Sunday, 23 March 2014

Entitlements and ransoms

Reports about the end of the age of entitlement are greatly exaggerated.

Describing the handout as government assistance to upgrade vital public infrastructure masks the reality that it’s a bailout of a private company brought to its knees by the rapacious behaviour of the airport manager Macquarie Bank.

SPC Ardmona asked for $25 million from the Australian government for factory upgrading in addition to $25 million from the Victorian government and $90 million from its own coffers. The financial strength of SPC’s parent Coca Cola Amatil was a factor in the Australian government’s refusal to accede to SPC’s request.

The assistance offered the Hobart Airport will comprise the bulk of the funds required for the airport upgrade and overlooks the ability of managers to raise funds elsewhere, not to mention turning a blind eye to events which necessitated the bail out.

A Macquarie syndicate paid $352 million for the airport when it was privatised early in 2008, reportedly more than twice as much as the next highest bidder. Half the funds were borrowed via a 15 year fixed rate facility. Syndicate members contributed $200 million.

Macquarie wasn’t fussed about paying too much, it makes its money from management fees, financing and deal making.

The airport in 2008 was a modest affair, a turnover of about $20 million, cash earnings before interest of about $12 million.

In 2013 the airport’s turnover had shown steady growth to about $33 million and cash earnings before finance costs of $21 million.

Over the first 5 ½ years cash earnings totalled about $90 million.

Unfortunately this was nowhere near enough to cover the fees and charges of $173 million, almost twice the cash earnings for the period, organised by the paper shufflers from Martin Place.

Included were advisory fees at establishment, costs to arrange finance and refinance, monthly management fees, interest costs and a staggering $74 million as an early exit fee from the 15 year fixed interest arrangement due to the halving of interest rates.

New capex of $39 million over the period required further borrowings.

Crunch time came late in 2012 when syndicate members contributed further equity of $121 million, enough to cover the cash losses and reduce borrowings back to $158 million, only slightly below the level at the beginning of their misadventure with Macquarie.

Not quite enough however to cover the costs of a runway extension.

Fortunately a federal election beckoned and the battle for the hearts and minds of voters of Franklin, which includes the airport, and those in the adjacent electorate of Denison, made it easy to extract a $38 million promise from Tony Abbott.

Similar to the $16 million for Cadburys, now justified as essentially an investment in tourism infrastructure.

Privatising infrastructure was supposed to bring private sector efficiencies.

In a perverse way this has happened. The ruthless efficiency of financiers and investment bankers extracting fees and charges equal to twice cash earnings has been a peerless performance.

Privatising public assets especially those with monopolistic characteristics has less appeal in small states like Tasmania. There are limits which a monopolist can charge for Hobart airport services. Providers will choose not to come if they can’t pass on higher charges to passengers, who won't come if fares are too high. 

There are no guarantees a privatised infrastructure provider’s interests will coincide with those of the community it services.

A classic case of the same phenomena was a privatised Tas Rail which was allowed by private owners Pacific National to deteriorate almost beyond repair. As a vital piece of infrastructure holding the government to ransom and forcing it to reacquire the business at an inflated price was easy. Since then the Australian government and to a lesser extent the Tasmanian government have invested hundreds of $ millions into Tas Rail to keep it afloat.

The government may well end up effectively owning the airport. Macquarie Global Infrastructure Funds which own 50.1% of the syndicate are closed-end funds due to be wound up in 2018. The most likely buyer of their airport share is the 49.9% minority interest holder, the Tasmanian government’s Retirement Benefit Fund (RBF).

However RBF is a small fund by industry standards with a little over $4 billion under management. It is facing declining prospects as it’s not an APRA regulated public offer fund and therefore is limited in its ability to attract more members.

The second stage of a review of RBF’s future is now underway. The most likely outcome is that the newer accumulation part of RBF will transfer to another public offer fund leaving RBF with only $1.6 billion in funds in the now closed defined benefits scheme used to pay members’ share of benefits. The government’s benefits share, currently 75%, is funded out of consolidated revenue on an emerging cost basis.

The airport investment will almost certainly stay with RBF.

If RBF has to further acquire the remaining 50.1% airport interest in 4 year’s time from its partner it will do so at a value no doubt boosted by an expanded facility funded by the proposed $38 million Australian government assistance.

But it will be the Tasmanian government as implicit backer of the much smaller RBF that will effectively have to fork out to fund the purchase.

At that stage it will probably need another Australian government grant.


  1. The rich ripping off the poor with the explicit support of the State and Federal Governments. Now that is a good economic model. Go Tassie! Go Aussie!

  2. What Abbott and Hockey actually meant by the "end of the age of entitlement" was entitlements for the poor. Entitlements for the rich will be expanded and increased, including knighthoods and damehoods just to highlight the fact we are entering a new feudal age.

  3. Actually John can you tell us if there is any area of public administration in Tasmania that is working properly from a financial viewpoint, or are we just living in a complete and total basketcase? Tough question I know....

  4. Excellent analysis John. I would love to see this worked up and republished in the AFR as a "cautionary tale".

    You mention "New capex of $39 million over the period". CAPEX on what? The airport is poorly equipped in many respects - still no airbridges and covered walkways to the rental cars. What a way for an Australian capital city to greet visitors on a wet and windy night. You might as well have landed at Boggabri. Totally pathetic.