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Govt. to fund projects by selling 'growth bonds' 
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The Chancellor has told Treasury officials to find ways to persuade savers to transfer billions of pounds held in bank accounts, building societies and investment funds to new government "growth bonds".

The money would be invested in infrastructure projects such as toll roads, green energy and housebuilding.

Savers could be offered tax breaks, similar to those available in Individual Savings Accounts (ISAs).


http://www.independent.co.uk/news/uk/po ... 18038.html

as always the devil is in the detail, but sounds a good idea ...

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Wed Jun 06, 2012 10:46 am
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MrStevenRogers wrote:
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The Chancellor has told Treasury officials to find ways to persuade savers to transfer billions of pounds held in bank accounts, building societies and investment funds to new government "growth bonds".
The money would be invested in infrastructure projects such as toll roads, green energy and housebuilding.
Savers could be offered tax breaks, similar to those available in Individual Savings Accounts (ISAs).


1) Buy bonds to pay for a road that we will then have to pay to travel on? I'm not sure that's a brilliant sell. I thought the point of toll roads was that private industry took on the financing of such projects on the promise of long term profit due to everyone paying the tolls? If toll roads aren't profitable so private industry won't touch them, doesn't that make bonds a bad idea too? Either the bond return will be rubbish or the government will have to top up the return for an extended period, in which case it might as well just have paid for the road to be built in the first place.

Let me make a guess here. Their plan is to finance the construction using bonds financed by the general public but the maintenance and toll collection will be handed over to a private company, which will stand to make a tidy profit off the tolls while having taken on none of the risk of financing the initial build. What do you reckon the chances of that are?

2) If they're sold as being similar to ISAs, why not put your money in ISAs? No risk, known return.

Jon


Wed Jun 06, 2012 11:13 am
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So I can trust a banker with my money or a politician?
It's a close call, but the lesser of two evils is:

The banks.

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Wed Jun 06, 2012 11:19 am
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jonbwfc wrote:
1) Buy bonds to pay for a road that we will then have to pay to travel on? I'm not sure that's a brilliant sell. I thought the point of toll roads was that private industry took on the financing of such projects on the promise of long term profit due to everyone paying the tolls? If toll roads aren't profitable so private industry won't touch them, doesn't that make bonds a bad idea too? Either the bond return will be rubbish or the government will have to top up the return for an extended period, in which case it might as well just have paid for the road to be built in the first place.


A construction company may find it hard to get reasonable cost finance for say a low cost housing project but will be able to pay a good rate of return on a bond (given that borrowing money costs a lot more than the rate given to savers)

jonbwfc wrote:

Let me make a guess here. Their plan is to finance the construction using bonds financed by the general public but the maintenance and toll collection will be handed over to a private company, which will stand to make a tidy profit off the tolls while having taken on none of the risk of financing the initial build. What do you reckon the chances of that are?

2) If they're sold as being similar to ISAs, why not put your money in ISAs? No risk, known return.

Jon

They could easily be fixed return bonds but offer a higher rate of return with the security that they are backed by the goverment (& before people say they wouldn't trust the goverment as the article says NSI have 9% of the savings market)

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Wed Jun 06, 2012 1:20 pm
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hifidelity2 wrote:
A construction company may find it hard to get reasonable cost finance for say a low cost housing project but will be able to pay a good rate of return on a bond (given that borrowing money costs a lot more than the rate given to savers)

Hmm. I take the point but I'm not optimistic. A private (as in PLC) company is legally required to operate in the best interest of it's shareholders, above and over the people who have taken out bonds. That means if they are in charge of repaying the bond dividend, their requirement is to minimise it as much as possible to maximise return to their own shareholders. Unless that bond dividend is guaranteed with the threat of severe action, how are you going to regulate it? And if the company goes bust due to having to pay back a dividend that outstrips the profit from the project, what happens then? I don't see in this case why buying government bonds is any better than just buying shares in the company and them then using that capital to complete the project. If the government gets involved in that, you're effectively nationalising large scale construction companies.

The scheme either has to work in a pretty straightforward way (i.e. without any offsets or buybacks or subsidies) or it just doesn't stack up as a good way to do it. We've already got plenty of complicated ways to shift capital around, and look where it's got us...

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They could easily be fixed return bonds but offer a higher rate of return with the security that they are backed by the goverment (& before people say they wouldn't trust the goverment as the article says NSI have 9% of the savings market)

Yep, that would work and is straightforward. Fixed return bonds are certainly a valid option for this kind of thing. I have to admit though I'm not optimistic about them doing it this way...


Wed Jun 06, 2012 2:22 pm
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Q) If savings aren't in banks, how will banks have funds to lend to people in general. Wouldn't they have to pay more for money from the international money markets?

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Wed Jun 06, 2012 2:27 pm
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