Tuesday, January 28, 2003

The stock markets in major economies are in a terrible slump. The British FTSE100 index has fallen for a record 11 straight days, and has now lost half its value over the last 3 years. By any standard for normal times, shares in the FTSE should be considered as undervalued. Comparing their current value with a 20 year trend, the undervaluation seems to be quite severe; remarkably, the trend value is about 1500 points above the current index of 3480. An adjustment was certainly needed after the excessive optimism of the late 1990s - it's only in the last 6 months that the series has fallen below trend. If these are normal times, the market should bounce back, and bounce back well.

The troubles of Australian insurer AMP suggest, however, that these might not be normal times. They have been exposed to the fluctuations of the FTSE, and there is doubt as to whether they can continue to meet claims. Once financial institutions like this crumble under the weight of an underperforming stock market, confidence can crumble too. If that were to happen, we might never regain the old trend. There could be a catastrophic break with the past. What we are seeing might be the start of a new trend in the financial series, and the start could be from a lower base. In a nutshell, we might be in for a hard time.

That said, AMP is not a firm where problems have emerged suddenly. Their former CEO, Paul Batchelor, resigned in September 2002 after poor financial performance. Marc de Cure, their former financial officer, had resigned a few weeks before that, after several months of financial setbacks. Their problems appear to owe rather a lot to investment decisions that, with hindsight, appear ill-judged and atypical of the behaviour of other firms.

It is certainly possible that the current drop in share prices represents a catastrophic break from the past. By my money still remains with the view that a not insubstantial rebound is likely.

Thursday, January 23, 2003

The government is considering giving itself the power to take over the running of British Energy, the troubled electricity generating firm. A takeover of this sort, which mimics the recent conversion of Railtrack into the non-profit Network Rail, might be innocuous in itself. But it does not confront the real issues facing the company.

Some of the privatisations of the Thatcher era have been extremely successful. The success of others, usually the more complex ones such as rail, has been more modest. When a monopolistic state firm is broken up into numerous providers, each of which must have contractual links with others, it is essential that the contracts are carefully designed and that the prices at which resources are transferred between the new firms are appropriately set. It is not clear that this has been the case with British Energy, and it certainly wasn't the case with Railtrack. Taking over the firm will not, of itself, fix these problems.

Nuclear energy has a lot of advantages - it is clean, and it does not burn up rapidly exhaustible supplies of fuel. But it is not cheap; safety considerations and the costs of decommissioning add to the bill. There's a powerful case to suggest that British Energy has not been allowed to compete on a level playing field with other energy providers. Maybe that's the case. Maybe the advantages of nuclear electricity even justify some sort of subsidy, or some adjustment to the prices that the firm currently faces. But if so, the subsidy should be out in the open. If the government takes control of British Energy, can we be sure that there will be transparency?

Wednesday, January 22, 2003

Today's the day the White Paper on higher education was published, announcing that differential tuition fees of up to £3000 per year, to be paid by students via an income contingent loan, could be levied by universities from 2006 onwards. This replaces the current fixed tuition of £1000. The greater flexibility, whereby different degrees in different universities will be able to charge tuition at different levels, has to be a good thing, moving us nearer to a market situation. Many people are, of course, concerned about rising levels of student debt; the repayment scheme that is proposed should spread out repayments over a longer period than at present, so that the repayment per month will for a typical student be lower than now.

The proposals have come amongst a raft of further initiatives aimed at widening access to higher education. This is, of course, desirable. But it needs to be borne in mind that many of the barriers that young people from less affluent backgrounds face in accessing higher education are barriers that exist in the secondary (and even primary) schools. Social engineering at entry to university is no substitute for fixing problems in the schools - and it makes no accommodation for young people who leave education altogther at ages 16 or 18. I'm all for widening access, but you can only positively discriminate in favour of some people if you discriminate against others. I can foresee all sorts of interesting cases coming up to the European court of human rights! To enforce aspects of the widening participation agenda, the government is proposing the creation of an access regulator. I dare say that after a couple of years, this will mean regulation of higher education in all sorts of ways not currently envisaged. But to flourish, universities need freedom from the state, not more regulation.

The most disappointing thing, though, is that the government has stubbornly held to its target that 50% of young people should pass through higher education by the end of the decade. This is when there is already much evidence to suggest that 30% of recent graduates are in jobs for which they are overeducated. 50% is a nice round figure, but if the government really wants to set a target of this kind (and why should it?) it really does have a responsibility to come out and justify it. That, it still has not done.