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JOINT VENTURE ACCOUNTING PROVIDES THE LIFEBLOOD FOR MASSIVE CAPITAL PROJECTS – AS TYPIFIED BY THE OIL AND GAS SECTOR

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Joint venture accounting provides the lifeblood for massive capital projects – as typified by the oil and gas sector

Joint venture accounting provides the lifeblood for massive capital projects – as typified by the oil and gas sector. It also means a lot of pain. More and more companies are discovering that the latest reporting and planning solutions allow recognised stakeholders to drill down to consistent, reliable business data, without overwhelming them with useless or out of date facts.

Naill Mclean Product Manager, Hubble Team

Naill Mclean Product Manager, Hubble Team

It’s a great way to ease the agony – while making friends up and down the supply chain. Naill McClean from Hubble explains

There has been a major change in business reporting, planning and analytical systems in recent years, with the best systems integrating all three, connected to a single reliable source of data. It means far less paper, and many more screens – with up to the minute data being shared across PCs, laptops, and tablets.

The latest reporting solutions have been designed to accept input from any number of very diverse sources to provide everyone – from management to operators, customers and business partners – with real-time visibility into the work flow via easily customized live dashboards. These solutions have already been successfully deployed to improve performance in a host of industry sectors, including finance, real estate, construction, entertainment and facility management.

The same approach offers even greater benefits when a number of organisations get together to finance and manage massive capital projects – typified by offshore exploration and drilling. Joint venture accounting is the cement that holds such projects together, provided you mix it right. But get it wrong and the partnership can collapse leaving damaged reputations that take a long time to heal.

The right planning solutions not only reduce the labour of joint venture accounting, they also increase reporting reliability, consistency and transparency. It is a great way to build trust for joint ventures – let alone the benefits for in-house management.

Keeping partners happy

Performance management has long relied on a fixed system of annual plans, targets and forecasts. But we face a far less predictable business environment, where start-up rivals can appear from nowhere with new business models. Instead of steady evolution, today’s business faces unpredictable, discontinuous changes, and both partners and customers can rapidly switch allegiance or demand new levels of service.

When it comes to joint venture partners in the oil and gas sector it is seldom simply a question of two companies simply deciding to share the costs and profits: a typical drilling operation could involve six or more partners with

varying stakes. This includes government partners who own the mineral rights and require a “royalty” licence fee but contribute nothing towards expenses.

Often the projects will run for several years during which time companies can merge or be taken over, legislation can alter and other circumstances force partnerships to be remade or scrapped.

Joint venture partners may not be as fickle as consumer customers, but the scale of involvement means just as much pain. One modest sized company, with around 150 employees in the oil and gas sector, reported 45 significant revisions to its partnership agreements over just five years. The cost of each change was estimated at around $3000, so they began to look for a better accounting solution.

They already had access to the necessary data from their Oracle Business Suite with Oracle Projects to manage each drilling operation, but reporting meant transferring the data manually to appropriate spread sheets for each partner – taking into account the different levels of investment, costs and obligations. So a significant backlog of work had built up in the time it took to choose a suitable remedy. They opted for a Hubble reporting and management solution, and in just three days it had paid for itself by slashing the administrative spadework and removing the need for advanced IT skills to extract and manipulate the necessary data from the company’s Enterprise Resource Planning system.

Nor did the benefits stop there. Better, more transparent and responsive joint venture accounting wins friends. The sort of contracts being made were extremely lucrative – we are talking millions of pounds for a drilling operation

– so there is a lot at stake in becoming and remaining a “customer of choice”. The latest reporting solutions now make it possible to share company data safely with partners: enquiries can be made directly to the system without having to go through customer services. Partners, and their auditors, love it.

And keeping the company happy

Solutions like Hubble are actually being developed to address far wider business issues than just joint venture accounting. All business nowadays is under pressure to adapt to a shifting commercial, regulatory and political landscape.

Making wise decisions fast enough is no longer possible using yearly or even monthly reporting. It can take a hundred days and twenty per cent of management time to complete an annual budget, meanwhile operating and market conditions deviate from the budget assumptions until performance reporting becomes meaningless and opportunities get missed. As a reaction to this dynamic business environment, annual planning cycles are giving way to more frequent business reviews, supported by rolling forecasts that allow people to spot trends, patterns, and possible disruptions before their competitors do.

Today’s more agile organizations are learning to manage planning as a continuous process not constrained by the financial year. It may still be appropriate to set regular strategic reviews or to hold a planning meeting in response to some major change, as one Fortune 50 company CFO explains: “Once the year is under way, we review performance twice a quarter. We ask questions about how we are doing, what’s changing in the market- place, what are the new opportunities that have arisen, and so forth. We might then produce a new estimate based on the latest knowledge. Plans never work out the way you expect, so you have to adjust as you go.”

Adjusting “as you go” not only requires real-time data on key performance indicators, it also means making that data much more widely available. For a manufacturer of consumer goods, for example, a special offer posted on the company website could trigger a surge in orders: so traditionally the website manager should inform the product manager and the product manager should make enquiries to ensure adequate stocks and so on up and down the hierarchy and chains of command. Unless this is done absolutely consistently according to best practice, there is always a chance that someone along the supply chain gets overlooked: maybe the goods are in stock but a forklift driver is off sick?

In a climate that calls for rapid response to shifting circumstances – including changes in joint venture partnerships – management should not be simply looking at internal data: as well as keeping an eye on the health of those business partners, there will be changing government regulations, exchange rate adjustments as well as the risk of economic downturn as external factors that could either sound a warning or suggest a new opportunity. So the latest reporting and planning systems offer access not only to ERP data but also to any number of external market feeds, including data from business partners, suppliers and customers.

Being designed top down to address real business needs and efficient operations, these systems do not deliver an indigestible mountain of information to each busy manager’s desk. Instead they offer a clear, simple window into operations via self-customized “dashboards” that offer real time reporting, automated alerts, the ability for authorised persons to input data into the system, and an easy way for colleagues and partners to comment and collaborate without having to dump data into Excel and email it.

The right data in the right hands

Although these solutions enable everyone to build their personalised dashboard relevant to their own operational needs, the important difference is that all those individual reports will be automatically based on the same consistent, centralised data. This eliminates the old problem of different decision makers relying on mutually inconsistent, manually selected spreadsheet data.

At the same time, it encourages greater collaboration. Instead of passing requests and instructions up and down the chain of command, more staff across the organisation are encouraged to think for themselves, feel more responsible for their own decisions and empowered to take part in the company’s success.

This is particularly relevant in the case of joint ventures, because such a solution enables the owner to offer any authorised person some measure of access to the system – and that could include business partners and auditors. Offering a more or less restricted window into the joint venture accounts is far more efficient than having to accept enquiries and respond by creating spread sheets manually.

An example from one among nearly fifty Hubble customers already in the oil and gas sector: how do you partition the fuel cost of delivering supplies to a number of offshore rigs in a fair manner when the supply ship makes a round trip between different partners’ rigs? This is a contentious issue: but once a system has been agreed by the partners and they can all access the actual figures to check that it has been fairly administered, then a lot of time and energy will be saved.

How does anyone build a reliable network of partnerships? Begin by considering the reputation and scope of a number of suitable companies. Then explore relative costs and ask for comparative quotes. Finally ask: “is this a good company to do business with?”

Anyone who builds a reputation for transparent, fair and efficient joint venture accounting wins a major business advantage. In a fast changing business environment, painless agile partnerships are a must.

Finance

Guarantor loans surge to top of UK financial complaints chart

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Guarantor loans surge to top of UK financial complaints chart 1

By Huw Jones

LONDON (Reuters) – Complaints about guarantor loans by companies such as Amigo soared last year, eclipsing grievances over payment protection insurance (PPI) that have dominated for more than a decade, Britain’s Financial Ombudsman Service (FOS) said on Wednesday.

Consumers have turned to loan providers since last March as lockdowns to fight the COVID-19 pandemic strained their finances.

“For more than a decade, the Financial Ombudsman Service received an unprecedented number of complaints about PPI. We’re now seeing thousands more complaints about credit – including about guarantor loans,” FOS said in a statement.

Guarantor loans require a friend or family member to guarantee they will take on repayments if the borrower falls behind. Complaints about this type of loan reached more than 10,000 in October to December, up from just over 300 in the same period a year before, the FOS said.

Complaints about other types of home credit jumped to over 6,000 from 430 over the same period.

The complaints about consumer loans usually focused on inadequate affordability checks, FOS said.

Amigo describes itself as Britain’s leader in guarantor loans. FOS said complaints about the company totalled 12,854 in the second half of 2020, up from 1,163 in the first half.

Amigo said it launched a scheme of arrangement, or court-approved compensation process, in January after receiving a high number of complaints last year.

“We are a new leadership team that wants to correct past mistakes in a way that is fair and equitable to all our customers – including our 700,000 past borrowers and guarantors,” Amigo said in a statement.

Provident Personal Credit Ltd was the second most complained about company, with 10,390 complaints in the second half of 2020, FOS said. Provident had no comment.

PPI became Britain’s costliest retail financial scandal that dominated FOS work until the final deadline for complaints passed in August 2019.

(Reporting by Huw Jones; editing by Barbara Lewis)

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Sunak promises to do ‘whatever it takes’ to shield the economy

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Sunak promises to do 'whatever it takes' to shield the economy 2

LONDON (Reuters) – British finance minister Rishi Sunak plans to say in a budget speech on Wednesday that he will do “whatever it takes” to support the economy, and that the task of fixing the public finances will only begin once the country is recovering from the COVID-19 crisis.

“We’re using the full measure of our fiscal firepower to protect the jobs and livelihoods of the British people,” Sunak will say, according to excerpts of the speech to parliament released by the finance ministry on Tuesday.

“First, we will continue doing whatever it takes to support the British people and businesses through this moment of crisis,” he said in the excerpts.

“Second, once we are on the way to recovery, we will need to begin fixing the public finances – and I want to be honest today about our plans to do that. And, third, in today’s budget we begin the work of building our future economy.”

Britain has suffered the biggest COVID-19 death toll in Europe and the heaviest economic shock among big rich countries, according to the headline measures of official data, after shrinking by 10% last year, its worst slump in three centuries.

Sunak has so far spent almost 300 billion pounds ($419 billion) on emergency support measures and tax cuts.

But Britain has also rushed out Europe’s fastest COVID-19 vaccination programme, raising the prospect of an economic bounce-back once its current, third lockdown is relaxed.

Sunak said in media interviews on Sunday that he would not rush to start addressing Britain’s yawning budget deficit, which is approaching 400 billion pounds – its highest as a share of the economy since World War Two.

Prime Minister Boris Johnson plans to lift lockdown measures gradually, starting with next week’s reopening of schools in England, before most measures are removed by late June.

Sunak is expected to announce an extension of his emergency support measures, including huge income subsidies that are on track to cost more than 100 billion pounds, to provide a bridge for the economy until then.

But he has also said he will “level with people” about how Britain’s 2.1 trillion-pound debt pile would carry on growing without action, which is likely to mean future tax increases.

(Writing by William Schomberg; Editing by Catherine Evans)

 

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UK gilt issuance to be second-highest on record at almost 250 billion pounds – Reuters poll

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UK gilt issuance to be second-highest on record at almost 250 billion pounds - Reuters poll 3

By Andy Bruce

LONDON (Reuters) – Britain is likely to sell nearly 250 billion pounds ($347 billion) of government bonds in the coming financial year – the second-highest total on record – to help power an economic recovery from the COVID-19 pandemic, a Reuters poll of dealers showed on Tuesday.

The survey of all 15 wholesale primary dealers, or banks tasked by the government with creating a market for its bonds, pointed to gilt issuance of about 247.2 billion pounds for the 2021/22 financial year starting in April.

Such a sum marks a sharp drop from the 485.5 billion pounds of gilts that the United Kingdom Debt Management Office (DMO) plans to issue in the current 2020/21 year to finance the economic response to the COVID-19 pandemic.

Finance minister Rishi Sunak is due to deliver his budget around 1230 GMT on Wednesday, after which the DMO will publish its 2021/22 gilt issuance remit.

Sunak has said he would not rush to fix the public finances as he readies a budget, which will add more borrowing to almost 300 billion pounds of COVID-19 spending and tax cuts.

In November, the Office for Budget Responsibility (OBR) forecast borrowing in 2020/21 would reach 393.5 billion pounds, or 19% of GDP, a peacetime record. The latest official data suggests borrowing will fall below this, partly because more taxpayers than expected have opted against deferring payments to 2021/22.

The poll showed Sunak is expected to announce a budget deficit forecast for 2021/22 of 180 billion pounds, 16 billion pounds more than the OBR had predicted in November.

“Our current estimate is that the latest lockdown will ‘cost’ around 16 billion pounds in terms of additional fiscal support,” said RBC economist Cathal Kennedy.

He cited the fact that more workers are now furloughed than the OBR had assumed in November, as well as expanded support for self-employed people and business grants announced in January.

In addition to the budget deficit, the government must also refinance 79.3 billion pounds of gilts due to mature in 2021/22.

As in the current year, much of the issuance will be soaked up by the Bank of England’s asset-purchase programme, which is due to buy around 100 billion pounds of government debt during the next financial year.

The poll suggested the government will finance borrowing almost entirely through gilts in the next financial year, rather than additional issuance of T-bills or via the government’s retail investment arm.

The DMO is likely to ramp up its issuance of inflation-linked gilts in 2021/22 to around 14% of the total, compared with 7% in the current financial year, the poll showed.

The DMO reined in sales of index-linked gilts through most of 2020 due to uncertainty caused by a review into the future of the retail prices index measure of inflation, which is used to price the bonds.

“Given pent-up demand, we think that this target is achievable,” said Deutsche Bank analysts Sanjay Raja and Panos Giannopoulos.

The dealers did not expect much change in the split between short, medium and long-dated gilts. Britain already has a longer average maturity for its debt than any other major economy, but the recent jump in global bond yields has prompted some commentators to say the DMO should do more to lock in low rates.

The government has also said it will issue the first “green gilts” – bonds to finance environmentally friendly projects – in 2021/22. Most respondents expect one or two bonds to be issued, of around 10 billion pounds in total.

(Reporting by Andy Bruce, editing by Larry King)

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