Aug 082015

Nationalisation of the railways and energy sectors are being discussed by both Andy Burnham and Jeremy Corbyn, which is good: I think doing both would solve more issues than they would create and allow for both long term planning and more efficient operations. We would need to be careful to avoid the organisational issues Network Rail has but that shouldn’t be beyond us.

What surprised me at the energy sector nationalisation however was just how cheap it was. In financial terms because the gilt rate is so low it barely makes sense for the government not to invest in taking over the energy companies. EDF has a dividend yield of around 5% which is double the interest on newly issued debt. Net assets would remain the same as the new bonds are balanced by the company shares but we’d gain an income stream. This would essentially be the same model as leveraged private equity investments taking over e.g. Boots which were popular a few years ago without some of the short term issues about subsequently loading the company with debt.

That’s just accounting though, it was the relatively small £185bn price tag attached to the shares. This is coincdentally the same amount that was lent to banks in a few months by the Bank of England during the financial crisis and around half of the total stock of gilt bought by the Bank of England as part of quantitative easing.

Which brings me to the point: we could tell the Bank of England to sell it’s bonds and use the money to buy the energy companies and hold the shares without even changing the size of the government balance sheet and still have another £185bn to buy something else with.

Anybody want a new train set?

 Posted by at 12:21

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