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When have I ever said that what you do does not work or is not valuable? It's exactly the sort of banking as a valuable service that I advocate. But you are constrained - you say so yourself - by a shortage of capital.

You are making the classic conservative argument against anything new.

"Nobody will use it because nobody is using it."

Moreover, you are once again agglomerating development finance with long term finance when - as I have said at least a dozen times by now - these are like Chalk and Cheese.

Unitisation of existing assets - the replacement of secured debt with a new form of quasi equity thereby - is IMHO a killer application capable of changing the face of global finance through:

(a) Resolving the Credit Crunch - through refinancing unrepayable property debt;

(b) Financing the transition to renewables through unitisation of energy.

Development financing will take more time to evolve from the conventional debt/equity model, since it will require a change in the enterprise model, and a new approach to equity investment.

What unitisation of existing assets would do for you as a project financier is to free up your development credit for assets you wish to finance. In other words, to recycle your capital.

There is a huge pool of funding out there looking for direct investment in energy. Assuming that there is a suitable framework of trust, which IMHO requires a decentralised clearing union, rather than a centralised clearing house, do you think that the Chinese and Japanese (for instance) would rather hold T Bills or Units redeemable in payment for gas supplied?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 10:21:33 AM EST
[ Parent ]
is a fairly traditional tool in project finance. For instance, most of Gazprom's new pipelines are not financed on a standalone basis (that's still sen as too risky), but are backed by the revenue streams from existing pipelines and associated exports.

Structured commodity export finance is the same - financing collateralised by existing export revenues (which can then be used for further investment or for other corporate purposes).

During the bubble years of 2005-2007, project finance banks did try to recycle capital by creating CLOs (collateralised loan obligations) - effectively bundling portfolios of project finance assets and "unitising" them, ie creating securities against the portfolio of revenue streams from these projects.

The market for that is dead due to the crisis, but I peronally think it's dangerous: one of the reasons project finance is safe is that banks keep the paper on their books; if they begin to be able to dump it on other investors in ways that are not completely transparent (why care about specific clauses in a deal if  that deal represents only 1/100th of the portfolio for the ultimate owners) - pushed to extremes, we saw where that went with CDO ABSs.

Where I actually fundamentally disagree with you is that in the peer-to-peer mechanisms, there isn't anyone to vouch - by having skin in the game - the quality of the underlying projects. By having banks doing the lending and keeping the assets on their books, you do have that quality control. And as we know, this is a vital service.


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 10:34:25 AM EST
[ Parent ]
Jerome a Paris:
Where I actually fundamentally disagree with you is that in the peer-to-peer mechanisms, there isn't anyone to vouch - by having skin in the game - the quality of the underlying projects. By having banks doing the lending and keeping the assets on their books, you do have that quality control. And as we know, this is a vital service.

Why can't everyone have skin in the game? God knows that this has been the default outcome of the current fiasco.

Bank capital is scarce, and a lot scarcer in fact than current window-dressing discloses. I have always thought that you are a long-standing proponent of the State's role in infrastructure ownership and development. Yet you are saying here - as I understand it - that it is for banks to provide the role of guarantor rather than end user producers and consumers collectively, backed by States.

I believe that the global markets in energy should be explicitly underpinned by producers and consumers  collectively and backed explicitly by international government agreement. This could be achieved through the creation of 'International Clearing Unions', which would be global agreements (not organisations!) underpinning the creation, development and operation of productive energy assets.

I agree with you that quality control is a a vital service, and that banks could and should be providing it.

I just don't see why banks - rather than market participants generally - should put their capital at risk in order to achieve this. Although I do believe that the income that bankers receive in respect of the use of their 'Human Capital' should be performance related to avoid moral hazard.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 11:18:32 AM EST
[ Parent ]
because these financial products are extremely complex and should not be bought simply on the basis of a rating. It takes a lot of analyst power to get comfortable with the underlying risk and such analysis should not be subcontracted.

Also, the lending group will need to take a lot of decisions during the life of the project, and project engineers should expect to be second guessed by a "parliament" of unknown investors who may or may not be available and who may or may not have the ability to understand what's at stake and what needs to be done. You need a small group of lenders managed by an agent who' able to do it job. Diffuse investors don't provide that. It creates very real operational risk, and I could give you several exemples from my recent projects where having to deal with more than a few other banks would have been a nightmare and would have put the project in serious trouble.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 01:13:49 PM EST
[ Parent ]
The question is whether or not the production to be unitised will be there or not, but that is what your job is all about.

If a project is 'bankable' then it is 'unitisable', but the converse is not necessarily true.

Clearly, the same issues of governance and quality control will apply in both enterprise models, but I suspect that in a partnership enterprise model the necessary agreements will be an order of magnitude simpler.

Which may not appeal to everybody involved.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 01:31:12 PM EST
[ Parent ]

 I suspect that in a partnership enterprise model the necessary agreements will be an order of magnitude simpler.

My professional opinion is that it will be the exact opposite. There are very good reason for the complexity, which comes from a thorough analysis of possible risks, available mitigation strategies, and eventual allocation.

And I say that as someone who has had to live with the complex project documentation I negotiated and was happy to enjoy its resilience most times.


f a project is 'bankable' then it is 'unitisable', but the converse is not necessarily true.

Again, my professional opinion is that it is the exact opposite. See my last point about agency roles. Dispersed "ownership" makes for decisions not to be taken when required.


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 02:24:41 PM EST
[ Parent ]
And yet 'dispersed ownership' will be the inevitable result of the technology we are using now. Have you not seen it in action already?

You, as a banker, provide a service - certainly in the analysis of risk, and, to a certain extent, the actuarial strategies. But from a societal POV, you are using the same methodology as would be used for a new sausage factory. The fact that the product you finance is 'good' is a coincidence. Or is it?

Putting together a movie or a TV series requires at least the same effort, disappointments, crassness, documentation, late night intensive sessions, and celebration of completion. We all work hard.

I've suffered the problems of 'dispersed ownership' in my dealings with Swedish companies. It CAN be exasperating. But it is also invigorating. It ensures that all views are heard.

Many of these 'views' are difficult to include. We elitists dismiss these views as anecdotal or irrelevant. They are, agreed, rarely fully informed. But they are the views of people who will be affected by the decisions taken.

It has been - prior to 1995 - possible to ignore the views of those who question the top-down nature of society and its subset, business. No longer.

Can I also add that you don't seem to read what people write. Chris Cook emphasised several times that air miles should be easy to understand as a meme, not that what he was proposing was equivalent to air miles. But no. Your argument was about the about the misfit of the analogy.

The technology that allows a French energy banker to start a very intelligent blog/forum is the same technology that will allow 'dispersed ownership'.

You can't be me, I'm taken

by Sven Triloqvist on Sun Jan 3rd, 2010 at 03:55:11 PM EST
[ Parent ]

The fact that the product you finance is 'good' is a coincidence.

That's the only part of all the above that I agree with.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 04:23:20 PM EST
[ Parent ]
Well, naturally ;-)

You can't be me, I'm taken
by Sven Triloqvist on Sun Jan 3rd, 2010 at 04:45:02 PM EST
[ Parent ]
Jerome a Paris:
See my last point about agency roles.

There is no principal and no agent in a partnership relationship.

Jerome a Paris:

Dispersed "ownership" makes for decisions not to be taken when required.

The ability to share risk and reward within a partnership framework enables the rights and obligations of the property relationship thought of as 'ownership' to be distributed simply and effectively in new ways.

Having been involved among many other interesting projects, in:

(a) drafting and implementing the detailed contract rules of a successful global energy exchange;

(b) clearing house provisions relating to default;

(c) cross border clearing relationships;

(d) the creation of a globally applicable market user agreement in the context of a 'Dot Com'; and

(e) detailed development of new market products and trading mechanisms;

I have some idea about complexity and resilience in contractual relationships.

I also have getting on for ten years' experience of developing simpler consensual ways of contracting which may not yet be familiar to you, but which are entirely familiar (say) to any Japanese businessman.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 04:48:22 PM EST
[ Parent ]
is that you do markets, that trade something that exists. Everybody is in the same position with respect to the underlying unit being traded.

The problem with projects not yet built is that they may end up not being built, or may end up being more expensive than expected. Someone needs to put up the money to build it, and someone may need to put up more money to get the project done. And production may be lower or higher than expected.

In other words, you don't actually know what you're going to be owning, and you don't know when you'll have it, and you need to know who will be taking decisions, and how, in the meantime.

Tell me who takes decisions in your mechanism, and how, during construction phase. Tell me who bears the consequences of such decisions.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 05:25:09 PM EST
[ Parent ]
I have dozens of times on ET distinguished between the risks during development, and the risks inherent in developed flows of production and/or revenues. I do not have - and have never claimed - anything approaching your experience in development finance, but I do have enough experience to appreciate a class act when I see one and am always pleased to give credit where it is due.

More power to your elbow, say I.

I have been involved in several partnerships involving the development of intellectual property, and have a couple ongoing in 'real' property (ie land development), with agreement in writing from a major municipality that they will invest 1.5 acres of prime land in what will be a multi-million pound development - if it comes to fruition..... I also have several potential 'proof of concept' partnerships in energy all small scale and most at a very early stage.

But that is irrelevant.

My point - which I made up-thread, again - is that the real prize lies in refinancing - through unitisation - existing developed assets, with a view to releasing equity in 'Rental Pools' and 'Energy Pools'

This unitisation and the resulting debt/quasi-equity swap is what will change the game, and create new asset classes - which is my thing, of course, as you observe above, but unfortunately you do not follow through on that observation.

Unitisation of your completed projects is capable of giving you more ammunition for your project financing.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 06:01:33 PM EST
[ Parent ]
I just don't see why banks - rather than market participants generally - should put their capital at risk in order to achieve this.

Amassing information costs time and money. By default, all participants operate with imperfect information, and having all participants amass perfect or near-perfect information in parallel would be hugely, ridiculously inefficient.

So you have to have a dedicated information-gatherer.

The dedicated information-gatherer has to be a neutral third party (because knowledge is power, and the role of refereeing based on that knowledge is power, and nobody within shouting distance of sanity wants to surrender that power to the other side of the table in a serious business negotiation).

The neutral third party has to put its ass on the line. Otherwise, it can just pull magic ponies out of thin air (see, e.g., Standard and Poor's, Moody's and their friends).

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

This is a point that your scheme will have to address: How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 3rd, 2010 at 05:26:53 PM EST
[ Parent ]
The function you describe is common to both a conventional intermediated transaction model and a partnership model.

But it's not possible for an agent to act as a fiduciary for both buyer and seller, and if acting as a 'middleman' counterparty, then there are two adversarial relationships to negotiate.

Whereas a development partner can often consensually agree with the other partners - with whom he is working as a service provider - a share in the outcome of a collective project. This is not difficult to document, but is not always possible because people are human, and expectations diverge.

My experience is that a partnership enterprise model is capable of delivering an agreement possible in no other way, but it's not a magic bullet.

JakeS:

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

The simplest way IMHO is to appoint a custodian of the project, of the fund flows, and of the purpose of the project. That does not make them a counterparty - merely a steward. Transparency to all stakeholders is essential, and indeed in everyone's interests.

JakeS:

How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

By making some or all of their income - which is essentially the reward for the use of their 'human capital' - contingent upon the outcome.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 06:25:10 PM EST
[ Parent ]

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