Privatising assets: how governments can stay one step ahead of the banks
In our experience, we have seen many instances of governments waiting until they are in desperate need of capital for infrastructure and other investments before hurriedly bringing an asset to market - forcing policymakers to quickly find an asset, hire investment bankers, and get ready for a sale. The result is almost invariably a fierce political backlash and a sale price well below the asset's true potential.
To avoid situations like this, we believe the best way forward is for governments to adopt the mindset of private equity firms and institutional investors - that is, actively managing their portfolio of assets, making moves to unlock value while protecting the public interest, and being thoughtful about which assets (or parts of assets) should be taken to market and when.
This mindset shift isn't easy, but we believe there are some universal truths for federal and state government assets, which we encourage government decision-makers to consider well before contemplating an asset sale programme. Specifically, here are three tips for policymakers to consider on the path to privatisation.
Think laterally about which assets might make good privatisation candidates
Roads, railways, poles and wires are classic privatisation candidates, but governments shouldn't limit themselves to looking at conventional hard assets. On the contrary, we believe that a broader range of assets - including digital businesses, data registries and healthcare services - can yield meaningful social and commercial value if privatised thoughtfully.
A good example of this is the recent concession of the NSW Government's Land and Property Information. By taking the appropriate part of this data asset to market in the form of a multi-year concession (the land titles registry) and retaining other components for the public good (valuation and spatial services), the government found a way to unlock a lot of commercial value while protecting the state's investment.
The US government has a chance to seek out similar opportunities as it goes about learning from Australia's successful asset recycling programme in funding its huge infrastructure investment plans. Naturally, the US will look at toll roads, railways and other conventional assets for privatisation, but there are likely to be other opportunities, such as the registration data management activity which sits behind the Department of Transportation, the Small Business Administration, and other federal and state agencies. Such opportunities could be interesting if policy goals can be met and the right regulatory framework can be put in place.
Think about the right owner for each asset at each point in time
Some assets will never lend themselves to privatisation, either because they can't be properly regulated to protect the public good or because the direct and indirect value they provide cannot be properly valued. Some other assets may not make sense for privatisation at a particular point in time - for example, an airport in its early stages of operation, when demand risk could arguably be better borne by the government. Conversely, assets which are operating in mature markets, and can be readily valued and regulated, lend themselves more clearly to private sector ownership.
With this in mind, it's important for governments to define their assets correctly and think carefully about the best owner for each asset - and then to pose the question, “who will maximise the commercial and social value of this asset, us or someone else?” This will ensure that the right assets are brought to market at the right time, and pitched to the right private sector operators.
Borrow from the investment banking mindset, but don't adopt it wholesale
It's important for governments to take a clear-eyed look at the financial value of their assets, but there are many other factors that they must take into account besides investment horizons and return on investment. Governments need to think about the long-term total societal value of public assets. They need to ensure that privatisation processes are characterised by thoughtful, transparent stakeholder engagement, a robust regulatory framework, a multifaceted approach to bid evaluation, and a system-level approach to value creation.
In summary, policymakers must ensure that the right components are in place to strike an appropriate balance between unlocking financial value from the private sector and maintaining broader socioeconomic value in the interests of citizens. In particular, it's important not to let the potential short-term upside of a privatisation outweigh the potential longer-term economic benefit of retaining an asset (or parts of an asset) in public hands.
Above all, our main message to governments is don't delay. Despite the long-term nature of infrastructure investment and divestiture cycles, thinking about the value and the best owner of government assets is critical for future privatisations to be successful.
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