Monday, January 30, 2012

Hot potatoes & water

In what seems like a carefully orchestrated move the China Investment Corporation has made its first investment in UK infrastructure – not in the form of new money for new projects, but by buying 8.7% of the shares in Thames Water which were previously 100% owned by 'Australian' investors.

I say orchestrated because the announcement of the share purchase on 20 January followed an article in the FT by Lou Jiwei, chairman of the CIC, last November which explained their interest in investing in British infrastructure because of its ‘solid returns*’ & George Osborne’s visit to China the week before the announcement.

We are now, in a sense, to pay for all those low price Chinese goods in which we have been able to indulge through the profits on what we pay for one of the basic necessities of life.

Lou Jiwei’s description of the attractions for investors of UK infrastructure mirrors an earlier expression by the majority shareholders, Macquarie, which described the key characteristics of infrastructure as
High entry barriers, inelastic demand, stable cash flow, moderate leverage and long duration. Investment in businesses which:
• provide an essential service to the community
• have a strong competitive position
• generate stable cash flows over the long term

OFWAT will conduct a ‘fit & proper person’ test on CIC

In less than 40 years water bills have gone from something we paid through water rates (part of the property tax we paid to the local council) to something we paid to a separately constituted, part-nationalised industry in the form of Regional Water Authorities, to paying wholly privatised plc’s or other wholly private owners.

Meanwhile 15 December 2011 saw the publication of a report by the National Association of Pension Funds which showed that British funds are getting out of investing in UK companies at an ever increasing rate. Only £1 in every £8 of their investments is now in UK shares compared with £1 in every £5 two years ago, £1 in every £3 five years ago & well over £1 in every £2 a generation ago.

So yet more evidence of one of the great mysteries of our current economic thinking: why our assets are so attractive to foreign investors (including pension funds) but not to homegrown ones.

Perhaps a clue can be found in something said by former Treasury minister Lord Myners & quoted in The Times:
With a few noble exceptions, foreign investors in British companies do not take an interest in governance questions, including keeping a check on excessive boardroom pay. Just too much of a hot potato, getting involved in wider political questions, easier by far just to concentrate on your own financial returns.
Well the hot potato relly explodedthis weekend, & one can easily imagine UK pension funds not wanting to be holding anything like that.



*An unfortunate turn of phrase for anybody who readthe recent post on the Economist Babbage blog Babbage Blog: Recycling water - Waste not, want not