Friday 10 October 2014

The EDF Hinkley Deal: We Have Been Shafted

When I started in business I was dealing in physical stuff: oil, gas, electricity, coal.  Standard, commoditised stuff.  Whenever you were selling, you tried to add value in different ways - credit terms, service levels, devising fancy pricing clauses, throwing in a few options - anything you could think of to customise, rather than sell on price.  I became an 'originator', hatching complex contracts with as much creativity as I could muster.  The margins got better as the deals became ever more bespoke.  On a good day, you could add so much value that the customer was only too happy to pay the premium: genuine win-win all round.  But it was still basically margin.

Then I moved from physical energy to being a service provider.  The creative value-adding thought-process served me well: but at the end of the day, it's just fees.  And sometimes it is a bit galling to see the client make a real packet from your very good idea.

So the notion of profit-sharing rapidly takes hold.  And lo!  One day a client liked a particular proposal, and offered a profit-share on the upside.  Kerr-ching.  We tied down the details, and away we went.

Everything went pretty much to plan: the idea worked out, the sales were made; and then came the day of reckoning.   In I go to the client's office, to be met with long faces.  No profit, you see.  Look, here are the accounts.  And it all seemed to be going so well, but - there it is, Nick.  Just your flat fee after all.

Well of course I pored over the books but they had been well and truly stacked, and I had been well and truly shafted.  

And now we find that UK plc has fallen for the same trick, but on a scale with so many noughts added, I'm not sure they can be counted.  The EDF Hinkley deal, which the EC so comprehensively demolished 9 months ago, has been passed because of a small alteration which makes it just fine: an upside sharing device for the UK to claw back a bit of the gargantuan subsidies, in the event EDF's profits are above a certain exorbitant level.  

Ah yes.  Profit on the construction and long-term operation of nuclear power plants, operated by an arm of the French state.  Does anyone on the planet reckon that the books which will be presented in due course will bear any relation to reality?

For many years now I have been predicting the French will get the rest of Europe to pay for its nuclear industry as surely as we all pay for their agriculture: and so it has come to pass.   The gormless gits in Whitehall have served it up on a platter.  There are some early rumours as to how the political fix was achieved, but we may never really know.  Will the Germans and Austrians really block it at the eleventh hour ?  I'm not pinning much hope on that.

This 'French Tax' on UK plc will run for 35 years, and will end up being an identifiable percentage of GDP.  Countries have gone to war for less.  The 'deal' (which, incidentally hasn't yet been signed) needs to be repudiated fast:  I might even join UKIP if they make it part of their manifesto.

ND

18 comments:

Sackerson said...

To quote Terry Pratchett's Discworld dog Gaspode: "Read my lips: per - cent - age - of - the - gross."

CityUnslicker said...

I can make sure it makes it to the UKIP manifesto - there we go, another one for the people's army.

More seriously, I could cry. We have been writing this blog for 8 years now and always warning that thte previous Government and this one have made some terrible errors on energy policy.....but they keep getting worse. Worse and worse all the time.

It's literally a dark future!

Electro-Kevin said...

Does the Government read this blog ?

In which case it explains a lot about what is going on in my life at the moment.

At least the 'boy who said the King had no clothes' was telling the truth. And I'm flattered at how many millions must have been spent getting at me.

If true then they've shot the messenger. Everything I warned would happen is happening and they have only themselves to blame.

(Some of you may remember what I'm talking about.)

Anonymous said...

You pose an interesting question as to who has better chance to scupper the deal.

Will it be the EC that UKIP hate but have the power to do it? Or will it be UKIP whose years at Brussels acheived nothign?

Answers on a carte postale to Dominique Ristori c/o DG for Energy.

Can't make up my mind if Mechthild WÖRSDÖRFER (Energy policy) or Klaus-Dieter BORCHARDT (Internal energy market) should be copied in too?

Timbo614 said...

What's missing from the analysis Nick is: "Which private company or individual gets very, very, very rich off the back of the deal?"

Shafted yeah, been there. Had a commission/profit share agreement same as you, Target for earnings to start 10,000 units. They sold 250,000 units in the first year. We were on a real earner... or so we thought. Ditto "et voilà" no real profit! Difference was we owned the technology - et voilà - New company - we sold the "source code" and workings to every competitor they had :) not as big an earner as the commission should have been but very much more satisfying :)

Jan said...

In my modest experience of the Civil Service and this is probably true of ministers as well, they are way out of their depth when it comes to anything businessy or financial. They are not brought up to think that way. They sometimes win by being devious but it looks like they've been well and truly outsmarted this time and it will be at our expense.

Pity you weren't involved in the negotiations Nick and to add to EK, I hope the governemnt do read this blog and if they don't they should.

Anonymous said...

"Whenever you were selling, you tried to add value in different ways - credit terms, service levels, devising fancy pricing clauses, throwing in a few options - anything you could think of to customise, rather than sell on price. I became an 'originator', hatching complex contracts with as much creativity as I could muster. The margins got better as the deals became ever more bespoke. On a good day, you could add so much value that the customer was only too happy to pay the premium: genuine win-win all round.
Then I moved from physical energy to being a service provider. The creative value-adding thought-process served me well: but at the end of the day, it's just fees. And sometimes it is a bit galling to see the client make a real packet from your very good idea."

This of course is as succinct account of the financialization of the UK economy as you could wish find.

Ever more arcane and Machiavellian financial instruments, but always ... a fat fee.

Which means there is actually less value in the transaction when every one of the financiers have taken their cut.

Anonymous said...

Anon: "Will it be the EC that UKIP hate but have the power to do it? Or will it be UKIP whose years at Brussels acheived nothign?"

Whichever, you can be bloody sure it won't be the Tories.

Nick Drew said...

Sackers - yes, that's the one: GROSS! ROYALTY! Plus proper audit rights! (My understanding is that Alec Guiness pulled this stroke in Star Wars: but that Christopher Plummer turned it down for Sound of Music)

CU - we will have to keep ourselves warm with that nice feeling of being right all along ...

EK - my weekended brain hasn't deciphered your cryptic comment, nothing too sinister I hope

Timbo - I envy you your revenge: my opportunity for payback has been limited (though not nil ...)

Jan, that is spot-on: even though they spend a fortune on costly legal advice etc, they are children. Defence procurement is traditionally the worst with NHS close behind, but DECC is setting new records with every passing month

Anon @ 2:11 - I am 100% sure there are ba-ad examples from the finance sector & elswhere. All I will say - emphatically - is that financial instruments can be used both creatively and constructively, and that win-win is (sometimes) possible & very real.

(I have done deals of which I remain touchingly proud, the counterparties to which still shake me by the hand when we meet, long after the deals have run their course. Defensive? Moi?)

Anonymous said...

ND: " All I will say - emphatically - is that financial instruments can be used both creatively and constructively, and that win-win is (sometimes) possible & very real."

Not really disputed. However, the more that is skimmed off in terms of fees & charges, beneficial interest rates ( to the bank) etc, leaves less value from the point of view of the customer.

Yes, the NHS might be able to afford a brand spanking new hospital, and the financier is able to afford the new DB9, but the people who pick up the tab are the taxpayers of tomorrow. That'd be .. the poor hapless tax payer.

Ultimately, the more your economy is turned into a FIRE economy, the less actual wealth is available to be skimmed off, you end up ( if we are lucky ) with stagflation, otherwise, if not - collapse.

Electro-Kevin said...

Nick - Someone posted here with a Welsh flag (2 years ago)

"E-K. You are about to find out what happened to the boy who said that the King had no clothes."

Sinister ? Not really. But not benign either - in that it is an obvious attack on my trade through over-supply, won't make prices for my customers cheaper nor provide them with badly needed capacity - nor will it avert industrial strife, probably instigate it in fact.

I'm towards the end of my service anyway. In reality I only need a couple more years.

Nick Drew said...

which brings us back to politicians too stupid to steer away from these traps for fools ...

and (another bugbear) Civil Servants unable to give proper advice

(however that is not entirely their fault, they have been emaculated by politicians, starting with Mrs T)

Anonymous said...

ND: "and (another bugbear) Civil Servants unable to give proper advice

(however that is not entirely their fault, they have been emaculated by politicians, starting with Mrs T)"

You are looking in the wrong place if you looking to the Civil Service for good advice.

The problem is not so much that the civil service gives poor quality advice, it's that the civil service is too damn big, has its fangs too deeply embedded in the private sector.

We could quite happily survive with a CS one quarter of it's current size.

Electro-Kevin said...

Nick - I put my country first. Which is more than can be said for them.

I'd do it again. In truth I crave being liberated from my onerous responsibilities at home and at work. The shifts are for young men anyway. 3am starts and finishes anyone ? Always working bank holidays and weekends ? Not allowed to drink most of the time ?

Can't wait to take the pension in fact - and work part time in Morrisons.

I'm probably being paranoid - and a little Kevin-centric - but that doesn't mean they're not out to get me.

john miller said...

Shafted?

I'll say.

EDF have thrown away the vaseline and put on the carborundum condom.

Sebastian Weetabix said...

The problem with the higher levels of the civil service is that over the years the technically expert have been eased out by innumerate essay writing oxbridge administrators who are all incompetent untrustworthy back-stabbing cunts. DECC is a prime example; when the engineers were in charge the infrastructure worked, there was spare capacity, we owned the technology, and the lights were never going to go out. Now they have subcontracted all thinking to the eco-maniacs and the engineers are long gone.

CityUnslicker said...

SW - this is not the CS fault. it is the lib-dems, tories and Labour who have given in to the eco-loons. These approaches have driven the more sensible types to up sticks.

We are left with the dross making up unworkable policies.

I was not grown-up in the 1970's but I fear it was like this back then?

Sebastian Weetabix said...

I was grown up in the 70s; in some ways it is worse today. The prevalence of irrational magical thinking and complete loss of cultural self-confidence among politicians and opinion formers is tangibly and incredibly worse. I cannot imagine the Labour Party of the 70s meekly surrendering to Islamists and allowing Sharia courts in Tower Hamlets, or the Tory Party going along with it. Nor can I imagine them presenting more expensive food and energy as a good thing.

On the other hand thanks to technology we are materially better off. But not for long, unless the climate change act is repealed p.d.q.