The end is nigh?

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The result of the Norwich North by-election – with a huge swing to the Tories, who now have a majority of more than 7,000 – has not only humiliated the Labour Party but triggered serious internal friction.
 
The by-election was caused by the resignation of Dr. Ian Gibson after he was effectively deselected by the 'star-chamber' of the Labour NEC. If Gibson had not been targeted by the star-chamber, an election would not have been called and Labour would still hold their North Norwich seat. Conflict in the party comes as a result of Gibson being ‘targeted’ after the expenses scandal. There has been a longstanding tension between Gordon Brown and Ian Gibson, as such it is not surprising that Ian Gibson was one of only five Labour MPs referred to the Star Chamber regarding expenses. More high profile members, such as Hazel Blears and Jacqui Smith, were spared the star-chamber treatment so as to retain an image of party unity. It is fairly evident that Gibson was initially used as cannon-fodder by the party to create an imagine that they would not stand for expenses corruption. Gibson trumped Brown by resigning, leaving the party with even more serious problems.
 
The Labour party now faces a crisis. They could be facing a historical downfall with little prospect of recovery. If they enter the next election with the possibility of coming third, any support they currently have will be sapped. This does not necessarily need to happen. Cameron is not on the home stretch yet, and elections have an uncanny way of throwing up surprises when they’re least expected. But as things stand, the Labour Party is a sinking ship and Gordon brown is acting as one hell of an anchor.

Au Revoir to the UK Financial Sector

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As reported in our letter to The Times of June 24, the Chancellor and Prime Minister seem to have agreed the French inspired proposals to hand financial regulation, albeit not supervision, over to Brussels. We surmised that to have been the price of Sarkozy’s attendance at the G20 meeting in April.

What was puzzling us then and since is why neither the City nor the Tories have risen up in protest. Do they believe Lord Mandelson’s soothing words that he will see the City all right? More likely is that the large British banks would actually prefer EU to British regulation and are lobbying to that end. Angela Knight has said as much in Parliament’s house magazine in the last few days. This is carrying hostility to the FSA too far. EU regulation is bound to blunt the UK's pre-eminence in financial services.

The financial crisis has revealed just how dumb our banks can be. Little seems to have changed since. Will someone please stand up for our last remaining major industry?

UK water – is Ofwat being realistic?

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Yesterday’s eagerly awaited draft determination announcement by Ofwat, regarding the water pricing regime between April 2010 and March 2015, confirmed modest price cuts in real terms and a near £21 billion five-year capital expenditure plan. Good news for consumers.

Shareholders, though, were less happy as Ofwat chose a 4.5% post-tax  Weighted Average Cost of Capital (WACC) figure, which was below market expectations. No wonder shares in the remaining publicly quoted water companies fell.

In today’s volatile markets, setting a credible WACC, which can endure until March 2015, is nigh impossible. Yields on water shares are closely correlated with gilt-edged stock; between March and June this year, the yield on 10-year government bonds rose by some 100 basis points.

Factor in, too, the planned issuance of gilts until March 2015, which could amount to an astonishing £800 billion, and it is clear that forecasting long-term yields is only for the brave. 

In the event of its WACC figure being materially awry, Ofwat did offer some hope of financial restitution - through the ‘substantial adverse effects’ clause in the list of notifiable items by which interim price rises can be awarded. 

In today’s announcement, Thames Water is an obvious loser. There is a near chasm between its own WACC assumption – close to 5.25% - and the 4.5% of Ofwat. A confrontation at the Competition Commission seems almost inevitable.

The tighter WACC being proposed by Ofwat is on the back of lower valuations of water stocks, which are now trading – in some cases - below their Regulatory Asset Value (RAV).

In reality, between now and November, when Ofwat publishes its final determination, expect considerable activity on behalf of the water companies to drive up Ofwat’s WACC assumption much closer to 5%. A lacklustre gilt auction before then would be very helpful.

Apologies for the service interruption

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As regular visitors may have noticed, the ASI website has been offline for the last 24 hours. This was due to a number of technical difficulties, which we hope have now been resolved. We'll be posting a few blog pieces over the course of the afternoon, and resuming normal service over the weekend. Thanks for reading...

A pointless 'privatization'

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According to Nick Timmins in the FT:

The private sector is to be invited for the first time to take over and run a big NHS hospital under plans backed by the Department of Health and the Treasury yesterday.

Needless to say, I'm generally a big fan of privatization, and an advocate of greater private sector involvement in the NHS. And yet the government's proposals do not exactly fill me with joy.

The trouble is in the way the scheme is set to operate. The government will offer a seven-year franchise on the hospital and invite private operators and NHS foundation trusts to take on its running and financial liabilities. But they will not transfer the assets of the hospital, and all staff will remain employees of the NHS.

Within that framework, you have to wonder what good the scheme will do. Sure, an organisation with private-sector expertise might be able to manage the hospital a bit more efficiently, but will they really be able to make much difference if the hospital has to be run more-or-less as it is now, with the same staff, and the same salaries and benefits (which will continue to be negotiated collectively with the Department of Health, rather than individually with the hospital's management)? No.

In the long run, I worry that politicians' obsession with 'private sector management expertise' (valuable though it is) does the cause of liberalization a lot of damage. They need to realize that the point of privatizing things is not just to introduce a new management with a better-developed profit motive. The goal should be to increase autonomy, choice and competition, and to focus services around consumer interests, rather than producer ones.

As things stand, the government's franchise proposal does not achieve any of those things.

Parliament: more transparency needed

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As the Parliamentary Standards Bill limps towards royal assent before the summer recess, picked at and weakened by the government and committee stages, it seems a good time to reflect upon the transparency of government and politicians.
 
On Tuesday BBC Radio 4 broadcast “Expenses: The MPs’ Story", in which a series of MPs gave their accounts of the days and events surrounding the expenses scandal. Listening to the programme there was a sense that they were looking for sympathy or even to pass some guilt onto the public for overacting with such ferocity. As some MPs claimed at the time, there was a ‘McCarthy style witch hunt’ for MPs – well, what’s wrong with that? If somebody had robbed a supermarket, we wouldn’t decide to let them off in case we hurt their feelings – why should it be different for MPs?
 
People such as Anthony Steen MP (who is thankfully standing down at the next election), claiming that the public were simply ‘jealous’ of his big Balmoral-esque house, and Lord Foulkes represent what’s wrong with many politicians. They have forgotten whom they represent and why they are in Parliament, detaching Westminster from the rest of Britain. When people enter politics, they need to accept the transparency and public scrutiny that should come with it.
 
What we need from parliament, and what the Parliamentary Standards Bill will not deliver, is a total change in culture of politics. We need a system that looks out towards voters rather than looking inwards towards personal power and greed, only noticing the electorate every 5 years.
 
Daniel Finkelstein has written a piece in The Times arguing that we should be able to see into the personal dealings of our politicians, and I couldn’t agree more. Finkelstein says the people of Italy have the right to know the details of Silvio Berlusconi’s misdemeanours – and this is true – but I’d still rather have a lothario than a thief running Britain.

And in other news...

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and-in-other-news

It seems that even members of the animal kingdom are resorting to desperate measures during the economic downturn...

'"Definitely never been robbed by a monkey before," says store co-owner Jerry Duncan.'

Social mobility

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The report from Alan Milburn makes it clear that there is a lack of social mobility in modern Britain. It is in fact lower than it used to be. The grammar schools used to provide a ladder for talented people from poorer backgrounds, but most of these schools were swept away in a fit of egalitarian enthusiasm which resulted in a levelling down and the closure of opportunities.

There is less social mobility than when Labour took office. The key to social mobility has always been education, but despite an emphasis on "education, education, education," it has largely failed people of disadvantaged backgrounds. The government pressurizes universities to lower admission standards for people from poorer backgrounds, thereby discriminating against talented youngsters who happen to have middle class parents.

This is not the answer, neither a valid nor a fair one. The answer is to raise the standard of state schools so their students can qualify on merit. The way to do this is to forget egalitarianism and to allow a variety of schools to flourish, and enable parents of all backgrounds freely to choose between them, taking the state funding with them. We've published on this before, and will do so again. It has worked brilliantly in Sweden and will do the same here. Roll on a government which will implement it.

In defence of hedge funds

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Douglas Shaw of Black Rock spoke at a Civitas lunch this week on the topic 'In Defence of Hedge Funds'. Good luck to him. The industry is about to be overrun by an EU army of new regulations, which will knock any innovatory stuffing out of them. As investment businesses evolve and grow in the US, Switzerland, the Middle East and Asia, the stunted European hedge funds will look more and more like the evolutionary throwbacks of the Galapagos.

I don't know why hedge funds don't spend about a thousand times more on PR, because they have a positive story to tell. Their clients are all large, savvy investors, who probably know their business better than any regulator. There are about 10,000-odd funds, and the sector is diverse and highly competitive. Their leverage was only about 3x before the crash, maybe 2x now – much less than the 8x or so of the banks – so you can hardly say they are structured recklessly. And again, the institutions which lend them that money demand very detailed information about their risk and management profiles.

Oh, yes, they short-sell shares of basket cases like Northern Rock. But that just speeds up the demise of the inadequate, by making prices reflect what is really happening, rather than what half-blind regulators think is happening. It's not the cause of the crash. Indeed, after the ban on short selling came in, the markets continued to fall...and fall. Even the best hedge fund manager does not expect to be right more than two-thirds of the time, but the fact is that hedge funds tend to be more right than wrong – which is why their returns have well exceeded the market indicators and why government agencies, along with pension funds and all the rest, buy into them.

Still, the EU regulation is a done deal, apart from a few drafting points, so maybe it is past the time for 'defence'. Being the sole EU country with a truly global financial market, the UK will lose a lot more than others from all this. But then if the UK loses, the whole EU loses, and the US, Switzerland and the rest gain. But I repeat: why have these efficient, effective investment bodies not spent more money promoting their positive message? Perhaps they are just better at anticipating markets than at anticipating politicians. Well, they are learning the hard way.

Freedom Week at Cambridge

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Last week was memorable for the 30 students lucky enough to win places at Freedom Week. Held at Cambridge in July, the week features lectures on the history of liberty and its relevance to the modern world. Organized by Jean-Paul Floru, Freedom Week is now in its fourth year. Its students stay at Sidney Sussex College, and have a packed programme of lectures, enlivened by social activities which include meals, receptions, punting and a barbecue. This year's event was agreed by those who attended to be excellent, featuring lecturers of very high quality, and with high level discussions both in the conference hall and in the social activities afterwards. It was helped by the weather, which stayed clear until the conference closed, at which point the heavens opened….