Friday, 17 March 2017

Tas Water: Where's the money coming from?

Where’s the money coming from?

That’s the problem facing Tas Water irrespective of who might be running it.

For starters there’s $2.5 billion of surplus cash sitting on Tascorp’s balance sheet earning 2.6%.

Tascorp always borrows more than it needs to lend to its customers, mainly government businesses.  It is paying an average rate of 2.9% to its lenders and earning an average of 3.9% when it lends to government business.  The margin helps Tascorp earn a small profit and to cover the cost of holding surplus cash.

About $3.6 billion is currently lent to government businesses. At 30th June 2016 Tas Networks owed $1.75 billion, Hydro Tasmania $900 million, and Tas Water $430 million. The rest are an assortment of smaller loans headed by Utas with about $100 million owing.

Having surplus cash earning less than the costs of borrowings might seem a bit odd but Tascorp tries to minimise refinance risks over a long term.

The only businesses that are lent money by Tascorp are, needless to say, those that can service the debt. Currently the government itself doesn’t have any long term borrowings with Tascorp. If it needs money it arranges for one of its subsidiaries, the government businesses, to borrow. It then extracts the new borrowings via a dividend, a special dividend or an equity drawdown, either to prop up its own spending or to invest in other businesses that can’t afford to borrow, like Forestry Tasmania and Tas Rail. Tas Racing is an exception to the rule, as it is to most rules. Tascorp lent it money which it can’t afford to service leaving the government to pick up the tab for both principal and interest.

For years Hydro held pride of place amongst government businesses. Even though the only new generating facility built in the last 25 years is a 25% interest worth about $60 million in a highly geared business which owns Woolnorth and Musselroe wind farms, it still has borrowings of almost $1 billion.

That’s because government has used it as a source of working capital for itself and other government businesses.

For all intents and purposes Basslink, when it works, is an integral part of Hydro’s generation assets, so if the amounts owed in respect of Basslink over the next 14 years of the contract are included with borrowings, the total debt in respect of its generation assets is about $1.7 billion.

The government needed another source of working capital, a government business that could service extra borrowings. Tas Networks which started life as Transend with no debt soon got into the borrowing habit and then got lumbered with Aurora’s debt when it took over the latter’s distribution network consisting of poles and wires.

It became the obvious target of attention as it still had a bit of spare borrowing capacity which successive government soon rectified. Borrowings increased and were then stripped out as dividends with equity withdrawals and transfers complementing the clean out. Its current debt of $1.8 billion is as high as prudence dictates, especially as the Australian Energy Regulator has already indicated in a draft determination which covers the next five year pricing period, that allowable fees and charges will be less than Tas Networks expected.

Hence the two geese that have been providing golden eggs over the past few years, Hydro and Tas Networks, will be off the lay for a while.

Premier Hodgman has overstated the State’s strong fiscal position as a consequence of his reign. If one overlooks the $80 million transfer from TTLine, which counts as government income, and the fortuitous windfall of $233 million over the forward estimates due to changes in the Pharmaceuticals Benefits Scheme which flows through as income to the Tasmanian Health Service, most of the triumphant surplus disappears. 

If the government had to set aside 9.25% superannuation every month for the one third of public servants in the old defined benefits scheme as it does for the other two thirds of employees in accumulation funds, it couldn’t. That’s hardly a sign of financial strength.

Tas Water as currently configured is not up to the challenge. Its owners are a rabble. It was remiss to keep borrowing to pay dividends and plunder all the profits while sitting on a list of projects as long as any wish list Santa will receive.  Councils continue their errant behaviour in the safe knowledge someone will eventually bail them out. Moral hazard is alive and well.

One possible advantage of the government running the show and capping any amounts paid to councils in lieu of tax equivalent payments, dividends and loan guarantee fees means the rabble is prevented from raiding the cookie jar. If the new GBE has to pay any of these amounts pursuant to national competition rules it will end up in the government’s hands. Even if Tascorp charges a small margin on the amounts lent to the new Tas Water, as it is probably obliged to do, any of Tascorp’s profits quickly find their way back into government coffers. It’s a much neater  and cheaper operation, more streamlined from a funding viewpoint and it will enable a much higher level of borrowings to be serviced with not too much pain.

When the major upgrades are complete, if Tas Water remains with its current owners, one thing that’s likely is any increased profits will flow to the rabble instead of used to reduce debt. It’s much easier to assert an entitlement to a commercial rate of return if one is an arm’s length shareholder. Most people have no idea how Tas Water operates and owner councils haven’t exactly been a source of enlightenment.

If Tas Water under new ownership was structured to provide a balance between maintaining services, keeping the plant in order, reducing debt rather than paying dividends and prohibiting the use of the business as a working capital cash cow like successive governments have with Hydro and Tas Networks, we may have a model that will work and serve the people.

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