When Profits at Utilities are Privatized and Losses Socialized, Do We Still Need Public Shareholders?
When Profits at Utilities are Privatized and Losses Socialized, Do We Still Need Public Shareholders? from Wolf Street
So who takes the risks, and who gets paid to take them?
By Leonard Hyman and Bill Tilles:
In the UK, the government puts its various rail franchises up for public bidding periodically. Rather sophisticated corporate bidders calculate projections for rail traffic, expenses, ticket prices and the like. And based on their financial assessment offer a series of payments to the government in return for the train franchise.
This week, the two operators of the London-Newcastle-Edinburgh train line, Virgin Group and Stagecoach, announced the line was likely to be operating at a loss in the next two years. Revenues and, far more importantly, profits were not remotely going to meet expectations.
These two operators of the East Coast line effectively went to the government’s Transportation Secretary Chris Grayling and said, “Here, you can have your franchise back. Oh and we won’t pay you the £3 billion we said we would two years ago. We messed up in our sums.”
And of course the Tory government — rigid disciples of Thatcher and F. A. Hayek replied, “Bust a deal, face the wheel.” Or the stern British ministerial equivalent thereof.
Not really. What they received was not even a half-hearted, meek reminder that corporations with stockholders should realize they assume certain business risks in return for what they expected to be adequate levels of recompense. And the fact that these anticipated profits have now proven illusory does not make this the government’s problem until the franchise agreement expiry in 2022.
Or, standing on the strength of their contract agreement the government’s ministers might’ve politely reminded the unhappy rail franchisees that in the harsh language of the elementary school playground, “Sorry, no backsies.” Which is merely an eight year old’s way of saying, “See you in court.”
But what happens when rosy business scenarios fail to materialize for large, politically well-connected privately owned corporations? Nowadays in the UK, the transport secretary lets you off the hook. Risk and reward apparently means, shareholders take the rewards, government takes the risk.
Or to borrow again from the playground, being a privately owned corporation in today’s UK means getting lots of “Do overs” from a lenient government bureaucracy.
Another government approved multi-billion dollar mess takes us to South Carolina and the SCANA-Santee Cooper nuclear fiasco. Starting around 2007, SCANA embarked on an ambitious two-unit nuclear construction project. As we’ve seen since the plant’s July cancellation, completion of this project was apparently beyond SCANA’s (and Santee Cooper’s) financial and managerial capabilities.
The project failed due to relentless cost over-runs which ultimately led to the bankruptcy of the builder, Westinghouse. SCANA’s stock fell in response. But Virginia-based Dominion Energy just offered to buy SCANA in a move that would, if little else, mitigate a considerable portion of shareholder pain. Let’s look at the deal.
SCANA has already written off a part of the project. In that respect, one might argue that shareholders have already taken a hit. Except that was on the books, not in reality. Dominion is offering SCANA’s shareholders an amount equal to what their stock was worth before the cancellation of the nuclear project. SCANA shareholders may emerge from this nuclear construction debacle almost unscathed. Bondholders will collect interest and principal on schedule too.
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