The biggest puzzle in the fiasco of accounting for student loans is not how it was done, but how successive governments got away with this conjuring trick for so long. The loans did not count as government spending, even though three-quarters of the advances will never be fully repaid.

The book losses on the advances were to be postponed until the debt was definitely bad, 30 years down the road. On the other hand, the (theoretical) accruing interest was treated as tax revenue even though no money was actually received. Any sales of loans at a discount were not considered to be losses until the 30 years were up.

This is the sort of accounting sleight-of-hand that helped bring down Carillion, only with more zeros. The loan book is over £100bn, and expected to reach £473bn by 2049. Now the Office for National Statistics has decided that the government must come clean on the true cost.

Well, cleanish, at least. The ONS assumes that 38 per cent of the accrued interest will actually be paid, so it allows that slice of the advances to be classed as loans. The rest counts as spending, adding £12bn to the deficit in 2020-21, and much more in future years.

The chancellor must have known that this ONS ruling was coming before he embarked on his income tax giveaways last month, which he justified by the Office for Budget Responsibility magically finding a similar sum to slice off the forecast Budget deficit. It all reinforces the suspicion that Philip Hammond’s real plan was to give the money away before Jeremy Corbyn could.

Hammering the point

Nearly every trading day for the last five months, there has been a buyer of Hammerson shares, often in penny packets but adding up to 27m, or 3.4 per cent of the company. Unfortunately, this is not some stalker who can see hidden value in Hammerson’s emptying shopping malls, but the company itself.

And a fat lot of good the buying has done. When it started, the price was 531p. It’s now 337p, an impressive plunge even by the standards of a struggling sector. The buyback is the aftereffect of a nasty dose of McKinseyitis, which recommended exciting new things for the Hammers to do, after the board’s view of the bid for Intu went from “irrevocable” to “withdrawal of recommendation” in the blink of an eye.

The last accounts now read like something from another age, with nothing but blue skies ahead. The 25 pages of impenetrable guff from rem. com. chairman Gwyn Burr includes a bonus to CEO David Atkins for “outstanding leadership skills to deliver the Intu acquisition”.

We must wait until February to find out if there’s a clawback, although by then there may be more pressing concerns about the balance sheet. The way Paul May of Barclays does the sums, Hammerson’s gearing had already passed its self-imposed limit of 40 per cent in June, and the commercial property market has got much worse since then.

After such an annus horribilis, change at the top looks well overdue, but chairman David Tyler (£325,000 to augment his day job at Sainsbury’s) and CEO Atkins (£2m, less than he got in 2012, poor love) show no sign of departing. In July, this column asked: What, exactly, is Hammerson for? Silly question, really.

For Brexit, read Next

British businesses, 140,000 of them, should brace themselves for a letter from the government telling them what to do in the event of a no-deal Brexit. If it is anything like the previous official missives on the subject, the businessmen would be well advised to get on with something more productive, like reading the 11-page analysis published by Next, the UK’s most successful store group with sales over £4bn, last September.

CEO Simon Wolfson is a Brexiteer, but the paper insists that a hard exit is not the company’s preferred option. It concludes that port delays are the biggest risk to the business, but that it is manageable, and presents an opportunity to reform customs procedures. Assuming the government does rather more than send out 140,000 letters, the overall impact would be about sixpence on the cost of a pair of socks.

This is my FT column from Saturday

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There were many aspects to George Osborne’s crowd-pleasing Budgets to dislike, but few promise to do as much long-term damage as his Help to Buy, that impressive example of economic illiteracy. In the face of a shortage of housing supply, the subsidy to buyers stimulated demand, pushing prices further up and creating an artificial two-tier market.

An analysis this week from brokers Peel Hunt showed the baleful result, and quantified just how successful Help to Buy Builders Yachts has been. In the years before the 2008 crisis, the sector made steady profits of around £2bn. The profits then disappeared, and did not regain that level until 2015. At that point, Mr Osborne’s big idea clicked in, and the profits took off. Houses financed by Help to Buy typically fetched a 5 per cent premium over the market price, which came straight through to the bottom line.

In the last four years the sector has more than doubled profits, to over £5bn a year, while building much the same number of houses as before the crisis. Help to Buy has transformed the trade’s margins, allowing dividends, which previously totalled around £500m in a good year, to soar to almost £3bn. Executives who happened to be in the right place at the right time have made fortunes, even at companies whose remuneration committees were more awake than those responsible for Jeff Fairburn at Persimmon.

This would matter less if some of the benefit had gone where it was intended, to the buyers of the overpriced homes. They are effectively being forced to gamble on a resumption of house price inflation, something the latest RICS survey cannot see.

After five years, the cost of the government help starts to rise sharply, to encourage owners to remortgage commercially or sell. If the homeowners cannot borrow enough or find a buyer at a profit, they will be looking for someone to blame for mis-selling them the loan. No prizes for guessing where.

Railing at the wrong target

London’s new railway is turning into very cross rail, as the traditional game of passing the blame gets under way. The scheme, commonly dubbed Europe’s biggest construction project, is late and over budget, and thus must be considered yet another example of Britain’s inability to build infrastructure.

This is silly. According to McKinsey, only two out of every 100 projects worth over $1bn comes in on time and budget. The average cost overrun is 80 per cent, and the average delay is two years. Crossrail was supposed to start last week, but 2020 now looks a realistic target. In 2012 the estimate was £15.9bn, and the latest budget increase only takes it to £17bn.

Unlike that other railway, the £100bn (just wait) HS2, that is hardly a runaway financial train. The London Olympics had to come in on time, and came in on budget by the simple expedient of raising it to four times the original estimate. By these standards, Crossrail is a model of how to do it.

How to raise productivity

We are constantly being told how hopelessly unproductive we are. The average worker in France or Germany produces much more per hour than the average Brit. Now it seems that while we do indeed lag those clever continentals, it’s by much less than we had been told.

The Organisation for Economic Co-operation and Development has looked at the way the figures are compiled and found that differences account for half the gap, which is thus not 16 per cent, but only eight. This is still quite a lot, and increasing prosperity requires increasing productivity, but measuring it in real life is close to impossible.

Information which previously took hours or days to gather is now available in a few clicks. How productive is that? Airline productivity may have risen dramatically, but mostly by forcing the passenger to do nearly all the work herself. Banks no longer employ armies of tellers, passing over routine stuff to the customer.

We should be grateful to the OECD for sparing some of our blushes, and producing this helpful research. But the organisation itself is something of an anachronism, and its highly paid, well qualified employees might find themselves more productive employment by closing it down.

Is there another big UK company that has been half as disappointing as GlaxoSmithKline? A business that once led the world in finding and developing pharmaceuticals is today reduced to expensive purchases of other companies’ research.

Its shares have gone nowhere for six years, and the question of whether the dividend can be maintained has taken the place of discussion of exciting new compounds. For a business highly placed in one of the world’s great growth industries, that is a sorry spectacle. Now Emma Walmsley, the newish CEO, has administered two doses of corporate action, but far from providing hope for a cure, they merely served to knock another 10 per cent off the share price.

If selling Horlicks looked sensible, the use of the proceeds (and more) to buy Tesaro, a developer of cancer drugs, looks like severe value destruction to Barclays’ analysts, among others. The deal is dilutive to earnings and painfully highlights GSK’s own shortcomings in research.

It is telling that the company felt it necessary to provide reassurance on maintaining the dividend (unearned, on some accounting measures), for a 5.6 per cent yield at £14.40. The balance sheet is not in the best of health, and GSK’s ability to sustain the payment in the long term must be in serious doubt. Moody’s downgraded the credit outlook after the Tesaro deal.

Successful drug companies do not yield 5.6 per cent. Unsuccessful ones do not yield 5.6 per cent for very long. On this week’s evidence, the prognosis is further financial pain for us chronic GSK shareholders.

Grayling’s chance to shine

Chris Grayling was most insistent. There was to be no more public money for HS2, Britain’s paper railway, going from London to Birmingham and thence who knows where or when. We never suspected that the current Transport Secretary had a sense of humour, but this is one of his better jokes.

Less funny was the drawn-out defenestration of the HS2 chairman, Terry Morgan, whose sacking threatened to take longer than he had been in the job, and is a fine example of shooting the messenger. Sir Terry is an engineer, and it is hardly his fault that the horrible financial truth of this benighted project is finally getting onto the political radar.

Infrastructure projects are worth doing only if they create more wealth than they destroy. Upgrading the rail network by straightening curves, removing bottlenecks and modernising signals produces measurable increases in wealth. Much of the money would be spent in the north of England, where it is badly needed.

Every published analysis has shown that HS2 returns less than the cost of its capital. Yet while the rest of the network is starved, it appears to have a charmed life.

For perspective, this week’s face-saving deal for Go-Ahead to spend £15m on “passenger improvements” to ease the misery on the home counties commuter trains amounts to 0.027 per cent of HS2’s £56bn budget, and nobody believes it can be built for anywhere near that price.

Mr Grayling knows that the figure is a fantasy, probably about half the final cost if it ever gets built. He also knows that he will be gone from the post long before the fiction is exposed. If he really wanted to do this job rather than his next one, he should scrap HS2 and divert a little of the money to solve the worst of the network’s problems. Then we would all be laughing.

He didn’t listen

Unilever’s CEO Paul Polman thinks that business leaders are too taken up with a “win-lose” mentality, and that the way ahead is to bring humanity into the executive mind. He explained to the FT’s Andrew Hill that company leaders of the future must “reach out and listen” to outside voices.

How very true. A little listening would have saved him the embarrassment of his climbdown over moving Unilever to The Netherlands. Had he reached out to investors in Unilever plc, rather than leaving finance director Graeme Pitkethly to tell us critics that we just did not understand, and that a minority was holding the majority to a form of ransom, Mr Polman would not have been forced into retirement rather earlier than he had planned.

This is my FT column from Saturday

 

 

The old adage about forecasting being difficult, especially for the future, might have been coined for the oil industry. A few short weeks ago, the price of a barrel of Brent had passed $80, and the speculators dreamed of $100. Now it is failing to hold on to $60, they are selling, and the end of the oil world is nigh.

It is not just the short-term expectations that have proved so wildly wrong. The 2008 World Energy Outlook from the International Energy Agency calculated that hydrocarbons provided 81 per cent of the world’s energy. A decade on, despite the trillions of dollars poured into alternative fuels, that percentage is unchanged.

As Nick Butler points out, the 2008 Outlook did not even mention the phenomenon that has transformed America from the world’s gas-guzzler to a net exporter of oil. The shale revolution was entirely unexpected. At the time, the expression “peak oil” meant the year when the world’s reserves would start to fall. Since then, the use has been turned on its head, to mean the date when oil demand starts to fall.

Wood Mackenzie’s analysts currently put that date at the late 2030s. For what it’s worth, the IEA forecasts that even by around that time, hydrocarbons will still be supplying three-quarters of a (much greater) world demand. We may be dazzled by the thought of electric cars (whether we really want them once the subsidies turn inevitably into taxation remains to be seen) but demand for oil for plastics, chemicals, construction and airlines will not be quickly replaced.

A thoughtful analysis from fund managers Ashburton concludes: “We believe the pullback in the oil price is transitional. This…confluence of normalised inventories, tight spare capacity and the lack of new oil from conventional projects – due to the collapse of capex from 2014 – will likely lead to tighter markets in 2019.”

It’s only another forecast, but it looks rather more plausible than the “end of the road for oil companies”. They are going to power the plant for a good few decades yet, and the price will continue to surprise us all.

Carnage at the Bank

Since this is the week for forecasts, Mark Carney deserves centre stage. The governor of the Bank of England should have known that the press would seize on his most pessimistic projection, rather as we always do with climate change, with apocalyptic warnings of impending doom.

The message that we shall all be poorer, not actually poorer, just poorer than we otherwise might have been had we done something else, is a tricky one to get across. The puzzle is why Mr Carney persists in “forward guidance” when his record is worse than that of a monkey with a pin.

The original Project Fear might charitably be seen as an honest mistake, which is a good deal less cynical than as a payback to the then Chancellor for giving him the job, but for an institution like the BoE, there is much to be said for saying less. It is not obliged to make forecasts other than those which are relevant to its remit on inflation.

This week’s Project Fear II merely hands more hostages to fortune. Whatever the UK’s position on April 1 next year, even if the shops run short of fresh veg from Spain and the M2 lorry park backs up to the M25, the sky is unlikely to fall.

It would be unkind to suggest that Mr Carney is thinking about dun’ governin’, now that a vacancy running Canada seems unlikely. Perhaps the IMF or the OECD might beckon. They both know quite a lot about the challenges of forecasting the British economy.

Comply or explain (or else)

Now pay attention. The chief executive is going to move up to become chairman next spring, at which point the property director will become CEO. The old CEO replaces the current chairman who has been there for 12 years. The new chairman promises to stay for only two more years, after which an outside candidate will be sought.

This is corporate governance at Derwent London, a successful commercial property developer, measured by the rather undemanding standards of the sector. As St Augustine did not quite say: Lord make me chaste and compliant, but not yet.

This is my FT column from Saturday

Takeovers are the vodka in the capital markets cocktail. They provide the kick to a worthy but dull mixture. They keep the pressure on complacent or incompetent managements and remind them whose capital they are using. They allow companies to evolve to meet changing markets.

They are also politically intoxicating. The merest hint of job cuts brings MPs of all parties out in spots and the lobbyists out in force. This is why the Competition and Markets Authority was set up with strictly limited powers to block deals. It can prevent too much concentration of market power, and cite national security, but not much else.

All this may be about to change. New proposals promise a much wider definition of of national security, ostensibly to meet the threats from foreign acquisition of sensitive technology. However sensible this may sound, the government’s irresistible urge to interfere would quickly extend the definition. As John Vickers, former director-general of the CMA’s predecessor, pointed out recently, the projection that 200 deals a year might face review, against the handful that do today, rather gives the game away.

The evolution of markets is already making contested takeovers (as opposed to agreed deals where top managements look after each other) extremely difficult, as Melrose discovered in its assault on GKN. Despite the egregious behaviour of the GKN board in trying to frustrate the bid, the margin of success was shockingly small. The ambiguous position of tracker funds and the prevalence of nominee holdings make getting out the vote so difficult that this may have been London’s last contested bid for a large company.

GKN had argued for “protection” as a defence contractor despite not being on the Ministry of Defence’s top 50 suppliers. New rules would make an appeal to national security much harder for the government to resist, and, like the vodka-free cocktail, remove a vital ingredient for efficient markets. 

White elephant news

And the news is that they are all fattening up nicely, ready for the chop. If only. First came the inspired idea for trimming a little fat off the world’s most expensive railway, the high speed link from London to Birmingham (and beyond!). Money can be saved, we’re told, by not running the trains as fast as previously promised.

Quite why nobody thought of this before is a mystery, but a speed of 225mph requires 8.8m diameter tunnels for noise and pressure reasons. Cut it to 143mph and you need only 7.5m diameter. One-quarter of the line to Birmingham will be in tunnels, so a lower speed will make a significant difference to journey times.

The speed may be falling, but the costs are rattling along. The latest guess of £65bn is just over twice the first sensible estimate in 2010, but even if the trains were to be walked through the tunnels by a man with a red flag, nobody expects that sum to be the final figure.

It is also a mystery that the project has got this far. Neither political party has ever objected, even as the justification slipped from “it’s faster” to “the existing line’s too crowded”. No outside study has ever found a convincing case for building it, and urgent projects on the rail network has been shunted into the sometime/never sidings.

Meanwhile, the nuclear financial meltdown that is Hinkley Point continues. The only positive aspect of the original deal was that the UK consumer would not pay for its ruinously expensive electricity until some was actually generated.

Even that is not enough, it seems. EDF, the French government controlled contractor, would now like us to start paying for it before we get it. Essentially all the cost of a nuclear station is incurred before any juice is generated, so financing the construction can be two-thirds of the final bill.

With a straight face, the EDFfers claim that this financing could make Hinkley’s electricity competitive with renewables. It wouldn’t, of course. It would produce the illusion of being cheaper, and would get EDF off a financial hook that may yet prove fatal.

Elsewhere, the National Audit Office has confirmed what everyone knew, that smart meters are merely a cruel nominative joke. This week the NAO’s report concluded that the programme is late, the costs are escalating and that the gains may be illusory. Just as well it’s only a baby white elephant.

This is my FT column from Saturday

If you know anyone who would like to read this stuff, then please let them know. Just type neilcollinsxxx into your favourite search engine (as they say on the BBC) and follow the links.

Would you like a chance to pay off your mortgage immediately after borrowing the money? Apply to Halifax bank before the year-end, complete by 31 March, and you go into a draw. Three winners will have their loan (up to £300,000) paid off.

Perhaps you prefer a cut-price sofa? M&S is offering 30 per cent off furniture. Leeds Building Society is waiving interest payments for the early months of the mortgage. Nationwide Building Society will advance £500,000 to those with a 5 per cent deposit. Marsden will waive legal and valuation fees.

Sainsbury’s Bank is offering a five year fix at 1.94 per cent, less than 1 per cent more than the UK government is paying for five year money. All this activity reflects the desperate state of the mortgage market, as lenders struggle to find borrowers, almost any borrowers, to try and reach their targets. Even though the money is being flung at them, the number of home mover mortgages is falling, by 8.6 per cent year-on-year in September.

Does any of this sound distantly familiar? We have not yet approached the 120 per cent mortgage that helped do for Northern Rock, but advances on these terms will only work for the lender if everything goes swimmingly. There can be almost no bad debts, no negative equity and no significant fall in house prices.

Never mind that in central London, which has always been the lead indicator in the past, they are already down by a fifth from the peak. Never mind, too, that prices for other types of property are looking distinctly rickety, after write-downs from Landsecs and British Land this week.

It’s different this time. It always is. But here’s a curiosity. The big UK banks seem to be bursting with financial health, boasting rising reserve ratios and increasing dividends. Yet shares in Lloyds Banking, owner of the Halifax, are cheaper today than they were eight years ago, when they first recovered from the crash.

The bankers say they have learnt the lessons from that gruesome episode. Their lending criteria are supposedly more sophisticated than simply assuming property prices always rise. The market is saying that it doesn’t believe them.

First earn the dividend

The interim statement from Vodafone runs to 61 pages, including six (count ’em) “alternative performance measures”, but one short sentence triggered a 10 per cent jump in the company’s depressed share price. Voda’s new boss is holding the dividend at 15.07 euro cents, with an aspiration to raise it.

This really does look like cart-before-the-horse. The “basic earnings per share” for the latest six months add up to a loss of 29c per share, and even the “adjusted” version only produces 3.56c. Sustainable dividends flow from cash that is not needed for the health of the business. Payouts that are not earned are merely thinly disguised repayments of capital which weaken the balance sheet.

It may be that Nick Read can weld Vodafone’s sprawling empire together. From his experience as the company’s CFO, he should at least know his way round the 61 pages, but given the company’s history of profitless expansion and monster dealmaking, the size of the debt mountain and the need for continuing investment in the telephony business, this dividend does not look sustainable. Which is why the shares, even after this week’s recovery to 157p, still yield over 8 per cent.

Bookies win again

It was less the climbdown on fixed-odds betting terminals that surprised last week, than the cloth-eared proposal in the Budget to allow the £100 limit to remain until next autumn. You have to wonder what, if any, thought processes produced such a self-evidently stupid decision inside the UK Treasury. The gambling industry had effectively admitted defeat, after its own Project Fear (of massive job losses) had failed to shift the public resentment at the damage these fruit machines can do.

It took a ministerial resignation (rather overshadowed by subsequent events) for sense to prevail. It’s also a silver lining for GVC, the owner of Ladbrokes and Coral. It had promised a £700m payday for the former shareholders if the cut in the maximum stake had been postponed to October. It proves once again that the bookies always win.

This is my FT column from Saturday

 

 

 

Another nail for the nuclear power coffin this week, as Toshiba gave up the unequal struggle to build a new station in Cumbria. It cannot even give its interest in the project away, so financially toxic is the business of building them.

The defeat will give the UK government an opportunity to make another wrong decision on nuclear power, and step in. This is an industry that for decades has been a billion-pound version of the roulette player’s telegram: “system working well, please send more money.”

On becoming prime minister, Theresa May was poised to stop this sequence, but then let Hinkley Point go ahead, on terms which saddle consumers with expensive electricity for decades to come. Despite this guarantee, the contractor EDF had to be rescued by the French government, and has yet to make its design work. The plant in Normandy is so late and over budget that construction of more them is now in serious doubt.

Nuclear power stations are a race between improving technology and ever more demanding health’n’safety rules. The industry’s fine record on safety has not overcome public superstition, and the experience of EDF suggests that the rules are winning.

The danger now is that in addition to its status as a £20bn white elephant, Hinkley Point may be the product of an obsolete technology. It is not too late to stop it, and EDF might even thank us if we did.

Car crash

They were whistling to stay cheerful at the Society of Motor Manufacturers this week. Look at the boom in electric cars! See how the fall in registrations is so much less than earlier in the year!  Never mind that the UK government’s war on diesel is devastating sales of what, we were told a few short years ago, was the most responsible form of locomotion.

That was then, this is now, and saving carbon dioxide emissions is deemed less important than cutting particulates, so local authorities are hiking the cost of diesel parking permits, and the motor trade is being forced into a gut-wrenching U-turn.

Even the above-average car salesman could be forgiven for feeling confused. The surge in electric sales may owe as much to beating the cut in government subsidy as to any real enthusiasm for them, since diesels which comply with the latest EU emissions rules are at least as green as an electric car. Oh, and then the prime minister goes and freezes the duty on road fuel.

Confusion might help explain why the distributors are so unloved, selling on around eight times earnings. The low ratings suggest that something more fundemental than government fiddling with the rules is going on. A shiny new motor used to be a near-universal aspiration, but the twenty-something generation is falling out of love with the car. Today’s young city-dweller may not even bother to pass the driving test, especially if that makes him the “designated driver” for his mates.

With Uber and its lookalikes at the end of your mobile, car-sharing and clever new forms of short-term rental becoming increasingly commonplace, it makes little sense to pay for a pile of gently rotting metal that you hardly dare use for fear of losing your precious parking place.

If this is ominous for the distributors, it is toxic for the manufacturers. They must bear the vast cost of developing electric vehicles just as the world may be approaching peak car. Even BMW, the car company that others want to emulate, this week reported static sales and halved margins in its latest quarter, as development costs weighed on profits. It’s not an industry for the thoughtful investor.

Life of Brian

And a warm welcome, please, for Brian McArthur-Muscroft, as he steps up to become CFO of Micro Focus International. He joins at a tense time for this software business, whose shares have halved this year. Micro Focus is the current owner of what used to be Autonomy, an $8.8bn business which none of us can understand, and which trails law suits.Here’s what passes for good news this week: “Constant currency revenue will be around the better end of the guidance of -6% to -9% for the 12 months to 31 October 2018.” Best of luck, Brian.