There is a Great Truth and a Great Myth about selling public goods like water companies, energy companies, hospitals, motorways, railways, schools and healthcare centres.
The Great Truth is that the private sector only buys if they can get it below market value, and the Great Myth is that the public sector always thinks it always sells above its market value.
There is actually another Great Truth about the above – bankers, lawyers, and consultants make a lot of money at the taxpayers’ expense with each deal, irrespective of success from the taxpayers’ viewpoint. That is a one way street for the public sector that hopes to win big time with these deals. Most of the time they would be better off holding on to their assets without doing anything, and they could always improve their financial position by managing the assets in a more professional manner.
The reason for these Great Truths and Great Myths is that private sector investors will never buy any of these assets unless they are very sure that they can make a profit, and that profit is seldom part of the public sector’s calculation.
In most cases, these investors will simply discount future cash flows from these assets to discover the price to buy. These cash flows will be based on the net income from the asset and this is simply the revenues less the costs.
The investor will want to reduce costs:
- He can reduce the workforce by sacking as many as possible, by employing cheaper staff, and by kicking out older folk, and
- He will want to reduce operating costs by cutting customer service, by reducing maintenance costs, and so on… The list will be quite long but they will do everything possible to improve “cost efficiency”. That means that the local community will see unemployment rise, a reduction in tax revenues, and much worse service… do not believe this at your peril.
The investor will also want to improve the revenue side:
- He will sell off as much land as possible and other assets that he does not need – asset stripping is fun…
- He will seek to increase tariffs as a top priority, and only invest if the there is a big financial advantage in doing so. Caruna and other transmission companies got permission to increase tariffs saying that they needed to invest in their transmission line “investments”. They got a 30% to 40% increase without making all of the investments!
- Another commonly used trick is to borrow a huge amount of loans for these investments instead of using share capital. These investment companies are usually highly leveraged. With super-low interest rates, these investors can show a big return on their investments and fool regulators into thinking that this is fine! This is what the electricity transmission companies like Caruna did so successfully. The public sector could also take advantage of these super-low interest rates, but the right-wing Kokoomus (the Conservative Party) are always moaning about too much public debt… austerity is better for the public sector but not for the private sector… they know where the money is coming from when the next election is around the corner.
Just take a quick look at the mining companies that raped the land by polluting it with their waste after the public sector granted them the right to dig up the valuable minerals below ground. These mining rights are also public assets that have been sold by the public sector well below their market price, which should have included the clean up costs, but did not…
Now we have been reading in the media how cash-strapped municipalities have seen their financial position turn bad because of Covid-19 and higher healthcare costs. Journalists have been interviewing investors who tell us that the municipalities can raise millions by selling their energy and water companies Nothing ever changes. The same stories were going around 10, 20 and 30 years ago with PPP contracts (Public Private Partnerships) and Privatisation!
Most all of them have produced excellent results for their owners who managed to do a deal or two, supported by their local bank and the big consulting companies. They were all natural monopolies that could easily increase tariffs of unsuspecting taxpayers. As soon as a new generation of young right wing political broilers arrive on the scene they see a bright new world where the private sector offers the win-win-win cliche to the media as the cure for all of our ills… Don’t believe a word. It is about as true as the daily utterances of that President who once held high office in the USA…