As the FT reports this morning:
Thames Water has appointed banking group UBS to lead attempts to raise £4.1bn of finance for the construction of the Thames Tideway Tunnel, or so-called super sewer
When sewers were first built they delivered the greatest transformation of public health the UK had ever seen. They were built by local authorities and their water boards, and they were funded with public bonds.
Now a privatised company uses a Swiss bank to create a special purpose vehicle from which profit can be extracted even though the costs of this project are underwritten by public funds - and it is portrayed as if there's some big risk in this fund raising as a result.
As I said recently, when discussing the ethcis of local authorities engaging in tax avoidance, it's a sad time when they think that being expert in tax avoidance is their duty but the ability of the local authority accountant to undertake their fundamental job of putting in place the funding to build the infrastructure their populations need has been lost.
This is all about the advance of the cowardly state (a concept explained in The Courageous State) believing its job is to leave everything to the market. It isn't of course, and we all pay the price for this folly.
Green QE could fund this project now. It's readily available. It has no effective cost. And the private sector need not cream off a surplus from it. But that would never do, would it?
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We use to call it S.G.Warburg, one of the leading fund-raisers in London. It was bought by Swiss Bank Corporation which merged with UBS. S.G.Warburg would have had a similar role when the water boards and local authorities issued their bonds.
Proof?
Ah yes. The same Warburgs who via I G Farben funded WW2 and the Nazi party. Most were tried as war criminals after WW2 but got off lightly because of their connections. Most of their capital found its way to Swiss bank accounts and the connection with UBS is no accident.
I am not sure what you want to be proven, but here is the Wikipedia entry for S.G.Warburg, who were as many older City types will remember, the lead manager on the first ever Eurobond, adviser to Eurotunnel on their fund raising amongst many other projects. Note that UBS have not been asked to fund the project themselves ut to lead manage the financing, which may involve underwriting some of the debt, but also bringing in other underwriters
http://en.wikipedia.org/wiki/S._G._Warburg_%26_Co.
Not much evidence of involvement in the local authority bond market of a century plus ago there then
That’s what I asked for
That’s what I did not get
I wonder if the above commenter has been reading Niall Ferguson’s tome on S.G. Warburg?
Well Lionel?
Aside from the obvious objections to this, it is interesting how the monumental waste of money that will arise from such an arrangement squares with claims that using the private sector is good because it is more efficient. This is getting close to the situation seen in certain countries noted for their corruption where the cost of any given project is heavily inflated because all sorts of people feel the need to skim money off the top of it.
So who will build it properly, in good time and at a significantly lower cost? Given the financing costs these days it is unlikely to be the Swiss Bank etc. for the third, quite the reverse. So why can’t Thames Water deal with the first two? It ought to be big enough and have enough expertise, unless this has been dumped to boost profits also going offshore. What is scary is that there is almost no major infranstructure project these days that is being done inhouse and at minimum added financing costs.
Agreed
One of our economists,KennethThomas, has used your work in his latest post.
http://www.angrybearblog.com/2012/10/starbucks-in-hot-water-over-british-tax.html
Tim Worstall (Forbes) has come by to comment to the contrary. It would be a pleasure to have you come by and comment,
I have had problems replying on the site – and even getting a mail to Kenneth – but Worstall ignores a) I disclose who I work for and b) facts simply do not support his claims
Time for renationalisation of the water industry. A recent report in GMB’s magazine (I’m a GMB member) highlighted the fact that since privatisation a number of reservoirs have been sold off to developers thus engineering water shortages.
That’s a bit xenophobic. UBS bought Warburg (via SBC) and Philips & Drew, both of whom were well known UK merchant banks/stockbrokers.
Warburgs were one of the biggest players in the Eurobond underwriting and placement business, and probably the best corporate finance adviser for UK corporates. Since £4.1 billion is far too much for a single counterparty exposure, this is clearly going to be a syndicated or securitised issue, and frankly I can’t think of any banks that would do a better job, although being strictly impartial I think there are quite a few who could do a comparable one.
It’s not xenophobic
It’s also nonsense there’s a lot of skill involved
How hard is it to sell a guaranteed bond?
As I understand the project, mostly from press reports, it will be finance 60% by senior debt and 40% by project finance equity, and the “guarantee” will only cover capital cost overruns not operating performance. So the investors’/bankers’ risk is substantial. Add to that the borrower will want an underwitten commitment while the £4.1 million financing required is way over the single counterparty limit of any bank and it becomes a little more complicated than the syndicated loans and bond issues that are placed in London every week.
You ignore this is a monopoly supplier
Why?
Richard Murphy says:
October 25 2012 at 9:20 pm
You ignore this is a monopoly supplier
Why?
Because all of the water industry is a monopoly but still contains substantial operational and financial risk. The periodic reviews between water companies and Ofwat set the tariffs and required standards for network performance, usually requiring substantial ongoing investment in network maintenance and repair. Water companies can lose a lot of money very quickly either by over engineering and failing to fix the network or by failing to maintain the network in a way that achieves the required performance on network outages and leakage, resulting in substantial fines from Ofwat.
http://www.utilityweek.co.uk/news/news_story.asp?id=195571&title=Ofwat+mulls+penalties+for+leakage+failures
Let’s ask a simple question
Has anyone failed in this oligopolistic cartel?
No
I rest my case
A water utility is hardly likely to become insolvent because Ofwat will step in and change the company management before it becomes critical, but Ofwat have imposed very large fines and changed the senior management in UK water companies when they considered it necessary to do so, most notably at Severn Trent, Thames Water, Southern Water and Yorkshire Water.
http://www.ofwat.gov.uk/legacy/aptrix/ofwat/publish.nsf/AttachmentsByTitle/not_fne_svt_propmisreport.pdf/$FILE/not_fne_svt_propmisreport.pdf
Incompetence does nto justify your argument
This is just a further example of extractive capitalism. The state is being use as a cash cow.
If Thames Water is a private company, how do the supporters of the free market justify the existence of this monopoly? And the same applies to any utility or transport infrastructure. The neo-liberals are forever arguing for the benefits of competition; that the market decides the correct price for any given service or product. So what about these monopolies?
Why are public funds underwriting a public company? Why is the government underwriting a project for a private company when it could undoubtedly do this work within the public sector? And probably cheaper and more efficiently to boot?
Keep the project in-house and the profits largely return to the country rather than into shareholders pockets!