PwC's Cargolux report is great literature

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PwC's Cargolux report is great literature

(Version française cliquez ici)

It is said that it is always the victor who writes History when the war is over. I'd similarly observe that he who pays for an "independent" report, is writing the report. Mr. Frieden paid € 200,000 for a report on Cargolux. And indeed, the end product just presented is exactly what the government had ordered. The customer is satisfied. But this is not an investigation, let alone a criminal investigation, it is probably an exercise in "damage control" and it is also history-fiction.

1. The report is a tale of 1001 nights

It's a beautiful story sewn with white thread, where well-known events in Cargolux' past, disparate and random elements, were woven together into one single oriental rug, well smoothed out around the corners . Part of the fiction would have it that a cohesive Cargolux-government team  superbly motivated, but under pressure from the Brussels Commission to accept another shareholder, had identified Qatar Airways as THE ideal strategic partner for Cargolux. Thanks to senior negotiator Mr. Frieden's superior negotiating talents, the big fish was finally pulled heroically on board in 2011, against all odds. The other parts of the fiction are  the embellished elements which have been under suspicion for years: the notion of THE strategic partner and the perilous justification of the privileges attached to BIP's and Luxavantage's preferred stock.

In connection with the choice of Qatar Airways as THE best strategic partner, the term "at the time" is used. This is probably an excuse for the rapid and scandalous failure of the strategy that was so great "at the time." Remember the increase in traffic, tonnage, destinations, revenue, employment to justify THE startegic partner?  However a good strategy to merit its name is not limited to a short moment in time and space. It should stand the test of time, and therefore it has to be a well thought-out plan for the long-term. The strategy of a partnership with Qatar Airways failed, because it wasn't good at any time. The question is, who were those strategists behind the Cargolux decision to engage in this way? Just to make sure to never recommend them to anyone.

The twisted story of BIP Group's beautiful exit as a Cargolux shareholder also became a revised fairy tale: in this variable geometry transaction , BIP's and Luxavantage's preferred shares enjoyed another privilege on top of  being preferred. They were singled out to have earned a 40% capital gain. This was explained at the time as a dividend only available to BIP and Luxavantage. This looked indeed like a magic move, not easy to explain. Don't worry you'll get it. The new explanation is that those shareholders,  determined to leave the company,  were actually deprived  of  the fantastic gains in shareholder value that the arrival of Qatar Airways would bring to Cargolux. In other words, the shareholder who withdraws does not participate in future gains, and therefore loses an opportunity. He must be immediately compensated for that potential loss!  Luxembourg has invented a new form of investment: if you invest zero, so at zero risk, in a company which is projected to pay big dividends, you will be deprived of those gains. That's so old school! According to this new thinking, you'll have to be immediately compensated for your loss of future earnings!

What the report does not say about BIP's withdrawal is that it was not even necessary from the Cargolux point of view, and a waste of the company's resources. But that goes beyond the imagination and the scope of the mission of PwC's report. Despite of a perceived European obligation that the government had to withdraw as a shareholder, which is now an obsolete argument after years of shareholding, fact is that no one had to sell shares to make Qatar Airways a 35% shareholder. It was not even desirable. Logic would have dictated to create new shares for Qatar Airways, to the level representing the 35% coveted. All existing shareholders would have been diluted. But  Cargolux would have had an immediate shot in the arm of $117.5 million, providing a real and alas also the only benefit to the company from the transaction. BIP could have sold its shares to an outside buyer without resorting to the much criticized metamorphoses of preferred shares. Or given the new argument of extraordinary future gains that were forecast "at the time", why not stay invested? I was surprised by the omission of this alternative in an investigation by one of the Big Four, but it is true that the client only wanted a photographic novel where pictures from "at the time" are stitched together. It could not capture the picture of the ghost of an idea that was never contemplated "at the time" by the customer.

The great mystery that was not illuminated by the lights of the report is how come that 35% of Cargolux were valued at only $135 million in 2011. It is a ridiculously low amount  Who did this valuation? It must have been the strategists from before.

Then there is the Wicked Witch in Brussels, the Commission, which is said to have put the Luxembourg government under pressure to sell, because it could be accused of subsidizing Cargolux. Can we ignore these "pressures", please? I would without any hesitation. Elsewhere so many European rules are ignored by France, Germany and others. Examples are the permanent violations of budget deficits regulations, or changing Schengen, or treating many other rules with benign neglect, making them effectively obsolete. It seems that the Cargolux subsidy rule is effectively obsolete too at this moment. And what about foreign governments owning large stakes in European companies. Example at random: Qatar acquired or saved or subsidized Luxembourg's BIL at 90% and KBL at 100%. Why would a bureaucratic Brussels regulator prevent the Luxembourg government from saving one of its core economic activities, air cargo? European subsidiarity principles are weak indeed!

2. The report is an exercise in "damage control"

In any case, the report is an attempt in damage control. To be effective, one should not violate some basic rules.

The first rule is that you cannot undo what was done, you cannot go back. The report moves against this rule, as it revises some former explanations and a posteriori stitches together disparate events in a causal sequence. The appearance is descriptive rather than analytic.  The report paints an idyllic and syncretic view of the new Cargolux, pleasantly describing a large picture, and conveniently avoiding too much analysis. That's impressionism! Which allows for the  superficial conclusion you must have: convey the impression through a reputable third party, without too much analysis or contradiction, that the Cargolux affair was smoothly conducted in the interest of all. You may need to spin the report a bit on the news cycle and the thing goes away.

This violates another rule: avoid falling into the trap of arrogance. We are right there: here is the report, now let's move on. Arrogance always sets the scene for violating another rule: if truth is not served, obstruction and obfuscation are generally worse than the incriminating facts. Hiding things and erasing evidence is not a good idea. Most often this attitude is more expensive and dangerous than presenting the facts openly, all the facts at once, the way things happened. Because the truth will eventually prevail. Do not forget that at the origins of this report were serious questions about the genesis of relations with Qatar Airways, possibly misconduct. If the perception remains that the public has not received all the information in all honesty, the damage control will be seen as an operation of obscuration.

However the operation deserves some respect for staging a diversion. We must pay tribute to a good play when there is one. While presenting  the report we also got the news of the Luxembourg Government's brave response to the European Commission's recommendation (them again), to introduce a toll on Luxembourg highways. This tactics of creating a diversion is often described as "setting fire to the kitchen to hide the fire in the garage." Mr Juncker also applied it when shouting "Fire" by disclosing old illegal tape recordings by Luxembourg's spy agency, the SREL, in order to distract from Cargolux and National Stadium affairs. In our case, the attention immediately turned from Cargolux to the highway tolls, monstrosity that does not even exist, but would highly infuriate even the most docile citizen. However, I would have chosen rather a Friday afternoon to make both announcements to maximize the capabilities of the Luxembourg public's forgetfulness over the weekend.

3. The report is not an investigation either

Remember that initially several members of Parliament were demanding a Parliamentary inquiry on the Qatar Airways deal. However, the House of Representatives voted along party lines to let darkness prevail. And the light was not. There was no criminal investigation either. For there to be an investigation in either case worthy of that name, there needs to be sworn testimony, contradictory hearings and seizure of documents and other evidence and this preferably before anyone can destroy them. But our elected representatives preferred to vote right away that there was no scandal, before gathering the facts. It was the equivalent of the old military firing order, but in reverse: "Fire, Aim, Ready!"

In conclusion, Mr. Frieden has received a medical certificate of complacency. i.e. of good health. He was an actor, sponsor of the report, payer, witness, I guess editor too, investigator and presenter. The whole orchestra. For Cargolux and its employees who are fully aware of their History, there is only one lesson: beware, and draft your own report.