How and when to use private money in infrastructure projects
WHEN the Indiana Toll Road was opened in 1956, there were eight pairs of travel plazas, or rest stops, along the 156-mile (250km) stretch linking Chicago to Ohio and points eastward. As cars became faster and less thirsty, travellers had less reason to stop regularly for petrol or snacks. Three of the travel plazas closed in the 1970s. Restaurants shuttered, even if offered free rent. The remaining plazas, dwindling in number, fell into disrepair. The abiding memory some road users had of Indiana was of grubby toilets along the toll road.
Those rest-stops are at last getting a makeover. IFM, an Australian infrastructure fund, is investing $34m in the toll-road’s plazas, part of a $200m-plus upgrade. Half of the road’s length, with 57 bridges, is being resurfaced, using a treatment known as “crack-and-feed”, which lasts longer than simply patching the top. IFM, which acquired a 66-year lease on the road in a $5.8bn deal in 2015, says a private-sector operator has the right incentives to invest for the long term. Fewer tyre blowouts mean less gridlock, more road users and more revenue.
Politicians across the spectrum agree on the need to upgrade America’s...Continue reading
The IMF nudges up its forecast for global growth
APRIL is the cruellest month, breeding lilacs out of the dead land, and, in Washington, chirpy forecasts from the IMF that often prove a bit too chirpy. On April 18th the fund released its semi-annual World Economic Outlook (WEO), raising its forecast for global growth in 2017 to 3.5%.
Growth forecasts for the emerging world have not changed. The IMF’s global optimism is based instead on hopes of increased growth in the rich world. The fund takes a rosy view of the American economy, citing both high levels of consumer confidence and Donald Trump’s plans for more government spending. In Britain the IMF now reckons GDP will grow by 2.0% in 2017, up from earlier estimates of 1.5% (issued in January) and 1.1% (last October). The IMF has also raised its forecasts for Japan and the euro area.
Snipers point out that IMF forecasts have been far from perfect. Some glitches are excusable. In the spring of 1990, it predicted that Kuwait’s economy would grow by 0.8% that year. It actually fell by 26%. The IMF’s model did not allow for an Iraqi invasion. But other errors are less easily explained: between 1990 and 2007, the IMF’s spring forecasts...Continue reading
Markets worry more about political turmoil than autocracy
THE VICTORY of Recep Tayyip Erdogan, Turkey’s president, in a referendum on April 16th is seen by many observers as a worrying step on the road to autocracy. The vote handed Mr Erdogan far-reaching new powers. But the Turkish lira, government bonds and stockmarket all gained ground as the results came in.
It was a reminder that the relationship between markets and democracy is not rock-solid. Like an errant husband, investors may proclaim their fidelity to democracy but are not averse to seeing someone else on the side.
In Turkey investors may have feared turmoil if Mr Erdogan’s proposal had been defeated. It is an old, but fairly reliable, rule that investors dislike uncertainty. And the early years of Mr Erdogan’s tenure, when he was seen as a liberalising democrat, saw rapid economic growth; his transformation into an emerging autocrat has not put investors off. Since he took office, the Istanbul market has gained 760% (see chart).
An authoritarian government can provide certainty, at least in the short term. In 1922, when Mussolini took power in Italy, its equity market returned 29% and its government bonds 18%, according to...Continue reading
Unshackling Europe’s sugar producers
IN A rickety warehouse on the banks of London’s Thames sit mountains of caramel-coloured raw cane-sugar. For centuries the sweet stuff has come across the seas to Tate & Lyle Sugars’ dockside factory, to be refined into the white stuff. Cane accounts for four-fifths of global sugar production, but only one-fifth of Europe’s. Most of the continent’s sugar is made from beet, thanks to a technique developed in the Napoleonic wars, when an English blockade hit French cane-sugar imports.
No surprise, then, that the sugar-beet industry has been well guarded by Europe’s Common Agricultural Policy. But in recent years the EU has reformed its system of quotas and subsidies to lower food prices and enhance its farmers’ competitiveness; production quotas for milk were dismantled in 2015, for example. Now it is sugar’s turn. From October this year, the EU will abolish its minimum price and production quota for beet. Its complex restrictions on sugar imports will remain, however, as will its income support for farmers.
The beet sector has already been restructured in anticipation. EU compensation schemes have...Continue reading
A market-related twist to the Dortmund bombing
WHEN three explosive devices hit a bus carrying the Borussia Dortmund football team on April 11th, it was immediately assumed that it was another Islamist attack. Notes were found at the scene of the crime alleging that Islam was the motivation, with the author claiming a link to the terrorist group Islamic State. But prosecutors in Germany allege a completely different rationale. They say that the suspect, a 28-year-old man, had borrowed money and taken out put options, which would benefit from a decline in Borussia Dortmund shares (which fell 3% on the day after the attack).
As yet, the suspect has not been convicted. But if true, the story would seem to come straight out of Hollywood. In the film “Casino Royale”, James Bond (as played by Daniel Craig) foils a plot to blow up an airliner owned by the fictional firm Skyfleet, after villain Hugo le Chiffre had sold the company's shares short (ie, bet on their price to fall). In “The Fear index”, a Robert Harris novel, a hedge fund's trading programme shorts an airline's stock just before a fatal crash. It was rumoured, after the September 11...Continue reading
Managing financial risk on London’s massive Crossrail project
THE eastbound platform on the Elizabeth line at Farringdon Station in central London is 30 metres below ground. Its length is as striking as its depth. At more than 200 metres, it is almost twice as long as the typical platform on the Tube. When service begins in December 2018, it will increase rail capacity in central London by 10%, thanks to the longer trains. Travellers nearest to the terminal stations at Reading and Heathrow, to the west of the city, and Shenfield and Abbey Wood, to the east, have a shot at the acme of commuter luxury: a seat.
Crossrail, as the £14.8bn ($19bn) infrastructure project is known, is on track to deliver other small miracles. With 85% of the work completed, the project is on-budget and on-time, in spite of its size and complexity. The programme required ten new stations, some with passenger tunnels linking them to existing Tube lines. The Elizabeth line itself will snake through 13 miles (21km) of twinned tunnels, including a section under the Thames. Tunnelling is a risky business. You never can tell if you’ll run into a hold-up. The Crossrail dig has yielded 10,000 items of interest to archaeologists. At Farringdon the diggers found 25...Continue reading
Digitisation shakes up corporate-bond markets
JUST a few decades ago, an asset manager wanting to trade shares, bonds or derivatives almost always had to call up the trading desk at a big investment bank. Today shares and many derivatives can be traded with a few simple clicks (or even in fully automated fashion, using algorithms). But buying and selling bonds, especially corporate bonds, is still an old-fashioned business. Over four-fifths of trading in American corporate bonds still takes place with a dealer, usually over the phone. Yet digitisation is at last beginning to change the structure of bond markets: witness the announcement on April 11th by Tradeweb, an electronic-trading platform, that it is to offer “all-to-all” trading in European corporate bonds, ie, a system in which any market participant can trade with any other.
Electronic bond-trading is not in itself new. Tradeweb’s platform, initially limited to trading of American Treasuries, was unveiled in 1998. Around half of Treasuries, and nearly 60% of European government bonds, are now traded electronically, reckons Greenwich Associates, a consultancy. But for corporate bonds, progress has been slower: only 25% of global trading volume in...Continue reading
America’s big banks have an encouraging first quarter
WHAT a difference a year makes. When America’s big banks reported first-quarter earnings for 2016, the mood was glum. The Federal Reserve was proving tardier than hoped in raising interest rates, which held down lending margins. Jitters about the world economy meant rotten results for investment-banking units, in what is usually their best season of the year. Regulators added to the misery: last April the Fed rejected the “living wills”—plans for liquidating lenders that get into trouble—of five of the six largest banks.
This spring bankers are happier. Business perked up last year after that dismal start. Donald Trump’s election in November, accompanied by promises to ginger up the American economy, cut corporate taxes and roll back regulation of finance, gave banks’ shares a lift (see chart). The Fed raised rates in December and again in March and is likely to keep increasing them. And 2017’s first-quarter results have, mostly, seen an improvement—though the cheer was not evenly shared.
“Wall Street activities have performed better than Main Street ones,” says Mike Mayo, an independent bank analyst. Revenues from capital-market...Continue reading
A trade economist wins the John Bates Clark medal
IN 1853 the government of India, then directed by Britain’s East India Company, began construction of a vast rail network, continued by the British Raj, established in 1858. At the time, most inland transport in India was hauled by draught animals: with carts where roads existed and were passable; packed on animals’ backs when they were not, which was often. Moving goods across the great expanse of the subcontinent was costly and painfully slow. That changed with the arrival of the railway. Between 1853 and 1930 more than 67,000km (42,000 miles) of rail was laid across India, providing transport that was fast, cheap and reliable. A bullock could carry a pack 30km a day; an engine could haul freight 600km over the rails in the same time.
Working out the impact of this took Dave Donaldson (a PhD candidate at the London School of Economics when he started trying) nearly a decade. He dug through mountains of yellowed colonial-era records that had never before been collated and digitised. He found that eight different kinds of salt were sold across India, each sourced from just one region: this quirk allowed him to use local differences in the price of salt to calculate transport...Continue reading