Sunday, 18 August 2013

Abbott's infrastructure vision

The election ritual certainly reinforces a belief in cargo cultism. On his latest flying visit to Hobart Tony Abbott promised $38 million to help upgrade the Hobart Airport, sold as a much needed upgrade of a public facility, but in reality a bail out of a badly managed private consortium.

The airport is owned and operated by a Macquarie Bank managed syndicate which acquired it from the State Government in 2008. Any upgrade should have been easy to organise without government assistance were it not for the highly exploitative terms imposed by Macquarie which has seen most of the earnings diverted to financiers and paper shufflers leaving  the business without sufficient funds for capital improvements.

Mr Abbott conveniently ignored the larger and more pressing problem of Bass Strait shipping costs and Port of Melbourne charges in his desire to pick up votes in the Hobart based electorate of Denison and Franklin.  

Macquarie as a manager of assets is not fussed if the purchase price is too high. In fact it welcomes higher prices as it means higher management fees. The State Government as seller of the airport in 2008 expected to receive between $85 million and $100 million. Adele Ferguson in The Australian on 5th July 2007 suggested a price between $117 million and $140 million was possible. Macquarie paid an unbelievable $352 million. Syndicate partners contributed $200 million in cash and borrowed another $175 million.

Almost all borrowings were hedged via an interest swap agreement. In other words rates were fixed at the prevailing 2008 levels for 15 years. Quite astonishing.

Revenue in 2012 was $31 million and expenses $11 million leaving an EBITDA of $20 million. EBITDA is earnings before tax, interest, depreciation and amortisation and in this case before management fees to Macquarie. In this instance it is essentially the amount of cash generated by the business. Depreciation of $4 million and interest costs of $13 million reduced the profit figure to $3 million. Macquarie then removed 75% of the remaining profits with a management fee of $2.2 million reducing profit to under $1 million. The management fee is based on gross funds under management, a paper shuffling fee rather than a performance fee based on profits.

But there was worse to come.

The interest swap agreement is a separate asset. If one wants to bail out of a swap agreement when interest rates have fallen then it will cost. The present value of future swap payments increased by $37 million to $71 million at June 2012. This means there was a further hit to profits of $37 million in 2012 and at June 2012 the estimated cost to bail out of the swap agreement was $71 million.

Therefore with gross revenue of $31 million the net accounting loss was $36 million. Quite an achievement for a monopoly provider of a few buildings at the end of a bit of bitumen.

Borrowings increased to $208 million by June 2012, which together with the associated swap liability totalled $280 million. (Borrowings were due to be renegotiated in January 2013.The outcome is not publicly known at this stage).

Since acquisition over four years ago, new borrowings have been required to fund all new capex, only $1.5 million returned to owners as dividends, three quarters of the operating cash flow appropriated by the financiers by way of interest, management fees and swap payments with the balance needed as part payment to financiers to remove the onerous obligation of a 15 year swap agreement with 10 years to go.

It’s been nothing but a fee feast ever since advisers and consultants extracted $15.8 million to arrange the sale/purchase in 2008, more than one year’s earnings.

There are two syndicate members. The Macquarie run Global Infrastructure Fund III floated in 2007 just as the Macquarie model started to wane, is a closed fixed term fund due to be wound up in 2017. It owns 50.5%. RBF, the State’s superannuation fund for public servants, owns the balance.

The price paid for the airport was 27 times EBITDA, more than twice what others were prepared to pay.

RBF could have owned 100% of the airport for the same outlay with half the debt if they hadn’t been mesmerised by the sharp suits from Martin Place. Financiers locked in a 8% rate of return. It should have been RBF locking in a return rather than bearing all the risks.

If the going rate for an airport is 15 times earnings then based on 2012 earnings it is worth $300 million. With borrowings and swap commitments of $280 million, the equity is only $20 million, a 90% reduction on the initial $200 million outlay.

Overpaying for the airport was a windfall for the State Government which used the proceeds to finance its way in the wake of the GFC without having to borrow. The general government sector in Tasmania is largely debt free. Government businesses are the ones loaded to the gunwales with debt.

Overpaying by RBF has caused rumblings of discontent amongst members and by tenants and users of the airport unhappy with the fees charges and facilities resulting from a cash strapped operator.

Fund managers and privatisation spruikers are continually lobbying governments to dispose of infrastructure assets as their coffers are continually overflowing with superannuation guarantee contributions with nowhere to go. Shuffling the ownership of existing assets merely inflates asset prices.

It’s a bit rich however for assets once privatised to be propped up by governments merely because of greed mismanagement and an overleveraged inappropriate structure.

Election time unfortunately is not a time for a sensible public policy debate about infrastructure.

1 comment:

  1. It's a pretty good shell game because an airport, even when privatised, still looks like public infrastructure. So a politician comes along during a campaign and promises to 'upgrade' a public facility can hold up his pledge as nation building rather than wealth transfer.