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The Economy

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Dave1987

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But it's not for the government to make judgements on how companies are being run. Their main concern when awarding these contracts is presumably who is best place to do the job for a competitive price.

As discussed upthread the fact a company has issued a profits warning doesn't mean it's automatically going to collapse.

Sorry I haven’t been on the forum for a while so that’s why I haven’t responded. Anyway it turns out today that Carillion senior management were deliberately avoiding paying into its pension fund but still paying out bonuses and dividends, so the pension fund has an enormous deficit. The Government seemingly knew this was going on and yet still gave them lucrative Government contracts. Ow I think the Government have a lot to answer for in their dealings with Carillion. Seems like they were the go to company no matter how badly the company was run.
 
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JamesT

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Sorry I haven’t been on the forum for a while so that’s why I haven’t responded. Anyway it turns out today that Carillion senior management were deliberately avoiding paying into its pension fund but still paying out bonuses and dividends, so the pension fund has an enormous deficit. The Government seemingly knew this was going on and yet still gave them lucrative Government contracts. Ow I think the Government have a lot to answer for in their dealings with Carillion. Seems like they were the go to company no matter how badly the company was run.

Do you have a reference for the Government knowing? The stories I’ve seen today have been about how the Trustees of the pension fund agreed to the company deferring paying in. The Pensions Regulator are probably the ones with questions to answer as they could have objected and didn’t.
From the POV of someone awarding a contract, if the regulator isn’t taking any enforcement action and the auditors are signing off the accounts, I don’t see what basis they have refuse Carillion?
 

Dave1987

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Do you have a reference for the Government knowing? The stories I’ve seen today have been about how the Trustees of the pension fund agreed to the company deferring paying in. The Pensions Regulator are probably the ones with questions to answer as they could have objected and didn’t.
From the POV of someone awarding a contract, if the regulator isn’t taking any enforcement action and the auditors are signing off the accounts, I don’t see what basis they have refuse Carillion?

The reports I read have suggested the Government knew that Carillion were not paying into their pension fund but were paying out bonuses and dividends. If that is true then that is very dodgy and they should never have been given Government contracts.
 

najaB

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We keep on hearing from certain commentators (all of whom, coincidentally or not, appear to be Brexiteers) that the record-breaking FT100 Index ( the so-called Footsie) is evidence that our economy is in fine fettle
The FTSE-100 just crossed its level of one year ago, in a downwards direction.
 

Dave1987

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Very interesting. BoE holds interest rates at 0.5%. Money/Debt is still very very cheap. Huge amounts of people are still using debt to purchase goods and services. With wage growth still very low and inflation still way above the BoE targets, so we are all still getting poorer each day. Is the economy strong enough to cope with debt becoming more expensive? I severely doubt it. Lots and lots of people simply do not earn enough to be able to have a decent living standard without relying on debt. How does that constitute a strong economy exactly?
 

najaB

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John McDonnell: Labour public ownership plan will cost nothing
Labour's proposal to bring services such as water, energy and rail into public ownership would be "cost free," John McDonnell has said.

The shadow chancellor says he wants to put public services "irreversibly in the hands of workers" so they can "never again be taken away".

In a speech in London, Mr McDonnell said privatisation had failed.

However, the Conservatives said the plan would cost taxpayers billions of pounds and lead to worse services.

Speaking before the speech on BBC Radio 4's Today programme, Mr McDonnell said taking services into private ownership could be achieved at no cost to the taxpayer by swapping government bonds for company shares.

"It would be cost free. You borrow to buy an asset and when that asset is producing profits like the water industry does, that will cover your borrowing cost," he said.
Is it me, or does this ignore the fact that the bonds increase the national debt? So effectively "It doesn't cost anything, it's on the national credit card."
 

Bromley boy

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DynamicSpirit

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Is it me, or does this ignore the fact that the bonds increase the national debt? So effectively "It doesn't cost anything, it's on the national credit card."

It's more nuanced than that but still seems odd.

To answer your direct question, no he doesn't ignore the fact. He draws attention to it in the last sentence that you quoted:

BBC said:
"It would be cost free. You borrow to buy an asset and when that asset is producing profits like the water industry does, that will cover your borrowing cost," he said.

(link)

However, I suspect his logic is faulty, since the share price would normally partially reflect the profits a company makes, and partly reflect the assets the company owns. I would therefore expect the price you'd have to pay to buy shares in utilities would be too high for interest to be recoverable on profits alone (Though I haven't done the actual calculations - but then I strongly suspect John McDonnell hasn't either). And then of course there are the assumptions that the companies would be run as (or more) efficiently than currently. More seriously, I'm fairly sure senior Labour figures have argued that nationalising these industries would allow profits to be ploughed back into investment in those industries. If I'm correct, then it doesn't work because you can't use the profits to re-invest AND use the same profits to cover interest payments!

Something else worries me in the report:

BBC said:
"Let's take water for example. They've given out £18bn of dividends to their shareholders, sometimes they've actually given out more in dividends than they've made in profits.

Someone with a legal/accounting background would need to confirm, but I'm fairly sure there's something wrong with the bolded claim: You can't legally pay more than you make in profits (unless you're doing something like using accumulated profits from previous years, which is quite legitimate and so not worthy of any remark in McDonnell's speech). Any excess dividends would be treated as a loan as soon as HMRC found out, and would have to be repaid. So it looks to me like either John McDonnell hasn't checked his facts properly, or he's misrepresenting something (either is worrying in a major speech like that).
 
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DynamicSpirit

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It is what it is. Fantasy economics from a delusional relic from the 1970s!

If that lunatic gets his hands on the economy Brexit will seem like a walk in the park.

By your (usually high) standards, that seems very close to name-calling and far from reasoned debate!
 

Bromley boy

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By your (usually high) standards, that seems very close to name-calling and far from reasoned debate!

Touche! I’m afraid I get irrationally angry when it comes to fantasy economics masquerading as genuine policies.

A bit like Jezza’s plan to buy houses for the homeless - problem solved - that’ll work well won’t it. :rolleyes:

To think, these lunatics may soon be running the asylum!
 

najaB

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However, I suspect his logic is faulty, since the share price would normally partially reflect the profits a company makes, and partly reflect the assets the company owns.
The main flaw in his logic is that shares, once issued, no longer represent a liability on the company but bonds do. The 'cost' is the transfer of an asset with no intrinsic value to one with a guaranteed value.
 

AndrewE

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You can't legally pay more than you make in profits (unless you're doing something like using accumulated profits from previous years, which is quite legitimate and so not worthy of any remark in McDonnell's speech). Any excess dividends would be treated as a loan as soon as HMRC found out, and would have to be repaid. So it looks to me like either John McDonnell hasn't checked his facts properly, or he's misrepresenting something (either is worrying in a major speech like that).
Isn't that exactly what Carillion have been doing? Just that they didn't pay into the pension fund to create the pretence of profits...
 

Dave1987

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When it comes to utilities, privatised water cannot be considered a “competitive market”. If your water company provides an extremely poor service you cannot change supplier. All you can do is complain to the regulator and hope they take action. As far as (re)nationalising of utilities is concerned I believe water has the strongest case. To a certain extent McDonnell has a point. Our Government can issue bonds at a pretty low interest rate and when you take the profits and subsequent dividends that water companies pay out at the moment it could be cost neutral. To say it’s all pie in the sky stuff from a lunatic is like saying the current system works perfectly which it clearly doesn’t. I believe that the NAO recently said that the PFI deals handed out by the Government recently would have been around 70% cheaper to the taxpayer had they been done by Government directly. The Government disputes this but I highly question the current Governments judgement. The energy market has started to work better recently but only after action was taken to ensure people could switch easily and smaller companies have come on the market.
 

najaB

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Our Government can issue bonds at a pretty low interest rate and when you take the profits and subsequent dividends that water companies pay out at the moment it could be cost neutral.
There is, however, a difference between something being cost-neutral in the long term and 'costing nothing'.
 

DynamicSpirit

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The main flaw in his logic is that shares, once issued, no longer represent a liability on the company but bonds do. The 'cost' is the transfer of an asset with no intrinsic value to one with a guaranteed value.

Can you clarify? I'm not sure how this difference impacts the cost of issuing bonds?
 

Barn

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Even if McDonnell was correct (which he isn't), the dividend income would only pay back the acquisition if the company's behaviour didn't change. And if it is going to remain profit-generating to the same or greater extent, what is the public benefit in the nationalisation?
 

AndrewE

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... And if it is going to remain profit-generating to the same or greater extent, what is the public benefit in the nationalisation?
For a start it gives the company a different remit: public service (and accountability) rather than a legal obligation to put shareholder interests above all others. Would you rather have reliable clean drinking water or see the profits go (via a loan from a shell company in a tax haven, so no tax payable) into dividends, rather than being reinvested instead?
Also the need for regulation would decrease so the number of these bodies (often several per industry) would also dwindle. They are paid for either out of taxes or by a levy on the industry (i.e. customers pay.)
 

Barn

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For a start it gives the company a different remit: public service (and accountability) rather than a legal obligation to put shareholder interests above all others.

That's true, but it's incompatible with McDonnell's argument that incoming profits will repay the acquisition price (which would need to be market value based on the current arrangements to avoid it being confiscatory).

It would be more honest to say: yes, we'll change the way they work and yes, that means it'll be expensive.

The political difficulty is that, whilst nobody is a huge fan of Thames Water et al, I suspect they wouldn't be at the top of anyone's list for a borrowing and spending commitment of that size
 

najaB

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Can you clarify? I'm not sure how this difference impacts the cost of issuing bonds?
The suggestion is that it will 'cost nothing' because we would simply be swapping bonds for shares. But it's not as simple as swapping one piece of paper for another one as the holder of a share certificate is entitled to exactly nothing from the company other than dividends (if they want to convert it to cash then it is a market transaction). The holder of a bond is entitled to redeem it at a future date (at a premium over the face value) - this liability is what represents a future cost to the government.
 

furnessvale

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The suggestion is that it will 'cost nothing' because we would simply be swapping bonds for shares. But it's not as simple as swapping one piece of paper for another one as the holder of a share certificate is entitled to exactly nothing from the company other than dividends (if they want to convert it to cash then it is a market transaction). The holder of a bond is entitled to redeem it at a future date (at a premium over the face value) - this liability is what represents a future cost to the government.
Thanks for that concise explanation.

Companies can, and do, go bust and the shareholders walk away with nothing. The Government doesn't do that (go bust), but in the event of a Corbyn/McDonnell administration, I will reserve judgement.
 

Dave1987

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There is, however, a difference between something being cost-neutral in the long term and 'costing nothing'.

Indeed. Corbyn and McDonnell are both at the extreme end of left wing political beliefs and economic beliefs. But when I read that the NAO report that said that recent PFI deals could have been 70% cheaper had they been completed in house instead of constantly outsourcing to the private sector its starting to look like our Governments have gone far too far in outsourcing to the private sector. Would a Network Rail model work for water utilities for example. I'm fairly certain that May's Government would have privatised Network Rail by now had we not had RailTrack before hand. Many right wing Tory MP's consistently criticise NR whilst defending TOC's.
 

AndrewE

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For a start it gives the company a different remit: public service (and accountability) rather than a legal obligation to put shareholder interests above all others. Would you rather have reliable clean drinking water or see the profits go (via a loan from a shell company in a tax haven, so no tax payable) into dividends, rather than being reinvested instead?
Also the need for regulation would decrease so the number of these bodies (often several per industry) would also dwindle. They are paid for either out of taxes or by a levy on the industry (i.e. customers pay.)

That's true, but it's incompatible with McDonnell's argument that incoming profits will repay the acquisition price (which would need to be market value based on the current arrangements to avoid it being confiscatory).

It would be more honest to say: yes, we'll change the way they work and yes, that means it'll be expensive.

The political difficulty is that, whilst nobody is a huge fan of Thames Water et al, I suspect they wouldn't be at the top of anyone's list for a borrowing and spending commitment of that size
I notice that you didn't address my other points...
 

Barn

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I notice that you didn't address my other points...

They're all facets of the same point, Andrew, which is that the advantage of nationalisation is that you can change the nature of the company. That's fine, but it means there is a net cost in doing so because we would be buying a profit stream at present value and then choosing to dial down the profitability.
 

AndrewE

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Sorry I haven’t been on the forum for a while so that’s why I haven’t responded. Anyway it turns out today that Carillion senior management were deliberately avoiding paying into its pension fund but still paying out bonuses and dividends, so the pension fund has an enormous deficit. The Government seemingly knew this was going on and yet still gave them lucrative Government contracts. Ow I think the Government have a lot to answer for in their dealings with Carillion. Seems like they were the go to company no matter how badly the company was run.
Did you see that the Carillion pension fund is made up of quite a few sections? Just one very small part is actually in surplus... the Directors' section!

They're all facets of the same point, Andrew, which is that the advantage of nationalisation is that you can change the nature of the company. That's fine, but it means there is a net cost in doing so because we would be buying a profit stream at present value and then choosing to dial down the profitability.
I don't agree. If the nationalised company is big enough to have internal (i.e. not-for-profit) departments it means that an enormous amount of money stays within the company instead of funding all the overheads of the services bought in, like interest on the working capital, Professional Indemnity Insurance, Directors remuneration, dividends, etc etc.
 

Barn

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Did you see that the Carillion pension fund is made up of quite a few sections? Just one very small part is actually in surplus... the Directors' section!

I don't agree. If the nationalised company is big enough to have internal (i.e. not-for-profit) departments it means that an enormous amount of money stays within the company instead of funding all the overheads of the services bought in, like interest on the working capital, Professional Indemnity Insurance, Directors remuneration, dividends, etc etc.

If the great advantage of nationalisation is that we can scrap comparatively minor things like indemnity insurance and directors' remuneration then, being charitable and assuming we can reduce those figures in the case of Thames Water by £5m, we would see each of Thames Water's 15m customers save just 30p on their annual bill.

If the advantage of nationalisation is that we can lower revenue on the basis that shareholders are not expecting a dividend (or interest on working capital) then, as I say above, that's fine but that means that McDonnell mustn't double-count and on the one hand say that we need to dispense with these evil profit-hungry companies whilst on the other hand saying that continued profits will cover the acquisition cost.

There are only two ways in which this could work.

Firstly, we could under-compensate shareholders / creditors against the market value (which, to be fair to him, McDonnell has hinted at). I am sure you can appreciate how catastrophic this would be to future investment in the UK, however.

Alternatively, we could change the pricing structure of the industry and make it more like taxation, so richer customers paid more per litre (or kilowatt-hour) than poorer customers. Perhaps this is a vote winner for Labour, but it should be announced honestly if it is indeed the plan.
 

najaB

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Firstly, we could under-compensate shareholders / creditors against the market value (which, to be fair to him, McDonnell has hinted at). I am sure you can appreciate how catastrophic this would be to future investment in the UK, however.
Expropriation was an option for Stalin, Castro and Chavez but it isn't an option if we are serious about being 'Open for Business' in the post-Brexit world.
 

Barn

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Expropriation was an option for Stalin, Castro and Chavez but it isn't an option if we are serious about being 'Open for Business' in the post-Brexit world.

Quite right. Once done, it is extremely difficult to regain your reputation as a safe place to invest ever again (as your three examples amply demonstrate).
 

AndrewE

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If the great advantage of nationalisation is that we can scrap comparatively minor things like indemnity insurance and directors' remuneration then, being charitable and assuming we can reduce those figures in the case of Thames Water by £5m, we would see each of Thames Water's 15m customers save just 30p on their annual bill.
No, The great advantage is that the income and other funding of the company goes almost entirely on its core activities. No need to set up subsidiaries in tax-havens to take money out in the form of repayments on fabricated loans, plus no need to fund all the parasitic losses all the way down the supply chain. Yes, they will use contractors for some big jobs, but the bulk of outsourced stuff can be done in-house. That way secure employment leads to a bigger tax-take, and the employees can also even consider buying houses
A relative of mine worked in a firm in the City that made an absolute fortune just arranging finance for PFI-type projects. Now that really was an unnecessary hemorrhaging of funds. I believe that most of the activity (and profitability) of the Thames Tideway sewer comes from the financial structures involved...
 
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