When you are growing or starting a business, accurately costing the risks associated with the process is crucial. LOUIS COUTTS
By Louis Coutts
Sometimes you realise that you simply don’t know what is going on behind the scenes. This story is an insight into how some companies grow, but unless you are a big shot, it isn’t likely to help the everyday garden variety of hard working entrepreneur or small business. But I just have to tell you the story anyway.
In my past life I was a lawyer and I still keep a foot in the camp through an organisation of lawyers known as the International Commission of Jurists. We are concerned about preserving what we call “the rule of law,” which is a legal concept to do with ensuring that everyone is treated fairly.
Anyway, I was doing some research in the law library at the university and came across a court case which went to the High Court. I won’t bore you with the details, but in reading the decisions of the judges, I learnt that there is an act of Parliament known as the the Development Allowance Authority Act 1992. There is another act called The Melbourne City Link Act 1995.
A company by the name of Transurban won the contract to construct the Tullamarine freeway in Melbourne pursuant to the City Link Act. Transurban needed a lot of money to undertake the project, and so it approached the Development Allowance Authority for a certificate. Once they got the certificate it meant that the interest on any money it borrowed from a consortium of banks (and they did borrow from the usual suspects) was non-taxable in the hands of the banks.
Let’s make it simple. The money that Transurban borrowed to build the Tullamarine freeway was effectively underwritten by the taxpayer. This infrastructure project was funded in such a way that the banks didn’t have to worry about paying tax on any profit they made from lending, and presumably it was therefore able to extend to Transurban loan conditions that were very favourable. The taxpayer picked up quite a bit of the bill. Now, that is not a bad way to grow if you can get into a project in which you can’t lose money and have the taxpayer come along and give you a hand.
What happened when the freeway was complete? I took the same route to the airport I had been taking for years, but after this wonderful transaction I had to pay a toll to Transurban to travel the same route. So Transurban and its banks got the freebie from the Government (taxpayer) to build the freeway and then the taxpayer had to pay Transurban dollars every time they used the freeway to which they had actually contributed financially.
I am afraid that deals like that don’t come along every day. However, if you want to expand and you are into infrastructure, you might just want to be aware that there may be a friendly hand just waiting to help you up the gravy train.
These little aids are generally unknown to the likes of you and me, but having learnt of their existence, one wonders how many more hand outs there are from the taxpayer to help us grow?
If, however, we can ignore for the moment the pain of knowing how the Tullamarine freeway was funded (or any other infrastructure development for that matter) and think of basic principles of funding we can learn a lesson.
Growth is often associated with developing a product over a period of time. It takes what we call “research and development”. There is a cost before the project returns a dividend. There is also the risk that it will not return a dividend and will be a dead duck.
Businesses sometimes get into trouble in that they do not translate the cost of being out of pocket for the period of the project and they do not adequately factor in the risks associated with the project. The result can be that a great idea goes down the drain simply because the developer of the idea did not have sufficient financial support to bring the concept to conclusion. Sometimes we need just a little help from our friends, and if the taxpayer is in a good mood it might not be a bad place to start looking for help to get you across the line.
Let me finish with a story.
Gutenberg made one of the most staggering inventions of all time. He invented the modern printing press. Unfortunately, he needed to borrow money to bring the invention to completion, so he borrowed the money which didn’t turn out to be quite enough so the lender, who had taken a charge over the invention, exercised his rights and took possession of the printing press and made a fortune while poor Gutenberg went bankrupt.
Managing growth by the development of new projects is a tough business, and you need all the help you can get.
Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.
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