Archive | October, 2013

Nuclear bonds are what we need

23 Oct

Nuclear

The deal on the financing of the new nuclear facilities at Hinkley Point has some interesting features. If EdF can manage the construction risk ( a big if, given the sagas at two other plants) they should earn a healthy (long term) rate of return, given the guaranteed, index-linked price offered for the electricity.

Unfortunately there are no obvious ways in which long term UK investors can take a punt on this. They could presumably buy the new bonds issued by China General Nuclear Power, priced at a mere 2.4% over treasuries, but they are only for five years and are dollar-denominated ( see http://goo.gl/DRPFnO).

The government could, of course, have structured the deal differently, and commissioned EdF to do the build while financing some of the costs by issuing its own sterling nuclear bonds – either on a conventional basis (as with China General) or as a kind of Social Impact Bond (see http://en.wikipedia.org/wiki/Social_impact_bond). The SIB could pay a coupon when the plant comes on stream, and link the coupon to the guaranteed electricity price.  If the place suffers a Fukushima-style disaster both capital & coupon on the SIB would be lost.

So far SIBs have been limited to non-energy programmes, but given the scale of the investment required there must be a case for looking at them here. For pension funds, they could be attractive, as they are a deferred, index linked asset to match their deferred, index-linked liability. And given the carbon benefits, even Prince Charles might be happy (last week, he was lecturing pension fund managers on the need for longer term, sustainable investments – hence the picture above). Come to think of it, perhaps he’s got room for some nuclear at Highgrove??.

The Thatcher government was bold enough to start index-linked bonds. It’s time for the coalition to step up to the mark and allow investors and taxpayers some upside on nuclear energy investment.

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Prince Charles and sustainability

22 Oct

Prince Charles’ address to the National Association of Pension Funds  (see http://youtu.be/SXRwPzj6vxk) is worth a look – yes, it surprised me too, but he actually has some quite insightful things to say about long term sustainability.

Nobel Prize time in Economics – Fama & Schiller are consistent enough

15 Oct

Some complaints in the press (and among the academics, who should know better) about both Eugene Fama and Robert Schiller (plus the third man, Lars Peter Hansen) jointly winning the Nobel Prize for Economics.

Personally, I think it’s a great example – a theory (the efficient markets hypothesis) is developed, and leads to practical implementation in areas such as the development of indexed funds. Then another academic comes along (Schiller) pointing out the limitations of the theory. All three place a heavy emphasis on empirical validation – Fama from publishing his data, Schiller from creating the Case-Schiller House Price index for the US, and Hansen (OK, I hadn’t heard of him either) for valuable work in econometrics (see http://goo.gl/5PDxYW). Isn’t that what Kuhn’s theory of scientific revolutions is supposed to be all about?

 

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Two hands not one: the role of the state

9 Oct

A quick addendum to my blog below on Africa post 2015  – catching up on my LSE Alumni collections, I see that Mariana Mazzucato was speaking recently on the role of the state – advocating a role beyond market fixing to market creation. You can get a quick 17 minute overview (if, like me, you missed the lecture itself) on Youtube – here’s a Tweet link:

plus you can also follow the good lady on Twitter itself.

Post 2015 Africa: central planning or the market?

3 Oct

Diageo Ethiopia

Attended an excellent event last week at Standard Chartered in the City, sponsored by Business Fights Poverty (http://businessfightspoverty.org). It was a panel discussion on a new report – “A New Global Partnership with Business – Building a post-2015 development framework to achieve sustainable prosperity in Africa”. Despite the mouthful of a title (and the title slide for the presentation had no less than eight corporate sponsors – four at the top, four at the bottom), the report is actually a good read (download from here: http://goo.gl/SG8FOT).

The panel discussion was equally good. By the time it had finished, I was feeling quite sorry for Diageo, very ably represented by Ann McCormick. They are one of the case studies in the report, focusing on their acquisition of Meta Abo Brewery in Ethiopia and their efforts to source more malt & barley locally. Their partnership efforts were certainly impressive, spanning the top (a G8 pledge signed with Obama & Hilary Clinton watching), the Ethiopian government (via their Agricultural Transformation Agency) and local implementation via an NGO working with smallholder farmers (Farm Africa). But what struck me in discussion was Ann McCormick’s obvious concern as to what the newly enriched smallholders were actually doing with their extra cash.

Hardly a problem, one would think, when Diageo buys grain in the developed world, but probably a real enough issue in Ethiopia. And just one small example of the hurdles businesses have to jump through to be good corporate citizens in Africa.

So why the title? I recall a lecturer in Cambridge saying once: “When I visit Russia [this was the 1970s] I think – My God, how they would benefit from some market mechanisms. Then when I visit the States, I think: My God, a bit of central planning wouldn’t hurt.” At the time, I was too inexperienced to value the remark, but with the passage of time I see its truth. The market can’t solve everything in Africa (or elsewhere) – it needs other institutions, including government, to play their part. One invisible hand is all very well, but two hands are better.

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