Hobart Airport: A cautionary tale

(As published in The Mercury 15th January 2016 here )

One reason for privatising public infrastructure like the Hobart Airport was the private sector is better at running airports than governments.

So we were told.

The performance of the airport in the eight years since it was acquired by a Macquarie Bank managed syndicate casts doubt on that proposition as many airport users will testify.

Annual financial statements confirm plundering by fund managers and financiers on a previously unimaginable scale to the detriment of the business, a vital cog in the Tasmanian economy.

The latest financial statement for 2014/15 show cash flow is positive at last, the long awaited Federal government bailout of $38 million has started to flow and much needed improvements are under way.

Why did a private syndicate need a handout? Why not contribute more funds or take on a partner just like any other business? It’s got a 99 year lease, plenty of time to invest and make a return?

The syndicate paid far too much for the business. It chipped in $200 million and borrowed $175 million, fixing interest rates at about 8%.

The previous owner TasPorts operated with borrowings of $45 million.

For the first five years interest plus fees to Macquarie meant the operation was unprofitable. There wasn’t enough cash to do all the required maintenance let alone undertake capital improvements.

At the end of five years borrowings had grown to $209 million. Interest rates were crashing but the syndicate was still paying 8% on the original loans. Not fixed for a year or two, but for 15 years. With ten years still to go the syndicate bailed out of the fixed rate deal. It cost them a staggering $74 million, roughly four times annual net profits before interest at the time.

Syndicate members had to put in another $132 million to pay the bailout fee and reduce borrowings to a more manageable $158 million.

Dividends of $16 million have been paid to syndicate members, but not from profits because there weren’t any. They were discretionary payments, most shamelessly made knowing a government bailout was imminent.

Total dividends have been similar to ongoing management fees paid to Macquarie to perform a bit of paper shuffling for the syndicate’s holding company. Macquarie had no interest in a low purchase price. Their ongoing management fee is based on the syndicate members’ initial contributions.

The more the merrier.

Further fees totalling $20 million were paid to structure the deal, to negotiate the inflated purchase price with TasPorts, arrange initial finance and refinance the mess after five years. This is more than one year’s net profits before interest.

It’s been a fee smorgasbord.

Airports are attractive assets .They have steadily increasing revenues with good margins. Rent seekers are always trying to get a piece of the action. But financiers overstepped the mark in this case.  Over the first five years, for every $1 in operating cash generated by the business, financiers grabbed $2.

Additional equity from syndicate members prevented disaster. Ideally this should have funded capital upgrades rather than financiers’ demands .Taxpayers shouldn’t have had to bail out the airport due to the actions of financiers. If there was no alternative it should have been a loan not a handout?

The syndicate comprises two small Macquarie funds owning 50.1% and the Retirement Benefits Fund (RBF) with 49.9%.

To date RBF has contributed $166 million and received a return of $8 million over 8 years. The investment is valued in RBF’s books at $130 million, 2.4% of total assets. Apart from cash it’s the largest single investment in RBF’s portfolio.

RBF will be demerged during 2015/16 with the accumulation funds comprising 65% transferring to Tas Plan. The remaining 35%, contributions plus earnings of defined benefit fund members, will remain, albeit with a different management structure.

A difficult decision awaits RBF-- how to divide RBF’s assets, in particular where to allocate the airport investment? Tas Plan mightn’t want half an airport run by Macquarie. If retained by RBF it would represent over 7% of total assets, an imprudently high proportion.  Nevertheless this is probably the most likely. It will mean all risks with the airport investment will be with the government as it has to fund any shortfall for defined benefits funds.

Strictly speaking the decision as how to split assets is one for the RBF Board. The government has no say.

The government has just increased the amount it contributes to meet its unfunded superannuation liabilities. It now contributes 80.5% to any new benefit payable by RBF. The rest comes from members’ funds referred to above. The government’s share of new benefits will increase each year by 2% until it reaches 88.5% in five years time. Increased government contributions have attracted remarkably little public comment. One determinant of the government’s percentage is the earnings on funds contributed by members. When the fund was first established the share was designed to be five-sevenths or about 71%.

A further problem may soon arise if the 50.1% share owned by Macquarie funds is sold. It has been expected these closed funds with a finite life of 10 years will be wound up in 2017/18.

RBF/government may get a new partner? It may even buy the share rather than remain a minority member subject to the rapacious behaviour of the fund manager? It’ll be a travesty if the purchase price is higher due to government funded improvements?

The perils of privatisation have been known for a long time.

The First Fleet under the auspices of the British Navy lost only 40 convicts, out of 736, on a voyage which took 252 days.

The privatised Second Fleet outsourced to former slave contractors took longer. Of 1006 embarkees, 267 died at sea and a further 150 shortly after landing.

Had Macquarie Bank been involved they probably would never have made it past the Cape of Good Hope?

There are as many pitfalls as upsides with privatisations. It’s not all plain sailing.