The financial system is meant to distribute investment dollars efficiently and, more importantly, to benefit the whole community. Government investment money comes from taxation and loans. Taxation comes from profits on businesses or gains in private capital values. The system is expensive to operate and inequitable. We can incrementally adjust the system and more than double public financial efficiency.
Financial efficiency is the investment made from a given amount of money over time.
Debt creates the most money in society. Debt has an interest charge, and the efficiency of debt is dramatically improved if interest does not compound. The change can happen overnight when governments borrow money from community banks owned by depositors and borrowers, where, with each repayment, the interest paid reduces the capital owed. Typically, it reduces the cost of a loan by 30% and increases bank profits by shortening the time needed to repay the loan. The change is a simple book-keeping change and, with agreement, can be done immediately.
Another improvement in financial productivity comes by accelerating and increasing the investment of profits without monetising assets. Today, profits go to the owners of productive assets, and governments tax the profits. Some of the tax is reinvested, and some money goes to repay debt or stored as increased asset values. Other money appears as overpriced shares, property valuations, or capital gains. The critical point is to reinvest most of the money received. We can remove most debt by changing the bookkeeping and re-investing income when it occurs to increase the rate of investment in profit-making opportunities.
The two changes that eliminate debt exceed the investment amount from a given amount of money and reduce the financial costs by more than half.
Light Rail in Canberra
Light Rail in Canberra can use the above principles to fund and develop the Light Rail system throughout the Capital and Queanbeyan. The government can place the Light Rail assets into a public company jointly owned by the government, investors, and local passengers who have used it since its inception. The number of shares passengers get will be proportional to their trips. Each time a person makes a trip, they are allocated a certain number of shares according to the value of the journey. For people with concessions, the government allocates money to the concession holder’s Light Rail account. All the money collected from trips is used for capital expenditure and distributed as shares to shareholders.
Every year, shareholders receive 5% more shares than they currently hold minus the number they receive from riding on the Light Rail. Every year, shareholders must sell 10% of their shares. Anyone can purchase shares from other shareholders. Shareholders receive extra shares to match inflation.
The government pays the Company all operating and non-capital expenses and receives non-earning shares in return.
The government can start the company by replacing current loans with money raised from Canberra’s private investors and Superannuation funds. The returns on investment are double the average of Superannuation Allocated Pensions and will attract long-term investors looking for a stable income stream.
The operation creates a system owned by investors (including the government) and users of the services provided by the Capital. It removes the cost of interest and increases the capital circulation rate. As long as the capital stays in the company, there is no cost of capital. No shares are sold outside the company, and the capital remains in the company.
The government can quickly check the financial efficiency of the Capital Expenditure by modelling how the system would work with the existing Light Rail System.
A separate company will build and operate the computer systems. The funding will use the same user ownership principles. However, instead of 5% more yearly shares, the Company will issue 10% shares. Its systems will owned by Light Rail Companies who use it.
Modelling Using Estimated Numbers
Setting up a Permanent Capital Market releases the static capital held in the assets. It removes the interest cost and ensures the productive investment of the released money. Any productive asset can use the same system. The extra income comes from the new investments made with the released capital. The capital savings for light rail are ⅔ of the current costs and is the equivalent of a 66% increase in financial productivity.
Importantly, all public transport users will gain capital with each ride. With the current system, any increase in capital goes to the financiers who supply the capital and nothing to those who pay to use the system. Financiers get paid repeatedly for the same capital. It is the removal of these payments that increases the efficiency and fairness of the financial system.
Summary
The current financial system allows investors to profit repeatedly from the same service for no extra cost to investors. It creates an unfair situation where money keeps flowing away from the community. Instead, we should transfer the money to those who paid to use it and invest the money. By doing so, we can ensure that the financing of public assets like Light Rail is fair and equitable and that we can maximise the returns we get from a given investment. It means the user community pays for public assets, and the profits from the public assets return to the community that pays for them.
