From a certain Ms. Orr:
The government is thrilled that it has found a buyer for the Treasury’s 40% stake in Eurostar. And no wonder. An Anglo-Canadian consortium has offered to pay £757m. In the autumn of 2013, when the coalition first announced its plan to sell, it expected to raise £300m. Which looks like prima facie evidence that the government doesn’t have much idea about how valuable national assets are. It’s all, says the chancellor, George Osborne, “part of our long-term plan to secure Britain’s future.” To an idiot such as myself, it looks like part of a long-term plan to secure the future of Patina Rail LLP.
But in the long term, selling off state-owned, profit-making assets can only ever make the government all the more dependent on tax revenues. As ever, profit gets privatised and risk or liability remains the business of the state…..Osborne has said that this money will in part be invested in infrastructure. Great. When that money has been spent on some infrastructure, when the risk is over and the profits are starting to flow, that in turn can be sold to the private sector,….
What seems to be missing from Ms. Orr’s understanding is that the £750 million the government will receive is the net present value of all future profits that are expected to be made by the line. In fact, looking at 2014 profits, it looks like some 35 times annual profits or so on that 40% stake. Which is a very fine price indeed to achieve.
Now, we’re not really fans of the government building or running railway lines but let us suppose that you are. You also note that government can borrow cheaply, has the ability to pass laws over rights of way and so on. It is thus cheaper for government to take that early risk in the planning and set up of a new line. Once the line is up and running then the multiple of future profits which it is worth is very much higher than it was at the beginning, when there were still risks as to whether it would be finished, find a customer base and so on.
So, government invests at, say, a multiple of 10x future profits, brings the project to fruition and then sells it at 35x future profits. This looks like a very profitable indeed deployment of the government’s special privileges over financing and the law.
That is, the sale of such a project once completed is an excellent idea.
Now, we all know why this doesn’t happen in general. Government ends up investing in projects for political, not economic reasons. Cost management on public contracts is ghastly and they are therefore always over budget (I am told that the last one to come in under time and under budget was Polaris, which we bought lock, stock and barrel from the Americans).
However, this doesn’t change the fact that if as and when government actually does manage to produce a profit making enterprise then it really should sell it. For that’s the best way to capitalise upon those special attributes that government has.
By the way, it’s worth noting that this stake was sold at something like 35 times last year’s attributable profit. Not 35 times the income, whatever that lower number will be, from holding the stake. It’s thus a very good deal indeed.
But our wish here is that the commentariat would actually understand the financial basics here. The capital sum you sell for is the net present value of all future profits. We’re simply swapping money today for money in the future, that’s all.