What are the Moral Underpinnings of Success?

And Why the Term ‘Government
Operation’ is an Oxymoron

Success
in business is important so your business can take care of your family and then
your family can take care of you. It also allows you to fulfill your duty to
your society not to become a burden on your fellow citizens.

Adam
Smith in WEALTH OF NATIONS notes that a seemingly simple overcoat is the
product of “the joint labour of a great multitude of workmen… without the
assistance and co-operation of many thousands of the very meanest (poorest, Ed)
person in a civilized country (it) could not be provided…”

When
individuals pursue their own self-interest, they are, in effect,
self-organizing to produce an optimal amount of goods and services for the maximum
number of persons in their society. This, of course, assumes that a competitive
market exists for those goods and services and that individuals are prevented
by their competitors from over-charging for their products or services by their
desire to maximize individual profits.

Governments
have a role to play in ensuring competitive markets and enforcing laws against
fraudulent behaviour. But beyond that, governments cannot be counted on to
produce goods and services efficiently through any form of direct government
operation. There is abundant evidence that the private sector can do this much
more effectively.

When
we bought an NHL expansion franchise (the Ottawa Senators), the team played its
first three and a half years in the city-owned Civic Centre, an antiquated
10,000-seat downtown arena. We asked the City of Ottawa if we could install
some private suites and they generously agreed. In fact, they offered to
install them for us at our cost. The plan they came back with was for 16
private boxes installed at a cost $12 million. Hmm.

Instead,
we did our own design and hired our own GC (General Contractor)—PCL, one of the
largest construction companies in Canada who also went on to build our new
privately funded stadium called the Palladium (now Scotiabank Place). We
retrofitted the Civic Centre with 42 suites installed in a semi circle in a
weirdly truncated, asymmetrical building* and at a cost of $3.2 million
including full F, F & E (Furniture, Fitup and Equipment including carpet,
seating, bar fridge and CCTV).

Ottawa Civic Centre Suites Installed by Sens
at Sens Cost

Now
if you are counting that is a difference of $673,810 per suite; i.e., each
City-built suite would have been a factor of 9.8 times more costly. Wowza.

The Sens paid for installation of
these suites and, on their departure to greener pastures, left them behind for
the Junior A Hockey team (the Ottawa 67s) to use but don’t weep for the team.
At $76k each, suites were fully paid for via annual rentals in just 1.2 seasons
(at an average of $65,000 per year for pre-season, regular season and playoff
games). That’s like buying your first home for $350,000 and paying it off in
1.2 years, not a bad gig. The last 2.3 years at the Civic Centre was all profit for the Sens, about $6.3 million (42
suites times $65k times 2.3 years). In fact, the cost to install these suites
was negative since they sold (financed) this revenue stream for cash upfront.

IRR
(Internal Rate of Return) on this investment is calculated as follows–

0
$(3,200,000.00)
1 $2,730,000
2 $2,730,000
3 $2,730,000
4 $1,365,000
Total $6,355,000.00
irr 72.1% p.a.

Now
if you can get rates of return north of 22%, you are doing well. The Sens were
able to achieve multiples of that because there is pent up demand for NHL
hockey in hockey-mad Canada and because they have a local (legal) monopoly on
supply. They can also sell this income stream for cash because the buyer (most
finance companies will do this) likes the return and likes the covenants on the
suite leases which tend to be large national and multi-national corporations or
well capitalized local ones.

If
the Sens sold this revenue stream with a 12% coupon, they would get a PV
(Present Value) payment of $4,224,481.54. At 14%, it would be $3,946,245.01 and
at 10%, $4,521,419.30. These are typical values for these sorts of transactions
circa 2013. You can see my calculations at the end of this post and download the
associated spreadsheet as well.

More
recently, I note that not-for-profit Ottawa-based incubator, Exploriem.org,
provides work spaces to entrepreneurs and artpreneurs for $300 monthly (plus a
small monthly charge for Internet, reception, meeting rooms, boardroom, mail
handling and operating expenses) while a City-run competitor almost entirely
funded by taxpayers was double, that is, until shamed into lowering their rates
by upstart Exploriem. Oh yes, parking at Exploriem’s incubator is free. At the
City-run facility, parking is more than $175 monthly if you can find any.

The
morality of capitalism is based on the notion that if you first take care of
your family and yourself then you will not become a burden on your fellow
human. This is a moral imperative. And once you have achieved it, you are in a
position to do good works for others, another moral imperative.

The
moral underpinnings of capitalism are—

a.
Self organization and profit-maximizing behaviour by individuals in competitive
markets will yield optimal production of goods and services;
b. Profitability is a desired outcome so that reinvestment in the business can
take place including investment in technology, business methods and employee
training;
c. Efficiency and environmental sustainability are linked;
d. Nothing is sustainable unless it is also economically sustainable;
e. Private ownership of the commons also means careful husbandry of resources;
f. Taking care of your business is a top priority;
g. So that your business can take care of your family;
h. So that your family can take care of you;
i. So you don’t become a burden on society;
j. So that you can look out for the interests of others once you have first
taken care of your business, your family and yourself;
k. So that they can help your business become sustainable even without the
active presence of its Founder(s) in a virtuous, self-reinforcing circle.

Henry Ford is credited with paying
his workers a living wage in 1914 ($5 per day estimated by Jared Hillary Ruark to be equivalent to $15 per hour
today) so that they could afford to purchase vehicles they were building. Henry
may also have been motivated by a need to reduce labour turnover which is
costly to a motor car manufacturer in terms of higher retraining costs as well
as lower quality and productivity.

Mr.
Ruark** goes on to compare Costco CEO Jim Sinegal’s position on wages to Mr.
Ford’s, “He rejects Wall Street’s assumption that to succeed in discount
retailing, companies must pay poorly and skimp on benefits, or must ratchet up
prices to meet Wall Street’s profit demands. Good wages and benefits are why
Costco has extremely low rates of turnover and theft by employees… And Costco’s
customers, who are more affluent than other warehouse store shoppers, stay
loyal because they like that low prices do not come at the workers’ expense.
This is not altruistic… this is good business.”

A
virtuous self-reinforcing cycle… sounds promising.

@ProfBruce
@Quantum_Entity

* In case you need more proof on
why Governments should stick to what they do best which is to not operate anything, think about the
original design of Ottawa’s Civic Centre. Originally supposed to seat around
16,000 people, City Council of the day ridiculously decided to lop one entire
side off to save less than $2 million in construction costs making the arena
obsolete on the day it was opened in December 1967.

Absurdly Truncated (Right Hand Side),
Asymmetrical Seating—Ottawa Civic Centre

** Note that Mr. Ruark is drawing
on New York Times writer Steven Greenhouse’s article How Costco Became the
Anti-Wal-Mart, July 15, 2005,https://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?pagewanted=all&_r=2&.

23-Feb-13
Ottawa Senators and Ottawa Civic Centre

City
of Ottawa Proposal 16 suites $ 12,000,000.00 $ 750,000.00 per suite
Senators and PCL 42 suites $ 3,200,000.00 $ 76,190.48 per suite
Difference $673,810 9.8

Annual
Suite Revenue $65,000
No. Seasons to Recover Capital Expenditure City of Ottawa 11.5
Sens 1.2
Annual Revenue City of Ottawa $1,040,000
Sens $2,730,000
Gross Profit Sens $6,279,000 2.3 years
Sens Cashflow
0 $(3,200,000.00)
1 $2,730,000
2 $2,730,000
3 $2,730,000
4 $1,365,000
Total $ 6,355,000.00
irr 72.1% p.a.
PV $4,224,481.54 12% p.a. Third Party Finance

E&OE
For demonstration purposes only