Link to article here.

Privatizing What the Public Paid For
Special to the Star-Telegram
By Ed Wallace
September 5, 2008

“Right. It takes unconventional and courageous thinking to come up with a plan that clears a highway lane for the well off, while the middle class and working poor are left to inhale each other’s $5-a-gallon exhaust fumes. The worst thing about this ill-conceived decision … is it allocates freedom of movement according to income.” –From “Diamond Lanes for the Rich,” by Tim Rutten (Los Angeles Times, April 26, 2008)

Few think of it this way, but America already has a major flat tax that we all pay equally: the 18.4-cent federal tax that is applied to each and every gallon of gasoline we purchase, or the 24.4 cents on every gallon of diesel. Say a young person, who just lost his job at McDonald’s, buys a gallon of gas to get to an interview at Burger King at the same time Warren Buffet buys a gallon of gas to get to the airport in Omaha to board his personal jet: Both the unemployed, below-minimum-wage worker and America’s richest billionaire contribute the exact same amount toward the nation’s highway system on that day.

Now, however, we are being told – to an increasingly urgent drumbeat – that America can no longer afford the luxury of building new infrastructure or even maintaining our current road system, because there’s just no funding for these programs. It’s here that the complete absence of critical thinking about America’s future should astonish and dismay anyone who looks at the facts even casually.

Just for the Rich?

In just a few months America has come up with nearly $1 trillion to cover foolish losses on Wall Street and in the nation’s banking system – losses primarily self-caused in the investor-driven buildup to the mortgage crisis over the past three years. But at the same time we’re being told flat out that Social Security is a disaster waiting to happen, because it will be $1 trillion in default somewhere around mid-century. Yes, you read that right: We can save our financial centers today in mere weeks when it looks like they are over $1 trillion upside down, but there’s no way we can find that much money over the next 40 years to secure all working Americans’ retirement.

And on Wall Street, many firms are pleading poverty and demanding federal intervention, claiming to be incapable of rescuing themselves from the disaster they have brought on the nation. But, according to a New York Times article from August 27th on privatizing the nation’s infrastructure, “Kohlberg Kravis Roberts, the Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the investors that have amassed an estimated $250 billion war chest – much of it raised in the last two years [emphasis added] — to finance a tidal wave of infrastructure projects in the United States and overseas.” (The last Federal Highway Bill appropriated $286 billion over a multi-year period, only $36 billion more than Wall Street has escrowed to buy up our infrastructure now.)

Likewise, Washington cries poormouth when asked how much we can spend in our next highway bill to fix and expand our nation’s highway system. Yet in less than one month Washington easily found $168 billon to send out in tax rebate checks to spur the economy – so the second-quarter GDP figures would look stronger.

Yes, America once found it necessary to “kick start” our economy in tough financial times. But back then the sudden infusion of $168 billion was spent on things everyone could use, like new highway projects: The money still had the same impact on the economy, but America gained something of lasting value to show for it. Long after the economic slowdown turned around and became a recovery, we would all benefit from better transportation.

It’s the bitterest irony of all that today elected officials talk about how great our economy has been on Monday, then on Tuesday say America doesn’t have the money to improve our nation’s infrastructure.

Which is it? Are we rich or broke?

Happy Motoring Now Has a Price

What’s even sadder is the fact that Washington is actually paying out taxpayers’ money to take the highways away from everyone who contributed to them; your dollars are being used to carve out separate lanes, so that those who can afford to pay additional tolls every day can drive unfettered by the congestion that traps the rest of us.

In Los Angeles the federal government allotted $213.6 million to convert many of that city’s HOV lanes into toll roads, on which drivers pay variable surcharges based on peak driving periods. Keep in mind that the unemployed of LA who bought gasoline paid the exact same highway taxes toward the construction of those roads as did the wealthiest individuals in Beverly Hills. What that means is that we have all contributed equally to create a system of motoring exclusion. Then again, that’s how flat taxes work. Everybody pays, most are excluded.

Recently it was mentioned that, just like LA’s, Interstate 30’s new HOV lanes could be turned into toll lanes for the well off. As they do in other cases around the nation, advocates of this divisive and unfair move claim that it will cut congestion and save fuel; but a daily casual observation of the road quickly exposes the difference between reality and that PR spin.

For if you really wanted to cut congestion and save fuel, those lanes should be immediately opened to everyone when an accident turns I-30 into a parking lot. That way, thousands upon thousands of motorists could start moving again – saving untold gallons of gas and tons of air pollution – not just the chosen few. Of course, that’s not the plan.

Just Plane Elite-Friendly

It should also be mentioned that a relatively large infrastructure campaign is now going on to improve the nation’s secondary airports. For the most part those airports are serving the ever-growing number of private aircraft; personal jets have become all the rage in the last decade. As David Cay Johnston points out in his excellent book, Free Lunch; How the Wealthiest Americans Enrich Themselves at Government Expense, airport expansions for private jets continue unabated, but it’s the average American taxpayer footing the bill.

Johnston further discusses the $31 million airport expansion for the field that serves the Bandon Dunes Golf Course in Oregon, where 5,000 private jets land each year; that’s up from three or four landings a year as recently as 1999. That airport expansion’s costs are covered by taxes paid by all fliers on commercial airlines and by a hefty chunk of the monies paid by Oregon Lottery gamblers – even though the improved airport mostly benefits executives flying in for a round of golf.

A similar report, put together by the Institute for Policy Studies, shows that private jet ownership has risen from 1,000 in 1970 to 10,000 in 2006; and, while these jets use 16 percent of the nation’s total air traffic services, they pay just 3 percent of the costs. Although this is assuredly on a different plane (pardon the pun) than selling off the nation’s already paid-for highways, the overall concept is the same: The majority of the people pay to build and improve infrastructure that will benefit and convenience only a tiny minority: the ultra-rich.

Private and Public: Don’t Mix

This is the modern politics of exclusion. But privatizing a country’s public infrastructure has already proven to be a bad business model, one that can and will reverse a half-century of smart economic expansion. One has only to look at England to find the truth behind today’s political spin.

Today England’s largest airports “… are in shambles. Terminals and runways are so overcrowded that flights depart late and bags are lost. Faulty plumbing has become a point of pride for many visitors from Africa; the lavatories at the airports back home work better.” And that’s the opinion of the very conservative Economist magazine, which blasted the fact that 21 years ago the Thatcher administration’s sold London’s three largest airports to one private company.

When I returned from London in June, my plane’s passengers were all loaded onto buses and driven to our jumbo jet, which was parked nowhere near the terminal; there aren’t enough passenger gates to handle all of Heathrow’s flights. Of course, private industry’s job is to cut expenses and maximize quarterly profits; but that’s never the priority in intelligent long-term planning for public transportation — whether it is for highways or airports. England privatized its utilities, airports and other government functions in the eighties, and today that nation is paying an enormous cost, with their equivalent of our Treasury Secretary calling its recent economic downturn the worst in 60 years.

Then again, now England is saying that the current private owners should divest of many of their airport holdings to other private ownership groups (and possibly back to government hands), but this will only extend the country’s current problems. It could even make them worse.

It’s true that many things our government does, it does poorly; but there are things that government does exceptionally well. The problem today is that our government wants to sell off what it does best and keep what it demonstrably isn’t very good at.

We’ve paid for all of it; yet now government is asking the majority of us to pay so the smallest minority can enjoy the benefits. Not only is that not a sustainable plan, it’s not even remotely American.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net

Link to article here.

For anyone who still thinks there’s no merit to the North American Union and the deep economic integration of the U.S., Mexico, and Canada through trade agreements like NAFTA, here’s your proof. This massive influx of Chinese goods is the “congestion” the USDOT and TxDOT are trying to solve with the Trans Texas Corridor, foreign-controlled toll road.

Mexico plans HUGE Baja port for U.S. trade
By Marla Dickerson, Los Angeles Times Staff Writer
August 28, 2008

MEXICO CITY — Mexico’s government is setting sail with the largest infrastructure project in the nation’s history, a $4-billion seaport that it hopes will one day rival those of Los Angeles and Long Beach.

President Felipe Calderon is scheduled to travel to northern Baja California today to open bidding on a development that his administration hopes will catapult Mexico into a major player in North American logistics.

Link to article here.

Roads to hell paved with debt
By Ian Verrender
Sydney Morning Herald
August 28, 2008

There will come a time in the not-too-distant future when ordinary people will look back on this era, shake their heads in wonder and ask: how on earth did anyone ever think toll roads were sexy?

From the tulip bubble in Holland in the 1630s through to the dotcom boom of the late 1990s, otherwise rational minds have discarded logic and joined the frenzied mob in whatever investment fad promises fabulous wealth.

Without fail, they always end in tears. And so it is with the infrastructure boom.

Yesterday, Macquarie Group found itself under concerted attack from hedge funds as its shares fell 10 per cent to $41.61.

That’s wiped out all the gains from the bull market and left senior executives floundering in a sea of confusion about how to stop the rout.

In part, the renewed attack on the Silver Donut is in part the fault of Babcock & Brown, the deeply-flawed and heavily-indebted infrastructure group.

When B&B’s bankers effectively seized control in a bloodless coup last week – sidelining Phil Green and Jim Babcock while they figure out how to retrieve their $50 billion in loans – the attention inevitably swung towards the last bastion of financial engineering.

Macquarie is not a Babcock & Brown. It has a huge global banking operation that will ensure its survival. But its growth strategy of the past decade has been built on buying infrastructure, loading it up with debt, selling it off to investors in tax-effective listed trusts and then “managing” the assets – with fees extracted every step of the way.

Even dividends and distributions were paid with debt rather than earnings.

With the business model now

dead, Macquarie’s future growth has evaporated. And every group that imitated the Macquarie model, such as the listed property trusts, is now in trouble.

Macquarie’s early response was to start buying units in its deeply-discounted satellites, spending as much as $500 million alone on Macquarie Infrastructure Group.

Lately, the plan has morphed into a strategy to delist the satellites from the sharemarket and resell them into unlisted funds. But events appear to be overtaking the plan.

There are now serious doubts about whether it has the cash reserves to privatise the assets. A stockbroking analyst from UBS concluded yesterday Macquarie Group had between just $150 million and $500 million in excess capital – well below the $3 billion claimed by Macquarie.

That started the hounds barking and was enough to concentrate the minds of hedge funds.

Another to run into a roadblock yesterday was Transurban, which started life as the successful developer and owner of Melbourne’s CityLink toll road.

It is a fairly simple model that goes something like this: cars drive on a road; they pay a toll.

The operator pays the government a concession for the right to build and operate the road for anywhere between 25 and 100 years. That invariably requires large borrowings that ensure losses in the early days. But as time goes on and the loan is paid down, the company becomes increasingly profitable.

Transurban did well out of CityLink. But as toll road mania swept the land, and then the globe, Transurban’s boss Kim Edwards scouted around for expansion opportunities. First he took Sydney – with a takeover of Hills Motorways M2 and a half share in the Macquarie-controlled Westlink M7. Then he bought a major slice of the M1, M4 and M5 from Macquarie. And then it was off to show the Americans a thing or two.

Each deal meant more debt to buy assets in an inflated market. And to keep the punters happy, Edwards pumped up the dividends with – a little more debt.

Transurban’s newly-appointed Chris Lynch, the former BHP executive, has inherited this mess and taken swift action. He’s raised extra equity and, luckily, has a strong backer in the Canada Pension Plan. He’s also slashed the dividend which left investors with a bitter taste.

Lynch, a no-nonsense former AFL player from Broken Hill, says he wants to transform Transurban back into a “fair dinkum” company. He’s going to have to.

So are numerous others who bloated themselves on cheap debt and now are stuck with overpriced assets no one wants.

Link to article here.

Macquarie along with its partner, Cintra, bought the rights to the Indiana Toll Road and Chicago Skyway. Macquarie has been a bidder on several Texas toll road projects. A Macquarie subsidiary also bought dozens of Texas newspapers in the path of the Trans Texas Corridor. A Wall Street analyst who sounded the alarm on Enron, Jim Chanos, also warned about Macquarie’s business model, which is to pay shareholders from debt, not actual earnings.

Doubts over Macquarie’s model
MARTIN COLLINS: John Durie
August 28, 2008
The Australian Business

A RELATIVELY benign analyst downgrading was the initial impetus to yesterday’s 10 per cent plunge in Macquarie’s stock price, but the sustainability of the model is the issue.
UBS, which happens to be one of the biggest traders in the stock, issued a downgrade yesterday, accompanied by a 2 per cent cut in its 2009 year earnings estimates and a 10 per cent cut in its 2010 estimates.

Two other firms, Goldman and Citigroup, already have the stock on hold and the report in itself was not exactly revolutionary.

UBS talked about potential asset write-downs on Macquarie’s $7.1 billion equity investments and the 12 per cent of revenue it generated from shifting assets from fund to fund last year.

It also figured that surplus capital was closer to $500 million than the $3 billion claimed by Macquarie in May’s annual results release.

The bank, for its part, notes that just 20 per cent of its earnings are derived from its listed funds and this includes advisory fees and the like and that, unlike a Babcock or an Allco, it is actually a regulated bank.

So what makes the stock fall so hard on the back of an analyst’s report that states the bleeding obvious?

The answer is: market sentiment and the growing doubts that Macquarie can continue with its program of shifting funds from its listed funds to its unlisted funds at director valuations, which don’t look anything like market valuations.

For 18 months or more, Macquarie has said there is patient capital aplenty (sic) for the type of quality infrastructure stocks it owns.

But over the last 18 months, valuations have come down and at some point investors in these funds will be asking why they should pay $x for an asset, which is valued in the market at $y, just because Macquarie said it was worth $x.

Then there is the issue of distributions, which Chris “Che Guevara” Lynch at Transurban put to rest a month or two back, when he said the toll road company would only pay dividends out of earnings. The folk at Macquarie Communications played this line earlier in the week, noting cash earnings totalled $325.3 million and distributions were $238.7 million, so they were covered 137 per cent by cash earnings.

Fair enough, but the problem is that calculating cash earnings seems clouded by a few one-offs.

There was a figure of $119.5 million in what was called non-current deferred revenues that was included, even though that description suggests the bank can’t actually get its hands on the cash right now.

Then there were charges for depreciation, amortisation and other items totalling some $54 million, when a separate entry in the accounts noted depreciation and amortisation was more like $330 million.

There will be an explanation for this, but the point is, the distribution cover may not be what it seems.

Macquarie Communications, like MAp before it, has started shifting assets out of listed funds into unlisted funds. No problem here so long as the unlisted fund investors are happy with the valuations used. As happy as they might be with Macquarie valuations, in this market they will at the very least be starting to ask more questions.

That’s the issue which seems to dog Macquarie now: its earnings sustainability.

The market value of four vehicles, the head stock, Macquarie Communications, MAp and MIG, have fallen by $22.2 billion from the highs in October last year to a combined value yesterday of $23.5 billion.

The bank itself is sticking to its statements in May which is just as well because the evidence from the US says those who hit the panic button first have proved the smartest.

When Bear Stearns put itself up for sale at $10 a share earlier this year, some claimed it had sold too cheaply. Debt investors got their money back and no-one is attacking the $10 a share valuation.

Likewise at $US25 a share when Citigroup raised $US12.5 billion, the smarties said it was an undue dilution of equity. This week Citi is trading around the $US17.60 mark and survival looks better than even bigger dilution.

The point is, the first mover’s advantage doesn’t mean its all over for those wanting to shore up their books.

Macquarie’s future doesn’t rest on a couple of days’ share-market trading, but with Allco and Babcock now effectively gone, it was natural that all eyes would look critically on Macquarie.

Strong should go

IAG chair James Strong is up for re-election at this year’s annual meeting and he is telling anyone who would listen that he wants to stand again but will step down some time in his next term.

One could politely suggest that, as with ANZ’s Charlie Goode, Mr Strong would be better off leaving, now that he has the company in safe hands.

Mr Specialty Focused himself, Mike Wilkins is an extremely safe pair of hands as chief and in contrast to the aforementioned Mr Goode, Strong has recruited well to have a board with talent to spare to replace him.

Former AMP and Aviva executive Phillip Twyman would seem just one person capable of filling Strong’s shoes.

As noted yesterday, John Morschel is ready, willing and able to takeover at ANZ when Goode leaves, so it also makes little sense for him to hang around any longer.

This concept of one more election smacks of inviting disaster and should be dealt accordingly if either of them above try it on.

Smarts and duds

THIS reporting season has presented many challenges for investors despite what on the surface looks to have been a relatively benign set of numbers.

Tax rates have fallen from a long-term average for industrial companies of 28.5 per cent to 26.5 per cent, which may not be sustainable against a legislated tax rate of 30 per cent.

On Macquarie numbers, interest costs in the June half increased over 30 per cent, in part because the smart companies bought debt raisings forward to get the money while they could and obviously on higher interest rates.

On Goldman numbers, earnings before interest and tax margins fell from 14.7 to 14.1 per cent and are obviously heading south.

Westfield reported a 35 per cent fall in headline profits, but this was due to a write-down in property values. In operating terms, Frank Lowy posted an impressive 14 per cent gain.

Lowy presents a good case in point because the market seems happy to allow him to pay out more in distributions than he actually earns, in part because his track record means they trust him.

Last year’s $3 billion equity raising was obviously superbly timed before the credit crunch hit.

But the trick is to increase income enough to maintain its development programs, but that is outside Lowy’s hands to some extent given the varying states of global economies.

Then there is the attempt to join his friends at Simon Property to convince Liberty’s Donald Gordon to either let them buy some assets or his company.

That play for the likes of London’s Covent Garden and part of Earls Court would seem to be a long-term game which perversely would be helped if the global economy got worse rather than better.