Harry Clarke On economics, politics & other things

September 17, 2014

Real estate agents providing financial advice

Filed under: business — hc @ 10:06 am

A snippet that interests me.  The Ray White Group (one of Australia’s largest real estate brokers) is to move into the financial planning industry.  They earn commissions on real estate transactions and I assume they will earn commissions on the advice they give.  They seek ASIC approval and expect to get it.  My devious, perverted, economist mind asks some obvious questions which I am too modest to articulate.

http://www.moneymanagement.com.au/news/financial-planning/2014/could-ray-white-s-planning-push-create-conflicts

February 11, 2014

Sugary lies

Filed under: business,food — hc @ 7:49 pm

In the current issue of NewScientist it is reported that in 2013 the US Sugar Association applied pressure on the US Congress to drop US funding of the WHO because its new food guidelines included strict suggested limits on the role of sugar in the diet.  More information is in this Guardian report.  Sugar is a nutritionally useless commodity – unlike fats, proteins and other components of food it is nutritionally redundant.  There are strong beliefs however that it is addictive and hence fosters the global obesity problem as well as nasty metabolic diseases such as Type 2 diabetes.  I have not intentionally added sugar to my food for 40 years.

The nasty lobbying here is yet another example of the way corporations suppress knowledge to promote profits.  The cigarette companies lied their heads off for 60 years and large fossil fuel energy companies spread lies about climate change links with carbon fuel-based consumption.  Groups such as the IPA and the Libertarians help to spread such lies – typically campaigning in ways that reflect the lies/marketing efforts fostered by corporate interests – we still have doubts, it is unproven, smoking is a “freedom of choice” issue etc.

A more trivial but still nasty episode was revealed again today when it was found that the Coalition’s Fiona Nash and her chief-of-staff Alastair Furnival pulled down a new “health star” rating site that provided ratings of different types of foods.  Alastair Furvival is married to a lobbyist for the junk food industry.  The Public Health Association and Choice have condemned the decision to take down the site.

OK maybe it is a coincidence but I am suspicious.  Also I am becoming increasingly paranoid about the role of corporate interests in manipulating information flows that affect our health and well-being but which deliver private profits.

January 31, 2014

David Jones directors make astute share purchases

Filed under: business — hc @ 12:46 pm

David Jones needs to be explicit on what two of its directors knew about a merger offer from Myer that was made to the board of DJs the day before these two directors bought shares in DJs and before DJ’s had decided to reject the merger offer.  DJs also announced an improved profitability outlook a few days subsequently.  As a long-suffering DJ’s shareholder also a bit annoyed that more weight was not attached by the DJ’s board to the offer.  Not a good look.

January 17, 2014

Privatising Australia Post

Filed under: business — hc @ 9:17 am

The cry has gone up from the BCA to privatize Australia Post.  Its a weak argument from a posturing bunch of low-intellect phonies who are promoting self-interest, neo-con ideology and third-rate economics.

Australia Post is a natural monopoly.  Its mail sorting and handling operations as well as its delivery and transport operations are characterised by considerable economies of scale and scope. You only want one firm carrying out these functions because the businesses cost function is sub-additive. Inevitably the issue of running it as a private firm inevitably raises difficult regulatory issues.

The BCA state that the letter business lost $218m last year and that these losses could have been avoided had the firm been privatised.  That misrepresents the situation.  These losses reflect the community service obligation (CSO) to charge a uniform postal rate irrespective of the source or destination of mail in Australia.  It also represents the obligation of Australia Post to handle all classes of mail rather than the highly-profitable commercial bulk mail sent along Australia’s east coast.  Finally too it reflects the increasing use of electronic mail services.  Whether the CSO should exist – I think it should – the issue of these losses is not tied to Australia Post’s ownership structure but to whether a privatised Australia Post would be obliged to follow this CSO.  Abolishing the CSO would enable a publicly-owned Australia Post to “cream skim” bulk mail deliveries just as well as any privately-owned firm.  The decline in revenues diue to the growth in electronic communications is not an ownership issue either – it only means that private firms will bid less for the business.

The claim that the sale of Australia Post’s assets worth $4.2b would yield $3b is unconvincing without specifying the income the Commonwealth gets from the business and the role of CSOs in restricting that income. As it turns out the business earned $312m in profit in 2013 which would have yielded over a 10% return on the BCA’s anticipated sale price.  Profits last year grew by 10.9%.  A sale at a price of $3b would impoverish the Commonwealth and transfer several billion dollars of public wealth to the private sector.  It would be a scandal.

An earlier post of mine on these issues is here.

October 5, 2013

Cost-cutting

Filed under: business — hc @ 8:51 pm

An entirely hypothetical situation I am thinking about raises the following parable.

A firm employs someone who earns $100,000 per year and he/she produces each year in revenues $400,000 – the value of their marginal product. There are no other significant variable costs. In the face of cost pressures the firm sacks him/her to save the $100,000.   The assumption is that the firm will replace him/her with someone cheaper or more productive in terms of generating revenue or that the firm can lump his/her duties on the back of other people employed without reducing overall productivity.

I cannot fault the reasoning here.  Its along the line that improvements are always possible.   The key word here is possible. If the employee being sacked is productive, hard-working and performing well relative to others in his/her occupation it would seem to be a risky move. Indeed for the economics to work out  there must be some inefficiency within the organisation.  Sacking the worker seems particularly risky if there are many other similar workers in the firm doing analogous work who are not making surpluses at all. It is certainly a highly risky move if you make the sacking without considering issues of productivity, work-effort and if the estimates of possible cost-impacts are total codswallop.  In this latter event the firm will end making flawed decisions that conflict with its own objectives. If they knew the information they were using was nonsense they would also be behaving in an unjust, dishonest way. (more…)

January 18, 2013

Albanese goes

Filed under: business — hc @ 10:27 am

So Tom Albanese has been sacked (sorry, err, he “resigned”) as the CEO of Rio Tinto.  He was only paid $7m in 2011 for his efforts at Rio Tinto so I guess there were warning clouds there.  But after all, what did he really get wrong? Turning down BHP-Billiton’s 2008 3 share offer might have been seen as a slight error.  This then valued Rio Tinto at $150 per share compared to the $64 the shares are now valued at.  But grumpy shareholders who get pissed-off with this should recognize that mistakes will happen.   They can also take pride in the fact that Albanese’s rejection saved BHP-Billiton from the most catastrophic investment in its long history of making dud investments and that would have reflected badly on BHP-Billiton’s Marius Kloppers.  There are real people here whose feelings do matter.

And it would be taking much too short-term a view to blame Albanese for the $35b in write-downs Rio Tinto has been forced to make since its dud acquisition of Alcan and most recently on its Riversdale assets.  I mean what is $35b?  It’s a dollar sign, two digits and an un-capitalized letter of the English alphabet.

Albanese and Kloppers deserve every cent they get. Indeed give them more and crown them with birthday honors.  If it wasn’t for the wise investment decisions made in our innovative private sector the Australian economy would indeed be up s**t creek without the proverbial paddle.  The crazy public sector decision to squander $27b on a National Broadband Network comes to mind.

December 4, 2012

BHP Billiton & climate change

Filed under: business,climate change — hc @ 9:08 pm

It interests me that BHP Billiton (the world’s largest coal exporter) is adjusting its port construction plans to account for the effects of climate change on ocean behaviour. They are also looking carefully at further investments in coal given they anticipate a movement away from coal. As a firm they are committed to addressing the risks of climate change and to exploring the business opportunities climate change creates.  In terms of intelligence BHP Billiton and many other responsible corporates (lets leave Gina R. out of that categorization) are more intelligent and far-sighted than out conservative politicians.   Its not just vision and responsibility either – its good business and showing concern for longer-term shareholder interests.

March 15, 2012

Financial heroes at Goldman Sachs

Filed under: business — hc @ 2:54 pm

Sociopaths who act only to enrich themselves at the expense of their clients? Surely not. Who could believe a disgruntled former employee? 

This is particularly so given Goldman Sach’s enviable track record. A reputation they are continuing to enrich, if you can excuse a dreadful pun.

This is the Borowitz report that provides a balanced view of the ex employee outrage:

“At Goldman, we pride ourselves on our ability to scour the world’s universities and business schools for the finest sociopaths money will buy.  Once in our internship program, these youths are subjected to rigorous evaluations to root out even the slightest evidence of a soul.  But, as the case of Mr. Smith shows, even the most time-tested system for detecting shreds of humanity can blow a gasket now and then.  For that, we can only offer you our deepest apology and the reassurance that one good apple won’t spoil the whole bunch”.

Un-disgruntled CEO Blankfein cut his take to a shade under $15m in 2011 when Goldman Sachs suffered a fall in profits of 38%.

Final comment. Yep, there is a fair bit of bitter scarcasm in my remarks above. I absolutely despise these people and all they stand for.  But why don’t markets work here? Why do investors (public and private) continue to deal with such discredited thieves? Marginal Revolution raise this exact question.  I can think of a half dozen partial explanations but none entirely satisfy me.

November 30, 2011

BlueScope Steel’s share price collapses in week before significant share issue

Filed under: business — hc @ 1:48 pm

BlueScope Steel seems to have some questions to answer.  It recently announced a 4 for 5 issue of shares at 40 cents. As the ex rights shares have traded over the last few days for less than 40 cents the value of these rights is zero at present.   As Bryan Frith points out in The Australiian it would also be interesting to know what the share price fell so markedly before this huge capital raising:

“The timing of the issue was a surprise, coming only three business days after BlueScope held its annual meeting. At the meeting the company reiterated its profit outlook for 2012, but there was no mention of the group’s debt position, and in particular the $478m blowout since June. If, as seems probable, BlueScope already knew that it was planning a capital raising, the AGM would appear to have been the appropriate time to make such an announcement. That it was not is no doubt one reason why the announcement took the market by surprise.

However, it may be that not everyone was surprised, because in the week before the announcement BlueScope’s share price slumped from 78c to 61c under much heavier trading than normal, and there was also heavy shorting of the stock. ASIC should take a look to consider whether any insider trading was involved”. (my bold).

Of course there will be an “explanation” – there always is – but the long-suffering shareholders in BlueScope deserve a better deal than this.  Many have seen almost the entire value of their investment vanish over recent years while this year, when the firm made $1b in losses, executives slurped at the trough and awarded themselves $3m in bonuses for work well done.  Problems in our modern economy can often be traced to public sector waste but the greedy clowns in the private sector whose main skill seems to lie in enriching themselves as the firms they manage collapse around their ears, seem to be a significant source of private sector inefficiencies.  Yes the exchange rate has appreciated and yes the Australian market for steel products is weak but don’t shareholders pay huge salaries to executives to deal with such problems.

September 3, 2011

Bank robbery

Filed under: banking,business,Uncategorized — hc @ 12:53 am

Over the past 5 years US bankers have been paid $2.2 trillion. That’s roughly twice Australia’s GDP. It is an astounding amount that was not invested in productive assets but spent on fairly useless business executives who drove their firms – and the world economy – to the point of collapse.

This makes the rewards to our own corporate dills seem stingy. The executives of Bluescope rewarded themselves with $3 million bonuses after losing $1 billion and sacking 1000 workers. One wonders whether their shamelessness reflects their view that Bluescope might not survive so that whatever is left in the cookie jar should be taken before it entirely empties.

August 18, 2010

BHP-Billiton to invest in agriculture?

Filed under: agriculture,business — hc @ 10:12 am

Potash or potassium carbonate has several industrial uses but is, in the main, used in agriculture. According to the Wikipedia entry:  “Potash is important for agriculture because it improves water retention, yield, nutrient value, taste, colour, texture and disease resistance of food crops. It has wide application to fruit and vegetables, rice, wheat and other grains, sugar, corn, soybeans, palm oil and cotton, all of which benefit from the nutrient’s quality enhancing properties”.

The mineral exists mainly in deep mine deposits in various countries but some of the world’s largest known potash deposits are in Saskatchewan, Canada.

Yesterday BHP-Billiton made a $US38.56b all cash bid for Potash Corporation of Saskatchewan, to secure ownership of one such deposit.  It would enjoy synergies with the nearby Jensen deposit that it already owns. It recently bought a nearby junior Canadian potash company Athabasca Potash. 

These are early days and Potash Corporation have rejected the bid – the final price might go to $US 60b.

It is a stunning move – the current bid is about equal to one-third of BHP-Billiton’s market capitalisation or, to provide perspective, more than the estimated cost of Australia’s proposed high speed broadband network.  The move while not as big as the (fortunately) failed bid for Rio Tinto it is still enormous.  In the press it is variously described as a merger/takeover.

I’ll watch developments but the planned takeover probably reflects expectations of strong continued growth in global food demands.   As the developing world develops it will not only want steel, coal and concrete – it will also want to feed itself better.

This quote from the Australian says it all:

People in Asia eat only 27.8kg of meat per head each year, compared with 123.2kg in North America and 74.3kg in Europe. As Asians become richer, their consumption of meat is expected to rise, and so more wheat and grain will be needed to raise cattle.

It has been estimated that it takes 7kg of grain to produce every kilo of beef. The population of the world is also expected to increase by half to more than nine billion by 2050, putting further pressure on food production.

Fruit and vegetable consumption is forecast to rise by a quarter to 2 billion tonnes a year in the next decade, while demand for grains and oilseed is expected to rise by a fifth.

With the supply of agricultural land declining in some areas as a result of rapid urbanisation, existing land will have to become more productive. Countries such as India and China are therefore expected to use much more fertiliser, increasing demand for potash, nitrogen and phosphates.

June 1, 2010

BP share price

Filed under: business,environment,Uncategorized — hc @ 11:32 am

Chart

It is interesting to look at BP’s share price. Its above where it was last July though it has fallen markedly (by one-third) since the oil spill began in April in the Gulf of Mexico.  Yesterday $11b was wiped off the value of the company as further efforts to stop the leak failed. 19,000 barrels of oil per day are pouring into the ocean in what may amount to perhaps the most significant environmental disaster in US history.  At least 75 million barrels of oil have leaked so far devastating large areas of the US coastline.

The US government rhetoric is growing more fierce by the day and BP certainly deserves some blame for this catastrophe.  But how much blame should be attributed to government decisions which allowed drilling to occur under such risky deep water conditions? The value of such resources is obviously immense but the risks, though small, have catastrophic effects.

Update: There are now several articles comparing the oil spill with the financial crisis in terms of private sector under-appreciation of risks creating a need for regulation. This by Kenneth Rogoff.  David Leonhardt  in the NYT claims that regulators have created a moral hazard problem by placing a $75m cap on oil spill damage costs.  The likelihood is that offshore drilling for the small amount of oil available offshore will be banned for decades.   Regulatory underprovisions lead to possible over-regulation longer-term.

Update: (3/6) BP’s shareprice continues to tumble but still surprisingly above its level at start 2009.  Analysts are now questioning the firm’s future with many making the (to me always surprising observation) that if the share price continues to tumble BP will become a takeover target.  It’s a claim that doesn’t make much sense unless you are trying to put a floor under the price.

Update: 11/6. The share price has collapsed now falling to its lowest level since 1996.  Estimated damage claims are now put at $33 billion.

March 18, 2009

Executive remuneration

Filed under: business — hc @ 8:22 pm

Here are the Terms of Reference for the Productivity Commission inquiry into executive remuneration in Australia.  It is a sensible inquiry because remuneration practices are part responsible for the excessive risk-taking and greed that has led to the current financial mess. 

My kneejerk reaction – the type of reaction that this inquiry hopes to forestall – is that remuneration decisions should be approved by the owners of a firm – its shareholders.  If these shareholders are too penny-pinching the firm’s fortunes will suffer. 

But at least we won’t have the old boy’s club plotting organised theft of shareholder funds under the business-school-driven myth that huge payments are essential to ‘allign’ the interests of third-rate business thieves with those of those who employ them, their shareholders.  Whatever happened to old-fashioned morality and the desire to maintain a decent reputation?  I assume the business schools see such issues as irrelevant if you can devise a clever enough incentive contract.

Shareholders should call the shots and bear the consequences of doing so.

I’ll follow the PC deliberations and change my views if they provide effective counterarguments. I’d be interested if readers could think of sensible counterarguments.

February 18, 2009

Costello is right on Rio

Filed under: business — hc @ 11:16 pm

Despite some silly protestations over at Catallaxy I think Peter Costello is quite right to oppose the deal by Chinalco to purchase key Rio Tinto assets.  BHP-Billiton, for a time, valued Rio Tinto shares at somewhere north of 3.4 times the value of BHP-Billiton script.  They are now trading at about 1.6 times a BHP-Billiton share.  There are two observations consistent with these findings. First, that BHP-Billiton vastly overvalued RioTinto stock because it ignored the boom-inflated valuation placed on Rio’s disasterous move into Alcan – so much so that, on this basis at least, the whole BHP-Billiton board should be sacked.  (The Rio board should unequivocally be sacked for rejecting the BHP-Billiton offer!). If Rio had accepted the BHP-Billiton offer the latter would have lost about $100 billion in market value by now.  Second – and this is only a partially contrary view – is that, while things were good, BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consummate a marriage with Rio and that this alone was worth a vast premium.  Both views have an element of sense.

Australia will be a major resource supplier to China for the indefinite future. The assets Rio is seeking to flog to the Chinese provide a sale in Rio’s interest but not in the interests of Australians since this sale will reduce Australian price-setting power in these markets.  The counterargument that Australian interests have incentives to bid a premium for Rio is logically correct (the existence of a global deadweight loss means the Chinese consumers lose more than Australians gain) but is misleading given the liquidity-constrained Australian capital market environment and the existence of bottom feeding Chinese carnivores supported by their state funding.  Furthermore assets are not trading currently at their value.

Look at Futuris which yesterday sold 19.9% of the Australian Agricultural Company for $1-70 a share when the asset backing of AAC is more like $2-74.  Futuris needed the dough presumably to remain solvent.  It is a bottom-feeding bonanza out there.  Sometimes one cannot prevent national interest losses – othertimes one can.

Keep crucial Australian assets that have the potential to yield excess returns for 100 years out of the hands of those who will consume these assets.  This isn’t protectionism as some in the blogosphere contend. It arises because a country with monopoly power in trading certain resources does not wish to sell the assets giving rise to these resources for a song at an all time trough in the business cycle to those whose interest it is to destroy Australian price-setting power.  Stop the sale.

January 28, 2009

Business-people who reduce capitalism’s appeal

Filed under: business — hc @ 10:41 pm

Maureen Dowd shows justifiable contempt for the greedy ‘masters of the universe’ who have destroyed the lives of millions – 80,000 extra unemployed globally in one day this week – and yet still cretins like former CEO of Merrill Lynch Mr. Thain – a man who in my view should be in jail – cries that huge salaries need to be paid to retain the talent.

(Thain) ““If you don’t pay your best people, you will destroy your franchise” and they’ll go elsewhere, he said.
(Dowd writing about Merrill Lynch) Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism”.

The maximum salaries paid in large companies should be subject to shareholder approval.  If shareholders underpay they will cop it in the hip-pocket but director-determined salaries (on the basis of reports by ‘independent’ remuneration committess) don’t work. Salaries that are 100X the average worker’s salary in the UK and 358X the average worker’s salary in the US are ridiculous.  You don’t have to get involved in arguments about angels dancing on the heads of pins to understand this.

It should be understood by all shareholders and all boards that all incentive contracts should be a minor top-up to fixed salaries that are payable as equity claims realisable with at least a 10 year lag. The claim that then executives are subject to the whims of their successors (more moral hazard reasons for enriching themselves!) is nonsense – they should select good successors as part of their job.

We all know that the ‘get rich quick’ society is a crock.  People who do a good job of managing firms for the longer-term should get good rewards of perhaps twice or three times average earnings.  Psychopathic executives (the sought after cunning, manipulative, untrustworthy, unethical, parasitic, and utterly remorseless output of the business schools) are not required nor are greedy spivs who believe that the path to wealth is simply to gear up and buy. All business schools need to teach courses in ethics and never pretend that an MBA alone provides the skills to manage anything.

Shareholders need to be clear. We don’t believe your lies, spivs. You have to work as anyone else does to justify a good salary. I am a defender and supporter of capitalism but I am not a fool and we have been dudded.

January 25, 2009

Ethics & Merrill Lynch executive remuneration

Filed under: business — hc @ 12:35 pm

The real bonuses and the phoney profits have been a feature of Merrill Lynch’s US operations.

But ex CEO John Thain’s actions seem to me to show the moral bankruptcy of Wall Street.  Merrill Lynch paid out $15 billion to executives in 2008 which just matched the controversial 4th quarter losses that Bank of America (its purchaser) have complained they were unaware of. Moreover, while Bank of America begged Washington for $20 billion more in handouts, Thain approved an accelerated bonus pool of $4 billion for his executives. 

In addition while, in the scheme of things it is trivial, one cannot help wondering how Thain could have approved $1.2 million of shareholder monies for redecorating his office.  I think Thain should go to jail.  The argument that Thain sold Merrill Lynch to Bank of America for $44 billion and therefore ‘saved the business’ seems questionable to me.  This seems, again, to have been a deception - the $50 billion dollar deal from hell.

I’ve read for years that executives have to be paid absolutely huge salaries to prevent them leaving.  It was ‘competition’ working.  But what’s the point of retaining executives who drive firms into bankruptcy and who require bonuses that exceed earnings.

What happened to ethics in all this? Do ethical issues become redundant when you ‘allign’ executive interests with those of shareholders by suitably cute incentive contracts?

The appalling behaviour of prominent business executives threatens our prosperity by undermining the basic institutions of capitalism.

November 26, 2008

BHP-Billiton – Rio Tinto deal is off

Filed under: business — hc @ 1:43 am

On July 14 2007 I tipped a possible takeover bid for Rio by BHP-Billiton. On November 8 that year it happened. I got it wrong however in suggesting it likely that eventually some sort of deal would be done. In dramatic news yesterday the 3.4 BHP-Billiton shares for 1 Rio Tinto shares bid was abandoned. As it turns out too my conditional argument that Rio Tinto was a cheap way of getting into BHP-Billiton provided the takeover goes through, although correct, is now irrelevant since the deal is not going through. In fact, those who punted on the takeover going through are taking a caning – Rio were off 36% in London when I looked at 12-46pm (London Time) – the biggest drop in 20 years. There will be fallout from this alone. I’ll watch Rio with interest on the ASX tomorrow.

Currently Rio is trading at 1.4 times the value of a BHP-Billiton share – the terms of the merger implied a valuation of 3.4 times. Apart from having the bid abandoned Rio is stuck with the $35 billion dollar debt resulting from the top-of-the-market takeover of Alcan last year. BHP-Billiton has only $6 billion in debt and is a much bigger company.

This outcome suggests to me that the takeover was possibly not a good deal at all for BHP-Billiton and that Rio Tinto by playing hardball in negotiations with BHP-Billiton severely disadvantaged their own shareholders. I cannot believe that the possible monopoly and synergy benefits were worth 36% of Rio’s capitalisation.

The Chinese who bought a massive slab of Rio script to help thwart the takeover paid over-the-top prices and are caught with their pants down. Their 7 billion pound stake is now worth about one quarter of that. The steel makers however can rejoice a little since the possibility of a world’s resources monolith is no more. Fascinating stuff and congratulations to BHP-Billiton directors and management for not being wedded to a dubious deal.

A few insiders seemed to have got a sniff of what was happening – BHP-Billiton shares surged strongly in the days prior to the announcement.

August 28, 2008

Macquarie Bank another domino to topple?

Filed under: business — hc @ 12:48 pm

I dont have time to comment on this review but as I have suggested in the past the future of Macquarie Bank and its ‘millionaire factory’ is being increasingly questioned. In my earlier post I noted that Enron analyst Jim Chanos described Macquarie as a Ponzi scheme.

Certainly the spinoff firms from Macquarie are not doing well and I get nervous in the current circumstances when firms sell assets and use the proceeds to support their share price. I am also nervous when (for whatever reasons) major investments like TransUrban are making losses of $142 million when these investments are basically supported by mountains of debt. Macquarie does not seem to have a lot of free capital to cover itself against shocks and to ride out an expected economic downturn.

July 13, 2008

Fortune magazine

Filed under: business,reading — hc @ 1:12 pm

Fortune is one of those magazines I subscribe to with mixed feelings. On the one hand it caters to some the worst aspects of US consumerism and an almost adolescent worship of wealth. But it also provides a gritty and useful view of the world of business from a business rather than economics perspective. It’s latest issue contains the Fortune 500 Global edition which looks at the performance of the world’s biggest firms. I generally look at this carefully noting particularly how Australian firms figure and how the emerging giants of China, India and Mexico are making their impact. I always stick my copy of this particular edition on a bookshelf and refer to it over the coming year – it is an invaluable resource and a great teaching aid.

Another feature of Fortune I greatly respect is that much of its material is online.

On the Fortune 500 listing Australia’s own BHP-Billiton is 183rd on the Fortune 500 list but 17th in terms of profits. For every three dollars of sales it makes about a dollar profit. For its size it is one of the most profitable firms on the planet. Amazing!

Barney Gimbel’s piece The New New World Economic Order in the same edition (unfortunately not online) is about as eloquent a 2 page summary of where the world economy is going as I have seen. The US, and indeed the developed countries as a whole, are no longer the locomotive of global growth – 54 developing countries surveyed will grow by 6.7% this year even though growth in 31 developed countries averages 1.6%. Voracious consumerism has historically come from the US but its source will soon be elsewhere. By 2020 China will have 700 million middle income earners and India 583 million. Gimbel sees the major threat to the world economy as exploding inflation in developing nations.

Despite some mild misgivings Fortune remains one of my favourite weekly reads.

April 16, 2008

No sovereign risk in Tabcorp/Tattslotto decision

Filed under: business,gambling — hc @ 12:21 pm

Sovereign risk refers to the possibility that government can change legislation so that they can seize property without any possibility of adequate compensation.

Tony Harris in today’s AFR (subscription required) argues that no issue of sovereign risk arises because Tabcorp and Tattersall’s gaming licences were not renewed by the Victorian Government.

Gaming licences have a finite life. Those applying to Tabcorp and Tattersalls expire in 2012. This expiry date is cited in Tabcorp’s annual reports.

Non-renewal is not an instance of sovereign risk.

Victoria’s gaming law provides that if a new licence is issued the holder of the former licence is entitled to a payment equal to the value of the former licence (Tabcorp claims its licence is worth something less than $600 million) or the premium paid by the new licensee whichever is the lessor. Depending on the new arrangement the compensation might be nothing or a small amount – there is no implication it will be $600 million.

If the companies dislike this ruling they can sue but I don’t think their chances are good – a letter from then Treasurer Allan Stockdale in 1995 to the companies states clearly that the companies must expect changes in the way the industry is run. Quote: ‘I must, however, make it clear that the statement of principles in this letter does not bind this government or future governments, and, of course that the Victorian Parliament has the power at any time to amend existing legislation or pass new legislation affecting your operations or the terms on which those operations are conducted’.

The market value of Tattersalls and Tabcorp declined by $1.3 billion and $1.8 billion respectively after the government announcement. To quote Harris: ‘Shareholders of Tabcorp, and probably Tatts, were mugged by unwarranted expectations, not by sovereign risk or lack of information’.

The view of commentators such as Stephen Bartholomeusz that the government’s decision not to award compensation is ‘immoral’ seem misplaced. On issues of morality I think it is reasonable to ask why Joan Kirner gave such a huge profit entitlement to two private companies in the first place and why Labor politicians and party hacks have been feeding off the gaming industry ever sense. One could also ask why investors in these companies came to adopt the view that the companies were entitled to compensation were licences not renewed.

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