Sunday, November 30, 2014

Terry Ryder cuts loose on Aquis; retains buy on Cairns

Just over a year ago I posted an opinion from well know real estate commentator Terry Ryder on Cairns and Aquis: Reasons to invest in Cairns?
There are many reasons to consider buying in Cairns. But a grandiose plan for a $4.2 billion resort complex should not be one of them.

Ryder came out again this week with a positive opinion on the Cairns property market and a spray at Aquis: Not all doom and gloom for Cairns, despite $8 billion resort falling through
The most predictable thing to happen in Australian real estate this year is the decision not to proceed with an $8 billion resort in Cairns. 
The alleged Hong Kong billionaire who was allegedly planning to spend billions building an extravaganza in North Queensland has reportedly decided to spit the dummy because he can’t get what he wants. 
Terry's comments on recent  property performance in Cairns are more exuberant than I currently think is justified given the so far modest recovery in median values more broadly across the city has been patchy but regardless:

Here’s the question every investor must ask when they get excited about a location on the basis of one major proposed event: If this major event does not go ahead, is this still a good place to invest?
If the answer is no, don’t buy there.
Fortunately, the answer in the case of Cairns is yes. For the past two years, I have been recommending Cairns a good place to consider for property investment. The Fung furphy was never part of the equation that led me to that recommendation. When I first put Cairns in my hotspots reports, the grandiose resort had not been announced.
Cairns stacks up for other reasons...........

The City Leaders are having nothing of any "Fung furphy" and cheered on by the Cairns Post have journey'd off to Hong Kong bearing gifts of frankincense, gold and myrrh: Cairns Mayor Bob Manning leads delegation to show support to Fungs over Aquis casino resort plan

I wasn't previously aware or missed that Fung had also donated $10,000 to the LNP sometime last year*. Maybe that's why he was so annoyed when probity wasn't simply waived through? Always uncomfortable with such a close alignment of politics, business and media in what can be an insular provincial culture. There was a good lesson of where things can go badly wrong in those circumstances a few decades ago: With a nod and a WA Inc


* http://www.parliament.qld.gov.au/Documents/TableOffice/TabledPapers/2014/5414T5411.pdf
* http://www.parliament.qld.gov.au/documents/hansard/2014/2014_07_15_EstimatesSDC.pdf


Thursday, November 27, 2014

What price a second bid for Reef Casino?

There is today an Open Letter to the Cairns Community from Tony Fung. I expect media response will be typically sycophantic but there is nothing here which placates my concerns related to matters on the Reef Casino (RCT) takeover bid.
While we have been able to develop an alternative to full ownership of the Reef Hotel and Casino the failure of the offer will nevertheless require a comprehensive review of our strategy for AQUIS and may require some difficult decisions about the project.
The other factor which comes into play for the events around the RCT bid failure and the Canberra gambit is the role and strategy of Casinos Austria (CA). When the initial transaction was announced I thought it was pretty clear that the Canberra Casino would have been thrown in as CA wouldn't want to be left with that dog alone in Australia so insisted it go as part of any Reef transaction. Now Aquis proposes to acquire the Canberra property at a further reduced price from the initial arrangement while I suspect deliberately gaming for the Reef offer to lapse.

CA have taken $6 million for Canberra down from $8.8 million in the previous agreement. The independent experts report had some difficulty with a valuation of Canberra given its almost unique situation of a loss making casino. I think that valuation on an already written down asset basis may even be below the initial licence fee with scope for recovery and a floor under the value?

So Casinos Austria definitely wanted out of that problem but still leaves them with a 47% stake in Reef Casino which is far bigger by multiples than Canberra. Aquis have also said they may reconsider a bid again next year for RCT after a strategic review. There are some rules around this. Section 621(3) says:  
The consideration offered for securities in the bid class under a takeover bid must equal or exceed the maximum consideration that the bidder or an associate provided, or agreed to provide, for a security in the bid class under any purchase or agreement during the 4 months before the date of the bid.
So Aquis can't bid again below the expired offer price of $4.354 until after March 28th 2015. The independent experts report in the target statement assessed the fair value of Reef at between $3.23 to $3.99. That leaves plenty of scope for another bid well below the previous offer. The upcoming 2H2014 trading update from Reef will be of interest.

Meanwhile the thinking and strategy of Casinos Austria may be of as much interest as the ongoing oriental opacity around Aquis. There is almost no potential for any subsequent successful bid for Reef Casino without support from Casinos Austria.

Update: "I thought it was curious an investor would want to invest $8 billion in Cairns"

Wednesday, November 26, 2014

A brief weather interlude

The Bureau of Meteorology have after some months updated the data at Lake Morris as dam level drops closer to water restrictions.  I have no idea why this had not been updated since June. Anyway, may we hope it continues to be upgraded on a more regular timeframe! Tinaroo updates at least weekly.

 
 

http://water.bom.gov.au/waterstorage/awris/#urn:bom.gov.au:awris:common:codelist:feature:lakemorris

Tuesday, November 25, 2014

I'm no lawyer but .......

Takeover Implementation Agreement between Reef Casino Trust and Aquis Casino Acquisitions Pty Ltd, dated 24 February 2014:

3.6 Conditions
(a) Each of the parties must, to the extent within its power, use its best endeavours to ensure that:
(i) the Conditions are satisfied as soon as practicable after the date of this agreement; and
(ii) none of the Conditions are breached or not satisfied.
(b) Target and Bidder agree not to do, or omit to do, anything which will, or is likely to, result in any of the Conditions being breached or not being satisfied.
(c) If any event occurs or becomes apparent which would cause any of the Conditions to be breached or become (either immediately or at some future point in time) incapable of satisfaction, or which would cause satisfaction of a Condition to be unreasonably delayed, Target and Bidder must, to the extent that they are aware of such information, immediately notify the other party of that event.


Statement from Office of Liquor and Gaming Regulation, 24/11/2014:
The nature of probity investigations is complex and intrusive and the length of any investigation is critically dependant on the availability of information and the cooperativeness of the applicant. To date important information remains outstanding from ...Aquis.


The Cairns Post, 22/11/2014:

In a letter obtained by The Weekend Post, Liquor and Gaming Commissioner David Ford has told the Hong Kong billionaire that Justice and Attorney-General department executive director Michael Sarquis had written to Aquis setting out “in considerable detail the outstanding matters of which the Office of Liquor and Gaming Regulation is presently aware and the information which is required to resolve them”. “Moreover, it stresses the importance of the three outstanding interviews that have recently been deferred at the request of Aquis.


Just saying?

Monday, November 24, 2014

Aquis circus caravan keeps rolling along ......

Clowns to the left, jokers to the right, and .......


Statements on Aquis from the Office of Liquor and Gaming Regulation, Michael Trout MP and Gavin King MP:

OFFICE OF LIQUOR AND GAMING REGULATION
The nature of probity investigations is complex and intrusive and the length of any investigation is critically dependant on the availability of information and the cooperativeness of the applicant.
To date important information remains outstanding from ...Aquis.
While legislation governing investigations of this nature is different in both states, it should be noted the OLGR is conducting the investigation jointly with the ACT regulator.
On finalisation of the investigation each jurisdiction will form its own conclusions having regard to its statutory requirements.
It is also important to note that the proposed interstate purchase is for $6 million compared to the proposed Queensland purchase price of around $260 million. The monetary value is of significance to the OLGR given the investigation must consider the financial viability of the applicant.
The probity investigation is in its final stages and Aquis has been made aware of the outstanding matters to bring the investigation to a conclusion.
The Aquis investigation is being conducted in accordance with well established and internationally recognised principles. Its proper completion is critical in underpinning the strength and reputation of the casino regulatory environment in Queensland. This has been a key requirement in the Queensland casino legislation since the Casino Control Act was passed in 1982. The Queensland Government will not compromise the integrity of the probity process.
It is not appropriate at this point of the investigation to comment about findings.

MICHAEL TROUT MP
We want development to happen and we welcome new investment opportunities, but we also want Cairns to be a safe environment to raise a family.
We will not apologise for having a very strict and stringent probity process on any new casino operator.
I welcome the news that the Fung family is committed to the Aquis project at Yorkey’s Knob.

GAVIN KING MP
We support the Aquis project, but not at any cost. Due process must be followed and we stand by the rigorous probity requirements.
If Aquis had extended its offer for the Reef Casino for another month it is my belief that the probity process would have been completed by Christmas, the same timeframe as indicated by the ACT Government.
Aquis has requested that the government continues the probity process, however there is still outstanding information from Aquis and answers being sought by OLGR and I urge Aquis to provide them as soon as possible.

Reef Casino: Ratf***ed by Fung*

Latest media this morning on the Aquis fiasco around Reef Casino:

Cairns Post: Aquis set back as Cairns Reef Hotel Casino takeover looks to fail after 13 out of 15 conditions ‘not fulfilled’

Courier Mail: Newman Government red tape holding up Cairns’ next big tourist attraction

Some overblown completely misleading hyperbole there in the C-M, particularly that Cairns property prices have "soared". Both these journalists were guests of Aquis on the Junket to Macau but apparently we are past the use-by date for disclosure on this by journalists?

This is the complete statement subsequently released this morning by Aquis:


 24 November 2014

REEF CASINO TAKEOVER AND CASINO CANBERRA ACQUISITION UPDATE

RCT Takeover Offer

Aquis Casino Acquisitions Pty Ltd (Aquis) refers to the notice of status of conditions it lodged on 21 November 2014 in relation to its takeover offer (Offer) for Reef Casino Trust (RCT). The effect of this notice is Aquis cannot now further extend the Offer.

The Offer remains subject to Queensland gaming regulatory approvals. The Queensland Office of Liquor and Gaming Regulation (OLGR) have advised that, in their view, it is logistically not possible for the approvals to be granted by 28 November. Aquis has not been advised of a date by which they can be granted.

Accordingly, the Offer will close at 7:00pm (Sydney time) Friday 28 November 2014. All acceptances of the Offer will likely lapse at that time and RCT unitholders who have accepted the Offer will continue to own their units and will not receive the cash consideration offered.

Aquis’ plans for Far North Queensland

Aquis remains committed to being a major investor in Cairns and in Far North Queensland and is continuing its work towards progressing its proposed Integrated Resort Development at Yorkeys Knob.

Aquis will seek to continue to work with OLGR to progress its probity enquiries of the Aquis Group with a view to completing such enquiries as soon as possible

However, completing the RCT Takeover Offer in 2014 was always important to Aquis’ overall financial and investment plans. In this respect, Aquis will be undertaking a strategic review of its plans and development timetable over the coming months. Subject to such review and should OLGR be able to complete its current probity reviews in the short term, Aquis may be prepared to reconsider an acquisition of RCT in 2015. A new transaction would need to be negotiated with RCT, Casinos Austria and Accor. Therefore, there is no certainty any such transaction would eventuate.

Acquisition of Casino Canberra

The Aquis Group had previously agreed with Casinos Austria to purchase Casino Canberra, conditional on, among other things, obtaining ACT gaming regulatory approvals and the RCT takeover offer becoming unconditional.

The ACT Gambling and Racing Commission has indicated to Aquis that it may be possible to grant the ACT gaming regulatory approvals in 2014. Therefore, in light of the position of OLGR that it is logistically impossible to grant approvals by 28 November, Casinos Austria and Aquis have agreed that the acquisition of Casino Canberra is no longer conditional on the RCT Offer. Casinos Austria and Aquis have also agreed to reduce the purchase price to $6 million and completion will take place prior to Christmas (subject to receipt of regulatory approvals).


The reference there of the ACT takeover proceeding is extraordinary. As far as I am aware, and has been reported, the contentious probity investigation is being conducted jointly and the ACT has indicated only that it "may be possible". The logic linking that with a "therefore" to the November 28 deadline is simply not rational.

There are three possible interpretations that I can think of which all raise questions on strategy and integrity:

1) A deliberate attempt to politically blackmail the probity process.
2) Deliberately don't co-operate with probity to ensure conditions are not satisfied and the offer lapses as a way out.
3) They bid too much the first time and maybe can get RCT cheaper.

This is the RCT chart for the last two years to close of trade last Friday 21st. RCT this morning is now down below $2.75 and in the pre-offer trading range.

 
* Apologies for the post headline but can't think of a more apt description currently. 
 

Friday, November 21, 2014

Aquis Statement: tick tock stop the clock?

Aquis statement on status of conditions released late today (Friday). This is required at least 7 days before offer expires which is 7pm Sydney time, next Friday 28th. There is no waiver of outstanding conditions and no extension of offer period. Aquis previously indicated they were not minded to extend the offer if the conditions were not met by the 21st.

Will confirm but my understanding is that the offer now can't be extended within the last 7 days so would be dependant on the conditions, including the probity and regulatory issues, being satisfied within the next week else the offer will lapse?

 
 
The relevant section on any extension is at 6.5 in the target statement from Reef available at the ASX website:
 

6.5 Extension of the Offer Period
Aquis may extend the Offer Period at any time before giving the Notice of Status of Conditions (referred to in section 6.3 in this Target’s Statement) while the Offer is subject to Conditions. However, if the Offer is Unconditional (that is, all the Conditions are fulfilled or freed), Aquis may extend the Offer Period at any time before the end of the Offer Period.
In addition, there will be an automatic extension of the Offer Period if, within the last 7 days of the Offer Period:
Aquis improves the consideration offered under the Offer; or
Aquis’ Voting Power in RCT increases to more than 50%.
If either of these two events occurs, the Offer Period is automatically extended so that it ends 14 days after the relevant event occurs.
 
 
An Introduction to Australian takeovers publication from lawyers Minter Ellison provides useful reference information.  
 
Today's amazing update: Gaming regulator blames Fungs for Reef Hotel Casino Cairns probity hold ups


Thursday, November 20, 2014

Lazy plagiarising journalist maligns workers in Cairns as lazy?

Rare excursions into the Cairns Post fish'n'chip wrapper edition threw up an interesting yarn this week on a Cairns Chamber 'report' in the Wednesday business edition, thankfully not posted online.
The two organisations have developed a 10 percent Productivity Action Plan to tackle poor productivity with lazy staff costing Cairns businesses $178 million last year.
Oh dear. Staff bludgers. In the private sector now? The relevant section in the Cairns Chamber 'report' actually says:
Cairns lost $178,200,000 of productivity in 2013 through disengaged employees alone. That equates to $2740 forgone profit for every employee every year*
This is a joint 'report' between the Cairns Chamber and a local company, together currently selling a weekend retreat at some cost to enthusiastic participants. The asterix is noted. There are several in the report. These don't particularly reference anything meaningful that can be used to clarify any of the numbers in the 'report'. Notably such as this:
The average productivity value for an employee in Cairns is $96,000 (Cairns Regional Council Data). A small 10% improvement in the productivity of the 65,000 employees across Cairns would deliver an additional $1.198 billion* in sales to our region every year.
Que?

However yes, the Cairns Post variation from "disengaged" to "lazy" is from old mate Nick Dalton. Business editor at the Cairns Post. I wonder what kind of CV is actually required to be business editor at the Post? Let me reparaphrase an interpretation at least or more valid from a brief perusal of this so called 'report':

The two organisations have developed a plan based on unconfirmed proprietrary data to tackle a vaguely defined productivity problem in Cairns of inadequate management disengaging employees. We will charge fees for this.
Never mind. I would have thought a Cut & Paste copy from another source was itself also the definition of lazy journalism? Perhaps Nick could justify such lazy plagiarism as a productivity boost for News Ltd?


* Apparently the Cairns Chamber was too lazy to even bother to appropriately footnote the data in their 'report'. 

International numbers turning around at Airport

Cairns Airport stats for October:


While the international numbers were still negative on the previous year this has been coming back from the steep falls following Jetstar changes to the Cairns-Darwin-Singapore route and shows signs of turning around. Comment from the airport is also positive:

The international jet flights which operated in both October 2013 and October 2014 were between Cairns and Auckland, Guam, Hong Kong, Osaka, Tokyo and Fukuoka. Passengers who flew on these international jet routes increased 2,100 (6%). Papua New Guinea passenger numbers were stable.

12 month moving average
 


Domestic growth remains consistent although slower than in recent years and more in line while still ahead of domestic growth at other major airports. Sydney Airport has also released October numbers with domestic growth at 1.4% for YTD 2014. Sydney also noted improved fundamentals for the domestic airlines: "Load factors improved with a 2.1 percentage point increase on domestic routes, reaching the highest levels seen in three years."
 
The Sydney report also has an interesting table on international traffic growth by nationality for October:
 

Rank Nationality Sep-14 YTD-14 Rank Nationality Sep-14 YTD-14
1 Australia +0.8% +1.4% 6 Japan -6.0% +1.5%
2 N.Z. +5.4% +0.9% 7 Korea -1.8% +2.7%
3 China +24.2% +15.4% 8 India +5.0% +13.0%
4 UK -1.8% -1.5% 9 Malaysia +17.1% +14.0%
5 USA +9.0% +5.0% 10 Germany -2.2% +1.1%

Wednesday, November 19, 2014

Queensland regional jobs weakness continues

Following on from recent weak employment data the Department of Employment have updated their internet job vacancies for October. Deep blue highlights the decline in advertised job vacancies over the past year across regional Queensland:

 

I was surprised to see the NT shaded light blue however a quick look at the detail indicates that this represents the relatively small NT ex Darwin labour market. I'm not sure if Darwin has been left off the map or one needs a magnifying glass to find it? When Darwin is included the NT turns a deep blue also.

Regional boundaries here make it difficult to draw more detailed conclusions specific to Cairns as FNQ also includes Townsville. The boundary here seems to be more or less the Far North from the previous ABS labour force survey plus Townsville SA4. Anyway this is the more detailed numbers for the Queensland regions:

Regional IVI – October 2014
Index (May '10 = 100)
Yearly
% change
Number of vacancies

Queensland
Brisbane
83.5
8.1
18,636
Central Queensland
88.4
-11.5
2233
Far North Queensland
110.5
-1.1
3822
Gold Coast
104.4
9.2
3718
Outback Queensland
82.9
-17.2
248
Sunshine Coast
130.8
7.5
1512
Toowoomba & South West QLD
122.7
-23.1
1221


Further commentary at Macrobusiness; also a recent post at Queensland Economy Watch on the regional employment data.

SALM explanation

In a couple of recent posts on the Small Areas Labour Market data I raised some queries on correlating the previous geographical areas with the current SA2 outcomes: Becalmed by Salm; More on SALM. The following response has been received from the Department of Employment:


It is likely that the changes in Central Cairns between the old Small Area Labour Markets (SALM) series, based on the ABS’ 2006 Australian Standard Geographical Classification, and the new SALM series, based on the ABS’ 2011  Australian Statistical Geography Standard, are due to changes in the way the Newstart (NSA) and Youth Allowance (other) (YAo) data (used as weights to apportion SA4 unemployment data between the SA2s within an SA4 – in this case the SA4 of Cairns) are sourced.  Under the old series, NSA and YAo data were sourced by postcode, and then concorded to Statistical Local Areas (SLAs).  Under the new series, the NSA and YAo data have been sourced directly at the SA2 level (this wasn’t possible when the old system was developed, but is possible now).  All of Central Cairns, but also much of the surrounding area (including significant parts of the old SLAs of Cairns (C) – Mt Whitfield, Cairns (C) – City and Cairns (C) – Western Suburbs), was covered by the postcode 4870 under the old SALM system, and differences in the allocation of NSA and YAo data between the concordance (published by the ABS, based on overall population) and the new data available directly at the SA2 level is the main reason for the differences between the new and old regions (it is worth noting that the difference between the old Labour Force Region of Far North, and the new SA4 of Cairns, has also contributed to the changes, although by not as large an amount).
 
It is not clear as to why the unemployment rates for the SA2s in the old Central Suburbs SLA are higher in SALM than they were at the 2011 Census.  The accuracy of the Census figures can be affected by the nature of the not stated populations in each area and the fact that the method of collecting the Census labour force figures is different from that used in the ABS Labour Force Survey. On the other hand, the SALM estimates are estimates, rather than a Census count or a direct survey (both of which are prohibitively costly to do at a small area level on a quarterly basis), and in a small number of SA2s the methodology used can lead to figures that can over or under-estimate the actual unemployment rate at the SA2 level.
 
In terms of the participation rate data from the Census, the system used in SALM takes the same approach as the ABS, and excludes the ‘labour force status not stated’ population from the calculation of the participation rate.  These participation rates are then applied to the latest available ABS population data at the SA2 level to calculate weights with which to apportion the SA4 labour force estimate between the SA2s within the SA4.  This provides labour force levels at the SA2 level that are consistent with data published by the ABS by SA4, while also reflecting changes in population growth since the Census.
 
 
Sourcing the Centrelink data input directly at the more detailed SA2 level rather than postcode would certainly make a difference in the  unemployment range across the Cairns suburbs. As frequently noted the 4870 postcode is among the largest populations in Queensland with some significant demographic variations. I still suspect census data related to ATSI population and employment may have some influence on the variation between the two series.

Tuesday, November 18, 2014

Tick Tock on Reef Casino Clock

Shhhh! Have you noticed how quiet any Aquis news has been recently? Not even a whisper from Nick Dalton at the Cairns Post. Which is curious because in just three (3) days time is the Tony Fung deadline for his probity approval else he will pull the plug on Aquis and walk away!

So what is the typically thin ASX market trading in outstanding Reef Casino Trust stock telling us?

 

There is actually still reasonable trade relative to historical levels with sound support on the buy side above $4 and no indication of a panicked rush for the exit. That previous big downturn was when the ACCC raised concerns. The Loose Change hedge fund took small advantage of that always unlikely obstacle but currently has no interest.

Note: To clarify. The offer closes on November 28 unless extended. November 21 is the date indicated to update on status of conditions and extend the offer period. Should he decline to extend the conditions could still be satisfied within the subsequent week.

Monday, November 17, 2014

Cruise tourism reports diverge

Wow: Cruise shipping spend triples to $37m to boost Cairns economy!
The value of cruise shipping to the economy in Cairns is triple what has been earlier estimated, topping $36.6 million a year.            
A comprehensive new report by Cruise Lines International Association Australasia has found that passengers, crews and operators spent nearly $37 million in Cairns last year, far more than the $12.5 million figure provided in an earlier report by industry body Cruise Down Under.
Well not so much tripled as a substantial difference between two different reports with the assumption implicit here at the Cairns Post that the higher one is correct. This is the media release from Cruise Lines International Association but can't yet find the report itself online. The earlier report is from Cruise Down Under.

Well the earlier Cruise Down Under report may have been released earlier but states it is for the 2013-2014 year. The CLIA media release doesn't specifically say but consistently refers to "last year" as being 2013. The two are actually quite consistent for aggregate direct spend for Australia $1.72 billion for CLIA and $1.85 billion for Cruise Down Under. So where is the difference for Cairns?
Last year in Cairns there were 43 visits, 61,024 passenger days and 13,194 crew days with direct spending of $36.6 million, passengers $14.7 million, crew $1.6 million and cruise lines $20.3 million.
But another report covering 2013-14 by Cruise Down Under found $12.5 million was spent in Cairns, $10.2 million by passengers, $850,000 by crew and $1.5 million by cruise companies based on 45 ship visits, 47,785 passenger days and 12,469 crew days.
Survey methods can never be perfect and there are differences here in the passenger and crew numbers. However the difference that caused the 'tripling' is almost entirely in expenditure by the cruise line itself with massive variation between $20.3 million and $1.6 million. The explanation for this category from CLIA with numbers for Australia:
Cruise lines’ direct expenditure of $963 million included $276 million on fuel (28.7 per cent of expenditure), $143 million on food and beverage (14.8 per cent), $121 million on travel agent commissions (12.6 per cent) and $97.5 million on port charges (10 per cent).
Is there some explanation or is one of these reports badly wrong on this category for Cairns?  

Friday, November 14, 2014

Wrong-headed on local preference

 Cairns Post: Cairns Regional Council caught out on cheapskate weighting for local tenders

Cairns Regional Council has been urged to give more regard to local companies amid ­revelations it only gives them a 5 per cent competitive advantage in tender processes.
That’s half the 10 per cent weighting Townsville applies and well behind the 15 per cent price advantage mandated on the Gold Coast. Cairns Chamber of Commerce chief executive Deb Hancock challenged council to follow the southern councils’ lead.

Local preference is effectively similar to a tariff as a form of protection. The economic case for tariffs has been pretty well demolished but that hasn't stopped the provincial protection zealots in the Banana Republic of Cairns and rent-seekers at the Cairns Chamber of Commerce..

All I see in a situation where all councils compete between themselves to match local preference protection is broadly increased costs and reduced productivity. One would have thought the lessons of competitive protection were learnt in the Great Depression but apparently not.

It's no surprise these policies are popular during periods when the economy is weaker and unemployment higher such as recent years in the USA. Research in the USA indicates increased costs and distortions at local preference levels over 5%. Similar to tariffs, higher preference margins such as the Gold Coast can be particularly harmful when it discourages potential competitors from tendering at all. This also lays the groundwork for crony capitalism.

For the provincial protection zealots the payoff is through a magic multiplier for the local economy when the money stays here. Yes, the uses and abuses of multipliers come into play again. I used to think the problem with applying a local multiplier effect across the broad economy by aggregating all those locally multiplied economies would be obvious but apparently not. A fallacy of composition?

An interesting paper on why these local preference policies can work for politicians despite negative long-run economic consequences came to the following conclusion: Preference Policies - American Economic Association

Using a two-player repeated game framework, preference policies can be rational for politicians who have a discount rate that emphasizes short-run benefits. Even when assuming perfect information as to the long-run inefficiency of these policies, short-sighted politicians with low discount rates, sticky capital, and lengthy political response functions provide justification to policy makers for introducing preference policies.
A 5% preference may be reasonable with limited unintended consequences. The Gold Coast tender preference is well beyond that. It is not in the broader interest of Cairns to respond to the Gold Coast with a 15% preference which would only damage ourselves.

An interesting suggestion within that paper is the alternative of a reciprocal preference policy where it may not be politically realistic to remove local preference. So there would be no local preference but rather a 15% penalty for any Gold Coast business tendering in Cairns. Have to think about that one not sure it works for me or would be practical.

Perhaps we should also erect a big sign at the airport arrival gates: "Go Home, Buy Local"


Some further reading:

Nicholas Gruen: Fair trade or no trade? Economic illiteracy alive and well in our think tanks; Krugman: Ricardo's difficult idea; Bastiat: A negative railway & The candlemakers petition; Backward economics; Bill would end local preference practices; The inefficiency of local food; The buy locally owned fallacy; How tilting the playing field spilled millions in Homestead & Bernard Keane: Buy foreign, buy local, just don’t buy Paul Howes

Thursday, November 13, 2014

Cairns employment disappoints in October

Todays regional unemployment numbers can only be described as disappointing: Cairns jobs worsen while Townsville sees improvement

Amongst the four components of the raw data there wasn't a single factor in Cairns which moved positively. My gender fetish indicates that the anomaly in recent months between male and female employment within the data may be reverting closer to 'normal'. Meanwhile the entire situation around Townsville employment is throwing up some curious stuff whether it be building approvals or employment data relative to media reports down there that they all be rooned!

Anyway, to try and again derive something of different interest, based on the Conus Trend series, I have rearranged the ABS data which splits Greater Brisbane from Rest of Queensland. I have moved Gold Coast and Sunshine Coast into SEQ and left the impoverished provincials as the regional remainder. This is Y-o-Y employment growth.

Source: Conus Trends

Wednesday, November 12, 2014

The great Australian land grab

At BusinessSpectator: The great Australian land grab
For Asian developers, Australia has become a proxy for growth to offset a downturn in their home markets -- and they are hugely inflating prices in Australia as they compete for land.
The foreign developers are routinely paying at least 25 per cent more than Australian developers are prepared to pay for sites in sought-after areas across Sydney and Melbourne.
As a result, local developers are effectively being priced out of the market.
“I am finding it difficult to get good sites,” says a Sydney developer, who requests anonymity.
“We are presented with a real conundrum, because we have to keep a land bank for future projects -- and Asian, particularly Chinese, developers are prepared to pay top dollar for sites without understanding the complexities of the development business in Australia.”
Apparently some local developers now even see selling down their land banks as a low risk way to realise a component of the development profits without having to develop the site themselves:
Holm recently hosted a lunch for 30 or so regular clients (old-time Greek and Italian developers) in Victoria, and says none of them are buying sites at the moment.
“Some are selling part of their land bank. They simply think of a number, double it and put on a development profit,” he says.
Mr Sanfilippo concurs. “Some local developers are selling their land for nearly as much profit as they could expect were they to develop the sites themselves.
“They may not make 100 per cent, perhaps 75 to 80 per cent of the development profit -- but there’s no risk,” he says.
Asian developer and investor influx also has increasing relevance for Cairns. The report also notes the cheaper financing currently sourced from Asia, which is effectively a kind of carry trade, as a factor consistent with my previous posts on Aspial: Billionaires getting cheaper! A quick look at Aspial Corporation

Potential for risks and unintended consequences in this scenario are not low.


Note: Previous post also on Aspial and apparent misvaluation on the Spence St land which I wasn't subsequently able to confirm from the Valuer-General: Land valuation weirdnesses revisited.

Monday, November 10, 2014

Mixed currency outcomes for tourism

The recent (misleading) Cairns Post report on arrivals, departures and the tourism deficit included some discussion of the currency. It is important to remember that the headline news $US rate won't reflect the range of currency outcomes across tourism markets. In a previous post on long term correlation of tourism and the exchange rate I used the Trade Weighted Index (TWI). While the $AUD is around its low for the year v the $US the TWI remains above its low for 2014.

I downloaded the most recent spreadsheet from the RBA of daily exchange rates for a range of currencies over calendar 2014. This is the current range of variation for the $AUD as of last Friday relative to the average for 2014 against each:


TWI is shaded green as the benchmark. The $AUD is still above its 2014 average for some key tourism markets and particularly Japan with the Yen being driven down under Abenomic QE. Others such as the UK and South Korea would barely be able to perceive any change.

 Although a change in currency relativities across the spectrum may also change the relative value of destinations. An intending traveller in either Japan or the USA, despite being at opposite ends of this scale, would have perceived insignificant change in currency value between either Australia or Europe as a destination. Skiing in Japan maybe starting to look cheaper relative to Aspen, or Mt Hotham, for some domestic enthusiasts.

The ABS don't aggregate the Euro on arrivals data and only list Germany among the top 10 nations. However an aggregated Eurzone would rival the UK and be ahead of the USA at #4. The non-euro Scandinavian currencies have also been similarly weaker recently relative to the $US with the Swedish Krona charting its own unique course in recent years and the current topic of some controversy among monetary wonks as their central bank appears to have successfully managed to induce only recessionary deflation.

It really deserves a more detailed longer term analysis but I was too lazy. Long term currency relative to Purchasing Power Parity may also be worth a look relative to tourism. Would have to check but I think the PPP estimate for the $AUD is somewhere below US80c which is where the latest currency forecast consensus now seems to be heading for 2014.

Note: Conus has a post today on backpacker tourism which may also have some currency relevance.