A couple of weeks ago, I went to a drinks party for a Climate Campaign organized by the Conservative Energy & Climate Change team. The crowd was amiable enough - mostly pin-striped types with a leavening of tweedy country squires and the odd celeb, as one might expect. But the level of bullshit was off the scale. And I'm not principally talking about the politicians, though there wasn't much substance to their words. I am talking about the guests - the people the Tories are talking to and apparently listening to on energy and climate policy.
One squire told me about the Energy-from-Waste (EfW) project that was planned for his neighbourhood, in which he was involved. This was not any old EfW project. It was a full-blown, cloud-cuckoo, mad-hatter's EfW project. Though located in the sticks, it was going to take twice as much material as the giant EfW plant that has just been built near Heathrow. It wasn't going to use conventional technology (like the Heathrow project), but gasification - a technology that people have been trying and failing for decades to implement commercially to run on waste. And this was not "vanilla" gasification (which is unproven enough for waste), but a particularly high-temperature version known as plasma technology. It wasn't just going to take municipal solid waste (MSW - the stuff in our bins), but waste straw and other agricultural residues and energy crops (which was where the squire came in), despite the fact that this plant would be located around 30 miles from one of the biggest existing straw-burners in the country, which had so distorted the market for waste straw when it was commissioned that it had pulled in material from a 150-mile radius. By some magical means, it would produce absolutely no waste by-products at all - not a tonne of char, tar or contaminated recyclate would need to go to landfill. And this, I have since discovered, was the scaled down version - it was originally intended to be twice as big, using technology from a different supplier (who had never built one before to demonstrate the commercial and technical feasibility of the concept). But most worryingly, though this fantasy project using unproven technology was expected to cost £200 million (according to the squire; £250 million, according to my subsequent research), they already had three-quarters of the funding in place, and had funders falling over themselves to provide the final 25%. Or so he said. I don't know if he had been fooled, or if he was trying to fool me, but someone somewhere was being kidded in a big way.
But perhaps he was just a lone fantasist. Or so I hoped until I spoke to a pin-striped type who ran a green-energy investment fund. I suggested to him that his difficulty would be finding enough projects that were solid enough and offered a good enough return to satisfy his investors, and that as a result he might have to be settling for less than ideal average returns. Not so, apparently. It seems that the world is awash with attractive, solid, green-energy projects, to the extent that he was confident of averaging 24% returns. That is some performance, when one considers that none of the renewable-energy companies that I am aware of is delivering figures like that, nor indeed many companies of any description. "Carbon prices" are low, support for mature technologies is being reduced, and estimated costs of immature technologies are being repeatedly increased. T. Boone Pickens has just knocked his plans for the biggest wind farm in the world on the head because he couldn't make it stack up, despite levels of support that have been making America the favourite country for new wind developments. Nothing in the world of green energy or the wider economy gives grounds for optimism, and yet this fund-manager was confident of returns to make a speculator blush.
But what was really concerning was the type of fund he ran. He claimed his fund acted as a middle-man to bridge the gap between pension funds and green-energy developers. If he was telling the truth (a big "if"), the money that he was taking to invest in these mystery projects, was money that ought to be invested in the safest, dullest investments available. But instead it was going into high-risk (whatever he claimed, you don't get 24% returns with low risks) green-energy projects promising returns that no experienced developer in the sector would believe remotely feasible.
Perhaps the room was just awash with fantasists, and the finance was not in reality so easily available for their fantasies as they claimed. In that case, we need "only" worry about the sort of advice that our probable future government is being given. This tone that there is easy money to be made in energy and climate change, and that the City can deliver masses of investment, profit and jobs in the sector if suitably encouraged certainly chimes with the Tories' policy pronouncements in this sector so far.
But just possibly, people in the City really believe this (as well as the Tories). The room was certainly throbbing with optimism. And there were a lot of pin-stripes there. And you can certainly find reports prepared by consultants that could justify this sort of delusion, if you were ignorant enough of the practicalities that you believed the consultants' bullshit. Could these people be representative of a City view that genuinely believes, despite never having built anything real in their lives, that longstanding technical obstacles, energy-price volatility, and sovereign risk from inadequate, badly-designed, micro-managed, government interventions, are details that can easily be overcome through a combination of their cash and their genius?
As most people now know, we face (thanks to Gordon Brown) a pensions crisis. People are living longer, and the costs of living in to that old age are increasing, while the statutory retirement age remains at the same level as it was when people lived 10 or 15 fewer years on average, and is pencilled to increase at a glacial rate that does not match the increase in the obligations. The working-age population is shrinking as the retired population increases, and ever more of that working-age population is itself dependent on government hand-outs rather than generating the cash that will pay for others. Final-salary pension schemes, particular in privileged segments of the public sector, are over-generous and under-funded. We cannot afford even the miserable current level of the state pension. And the money-purchased pension schemes that most people in the private sector (and some lower down the ranks in the public sector) now have to rely on to make up for the inadequacy of the state pension have seen their values and (worryingly for those already in receipt of their pensions or responsible for managing them) their yields from the underlying investments, decimated, with every likelihood that it's going to get worse.
But at least the path out of this crisis is clear, even if the political means by which we achieve it is not. People will have to work longer, consume less and save more. Final-salary schemes will have to be cut, at least by freezing the existing schemes at the level of benefit accrued to date and moving the beneficiaries onto less generous or money-purchased schemes, and possibly (depending how bad the economy and the Government's budget gets) by actually revoking entitlements. Families may have to take more of the strain of care for their elderly relatives that the state can no longer afford to provide. The elderly may have to accept a lower standard of care than the already menial levels provided by the state. Quite simply, we will have to find ways to balance the amount of money put away for our old age against the quality of life that those funds can support. It won't be pleasant, and the tough times could last for two generations, or more if we don't get to grips with the problem now.
But now imagine that, to these problems, we add the (further) malinvestment of pension funds. We take the already pitifully-small amounts of money put aside to provide for our expanding old age, and invest them in "opportunities" that claim to be safe and high-yielding, but which actually hide a high level of risk not just of failure to deliver the promised returns, but of bankruptcy and destruction of the investment funds. How do you recover from that? What quality of life and level of retirement income matches an obliterated pension pot? Destitution is the answer. Or more likely - because we live in a democracy and pensioners and their children will constitute a majority vote in these circumstances for whatever party appears to offer a state-funded way to avoid complete penury - higher levels of tax to pay for a more generous state pension to make up for the gaping hole in people's private pensions. But higher taxes will destroy the jobs that are already too few to cover the costs of the increasing numbers of pensioners, and will drive the economy into a downward spiral. Frankly, anything which risks making a bad situation worse at the moment by further malinvestment of pension funds threatens the real possibility of an unavoidable armageddon scenario where dignity in old age is unattainable for those who have not made substantial private provision in low-risk assets. When fools talk glibly about easy availability of investment funds for projects that are cloud-cuckoo and/or black-box high-yielders, they are really talking about is gambling casually with other people's futures.
You'd think, in practice, that they wouldn't. Risk-management systems and more experienced managers would step in before money was thrown away. And probably that will be the case. But we've seen recently how systems can fail to spot risk and experienced managers can make fools of themselves. And the priapic enthusiasm for the many opportunities supposedly available in the green-energy sector at the moment, which was palpable in that crowd of pin-stripes, suggests that (at the least) the "Masters of the Universe" have not learnt caution and humility from recent experiences, but remain convinced of their infallibility and ability to overcome the laws of nature and economics.
That is just a subjective impression from a small sample. But a recent report suggested that it is not inconceivable that this level of over-confidence remains more widely in the financial-services industry. The Telegraph on Thursday reported that
"M&G, Prudential's asset management arm, has raised £1bn for a new fund that will provide loans to UK companies suffering from the collapse in bank lending. The UK Companies Financing Fund will enable pension funds and other institutions to lend directly to medium-sized businesses, who will be offered loans in the form of a bond with a minimum term of five years."
Of course, there is a benign interpretation of this. Maybe there are a lot of medium-sized companies who remain rock-solid despite the downturn, but who cannot persuade the banks to lend to them, for instance because the banks are rebuilding their balance sheets and therefore simply do not have enough free capital to lend to all viable borrowers. But is it really the job of pension funds to lend (albeit indirectly) to medium-sized businesses who cannot persuade banks, who would normally specialize in this sort of loan, to lend them money? It might seem to offer attractive yields, which may be very attractive to pension funds struggling to meet their obligations from a pot whose value has been significantly reduced and against a background of falling earnings and dividends. But is it really an appropriate balance of risk and reward for pension funds to pursue?
Can one assume, if a company was profitable in the boom before a bust, that it will probably return to profitability if it can raise the finance to see it through the downturn? Or might some of these medium-sized companies have unsustainable business models that only appeared to be viable in the artificial conditions created by the boom? Here is a hint from the same report that some of these medium-sized companies are at least having trouble rolling-over their existing loans:
"Bernard Abrahamsen, director of fixed income at M&G, said the fund could also be used by companies to refinance existing loan facilities but would not provide a bail-out for struggling businesses."
I am glad Mr Abrahamsen is able to distinguish clearly between the solid and the struggling businesses that need to refinance existing loan facilities. Others have not enjoyed such 20:20 vision in the fog of uncertainty that has lingered since the Credit Crunch began.
It will probably all work out OK in the long-run. But it would be better if pension funds were not relying on things probably being OK. Those who are relying on the income from the pension fund will want it definitely to be there, not probably.