The Telegraph made much noise yesterday about a claim from hard right think tank, The Centre for Policy Studies, that what they say are Labour's nationalisation plans might 'cost' £176 billion. As the CPS put it:
New research published by the Centre for Policy Studies estimates that the cost of Labour's renationalisation plans would be at least £176billion. This would represent around 10 per cent of the national debt, or nearly £6,500 for every household. It would be enough to pay for central government's contribution to the cost of 2.9 million new homes in social housing.
Labour's 2017 manifesto, and its subsequent policy announcements, have committed the party to the renationalisation of some or all of the energy, water, rail and mail sectors, as well as an unknown number of PFI deals.
Analysis by the CPS estimates the costs of these renationalsiations as: over £55.4bn for energy, £86.25bn for the water sector, £4.5bn for Royal Mail, and £30bn for PFI nationalisation (although this estimate is particularly uncertain).
According to the Telegraph, Chancellor Philip Hammond said:
Labour claim renationalisation won't cost taxpayers a penny, but in fact it would mean hundreds of billions more borrowing, meaning more debt and higher taxes.
The claims by both the CPS and Chancellor, willingly repeated by the Telegraph are absurd.
The first reason for this is that they assume that buying an asset, which is what happens when you nationalise something, is the same as spending money on consumption. To use a household analogy, they are claiming that buying a car and a takeaway meal are the same thing: the suggestion is that both are consumed, and are of no further value, minutes after the spend takes place, but that is obviously untrue of the car, or any other capital asset. In that case it is absurd to suggest that there is a cost of anything: there is instead an investment, which is something fundamentally different, not least because it goes on the government's balance and quite categorically is not the cost at all. It is instead an asset, and they're good things to own.
Second, spending money on buying this asset does not mean that money cannot be spent on other asset: as a matter of fact any government, anywhere, can create money whenever it wishes to so long as that does not create inflation and so long as there is a mechanism for a return on that money to be paid. In that sense the government is exactly like a bank who lends money to someone to buy an asset: unless there are capital controls in place (and there are not) and so long as it can be shown that an asset can pay for itself a bank will always willingly lend precisely because it makes money from doing so. The suggestion then that nationalising any industry will prevent the building of social housing is simply untrue: there is no shortage of money for this purpose if both can pay for themselves. What CPS are showing is that they do not understand how governments, money, and banking all work.
Third, as a matter of fact it is apparent that CPS think the nationalised assets can pay for themselves. After all, the whole basis of the valuation that they propose for the assets in question is the present income stream that they generate. What they say would have to be paid these assets is compensation to the current owners for giving up their future income stream to which they now have a right. If there was no such income stream there would be no compensation due. But precisely because they do think a price will be payable CPS clearly indicate that these assets are, as they stand, income generating. And there is no reason, at all, why that income stream should cease the moment the assets are nationalised: as a matter of fact it is exceptionally unlikely that they will. To put it another way then, the assets can pay for their own purchase in that case out of the income stream they generate. This is not an unusual concept: when one company buys another it is always assumed that the future income stream of the acquired company will generate the funds to pay for its own acquisition. Why else do it otherwise? If CPS do not know that they really do not know how markets work.
And fourth, in that case there is absolutely no reason to have more taxes at all as a result of this nationalisation: they simply would not be needed. And nor would the interest payable on the debt be a cost to taxpayers: the nationalised assets would pay that themselves.
So, it is true that there would be more debt. But equally, the country would own more assets. And there is no net cost then to buying the assets: any additional borrowing is matched by owning new assets.
And because these new assets generate an income, then maybe no extra tax need be collected to pay for this acquisition because they pay for themselves.
All the CPS claims are wrong, and have to be because their suggested asset values prove that a) these assets are worth buying and b) can pay for themselves or they're not worth the price they claim to be appropriate.
There is, however, something that CPS ignore. The current owners of these assets will value them at the commercial cost of borrowing to buy them. It is a fact that the commercial cost of borrowing to buy an asset is higher than that which the government pays. The result is that the private sector will value these assets at a lower rate than the government, precisely because the government can borrow more cheaply than anyone in the private sector. So, when the government, after nationalisation, substitutes borrowing in these industries at the government's rate of interest as opposed to current borrowing at commercial rates of interest the value of these assets will rise. At the same time interest costs within these these industries will fall, and the surplus that they will generate will be greater than that which the private sector could have made. The result is that in fact far from requiring that additional tax be paid these industries should begin to make a return to the Exchequer greater than anything that they could generate as a profit in the private sector.
And how do we know that could happen? Because evidence supports the argument; that's why. The East Coast rail route proves it: when nationalised this paid strong, positive, returns to the government. When under private management it has required successive bailouts. It's the same asset, but it's simply more successful in state ownership, paying a return to the government when nationalised that could, if the government so wish, actually reduce the tax burden on people in this country, whereas privatising it increases that tax demand.
Bizarrely, CPS do then have all their logic wrong. In fact every argument they make is the exact opposite of what is likely to happen if the nationalisation of industries that are natural monopolies takes place for public benefit.
It really is time the right wing stopped talking economic nonsense about nationalisation. In the case of natural monopolies state ownership is the only logical way to organise an industry for social benefit.
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Richard, your argument isn’t consistent with itself and fails to acknowledge a couple of key point:
1) you argue that these assets are valued on the basis of the future income they will generate – this is, of course, entirely reasonable. However you then go on to confuse the value of the assets with the owner’s cost of borrowing. – that’s nonsense! The value of the asset (future income stream) is entirely unrelated to the cost of borrowing. However, the cost of borrowing will be relevant when deciding whether to borrow to invest in the asset.
2) you fail to acknowledge that one of the main reasons for nationalisation is supposedly that consumers are being ripped off – if the proposal is to reduce prices to consumers then the future income stream to the government will be that much lower and hence this will represent a significant loss
3) you fail to acknowledge that the size of borrowing proposed would certainly increase inflation
4) you fail to acknowledge that the history of the public sector being more efficient than the private sector is not favourable by any means!
Bill
You are becoming ridiculous
The future value of an income stream depends on the discount rate. A hurdle rate has to be passed. Shall we call that a borrowing cost? The value of an income stream is higher to a person with a lower borrowing cost than it is to a person with a higher one: that has to be true because the former will in fact attribute value to streams that the latter will consider worthless. You are just wrong.
And if the benefit of nationalisation is reduced prices that’s also fine: right now we’re in effect paying tax to the private sector instead: now at least we’d pay it for social purpose, including redistribution rather than to increase the intensity of inequality. In future even if we pay less I have shown that is affordable because the cost of capital is lower. There may still not need to be tax rises.
As for inflation, why does the scale of borrowing for asset purchases fuel inflation? Please explain how. Should we ban corporate bond issues for the same reason? Might you explain why not?
And you ignore the obvious evidence in your last comment tha the state could run the East Coast route very well and the private sector cannot. Please tell me why? Might you also tell me where the private sector manages medical complexity such as A&E and multiple co-morbidities well in the NHS? Or is it just that this ‘efficiency’ is actually called ‘cheery picking the easy bits’?
If you feel like continuing to make a fool of yourself, carry on.
“you fail to acknowledge that the history of the public sector being more efficient than the private sector is not favourable by any means!”
British Rail’s “Inter-City” service was used as a model (for running most inter-city services by many/most/all mainland railway operators in the 1980s. The same mainland operators that now run Uk rail services (with varying levels of success). The urban power network with the lowest “customer minutes lost” (CML) – globally is……MANWEB (Merseyside & North Wales Eelectriciy Board – as was) – most of the network was built in the 1950s through to the end of the 1970s – all when it was gov’ owned. As it happens, the network is ideally suited for power genration using renewables. The same company in the late 1960s asked itself – what should its relationship be with its customers – answer: to help them use electricity more efficiently. How long do you wait when talking to your energy supplier? Pre-privatisation it would typically be about 10 seconds (I know – I used to work on the data network that provided the answers to customers questions when they phones up their… local office) – oh & the cost of the call? – it was a local call becuase there was this daft idea of providing customer services……..locally. l I could go on & on.
There was an argument with respect to some of the public sector being over-manned. However, when one compares what was – with the current rapaciousness of private monopoly providers – your statement that they are “more efficienct” is correct only in so far as they are excellent extractors of profits for services that for the most part are measurably poorer than when state-owned. I have professional interactions with some of these “companies” (unfortunately): they are almost without exception – rapacious, dishonest to a fault & leave me wondering how we got to this state, why it has lasted for so long & why some people think that monopoly private provision of key services is a good thing. It ain’t.
Thanks Mike
But remember you’re dealing with someone who claims to be a pension industry actuary who knows otherwise (but very little, in my opinion, about his own area of supposed expertise)
I wish John McDonnell had been able to explain this on Andrew Marr yesterday. It’s just depressing when, in response to the usual “Labour is in financial cloud-cuckoo land”, he challenges the figures quoted rather than the underlying principles.
John McDonnell needs advisers who can think this stuff through
He hasn’t got them, I fear
And so he can’t explain it
And that’s a loss to us all
And I am not applying for the job he once offered me and which I turned down, for good reason
You are not being fair on John McDonnell, Richard.
Your excellent piece is fairly long but not readily reducible to the sound-byte medium of the Marr show. I listened to the interview twice and believe he broadly covered the ground in line with your thinking.
As you attempt to do in your piece, he very efficiently rubbished the CPS, its backers and its Tory ideology. Bad people telling lies to stupid people…
John is not stupid. He clearly ‘gets it’ and I think he sees the main difficulty as reducing the truth of these matters to easily digestible TV sound-bytes. Try doing it sometime. There’s an eager audience out there.
I have, I think, a good reputation for explaining complex issues in comprehensible form on things like national television and radio: check it out. I have done it, often
I looked at Marr
John did not get near the real issues, in my opinion, and could have done, with ease. He simple does not try enough to reframe the issue and so always plays on the right wing agenda. In that he has changed nothing for Labour, so far
I live in hope
I know it is possible
Where there is a natural monopoly it makes sense for them to be run by the State. The cost of many of the assets can be measured by market capitalisation where there is a listing. Not a “market price determined by Parliament” as McDonnell has said. Obviously a key issue here is property rights. Should a Labour Givernment fail to respect them then this would put up a big barrier to inward investment and encourage a flight of capital. Labour is also suggesting giving current shareholders Gilts in exchange. We would face the bizarre scanario of those new owners selling the gilts immediately in the secondary market – only to be bought back by the BofE as no rational investor is buying and owning gilts at negative real rates of return which is what is offered at current prices. So we would be simply printing to acquire assets. It is hard to believe this can be achieved without weakening sterling and importing inflation.
Listing does not determine market price
It determines the price of the share currently for sale in the market and that is not the same thing at all. You really should learn some economics
As for your comments on QE: there is actually a shortage of government debt. Every issue is massively over subscribed. The price is high (that’s why the yield is low). That’s due to demand. How can you get everything wrong?
Listing does determine market price – by it’s very definition. Own 100% of the shares in a company and you own the company, and when those shares are listed on an exchange…..hence the term “listed”.
I am finding it very difficult to comprehend how little you right wingers know
But for the last time, the value of 100% of a company is not the value of the 0.1% that might be traded on a stock exchange in a day times 1,000
It will often be more
It could be less
But it’s just about never what you, in your upugnirance, are claiming
I suggest you go and read about valuation
Dc,
“no rational investor is buying and owning gilts at negative real rates of return which is what is offered at current prices.”
Negative real rates of return indicate high demand. Irrationality must be rife (more so than usual).
“This would put up a big barrier to inward investment and encourage a flight of capital.”
Even if that were partly true it would scarcely be be much of a real concern. Negative real rates of return, historically low interest rates – these are just two among many indicators of capital glut.That which takes “flight” should know that will be readily replaced.
Of course the current share price is the market price. What else can it be? It reflects all known information at that time. If there is a profit warning it falls, a takeover bid it rises.. I have worked in capital markets for 30 years. But hang on your still going to say neither I nor all the other market participants know what we are talking about!! It’s actually quite amusing.,
With respect, please read what I said
It is the price of the marginal share
It is not the value of the company as a whole
That is why takeovers are rarely pitched at the current price
Apparently you have not learned that. Quite worrying after 30 years.
“I have worked in capital markets for 30 years” – I’ve gambled on the markets for 38 years.
“The current share price is the market price…….. reflects all known information at that time.” Utter nonesense on two legs.
The only thing any current share price reflects is prejudice and guessing. You may be too young to rememebr BAe when it tanked in the early 1990s from £6 to £1 in a month or so (I did well on that one) – same company, but market got “jitters” and down she goes & a bit later – up she comes. Vestas – short sellers (2008 – 2012) drove it down from 800DFK to 23DFK – same company – but some sharp boys thought they could make a killing – break up value of the company was 50DFK. Nokia? yep I was there in … 1992 that went well.
There are many other ways in which to value a company apart from profits – that you mention this suggests herd-like thinking. & for clarity – for trading purposes I’m classed as a professional & my trades tend to be 6 figures in size. & to finish – I don’t think you know what you are talking about. I just hope you don’t work for my broker.
🙂
On QE the Bank of England has been the marginal buyer for the last few years to drive prices higher. Again that’s the BofE stated objective to suppresss interest rates – as evidenced by them owning 30% (or whatever the figure is) if the national debt. They have bought that off conventional institutions. Of course some pension funds are compelled to continue to own gilts and the suppressed rates contribute towards pension fund deficits and the closure of final salary schemes. An unintended consequence of QE.
Sure they’re compelled to buy gilts
That’s because they’re the best product there is
It’s to do markets a favour that governments create them: they do not need to do so, after all
And they’re far from alone: there is an absolute shortage of high quality debt: why not read your FT?
Pension funds being compelled to buy LONG TERM gilts and is not the best investment particularly after inflation. Tony Blair and Brown instituted that seductive Pension investment rule after ht eRailtrack Bond strike by the city. The subsequent rule of Trustees required to match a long term liability with a long term assets THAT HAS to pay out in 30year and be AAA rated leaves . . . . only one asset class left AAA 30yr Govt Gilt.
Result Pension fund demand is higher than Govt 30year Gilt supply and the yield goes down to ridiculous levels below inflation.
Thats a rigged market and why participants have to use 10 year gilts to get a better view of the market
So? The supp;y needs to be increased
Next problem?
Increase supply and the next problem is higher long bond yields. Mortgage rates are set or used to be with the risk free rate which was long bond yields.
So a property stagnation vs inflation until normalized.
We could do with a property deflation
Gently, but persistent is the aim
Richard
Please explain where a company’s own cost of borrowing factors into the discount rate used to discount future income from a venture!
It’s the cost of capital
Please no need to print this – this is just to you..at any moment in time the last transaction in the share establishes the market price of the shares..when multiplied by the number of outstanding shares this gives the market capitalisation I.e the value of the company at that time.. with every new piece of information this can change (that’s why shares prices move!!) but undisputedly the market value.. god knows what you are trying to prove … and back to my original point the market price is established by trade on the LSE or wherever and not by Parliament as John McDonnell has foolishly stated
I will publish this
And what you reveal is complete ignorance iof share valuation – for all your supposed knowledge of markets
As anyone whio really knows these things knows the vakue of a share in a company is very different indeed from the vaue oif 1%, 10%, 24.55, 25%, 49,5%, 50%, 50.1%, 75% and so on
You are just hopelessly wrong
Go and do some very basic home work on soemthing you claim to have done for 30 years
I’m afraid DC is completely correct here.
The market capitalisation of a company = number of shares x last traded value of a single share.
Percentages simply don’t come into it.
What you are thinking of is M+A takeovers, where one company may pay more than market for a large amount of shares. This happens because by law a company needs to buy a certain amount of shares to complete a takeover, so makes an offer to a large number of shareholders at once to complete the deal. The could buy them on the open market but this would drive the price higher anyway, and can fall foul of disclosure laws.
Have you any comprehension of what nationalisation entails?
Of course it is but the market capitalisation of glaxo at 3pm this afternoon will be share price x number of shares in issue agreed? If there is rumour of a bid the price goes up to around where the bid is..as I say the price will reflect all the information available at that time …of course a bid could come in at a big premium to the prevailing price and shareholders might reject it.. they think the “market” is undervaluing the shares.
My initial point is the market price is at any moment in time determined by where buyers and sellers. A bid for the company is normally at a premium to the market price.., re nationalisation McDonnell talks about a “market price determined by Parliament”.. I don’t know what that is..but it sounds potentially an infringement of property rights and that will have implications for inward investment.
No, I do not agree
That is what you say it is – price x shares in issue
Is that what Glaxo is worth, which is the question I was addressing? No, of course it is not.
And can parliament determine a price? Yes, of course it can: that’s no difference from arbitration
If you are in doubt refer to the Northern Rock and other deals where shareholder’s objections failed
For someone who claims to be a finance professional you really don’t know much, do you?
So the discount rate used to value a stream of future cash flows is not linked to the riskiness of those cash flows, it is linked to the purchaser’s cost of capital?
This is priceless!
Can you provide a link to credible mainstream economics which supports your proposed approach?
Hang on – did I say that?
Of course the discount rate can be adjusted for those things: I never said otherwise
But, where does the discount rate start? It is a base + factors to cover for risk (in various forms)
So what is base? Are you saying that has nothing to do with cost of capital when the vast majority of business finance is from gearing?
Come on, please……
Or stop wasting all our time
You are still not making sense.
The risk on the investment is entirely unrelated to the cost of capital of the company making the investment.
Go and learn some investment basics Bill
On your logic the cost of capital has nothing to do with investment appraisal
How long did you say you’d been an actuary
Maybe you should do some CPD
Well, if its “priceless” then no one can afford it no matter what their cost of borrowing.
Thank God it isn’t.
Of course Parliament could determine a price but it won’t be a price established by the market..for a start shareholders won’t have the right to refuse.. hence my comment on property rights and the implications for inward investment.
Have you never heard of compulsory purchase?
Dammit, have you ever come across HMRC share valuation?
You are so far removed from reality I think your time here is up
Like Bill I think you’re a stooge who is not what you claim to be
Can I just try and understand your point a little better?
– there’s a market capitalisation figure for any listed company (shares x price) which you all agree exists.
– If another company wishes to buy the company then, in the normal course of events, they will have to pay at least the price per share.
– If Parliament decides the value of the company is (say) half the market capitalisation figure, then the shareholders will lose 50% of their holdings’ value.
– with regard to compulsory purchase, aren’t the rules that the vendor must receive recompense that ensures they are in no worse a financial position?
I’m trying to understand how Parliament can (say) halve the value of shareholders funds without legal challenge or how this passes any current legislation, and how they can describe this as ‘market value set by Parliament’?
Thanks
Who said they were going to pay half?
Why ask questions that make no sense?
Perhaps someone should send this to the so-called Centre for Policy Studies:
https://stats.oecd.org/glossary/detail.asp?ID=1138
Its the OECD defintion of Government Net Debt: “Government net debt comprise all financial liabilities minus all financial assets of general government” etc., etc.
With any luck they might get the hang of it. I doubt it but hope springs eternal.
Not a hope….
I have to say that I just cannot see what the CPS or any of the naysayers here are getting at here.
We’ve had enough time to appraise the performance of a railway system that now gets more subsidy that it did when it was nationalised. I remember when the right wing press used to slag of British Rail just because it needed an extra £3 million!! The current subsidy is much higher than that!
Well over £300 billion (will we ever no how much was really pumped in?) was printed and pumped into the financial sector as a result of the Credit Crunch not to mention billions pumped into private pension funds to prop them up and no doubt other corporate welfare by this Government and previous New Labour administration but we’ve heard very little dissent from the usual suspects about that.
For me the main point is that this is an asset that will give a return – the Government would indeed purchasing a liability but it one that is also producing revenue – generating cash.
In social housing development, we work on developing on the basis of lower than market rents. It’s money in and money out. What’s not to like about that? We don’t charge people higher rents as a result. The rent is the rent and the rent is the revenue and we just spread out the pay back over longer periods than commercially possible.
A private company trying to balance providing a service and the needs of increasingly greedy, short term rent seeking investors whom must come first in the eyes of the law is not the sort of organisation who should be running essential and strategic services like our railways and many other similar functions for that matter.
Have you never heard of compulsory purchase?
Dammit, have you ever come across HMRC share valuation?
Yes but these are MILES AWAY from a market price and infringe on property rights..so international investors & businesses will be reluctant to invest in the UK and indeed will encourage flight of capital..which was my original point!
And Marco – negative real rates of return in the case of gilts is a function of QE..so yes high demand but were the demand is coming from The BofE..and some pension funds who are forced to own a proportion of govt debt, thats about it.
With respect, HMRC rules seek to establish market price – and I can assure you they would not accept unadjusted share price if you happened to own, say, 30% of the shares in a quoted company
I am sorry – bit yet again you show you just do not know what you are talking about
As is also true of supposed capital flight – which will also not happen. After all, where is it going? And why sell shares in a company that will never be subject to any question of nationalisation just because some utilities might be taken into public control in what might be called a takeover by any other name? Has that happened for any other takeover?
DC
Where I work we use compulsory purchase on a private asset when it is because some private sector idiot who owns it is not looking after it and it becomes dangerous to use.
We have to buy a lot of private housing stock (usually used in the private rental sector no less) like this (CPO) and then send the boys around with the scaffolding to prop up houses that are about to fall down because of these numpties exercising their inalienable ‘property rights’.
I’ve also been involved in CPOs of property when it is part of a demolition process. Could you tell me why a local authority has to pay a full market price for any house given that we know the market is over-priced? Just like the stupid markets who over value assets in the financial system?
Given that we know about what how estate agents like to massage house prices in order to boost fees?
Markets can’t price anything properly as far as I am concerned. Because markets are dominated by greed and your adherence to ‘property rights’ just supports this I’m afraid.
Markets are not always right; they are not efficient; they are based on emotions and easy earnings. Not a good basis from which to discuss ‘property rights’ when they relate too often to what are fictitious valuations.
Dc,
QE has no doubt had an affect and the main programme ran from 2009 to late 2012 with an additional but much smaller episode in 2016. So demand came from the BoE an impression was made but it is 2018 now and bit of a stretch to try and explain all current market bond market conditions in terms of QE.
The current demand is no longer coming from the BoE.
Correct
The BoE created £445 billion in order to purchase gilts from the private sector. The gilts reside on the balance sheet of the BoE.
£176 billion of gilts could be sold to the private sector and replaced with the shares of the nationalised companies. We would then be in eactly the same position as now with dividend payments replacing gilt interest. Shares can be resold just as gilts can be resold.
Before looking at the other complexitites why would this not work. If necessary substitute a national investment bank for the BoE but still link the £176 billion offload of gilts to its creation.
PQE, in other words
Who said they were going to pay half?
It was an example (that’s what ‘say’ means) – the point being that the ‘market rate’ set by Parliament may well be less than the market share price (otherwise why even mention it)
Why ask questions that make no sense?
OK – to explain, the main point is: how will any rate set by Parliament less than the market share price survive any legal challenges ?
I hope you’re a little more polite to your students
I don’t recall my students asking questions based on crass assertions
And how does Parliament set the rate? By asking experts, no doubt
HMRC try to establish a fair price when there isn’t a market price i.e for unquoteds, where shares haven’t changed hands for sometime and/ or there has been no recent rounds of finance..I am making the point that there is a market price for many nationalisation targets..the stockmatket price.. HMRC doesn’t need to establish anything.,Let’s be clear that McDonnell wants to acquire these assets at less than there stock market valuation and when he does it will be seen as an infringement of property rights, there will be a flight of capital and less inward investment..it is conversations I have have day by day with mainstream institutions, hedge funds, family offices and within industry.. anyway no doubt all contrary opinions are dismissed as nonsense.,
You are wrong again, as I made clear in previous comments, which you have ignored where I explained why i was entirely reasonable to ignore your so called market price on occasion
As for setting a value: if a nationalisation was price fixed by markets (heaven forbid such a thing might happen!) then of course it would be appropriate to substitute a fair value
But for the rest of your claim – where has McDonnell said he is seeking to underpay? Might you show me?
And where is the flight to capital going to go? Into businesses where there isn’t the fear of state intervention.. there is a world economy out there and no shortage of investment opportunities
Have you seen how much of the world’s money is invested in the UK?
And you really think all that cash flow is going to be fled from?
Pull the other one
Dc
“there is a world economy out there and no shortage of investment opportunities”
No shortage of investment funds more like it and if the opportunities are so great how come so much of it is parked in cash deposits and highly liquid, low return assets like bonds.
What else can “market price determined by Parliament” mean?..it certainly won’t mean more than the stockmarket valuation.
Look at the valuation of listed uk centric companies..they are very very cheap when compared to similar businesses listed overseas or multinational companies..that is the fear of a labour govt (as well as brexit)…so the flight of capital has started.
whether it is true or not , Nationalisation will be considered the start or a wider encroachment on the private sector and property rights. That will not encourage private sector investment from overseas.
Canvass opinion from international business and the global fund management industry, this is the message you will hear..
It means by an expert to prevent market abuse
And you may not be aware of this, but property rights are, right now, what parliament and the courts agree they are
So i’d stick with parliament deciding if I was you
The alternative is much worse
I’m sorry but I think you are completely wrong here. Actually, I don’t think at all – what you have said in the paragraph I repeat below is utter nonsense, and is not how the finance industry value assets.
“There is, however, something that CPS ignore. The current owners of these assets will value them at the commercial cost of borrowing to buy them. It is a fact that the commercial cost of borrowing to buy an asset is higher than that which the government pays. The result is that the private sector will value these assets at a lower rate than the government, precisely because the government can borrow more cheaply than anyone in the private sector. So, when the government, after nationalisation, substitutes borrowing in these industries at the government’s rate of interest as opposed to current borrowing at commercial rates of interest the value of these assets will rise. At the same time interest costs within these these industries will fall, and the surplus that they will generate will be greater than that which the private sector could have made. The result is that in fact far from requiring that additional tax be paid these industries should begin to make a return to the Exchequer greater than anything that they could generate as a profit in the private sector.”
Let me point out the various errors you have made here, but you don’t seem to understand basic corporate accounting, equity valuation and fixed income valuation, and are mixing up aspets of both.
1. “The current owners of these assets will value them at the commercial cost of borrowing to buy them.”
No they don’t. Different assets are treated differently, but what I assume you are talking about here are fixed assets. Which are held at “book” (i.e. how much they cost to build) value and then depreciated over time. How much debt would have to be raised to finance them has nothing to do with their valuation.
2. “The result is that the private sector will value these assets at a lower rate than the government, precisely because the government can borrow more cheaply than anyone in the private sector.”
No, identical assets held by the government or a company are worth exactly the same amount. You don’t NPV/discount fixed assets in that manner – using a debt discount curve – and if you did both the company and the government would discount at the risk free rate, which is normally the government curve. It is ludicrous to even suggest that you can create value simply by shifting things from corporate to government balance sheets.
3. “So, when the government, after nationalisation, substitutes borrowing in these industries at the government’s rate of interest as opposed to current borrowing at commercial rates of interest the value of these assets will rise.”
Again, no they won’t. The value of those assets won’t rise at all. They remain unchanged. Debt service costs are the only thing that will change.
4. “At the same time interest costs within these these industries will fall, and the surplus that they will generate will be greater than that which the private sector could have made. The result is that in fact far from requiring that additional tax be paid these industries should begin to make a return to the Exchequer greater than anything that they could generate as a profit in the private sector.”
A might leap of faith here, and one that has proven time and time again to be false. Debt service costs may go down, but most companies are funded through equity rather than debt. Which is typically cheaper for the company than even government debt funding costs. By market capitalisation equity is more than twice as big as debt using BIS data.
Likewise there is simply no guarantee that the government can run an industry as well as the private sector – especially when the company and its services become politicised. There are countless examples of the state owned industries failing when compared to the private sector, so to simply assert that the government can do it better is simply nonsense.
Good heavens above
I sincerely hope you arn’t anywhere near advising anything if you think any of that is true
I just loved the suggestion that everyone will always agree in the value of an asset and all use the same discount rates
I seriously suggest you should start observing the real world. You would realise how daft what you are suggesting really is
Let me suggest just one reason why
Suppose debt servicing costs fall, as you agree in a nationalised enterprise: that means free cash flow increases. And so even if discount rates were always the same (and very obviously they are not) value must rise
You really do need to learn how to think things through
Oh, and please do not quote Modigliani and Miller at me: you should know it does not hold true in the real world
Coming in a bit late here but I’d thought about that last line in the couple of days since I first saw this and it occurs to me that Modigliani / Miller is like the micro equivalent of the original ‘Ricardian equivalence’ (Ricardo’s version).
They are both trying to say that the 2 main funding options are going to end up costing the same anyway. They are both purely theoretical and they are both loaded up with unrealistic assumptions. I imagine that such things are born of a fixation with equilibrium and ‘efficiency’. At least Ricardo had the good sense to ditch the idea.
Agreed
You were the only person to pick it up
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