The Case for Public Ownership of Infrastructure
Disclaimer: This post is not designed to be a conclusion, but to draw attention to a few things that I feel have been overlooked in the media. I am not a natural writer, so please forgive the structure of this post – I just want to get my ideas out.
The term Natural Monopoly refers to industries where it often considered impractical to have multiple providers. Utilities such as Railways, Power Lines, Water, Sewage and in the past Telecommunications have traditionally been called natural monopolies, but more and more, we see these notions being challenged.
Technological advancements such as Fibre Optic cables and spread spectrum wireless communication have opened up Telecommunications to many competitors, and there are few people who long for the days of Telecom Australia.
The establishment of the National Electicity Market in 1998 and the interconnection of all Southern and Eastern States (every state except WA and NT) started paving the way for private participation in Electricity generation. In NSW, all generators are still publicly owned at the moment.
The other utilities, more or less, still fit the definition of natural monopolies.
Funding
Goverments have a great advantage in that they can raise money by issuing bonds. Government bonds pay lower interest rates than enterprise would have to pay if they borrowed the money from banks or issued their own corporate bonds.
Funds can also be raised by issuing new shares via an IPO, but it likely to receive a cold response unless investors are convinced that there are realistic earnings expectations.
Hence, it is significantly cheaper for a government to fund the construction of expensive infrastructure.
Indirect Profits
Privatised infrastructure can only make money through the direct operation of the infrastructure, i.e. by pricing electricity, water or rail tickets at a healthy profit that is considered acceptable to shareholders.
With public infrastructure under government ownership, the government can still make a net gain, even if the specific infrastructure operates at a loss. If the infrastructure enables economic and population growth, it will lead to increased taxation revenue.
For example, a new power plant could increase the productivity of miners who extract metals from ore (indeed, BHP’s Olympic Dam mine in South Australia is expected to consume half of the state’s supply following its expansion).
New railways could reduce transport bottlenecks, easing labour movement, reducing unemployment as people are more easily able to get to areas with opportunities.
Profitability
Private enterprise wants profits from day 1, or at least as early as possible. There is little incentive for private enterprise to expand infrastructure to an area that is not currently experiencing growth, or may not experience growth for an extended period – e.g. 10 years.
As we have seen here in Australia, Telcos have been reluctant to provide service in the bush and the government has been forced to consider legislation to compell them.
In fact, this can worsen an existing situation where people will move away from an area with poor infrastructure and increase the burden on infrastructure elsewhere, leading to urban sprawl, traffic congestion. As someone who enjoys the convenience of working in the Sydney CBD and having a short rail commute from the East, I would not jump at an employment opportunity in North Ryde, for which I would need to buy a car, fill it up with expensive petrol and maintain it.
Operation of Infrastructure
I am not sure what is the best way for infrastructure to be operated, but here are my thoughts:
Operate Publicly
This is where the government is responsible for everything, including hiring employees. One could expect all the associated problems traditionally associated with government ownership, such as low productivity work culture, and frequent threats of union action.
Lease out the infrastructure to private enterprise
Potential private operators would issue tenders to operate the infrastructure for a given period of time, and would be responsible for day-to-day operation.
The advantage of this is that a bad operator can be evicted and replaced. The disadvantage is that the private operator has low incentive to improve the infrastructure. Any expensive upgrades or technological enhancements would have to be approved and funded by the government.
Other Issues
In order for Public Ownership to succeed, the following would preconditions would have to be met
- We would need intelligent bureaucrats who know where to put the infrastructure
- The bureaucracts would have to perform a sensible Cost-Benefit Analysis to ensure that there is a net gain.
Examples of poor analysis – the NSW Cross-City Tunnel and the Airport Link for which ticket/toll prices were considered unreasonably expensive by Sydneysiders. They were only patronised by a fraction of the expected number of commuters, and both facilities have gone into receivership.
Public-Private Partnerships
If handled correctly, these could possibly work, but recent history have shown the State Governments to be have been incompetent negotiators working against their constituents. Both the the failed NSW Cross-City Tunnel and the Airport Link were Public-Private partnerships.
Privatisation is Not for Everyone
We’ve been hearing a lot about privatisation lately with the Iemma government’s determined plan to privatise the NSW electricity sector (Iemma powers ahead with electricity sale) despite widespread opposition within his own party.
I personally oppose the creation of private monopolies. Consumers realise no benefits from capitalism without the presence of healthy competition.
Another event took place that is likely to steer this debate further:
Today in the media, it was reported that the New Zealand government reached a $555 million deal with Toll Holdings to nationalise its railways. They were originally government owned, but had been privatised in the early 90’s under a previous government.
According to the article, under private ownership, the railway lines have been poorly maintained and many services reduced or cancelled, so the government saw no other option but to repurchase.
Bank Shares
Filed under: Business, Finance and Investment, Uncategorized
Earlier today, I was asked whether I thought Australian Bank shares are a good investment in current market conditions.
For the sector as a whole, I expect Capital Gains to be subdued for the next few years as our economy is slowing, interest rates are high and people are borrowing less (or paying back debts). Profit growth will be very small, however I do not expect any cuts in dividends.
For individual banks, the situation is not so clear. ANZ has been in the news due to having increased its provisions for bad debts, as well as the OPES Prime fiasco. NAB has also copped some flack due to exposure to the US mortgage crisis. SGB and WBC have done better, both reporting strong single digit earnings increases.
I am not going to make a call, but I can tell you how I would start my analysis – I would examine each bank to determine the proportion of income from each of the bank’s activities, e.g. Retail banking, business lending, wealth management/financial advice and others. Also, I would look at the proportion of income earned in Australia and the proportion earned overseas. I can then make my own judgement on the future prospects of each activity.
Commonwealth Securities provides research from Aspect Huntley on its website. The above information can be found under the ‘Analysis’ tab.
Be cautious about PEG estimates provided online. These are purely guesses made by the research company’s analysts. It is better to read each bank’s earnings guidance in their annual report and use your own critical thinking skills to see what assumptions lie behind them.
For me, banks are now an income investment, as they pay large, stable, fully-franked dividends. I have been holding ANZ and NAB since last year. Do not consider this a recommendation.
Registration enabled
Registration is now enabled. Once you register, you can comment on any article.
No Free Wifi for Sydney
Filed under: NSW News, NSW Politics, Sydney News, Uncategorized
ABC news has just informed that Morris Iemma has aborted the plan to provide free wireless internet access in the Sydney CBD and a few other areas.
I first read about this in MX in 2006, just before the election, and I knew the plan was total BS and a fake election promise to fool the naive.
‘Undervalued’ Capital Notes
Filed under: Business, Finance and Investment, Uncategorized
Someone I know recently went to an investment course conducted at an evening college.
The presenter pointed out a number of ASX-listed debt securities (often called Capital Notes) that are trading below their Net Present Value (NPV), by between 5-12%. I was asked for my opinion.
For those that don’t know what these are, these are much like bonds – they are normally issued by public companies, e.g. banks/insurance companies to the public in order to borrow large amounts of money, e.g. to facilitate expansion.
Each bond/note that is issued has a given face value, e.g. $100. They pay a certain interest rate periodically for the duration of their lifetime, i.e. 8% per annum for 10 years, after which the bond matures and the face value is paid back.
The underlying value of a bond at a given point in time is the Net Present Value (NPV) of its future cashflows. We take each pending payment (interest income and the face value paid upon maturity), discount them back to today’s dollars using current market interest rates and then sum them together to produce the NPV.
This is why when the RBA raises interest rates, the value of bonds falls, and if interest rates fall, the bonds rise.
OK, here’s a far better written explanation from Investopedia:
http://www.investopedia.com/university/advancedbond/advancedbond2.asp
OK, so does this mean that if a bond/note is currently being traded below its NPV, that it is a risk-free investment? The answer, as always, is in the fine print.
I checked out a couple of product disclosure statements. I noted the following:
- One product gave the company the right to indefinitely delay maturity of the bond.
- One product stated that in the event of the company getting into financial trouble, note holders would rank above shareholders, but below other debtors.
- Some have other conditions that make returns dependent on the movements of the company’s normal shares.
Such conditions may potentially pose risks and should be factored into your investment decision.
F*** the Macarena
In 1996, a horrible sonic plague was unleashed upon the world. By this, I mean the song ‘Macarena’ by Los Del Rio. The song had a few mixes and covers, but the most played release was the Bayside Boys remix.
I dislike it for the following reasons:
- The repetitive accompaniment consisting of maybe four notes tops
- It would somehow sneak into playlists at parties and get a crowd into a retarded synchronised frenzy
- The song’s lyrics teach women that cheating on your boyfriend is a cool and fun thing to do
- The outfits of the women in the video
- Having the two old guys (who wrote the song) in the video was clearly an afterthought
- The fact that after this was a hit, they came back for a second money grab with the “Christmas Joy mix” that replaced the English portion with snippets of Christmas Carols.
For those of you who dislike this song as much as me, I bring you “F*** the Macarena” by MC Rage, courtesy of Youtube. It’s hardcore techno (gabba) and apparently was a hit in the Netherlands. Good on ’em.
WARNING: Profanity – use headphones if at work
Oh, and if you really need to be reminded of the original:
