A Very Brief History of Australian Privatisations

Several readers have asked us to justify our comments on Queensland Rail. After all, not all public sector privatisations are bad for investors, what about Commonwealth Bank [ASX: CBA] and Qantas [ASX: QAN] and Telstra [ASX: TLS], we were asked.

Enough said about the last one. Especially if you bought in to T2. Next…

As for Qantas, well, we’ve got no personal recollection of the move from public to private company. All we can rely on is stuff picked up on the Interweb.

The story seems to be…

In 1992 100% government owned Qantas pays $400 million for 100% government owned Australian Airlines. A bit like buying your own car from yourself!

In 1992/1993 British Airways buys 25% stake in Qantas for $665 million.

In 1993 Australian government gives 75% government owned Qantas $1.35 billion.

In 1995 Qantas shares listed on the Australian Stock Exchange, with the government receiving $1.45 billion.

From what we can gather, the government sold off a bunch of other Qantas shares in 1996 and 1997, the value of which we’ve been unable to find. So let’s say, all up, the value Qantas was sold on the market for was about $2.5 billion – feel free to correct us if we’re wrong.

Yet the real net gain to the government would have been around $1 billion when you strip out the $1.35 re-capitalisation (subsidy) provided by the taxpayer in 1993.

But that’s only part of the story. Thanks to the near monopoly position of the airline – remember that monopoly status is a gift from the government – Qantas was able to rip-off passengers for years. Some would argue it’s still doing so compared to the cheaper flights available elsewhere.

In simple terms, a lack of competition in the market burdened Australians with what was effectively a tax on travel. It was a tax because the fares were higher than they otherwise would have been under a free market.

And in such a situation, even when you have a single competitor, such as Ansett, there’s no incentive for the competitor to offer significantly lower fares as they know the market is rigged. All they needed to do was provide a small discount to grab market share.

Which, from what we recall, is exactly what they did.

That’s one of the reasons – among others – why Ansett collapsed in 2001. When new discounted travel came from Virgin and Impulse, the high cost structure and inept ownership by Air New Zealand, left Ansett unable to compete.

Qantas of course was protected due to its national carrier status and its government gift of a rigged market, so the weakest of the airlines was bound to fail… and that was Ansett.

As for Commonwealth Bank, a bit of fishing around on the Interweb has produced the following:

The first batch of shares were sold for $5.40 in 1991.

The second batch sold at $9.50 in 1993.

And the final load sold for $10 in 1996.

Since then, if you take into account dividends, there’s no denying shareholders in Commonwealth Bank would have done quite nicely indeed.

But here’s another difference between Commonwealth Bank and QR…

The Commonwealth Bank can create money from thin air which it can then lend to suckers who want to buy an overpriced house.

The last we looked, it isn’t yet possible for rail companies to create coal from thin air without a mining company first digging the stuff out of the ground.

And don’t forget the banks are in the kind of privileged position that no other business in Australia is in. And that’s the explicit guarantee from the government that it will underwrite all and any losses a bank is in danger of making.

Of course that ultimately won’t be possible without the massive devaluation of your wealth through inflation, but it’s accepted by the mainstream that that is what will happen and therefore banks are a good investment.

Make no mistake, the Commonwealth Bank was gifted a power that only it and other banks have, the ability to create its own assets from nothing.

Remember, it’s not a house or a business that is the asset on a bank’s balance sheet, it’s the loan against the house or business that’s the asset. Banks don’t actually create or build anything when they create an asset, they simply use a depositor’s savings as security and then create additional money which they credit to the borrower’s account.

Put simply, Customer A deposits $100,000 into the CBA. That’s an asset for the customer and a liability for the bank.

Then the CBA receives a loan application from Customer B for $90,000.

The CBA creates $90,000 which it deposits into Customer B’s account. That’s a liability for the customer and an asset for the bank.

$10,000 remains as equity in the bank. You can call it the bank’s reserves.

Yet both Customer A and B believe they are able to withdraw the full amount of cash in notes from their accounts – one from a deposit account, the other in a loan account – yet there’s only $100,000 of that money actually held in notes.

The bank is taking a punt that both customers won’t ask for the cash at the same time. In the world of banking that’s called banking. In any other business it’s called trading while insolvent.

So where does the remaining $90,000 come from? From thin air. The bank created it from nothing. It was able to create an asset for its balance sheet simply by making a book entry.

Now do you see why the banks are always so keen to offer you credit? Every time you accept an offer for a credit card or a home loan and draw down on it, that creates an asset for the bank.

It’s a good business. If you’re into counterfeiting and fraud that is. Ultimately – as you’ve seen over the last couple of years – the current financial system is unsustainable.

Yet the politicians and central bankers are determined to not only ensure it’s maintained, but they’re determined to return it back to where it was in 2008 before the bubble popped.

You don’t need me to tell you what the result of doing that will be.

Therefore, we’d be very wary about comparing the success of the Commonwealth Bank float to that of the QR float. The businesses, and how they make money are completely different.

The success or failure of one by no means ensures the success or failure of the other.

As I mentioned to you yesterday, we could be wrong and the Queensland Rail float could be a corker, and you could make a motza out of it. But in my view, thanks to the amount of government influence and manipulation it’ll be subject to, it’s just not worth the effort.

There are plenty of other stocks on the market that have a history of operating in market conditions.

Take this as an example. Why take a risk of investing in a stock that will raise around $7 billion for the Queensland government, when the company itself has already had to secure a debt funding deal of $3 billion from a banking consortium – including Commonwealth Bank.

Which we assume is to replace the $4.3 billion of outstanding borrowings that is being transferred from QR back to the State of Queensland. Or should we say, being retained by the State of Queensland.

Is this another case of privatizing the profits and socializing the debts? We don’t know, but it looks fishy.

Look, we’re not a financial engineer, so our brain capacity to work out all this financial wizardry is pretty limited. And we’re not saying that we’d prefer for the company to remain in public hands, because we wouldn’t.

But what we are saying is that we’re very, very dubious of anything where the books are being cooked, or where there are thick layers of lipstick applied to try and tart up the sale to gullible shareholders.

I mean, looking at the offer document you could be mistaken for thinking QR is debt free. Which technically it will be… until it has to start drawing down on the $3 billion debt facility. Which it obviously will, otherwise why bother getting it.

And also considering that from what we can gather, QR doesn’t have any cash on the books, as the $8 million it did have is also being transferred to the Queensland government.

It all smells a bit too rank for us.

But of course, if we’re wrong about any of this then feel free to correct us when this article is posted on the Money Morning website later today.

As I mentioned yesterday I’ve wasted no more than about 30 minutes checking out the QR offer – hardly enough time to provide a thorough analysis, but just enough time to raise plenty of questions that you’d need answering before chucking your money at the stock.

Cheers.
Kris Sayce
For Money Morning Australia


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


60 responses to “A Very Brief History of Australian Privatisations

  1. There are plenty of people who really want to afford a roof over their heads, and can afford to, who are not suckers, Kris.

    I’m one of them.

    Whilst most of your readers would agree the market is way overpriced, it doesn’t mean you should call some of your paying subscribers suckers.

    In any case you’ve been banging on about a crash for some time now. Meanwhile prices have gone up, and up, and up, and up.

  2. i have been waiting for your so called housing crash to happen for quite some years now, and i probably could have bought and sold in that time and doubled my money, the sooner you stop banging on about a housing crash the better, its just your (wrong) opinion.

  3. haha – nice ones Jason and Tim….if you are a housing bear, then right now is the perfect time to bath int he sunschine of debt-deflation

    House prices are already crashing! Sayce was right\

    If you become a housing Bull now, it would be like jumping into tech stocks in 1999 and then bailing out in 2002 and saying “that Google company, they have no potential!!”

  4. “The bank is taking a punt that both customers won’t ask for the cash at the same time. In the world of banking that’s called banking. In any other business it’s called trading while insolvent.””

    – EXCELLENT.

  5. So, PuntPal, what are the odds to see that 30% crash by the end of the year? 100-1? Even that would seem too generous at this point, unbackable odds, I would say, notwithstanding the many signs that you and Sayce have been seeing coming, always just around the corner, for years.

  6. gutfeeling, it is. And that’s no gutfeeling. There is joke in all that, of course, and the joke is on us, the poor schmucks.

  7. “they simply use a depositor?s savings as security ”

    Well, no. The security is the asset, the house, or the shares, or whatever is backing the loan. Depositor’s money might be called the base from which the bank writes the loan, but it is no security for the loan, that’s for certain. Not in the ordinary meaning of the term, anyhway.

  8. jason,my opinion is that the housing market will crash,i have been saying it for five years.the only thing the crash has been delayed,by banks and goverment,buy about two years,its called stimulus.
    first home buyers,sucked in ,last eighteen months
    100%borrowing on housing loans
    sucker low interest rates.
    now that all these schemes are over look at the corrections taking place in the housing market now.
    and most of these people who have made gains in property prices.
    have probably used all thier equity in the home,ie credit card debts,
    ge finance debt,new car.boat whatever,so give it time while prices are going down,people will owe more than what thier house is worth.
    we are a debtor nation and thats dangerous.
    jason go and buy a house now,no one is stopping you.if you are so confident in housing go for it,drop us a line in twelve months.

  9. Tin & Jason, I have to agree with Kris, in that housing has generally topped in most price brackets and regions…

    I am not in that game, but anecdotally, the buyers are making outrageously cheeky offers or keeping their hands firmly in their pockets fearing interest rate hikes/employment insecurity/escalating infrastructure costs (fuel costs, vehicle registration/drivers licences, water and energy charges etc)…

    When USA exits the “denialist stage” and faces a reality check there will be pain and anguish, rioting in the streets (as per Greece and recently Europe), and with the home armouries of suburban USA, a possibility of armed insurrection and rioting? Things happen slowly because of the magnificent money printing activity of the USA FED via the master of ceremonies Ben Bernankie…

  10. I’ve just been chatting to a friend up in Newcastle who is a RE agent.

    He has told me that he would be lucky to see a foreclosure 5 times a year. The last 2 months he has been dealing with 2 or three per day.

    He added that a photographer that takes photos etc for the RE industry, has said to him that he is astounded how many he is seeing now on a daily basis, during similar period.

    In the Newcastle/Hunter region nothing is going up. All his sales prices are going down or not moving at all. 10% – 30% falls are the “norm”.

    cb….I saw your point on this one, but even I, am now starting to frown with what I see on the ground.

  11. I contend that an understanding of the ‘macroeconomic situation’ is necessary to grasp the extent of the potential of the GEC (Global Economic Crisis)… Mind boggling fraud, currency, commodity and general market manipulation seem to be at the root of the GEC… An understanding of this will enable the reader to better understand the local trends…

  12. Excellent article Kris. It is good to see that MM is now saying what fractional reserve banking really is. (Earlier articles didn’t spell this out). We really need to get this out into the main stream media. We also need a strategy to rid us of this scourge.

  13. If you borrow $500K to buy a house with interest only repayments at around $38K per year that you can no longer afford and therefore must sell.
    Lets say you sell the property for $400K and take a $100K loss which you still must pay back. Repayments (interest only) for the $100K still owing are $7,800 per annum.
    Add this to rental payments , (because you are now renting) of $15,000 per year, total costs are now $22,800. That’s a lot less than the $38K when you were a debt slave even though you lost the house but still owe $100K outstanding.
    The bank is still in front as they havn’t lost on the reduced sale of the property.
    It would be interesting to know how many people are in this situation and for how long they will continue to tolerate such a position.

  14. Nick – I agree. And what you are hearing is very alarming. I suppose we would not even need double digit interest rates for squashing this market like a bug. High single digits will do the job just fine. And the banks clearly don’t care. They are backed by the tax payer through the government anyhow. And on top of it, they do not want to be regulated either. And who can blame them. We all would like to live in the best of all worlds.

  15. Earlier this year I got sick of the alarmism and asked PuntPal to name a date by which we would have to see a crash, or he will admit that Sayce knows no more than than the average punter as to where prices are going to be. He nominated the end of the year, so I am just reminding him of what he said back then.

  16. Was Puntpal’s end-of-year prediction that a crash would be apparent or that it would have fallen by 30%? Puntpal?

  17. Nick – It is a good question. And this one:
    Fema Camp Coffins Investigated
    http://www.youtube.com/watch?v=m3zSDdm-SHI

    I can only think back to the time when in the wake of Catrina the people of New Orleans were totally abandoned and left to their own devices. Had they not changed their minds about it, these coffins would have come handy, to be sure.

    One can take two views on this, I suppose. One more sinister than the other. One can view them as little more than sensible planning for cleaning up in the wake of mass deaths from some natural disaster. Or one can suspect that the bastards have something more intentional and specific in mind, and anything inbetween those two, such as “If people revolt against the NWO, there will be lots of bodies, so we better have something on hand for cleaning up the mess.”

  18. Drew – From my recollection, and we can go back to check this, at the time prices looked like they had peaked out and started to dip, so at the time Puntpal identified that to be the start of a correction that would accellerate into serious falls by the end of the year. So, I don’t think that the dipping we are seeing now would or should qualify. Anyhow, let us hear from PuntPal. I suspect that his faith remains unshaken that the collapse is just around the corner, and that Sayce has been right all along. My point is that if he has been right all along, it has been rather too long whithout anything to show for it.

  19. Nick – If you can find half an hour or so to watch Bob Chapman on Alex Jones, linked above, to check out some rather interesting developments. It sounds as though there is an internal sh!tfight going on in the globalist camp, with Soros out to get Murdoch and vice versa. What do you make of it?

  20. cb @ 23 With the sort of plans these bastards have do you really see them as a mutual appreciation society. As the saying goes “keep your friends close and your enemies even closer”. They are collaborators but they would be probing each others spines for a suitable entry point.

    MF @ 24 Also goes to show our significance in this global neighborhood. Just stop your average american and introduce yourself. They’ll gaze at you in wonder because you have so little body hair and walk upright. Nothing like they expected at all.

  21. lol, MF.

    Fitch – Yes, I suppose the world and its spoils might prove two small for more than one megalomaniac.

  22. Very interesting take on China, Obama, etc., by Wayne Madsen.
    I only wish I had a better grasp on where and how China’s leadership figures in relationship to the plans of the globalist. They are probably playing along to a large extent, while at the same time have plans of their own.

    Friday, November 12, 2010
    China Fired Missile Seen In Southern California : Wayne Madsen
    http://geraldcelentechannel.blogspot.com/2010/11/china-fired-missile-seen-in-southern.html

  23. Fitch – and I should also add that these bastards can probably do far more damage to each other than most of us on the outside can ever hope, so as far as I am concerned, they have my full support to do each other in. The more, the better.

  24. Something really caught my ears about what he said regarding how a dramatic dollar devaluation would work, such as every three dollars you have now being exchanged for just one single new dollar. Supposing that something like this happens, what is unclear to me is this: What happens to people’s mortgages? For example, will a 300k debt be also converted to a 100K debt, or the debts do not get devalued, only the savings? Anyone has info or a view on this?

  25. Nick, Fitch & All – Check this out. Beck is going radical. Him and Murdoch seem to be under the pump from the Soros faction, so this is them fighting back. The fascinating thing is that they are doing it by appealing to the plebs, the people. Why don’t they just do each other in, instead of trying to convice the plebs about how bad the other side is? Anyhow, lots of questions here:

    Beck: Coming Insurrection
    If everything you knew suddenly changed, what would you do?
    http://video.foxnews.com/v/4406355/beck-coming-insurrection

  26. Ah, this one gets better and better: Beck calls Soros “an economic war criminal,” and accuses him of orchestrating the NWO along with various allies. Very interesting…. and where will this end?

    November 13, 2010

    Beck Exposes George Soros’ Puppet Show
    Glenn Beck reveals the far-left financier’s shadowy secrets aimed at changing America
    http://video.foxnews.com/v/4406355/beck-coming-insurrection#/v/4417299/beck-exposes-george-soros-puppet-show/?playlist_id=87937

  27. cb…@31… in Greece 1930’s depression, my parents told me how cash was devalued (or re-valued) literally over night. You went to bed that night, next morning the currency was 1% of what it was the day before. Those who had gold were safe. The new notes were the same but with the corner cut off.

    In this case ALL debts were waved. Some did well out of it but most still starved to death. Mortgages were rare back then as land was passed from generation to generation. In today’s world, I doubt that
    it would apply as the banks have made a game of it.

  28. Thanks, Nick. Yes, it would probably quite naive to expect that the bankers who are ultimately orchestrating much of what is going on should devalue their own balance sheets (the money owed to them by the plebs). If we looked at private contracts between one person and another, then debts would be probably devalued along with the currency, but that will be unlikely to happen with bank debts if the bastards have any say in it.

  29. Nick @ 36 & cb @ 38. It’s not about the money, they already have virtually all of it. If I can own everything that I see then why do I need money. The details only concern you and I and they are immune to them.

    All the banks of note are ultimately owned by a select few so it matters little if currency’s are devalued as they will still have it all along with the vast majority of every other thing of value.

    For all the talk and technical analysis of the American economy the foreclosure of it’s assets would represent the most fantastic bargain of all time.

  30. Fitch…It is a well known fact that the Jews of the time turned all their cash into gold and when the housing went rock bottom, they bought up on mass and rented them out to the desperate.

  31. Fitch – I would agree with all of that, but what do you see in terms of implications it might have for a parallel devaluation of debts, including mortgage debts, alongside the devaluation of the currency described by Dr Warren and Nick? For, if debts do not get devalued alongside the savings, then debtors will be roundly screwed by such devaluations.

  32. To those of us thinking about what the Chinese are thinking about a quote from Abraham Lazlo. “No matter how great your triumphs or how tragic your defeats, remember that approximately one billion Chinese couldn’t care less”. All those counting on trading in a never ending economic ‘boom’ here in ‘Butweredifferentland” thanks to our mineral deposits and the Chinese economy should think again. Just cause you suckered up to a mortgage you really could’t afford as the price of money gets more expensive, just as you thought your job security and income were forever, just as you thought your property value was immune from the reality of rapid deflation and just as you thought a MRT was sure to put our economy back into surplus from an unnecessary deficit splurge – one billion Chinese don’t and won’t give a stuff. Nor should they.

  33. with ref to cb @ 40…many ponder why this is happening to the US in such a dramatic” fashion. To those who have been conscious to the real state of play in the world for decades, if not generations, this is just a “time line” event.

    The US has been the only country in the world that has never allowed their right to own guns to be stolen from them. Attempts have been made but met with impenetrable resistance.

    This final “bastion” of “liberty” needs to be destroyed, before the “agenda” can continue to the next phase.

    Have no doubt, that they have the means to do so in the most “Orwellian” fashion.
    The next “black swan” will not be an “Oklahoma” or 9/11..etc..the world is too savvy to that now.
    It will be of a nature that seems “natural” and fool the people again. But while they are coming out of their stupor, the corral door will be closing.

  34. Nick – Yes, and in a wider context like that, all the preparations that we see with mass multi-body coffins and FEMA detention camps would make sense. But if they are going to release a killer virus, they better have the anti-dote for themselves and their minions. And, moreover, they would better hope that the antidote will in fact protect them and their loved ones, so overall, it is a very dicey proposition that sort of mad plan.

    Incidentally, I have read somewhere that Israel has been trying to develop a GM bug that would kill Arabs, but not Jews, and that they are having a hard time with it. If they could develop it, I have no doubt that they would release it without as much as a second thought. What do you know?

  35. cb @ 42. I would imaging that debt would be devalued accordingly, anything else would amount to all out revolt and the parasite will have killed the host ahead of time. This is probably the natural progression as all governments are skilled at major reform where there in fact is no reform at all but a worsening of matters.

    BB @ 43 – Exactly. Soon enough the “comfortably numb” will have to deal with it.

    Nick @ 44. How long before the question asked you at the immigration counter is “What is the reason for your departure?”

  36. Fitch – Yes, it is plausible. Unless they were prepared to impose an outright and brutal dictatorship, it would be a most unwise move by any regime. Chances are that people would simply refuse making any further payments, as well as refuse vacating their homes.

    But then, I am just trying to think through this a little, who would be the winners and the losers. Someone with net savings would be a loser, that’t clear enough. As for the net debtors, I am not sure. Would they be better off, or not? What else would be likely in circumstances like that? Asset and consumer prices, how would they be affected? This would factor into deciding the questions about winners and losers in the wake of such devaluation. My mind is going all fuzzy on me. Your thoughts?

  37. Bill Maher (and Michael Moore) should watch this to understand how their attacks on the rich are aiming way, way too low

    We’ve been saying for a long time that the banks that caused the crisis – and are now profiting from the aftermath – hew toward a political directive whose objective is to crash the American economy outright and return to a period when workers had no negotiating power at all and the idea of a social democracy was abhorrent. This video with economist James R. Crotty delves into these issues, including a breakdown of the Koch Brothers recent funding of the ‘tea party.’

    http://maxkeiser.com/2010/11/14/bill-maher-and-michael-moore-should-watch-this-to-understand-how-their-attacks-on-the-rich-are-aiming-way-way-too-low/

  38. cb…@45..I hasn’t heard that but it will not work. Yes, Israel’s genetic warfare is very advanced but the genetics of the region is to closely related to be without risk of “crossing over”. Asians, blacks for example is very simple, scientifically speaking, to target. Even hair colour can be achieved.
    Do not be fooled. For every virus developed, the “antidote” has been developed in conjunction. This is true of all manmade viruses. AIDS included.

    Don’t worry, Israel is becoming extremely frustrated. Their plans to commit genocide on Iran has been stalled by the “dogs in the shadows”, plus another more subtle issue.

    Israel’s plan was to create factions within the Palestinians to destabilise them hence conquer. This had been successful for a while, however, a major development has been emerging that is worrying Israel. That being the fact that the different factions of Palestine are now reunifying hence making Palestine “more organised”. Now the talk is that should Israel make a blunder (or miscalculation) it will be with great pleasure of many in the region to wipe her off the map.

  39. Hence my clients suggested Singapore Dollar for trade.
    G20 was a waste of time…but most knew that anyway….

    “Mr Abhisit echoed a call made by the Asian Development Bank (ADB) to use China’s yuan as a major trading currency in the region to reduce the impact of currency volatility, especially linked to the weakening of the US dollar. He said he was the one who proposed the idea to the ADB.”

    http://www.bangkokpost.com/news/local/206142/abhisit-calls-on-asia-to-use-yuan-in-trade

  40. What really is the point of these extreme patdowns? The first hand accounts of people subjected to them do sound too horrible. It seems like the American State is giving a free licence to bullies to abuse people, not only in overseas wars, but also domestically. No doubt there are still many great things about life in America, but the pattern is clear enough: More and more things appear to be going to the dogs. Where will it stop?

    Saturday, November 13, 2010
    Revolt Against TSA
    http://geraldcelentechannel.blogspot.com/2010/11/revolt-against-tsa.html

  41. Nick @ 58 – Yes, indeed!!!

    But here is the question: For how long will the voices of these brave people be suppressed and dismissed as little more than the voices of conspiracy nuts and you tube video hoax? Is it getting out into MSM? Was this video clip evidence of it, or is the station one of those marginalised and discredited by the MSM machine?

    A note to PF – You appear to have gone quiet. Got tired of spinning and discrediting? Or have you been kicked somewhere upstairs into a more cushy job in the Thought Police? Give us a report.

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