I think The Telegraph had the most accurate summary of what has actually happened. The BBC's version is also reasonably good. To cut a long story:
1. Thames Water was privatised donkeys years ago, and all those little UK popular capitalists did the decent thing and sold all their shares to German utility concern RWE in 2001.
2. Various pension, investment and sovereign wealth funds set up a company called Kemble Water which bought Thames Water for £8 billion [gross] from RWE in 2006.
3. Stakes in Kemble Water change hands occasionally, for example "In December [2011], the Abu Dhabi Investment Authority, another sovereign wealth fund, bought 9.9pc of Kemble for an undisclosed price. Macquarie European Infrastructure Fund was the majority seller in that deal."
4. The Chinese sovereign wealth fund (China Investment Corporation, CIC) has now bought 8.68% of Kemble Water "for an undisclosed sum which analysts believe is at least £500m [from] Santander Private Equity, part of Spanish banking group Santander's asset management arm, and Finpro, a Portuguese investment vehicle..."
5. So big deal really, legal ownership* of Thames Water has been in foreign hands since 2001 (and chunks of it before then), it is merely that Juan Foreigner has now sold a bit of it to Johnny Foleigner. Not a single penny has been invested in the UK as a result of this, and it's not even as if we have reduced our net indebtedness to the Chinese. George Osborne is making an idiot of himself by prancing round and pretending otherwise.
* Of course, in practice, the UK government, OFWAT and so on still have reasonable day-to-day control over Thames Water. That's the nice thing about selling off stuff to foreigners, instead of them having you over a barrel, you have them over a barrel.
Tuesday, 24 January 2012
That multi-billion Chinese investment in Thames Water was no such thing.
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44 comments:
In one sense Osborne is trivially correct in that the Chinese have indeed invested in an entity that draws all (most?) of its income/profits from the UK. However, (as Emily Gosden in the Telegraph implies) the Chinese share purchase is a vote of confidence, not in the UK as such, but in the continuation of the sell-out of Ofwat to the producer interest.
After all, Thames Water (together with all the other water utilities) is a monopoly. This is an investment that the Chinese can not only understand but, given that China is still not the capitalist haven that Anthony Bolton, for instance, led us to believe, China would recognise as (more or less) an organ of the state with, effectively, state-guaranteed profits
U, OFWAT do a reasonably good job IMHO and Thames Water would be doing an even better job if all the NIMBYs weren't stopping them building their new sewer.
I don't think water prices have risen unduly, and why shouldn't such a business makes steady profits? That's the deal with OFWAT, isn't it?
No you have made an error there - This transaction is indeed a transfer of £500 million from China to the UK. If you follow the money over the full 5 step transaction you will have to concur that China is £500 Million less well off and the UK £500 Million more well off.
Den, nope. UK investors made their money ten years ago be selling out to Hans Ausländer, that money is long gone. Any subseqent transfers are from Johnny to Juan and do not affect the UK one way or another.
The overall transfer of cash is not from CIC to Santander. Santander is only returned to its original capital position, they have not gained. The overall Global position is CIC has £M500 less and Thames water has £M500 more. The intermedaries are out of the picture. That is the nature of commerce and trade.
Mark W,
U, OFWAT do a reasonably good job IMHO and Thames Water would be doing an even better job if all the NIMBYs weren't stopping them building their new sewer.
There's also an issue about reservoirs and the growth of London. Thames Water want to build around Stanford-in-the-Vale in Oxfordshire and the locals don't want it (which is a bizarre form of NIMBYism as reservoirs are rather pleasant and stop anyone building new houses near you).
But we do have a serious problem of how many people now want to live within commuting distance of London. The last government spent like crazy on London (improving the Opera House, the Dome, St Pancras, the Olympics, Crossrail). All of which just encourages people to live near to it or to work there.
Den, now you are even wronger, if want to amalgamate all transactions since 1989, TW never got a penny, it was SOLD. If I sell you my car, my car does not receive a penny either, does it?
The UK government sold it to private investors, who sold it to RWE, who sold it to [etc] who it to the Chinese.
But the UK government, who originally banked the sales proceeds back in 1989 has had its money (and pissed it up the wall long since). Anything that happened since then is of no interest to the UK government; once the first wave of shareholders sold out to RWE, anything that happened since then is of no concern to them either, and so on.
The S, what growth of London? The population of Greater London has hovered between 6 and 8 million since the 1901 census, I think we are currently at 7 million, but it has been higher in the past.
Although it's possibly true that there are more people living within commuting distance - for the simple reason that commuting distances are a lot longer than in 1901.
Mark,
Yes - I'm thinking more of the places like Reading, than London, which has seen huge growth (and is now at the point where the railway to London is at capacity). And this is the Thames Water area.
The S, yes, fair point. UK pop is up by a third since 1945, and they didn't go to London, so they must be somewhere else. But M4 corridor is a bit closer to Wales so they'll just have to pump the stuff over (question mark: what on earth will they do for sewage?)
If China bought the shares on the first day of the IPO or if the shares were bought by a market maker and then China or changed hands five times on the first day of the IPO and ended up in the hands of China you would say "China has Invested in the UK". The money came from China. What difference does a few years make --- none. So you must say China has invested in the UK even if at first hand you find it counter-intuative. Time does not figure in the analysis. The aftermarket provides the money the government got from the primary market.
Den, very indirectly and on a philosophical level, maybe yes. In practical and day to day terms, definitely not.
It just winds me up now end when people talk about "investing" when it is no such thing (on a practical and day to day level).*
If TW had been a bit strapped for cash and had issued x million shares to the Chinese for y million pounds, then yes, that would be an investment in TW (the company) and TW in turn might actually genuinely invest that money in new drains or sewers or something. That is proper investment, building up the real capital stock.
* Such as people who claim to "invest in property" do absolutely no such thing. The amount of land and housing is completely unchanged before and after the transaction.
"George Osborne is making an idiot of himself by prancing round"
He seems to be quite good at that.
Den, AFAICS, even if the Chinese bought the shares on day one, they weren't investing in Thames Water, because Thames Water weren't selling the shares, the British Government was. They were "investing" in shares in Thames Water, but that's only "investing" like "investing" in property, i.e. speculating. So the Chinese are not investing in the UK, they are speculating in shares of a UK based (but not owned) company.
They were "investing" in shares in Thames Water, but that's only "investing" like "investing" in property, i.e. speculating.
Not that I know any details, but what happens to the profits of Thames Water? Do they get retained or paid as dividends to the shareholders? In the latter case then it would be "investing" to an extent.
If you buy a derelict property and do it up, then I would probably call that investing as well, even if there is some element of speculating and/or rent-seeking in it.
Hi Bayard. I agree In this instance it is complicated by the fact that Thames water were not the original sellers of the shares. I was focussed on the after market/Primary market distinction which AFAICS is a fallacy.
Thames water must have sold shares to raise working capital at some point in the past, before the UK Government bought the shares, and if you "follow the money" It comes from, beleive it or not the Chinese, because the secondary market provides the money for the primary market, in the same way that the consumer provides the money for the retailer that provides the money for the wholsaler that provides the money for the manufacturer.
Everyone acknowledges there is a time delay before consumers pay for a product after a maufacturer has sold it and that the money for manufacturers ultimately comes from consumers. But they then incorrectly apply a different logic to shares.
What are LLPs.
B, ta for back up.
Anon 17.53: "If you buy a derelict property and do it up, then I would probably call that investing as well"
Yes and I would completely agree, the capital stock of the nation has increased by one nicely done up house.
Den: "Thames water must have sold shares to raise working capital at some point in the past"
TW was all part of a nationalised utility, it never issued shares to outsiders (unless you go back to several decades previously, when it might have been originally a private company, I don't know). The UK government just bundled up certain bits and pieces (pipes, reservoirs, whatever) made up a balancing figure for 'share capital' and then sold off the shares. TW didn't get a penny of that money.
The notion that the Chinese have just post-financed what Bazalgette et al were up to over a century ago is slightly artificial, methinks. That financing was done by the Victorians who paid for it at the time, end of, it has nothing to do with the Chinese.
My new thinking is that companies limited by shares are a fiction and a nonsense anyway, when I'm in charge we'll all use LLPs, then it is clear who is selling what to whom.
LLP = Limited Liability Partnerships, the corporate form of choice for the discerning gentleman.
Look, on China, we'll have to agree to disagree. I hotly dispute that the Victorians would have put all their fantastic improvements on hold pending confirmation from some time traveller that the Chinese would post-finance it all.
Everyone acknowledges that there is a time delay between consumers paying for a product and the manufacturer selling it but they then incorrectly apply a different logic th shares.
What are LLPs.
I agree to Disagree on China.
Do you concur that the critisism often made by socialists that the share secondary market is speculation and that the primary market is investment is arbitary. I think that is like saying wholsalers are the true funders of manufacturers and consumers are not nessasary.
Den, in this case, it's not a primary/secondary market distinction, because Thames Water never sold the shares to the Government in the first place, as we have established. Admittedly, Thames Water had been formed from the Metropolitan Water Authority, which itself had been formed from other water authorities and boards, which had taken over various private companies at the start of the C20th, but that is getting pretty tenuous.
Den, I don't have a problem with primary/secondary market as such, I have a problem with shares, full stop, which are just an excuse for speculating and capital gains, fund managers churning people's savings round and charging commissions.
Any value in shares above and beyond the net asset value of the business is pure speculative value and not real money.
For sure, businesses have to be 'financed' somehow, there is money tied up in stocks, assets, debtors and the like, but using an LLP, the capital side = the assets side.
Every partner (or investor) puts his money in, or an employee agrees leave some of his salary in the business, and then the business just pays interest on the capital at x pence per pound, and/or if it has spare cash, it pays a much lower interest rate and repays some of those capital accounts.
In other words, £1 in the capital of a business is always worth £1, no more and no less (unless there is a sudden catastrophic bankruptcy, which is highly unlikely in the absence of all this leveraged-private equity buy out tomfoolery). There's no need for a separate final salary pension fund, if you want a pension, then you just leave some of your salary in the business every year and draw it in retirement.
" Time Traveller " no disrespect to you but That Comment made me chuckle because all financial transactions apart from barter invoke time travel. Of course the time travel is not backwards but forwards. Thats the whole point of using money.
Cadbury was recently a leveraged buy out. To pay for the borrowing I predicted that the size of Cream eggs would decrease and I do beleive the Mars bar has got 4 grams lighter.
Den: "all financial transactions apart from barter invoke time travel."
1. Barter also includes people's relative preferences between current and future consumption.
2. If I am paid at the end of a day's work and spend all my money down the pub, there's not much time travel involved.
3. Most investments are made on the basis that the income has to cover the costs within a few decades. The Victorians did not budget over a century ahead to when the Chinese might come round and buy some shares from a Spanish bank.
Take it from me, they did not. They did in the interests of public health, and the original investors will have had their money back out of profits a long, long time ago.
And take it from me, on a practical every day level, the Chinese have not invested a penny in the UK. You can chat gaily about primary and secondary markets all evening, on a practical every day level it is quite simply not true.
They have no more invested in the UK than I have invested £10 in a horse if I go to the bookies and place a £10 bet on that horse.
"I have a problem with shares, full stop, which are just an excuse for speculating and capital gains, fund managers churning people's savings round and charging commissions".
That's not a problem with shares, it's a problem with the Stock Market. If you look at shares not traded on the Stock Market, like those in heritage railway companies, you will see that all the shareholders in these bought their shares because they wanted to put money into the companies and it is very unlikely that any of them have ever been sold to pension funds, because they are never going to be worth more than what was paid for them. Indeed, you'd be lucky to get your money back, if you could find a buyer.
B, i was talking in general about proper businesses.
The fund managers and money churners pretend that they are 'allocating capital efficiently' and all this crap, and they pretend that running businesses as partnerships (or as limited companies where there is no market for the shares) is some sort of anti-capitalist plot.
This is just propaganda. It's customers who do the best capital allocation of all, and they do it for free, by spending their money at well run businesses and shunning the badly run ones.
Second best in judging how much to invest in a business (i.e. whether to draw all your salary or to leave some in for expansion) are the people who work at that business.
The idea that worker-owned businesses have less of a profit motive, or are somehow less capitalist than businesses owned by pension funds managed by managers who don't have a clue about what the business actually does, and whose senior managers have no interest apart from awarding each other massive bonuses is questionable, to say the least.
I don't mind worker-owned, but are LLPs always worker owned? Can they be organized as worker-owned, investor-owned or a mix of both?
-Kj
Ok I've read up on your previous postings on this topic, never mind.
-Kj
If I sold you a Desk lamp for ten pounds and two days later you sold it To Bayard for ten pounds would the ten pounds in my pocket not come from Bayard?
If you waited two weeks to sell it to Bayard would the 10 pounds in my pocket not come from Bayard ?
If you waited four months to sell it to Bayard would the 10 pounds in my pocket not come from Bayard ?
If you waited ten years to sell it to Bayard would the 10 pounds in my pocket not come from Bayard ?
If you waited 200 years to sell it to Bayard would the 10 pounds in my pocket not come from Bayard?
What can you disagree with.
Kj, LLPs are not "worker owned" in the narrow sense, they are usually used by lawyers and accountants, where it is the 'partners' or top ten per cent who hold the capital and run the business. But there is a wonderful blurring of boundaries, and no question of one partner selling his share to a third party outsider.
Eeniro: "If I sold you a Desk lamp for ten pounds and two days later you sold it To Bayard for ten pounds would the ten pounds in my pocket not come from Bayard?"
No, it could come from me. The money in my pocket comes from B.
Clearly, if I am a lamp wholesaler or retailer and pre-anticipate the onward sale to B, then that is slightly different, but in that case I am not investing in the lamp for the long term.
Your whole example confuses the concepts of "buying something with the sole intention of selling it on as soon as possible" with "investing for the long term in the hope of deriving income from that investment". The former is retail/wholesale and the latter is investing.
"If you waited two weeks to sell it to Bayard would the 10 pounds in my pocket not come from Bayard ?"
Still no.
[etc]
"If you waited 200 years to sell it to Bayard would the 10 pounds in my pocket not come from Bayard?"
Sorry, still no.
MW: are there any examples of organizations other than classical professionals, industrial production etc., organized as LLPs?
Anon, LLPs have been around for ages in America or in Germany (where they are called KG or GmbH & Co KG) but the structure is relatively new in the UK (invented in 2000). I don't know about America but there are plenty of ordinary businesses organised as KG in Germany.
They are still rare in the UK. All the professionals were partnerships anyway, so for them to convert to LLP was a no brainer. And you can convert an LLP to a limited company without too many problems.
But you cant' convert an existing limited company to an LLP (huge tax costs in most cases) so it will be a long time before we see any sizeable LLPs in industry or retail or electricity generation. (it's a one way filter)
MW: Ok, we don't have this type in Scandinavia, either you are UL partnerships/sole trader, or LL share-owned or cooperative. Of course you know more about companies in general than most, but it seems that LTDs can structure themselves in a range of ways, and unlisted LTDs can also stop anyone from selling their shares to third parties by ways of agreement as far as I know, so they are not automatically the route to flotation.
-Kj
B, 'proper business' means businesses set up and run with a view to making a profit, whether that's a corner shop run by husband and wife or an oil refinery with a thousand employees.
Kj, the details are very messy. Suffice to say, LLP (or indeed GmbH & Co KG) is the most flexible and coolest for tax purposes.
Cue howls of outrage from the great unwashed who think that if you run your business as a limited you only pay 21% tax, I've spent the last decade explaining why this is not true, but people need to understand alien concepts like "maths" and "logic" to get the point.
MW: That's true. If you include all taxes along the way, LTDs are pretty horrible here. Try this for taxation: VAT 25% -> CT 28% -> Dividend 28% -> Wealth tax 1% of share value. Quadruple taxation.
But as LLPs are pass-through, all income is taxed as wages?
-Kj
Kj:"But as LLPs are pass-through, all income is taxed as wages?" It's even better than that, it's all taxed as self-employment income which is much lower National Insurance rates.
If I sold you a Desk lamp for ten pounds and two days later you sold it To Bayard for ten pounds would the ten pounds in my pocket not come from Bayard?
No. The answer to whose money it is must be able to consistently handle adverse results as well. For example, what if Bayard was only willing to pay 8 pounds for the lamp? It would then be obvious that the 10 pounds in your pocket could not have come from him.
Yes, the concept of the consumer's money ending up at the producer is useful to get across the idea of consumer-directed production, but you must always remember that no consumer action can influence past production, only future production. Once production is completed, the producer cannot undo it, even disassembling the item to it's constituent parts would be additional production rather than an undoing of the original because it requires additional time to do.
So while in a philosophical sense you can talk about the consumer's money ending in the producer's pocket or even the consumer's money producing the goods, it's not actually a useful construct when dealing with real life actions, because they are taken without the benefit of knowing whether any money will actually be forthcoming.
MW
My bad re OFWAT - it's not been captured yet! I must've been thinking about the BBC Trust. Even so, the Chinese investors are still relying on OFWAT allowing Thames Water a reasonable (whatever that is!) return on its capital employed.
As to LLPs in the UK and US: they are analogous to limited liability companies (LLCs) invented in Wyoming in the 1980s. Essentially LLPs and LLCs are incorporated partnerships and, in the UK, LLPs allowed the simple creation of partnerships where all partners have limited liability - hence their popularity with professional firms. Under the old 1890 Partnerships Act at least one of the partners had to have unlimited liability.
Frag, nice one! You can't beat logic.
U: "Under the old 1890 Partnerships Act at least one of the partners had to have unlimited liability."
That wasn't the problem (and I think you should be referring to LP Act 1905). You can circumvent this by having a limited company as the unlimited partner (hence GmbH & Co KG), the problem was that active partners could not have limited liability, only passive partners/outside investors.
Oops, it's the LP Act 1907, not 1905. Typo.
"LP Act 1907"
Blimey - wrong twice (me) in 2 days!
Yes I know ways of getting round the various acts - it was only a point of info (technically wrong info as you pointed out!).
"B, 'proper business' means businesses set up and run with a view to making a profit"
Even heritage railway companies run at a profit, it's just that the profits are always reinvested in the business, AFAIK. However, the idea that businesses set up and run by enthusiasts aren't "proper" businesses is pretty widespread. It's got to be grim to be genuine!
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