Since the National party moved into the Beehive back in 2008, mining has been a contentious issue. The government, looking for ways to mirror Australia, as well as speed up economic growth, focused on upscaling the mining industry. We have plenty of coal in country and, possibly, major reserves of oil and gas offshore. What’s not to like about that?

Well quite a lot really. Gulf of Mexico ring any bells? Like Chernobyl and Bhopal before, major industrial accidents can have long-term, catastrophic consequences, as well as immediate costs measured in human and economic cost. Offshore drilling carries huge risk and major negative downstream effects if it goes wrong. Onshore mining, on the other hand, is supposed to be plain vanilla these days. Apparently it’s a little like rolling up a cricket wicket and re-laying it when you’ve dug out a bit of sub-soil.

It’s safe, clean and you end up with an environment, which is as good as, if not better, than before. I was told that by the Assistant Head of Global HSE at Rio Tinto back in 2000. Actually it made sense to me…if you contain all the possible polluting effects, run a safe operation and remediate to very high standards…that could work. Perhaps that culture hasn’t quite made to to NZ. Judging by the poor practices at Pike River, one would have to ask serious questions about the management of mining in NZ. This has been reinforced by the recent shutdown of the Solid Energy mine at Spring Creek.

So I’m waiting to be convinced about this new world of clean coal and safe extractive practices. However, whilst I’m waiting, I’d like to suggest another way forward. Given that we do need certain commodities to be extracted, we need to create a risk structure that allows for exploration but with a precautionary approach. In other words, extractors must pay their way and do so in a manner that reflects the worst case scenario, such as the BP Gulf of Mexico disaster. So far BP have set aside a $20b fund for settling claims, of which $7.8b has been currently allocated. It’s an extreme event but an example of how badly things can go wrong when operating in sub-optimal conditions.

It’s time to explore environmental contingency bonds, as a way of mitigating risk and ensuring that insurance is in place before the extracting activity takes place. Just as someone renting a house has to pay a bond up front, to ensure any potential damage is covered, so do extractors have to pay an upfront amount before they start work. This upfront risk adjusted payment would be used to purchase government bonds (supposedly risk free!) or similar risk free asset, for the duration of the extractive activity. If, at the end of the activity period, there are no adverse effects, over and above what may have already been applied for, then the money is returned (plus any interest) to the extractor.

There are several consequences to this approach:

- This may increase the cost of extraction (though, in reality, this is simply a financing cost, assuming no damage occurs).

- This may spur companies towards better risk management and remediation processes. If they get it wrong, they pay. The onus of responsibility falls on the extractor and not the taxpayer and/or local community.

- In some cases, the sum demanded by the rental agent (usually the government) will be too high for the extractor to bear and this may result in the proposed project not proceeding. This isn’t necessarily a bad thing, as the priced risk is considered to be too high. An example of this may be drilling for oil in the Arctic or the new trade of the day, fracking.

How will the bond be priced? Each industry will have a different risk factor, which will be based on previous data….for example, offshore oil drilling and onshore coal mining have very different risk profiles. It’s important to note that this is not an insurance payment but a full cash upfront payment. The extractor may, of course, wish to insure their own risk on having to forfeit the bond but the important point here is that the government holds the cash and can move into remediation action as soon as any damage occurs. As we have seen with numerous disasters, insurers and re-insurers are difficult to deal with and can lock up claims for many years.

Remediating and risk management plans are great but for business, paying cash up front against possible mishaps will certainly concentrate their focus on doing the job properly and without harm. The public will be happier knowing that extractors are having to pay upfront and that they will, therefore, do their utmost to ensure their activities are not polluting, harmful or dangerous. Governments will be happy knowing that they have the cash in the bank, just in case anything does happen. The extractors? Well they probably won’t be happy at the extra cost but according to them they will leave the place in a better condition than they found it. So really they have nothing to worry about at all.

People are always asking me where to put their money so I thought I would do a simple post about it. I should add this is simply my own opinion and you should really check with a financial advisor…………tongue firmly in cheek!

Let’s start with the obvious. There is no such thing as a risk free investment. Even sovereign bonds (those issued by governments) can turn into wallpaper….look at the US Treasury market now, the world’s safest place to park your cash. Ultimately it’s just an IOU, generally backed by commodities or in the case of the US by a fairly large military and lots of nuclear rockets.

Having got that out of the way the first question you need to ask yourself is why am I investing? Is it for regular income or the hope of generating a huge pile of cash for future income generation (retirement for example).

Let’s start with the income piece by looking at what is available:

- Cash deposits.

- Term deposits.

- Government bonds.

- Corporate bonds.

- Shares that pay dividends.

- Property.

Generally, as in all things, you pay for what you get. The main issue any investor should consider before making an investment is liquidity:

How quickly can I get my cash and what will I have to pay to get it?

As many investors found to their cost in recent years, liquidity is the single most important issue.

Which draws the question: is there a market for my investment?

In the case of cash that is not a problem (actually that’s not true but for the sake of this exercise we will pretend that cash is always available – see Northern Rock for further details).

Stocks can generally be sold on the spot and cash received quickly (of course stocks can be suspended at anytime which means you can’t trade it, well not on the exchange).

Bonds have a market you can trade on but liquidity can be an issue sometimes.

Property you can forget. That’s a highly illiquid asset.

Managed funds as we see all to often can be very hard to get out of and the fees can be severe. If the fund holds any kind of assets other than plain stocks then redemptions may force suspension of the fund (we’ve seen that).

Baring all that in mind cash seems like the best place to have your money if access is an issue and you are risk averse. Second up would be quoted shares with high liquidity (shares on the major index e.g. Telecom in NZ which pays a good dividend). Bonds would be next and then managed funds and property bringing up the rear.

Anything that offers these with a twist is to be avoided unless you’re a professional. Like guaranteed capital return plus 100% of the 5 year blah blah return on some index. Avoid. There are huge fees and margins built into what is a simple option structure.

I’m sorry but there’s no free lunch in the investment world. But it’s very easy to lose money or receive poor returns whilst paying out large fees and charges.

My advice is start with cash and spend some time learning about basic stocks and bonds. Believe me it is not difficult.

Armed with a little knowledge most people could construct a portfolio of cash, stocks and bonds in a few hours.

Also don’t be lulled into the idea that you are a long term investor and won’t be pulling down the cash for 20-30 years. Look at how fast the world is changing…….planning that far ahead may not actually make much sense.

As with most things in life, keeping it simple can pay off. Also spending a little time learning about investment can save you a lot of money as well as enabling yourself to take charge of your own financial destiny.

As the credit crunch continues to spreads its woes my inbox is filling up with offers from NZ banks (all Australian owned by the way) to buy various types of debt with fabulous names:

- Perpetual non-cumulative preference shares

- Perpetual callable sub-ordinated bonds

All offering north of 10%. A no brainer for bank debt surely?

Well yes it is. Let’s face it if the bank goes belly up we’re all stuffed. How much is deposit insurance worth these days? Probably not much. But the reason behind this rush of issuance is more interesting.

Banks have plenty of cash on the books, known to us as our deposits, but recorded as unsecured liabilities in the bank’s balance sheet. Yes we are not really depositors but merely unsecured creditors.

So why do banks need to raise more debt or more to the point equity dressed up as debt? Well their balance sheets are under severe pressure and they need to meet the requirements laid out in Basel II which means they need more equity on the balance sheet in order to lend out all this cash.

This is not good news at all. It means banks are constantly trying to tidy up their financial position which is tenuous at best.

In the US mortgage backed bonds, normally AAA, are trading at their widest against US treasuries since 1986. There is some serious de-leveraging going on even in the most liquid and traditionally safe markets. This is a harbinger of further losses to come. Many players are now starting to realise that the financial system is in structural distress.

Suddenly owning a few dairy cows seems like a sensible investment.

Local cities and states have finally woken up to the way in which they are systematically fleeced by the rating agencies. Bill Lockye, the Californian Treasurer, is leading a campaign to change the way in which their bonds are rated.

Often they are rated poorly which then requires a nice fat insurance payment on top. This simply transfers more taxpayer funds to the financial sector.

Ok so it’s just another racket but what I like about this is the awakening from local financial institutions and the realisation that they can do things a bit differently.

What is to stop local governments from issuing their own bonds to their own people for local projects? Take that a step further and what’s to stop them from issuing their own local currency.

The current crisis is helping many people to see through some of the smoke and mirror charges imposed in the course of financial transactions and the system is becoming more transparent as “special purpose” structures and entities are revealed to be nothing more than methods to add on commissions and fees as many times as possible.