How to nationalise the energy suppliers

Can the energy suppliers be nationalised ?

In principle, yes.

Won’t it be too expensive ?

No

So where will the money come from?

No money is required.

So the government will confiscate private assets?

No, that would breach international law.

So how will the government take over the energy suppliers?

By an ‘asset swap’

Can you explain?

Yes, the government can create bonds from nothing. It then sells these bonds to private investors who own shares in the energy companies. The private investors pay the government for the bonds by surrendering their shares to the government.  This transaction is very similar to an ‘asset swap’, where two parties agree to swap their assets  (the government and private investors agree to swap bonds for shares)

Example

  1. Before nationalisation, private investors have shares in energy suppliers worth, say, £50 bn
  2. The UK government creates and sells interest bearing bonds worth £50 bn to the private investors.
  3. By way of payment, the private investors surrender their shares to the UK government

After the ‘asset swap’, the private investors own the government bonds. They will receive guaranteed payments of interest each year (or every six months) from the government.

After the ‘asset swap’, the government owns  the energy suppliers and can control their investment strategy and pricing policy. For instance, the government can direct the energy suppliers to invest in technologies that make the UK green and / or self-sufficient in energy.

After the ‘asset swap’, the government is entitled to receive dividends out of the energy suppliers’ profits. The government can use the dividends to pay the interest due to the private investors.

When the bonds mature (ie fall for repayment), hopefully, a long time into the future, the government can either ‘roll the bonds over’, or redeem them for cash generated out of profits.

Why would private investors agree to swap their shares for bonds?

Government bonds are very safe. It is very unlikely that the UK government will go bust and default on its financial obligations. So government bonds have fewer risks than shares in private companies. Generally speaking, investors prefer a fixed and known return to a volatile and unpredictable return. In short, shares are more risky than government bonds.

Won’t the asset swap increase the government’s debt?

Yes and no. Although the gross debt will be increased, this will be offset by an asset (the shares) to the same value. So the net debt (liabilities minus assets) will be unaffected. So the debt hawks can not validly dismiss the ‘asset swap’ on the ground that debt will be increased

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25 comments

    • Hi Doug

      I really don’t know the answer to that question. I’ve tried researching that very point on the WWW but have been unable to find anything.

      Nowadays, share exchanges between two companies are accepted as a means of one company acquiring another or the two companies merging. The difference is that instead of the predator issuing new shares to the target company’s shareholders, in a nationalisation procedure the government would issue bonds to the target company’s shareholders. It’s the same principle – an asset swap. I can see no reason why this should not work and no one has yet advanced valid objections to it (even when they are ideologically disposed to do so :-))

  1. The debt won’t be “offset” by the shares because the government has to pay interest on the bonds it has created. Which costs more money. And creates more debt.

    • The interest can be paid from the dividends received from owning the shares. Bonds pay interest, shares pay dividends.

      The shares will sit on the left hand side of the government’s balance sheet because they are an asset. The bonds in issue will sit on the right hand side of the government’s balance sheet because they are a liability. The shares and the bonds would be shown as equal in value and so would cancel out each other. The impact on the government’s net indebtedness would hence be zero.

  2. I have a better idea. The government can produce money just as our banking cartel produces money. The Bank of England could produce money by typing it on the balance sheet also. This could be in the form of household loans. £200bn could be produced and used to give every household in the country enough to buy solar panels and small wind turbines with a battery system. Imagine the industry created through such a move. A similar project could be rolled out for businesses. There would be no shortage of work for a while both in manufacturing and fitting the systems. If this equipment is mass produced the cost could be as low as £7,000 per average household (x25mil) which is a loan that could be paid back over a 10 year period effectively replacing domestic bills for loan repayments. It is sustainable energy and it would be free to the household after the loan repayment. Of course the energy companies would go out of business but I cannot think of many people who would shed a tear over that. The remaining infrastructure could be bought up on the cheap. Power could still be sold locally so we wouldn’t need to see our countryside with wires everywhere. Each household would become their own energy producer which has got to be the ultimate free-market economy, isn’t it? This is part of a bigger idea I call ‘distributed capitalism’, some call it popcapitlism. Of course we would need a democracy in order to be able to put a plan like this into effect and have a system that works for the population….but that’s a whole different idea. – Further info please read Now Utopia

    • Yes, but printing money attracts opposition from the inflation / debt hawks and is hence very difficult in political terms. The proposal in the post avoids these, since it requires no additional borrowing or money printing.

      Once the government has restored control of energy via nationalisation then democratisation of the supply along the lines you suggest could be considered. But the first step has to be nationalisation.

      • Opposition? There would be opposition to any proposed change to redistribute wealth. 97% of the money in the current system is money brought into the system by debt. That debt gets paid off but interest payments on that debt needs to be found from the money pool of the wider economy, which means it needs constant growth otherwise it will collapse. It also distributes money from the 99% to the 1%, further widening the wealth divide. I am not suggesting printing more money, that has to remain at a constant ratio to the cash we all use, currently 3% of the total money in circulation. I am suggesting having the central bank create the money as debt on a balance sheet just as our private banks do now, only the interest payments will go to central bank and then to the government and could be used on government services which injects the money back into the system at the needier end. This money system would be sustainable, it could be proportion to both utility and to consumption. Investing money into green energy production also produces surplus value, in the form of thermodynamic energy, which is then consumed at source by the producer or passed on to local consumers. The net result (apart from using less CO2) is that money in the economy stays at the working end and not held in high end assets that get further inflated in value and further out of the reach of the many. The guys at http://www.positivemoney.org explain these things quite well with the help of visual aids. I have worked the ideas into a broader economic policy that I call ‘collective sustainable economics’. In my view it’s pure genius, but then I would say that. Anyway, have a read of Now Utopia (www.nowutopia.co.uk) or see the political movement that is http://www.thehumanistparty.com – RA

      • Creating bonds is borrowing. That is what all current government borrowing is.

        On net of course there are assets to back it. The government actually has a positive balance sheet on net. But that’s irrelevant when those assets are not anything we are able to liquidate.

      • Again, I don’t think you understand the post.

        Creating bonds from nothing and swapping them for shares is not borrowing CASH. That is, no money or demand is removed from the economy by asset swapping. A big difference, I suggest.

        The last sentence makes little sense.

  3. There is one major factor as to why this is not as simple as mentioned above, Most if not all of the Big 6 are foreign energy companies which in short means they are unlikely to want to accept bonds or for any reason allow there companies to be nationalized.

    • Three things:

      1. The acquisitions can take place piecemeal (ie bit by bit). Acquisition doesn’t have to be big bang. A piecemeal acquisition may take longer, that is all.
      2. The government only needs to acquire 50% + 1 shares to achieve control. Once it has a majority stake the government has the ability to remove directors and to appoint those of its choosing. It doesn’t need to acquire all the shares.
      3. Foreign investors trade in UK government bonds just as they trade in UK listed shares. There is no reason to suppose that foreign investors won’t agree to exchange their shares for UK government bonds, which are very attractive to many investors. Of course, the managements of the energy suppliers may resist being taken over, after all they may well get the sack once the take over has completed. But ultimately, investors are investors and they will take the course that best suits their investment portfolios. In today’s globalised markets, investors can and will invest anywhere in the world.

      So I am afraid your objections do not stand up to scrutiny.

  4. You’re assuming the value of the shares wouldn’t fall after “nationalisation” because nobody actually expects the government to be able to run the companies at a profit. The same way they have failed to time and time again. So you’ve now issued £X billion of bonds for businesses worth only half that. What’s that you say? Massive increase in National Debt.

    • Rubbish!

      Firstly, if the government acquires ALL of the shares then the shares will no longer be traded on the stock market. So how can the value of the shares fall when they are no longer traded?

      Secondly, if the government did not acquire all the shares then, as you say, the shares still trading on the market may fall in value. In which case, the government can step in and acquire the shares cheaply via an asset swap. Once removed from circulation, the value of the shares becomes irrelevant, especially under historical cost accounting rules.

      Thirdly, the government could appoint professional managers, or even keep the same ones, to run the firms after nationalisation. So it is not true to say that government owned firms are run badly, unless of course you believe that managers of private sector firms are poor at managing.

      So, to summarise, the “massive increase in national debt” simply won’t materialise as a consequence of a nationalisation using the method outlined in the post.

      Sorry to disappoint you.

      • OK. You remove the shares entirely from circulation. So now you’ve borrowed to purchase a business that you now only have the physical assets of, not the inflated price companies trade at on the stock market on the basis of future profits. You’re still left with a pile of debt and a business that by your own comments you are intending to not run on a profit maximising basis. As such the value of what you have will not be vaguely equal to the value of what you paid to get it. That will quickly wipe out any gain from the difference in the 2% government bond interest rate and the 5% dividend rate.

  5. Simply start a non profit company that the government has a controlling interest in. Once enough customers transfer to the new company the other companies will fold and this will not cost the tax payer a penny in compensation.

  6. Where there not reams of contractual items in the privatisation that can be publicly scrutinised? Can a reclaim on some of the business be achieved following any breaches?

  7. Don’t be rude. I don’t think you understand what government borrowing or the national debt are but I don’t say so. I try to engage on your level.

    What are the odds here. Either you have personally invented a new way for the government to acquire massive businesses without it requiring any borrowing or you’ve failed to understand how the public finances work?

    How do you think the ’08 bailouts were done? The government purchased shares by swapping them for bonds of equal value. Still meant the national debt rose dramatically and still cost Billions. Pretending otherwise is silly.

    • I am sorry if I appear rude. It’s just that I expect comments to engage honestly with the post and to not misrepresent, or to wilfully miss the point of, what I wrote.

      To deal with your substantive point, if the government issued bonds to RBS shareholders in exchange for their shares. then the net debt would not have been affected. Here is a double-entry representation of that transaction:

      Dr Shares in RBS (Asset) X
      Cr Bonds in issue (Liability) X

      The NET debt recorded in the government’s books would thus be unaffected. And yes, interest payments would have increased due to the new bondholders.

      However, there is an important difference between nationalising RBS (and other insolvent banks) and nationalising the energy suppliers. That difference is that the energy suppliers are not insolvent and would be acquired as going concerns. Hence any dividends paid after nationalisation would be received by the government who could use them to pay the bondholders their interest. So the net cost to the exchequer of nationalisation is minimal, if not zero, under an asset swap. In contrast, RBS is a loss making bank and these losses, post-acquisition, are being met by the taxpayer.

      As far as I am aware, the actual cost to the taxpayer of rescuing the banks consisted in the liquidity support the government provided to them. This would not have been an asset swap in the sense I have used it. An asset swap to acquire another firm does not affect liquidity, unless one of the assets used in the swap is cash, or near cash. I believe cash, or near cash, was used to rescue RBS and the other insolvent banks.

      In all these cases, the transactions are just numbers on a computer screen. Despite this, debt hawks and inflation hawks use debt and inflation to scare people into a belief that nothing can be improved. The asset swap scheme I describe has the merit that neither debt hawks nor inflation hawks can validly object on the grounds that public debt will be increased or that inflation will ensue.

      If you can demonstrate that public debt would be increased by the scheme I propose, then I am very happy to listen and to consider the matter carefully. So far, you have not done this.

      • That’s better.

        Let’s try one simple point. Nobody, when talking about government debt, refers to net debt. All references to government debt refer to gross debt. As they do when talking about corporations, or even individuals. So both inflation and debt hawks will continue to object because the National Debt, the number the ONS reports and is discussed in the media, will have gone up.

        Further, even if we go for the ‘net debt’ idea then you specifically state the point of all this is to change energy company behaviour from rapacious short-term capitalism so the government can control bills, direct investment etc. This will reduce the amount of profit the businesses make and dramatically reduce the businesses value from the current market capitalisation, which prices in the assumption the business will continue to single-mindedly hike prices and pursue profit. So even if we look at net debt, you are still going to increase the national debt.

      • “Further, even if we go for the ‘net debt’ idea then you specifically state the point of all this is to change energy company behaviour from rapacious short-term capitalism so the government can control bills, direct investment etc. This will reduce the amount of profit the businesses make and dramatically reduce the businesses value from the current market capitalisation, which prices in the assumption the business will continue to single-mindedly hike prices and pursue profit. So even if we look at net debt, you are still going to increase the national debt”.

        Again, you have misunderstood. If the government owns the shares of an energy supplier, why do you talk of a market capitalisation? There can be no market capitalisation unless a firm’s shares are traded on an exchange. By definition, if the government has removed the shares from circulation via an asset swap, the shares can not be traded on an exchange and there can be no market capitalisation.

        You still have not demonstrated that net debt will increase. A series of unsupported assertions, perhaps derived from a simple minded understanding of economics, is not very convincing evidence.

        “Let’s try one simple point. Nobody, when talking about government debt, refers to net debt. All references to government debt refer to gross debt. As they do when talking about corporations, or even individuals”

        Again you are wrong when you say that net debt is never used to describe public debt, corporate debt or household debt.

        You must have heard of house owners talking about the equity they have in their property. How do you think this is calculated? It’s assets minus liabilities, ie equity. When there is negative equity then there is net debt. So the principle of netting assets off against liabilities is understood and used even by households and individuals !

        Corporations and analysts also refer to net debt when they talk of their gearing ratio. Just in case you don’t know, gearing is the ratio of a firm’s debt to its total assets. Firms also report Equity, or Net Worth, on their balance sheets, which again, is simply Assets minus liabilities (net assets or net debt, whatever the case may be).

        And you are also incorrect too when you say the government’s debt is not reported in net terms. It most certainly is! Debt hawks may always refer to public debt in gross terms but that is usually because they are pursuing another agenda, eg, they seek to shrink the size of the state, or they are libertarians.

        So for decision making by mortgage brokers, bankers, analysts, bondholders, and other investors, et al, it is the ability of the borrower to repay and to service the debt that is uppermost in their minds. The net debt is an indicator of a borrower’s ability to repay the gross debt. This is why net debt is extensively referred to by individuals, households, corporations and government

      • Because the current market capitalisation is the amount of gross debt the government will have to distribute to swap with the assets. But as soon as it does so the asset it holds will no longer be equal in value to the liability it took on because nobody trusts the government to manage the company efficiently, we’re back to my original point. Do you think assets never change in value? Or are you merely saying that the government can run the entire energy sector more ethically but still make the same profit as private companies? Of course companies and individuals sometimes use net debt as well as gross debt, but that is certainly not what the government means by “national debt”, nor the political parties, nor the media, nor the ONS. Nobody is going to be interested when you explain that net debt has not increased because that is not the relevant measure that is generally discussed.

      • Oh dear, there you go again, making unsupported assertions!

        Have you ever heard of historical cost accounting? If you had, and you understood, then you would know the shares would be recorded on the government’s balance sheet for what the government purchased them for. This would be the same value as the bonds issued. Hence no increase in net debt.

        If, as you seem to be saying (?), the value of the firm will fall just before nationalisation then so what?. The bond issue to compensate shareholders will be smaller as a consequence !

  8. The idea of an “asset swap” is quite frankly wrong on many levels. Investors choose equities over debt because they want a higher return. You have effectively swapped a higher returning asset with a lower returning asset. They won’t want “certainty”, they want return. This means to replicate the types of return they would receive for their equity investment (via either issuing the debt at a deep discount or having a very high interest yield). Either way, the net result will be that the government “owns” a company with a much higher contractual cost base because of the higher interest payments which are obligatory rather than optional.

    Finally, with the government owning the energy companies where are they to find the over £100bn of new capital to invest in British energy generation over the next decade?

    • Thank you for your comment

      Investors trade risk against return. Equity offers offer high returns in exchange for higher risk. Investors will happily swap equities for debt if the risk-return ratio makes it rational to do so. So there is no in-built investor preference for equity, as an understanding of the Capital Asset Pricing Model demonstrates. So I am afraid you quite wrong to assert that investors would be reluctant to swap their equity for government issued debt. Whether investors would accept debt in exchange for their shares would depend on several factors, including their risk appetites and their portfolios, the latter being in constant adjustment. Government bonds are a safe asset and many investors are seeking safe havens for their money. It is simply not correct to assert that investors will always prefer equity to debt. A study of the CAPM and MM’s theory of capital irrelevancy provide insight into these matters.

      You also miss the point that debt servicing costs are lower than equity servicing costs due to the lower risk that attaches to debt when compared to equity. You said this yourself when you said above that investors choose equities over debt because they want a higher return. So even if government debt were to be issued at a deep discount the cost of servicing it is likely to be no higher than the return required by equity shareholders. So I am afraid your argument fails on this point too.

      As for your last point, the £100bn of new capital you say the energy companies need for investment would be found from the same sources from which they are found now. So this objection too has very little force.


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