles was apparently a protracted battle of wits. You gained status if you showed “esprit” — clever, erudite and often caustic wit, aimed at making rivals look ridiculous. The king himself kept abreast of the sharpest remarks, and granted audiences to those who made them. “Wit opens every door,” one courtier explained.

Indeed it does.  An inability to answer a random, irrelevant, and often daft question in a French meeting will demonstrate that a speaker is “unprepared”, and thus possibly unsuitable for promotion.  Hence he or she must “prepare” by stuffing their presentation with dozens of slides containing table after table of raw data in Font 8 or smaller, which are preceded by five or more slides of “context” containing sentences such as “In the beginning God created the heaven and the earth” and “When viewed in an inertial reference frame, an object either remains at rest or continues to move at a constant velocity, unless acted upon by an external force.”  Given French presentations normally consist of the speaker reading the contents of a slide line by line, one after another, it’s no surprise to learn that meetings can run on for hours.

Whether these practices are fit for a modern business operating in an increasingly competitive and globalised world is a matter for debate.  A glance at the French economy and unemployment rate would suggest not.  Us Anglos could learn a lot from the French in many fields, but conducting meetings and delivering presentations are not among them.

Où est la Thatcher française?

This article speaks volumes about the French government’s understanding of global business practices:

French President Francois Hollande has met the boss of General Electric’s (GE) to discuss his firm’s interest in buying part of engineering firm Alstom.

It follows reports the US company is preparing a deal to buy Alstom’s power turbines business.

Alstom, which also makes TGV high-speed trains, is one of France’s biggest private sector employers.

Alstom is one of France’s biggest private-sector employers, with 18,000 staff across the country.

Its share price jumped by 11% on Thursday after reports of the interest from GE, but the firm said on Sunday night that its shares would remain suspended from trading on the Paris stock exchange until Wednesday.

The French firm has suffered from heavy debts and a fall in orders over the past decade, and was bailed out by the French government in 2004.

So, a struggling private French firm looks to be taken over by a more successful foreign one, and the French government sees fit to stick its beak in.  But to what end?

France’s economy minister has already said the government would block any deal it sees as unfit.

“We are working to improve the offers to make sure that French companies…do not become prey,” said Arnaud Montebourg, before Monday’s meeting.

Erm, fella.  Alstom already is prey: it’s struggling, and ripe for a takeover.  What you mean is “we want to make sure any potential buyer doesn’t make any changes that we don’t like.” Such as make the necessary changes to turn the company around.

“On the other hand we are open to alliances that help to equip us for globalisation.”

Right, but is GE interested in such “alliances”?  I suspect not; my gut feeling is they intend to buy Alstom and manage it however they see fit with the aim of turning a profit, and are not much interested in helping equip Frenchman for globalisation, whatever that means.

But Mr Montebourg has ruled out nationalising the firm if neither the Siemens nor GE offers go through.

No, you just want to interfere and veto any proposal you don’t like in the vain hope that a competitive and successful foreign company will plough capital into a politically sensitive French company without making any changes which will upset the management and workers.

Obviously Mr Montebourg hasn’t learned much from his previous experience of dealing with potential American buyers of French companies:

The head of US tyre manufacturer Titan International told the French government Wednesday that his firm will not take over a loss-making Goodyear factory because the unions there are “crazy” and its employees “only work three hours a day”.

“How stupid do you think we are?” Titan Chief Executive Maurice Taylor asked French Minister for Industrial Renewal Arnaud Montebourg

“I have visited that factory a couple of times. The French workforce gets paid high wages but only works for three hours.

“They get one hour for breaks and lunch, they talk for three and they work for three. I told this to the French union workers to their faces. They told me that’s the French way!”

Taylor was responding to a proposition by Montebourg to see if Titan, which makes tyres for agricultural vehicles, wanted to invest in the plant in Amiens, northern France.

Titan had approached Goodyear Dunlop Tyres France in 2012 to discuss a possible takeover, but negotiations were blocked by the Communist-backed CGT union.

Montebourg’s appeal to Taylor was a last-ditch attempt to woo Titan back and save the plant and its employees after Goodyear announced at the end of January that it was definitively closing the plant – which employs 1,173 workers – following a long struggle with the unions.

Poor sales at the plant resulted in a loss of 61 million euros in 2011, according to company figures.

Taylor warned Montebourg that despite his tougher stance toward EU trade protection, the French manufacturing sector was doomed if the government did not face up to the realities of Asian competition and deal more effectively with troublesome unions.

And sure enough, the Goodyear plant in Amiens is now on course for closure this year.  One would have thought that Mr Montebourg would this time around be standing well clear and allowing a foreign company to take over Alstom, but his meddling is likely to scare off any suitors.

Which is a shame, because the French make for extremely good engineers and technicians and there is probably an enormous residual value in Alstom in the form of personnel, products, and patents which GE could put to use without destroying the company or its presence in France completely (which is presumably why they wanted to buy it in the first place).  But should the actions of the French government and the unions prevent such a takeover, it increases the likelihood that the company will cease to exist altogether within a decade, as we’ve seen with the Goodyear factory.  And how does that help anyone in the long term?