How finance industries create economy instability
How does a car park go bankrupt? A series of long-standing assets which are heavily monetised and mostly have high occupancy would appear to be a safe and reliable business model. That it is not indicates why finance is now paying such a harmful role in the economy – and shows that the wealth of a few is now predicated on the insecurity of millions.
It is being widely reported today that NCP (National Car Parks) is going into administration with 700 jobs at risk. Yet if there is a business model which would appear fairly robust it is parking.
Most readers will be very familiar with NCP car parks given their prevalence. Data on the average age of their car parks is not publicly available but many were built in and remain largely unchanged since the 1960s. These are not complicated assets and do not require complex maintenance or significant upgrades.
Asset depreciation ought to have brought the capital cost of the business down to very low levels and given that many car parks have high occupancy and that parking charges are substantial and have risen rapidly, car parks would seem like a license to print money.
So how do they go bankrupt? The answer is that no owner in the modern economy has an asset which they are content to make a generous perpetual profit on if the can make a stupendous immediate capital gain.
NCP has been the subject of decades of repeated 'debt restructuring'. Put very simply, the company has been stripped of its capital value many times over. One generation of owners chooses to take the profits of every generation to come and banks them now. This is done by loading the company with debt.
You start with a portfolio of car parks with little or no debt from which you are deriving a generous profit. Then you refinance those car parks – effectively mortgage them – and take out all the capital value. Now the car parks have significant debt attached and the profit is marginal or barely paying off the debt.
The owner is now extremely wealthy but the business is struggling. The history of refinancing of NCP is like a microcosm of the wider economy. This began in 1998 with a failed stock market flotation and then the sale of NCP to an American property company.
It restructured the company and sold it within seven years. That ownership period was only two years before it was sold again for a further ten-year period (but as an outsourcing business which had twice been restructured and refinanced), and then sold again for a nine-year period leading to bankruptcy. It had one owner for its first 70 years.
The point is that for most of us NCP has been a car park operator, but for its serial owners it was always a property portfolio to strip and and chop and extract from – until there was almost no value left.
This matters. Scotland is a rural country with less than comprehensive public transport coverage which makes cars (and therefore parking) all but essential for travel in some parts of the country. Parking is a public service which was run by a family business but has been destroyed by financiers.
The outcome is economic instability and the hollowing out of the economy, the lost of public assets and another unemployment driver. There is no upside to this story for citizens, but there is for the financial elites. The myth is that they have made their money through creation, by investing in the economy.
The truth is more that they made their money through destruction, by carving up and extracting assets which preexisted in the economy. In car parking the resultant dynamic explains why we can't afford public services; the untaxable wealthy load the company with debt and take the money, you pay very high parking charges and so have reduced taxable disposable income.
The solution to this is a new finance system and stronger regulation. The Scottish National Investment Bank was meant to be about investment and stability. It is failing in that role but that can be remedied. We need to change our attitudes. Attracting finance is often taken as the primary goal of government; the NCP case shows it is a threat to our economy wellbeing.