How much is QR National worth? With the sell-off of the massive freight and rail infrastructure part of Queensland Rail launched on October 10, will the “investment community” here and overseas gobble up at least 1.46 billion of the 2.44 billion shares on offer at between $2.50 and $3?
If it does, the float will be worth between $6.1 billion and $7.32 billion for Queensland’s coffers (including at least $1.525 billion in QR National shares) and QR National’s managers, like those of Goldman Sachs and Merrill Lynch, will have “earned” $65 million in fees.
Once QR National begins trading on November 22, will the share price skyrocket (like the Commonwealth Bank’s whose 1991 offer price of $5.40 has risen to more than $50 today) or will it follow the nose-dive of Telstra 3 (now trading at around $2.60 after being offered at $3.60 in 2006)?
Those with the billions to spend would like to believe QR National CEO Lance Hockridge’s pitch that the company can follow the path of Canadian National.
Privatised in 1995, the Canadian National float was eight times oversubscribed and the company’s market value has grown from C$2.16 billion at launch to $30.26 billion now (A$30.39 billion).
But that was before the global economic and financial crisis. Brokers who have to advise their clients whether QR National is worth the risk are sceptical. QR National is being sold as a “growth stock”, one whose share price can be expected to rise on the back of company expansion.
Certainly, no one will be seduced by the stock’s dividend yield — at most 2.5% this financial year and 3.3% in 2011-12, when the average yield for big companies is 4% and bank term deposits presently yield 6%.
Its dividends will also be “unfranked” — shareholders will be liable to tax on dividend income because QR National won’t be paying company tax on that part of its profits.
However, growth high enough to justify QR National’s share offer price is not guaranteed, even though QR National replaces a public monopoly with a private one. It’s not certain its monopoly won’t be eroded by competition from main rival Asciano and from Xstrata.
Its coal contracts are shorter than Asciano’s and could be lost to it when they become due; coal growth projections are vulnerable to demand declines in Asia, capacity constraints and a price on carbon; and QR National’s container transport (“intermodal”) division is losing money.
The nervous fund managers also fear a privatised QR National will still suffer from a “public service culture”, that government regulations could change the “rules of the game”, and that a high Australian dollar could dissuade interest from overseas investors.
Their caution showed up in the tepid response to the “retail” phase of the float, which ended on October 22 with only $1.05 billion in firm offers (only 20-25% of the expected final value of the float when the average has been around 40%).
These difficulties should remind us of what a commercial crime the QR National sell-off is.
Since March 2009, Premier Anna Bligh and Treasurer Andrew Fraser have subjected Queensland to a blizzard of propaganda claiming that the QR National and other sell-offs are unavoidable if the state is to have hospitals, schools, railways and roads while digging itself out of a “$15 billion financial black hole”.
Yet the “black hole” has turned out to be pure fiction. As University of Sydney accounting professor Bob Walker and economist Betty Con Walker state in their May 2010 report for the Queensland Council of Unions (QCU), Queensland Privatisation — Fraser’s Folly: “Rather than a loss of $15 billion revenues as claimed by Treasurer Fraser, the Government will have an increase of nearly $14 billion over the four years to 2012-13 — a turn-around of $29 billion.”
In their two reports to the QCU, the Walkers also show how much Queensland has benefited from having Queensland Rail as a public enterprise — recent Treasury data uncovered by them reveals it would have produced $564.2 million for the public purse by 2012-13 (after notional 30% company tax was paid) .
The Walkers’ work exposes the real, never admitted, motives for the QR National sell-off: to feed corporate profit (seen as essential to economic growth and development), provide Queensland Labor with a war chest for the next election, weaken the conditions of public sector workers and the influence of their unions, and set up Hockridge and the rest of QR National management on lush private-sector remuneration.
The scale of Bligh and Fraser’s “great train robbery” is immense.
Going on the Queensland Treasury figures revealed by the Walkers and on QR National’s own earnings projections, Queensland Rail would have returned the full value of the privatisation to the public purse in seven to 12 years. After that point, the Queensland accounts would be ahead, continuing to generate income.
The final QR National share price will be determined by the supply and demand for its stock, with the Queensland state’s own holding of between 25% and 40% being used to influence it.
On the social side, Hockridge has been busy reassuring potential investors that once the guarantee to maintain QR National’s 9500 workers’ jobs lapses after three years, staffing levels will go. Mark Rowsthorn, CEO of rival Asciano, said on October 19 that such staff cuts were inevitable.
As for the environment, the main source of profitability of QR National is being plugged as linked to the potential explosion of Australia’s coal exports to booming Asian economies. The bigger the exports, the bigger will be QR National profits.
After the semi-flop of the retail uptake, the already frenetic QR National ad campaign started to feature graphs of QR National coal tonnages climbing skywards. Millions of dollars more profit, millions of tonnes more greenhouse gas.
Will the QR National float be “successful” over time? Such “success” can only come at tremendous cost to railways, workers, rural and regional communities, and the environment. We should keep up the fight against it.