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Captive Market

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There are many reasons why China’s involvement in building nuclear power stations in Britain is wrong, yet those who oppose it, or question it, have struggled to articulate their unease without sounding racist, paranoid or Little-English, or getting bogged down in arcane financial minutiae.

One obstacle to exposing the British government’s error is language. In the case of China and the nukes, politicians, journalists and finance professionals are complicit in misleading usage of the words investment and tax. George Osborne, a master of such lexical abuse, maintains that Britain needs Chinese investment, and that the planned Chinese-French reactors won’t cost the British taxpayer a penny. Both propositions are false.

Investment is a greedy word, swallowing many different meanings. It can mean ‘buying a thing in the hope it’ll be worth more money when you sell it later’. It can mean ‘buying a thing in the hope it’ll generate a steady income’. Or it can mean ‘spending money to make a new, improved thing, in the hope people will feel the benefit, and pay enough to use it to recoup the money spent’. Sometimes it can mean all three. Take the example of a house in London. A wealthy person buys it, hoping to sell it later for a profit. She ‘buys it as an investment’. While she owns it, she lets it out. She is ‘investing in the rental market’. She builds a second house in the back garden: she is ‘investing in the demand for housing.’

In the British government’s presentation, construction of the Chinese-French reactors correspond to the third category – a new, improved thing. Just as Britain needs more houses, and should be grateful for those who build them, Britain needs the security of the low-carbon electricity supply that nuclear power offers, and China will provide it. Thank you, Beijing – Chinese investment!

But what if the hope that people use and pay for your new thing isn’t a hope? What if it’s a certainty, guaranteed by the government? And what if it isn’t so much a new thing you build – like our imaginary housing investor’s second house – but simply a replacement of an existing, non-optional thing? Then it becomes a different kind of investment. In terms of the housing comparison, it’s like a house with a tenant who has no choice but to live there for ever, and is compelled to pay the rent the government sets on the owner’s behalf. Then the main investment isn’t in the house; it’s in the tenant. The government isn’t encouraging Chinese investment in Britain’s electricity industry so much as selling China and France a captive market of British electricity users.

If investment is semantically bloated, tax is semantically starved. In Britain it has acquired the narrow meaning of ‘that percentage of a person or firm’s income compulsorily levied to finance public spending’. Income tax, in other words, or corporation tax. But there are other compulsory levies. The electricity bill is one of them. Electricity is a universal network: everyone must always have it, and everyone must pay.

British electricity customers can shop around for who supplies their electricity, but they will have no choice about whether they subsidise, through their bills, the new nuclear stations, which wouldn’t be built in pure market conditions. The provision of electricity is public spending, even if it is carried out by private companies, or, in the case of the Chinese-French reactors, foreign state companies. The electricity bill is, accordingly, a tax – a privatised tax.

The British taxpayer will pay to subsidise the new nuclear power stations. Whether that money goes through the Inland Revenue and the Treasury, or through private electricity companies, it is still a tax.

Britain does not, in reality, need Chinese investment in nuclear power stations. It needs safe, cheap, reliable, efficient electricity – and if the best way to generate it happens to be Chinese-built, French-designed nuclear reactors, great. It needs money to pay for them – and if a government-backed bond, issued by a non-profit trust set up to commission low-carbon power sources, were to be bought by China’s sovereign wealth fund, great again. Instead of which, citizens are bundled up, the rights to tax them sold to unelected foreign governments, and the domestic government is reduced to the role of steward, minding the master’s estate.

Comments on “Captive Market”

  1. stockwelljonny says:

    Very well put (though after this elucidation I am now more depressed than I was previously!)

  2. streetsj says:

    I don’t accept that your electricity bill is a tax. On your argument food and clothing would also be a tax.

    • Alan Benfield says:

      Your remark assumes that there is competition in a real market: here that is not the case. Unless there exists a supplier who does not take supplies from Hinkley Point C (and how would that work, exactly?), all suppliers will be forced to pay the guaranteed rate, which will invariably put up the aggregate general rate at which electricity is supplied i.e. the consumer has no choice but to pay the rate because he cannot go anywhere else (except perhaps to buy some solar panels).

      In this sense it becomes a tax (or, from the point of the provider, a rent, as I put it above. In a sense, all utilities are in the nature of a tax, in that they are regarded as essential (unless you consider that we should all return to nature) which is why the provision of such (water, electricity, gas, sewage disposal) are best left in the hands of a state monopoly, as privatisation has since shown: the consumer has never really benefited from it.

      • John Cowan says:

        That’s not everywhere and always the case. The oldest electricity-delivery infrastructure in the world is Con Edison in NYC, where I live. It may clank and creak in some respects, but it has pretty much kept the lights on (and the gas and steam flowing) since 1889 while being highly profitable to its stockholders. It is not obvious to me that if the City or the State of New York were to nationalize (if that’s the word) rather than merely regulating Con Ed, that it would do any better at delivering the juice, or charge us any less for it. East of us, the grid has changed hands from private LILCO to public LIPA to private PSEG without (I am told) any noticeable improvements.

        Now only about half the bill I pay, groaning but accepting it (at least the benefits are tangible and obvious, not the case for most of my other payments in the nature of economic rents) is for delivery; the rest is for supply. There are over 100 companies that are eager to get paid to supply me, doing their very best to obtain the lowest-cost energy for me. (Some companies have other metrics: some provide only “100% green” energy, mostly hydro; others acts as insurers against price fluctuations.) I confess to not believing that any of these hustlers, or ESCOs, can do significantly better in the long term than any other, so I remain content with the default supplier assigned to me by New York State.

        Of course, the situation of consumers on a fairly isolated island is going to be inherently different and less flexible than people well-connected to a continent-spanning series of grids. (Hey, that’s why we like islands, they’re quirky.) New York City is somewhere in between. By law, it must be possible to supply 80% of the peak power demand of NYC (just over 10,000 megawatts) by generating facilities in the city itself. Of course that’s not the cheapest strategy, and a lot of those facilities are shut down much of the time, but we could survive even in a “Fog On Channel, Europe Completely Cut Off” situation.

  3. Alan Benfield says:

    Many thanks for referring to my remarks as ‘a text book answer’ – although I doubt you meant it in an approving way. I think, in fact, this characterisation is wrong: most mainstream textbooks will not recommend the simple idea of governments borrowing in the market, because the economists who write them are also in thrall to the idea of small government and direct government borrowing is anathema: hence PFI and PPP. Unfortunately, New Labour swallowed this idea wholesale, thus achieving the double distinction of having used the process to borrow expensively (mortgaging the future, which the Coalition and now the Tories continue to do) to build public infrastructure while then being (falsely) accused of causing the deficit by extravagant spending anyway (an accusation which they have singularly fail to rebut at any point, although the point has been made repeatedly by economists, notably Paul Krugman:

    “It has been astonishing, from a US perspective, to witness the limpness of Labour’s response to the austerity push. Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible – or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-2009.”

    http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion )

    But this is not really about PFI and PPP, deficits or austerity: it’s about who owns Britain. James Meek has written a fine book on this subject, which you would do well to read:

    http://www.versobooks.com/books/1731-private-island

    To get started, read John Grays’s Guardian review:

    http://www.theguardian.com/books/2014/sep/05/private-island-why-britain-now-belongs-to-someone-else-james-meek-review

    Or this from the FT:

    http://www.ft.com/intl/cms/s/0/947a5bf4-345e-11e4-8039-00144feabdc0.html

    To take some other points:

    “The Chinese would not look at such a Bond because their focus on investment has to be more hands on productive with if possible a revenue flow which was of course intimated by James Meek.” – Yes, but the hands-on is the scary part: what this will do is (if it is ever completed) put about 7% of generating capacity into the hands of two foreign governments, one of which is already notorious for dumping steel on the market and is clearly not a benign provider of money for investment. Is this a good thing? With a bond issue the ultimate owner is the state – ours, not theirs.

    “It is advantageous to our economy if the Chinese are actively involved, for they bring with them a determination to do the job at the price” – well at the price they are getting, they would be fools not to.

    “One cannot blame the Chinese for keeping out of the Bond Market for the designation ‘Blue Chip’ can and does get eroded over time for each issue is subject to inflationary pressures if returned to the market. It is no longer the case that Pension Funds can look to these for long term security; yes they are necessary to balance the portfolio as against risk but even now it is a desiccated fall back and last resort.” – this is so wrong I don’t know where to start; because of its position as probably the largest financial centre in the world, the UK has the advantage that, deficits notwithstanding, its government bonds are incredibly solid: the UK is not Greece or Portugal. The yields on UK government bonds do not yoyo up and down like those of weak Eurozone countries.

    “At least the Chinese are not Hedge Funds and Take-Over merchants closing down on our limited successful brands.” – I think this called ‘damning with faint praise” – “We have to square up to the fact that we can no longer play a global hand in a manufacturing environment. – I think that is called defeatism – and is a reason for more government intervention in infrastructure, not outside investment from the likes of China.

  4. farthington says:

    Can EDF build EPRs?
    Check out the experience at Flamanville (unfortunately, there is probably an inadequate coverege in English).
    The answer is no.
    Can EDF deal effectively with waste and decommissiong?
    In both cases, the answer is no.
    A massive waste dump is being imposed undemocratically at Bure.
    As for decommissiong, a huge head in the sand.
    The most immediate problem child is Fessenheim, with endless deferral of the hard questions.
    France’s nuclear power based electricity was once a source of great national pride.
    Its future represents a cost of unfathomable depth.
    Meek is too kind.
    This proposal is a disaster of the first order – madness.
    Here is a once proud empire reduced to colonial cringe.
    And where is the City of London, on which Britain’s economic and industrial policy is fixated, in all this?
    Off gallivanting in the Channel and Virgin Islands.

  5. abgood says:

    I always look forward to reading James Meek’s articles and blog posts. He makes me think (a commendable innovation). In this post, I was reading along, taking it in, when I encountered the word “rents,” and everything fell into place. Rents, as in “rentier,” “rent-seeking,” etc. This mini-epiphany then dissolved into a brief vision of George Osborne’s face, and all was revealed. We ought not to be shocked by the sale of Britain’s assets, strategic and otherwise, to foreign governments, corporations or entrepreneurs by the country’s leadership. Osborne’s entire concept of political economy is a rentier’s. Far from feeling a surge of bile at the word, the chancellor would simply shrug. For him, the rent-seeking (and -selling) economy is the natural order of things. It’s the rest of us who are the oddballs.

  6. kiers says:

    It just amazes me. I thought the UK was FULLY on board with America’s (as in all things) new trade regime, ie. the TPP and TTIP. These agreements DO NOT allow government procurement with other STATE OWNED (especially communist state owned) enterprises???? So what gives here?

  7. tprightsofman says:

    LRB readers like me who are puzzled by some of the the comments above, may appreciate a recent contribution to STOP HS2 by one of the many formidable opponents of HS2 :

    “An update of Chinese blogs during Xi Jinping’s state Uk visit this week.

    But one quick point before I start: whilst Chinese state censors have successfully controlled all published media to only report the good-news party line, they have struggled to control blogs where, more often than not, the true stories routinely emerge, before the censors close them down.

    So, the summary (written in Chinese, and only discoverable using Chinese search engines) is this:

    Due to China suddenly having to dramatically downsize their overly optimistic high speed rail development programme, the Chinese government and suppliers are drowning under the weight of giant manufacturing facilities, rolling stock, trackside technology etc that will never be required in China. The government is heading for a turbulent time justifying their errors. Even the overhead and investment getting this far could finance a small country.

    The blogs are reporting that the leadership of China have now secretly acknowledged the financial reality of this chaos and is now focusing on other countries, such as Uk, that can be utilised for some of these high speed train excesses. Doing this makes an attempt to neutralise over production, and justifying manufacturing facilities. The Chinese will undercut Japanese and French high speed train suppliers.

    The blogs also report the Uk as “a fallen word leader” which is now standing in line with its begging bowl along side many developing countries – mainly in Africa. The Chinese are amused how the Uk has self-messed up to the point is now crawls to China for money. This week’s display of royalty and politicians dressed in red has been laughed at in China.

    Cameron forever at Xi’s side has been seen as a joke. The blogs say that Xi has played a masterful game of bluff by kidding Cameron et al of great long-term benevolent investment, whist the actual masterplan is to draw as much inflated interest from loans and taking control of as many essential utilities, real estate and manufacturing of domestic brands as soon as possible, thus sucking extraordinary sums of cash out of the Uk economy.

    Xi Jinping sees HS2 never making money (as wont high seed rail in China) but HS2 can be used to placate wrong decisions in China, whilst currying favour to gain access to other far more profitable UK investments.

    The blogs also report that the USA and particularly the European Union (as a body) are proving a hard nut to crack as they are individually and collectively suspicious of China (particularly the risks to state security) but the Uk, courtesy of mainly Cameron and Osborne, have been easier to kid as they preside over a fallen nation that now can do nothing but rely on Chinese cash. In short, Xi et al see the Uk as a push over.”

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