Privatisation: The $9 trillion sale; Governments should launch a new wave of privatisations, this time centred on property

Privatisation: The $9 trillion sale; Governments should launch a new wave of privatisations, this time centred on property

Jan 11th 2014 | From the print edition

IMAGINE you were heavily in debt, owned a large portfolio of equities and under-used property and were having trouble cutting your spending—much like most Western governments. Wouldn’t you think of offloading some of your assets?

Politicians push privatisation at different times for different reasons. In Britain in the 1980s, Margaret Thatcher used it to curb the power of the unions. Eastern European countries employed it later to dismantle command economies. Today, with public indebtedness at its highest peacetime level in advanced economies, the main rationale is to raise cash.

Taxpayers might think that the best family silver has already been sold, but plenty is still in the cupboard (seearticle). State-owned enterprises in OECD countries are worth around $2 trillion. Then there are minority stakes in companies, plus $2 trillion or so in utilities and other assets held by local governments. But the real treasures are “non-financial” assets—buildings, land, subsoil resources—which the IMF believes are worth three-quarters of GDP on average in rich economies: $35 trillion across the OECD.

Some of these assets could not or should not be sold. What price the Louvre, the Parthenon or Yellowstone National Park? Murky government accounting makes it impossible to know what portion of the total such treasures make up. But it is clear that the overall list includes thousands of marketable holdings with little or no heritage value.

America’s federal government owns nearly 1m buildings (of which 45,000 were found to be unneeded or under-used in a 2011 audit) and about a fifth of the country’s land area, beneath which lie vast reserves of oil, gas and other minerals; America’s “fracking” revolution has so far been almost entirely on private land. The Greek state’s largest stock of unrealised value lies in its more than 80,000 non-heritage buildings and plots of land. With only one holiday home for every 100 in Spain, Greece should be able to tempt developers and other investors at the right price. Analysts at PwC reckon Sweden has marketable state-owned property worth $100 billion-120 billion. If that is typical of the OECD, its governments are sitting on saleable land and buildings worth up to $9 trillion—equivalent to almost a fifth of their combined gross debt.

Get on with it

Governments seem strangely reluctant to exploit these revenue-raising opportunities. That is partly because privatisation always faces opposition. Particular sensitivities surround land, as Ronald Reagan discovered when his plan to sell swathes of America’s West were shot down by a coalition of greens and ranchers who enjoyed grazing rights, and as the British government found in 2010 when environmentalists scuppered its attempt to sell Forestry Commission land.

In recent years the big transactions, apart from reprivatisations of rescued banks, have mostly taken place in emerging markets. Activity is starting to pick up in Europe: the British government sold Royal Mail last year, and is setting a good example both in transparency over its land and property holdings and in its readiness to sell them. But, overall, caution rules. Italy, for example, carries a public-debt burden of 132% of GDP, yet its privatisation plans are timid—even though the state has proportionately more to sell than most other rich countries, with corporate stakes worth perhaps $225 billion and non-financial assets worth as much as $1.6 trillion. Now that markets have regained their composure, it is time to be bolder.

There are ways of encouraging sales. Data collection on public property is shockingly poor. It is patchy even in Scandinavia, where governments pride themselves on their openness. Governments need to get a better idea of what they hold. Effective land registries, giving certainty to title, are essential: Greece’s registry remains a mess. Too many governments use a flaky form of “cash basis” accounting that obscures the costs of holding property. Too few produce proper balance-sheets. Better beancounting would make it easier to ascertain what might be better off in private hands.

Governments also need to sweat whatever remains in state hands. There is no single model for managing public assets, but any successful strategy would include setting private-sector-style financial benchmarks, replacing cronies with experienced managers and shielding them from political interference. Not only is this good in itself, but it can also lead naturally to privatisation. That was the case in Sweden a decade ago, when creating a professionally managed holding company for state assets revealed many to be non-core, leading to a selling splurge by a left-leaning government.

Where are the successors to Thatcher and Reagan?

Privatisation is no panacea for profligate governments. Selling assets is a one-off that provides only brief respite for those addicted to overspending (though, once sold, assets—from ports to companies—tend to generate far more business). It also has to be weighed against lost revenue if the assets provide an income stream: oil-rich Norway gets a quarter of its government revenue from well-managed state companies. Selling when markets are depressed is generally a bad idea.

Governments also need to learn from mistakes made in past waves of privatisation. Without robust regulation, sell-offs enrich insiders and lead to backlashes. That happened in Britain (over rail and utilities) and emerging markets (telecoms, banking and more). The Royal Mail sale was a reminder of the political risks: price an asset too high and the deal might flop; price it too low and the taxpayer feels cheated. Nevertheless, for governments that are serious about bringing their spending in line with revenues, privatisation is a useful tool. It allows governments to cut their debts and improve their credit ratings, thus reducing their outgoings, and it improves the economy’s efficiency by boosting competition and by applying private-sector capital and skills to newly privatised assets.

Thatcher and Reagan used privatisation as a tool to transform utilities, telecoms and transport. Their 21st-century successors need to do the same for buildings, land and resources. Huge value is waiting to be unlocked.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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