Still At It

1 12 2011

Category; Finance, Politics, Bristol

It takes a throwaway remark by a part-time local politician in one of Britain’s smaller cities to illustrate that while the eurozone crumbles and the Western world’s economy  faces deep recession, no lessons have been learned.

They are still at it.

The councillor responsible for transport in Bristol was talking about a new scheme to charge visitors to park their cars where it currently is free. This is what he had to say to the local BBC:

“He hoped the move would raise some £200,000 per year – allowing £3m in capital to be raised.”

BBC News 26 November 2011 – click here for the report; Ashton Court Parking

So how does £200,000 turn into £3 million? I’ve already discussed how this works here and then here, and here it is in operation.

Of course I don’t know how exactly the plan would work but it’ll be something on these lines:

The car park at Ashton Court has seen in excess of 200,000 cars per year parking there for the past several years. If the council imposes a £1 parking charge and a similar number  keep parking there, it would raise £200,000 per year. £200,000 per year, every year coming into council coffers. Pretty good; bit of a windfall. But £3 million now is a lot more tempting and this is how you get that.

Step 1

Set up a company, this is called a Special Purpose Vehicle (SPV) but don’t get tangled up in the terminology. It’s a company, and companies needs assets so you give the company an asset. It’s not a physical asset, but more of an idea, it’s a right to something; it’s worth something so it’s an asset.

Step 2

You give the company the right to the net profit from parking revenues for, let’s say, 10 years.

Step 3

You create bonds to be issued by the company. This is the way you’ll get your £3 million. The bonds are investments that will pay out a percentage of their face value every year for a defined period until the bonds are redeemed; i.e. the bondholders lend you money for a certain number of years, you pay them interest on the money they are lending you until the fixed term comes to an end when you must repay them the original loan. These will be traded on the open financial market.

To maximise the revenue, the bonds are going to be broken up into different classes; A, B, C, D.

The A class of bonds will be the safest and D the riskiest. By safest I mean most likely to be paid out the interest and, at the end of the term, repaid the capital, and by riskiest I mean least likely to have interest and capital repaid.

Step 4

To decide exactly how safe or risky these are you have to go to a Rating Agency. They will look at the asset and the proposed terms of the bond and decide exactly how safe or risky the investment is. In straightforward terms; how much the parking is likely to generate, how likely that money is to be able to cover the interest and repayment, and where the bondholder would sit in the pecking order when it comes to a payout. The investment is in the parking charges only, none of the council’s other assets (or liabilities) are taken into account.

Ratings agencies love deals like this because they are so simple. There’s only one thing for them to look at; how many cars are likely to pay a fee over a period of time? If they have to give ratings to large companies or countries there is a bewildering, virtually limitless, list of things that might affect the credit-worthiness. Ratings agencies also like the fees. So do the bankers, lawyers, consultants, underwriters.

Step 5

Your bankers place the bonds with institutional investors and you get your £3 million.

Why doesn’t the council just borrow?

If the council were simply to borrow the money they would have to pay a higher rate of interest because they are borrowing from an institution that is taking all the risk and expects a commercial return. The council is already likely to issue general bonds, but they are based on the council’s credit-worthiness as a whole which is a much more complicated business and would achieve a lower return.

There are almost certain to be limits imposed by central government on the amount a council can borrow. This transaction would not be categorised as borrowing, even though it is borrowing.

Also, owing lots of money doesn’t look good. This deal doesn’t appear in the paperwork as a debt so the council, and specifically the party in power when the deal is transacted don’t look as bad as they otherwise would.

What’s the problem?

This idea is being proposed purely as way for the council to borrow money. That’s what Councillor Hopkins admitted to the BBC. It’s a pretty inefficient way to borrow money; setting up the infrastructure for parking, putting hundreds of thousands of people to inconvenience and expense and making them pay for something which they currently expect to use as of right.

Have a look at this map – This is a link to a map of the area (the parking is represented by the big ‘P’s). There are three disparate car parks; how much is it going to cost to rig them up for pay and display, how much to operate the system every year, to hire and equip the people to run it?

The contracts to install and maintain are likely to be outsourced, committing the city to an ongoing expense. And also a time burden. The proposals, reports, contracts will take an enormous amount of the time of councillors and council employees and consultants. Doesn’t it take the council away from its core activities? Does the council exist to regulate and improve the lives of local citizens, or is it a business?

This is a scheme that seeks to address a problem of now with the money of tomorrow. Filling a funding gap right now seems the most urgent thing to the councillor of today, but they are spending money today with the revenues from years ahead, and doing so in a complicated, expensive and inefficient transaction that restricts a council service, and contributes to the commodification of our daily lives.

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