Extent of Co-op shambles laid bare by Lord Myners

Lord Myners said management standards at the Co-op were worse than at banks before the credit crunch. Photograph: Gary Calton for the Guardian

The shambolic state of the Co-operative Group was laid bare in a scathing verdict warning that the survival of Britain's biggest mutual organisation was at stake.

The Co-op has been undermined by "reckless" dealmaking, "shocking" levels of debt and governance standards far worse than even the banks before the credit crunch, according to Lord Myners, the group's senior independent director who was charged with overhauling the boardroom.

In an exclusive interview with the Guardian, the City grandee who was installed as a Labour minister at the height of the credit crisis said: "I have observed the bad governance of the banks, but this is on an altogether worse level.

"The rate of deterioration has increased over the last half dozen years because of the recklessness of the strategy being pursued and supported by the board."

He added that the entire retail, funeral home, pharmacy and farming conglomerate would deteriorate further unless it was radically reformed.

Myners, also an ex-chairman of Marks & Spencer and Guardian Media Group, said the Co-op's reputation as a business run democratically by its members was a myth.

He said the company's most senior managers were left to waste billions of pounds on disastrous corporate transactions because the directors drawn from the Co-op movement were not qualified to keep them in check. "Few of them have any serious business experience and many are drawing material financial benefits from their positions."

Myners said the Co-op's elected directors – who include a plasterer, lecturer, tax official, nurse and farmer – had overseen "breathtakingly value-destructive" deals, including the takeover of the Somerfield supermarket chain and the Britannia building society.

It was the Britannia deal that left the Co-op bank facing a £1.5bn financial black hole and resulted in the bank being taken over by US hedge funds.

Myners, called in to review the group's governance in December, proposed far-reaching changes that he said would ensure it could stay true to the Co-op's democratic ideals and still be run on commercial lines.

In a report rushed out – just days after the group's chief executive, Euan Sutherland, quit and branded the organisation "ungovernable" – Myners concluded that:

• The group's "massive failure of governance" had "gravely damaged the organisation", letting its business decay and leaving it financially weak.

• Its members, who supposedly own the business, have almost no say in what the board or managers decide.

• Unless the governance is reformed "it will run out of capital to support its business".

Myners said it was a tragedy that Sutherland had quit because the Co-op owed its survival through last year's bank crisis to him and his team. He said what he had uncovered at the Co-op was so serious that the group had no choice but to change.

"What I think I have exposed is that the Co-op is not a democratic organisation and has a deeply flawed governance structure, and if it doesn't address these issues the pace of decline will simply increase. The reality is that the Co-op has been in decline for 60 years."

The organisation had "the worst governance I have ever witnessed" and "shocking" levels of debt, some of which was hidden by complex property deals, he said. The group currently has debts of £1.2bn. "This is folly in the extreme. This really pains me."

He said that the group, led by £1.2m-a-year chief executive Peter Marks until last year, had been obsessed with making large acquisitions instead of competing in the cut-throat world of grocery retailing, which is its main business.

The crisis at the Co-op came to a head last week when Sutherland resigned, after just 10 months, when the Observer revealed his £3.6m pay package. Sutherland said that senior colleagues were determined to undermine him and he blamed them for a series of damaging leaks. Myners claimed Sutherland never intended to take the £2m of bonuses awarded on top of his £1.5m salary. The money was agreed before Myners became involved and, he said, should have been revealed earlier.

Britain's biggest mutual company was plunged into chaos last May when a £1.5bn financial hole was revealed at its banking arm. The capital shortage had forced the Co-op to abandon its bid for more than 600 Lloyds bank branches and has led to US hedge funds owning most of the bank.

The problems deepened in November when the bank's former chairman, Paul Flowers, was alleged to have bought class A drugs and used rent boys.

Myners said the Co-op had lost almost all the customers it picked up when it bought Somerfield in 2008 for £1.6bn. He said taking over the Britannia had almost bankrupted the Co-op bank and the attempted Lloyds deal, codenamed Project Verde, was misconceived: "Somerfield was reckless. Britannia was reckless. Verde was reckless."

Myners said he had worked four days a week for three months examining the group's "labyrinthine" structures and coming up with proposals. He will be paid £1 for his efforts.

The Flowers affair triggered a string of inquiries into the turmoil at the group, whose ethics and democratic structure had been lauded as an alternative to the big bonuses and ruthless business practices of City-controlled companies.

Myners said his proposals would make the group more democratic by involving its currently- ignored wider membership while making sure people with business experience were in charge of commercial decisions.

He faces opposition from within the group's senior ranks who accused Sutherland of trying to scrap the values established by the Rochdale pioneers who founded the group in 1844. But Myners argued even his most entrenched opponents now realised the status quo could not stand.

Myners said the group's directors had been paid hundreds of thousands of pounds in the last few years as the group was driven close to ruin.

"It depresses me. It's a controlled anger," he said.

He rejected claims he had alienated board members with his uncompromising verdict on their abilities and the Co-op's record.

He called for the replacement of the group's 20-strong elected board with a smaller board of six or seven non-executive directors with business experience and two executives from the group.

Members would be represented on a new National Membership Council to hold the board to the group's values and principles. Directors would be elected and reelected each year by all members, overhauling the current system which puts power in the hands of a few hundred activists

Non-discriminatory market access: Pakistan, India all but sign trade normalisation deal

India has accepted Pakistan’s demand to exclude 160 items – mainly textile products – from its Pakistan-specific Sensitive List. ILLUSTRATION: TALHA AHMED KHAN

ISLAMABAD: 

Pakistan and India are very close to clinching a deal on complete trade normalisation after New Delhi accepted Islamabad’s demand to remove textile products from its prohibitive list, an aide to Prime Minister Nawaz Sharif told The Express Tribune on Friday.

Both sides have reached a broader understanding on how to move forward on the issue of liberalising bilateral trade and overcome associated obstacles, said Miftah Ismail, special assistant to the prime minister and chairman of the Board of Investment.

Ismail is the first senior government official to speak at length about Pakistan-India trade talks, which have so far been held behind closed doors. He said both sides would simultaneously announce Non-Discriminatory Market Access on Reciprocal Basis (NDMARB) status for each other.

NDMARB was coined after the term Most-Favoured Nation (MFN) became controversial. The new term will grant India the same benefits as envisaged under MFN.

A special government panel chaired by Finance Minister Ishaq Dar has already decided to ask the federal cabinet to approve a fresh roadmap for granting NDMARB to India. A summary will be moved to the cabinet shortly and it is expected that both sides will notify changes by March 31, according to finance ministry officials.

According to Ismail, Pakistan will abolish the Negative List of 1,209 items which cannot be imported from India under the NDMARB agreement. Pakistan, in 2012, took a giant step by replacing the Positive List of 1,946 items, which could be imported from India, with the Negative List.

On the other hand, Ismail said that despite India’s claims that it had granted MFN status to Pakistan in 1996, New Delhi has so far not allowed Pakistan free market access. “There are restrictions on investment from and in Pakistan, for instance,” he said. “Until these restrictions are there, India cannot claim it has given Pakistan MFN status.”

Some of the items currently protected under the Negative List would subsequently be protected under the Sensitive List maintained under the South Asia Free Trade Agreement (SAFTA), Ismail said. According to him, automobiles and pharmaceuticals are two sectors which will be protected under the SAFTA Sensitive List, neutralising two lobbies against NDMARB status for India.

“As a nation we have sacrificed a lot while setting up the auto industry and we will protect it,” he said.

Meanwhile, India has accepted Pakistan’s demand to exclude 160 items – mainly textile products – from its Pakistan-specific Sensitive List, Ismail told The Express Tribune. India, he said, will also bring down the list from 614 items to 100 items.

As a first step towards NDMARB, Pakistan will allow India to import all goods through the Wagah-Attari border, Ismail said. The border would also remain open 24 hours a day, he added. According to him, the containerised movement of goods across the border will replace current labour-intensive practices.

Ismail said Pakistan has not compromised on anything while deciding to liberalise the trade regime with India. He said if India tried to create obstacles in the way of Pakistani goods, Islamabad would respond with the same intensity.

“Trade normalisation will triple the volume of Pakistani exports to India immediately,” Ismail said. He added that imports from India will substitute expensive machinery imports from Europe and West.

“In the end, it will be the consumers who will benefit from trade normalisation.

Industry feels threatened by imported, smuggled tyres

According to statistics, Pakistan imports four million tyres while 1.6 million are sold by local manufacturers. PHOTO: FILE

LAHORE: 

For those Pakistanis, who have their own vehicles, the influx of imported and smuggled tyres may provide a cheaper alternative, but for domestic manufacturers, the market of such tyres has reached such a scale that could severely hurt Pakistan’s industry.

Manufacturers insist that the domestic industry is feeling increasingly threatened by heavy imports of under-invoiced tyres, which are hindering the growth of their business. They believe no quality check is applied to the imported tyres, majority of which are substandard and can pose a threat to vehicles and passengers while driving at high velocity.

“It is estimated that due to under-invoicing of tyre imports, the government loses a minimum of Rs5 billion annually. This practice is increasing year by year. And the authorities are not doing anything to curb this,” said a leading tyre manufacturer but asked not to be named.

The country’s rubber industry has room to play host to three new units, but in such tricky conditions investors are hesitant to inject capital. An investment of around $300 to $400 million was needed to set up a complete unit, which could generate about 25,000 direct and indirect jobs besides giving millions of rupees in taxes, he said.

Cars, trucks, buses and light commercial vehicles running on roads in the country need 8.2 million radial tyres every year. According to statistics, Pakistan imports four million tyres while 1.6 million are sold by local manufacturers. The remaining 2.6 million are smuggled into the country.

According to the manufacturer, the locally produced tyres are in line with the best standards and cannot cause harm to vehicles and passengers while travelling.

Citing an example, he said 30 different tyre companies were working in India and catering to the domestic needs as Delhi did not allow imports in order to protect its industry.

He stressed that his company had the capacity to churn out 2.1 million tyres in a year, but could market only 1.6 million. “This comes despite the fact that our radial tyres are much better in quality than all foreign tyres brought into the country through under-invoicing and smuggling,” he said.

“We have been producing tyres for the last 50 years in collaboration with the fourth largest tyre producer in the world,” he said, adding the foreign principal had assisted the company in producing tyres that could withstand rough roads of Pakistan.

Besides losing Rs5 billion due to under-invoicing, the government is said to be bearing another revenue loss of Rs2.5 billion because of smuggling.

According to the manufacturer, around 200 to 225 trucks carrying smuggled goods including tyres cross into Pakistan from Afghanistan every day through the Chaman border. Each of these trucks usually carries goods worth Rs10-15 million.

To cope with under-invoicing, the local manufacturers have suggested a minimum increase of 50% in the import value of Chinese manufactured tyres and 40% in the value of tyres coming from other countries.

“If the authorities pay heed to the suggestion, government’s revenues could go up by almost Rs5 billion annually,” he argued.

July-February: Country receives 18% more foreign investment

More significantly, FDI increased sharply in February as it amounted to $79.2 million. CREATIVE COMMONS

KARACHI: 

Foreign direct investment (FDI) in Pakistan rose 17.9% in the first eight months of the current fiscal year, standing at $606.3 million compared to the corresponding period of previous year, according to data released by the State Bank of Pakistan (SBP) on Friday.

More significantly, FDI increased sharply in February as it amounted to $79.2 million. In contrast, there was an outflow of $14 million in the same month of the preceding fiscal year.

In the first half of 2013-14, FDI stood at $416.1 million, which was 26.8% lower than the amount invested in the corresponding six months of previous year.

Pakistan received FDI worth over $1.4 billion in 2012-13.

The oil and gas sector attracted the highest amount of FDI in the July-February period. It attracted a net investment of $296.2 million. However, it was 12.8% lower than the investment of $339.7 million it got in the corresponding period a year earlier.

Sectors of the economy that received major FDI inflows during the last eight months include financial business ($102.8 million), chemicals ($71.6 million), tobacco and cigarettes ($55.5 million), food ($75.1 million) and beverages ($23.7 million).

In contrast, a major dip in FDI was registered in the telecommunications sector, where the net outflow of investment was $131.4 million. Other sectors that recorded a considerable net outflow were petroleum refining ($11.6 million), electrical machinery ($11.3 million), trade ($8.5 million) and transport ($5.2 million).

As for foreign portfolio investment (FPI), which includes foreign public investment, Pakistan attracted $118.3 million during the July-February period, down 28.8% from $166.2 million in the comparable period of previous year.

Countries that brought significant amounts of FDI into Pakistan during the period under review include Switzerland ($178.3 million), United States ($161.9 million), Hong Kong ($144.9 million), United Kingdom ($76.2 million), Italy ($50.8 million), France ($47.6 million), Oman ($35.3 million) and Austria ($32.2 million).

Countries that took major investments out of Pakistan are Norway ($47 million), Qatar ($38.9 million), Saudi Arabia ($32.8 million) and Singapore ($31.1 million

National carrier: Selling 26% shares is not privatisation, says secretary

The national flag carrier will phase out old Airbus 310s as it inducts newer planes like the B-777s so there are planes for longer routes. PIA will also need at least 20 narrow-bodied planes. PHOTO: FILE

KARACHI: 

Pakistan International Airlines (PIA) is not being privatised, but only a small stake will be sold to a strategic investor, insisted Aviation Secretary Muhammad Ali Gardezi on Friday. 

“We have nothing to do with it (privatisation),” said Gardezi, who is also the chairman, on the sidelines of an event held to open bids for new planes before newsmen. “Yes, the management will also be given to the investor, but the government will still hold 74% shares in the airline.”

Repeated insistence by the aviation ministry and PIA’s management that the government is not privatising the national flag carrier is in stark contrast with what senior government officials have been saying all along.

Pakistan Telecommunication Company Limited (PTCL) was also ‘privatised’ in a similar manner when government sold 26% stake in landline telephone monopoly.

Tender requirement not met

PIA is most likely to reject the bids it received on Friday for lease of four twin-aisle and as many ATR aircraft because it was offered much older planes than what the tender asked for, airline officials said on Friday.

Five bids received in response to the February 12 tender were opened in front of Gardezi, senior PIA officials and newsmen.

Bids came from Standard Chartered Bank, DV Bank, Bank of China, Aircraft Leasing and Dubai Aerospace but none of the planes met the tender requirement of being manufactured in year 2010 or later.

“PIA director technical will now review the bids in detail and then decide what to do,” PIA Managing Director Junaid Yunus said. “But apparently the bids will be disqualified.”

In case that happens, PIA will issue another tender.

Some of the planes offered for lease have been built in 1999. PIA wants to induct newer planes into its fleet to bring down fuel cost, which eats up more than 50% of its revenue.

Gardezi said that the national flag carrier will phase out old Airbus 310s as it inducts new planes. “We are trying to get the B-777s so we have planes for longer routes.” PIA will also need at least 20 narrow-bodied planes, he said.

PIA is slowly increasing sales to meet the deficit, he said. “Monthly expense of the airline is around Rs13 billion. We have been able to increase the revenue to between Rs9.1 billion and Rs9.5 billion a month. Our aim is to reach the break-even point at any cost,” said Gardezi.

Fuel expense, which eats up 56% of airline’s revenue, is being brought down, he said. “Ultimately, we would want to take it down to 35%.”

In response to a question, he said there is need of building second and third hubs for PIA in Lahore and Islamabad. “Ultimately, we will need multiple hubs. Financing for that remains an issue,” Gardezi said.

Leasing more aircraft will add to PIA’s already huge long-term liabilities of over Rs70 billion. Yunus said the debt has to be restructured to help PIA come out of the red. “This does not mean we are seeking equity injection from government. We can do that on our own.”

Business summit: From conformance to a leadership role

was attended by more than 600 professionals from the finance and business communities. PHOTO: FILE

LAHORE: In the contemporary business environment, the role of the Chief Financial officer (CFO) has advanced — from a traditional role of providing financial insights and analysis to a supporting one where strategies are shaped and key business initiatives are taken as the financial leader.

This was stated by financial experts at the Chief Financial Officer (CFO) Conference, organised by the Institute of Chartered Accountants of Pakistan (ICAP), which was attended by more than 600 professionals from the finance and business communities.

ICAP’s professionals constitute a vital part of the industry and it is incumbent for the institute to cater to their needs and expectations, said ICAP President Naeem Akhtar Sheikh. The ‘CFO Conference’ over the years has emerged as a platform where professionals in business and industry meet to explore, confront and look for solutions to meet the challenges and issues of modern business era.

He also discussed the emerging role of CFOs as value integrators at large, expanding their influence beyond financial decisions to broader strategic choices about their business, citing the challenge to balance and achieve excellence in all roles.

Sheikh supported the significance of governance in the system and training finance teams with modern technology. He pointed out the qualities CFO must possess like patience, flexibility, strategic orientation and independent thought.

Kamran Mirza, CEO Pakistan Business Council, while emphasising the role of CFOs as a strategic partner to the CEOs, said that transformational leadership will result in creating synergy and building strong teams. He added that CFOs need to apply vision, determination and, above all, a steady and methodological pace to reap the benefits across the organisation. To be effective, continuous education is a must.

Abdul Aleem, Secretary General Overseas Investors Chambers of Commerce and Industry, elaborated on how to create an enabling environment for growth in the Pakistani economy.

“Our resilient economy has absorbed multi-dimensional shocks over the years,” he said, adding that the government has to have a national economic agenda to steer the country out of the crisis, for which a robust political will and commitment are needed.

Panel discussions were also held on different topics like the role and expectations of a CFO – preparing accountants for finance leadership, ROI-value versus profit among others.

Malaysian plane could have been hijacked to Pakistan: US media

WASHINGTON

The missing Malaysia Airline flight MH370 could have flown for an extra four hours after it lost contact with air traffic controllers and could had been hijacked and landed in Pakistan, according to American media reports.
In another dramatic twist, aviation experts believe the plane flew for a total of five hours under radar.
The possibility means the plane could have travelled for another 2,200 miles to Pakistan or Mongolia, according to the Wall Street Journal.
The plane could had been hijacked and taken to an unknown location – one of many theories as to what may have happened to the disappearing plane.
The journal said it is not clear whether investigators have evidence of a hijacking – but they have not ruled the possibility out.
US investigators are looking into the prospect and counterterrorism officials are investigating the idea that the plane’s transponders were turned off intentionally and the aircraft was diverted when an image appeared to show debris.
It is based on data automatically downloaded and sent to the ground from the aircraft’s Rolls Royce engines as part of a standard monitoring programme.
The Boeing 777 jetliner vanished six days ago with 239 people on board. The Beijing-bound flight left Kuala Lumpur at 4.41pm GMT, but less than 50 minutes later it lost communication with air traffic control. But a senior Malaysia Airlines official told media that no such data relating to the potential extra flight time existed, while a second official said he was unaware of it too.
A spokesperson for engine manufacturer Rolls-Royce had no immediate comment. Malaysia Airlines said previously the engines stopped transmitting monitoring signals when contact with the plane was lost. The engines should transmit live data to the ground every 30 minutes.
Hopes were raised when a Chinese state agency released satellite images of three pieces of large debris floating near the plane’s last recorded position in the South China Sea but found nothing.