THE PORT OF MELBOURNE: WHEN IS A ‘SALE’ NOT A SALE…AND DOES IT MATTER?

The saga of the ‘sale’ or not of the Port of Melbourne has been going on now for some years. Valued at around $5-10bn, the transaction will make a difference to the state government’s cash flow when the transaction goes through, as now seems likely.  But much of the argument misses a key point – the ‘sale’ will not actually be a sale at all!  And it does matter.  Let me explain.

It’s a lease, not a sale

The Government documentation makes it clear that the transaction will be a ‘lease’ of the port for 50 years. That’s a long lease, but it means that the government – and the people – will still own the port…and will get the port back in 50 years’ time.

Yet the transaction is consistently reported in the media as a ‘sale’. Why?  Because reporters don’t understand – or choose not to understand – the difference between a lease and a sale (just as people don’t understand the difference between owning their car and leasing it – it’s the same car, I drive it, it must be mine…).

Also, ‘sale’ of a public asset is an emotional issue. If sold, the asset is lost, gone, given to someone else, whereas explaining a lease is complex.  Third, journalists are (rightly) cynical.  Perhaps the new operators of the Port will convince the government during the 50 years to sell the port to them at a favourable price or will run down the value of the port during their time (eg environmental degradation, poor planning) and the government will pick up a bill in 50 years’ time to fix this.  So it attracts more attention by calling it a ‘sale’.

So what is a ‘lease’ (simply)?

A lease gives the operator the right to use an asset (eg a car, equipment, farms, aboriginal land, government land) for a stated period, with conditions attached. At the end of the period, the asset returns to the owner.  In the case of a car or equipment, the value at the end of the lease period is quite low, so the value to the owner is not great, so leasing and ownership are not greatly different except the lease payments are spread out over the period whereas, in a sale, all the payment is made at the start.

But when leasing a property asset, the value of the asset may well be greater at the end than at the start!  So the owner gets a cash inflow each year (effectively the rent of the asset), loses the operating net cash inflow each year (which goes to the lessor), but gets the asset back at the end and can sell (or lease) it again if it wishes.  This is often done in countries which do not wish to sell their land to foreigners, so they lease the operating of the land, but retain ultimate ownership.

In the case of the port, some genius came up with the idea of rolling 50 years of operating lease payments into one front end lump sum, making this a very attractive current option to the lessor!

Sale or lease: does it matter?

YES! The media has totally ignored the fact that the government will continue to own the asset.  This incorrect reporting generates emotion over the apparent ‘loss’ of the asset… which isn’t happening!  The government could decide during the lease period to kick out the operator if the operator failed to meet the terms and conditions of the lease.  This would probably be costly, but it is at least an option to recover your land (which is not available if  you sell it).

There’s also a complicated tax argument that shows that leasing is a good financial option for non-taxpaying organisations (such as governments). They can access lower cost after tax funding that is only available to taxpaying organisations, but this article is too short to explain this.  This asymmetrical tax position also makes leasing attractive to the lessor, compared with other funding alternatives.

So is leasing the port a good thing then?

This is a different question, and a key to the political (and economic) debate!  Leasing is just one financial option for an asset.  Sale, renting, borrowing against the asset to build other assets (a public version of negative gearing) and changing the operating management of the port to get better returns are other options which could be used to get similar financial outcomes ie to use the port asset to bring in money that can be used by the owner (government) to build other assets or fund other expenditures (removing rail crossings is the purported use of the lease funds by this government).   Simply borrowing the money at the very low current rates available, fixing the rate for 30 years and incurring a small ongoing interest bill while hanging on to the port is a very interesting alternative.

A key political issue is the timing of the cash flow.  The current government sees the immediate cash flow as being of immense benefit (assisted by the poor state of public accounting – another issue too complex for here).  The cost, however, is the loss of cash flow receipts for the next 49 years.  So a big benefit now has a small annual cost…for the next 49 years…which locks in future residents, but, hey, who cares about them.

Summary

The government has at least been honest in its description of the transaction as a lease. The media hasn’t and has created emotion around the issue that is not appropriate.  Whether taking 50 years of rent/operating money up front in one year to fund some short term projects and forgetting to tell people about the impact of this on all future budgets is a good decision is hard to tell.  But we all like the idea of a quick buck, cash in the hand.  We’re not so good on considering what will happen over 50 years and how we allocate benefits and value to all those future taxpayers, residents and governments.

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