Sunday, 24 August 2014

Selling public monopolies

The campaign to sell public assets continues, in Tasmania's case the electricity assets, maybe MAIB , the water assets although they're owned by Councils, and who knows what else.
The Age’s Michael West wrote a crackerjack article at the weekend re the NSW government’s plan to tender out operations of Manly ferries to a monopoly provider.

Currently two private operations run the show altho’ most of the assets and infrastructure are still owned by the government.

“Some may question how scrapping competition and bestowing a monopoly upon one operator could possibly be good for consumers. Not this correspondent.

We now know that our overlords have embraced an economic theory so radical, so visionary, that nobody else has thought of it yet.

Until now, traditional economics has had it that competition encourages businesses to compete for customers. There are two ways in which they compete: quality and price”

He goes on to say:

“The state appears to have gleaned inspiration from its federal government peers who have a penchant for delivering their citizens’ belongings into the warm embrace of monopoly operators.

Sydney Airport for instance, again named the worst airport by the Australian Competition and Consumer Commission this year, also enjoys the first right of refusal over Sydney’s second airport. A double monopoly with cream.

To be fair, Sydney Airport has delivered a handsome return for some taxpayers; those who are also directors of corporate entities in low-lying Caribbean islands, own shares in the airport trust and do not have to pay tax.

As for the incessant complaints, service levels at Mascot are at least on par with Toncontin International Airport in Tegucigalpa, Honduras..”,

Reminds one of Hobart Airport. What has privatisation achieved there?. In the first 5 or so years of trading the business generated $90 million of operating cash before finance and capital costs but the financiers and promoters extracted $173 million in fees and charges necessitating extra funds by the partners and a $38 million cash offer by Tony Abbott to finance runway extensions. Poor service and the escalating costs complete the report card. Hardly a ringing endorsement for privatisation of a monopoly asset.

The privatisation of Tas Rail was even more of an unmitigated disaster. A complete rundown of the assets stopped only when the government agreed to pay the ransom demand to return the asset to public hands.

Yet the push to sell our remaining assets, currently being resisted if one can believe the Treasurer, continues. Economists and commentators overlook that selling government businesses as suggested by Joe Hockey when he offered a 15% premium on the sale price, will result in a halving of the State’s balance sheet. With such a radical proposal one would have expected some comment on what the pro forma financial statements will look like after the sale. With a greatly diminished balance sheet and reduced cash flow, just exactly what will the income statement look like in 5 years?? Most likely there won’t be a State in 5 years if the state sells its remaining businesses.

The privatisation push, although couched in terms of the promotion  of economic efficiency is little more than a thinly veiled attempt by banks and fund managers as members of the rentier class to get their hands on assets with regulated if not guaranteed returns thus ensuring that when the national pie is split they get a bigger share. It’s not about efficiency . It’s about self interest of a few.

What asset will be next?

What about city car parking? What’s the revenue from Hobart’s parking? $18 million? Surely an investor would pay a decent multiple to the Council to run the show for a while? 10 times? 15 times?

One of the all time classic public asset sale was the sale of Chicago’s 36,000 parking meters, or more correctly the sale of the rights to income from the Windy City’s parking meter revenue for 75 years. Matt Taibbi tells it best:

Readers of my last book 'Griftopia' might recall a chapter about the city of Chicago leasing 75 years of its parking meter revenue to a coterie of private investors, some of them from the Middle East. The end result was and is a political obscenity: Native Chicagoans are now completely at the mercy of private interests when it comes to parking rates, collections, even holidays. When elected officials in Illinois can’t shut off the parking meters on Abe Lincoln’s birthday because a bunch of sheiks in Dubai don’t want the revenue stream turned off even for a day, you know something has gone seriously sideways in the national body politic.

He goes on to say, referring to the possibility that New York was considering the same deal:

A New York parking meter deal, like the Chicago deal, would be a perfect example of the deeply cynical short-term thinking of many American politicians these days. These deals involve a sitting executive selling off a valuable piece of city property at a steep discount to private financial interests (often, to friends or campaign contributors), in order to solve a current cash flow problem that, surprise, surprise, will still be there the year after you finish spending the proceeds of your sale.
In Chicago’s case, Mayor Richard Daley sold 75 years of meter revenue – worth an estimated $5 billion – for $1.2 billion. So he gets 20 cents on the dollar for the city’s parking meters in 2008, and then in 2009 the city still has a budget problem that’s now worse, because there’s no parking meter revenue anymore, ever. Meanwhile, a bunch of private investors rounded up by Morgan Stanley – these bankers go on road shows here at home and abroad to places like Geneva and the UAE to hawk discount American infrastructure to foreign billionaires and sovereign wealth funds – get to enjoy the fruits of raised rates. In some Chicago neighborhoods, the meter rates went from .25 cents an hour to $1 an hour in the first year of the deal, and then to $1.20 after that.

Meanwhile, whoever gets to own all of those meters will now be sitting on the ultimate investment. You get all the certainty of tax revenue, but you don’t have any of the accountability attached to public governance. It’s profit without risk, customers without responsibility. Cash now!

That just about sums up privatisation of monopoly public assets. The end of the State will be assured if it occurs.


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