Month: August 2008

The latest figures for the UK and other Western economies confirms that the main threat is falling activity rather than inflation. The ECB and the Bank of England still think they have a problem balancing their prime aim of cutting inflation with their wish to avoid a major downturn. They have kept their rates on hold. They seem to ignore the delays between tightening credit and the impact it has on prices.

Over the last three weeks there have been heavy falls in the oil price. Where last month some pundits and market participants were telling us it could only go up, and were headily forecasting even $200 a barrel oil, today there are bears on the prowl seeking to extrapolate from the most recent trends. They ask if it can fall $30 in a month, by how much more could it fall in two?

The inflation of recent months has been fuelled by the twin pressures of higher energy prices and higher food prices. In the UK this has been assisted by a government which has failed to reform the Common Agricultural Policy which has kept food prices higher anyway, and has imposed taxes on petrol and diesel which in part increase as the price of the underlying product rises. It is true that companies worldwide have so far had some success in passing the commodity price rises on, thanks to the reduction in aggressive pricing by India and China on world markets. It is also true that there is some modest upward drift in wages and salaries, reflecting links to higher Inflation statistics. Both these tendencies will be abated by the slowdown in demand. The more wages go up the more businesses will in due course shed staff as they will not be able to afford them all.

For months now I have found it bizarre that well trained and well paid people at the ECB and the Bank of England can seriously think there is an inflation problem two years hence (the typical timescale for the full effects of monetary action to be felt). In the UK have they not seen the 20% fall in commercial property prices, with more to come? Have they not noticed the sharp decline in new housebuilding, and the rapid fall in house prices in recent months? Have they seen the contraction of new mortgage credit, the main form of lending money to individuals in Britain? Just as they ignored the obvious signs of overheating and too much credit in 2005-6, so today they ignore the obvious distress of too little. They made the first mistake of failing to curb credit excess a couple of years ago because price rises then were small, thanks to Chinese and Indian pricing. They were spurred on by a UK government that was leading wonky finance with its huge commitments to PFI and PPP schemes, buying things on the never never for taxpayers who will end up paying dearly for the privilege. Now we are having to live through the second painful mistake, ignoring the collapse of credit at a time when some world prices have been rising too quickly for comfort as a result of past credit excess.

I remain of the view that inflation will subside next year as measured by the RPI, as lower commodity prices work through. I also expect more companies to reduce their workforces to combat lower demand in their sectors, and for there to be several more months of a squeeze on people’s incomes as the full effects of energy price and food price rises work through against a background of restraint on wage increases, and as more people lose their jobs.

The FSA’s prognosis that the banking sector will be in for as tough a time as 1991-2 may be right and shows the regulator understands the seriousness of what we are living through. They have been right to urge the banks in London to raise more capital. What we need is better co-ordinated action between the FSA and the Bank of England, organised by the Chancellor, if we are to continue with the three headed system Gordon Brown so foolishly designed. Identifying the problem and telling the banks to raise more capital is prudent, and all that the FSA can do. Too much prudence after the crisis will simply delay recovery – we needed more prudence before the crunch. The Bank of England needs to offset some of the contracting effects of banks raising more equity and being more cautious in their lending, through its operations in the money markets. It also needs to cut interest rates.

Without further action credit will remain too tight for comfort. Northern Rock is turning into the expensive nightmare readers of this site will be expecting. Losses of £585 million in just six months may well be followed by further losses, as the bank is writing practically no new business but still has staff numbers as if it were. I always thought they would lose us more than a billion and see nothing in these first figures to change my mind. Indeed, converting £3 billion of the outstanding taxpayer loan into new equity implies we should prepare ourselves to say good bye to a substantial sum, at least for the foreseeable future and maybe for ever. The best action the government could take is to sell what remains of Northern Rock at whatever price they could get for it as quickly as possible, with an agreed repayment programme for all the outstanding taxpayer debt and the new equity. That way we would have more chance of getting all our money back, and the newly privatised bank could start writing more mortgages again to make some money and ease the shortage of mortgage finance in the market. If the government could get £1 for it (or maybe more in an auction) and the promise of full repayment, it would be a better deal than we have now with it nationalised and destined to cut and cut again as it cannot write new business.

It’sd good news for the Oppositon every time Caroline Flint comes on to the radio and television. Her insouciance to the parlous state of the housing market and her bland reminder than many of us are not about to lose our homes to repossession is allied to a strange silence about housing finance that saps confidence in the government more. It’s bad news for the country that such a crucial part of our economy and markets should be dealt with like this at this critical stage.

I blogged earlier in the year forecasting further heavy declines in housing prices. These are now all too obvious in the monthly and annual figures, as the rises of last year drop out of the yearly stats. I have also pointed out that Ms Flint argues a contradictory case, telling us on the one hand that house prices are the result of supply and demand for new homes, and on the other that in the middle of a crash in new homes prices we need to up the build rate! Her urging more new homes has all the force of Canute telling the waves to go back during a rising tide, as builders cut back in response to the drop in demand.

We also now have her telling us that cutting or suspending Stamp Duty is an option, when in the marketplace uncertainty about the government’s intentions on Stamp Duty is understandably persuading even some of those who can still afford to buy a house to hold off to see if the tax is going to be abated.

If Ms Flint really wants to help the housing market she needs to take actions that would help stabilise prices. It is difficult getting the building industry to increase its build rate all the time prices are falling, and all the time prices are falling it will depress sentiment and drive more people into negative equity. She could, for example, cancel the hated Home Information Packs, agree and announce lower Stamp Duty, and talk to the Chancellor about easing liquidity in money markets more to help with the supply of mortgages.

If she is unable or unwilling to do any of those she would be better not interfering and expressing an opinion – unless her aim is to help the Opposition!

Over the last week I have set out some thoughts on how we could build ourselves capacity in the main networks across the downturn, largely using private money. The public sector needs to be a speedier and more helpful regulator, and to spend from within existing budgets intelligently to maximise private sector response.

One of the big issues the government needs to speed is what will be the role of new technology and new projects in the future of the UK? Again this is not a case of the government needing to spend more money. Much fo the development and all of the production can be paid for by the private sector. It is a case of the government being a well informed purchaser of technology for its own purposes, and a good regulator capable of allowing and even initiating the right kind of projects which the public sector can bid for and accomplish.

There are a number of large schemes around on drawing boards and in dreamers and designers minds. The government has set out ten different possible projects as options for harnessing the tidal power of the Severn estuary – but wants to take two years consulting and thinking about it. Two years is a common time period for thought these days, taking decisions beyond the next Election. Some people want to build new islands in the Thames estuary, and some even want to put a new London airport on one, others favour a new bridge between Kent and Essex as part of the package. There are schemes of drawing boards for new reservoirs, new desalination plants, new power stations, schemes for clean coal technology and carbon storage, schemes for more renewable power and greater energy efficiency, schemes for local and micro generation and for more water capture from each household roof. The private sector is alive with proposals to make the world cleaner, greener, more fuel efficient..

Some of these will be developed and hammered out in the market place with no government involvement. Others are large, need a government view and government permits of various kinds. Some need the government to organise competitions around the permits it is prepared to grant, as it will have to create artificial scarcity as part of its planning view. No Minister has managed to bring these issues to sensible conclusions or to provide an overarching vision of the role of technology in solving these network and supply issues, backed up by administrative speed and competence to make something happen on the ground. |Let’s hope sometime soon the penny drops. Technology is in an exciting phase. It can solve some of these problems if government wishes it to.

Telecoms is a British success story. In the early 1980s we were way behind the USA, with an old fashioned system with too little capacity, run by a nationalised monopoly. It charged too much and delivered too little, like most monopolies. Working in the City of London I could not get a phone line that would take data from the Stock exchange to my office, a journey of less than a quarter of a mile, without data degradation when it rained, for water got into the cables according to the engineers. At home in Oxfordshire, living a couple of miles from the centre of Oxford, it took months to be supplied a phone as the monopolist couldn’t be bothered to put the cable in to my house.

It was this kind of nonsense that persuaded me to argue the case for a deregulated competitive telephone system capable of offering a competitive challenge to the Americans. The first round saw the sale of BT and the licensing of a single business competitor, cable and Wireless. The second round saw massive new investment in mobile networks, and the third more competition across the board. Over a ten year period we narrowed and removed the gap between UK and US telephony, and created a telephone infrastructure that could support the flowering of financial and business services in the City of London. If we had stuck with the monopoly and all those tedious debates about capital and investment rationing in the public sector London would not have sustained so much successful business.

Today we can still take some pleasure from the huge expansion of mobile telephony, the relatively rapid take up of the internet and the expansion of transmission capacity for data and pictures. We should not, however, be complacent. BT still has a strong market position in the last mile of cable into people’s homes, and at the local exchange. These still restrict line speeds and capacity in some cases. Meanwhile BT is excluded from mobile telephony and feels hard done by on some of the regulation it still faces.

The government and regulator need to consult further on how they could allow or encourage more rapid investment in more capacity into homes and businesses, as the demands for more data, film and picture transmission at higher speeds are growing daily. The internet is the new highway of world trade, the new digital railway network for commerce and communication. Britain has done well, but could do better. The public sector could improve its use of internet technology, websites and web communication. The providers need to work harder to ensure the UK is wired for success.

The UK is an island of coal set in a sea of oil and gas – if I am allowed a little hyperbole and the odd long word this morning. It has taken a unique ability to make a mess that we end up importing large quantities of gas, worrying about the recent surge in world oil and gas prices, and worrying about our own security of supply.

We extract less oil, gas and coal than we could for a variety of reasons. Most of them relate to actions and inactions of the government.

The main reason we are getting less oil and gas out than our geography would suggest is taxation. The government has tweaked and changed the oil tax system in a number of ways, all designed to take more money from the industry. The politics of this are good. Oil companies are assumed to be too big , too powerful and too profitable, so hitting them in the pocket book can be popular. Many people don’t see it is happening, more don’t care if it is, and some positively welcome it. It would be an unusual politician whom went on TV or radio to argue for higher oil company profits or lower oil company taxes, at a time when the stated nominal profits are large.

However, to understand the shortfall of oil and gas production we do need to understand the nature and purpose of oil company (or for that matter any company’s) profits. The oil companies are in the main very large companies that have invested huge sums of money. They need large sums in profits to justify and remunerate these investments, and to pay dividends to our pensions and savings funds who are the main owners of these companies. More importantly, these companies have the opportunity to invest in a wide range of risky new ventures around the world. At any given time there are more projects than there are people, cash and machines to undertake them. The oil companies have to choose, and they will choose those projects and territories where the opportunity to make a good after tax return seems best. High taxes, or unstable taxation regimes where the changes are always upwards, put oil companies off investing.

The North Sea province is relatively mature – that means the easy finds have been made. It is getting dearer and dearer to find new oil and gas though there is doubtless n new oil and gas to be found. It is also getting dearer to get more of what has been found out of the ground. Oil companies leave some of the crude in the wells, as it is do difficult to bring it to the surface. The UK could make it more worthwhile to find more fields and exploit existing ones more fully by cutting tax rates. It might not reduce the revenue much or at all once the new schemes are brought on stream.

The problems with coal are different. It is difficult to get planning permission for opencast coal mining as it is not much fun living near an opencast mine. There is still a belief deep down in traditional Labour that the only mine that counts is a nationalised deep mine with miners travelling to the face on conveyors. There is also a modern ambivalence about how much coal we want to burn, with indecision about the clean coal technology which is going to be needed to bring coal back as a serious part of our energy supply.

The government should look again at the road blocks to bringing out more coal and more oil, and gas. Many of us do not look forward to increasing dependence on the Middle east and Russia, and would rather spend some money on the technology and exploitation of domestic resources, than get dragged into yet more difficult politics in dangerous countries.

Nowhere has the government let us down more than in the area of power generation. We have falling to bits Britain on the roads and at the power socket. We have carried on trading on our old nuclear power stations in the hope that something will turn up. We have added a few windmills, and trusted to consultation documents and the promise of a great nuclear debate to keep us warm in future years. I guess the strategy is to let us burn all those consultation documents on open fires as the power winds down as nuclear stations are retired on days when the wind is not blowing.

It’s strange that the government has been so remiss in this area. It does not take much public money after all – most power stations can be run without public subsidy, and those that need subsidy can obtain it by charging consumers overall a higher price, distributing the proceeds in the way the government demands. The industry needs permissions – health and safety permits, planning permissions and the rest. It also needs guidance on the government’s view on how much money should be spent on moving to a lower carbon model and how the excess cost is going to paid for. That’s not asking much, you might think, but so far it has eluded DTI and BERR Secretaries of State.

The UK needs to replace more than a quarter of its current capacity in nuclear and coal with more modern plant and possibly with different fuels. It also needs to add a bit to give a better safety margin in an economy where rapid inward migration is raising demand, and here increasing reliance at the margin on wind power will require more stand by plant for calm days. The government is indicating that it wishes to replace nuclear with nuclear – otherwise the carbon output rises if the industry substitutes modern coal or gas stations.

Why doesn’t the government get on with it, and make more rapid progress? Why is there still so much delay in agreeing what is needed with the industry and granting the necessary approvals? Do we really have to wait two years for the new planning system to be introduced before a planning application for a new power station can be considered? Is this yet another device to push these decisions beyond the next Election, so the current Secretary of State knows he is free of the obligation, and the government as a whole will probably be off the hook? Or is this the unintended consequence of a well intentioned idea? Either way, it makes it more likely we will be rationed or short of power before the end of the decade.

This is perhaps the easiest of all the capacity bottlenecks and shortfalls to remedy. Decisions now on the carbon regime, the approved technologies and the sites for new stations would lead to a major new building programme. The UK could then look forward to a future with enough power.

Over the Labour years car ownership has proved ever more popular. Thanks to global competition and new technology cars have got better and better, and the cheaper ones more affordable relative to incomes. People value the flexibility and freedom the car brings them. The car is never late for them but they can be late for the car. The car goes from home to where they want to go, rather than from one difficult to reach station to another difficult to reach station in the centre of a congested town. The car can take all their luggage and their friends and family. They can play the music of their choice or listen to the radio programme of their choice whilst travelling. It’s too good a package for the railways to counter for most journeys, and there are so few spare railway slots and seats at peak hours anyway.

Labour set out to get people out of the car. Aggressive policies were designed to limit the amount of effective road space in towns and cities, to control speed, and to remove capacity from highways by new signals and other controls. We were all urged to leave the car at home and take the train or the bus. Livingstone excelled at these brutal anti motorist policies, introducing the policy of only the rich should be allowed to drive in London with his £8 (formerly£5) a day charge for anyone determined to use the car. Despite all the exhortation, despite the restriction of road space and capacity, and despite record subsidies to the railways, the use of cars and roads went up and up.

After a few years of building no new roads, the government relented. They at last began to grasp the simple arithmetic. As only 6% of our journeys are by rail, if you expand rail by 50% (a task they failed to achieve) that only deals with one year’s growth in overall travel demand. The rest of the growth over the ten years goes by road. Every time you have the wrong kind of snow or engineering works on the line, the good old road system just has to take the strain of extra demand.

The truth is that after a decade of underinvestment the UK is short of transport capacity of all kinds. Yesterday we looked at ways of stimulating much more rail investment. Let us assume government does this and let us assume it works – two big ifs. Even so we will need much more road capacity.

In the Economic Policy Report we proposed a short term and a longer term programme to create more road capacity. The short term programme can be easy and relatively cheap. It means reversing the worst of the clumsy restrictions imposed on the existing highway network that are getting in the way of the smooth flow of traffic at busy times of day. Out should go the all red traffic light sequences for traffic introduced at some crucial junctions (e.g. Victoria Street in London), and the ultra short green light phases (Trafalgar Square London). Where possible junctions should be widened to allow the segregation of slow moving right turning traffic form traffic going straight on or turning left. Artificial chicanes should be taken out and two lane running restored on wider main routes where this has been cut back to one. Bridges and tunnels should be introduced at larger city junctions where main route traffic could be allowed to flow unimpeded across the junction on a continuous basis by such investment.

For the longer term we need to improve the main routes, removing bottlenecks and increasing the number of lanes. The government has done a little of this on the M25 western sections with some success. We need to complete the dualling of the A303 to the west country, of the A3 to the channel ports of Portsmouth and Southampton, and the A27 south cost highway. We need more capacity on the M25, the A12, The A14, and the main M ways 1-6. Where there are competing routes we recommended offering a franchise on one of the routes to the private sector. In return for charging a toll for using the route the private contractor would be required to increase the capacity by road widening. If tolls are introduced on any scale other road charges and taxes would be reduced proportionately. Indeed the government could in the short term generate cash for the taxpayer by selling franchises for specified routes and time periods. The proceeds could be sued to repay public sector debt, and motoring taxes reduced by the amount of the interest on the debt saved.

We are in great need of more capacity on our highway networks. It is putting business off the UK, and putting more hassle into our lives as the daily inadequacies of the network hold us up. It is also the opposite of green as more and more hours are spent by more and more vehicles in traffic jams with engines running.

Rail is the Cinderella who came to the ball, but made such a mess of her attendance. Labour spent the first few years in office praising the results of privatisation. It turned the industry round from decline to rising use, seeing good growth in both freight and passengers. A couple of bad crashes, producing a safety record only slightly better than the nationalised industry, persuaded the government for no good reason to nationalise the track company, which led to a colossal surge in the cost of renewing and maintaining track, slowed the industry down through all the speed restrictions they needed to impose, and disrupted timetables. Now we are getting used to a semi nationalised industry which is not responsive to the needs of passengers and is dreadfully short of capacity at peak times and on popular routes.

The industry is mesmerised by speed. It is a strange paradox of this government that they see speed as an evil on the roads, and are constantly trying to slow cars and lorries down with ever more restrictions and controls. At the same time they have a boys own enthusiasm for ever faster trains , despite the evidence that trains are much less stable at high speeds given the small shiny surfaces of wheel and track that try to stay in contact with each other. Building high speed train networks in the UK is going to b e expensive, slow and difficult. To make high speed trains as safe as possible requires dedicated straight flat track beds with good overnight maintenance. The higher speed the more the wear and tear on the track, increasing geometrically with the speed. In a crowded island with an army of nimbys close to any project it is not going to be easy finding the space and moving enough earth to make a straight flat track bed. In Japan the fast trains there run along a flat straight coastal strip close to big centres of population on tracks dedicated to them and maintained overnight. That is ideal geography and engineering for such a system in the UK the government has tried to introduce faster trains on a mixed use railway, with timetabling and maintenance problems as you try to insert high speed running in with all the rest, and run freight trains overnight on the same track.

What we need in a more practical spirit is more capacity for both commuter travel and heavy freight. In both these areas the railway has natural advantage. In both cases adaptation of what we already have can provide the bulk of what we need. The freight industry needs to build more links to the main railway into the leading ports, industrial parks and freight handling facilities. Marshalling needs to be improved, and longer and heavier trains permitted to get the maximum fuel saving out of railway running compared to lorry freight.

The commuter railway is hamstrung by the current technology. The UK’s emphasis on heavy trains means restricting the number of trains to 24 an hour of the mainline, as it takes so long to accelerate and break using steel on steel technology. There need to be long gaps between trains that take more than mile to stop from top speed. The railway does now accept it needs to introduce lighter weight trains which brake and speed up more rapidly to increase the hourly capacity. It could also think of some other method than dropping sand on the track to increase commuter train adhesion to improve braking and acceleration. Road traffic has long found rubber provides the best answer. Allowing almost bumper to bumper running at commuter speeds every morning.

If we could get the railways to take more the strain of freight and commuters it would serve us well, and improve our total transport fuel efficiency no end. Much of this investment in new vehicles can be private investment, as current investment is.

The water industry was the Cinderella of the privatisations. Telecoms received strong competitive challenges in two tranches, on and after privatisation, producing a large number of new providers and suppliers. Electricity and gas had much of their monopoly broken, and they were in strong competition with each other. Even railways were made to compete through franchise awards to run the trains, and through different leasing and owning companies. Water alone saw the main regional monopolies survive intact, with the predictable consequences – the two worst characteristics of the nationalised industry, shortage and higher prices, partially survived the change of regime. Regulation and shareholder pressure did something to improve both areas, but not enough.

The first step the government should take stimulate new investment is to break the monopoly. If the industry is as advertised a natural monopoly removing the legal monopoly will make no difference. If, as seems obvious, it is not a natural monopoly, new entrants will come in to challenge the current returns and high prices of the incumbents, and offer a lower cost model of water supply and dirty water removal. New entrants will seek to tap into borehole water in the many parts of the country where the water table is rising. They might offer to desalinate sea water, or to use river water where there is sufficient to allow further extraction.

Water is no more a natural monopoly than oil or gas production. Each of those businesses needs pipes and tankers to get the product from where it is fouond naturally to the market. They need to refine or purify their raw material;. Water suppliers need to pipe or transport water form where they can collect it or abstract it, to the customers, cleaning on route to the necessary standard.

A competitive water industry might not wish to supply all water to a uniformly high standard for drinking, but may supply cheaper water for gardens or loo flushing. It might propose collecting more water at or close to the user’s own home for lower grade uses. It might supply water to industry without the drinking water additives some water companies put in on a take it or leave basis. A competitive industry is unlikely to tell people to use less water in hot summer periods, or cut people from certain uses altogether. In summary a competitive industry would be more obliging and more flexible in meeting customer requirements.

The government should also make it clear permits will be forthcoming to put in extra reservoir capacity where needed. There is a need for several more reservoirs in southern and eastern England. It is important work starts on these soon. Even if the government is sufficiently gutless to want to keep the monopolies, it could insist through the regulator that the companies aim to meet demand rather than artificially restricting it. This should be enough to trigger the investment schemes needed. Water is not a scarce resource, and it is the ultimate renewable. You cannot destroy it, it merely returns through the water cycle. As this is the case we should sotp all this nonsense about husbanding the resource and using less, and concentrate on finding ways to route around another 1% of the copious rainfall our country experiences to customers through the pipe, borehole and river system.

Over the course of the next week I am going to look in turn at the main areas of infrastructure, where the UK and especially southern England are badly provided . This is a good time to be considering substantial new investment in transport, water, communications, and energy. The construction industry is going to be short of orders, prices will become keener as a result, whilst even in this Credit Crunch there are substantial funds available from Infrastructure funds and banks for this type of investment.

The last eleven years have seen little progress in making the substantial new investments we need. Many road projects were cancelled when the new government arrived in power. With the exception of the completion of the Midlands relief toll motorway, proof that toll roads can be successfully built and financed as supplementary routes in the UK, there is little to show for this long period. It is the same story on the railways. Massive sums have gone into rail, but so much of it has been spent on consultants, advisers, repairs and remedial work, and little on new track or capacity enhancing facilities. The period has seen the completion of the Cross Channel rail link and a revamped St Pancras Station as exceptions to this rule of maximum spend for no gain.

In energy there has been a deathly silence. The Conservatives initiated the “dash for gas” as the newly privatised industry decided building more fuel inefficient and dirty coal fired power stations was a bad idea. The UK made its one decisive move to a lower carbon economy through this change of fuel for power generation, which has enabled the country to hit its Kyoto targets. Over the last decade little has happened. The nuclear stations have got that much older and closer to the point where they have to close as they exceed their design lives, whilst we have been treated to successive Energy consultation documents and the promise of a grand debate on new nuclear.

The water industry has remained a monopoly for all but the largest users, and has seen a drought of new provision leading to hosepipe bans and reduced supplies as if it were still nationalised. The regulators have allowed the industry to push through substantial price rises, exploiting the monopoly position. The South and east of the country are short of water capacity.

Only in telecommunications has there been an explosion of new capacity, as a more competitive industry has responded to the demand for much more capacity to handle the internet, increased demands for mobile telephony,. And new services ranging from data transmission through security to entertainment downloads. Even here there has been some difficulty in generating the extra line capacity needed to ensure all have access to good internet service, thanks to the strong market position enjoyed still by BT in controlling the local loop and the local exchange network. Mobile networks have expanded dramatically under the impetus of full competition and strong user demand.

The UK as a result of the missing decade of network investment is short of capacity of all kinds for running a twenty first century economy with substantial inward immigration increasing demand as well. The next few years of slowdown or worse present an ideal opportunity to start to remedy these defects. I will set out thought son what the government and the private sector can do in the months ahead to rectify the shortages.