In which Eeyore is told where to invest
Friday, October 27th, 1995

The Old Grey Donkey Eeyore stood by himself in a thistly corner of the Forest, his front feet well apart, his head on one side, and thought about things. Sometimes he thought sadly to himself "Why?" and sometimes he thought "Wherefore?" and sometimes he thought "Inasmuch as which?" - and sometimes he didn't quite know what he was thinking about.
A.A. Milne, Winnie-The-Pooh

Eyeore the Donkey, according to A.A. Milne, lived in a "gloomy place, rather boggy and sad" at Pooh Corner. The Eeyores in the Australian fund management business must be feeling pretty sad and gloomy after their recent experiences in Coles Myer and, as far as El Presidente is concerned, they certainly live in Pooh Corner. No wonder they have to drown their sorrows by quaffing so much red wine.

El Presidente has labelled the fund managers donkeys for forcing Pacific Dunlop to sell its food companies and told them they should invest more money supporting industry, smaller companies and infrastructure companies. If it helps, perhaps Pierpont should point out that investment advice from the Labor Party has no better track record than that from the AMP Society.

Your correspondent can recall Strangler Connor back in 1974 berating Australian mining companies as "mugs and hillbillies" (one cannot help but admire the ALP's grasp of the vernacular) for not denominating all their overseas sales in Aussie dollars.

The $A was then worth around $US1.25. Any mining company which followed the Strangler's advice would have gone broke several times since and probably have taken with it any fund manager who was donkey enough to buy its shares.

It could also be pointed out that Strangler took his investment advice from Tirath Khemlani, who had an even worse track record than the Natty Mut.

While in point-scoring mode, Pierpont notes that the fund managers are operating in a deregulated market where they are free to invest as they please. And it is integral to those free markets that foreign investors have been free (or pretty free) to invest in Australia and bowl over small companies.

Question: Who deregulated the financial markets?

Answer: Some clown of a Treasurer (Hey! Pierpont's picking up the vernacular, too) back between 1983 and 1985.

That same Treasurer has ever since been preaching remorselessly to business about the virtues of free markets. The problem, of course, is that while a free market will always deliver a result, it may not be the one you want. It now seems that El Presidente is in favour of free markets only for as long as they do what he wants.

If fund managers are going to be directed to invest in infrastructure projects, perhaps they should all study the first annual report of Hills Motorway Group.

As Pierpont has mentioned (AFR, August 11), this group is a weird hybrid in which investors get one share in a company, Hills Motorway Ltd , stapled to one unit in a trust, Hills Motorway Trust. The company is responsible for the design, operation and maintenance of Sydney's M2 freeway, and the trust will own it. When the M2 is completed (hopefully in November 1997) the company will receive all the money from the tolls and pay rent to the trust.

The trust is the main financier of the M2 and by June had borrowed $148 million of a planned $311 million. At the end of 45 years (or possibly earlier) the trust has to hand the M2 to the NSW Roads & Traffic Authority.

The accounts of the group are bemusing. The trust has recorded as income $8.99 million interest paid by the company. The company has not recorded any costs for the year as it is capitalising all interest until the project is complete. So we have a credit on one side of the group which is not balanced by a debit on the other.

In fact the company doesn't have any costs at all. Everything is capitalised, apparently including the $470,000 administration costs and $149,000 directors' fees (something Pierpont has never seen before).

Furthermore, investors have no accurate idea of the financial status of either the trust or the company because there is an inter-company account under which the trust settles "certain expenses" of the company. As far as Pierpont can ascertain, the two entities have so far capitalised somewhere north of $26 million in interest and other expenses. The cash is gone from the till, but under the holy laws of accountancy it remains an asset in the books.

The most invisible asset is the amount that was capitalised in insurance premiums. The directors have all taken out professional indemnity insurance but have refused to disclose how much they are costing the shareholders.

If the Eeyores are forced to invest in more infrastructure projects, Pierpont would like them to be a bit more transparent than this one.

And on Pacdun, Pierpont has just received a press release from Vegco Ltd. When Pacdun closed its Edgell-Birdseye factory at Bairnsdale, a local lad called Chris Egan put Vegco Ltd together as a food business after holding discussions with growers, unions, governments, retailers and distributors.

Vegco was launched 18 months ago at a function where the stage was shared by the Victorian Premier, Jeff Kennett, and the Federal Minister for Employment Education & Training, Simon Crean. Vegco today seems to have a flourishing business. It took over the factory for $4.5 million, although it had been in the Pacdun books at $10 million.

It sounds like precisely the sort of industry restructuring that Canberra's mandarins and El Presidente keep saying should happen in Australia. If Pacdun couldn't do these things itself, perhaps the Eeyores were right to force it to sell out of food (if, in fact, that is what the Eeyores did). Instead of an uneconomic Pacdun plant we now have an economic Vegco plant.

After Chris negotiated his enterprise agreement with the unions, Bill Kelty called him "Australia's best businessman". Perhaps Bill should tell El Presidente that Pacdun's departure from Bairnsdale was not all bad news for the locals or the industry.

Naturally, it would be better if Bill carried the message to Canberra because he doesn't have to pay to meet Cabinet ministers. And he'd better carry it soon, because the Eeyores are still living in Pooh Corner.


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