Federal Hotels: End of a chapter

 

Federal Hotels’ 2012/13 financials confirm its cash flow struggles highlighted the previous year have continued and will only be resolved by a selloff of most of the regional tourist assets.

Revenue fell by $23 million to $497 million. An estimated 50% comes from gamblers.

In inflation adjusted terms revenue has shown little or no growth since 2006 as shown in the following graph.

Airport disaster averted

 

The Hobart Airport consortium (TGC) has survived another year, avoiding looming disaster by injecting more equity and offloading a sizable chunk of debt. The recently released 2012/13 financial statements have revealed how consortium members, including RBF with a 49.9% interest had to find another $121 million to refinance and reduce debt. Finance costs and management fees have strangled the consortium since inception. Dividends have been conspicuously absent in the past three years and capital expenditure dependent on more borrowings.

Hydro Tasmania: The fall guy?

 

Imagine a company taking over another company with a book value of $89 million ($346 million worth of assets less $257 million worth of liabilities) and just a few weeks later the Directors revaluing the assets downwards by $227 million and the liabilities upwards by $108 million and announcing the CEO was leaving as “the time was right for a change to take the business through its next phase and to provide long-term stability to the organisation”.

That’s what happened in June 2013 when Hydro Tasmania (HT) took over the Tamar Valley Power Station from its sister company Aurora Energy and CEO Roy Adair left shortly thereafter.

MIS scams uncovered

Legendary bank robber Willie Sutton was a clear thinking sort of guy. When quizzed as to why he robbed banks, he replied that’s where the money is.

Had he been born 80 years later Willie could well have become a MIS promoter.

The ATO’s first attempt to impose civil penalties on tax scheme promoters has seen two taxpayers, Ludekens and Van de Steeg, hauled before the courts.

The tax scheme involved Gunns’ 2006 MIS woodlot scheme. Normally the MIS company is considered to be the promoter but in this instance the scammers interposed themselves between Gunns and the grower/investors. This is what made the case slightly unusual. The complexity of the alleged scheme makes the court decisions inaccessible for a lot of readers. The first hearing in Sept/Aug of 2012 before Justice Middleton of the Federal Court who handed down his decision in March 2013 found against the ATO but before a full Federal Court, in August 2013 the ATO successfully appealed.

Debt money and QE:Lessons from the GFC

 

 

The Debt fallacy examined the question of government debt and the budget surplus mantra from an accountant’s perspective.... where there’s government debt there must be a corresponding asset in private hands and if governments run surpluses then the non government or private sector has no option but to run deficits implying more private borrowings or a rundown of private financial assets. Debt (specifically borrowings of the Australian government) is issued via IOUs or government securities and appears as liabilities on the Australian government’s balance sheet. Notes and coins are also government IOUs but these appear as liabilities on the Reserve Bank (RBAs) balance sheet. Since our currency is now longer convertible (into gold say) the only payment one will get for a note is another note.

The aim of this blog is to have a closer look at debt and how it reconciles with the money supply. We are constantly bombarded with concerns about ‘money printing’, but how exactly is money created and by whom? If one were to take a quick street poll as to who creates most of the money in our economy, the answer would be the government does, and it’s delivered round the community in Armaguard trucks. However it doesn’t work like that and it hasn’t for quite a while.

The debt fallacy

It’s not only refugees who are about to swamp us but also governments debt. The need to return the federal budget to a surplus is an article of faith by every politician running for office, all of the mainstream media and most economists. It’s only a question of how quick we proceed.

Are we being told the truth, the whole truth and nothing but the truth?

The alleged problem

A recent report on tax reform by PwC one of the leading accounting firms Protecting prosperity contained a preamble about why we needed tax reform, essentially to avoid mounting government debt. Australia’s challenge was summarised as follows.

After 22 years of continuous economic growth, Australia now faces the risk of falling incomes and increasing government debt. PwC estimates that the combined annual deficits of Australian governments will rise:

·        from $27.4bn (1.9% of gross domestic product [GDP]) in 2011-12 to $213.5bn (3.5%) by 2039-40and to $583.1bn (5.9%)by 2049-50.

And our governments’ debt levels as a proportion of GDP will rise:

·        from 12.1% in 2011-12 to 32.9% by 2039-40 and to 77.9% by 2049-50.

These trends are unsustainable as the population ages. Australian governments risk not being able to meet the key needs of our community and a further slide into debt.

Airport gravy train

As we saw with the Hobart Airport HERE, the Macquarie syndicate which included RBF with a 49.5% interest paid too much, which meant after locking in interest rates there was insufficient cash to fund capital upgrades.

Hence Abbott’s offer of a bailout.

Sydney Airport’s spare cash, $700 million was the latest annual figure (this compares to Hobart’s $20 million) was similarly diverted to financiers and managers. Were it not privatised in 2002, by now it would have tipped $1 billion into Commonwealth coffers. Michael West in The Age has posted two excellent articles on how the Macquarie privatisation model has worked to shift money to the rent seekers.

The benefits of privatisation were ostensibly to reduce public debt. Instead we have even larger amount of private debt and returns to governments diverted to rent seekers. The practice also highlights the distortion resulting from the preferential taxation treatment given to debt financing vs equity financing. It is difficult to see why, in the case of acquisition of existing assets, this is desirable public policy.

Michael West’s articles can be found HERE and HERE.