February 15, 2011
It is commendable that Mr Oettinger is getting into the energy (roadshow) business, with the aim of linking up the companies that will build infrastructure and renewables with those masters of the universe, the European and global finance community.
Last week I attended a European Renewable Energy Federation (EREF) workshop and was privileged to hear one of these financial Olympians (from Axa as it happens) setting forth the conditions under which they would deign to invest in European renewables and infrastructure. At this point I would bring readers attentions to Mr Oettinger’s spokesman’s comment (shown below): please recall this at the end of the letter, as we will see it is touchingly naïve.
“The idea behind it is that people who are ready to invest shall be brought closer to investment projects in the sense that their attention is brought to huge investment projects in the field of energy,”
The person (henceforth Axaman) that gave the presentation was a personable enough messenger boy and the written evisceration of the financial community which will shortly follow should not be taken as a reflection of his personal qualities or abilities. Note also that Axaman’s comments were intended as a commentary on the finance business as a whole, NOT as the views of Axa.
Axaman’s key points were:
A. The Euro/US financial community is the only place that the EU will be able to source the money it needs to make the investments it needs (message: we are the only girl in town – if you don’t like our conditions – tough).
B. The finance community does not like to invest in small companies (i.e. with values less than Euro200m – called “small cap”).
C. Renewables are more risky than other investments.
D. Institutions do not like to make investments above Euro50m per institution in things such as offshore wind farms (leading to 20 banks being involved in one project – Axaman admitted that this made things complicated)
E. The finance community prefers the oil and gas sector – a preference reflected in the much higher levels of investment in these two sectors compared to renewables (and their attendant infrastructure).
Point B suggests a systemic problem that might need legislation to drive the financial sector to make more effort with respect to infrastructure and renewables. Axaman claimed that looking at small cap companies (typical of the RES sector) takes one of the “masters of the universe” (Motu) too much time for the rewards involved. The fact that companies involved in renewables tend to offer high growth compared to other sectors seems to be overlooked by the Motu.
In the case of Point C, perhaps Axaman was being ironic or suffers from a short memory. The financial community likes risk, provided it is embedded in things created by the financial community. The financial collapse of 2008 was largely due to the creative efforts of the financial community with the development of innovative instruments, such as Collateralised Debt Obligations (CDOs). Axaman expanded on the risk issue by noting that elements that would make the RES industry attractive to Motu include: Credit rating agency + liquidity + asset backed.
Readers familiar with the recent financial collapse may at this point be crying with laughter. The finance industry massaged the main credit rating agencies so that the agencies maintained ratings on banks and financial institutions despite the increasing risks being assumed by these organisations.
Indeed, following the crash, the US big two (Standard and Poor and Moodys) had so little credibility (e.g. they rated 90% of all CDOs as AAA) that the European Commission seriously considered (and may still be considering) some EU alternative.
Similar comments could be made about liquidity, where financial institutions massaged this to the point where it had no meaning. In light of these facts it seems to be a case of ‘one rule for the finance business – and another for the rest of us’. Similar comments could be made about ‘asset-backed’.
In the case of Point E, a recent article in the Guardian noted that some gas producers have submitted a report (produced by McKinsey) to the European Commission which suggests that using more gas would be a cheaper route forward for Europe in terms of GHG reductions. This would fit well with the interests and prejudices of the Euro finance community (as outlined by Axaman). Can we thus expect lobbying both from the ‘usual suspects’ (gas companies) as well as the Motu?
The comments of Axaman stand in striking contrast to those made by Nicolas Stern to the European Parliament: “The risks we are dealing with are immense, essentially existential in terms of the relations between humans and the planet.” Stern understands the threat, by contrast, the euro finance business thinks it is a case of “same as it ever was”.
John Lanchester in his book ‘Whoops!’ goes into detail with respect to the failing of the finance business. Mr Oettinger and his staff would do well to read it – doing so will help them avoid making comments such as the one quoted at the beginning of this letter. Page 169 to 170 are particularly relevant with respect to attitudinal differences between real industries (which make things as their primary aim with profitability as an important but follow-on element) and the finance business (its only money). Page 174 and 175 discuss the psychology of the Motus and observes that the Motus regard themselves as paragons of rationality whilst onlookers regard them as “slightly nuts”.
The finance business exists to provide financial services to individuals, businesses and organisations. Deregulation let to a state of affairs where the finance business focused in on itself (CDOs tend to be sold amongst finance institutions). Axaman’s comments show that the finance business has a very modest interest in the common good or in vital EU long-term projects such as renewables and infrastructure. Furthermore, it expects those outside the industry to meet rules and regulations which it does not follow itself. Thus does the finance business position itself as part of the problem, not part of the solution.
If Mr Oettinger expects any meaningful investment in infrastructure or renewables then there are only two ways. Public money, for example, a massive expansion of the EIB) or private money. In the case of the latter, given Axaman’s profile of his ‘industry’, it is clear that obtaining substantive investment from it will require substantive regulation, which is in any case, as the events of 2008 to the present show, is long overdue.
Given the above, Mr Oettinger’s roadshow will doubtless look good but will not produce a result.
PWRAuthor : Letters to the EurActiv editor