Privatisation the only option for states

Governments "running on empty" will need to improve approach to asset sales, says James Close of Ernst & Young

World leaders responded to the financial meltdown with complex, multifaceted plans and spending packages in an attempt to keep their economies afloat. Now, though, the combination of falling tax revenues and increased spending has left governments running on empty and keen to explore a wide range of measures to restore economic stability.

As a result, today's corridors of power echo to the sound of cuts and the cold bite of austerity. But the more traditional options of increasing taxes and cutting expenditure are unlikely to be enough to dramatically reduce today's historic levels of national debt. With this in mind, policy-makers are exploring all means of raising funds to reduce deficits - including privatisations.

As a result, we expect to see an increased number of privatisations taking place concurrently, each of them competing for the same limited supply of global funds. As governments come under greater scrutiny – from local and international markets and stakeholders – maximising financial value will take on a higher priority than ever before.

Ernst & Young has recently examined privatisations conducted in Europe over the last 15 years - interviewing senior officials in government, management teams and private equity firms from 12 countries to uncover leading practices and the lessons learnt.

There was approximately $900bn of assets privatised globally between 1995 and 2010, across Europe. Yet, we believe the characteristics of future privatisations are likely to change. In particular, we will see a shift for some countries from the less traditional asset groups - such as transport and education - to more innovative, less familiar asset groups which may not have been privatised before.

Our survey uncovered some interesting findings. For example, 67 per cent of respondents stated that the need to raise funds had been the main driver for privatisations in the past. Although, this will continue as the key driver of privatisations over the coming five years, governments must now take into account the nature of the global economy and the impact this has on capital availability and competition for funds.

Some 70 per cent of respondents felt that maximum value had not been achieved. Understanding why value was not maximised and incorporating the lessons learned from the past into future transactions is crucial to governments seeking to raise funds and justify their privatisation strategies.

And only 33 per cent of respondents had a formal evaluation process in place. For governments, the first step in delivering a successful programme is to evaluate and implement the lessons learned from previous experiences. The ongoing success of the programme is dependent on each individual privatisation being successful and the ability to demonstrate this to the market and wider stakeholder group.

Ernst & Young's research suggests there's often an ad hoc approach. Our respondents stated that a dedicated corporate finance team, appointed by the government to manage their asset portfolio, is one way to address this challenge.

Certainly, a consistent, systematic approach within a country is fundamental to instil leading practices across different bodies and levels of government. Communication is critical to keep all stakeholders aligned and supportive of the privatisation and fully aware of the benefits and challenges it can bring.

Governments must intrinsically understand the value of national assets. A systematic approach should be adopted to increase value and increase the probability of success. In the years to come, we believe achieving optimum value will be at the heart of any privatisation objective for governments and entities alike.

James Close is a Government Services Partner at Ernst & Young LLP