Political will holds off EU privatisation

2013-03-14 18:48

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London - With Europe's stock indexes hitting their highest since before Lehman Brothers collapsed in 2008, privatisations could be a boon to the region's debt-laden governments, but while markets are no longer weak, politicians are still not willing.

Countries across Europe, including Italy and France, are sitting on trillions of dollars worth of assets, and the sale proceeds could help limit unpopular spending cuts or tax rises, if politics were that simple.

"The politics are quite relevant because there can be significant public backlash. Pursuing that kind of agenda, even when markets are good, is not necessarily attractive politically," said a financial industry source with experience of privatisations.

"We don't expect the flood gates to suddenly open."

Witness Bulgaria, mired in political crisis and facing May elections. On Monday it extended the deadline to sell part of its railway network after public pressure to halt the deal and review the privatisation programme.

Most privatisation activity in Europe over the last year has been at the point of a gun, as in Portugal and Greece, which agreed to sales as part of European Union (EU) and International Monetary Fund (IMF) bailout packages.

Lisbon has already met its target to raise €5.5bn by the end of 2013 and plans further sales this year, including the profitable national postal service CTT and the cargo unit of national railway company Comboios de Portugal.

Politically off-limits

In Italy, where pro-market think-tank Istituto Bruno Leoni estimates the state holds assets worth €1.9 trillion, an inconclusive election last month has left government in limbo and taken potential sales off the agenda for now.

The Istituto says around €136bn worth of Italian assets could realistically be sold, when things such as historic buildings are excluded.

Before the election, Silvio Berlusconi's People of Freedom party had proposed a big sale of state-owned assets. The Democratic Party (PD), which led the centre-left bloc that won the lower house but not the senate, had less extensive privatisation plans.

Selling some of Italy's biggest holdings, energy groups ENI and Enel, could prove politically off-limits. In October, Economy Minister Vittorio Grilli said that in order to guarantee energy supplies it would not be wise for the government to reduce its stakes in either.

France owns around €55bn worth of stakes in listed companies, including 84% of energy group EDF , but socialist French President Francois Hollande is not expected to favour asset sales, despite admitting France will fall short of its deficit-cutting target this year.

"You have got some governments which are not typically [nationally] in favour of privatisations and would prefer to retain their assets not just for value reasons but just for national identity reasons," said the finance industry source.

On the whole, bank stakes are considered the one exception, bankers and advisors said, with most countries keen to get rid of stakes they reluctantly took on during the financial crisis.

Family silver

Even for those governments more comfortable with privatisation, the time it takes to prepare a company and the economic backdrop across Europe make it unlikely to be a bumper year for state sales.

While stock markets have improved, many European economies are still contracting, and while there is some interest from buyers, bankers expect most investors will remain cautious until there is greater clarity that the economic cycle has turned.

In November, the privatisation of Italy's third-biggest motorway operator failed to attract any bids, while later that month a planned flotation of Italian airport operator SEA was scrapped due to lack of demand.

Greece, which has made privatisations a key part of efforts to kick-start growth in its recession-mired economy, is also expected to face a struggle for buyers.

In October it cut its privatisation target to €11bn by the end of 2016, from €19bn by the end of 2015, well below an initial target of €50bn.

It has so far raised about €2bn from sales, but its plans have been bogged down by delays and it has yet to sign any major deal. On Monday it appointed its third privatisation chief in less than a year.

The first big privatisations are scheduled to be completed later this year, with the state selling gambling monopoly OPAP and natural gas company DEPA.

"They are not doing it because of any popular desire, they absolutely have a gun to their head to sell," said Bill Megginson, Professor of Finance at the University of Oklahoma.

Politicians are also aware that selling off national assets when their economies are depressed can too easily be characterised as weak and short-sighted.

Spain's conservative government has not revived its predecessor's plans to float the state lottery, the country's most profitable public company, which was delayed in 2011 due to the economic climate and political pressure.

"There is always a reluctance to sell off valuable state assets when you are in a deep recession, especially to foreigners. You are selling the family silver cheap in a distressed asset sale, said Megginson, a former member of the Italian government's global advisory committee on privatisation.

€30bn privatisation

The other problem with trying to take advantage of a market window is the long preparation time needed to get many state-owned assets ready for sale.

In January, the IMF said it would extend Romania's aid deal by three months beyond its March deadline, as the government needed more time to reform sprawling state-owned enterprises.

"The governments in question ... are juggling different agendas, and actually privatisation is complex to deliver, not least because all too often the assets remaining in the pipeline have particular challenges," said the financial industry source.

Where the economic and political situation is conducive, those governments with stakes in already listed companies would find it easier to dispose of them quickly. Last month Portugal took advantage of rising markets to dispose of its remaining 4.1% of Energias de Portugal.

But examples remain exceptions for now.

"You'll see another €20bn, maybe €30bn privatisation year in Europe in the not too distant future," said Megginson. "But it is not going to be this year."
Read more on:    imf  |  silvio berlusconi  |  europe  |  economy

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