Time To Bank The Banks

Taxpayers could use some of that

The banks are back in the serious money. Hurrah!

Well, hurrah if you're not a saver being ripped off on your bank deposit account, with near-zero interest rates in the face of 5% inflation. Or a borrower paying through the nose for a meagre sliver of credit. As long as you're a banker, you can afford a very loud hurrah indeed.

But bank shareholders, surely they ought to be cheering as well. And that includes us taxpayers, because we're still sitting on all those bank shares.

Just as a reminder - in case you'd somehow forgotten - we currently own not just the Crock, but also 27.6 billion (yes, I did say BILLION) shares in Lloyds, and an astonishing 90.6 billion shares in RBS.

Hurrah!

The question is why aren't we selling them yet?

We've blogged this before. Not only does the government have no business owning commercial banks, but the price of these things has moved right back up again. Indeed, Lloyds is now back above our 72.2 pence average purchase price - we're actually in profit!

Tyler's fag packet says that at current prices our stakes in Lloyds and RBS are worth �68bn. Money we could use immediately to reduce our gigantic national debt.

What's that?

Hold on because bank share prices are bound to head even higher?

My friend, if you feel that way, my strong advice is to remortgage your house and family and snap up some RBS shares while stocks last.

The truth is that nobody has the faintest idea where bank shares are heading. And governments should not be in the business of punting around in the equity market with our money.

********

Tyler is now taking a few days break.

But as a parting shot, let's just note the public appeal to help victims of the catastrophic floods in Pakistan (you can donate here).

Obviously we all want to help. But most of all we want our government to get emergency relief out there fast.

Is DfID up to that?

Why does it always seem that serious help takes so long to organise and arrive on site? Disaster zones seem to be crawling with western TV reporters long before the official relief effort finally gets into gear.

As we've blogged several times, the vast bulk of DfID's �7bn budget goes not on humanitarian relief of the kind they're dying for right now in Pakistan, but on economic development where the evidence of success is virtually non-existent (eg see this blog). The priorities seem entirely wrong.

It makes Tyler angry.

BBC - Don't Starve It, Flog It

There must be some people who'd pay to watch this

At last, a Tory government that's going to grip the BBC. Kultur Kommandant Jeremy Hunt says cutting the Telly Tax is under active consideration.

Hurrah. It has long been obvious that the BBC is a major roadblock to smaller government and serious public sector reform, and however much it squawks, it has to be tackled.

But cutting the licence fee on its own is not such a great idea. All that will do is starve the beast of funds and weaken it. Far better to keep it healthy and drive it to market soonest.

Consider a few sums.

The BBC's total annual revenues are currently running at �4.6bn (2008-09), of which the telly tax comprises �3.5bn, and further government funding (the World Service) comprises �0.3bn. So total tax funding is �3.8bn.

Let's assume the BBC is privatised and the tax funding ends. The question then is how much of that �3.8bn would the BBC be able to recoup from subscriptions and advertising revenue?

In truth, nobody has the faintest idea. But for many, the BBC is a compelling brand, and so we'll assume it can hold on to half the total. In which case, its total revenue would be about �2.7bn pa (ie its existing �0.8bn non-tax revenue plus half its existing tax revenue).

The next question is how much could we raise from flogging a big established media company with revenues of �2.7bn pa?

Assuming the BBC could match BSkyB (and if not why not?), it would deliver a net profit margin approaching 20%. Which in the BBC case would be around �500m pa. And applying the current BSkyB market multiple to those earnings - its 19x ratio of market price to earnings - we can get a rough valuation for the BBC.

And that valuation is getting on for �10bn.

Could the Exchequer use �10bn right now?

You know, I rather think it could.

Don't starve it, flog it!

PS We've contacted BOM's man on the Wharf with the gigantic company valuation spreadsheet to check the numbers. Doubtless he'll say we've misinterpreted the fine print of BSkyB's financials, at which point we'll amend our figures. But meanwhile �10bn it is.

Update BOM's Wharf correspondent has now reported back. He reckons our estimated �10bn price tag is far too optimistic. He points out that the BBC's gold plated pension scheme has generated an unfunded debt of �1.6bn (Sky has no pension debt) which any buyer would lop straight off the price. Moreover Sky's profit margin is actually closer to 10% rather than 20%, so we've overegged the BBC's likely profitability. Plus a few other things. So his bottom line is �4bn.

And just for the record, here's what he says:

"If you somehow dump the pensions on the government, flog off all the real estate, move everyone to Manchester AND match Sky's margins while keeping 25m licence fee payers on board you are talking real money. If somehow you can also start charging for premium content and advertising as well the BBC could be worth over �25bn, but frankly none of these things are going to happen.

The firm has a culture of complacency and entitlement so margins (and pensions) will stay the same. I am reliably informed that many BBC staff don't like the idea of moving up north so they are quitting the BBC payroll, starting media consultancies and charging the BBC for the same work they did before, still based in London. So while assets may get sold costs will go up possibly drowning out the effect of the disposals. Compulsion is the only reason people pay for the BBC. I would expect a 50%+ fall in licence fee payers if the rate stays the same. ITV1-4, C4/E4/M4/F4 and Sky News are all free so why pay? People pay for Sky because it has hundreds and hundreds of channels and premier league football. They will not pay for documentaries about how grim it is up north, etc. The BBC doesn't have any premium content other than Eastenders, some sport, arguably Doctor Who & other kids shows and the external stuff not bid for by Sky, ITV or C4. Advertising would be politically impossible even after privatisation. It would probably be a condition of the sale.

The BBC may be huge but Sky has 40% as many subscribers and juices 3.5x the money out of them before you even get to costs (partly due to phone and broadband). They have a similar amount of invested capital on the balance sheet and NO PENSION DEBT. Frankly I would expect them to be worth much more than the BBC. No wonder Murdoch Sr. is trying to buy out the free float."

Yes, well... we can't really argue with that.

We'd still do it though. And for all those commenters who say they don't want telly with ads, we'd trust the market to develop a subscription based service with no ads.

Fire Sale

How much am I bid for a licence to farm Dartford?

The headline is clear enough, and simply repeats what we were told back in the Budget: from 2010-11 onwards Brown is planning to sell a further �16bn of assets, including �3bn in the first year.

But as always, the details are rather less clear. Indeed, as befits a fire sale, the whole thing is shrouded in dense smoke.

All we've been told is that "the Tote, the Dartford Crossing, the Channel Tunnel rail link, and the Student Loan book... are estimated to raise �3 billion". On top of that, "the Government�s share in Urenco, which operates uranium enrichment plants in Britain, Germany and the Netherlands, is also up for auction", but we have no idea what that might be worth.

Also in the dark are the local authorities, the sale of whose playing fields and libraries is supposedly going to raise no less than �11bn of the total �16bn. According to the Local Government Association, Gordo's announcement this morning was the first they'd even heard of the plan. Indeed, there's a real questionmark over whether central government actually has the power to order this. Half-baked doesn't really cover it.

Even on the sale items we have been told about, there's huge uncertainty.

For example, we know the government failed to sell the Tote for a sensible price before the Crash, and the betting now is they will have to settle for less than half the �400m previously sought.

On the other hand, the Dartford Crossing could raise a packet. It's a monopoly crossing on Britain's busiest motorway, and there's a straight trade-off between sale price and toll rates. The right toll regime could make this a nice little earner.

How's that going to be managed? And why stop at Dartford? Why not sell other stretches of busy motorway, with an accompanying right to toll?

It's a very similar deal to the old Roman system of tax farming - the government sells a local tax collecting concession to a private individual, and it's then up to that individual to milk the punters for as much as he can get, short of starving them to death or sparking a rebellion.

And when you think about it, why stop at motorways? Why not auction off the right to collect vehicle excise duty? Or indeed, the telly tax (we could bundle in the BBC)?

The fact is that the government flogging off income generating assets purely to raise money is A Very Bad Idea:

1. The Simple Shopper is hopeless at driving a good deal - eg the disastrous Brown Bottom gold sales, and the horrifically bungled sale of Qinetiq
2. Borrowing money via the gilts market is always cheaper (well, it is unless HMG gets downrated to CCC)

Sure, there are good reasons to flog off government assets - eg company privatisations generally raise efficiency. But selling the right to collect tolls, or the right to collect student loan repayments is pure sleight of fiscal hand.

These asset sales may reduce public sector borrowing as officially measured, but where they are simply sacrificing future income for cash today, we'd be better off borrowing via the gilts market. We do not need yet more Enron accounting and yet more rip-offs.