GreenSpill: Tigers in the Cabinet Office?

"You've missed the point completely, Julia: There were no tigers. That was the point." So said Alex at the start of T.S. Eliot's "The Cocktail Party". Julia replied: "Then what were you doing up in the tree, you and the Maharajah?"

David Cameron ("DC") has attended a few cocktail parties in his time. It is perhaps not too unkind to suggest that he, too, is prone to the odd lapse of judgement and, as in the Greensill case, an occasional aneurysm in the common sense artery. But the tigers are not the politicians here: the political fallout is a transitory sideshow. The focus instead needs to be on how DC, as it were, ended up in a tree with the "Maharajah" of "Supply Chain Financing", Lex Greensill ("Lex G"). The conclusion is that there appears to be a malaise infecting the administration of government and, specifically, the Cabinet Office. The symptoms seem to include: a shortage of real world business acumen; a lackadaisical approach to due diligence; and myopia relative to conflicts of interest. The good news is that this malaise can (and indeed must) be addressed in short order.

"GreensSpill" is the cautionary tale that should catalyze the search for a cure. Lex G was apparently first introduced to DC in 2011 by the greatly respected Lord (Jeremy) Heywood of Whitehall, who at the time was Downing Street Permanent Secretary. Heywood and Lex G had met when they were both bankers at Morgan Stanley (Heywood took a respite from the Civil Service from 2003 to 2007). At the time of the introduction, there was an energetic (and wholly appropriate) focus on rendering government more efficient. It seems that Lex G was sufficiently persuasive of the efficacy and relevance of his "supply chain financing" ("SCF") secret sauce that he was retained as a "special adviser" to DC and allowed to base himself, for at least part of the time, at Number 10. In my experience, good advisers are independent and objective: advice that is without fear or favour best informs decision making. When contemplating whether or not to buy an electric car it is best not to seek the input of Elon Musk, for example (even if Elon was prepared to work for a very low fee). Taking advice on the applications of SCF for the Government from Lex G, who was setting up an SCF business, was unlikely to lead DC to the conclusion that SCF was largely inapplicable.

Nonetheless, in a leaked email (is there any other kind of email in a Conservative Government?), Heywood said “Lex and I have been working on this stuff [presumably SCF] on and off for five years, It is a huge frustration that HMG [Her Majesty's Government] -continues to leave free money on the table in this way.” This is a Sphinx -like statement. SCF, in and of itself, would not have meant that HMG could take "free money" off the table. What is more, there is no such thing as "free money" - at least I have never found it in my forty years in finance. The application of SCF would be to suppliers of goods or services to HMG; it would not, per se, mean that HMG could thereby reduce the amount it pays to its suppliers, as I will explain (I was a structured finance banker myself for 20 years).

Even before my time, SCF, or as it was then known (less glamorously, but more transparently), "receivables financing" or "receivables factoring". A financier "buys" or lends against your invoiced sales by taking security over the receivables thus created by advancing you their value on the day the receivable is created, less the agreed cost of this financing (say, 2%). So if in your business you sell goods or services to customers on the basis that they have 60 days to pay you, the SCF financier pays you, on or about the day the invoice is created, 98% of the billed amounts and is paid back 100% once the customer pays. This means the supplier has working capital to invest in generating more receivables. It is unclear what Lex G's secret sauce might have been: the adage that "there is nothing new in finance" is, in my experience, a truism.

The argument was, presumably, that if suppliers to HMG could through SCF be "paid" more quickly, then HMG could negotiate better terms - for example, rather than paying in 60 days, it could pay in 90. The fly in the Lex G ointment would seem to me that HMG could achieve the same effect by asking suppliers to bid on the basis of different payment terms - say, 10, 30, 60 or 90 days. Suppliers would necessarily reflect their cost of working capital finance (which they already obtain from multiple sources) in their bids. Complicating HMG procurement by offering "tied SCF" would likely have an inverse impact to that desired.

Lex G might protest that I am being unfair. It seems that Greensill took SCF further by financing "future receivables" for its clients by using data analytics to predict when, and in what quantum, invoices would be generated by them. Though potentially of benefit to the supplier being financed, this adds significantly to the risks of the product both for the borrower and the financier. This is particularly the case when there are unusual levels of uncertainty in the marketplace (an unexpected pandemic,for example). You do not need to be a skilled working capital financier to work out that, if the predicted receivables do not in fact get created, the financing cannot be repaid. Further, the recognition of the "future receivables" as the asset that is being financed arguably means the borrower's balance sheet obfuscates, and potentially distorts, its true financial position. But this strays into a debate on why Greensill ultimately collapsed, which is not our purpose here.

So, back to Lex G's anointment as "special adviser". 2011 was also the year that Lex G founded Greensill. Based upon Companies House records, Greensill Capital (UK) Ltd - apparently the SCF vehicle - was not incorporated until July 2012; Greensill Capital Management UK Ltd was incorporated in April 2012. It seems reasonable to conclude that, as of 2011, Lex G had no actual vehicle through which to channel the SCF: he had ideas and a winning patter. Though at first blush this might have been deemed to be a Good Thing as it meant he was advocating something that he could not at that point deliver himself. Subsequent events demonstrate that this would have been a specious argument.

The question is what, if any, due diligence Heywood or his colleagues conducted on Lex G before he was introduced to DC? It would have been entirely reasonable for DC to suppose that, with the endorsement of Heywood, Lex G was a man with the expertise and the wherewithal to bring the SCF schemes to fruition and that this had been carefully investigated. As a PR man himself, DC would no doubt have been impressed by Lex G's ability to spin a yarn but it is remarkable that someone of, at least apparently, such relatively little resource could have insinuated himself so effectively in the corridors of power. Lex G's appointment was a vivid example of the malaise diagnosed earlier.

It is not clear what Lex G was doing for the period between 2011 and March 2014: I have found no evidence of the fruits of the advice he was proffering. However, that was the point at which six new Crown Representatives were appointed - Lex G and five others. These six joined the existing 15 members of the panel. (Today the total number has dropped back to 20 as the Lex G entry has been airbrushed, funnily enough). Crown Representatives ("CRs") are a new one on me: the title suggests worthy individuals travelling the globe (or at least the Commonwealth) "representing" Her Majesty. In fact, the name is somewhat misleading: the panel was created to assist Her Majesty's Government to procure goods and services more effectively and efficiently (a simple example would be ensuring that Government departments are not individually contracting for utilities provision to government buildings and thus not harnessing HMG's vast buying power). The CRs work with the Government's 38 Strategic Suppliers (all names that you would recognize) in order to find ways to improve the deal Government gets. This is a Good Thing. (I have adopted this shorthand descriptor from the marvelous "1066 and All That" by Messrs. Sellar and Yeatman: if you have not read it, you should).

The CRs are necessarily independent - though many have had lengthy and distinguished careers with a Strategic Supplier, they are no longer employed by them (not even as lobbyists) and instead offer their sage advice for the princely sum of ￡500 per day (speaking as a taxpayer, this is a real bargain given the quality of the CRs). Each CR "man marks" a couple of the Strategic Suppliers (obviously not ones for whom they have worked) to work collaboratively on creating better procurement outcomes for HMG. The one outlier in the newly appointed CRs was - drumroll - Lex G. He was relatively young, still active in business and had never worked for one of the Strategic Suppliers. Other than this, he was a perfect pick. See comments above in respect of advisers who are not independent and objective.

It appears that Lex G was recommended for "CR ship" by Bill Crothers, who was the government's Chief Commercial Officer until 2015. Prior to this he was the government's chief procurement officer - a powerful ally for Lex G. In July 2015, it was announced that Crothers would leave the civil service. The Cabinet Office said Crothers would continue to work as an adviser on the government's "most complex deals", and would also take on "some similar advisory roles in the private sector" in the future. Official approval was given for him to begin advising Greensill in September 2015, while still employed in the civil service. Two months later he joined Greensill and in August 2016 became a director of Greensill's UK company. It seems that Crothers broke no rules and received all the required approvals from the Cabinet Office. It is ironic that Crothers' catch phrase in the civil service was "commercial common sense": irrespective of the rules, the optics of what he did do not pass the common sense test.

In the meantime we can only assume that Lex G was such a success as a CR that, in the Queen's Birthday Honours list of 2017, he was awarded a CBE "for services to the economy". Two brief asides here: (a) the CBE is the highest honour in the genus "Order of the British Empire" - trumping both OBE and MBE; and (b) in the currently febrile political correctness environment, presumably someone somewhere is considering changing the name of these awards. If it is apparently inappropriate that Emma took sugar in her tea (obviously as this directly links her to slavery - I jest not, Google it) surely the very mention of Empire in any context is to be avoided? (My tongue is firmly in my cheek here, for the avoidance of doubt).

The criteria for awarding CBEs are somewhat vague, but do require some form of distinguished contribution to something - be it in the business, political or charitable sphere. Answers on a postcard please from those of you who might shine a light on Lex G's towering achievements that so benefited the economy (as of 2017). My own initial thought was that the "CBE" next to Lex G did not in fact signify the eponymous honour but instead referenced, for example, Core Banding Exceptions or Chemical Beam Epitaxy (both of which exist and are worth your looking up; both, at a stretch, could have applied to our protagonist).

The Prime Minister has already announced an independent inquiry into "the Greensill Matter". In a sense, though, Greensill is just one symptom of the malaise in the Cabinet Office that should really be the focus of the inquiry. We should bear in mind that, if Greensill had not imploded so spectacularly, it is likely that it would have remained under the radar. We need answers to some important questions:

• How can the commercial acumen of the Cabinet Office be further enhanced?
• What is the role of special advisers in the context of the Cabinet Office?
• How are they selected and what diligence is carried out?
• How are CRs selected and what diligence is carried out?
• How are conflicts of interest in the Cabinet Office assessed and managed?
• Why do civil service rules permit civil servants to join companies with whom they have been working as civil servants after only two years?

There is no doubt that the world would be poorer without characters like Lex G: we just should not let such tigers loose in our government's corridors of power. The whole sorry mess that has resulted from doing so should at least serve as a salutary lesson. Or perhaps T.S. Eliot was right when he had one of his characters in "The Cocktail Party" say: "Half the harm that is done in this world is due to people who want to feel important."