After being caught using leaked tax plans, PwC is flogging its lucrative government consulting business – rebranding it “Bell” – to a private equity firm for $1
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 22 in our series for 2023 and today’s date is Friday June 30
First I’ll be talking to I’ll be talking to Janty Ayoub, Founder and CEO of AiiMs who will talk about how people can protect themselves from online scams. And I’ll be talking to AMP Capital chief economist Shane Oliver about the market outlook for the next financial year.
But now, let’s talk to Janty Ayoub,
So what’s happening in the news?
Renowned investor Jim Rogers, a veteran American bigshot who has worked closely with George Soros and co-founded Soros Fund Management, recently made a startling prediction about the future of the financial markets. According to Rogers, the next bear market will be the most significant in the last 80 years, drawing parallels to the Great Financial Crisis of 2008 and foreseeing an even worse scenario. Rogers highlighted the mounting levels of debt within the global economic system as a crucial factor that will eventually trigger a severe bear market in risk assets. Comparing the current state of affairs to the 2008 crisis, he emphasized that the debt levels have skyrocketed since then, making the situation far more precarious. Rogers also drew attention to the great inflationary crisis of 1980, recalling the substantial interest rates and treasury yields that were necessary to combat inflation at the time. He warns that a similar situation could be on the horizon for the market. The concerns raised by Rogers extend across multiple markets, including property, stocks, bonds, and currencies. During the 1980s, interest rates on treasury bills reached staggering heights of over 21% during the last massive inflationary storm that struck the market.
Governments around the world should raise taxes or cut public spending to help central banks tame inflation and mitigate the risk of a financial crisis, the Bank for International Settlements has said. The central bankers’ bank, which often operates as an informal mouthpiece for the institutions, said governments were “testing the boundaries of what might be called the region of stability” by leaving fiscal policy loose while inflation remains high and interest rates are rising rapidly. “[Fiscal] consolidation would provide critical support in the inflation fight,” the BIS said in its annual report, published on Sunday. “It would also reduce the need for monetary policy to keep interest rates higher for longer, thereby reducing the risk of financial instability.” Traditionally there has been a separation between fiscal policy, set by governments, and monetary policy, set by central banks and targeted to control inflation, while taking account of the levels of public spending and taxation. Central bankers have insisted that they are confident in their abilities to separate monetary policy decisions from financial stability concerns, but the BIS’s concern contrasts with those assurances. The chances of a financial crisis are significant given that interest rates are high and still rising, the BIS said. However, it added that these risks could be reduced if governments tightened fiscal policy, taking some pressure off interest rates as the primary policy tool and strengthening countries’ public finances.
Oil and gas majors are stepping up efforts to break into lithium to diversify beyond fossil fuels as hopes rise over a technological breakthrough to produce the metal critical for electric car batteries. ExxonMobil, Schlumberger, Occidental Petroleum and Equinor are exploring whether their core skills of pumping, processing and reinjecting underground fluids such as oil and water could be deployed to process lithium from unconventional brine resources, helping to ease forecast shortages of a material expected to be vital for the energy transition. “There are a number of oil and gas majors putting a lot of time and attention into how they can become big in lithium,” said Brian Menell, chief executive of TechMet, a mining investment fund backed by the US government. TechMet has a stake in EnergySource Minerals (ESM), a lithium developer backed by oilfield services giant Schlumberger. The potential push into lithium comes as producers from Exxon and Chevron in the US to Equinor and BP in Europe try to remain profitable amid a global effort to curb emissions and transition from fossil fuels to cleaner energy. Oil majors’ drive into lithium would reassure automakers that at present rely on small, unproven miners to deliver the vast quantities of lithium needed to electrify their vehicles in the coming decade as western countries ban sales of new petrol and diesel cars and as electric vehicle use soars in China.
High interest rates are expected to make the Australian economy one of the worst performed across the Asia-Pacific over the next two years, with warnings the full impact of the Reserve Bank’s aggressive tightening of monetary policy has yet to be felt. Ratings agency S&P Global has forecast Australia’s economy to expand by just 1.4% this calendar year, making it the fifth slowest of the 14 major Asia-Pacific economies tracked by the organisation. Next year, it is tipping growth to slow to 1.2%, dragging Australia down to the second-worst economy in the region, ahead of only Japan, which is expected to expand by 1.1%. S&P has sliced half a percentage point from its forecast earlier this year on the Australian economy, due largely to the growing impact of the RBA’s sharp increases in interest rates this year.
PricewaterhouseCoopers plans to exit all government advisory work, entering an exclusivity agreement to divest its federal and state government business to Allegro Funds for $1 in the wake of the tax leak scandal. The $1 price tag means the consulting business has effectively lost all its value. Allegro would meet the costs of setting up and running the new venture if the deal goes ahead. It will have about $300 million in theoretical billings and it will only provide consulting services to public sector organisations. The Big Four consulting firm on Sunday announced it would aim to sign a binding agreement with Allegro Funds by the end of July, at the same time it revealed Kevin Burrowes would be appointed as chief executive officer. Government work accounted for 20% of PwC’s revenue in the 2023 financial year, and will impact its future size and operations, the firm said in a statement. Around 130 PwC partners and up to 2000 employees would move across to the new business, known as Project Bell. PwC’s inability to deal with its tax leaks scandal led to the Department of Finance effectively banning PwC from winning any new contracts from the Commonwealth last month, all but destroying a business previously worth about $250 million in billings a year. The difference in the size of the billings is due to the inclusion of the firm’s risk consulting arm in the potential deal. The proposed new company will involve former PwC partners providing government, health, infrastructure, defence and risk advisory consulting services. It will have separate systems and offices from PwC and operate throughout Australia. Bell’s interim leadership team is made up of 10 PwC partners: Tim Jackson, PwC’s global government and public services advisory leader; David Sacks, the firm’s government consulting practice leader; Jamie Briggs, the firm’s Adelaide management partner; Ben Neal, the firm’s defence leader partner; Chris Rogan, the firm’s markets managing partner; Adrian Box, PwC’s national leader for integrated infrastructure; Tricia Tebbutt, the firm’s Perth consulting lead partner; Diane Rutter; Kate Evans and Josh Chalmer
If PwC, Allegro and the 10 partners who will lead Bell can actually pull it off, it could change the big four accounting/consulting oligopoly forever. That’s because Bell, or whatever the business ends up being called, will give up all private sector work, a move specifically designed to deal with what a Senate report last week described as the conflict at the heart of the PwC scandal: the fact the firm has always worked as a tax agent and adviser for the private sector while also advising the public sector. Bell would specialise in work for government departments and agencies, public sector organisations such as universities and public health bodies. The idea is that by steering clear of the private sector, Bell simply couldn’t do what PwC did – use secret government information to help corporate clients and make profits for itself. (The new body will also need to adhere to the Australian Public Service code of conduct.) Notably, none of the 63 PwC partners and staff on the infamous list of people who received the leaked tax information would work for the new company, nor will anyone associated with other government scandals such as robo-debt. The hope is that a pure-play, independent government consulting firm would have a distinct advantage over the likes of Deloitte, KPMG and EY, which would continue to face the challenge of managing the structural conflict that the Senate committee wants addressed. That’s not to mention McKinsey and Boston Consulting Group, who have a model where they advise governments on policy and then companies affected by that policy on strategy. Which begs the question: if Bell does get off the ground – and that remains a big if at this stage – could the other members of the big four be forced to contemplate a similar split?
Singapore-based PwC veteran Kevin Burrowes is a safe pair of hands who is being parachuted into its Australian headquarters to help steer the firm out of a controversy that has rocked its local business and severely embarrassed its global partners. British-born Burrowes, a PwC partner for 19 years, is currently PwC’s global clients and industries leader, with a strong background in financial services. With PwC’s New York-based global chair, Bob Moritz, delivering a scathing criticism of its Australian leadership, which, he said, had “failed to meet the network’s code of conduct and uphold its professional standards and values”, Burrowes will have a major role to play restoring trust in the organisation’s Australian business. PwC’s Australian chair, Justin Carroll, said Burrowes’ experience across other parts of the accounting firm’s network would allow him to bring “a fresh perspective to the firm”. He said Burrowes would “work with his colleagues and management team to re-earn trust with PwC Australia’s stakeholders”. In a statement, Burrowes said he would “work tirelessly to increase transparency and repair trust with our stakeholders, while also enhancing our governance and culture”. Burrowes took up his current role in Singapore in July 2020 after four years as a member of PwC’s UK’s executive board, where he was managing partner, clients and markets.
Some of the world’s biggest car companies say Australia must urgently adopt globally competitive fuel efficiency targets if it wants to boost imports of affordable electric vehicles and ensure the carbon-intensive transport sector does its “fair share” of contributing to legally binding climate targets. In a new submission to the Albanese government, the key industry group for electric vehicle manufacturers, retailers, importers and charging station suppliers recommends the introduction of credible and ambitious vehicle pollution limits to reward carmakers for bringing more low- and zero-emissions vehicles into the local market, and penalising those who do not. Australia trails globally on the adoption of electric vehicles. Just 3.8% of new vehicle sales were electric last year, compared with 8% in the United States, 23% in Britain and 25% in Europe, the International Energy Agency says. The Albanese government has set a target to cut emissions 43% by 2030, and net zero by 2050. NSW, Victoria and Queensland have set targets for EVs to reach 50% of new car sales by 2030, and 100% by 2035. But without strict pollution limits that match the ambitious goals set by the United States and European Union, carmakers would have to target countries with more attractive policies, the council says. The US fuel efficiency standard, forecast to cut the country’s emissions by 40% by the end of the decade, is designed to boost sales of electric vehicles by 1000% so that they account for 67% of new passenger cars sold in the US by 2032.
Almost $270 billion of Australian home loans are at risk of defaulting or being classified as severely stressed in the next year, as the borrowers behind “zombie mortgages” struggle to keep up with their repayments. The COVID-19 mortgage boom may come to haunt the major banks, warned Barrenjoey banking analyst Jon Mott, as loans written when interest rates were at record lows become increasingly expensive to service as the employment outlook deteriorates and the cost-of-living bites. This follows 12 cash rate increases from the Reserve Bank over the past 13 months that have added about $20,000 to annual repayments on a $750,000 loan. As RBA deputy governor Michele Bullock warned unemployment had to reach 4.5% in the next 18 months to tame persistently high inflation, Mr Mott said Australia was likely to hit a technical recession – two straight quarters of economic contraction – and the jobless rate could stretch as high as 5% and create a wave of “zombie mortgages”. New Zealand’s economy slipped into recession this month. “This will have a significant impact on many mortgagors who borrowed their maximum,” the bank analyst said. “Many of these customers are likely to fall into delinquency as serviceability buffers have been exceeded, real wages have fallen, and additional work is likely to become harder to come by.” The big four banks wrote $267 billion in home loans over the 2020 to 2022 financial years to borrowers who took on debt of more than six times their income, analysis by Barrenjoey found. A debt-to-income ratio of six times or more is considered “risky” by the prudential regulator.
Social media giants will be hit with millions of dollars in fines if they repeatedly fail to remove disinformation and misinformation from their platforms under a major crackdown by the Albanese government. Communications Minister Michelle Rowland on Sunday released draft legislation to give the Australian Communications and Media Authority (ACMA) powers to hold digital platforms to account for spreading harmful fake news. Under the proposed laws, the authority would be able to impose a new “code” on specific companies that repeatedly fail to combat misinformation and disinformation or an industry-wide “standard” to force digital platforms to remove harmful content. The maximum penalty for breaching an industry standard would be $6.88 million, or 5% of a company’s global turnover. In the case of Facebook’s owner, Meta, for example, the maximum penalty could amount to a fine of more than $8 billion. Codes or standards could include requiring platforms to have better tools to identify and report misinformation, a more robust complaint handling processes and greater use of fact-checkers. Under the proposed laws, the ACMA would also be able to obtain information and documents from digital platforms relating to misinformation and disinformation on their services. But the government says the ACMA would not have a role in determining what is true or false. The draft legislation went out for public consultation from Sunday, which Rowland said would give companies and the public the chance to have their say.
Business collapses have hit the highest monthly level in more than seven years, as failures spread beyond property construction to retail, healthcare, childcare and mining. Higher interest rates, weaker consumer spending and directors throwing in the keys after a temporary pandemic reprieve are the main reasons for the jump in insolvencies. Insolvency and restructuring appointments hit 868 last month, the highest monthly result since November 2015, according to analysis of Australian Securities and Investments Commission data. While some of the spike is attributed to a “catch-up” of struggling businesses that delayed folding during the pandemic, insolvency practitioners say momentum is building after a quiet few years. Insolvency work fell to record lows during the pandemic due to massive stimulus payments to businesses, loan repayment deferrals granted by banks, rent waivers by landlords, the Australian Taxation Office giving firms a breather and the federal government’s temporary insolvency moratorium. Some 7158 companies went bust in the 11 months to May 31 this year, leaving administrator appointments on track to match or exceed pre-pandemic levels recorded between the 2017 and 2019 financial years. Appointments have hit 2032 in construction, 1013 in accommodation and food services, 490 in retail and 423 in manufacturing. Collapsed home builder Porter Davis has been the highest-profile casualty, but more businesses outside the troubled construction sector are also appointing administrators or being wound up as debt and equity financing becomes more challenging. These include stricken transport group Scott’s Refrigerated Logistics, rapid local delivery service MilkRun, beauty and skincare group BWX and craft beer company Tribe Brewing.
Sentiment among manufacturers has plunged to its lowest level since the global financial crisis as the industry grapples with rising costs and a slowing economy, with some firms predicted to go bust. A net 32% of manufacturers expect the general business situation to worsen over the next six months, according to the ACCI-Westpac industrial trends survey for the June quarter. The figure represented a sharp deterioration from the March quarter when a net 15% of respondents thought conditions would get worse, and was the weakest outcome in 14 years. The release of the survey comes amid mounting evidence that growth in the economy is slowing in response to the fastest interest rate tightening cycle in a generation. While higher interest rates have so far failed to tame inflation or to force a meaningful increase in the unemployment rate, they have contributed to a downturn in discretionary spending and a souring in consumer and business sentiment. A net 10% of manufacturers predict their profits will decline in the coming year, according to the ACCI-Westpac survey.
Medibank Private will have to set aside $250 million as insurance against issues associated with a major data breach last year, with the prudential regulator also reviewing the company’s “governance and risk culture”. The decision by the Australian Prudential Regulation Authority would likely “increase the risk of adverse class action rulings” against the company, according to equities analysts at JPMorgan. The additional capital adequacy requirement, which came as a surprise to some in the market, was “a short- to medium-term negative for the stock itself, and arguably indicates increased risk of adverse findings in the class actions against them relating to the cyber breach”, the investment bank’s Siddharth Parameswaran wrote in a note to clients on Tuesday. The company is facing three class action lawsuits from customers and shareholders because of the breach. Maurice Blackburn has also filed a complaint to the Office of the Australian Information Commissioner, which can force Medibank to compensate affected customers. In October, almost 10 million customer records were stolen from Medibank by criminal hackers, who later released parts of the information after demanding a random payment. The stolen data included sensitive information on 480,000 policyholders’ medical conditions and treatment. In late April, the company said it would introduce changes to its systems after being handed a report on the breach conducted by Deloitte. However, the company will not release the report or its recommendations.
The executive chairman of Bega Cheese, which owns the Dairy Farmers, Big M and Farmers Union milk brands along with Vegemite, says labour shortages on dairy farms are contributing to rising milk prices for households. Barry Irvin said there had been a 9% drop in the volume of milk being produced by dairy farmers in Australia in the past two years, a reduction of 700 million litres. Fierce competition for the shrinking pool of milk which all players, including private-label brand owners such as supermarket chain Coles, are chasing is keeping farmgate prices high, along with rising input costs and inflation. This is at a time when global dairy prices for products such as skim milk powder have fallen about 30% in the past three to four months. But Mr Irvin said the “disconnect” between pricing in the two different parts of its business – branded products and bulk dairy commodities – would prompt write-downs of between $180 million and $280 million at Bega Cheese. The company is reviewing some operations at dairy plants at Koroit and Tatura in country Victoria as it assesses the final extent of write-downs across the company.
Latitude’s woes could become even costlier after being hit with a $1 million lawsuit by a former mayoral candidate who says the firm’s negligence meant his personal details were shared on the dark web. The firm was hit by a cyberattack in March after a hacker used privileged credentials from a third-party vendor to access its systems and steal the data of 7.9 million customers. Shahriar “Sean” Saffari was one of the people affected by the hack and is now pursuing Latitude Financial Services Australia for $1 million in damages in a Federal Court case filed earlier this month. According to documents filed with the court, Saffari held a low rate Latitude Mastercard credit card. He had his personal information stolen in the data breach and provided to the dark web where other parties could use it for financial gain. Saffari, who was an unsuccessful independent candidate for Maitland’s mayoralty in 2021, claims the firm failed to take reasonable steps to protect and secure his data, breaching both his privacy and its duty of care to protect him from harm.
And that’s it for this week. And next week, I’ll be talking to Andrew Curnow who created Foundation, an Australian made personal care products that donates 100% of all its profits to registered charities supporting survivors of domestic violence in Australia. And I’ll be talking to RMIT economist Sinclair Davidson about the likelihood of recession.
In the meantime you can catch me on Facebook, Twitter, Instagram, LinkedIn and YouTube. And if you want leave a comment. For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business on the Apple podcast store or on my website leongettler.com.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week