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Tuesday, 24 October 2017

A fickle flavour

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  • A fickle flavour

This year will provide a crucial litmus test for privatisation. Slovenia has proven willing to sell off a wealth of state assets in search of a balanced budget, as has Cyprus’s modernising, post-bailout government. But reform agendas are stalling elsewhere, notably in Russia, suffering with its own problems, and Greece, where the new Syriza-led government is leading the charge to stymie the process and bring key assets back under the government’s purview, not forgetting the upcoming sale from the second half of 2015 of once-troubled banks in the likes of the Netherlands and Ireland.

Privatisation has long been a cyclical phenomenon. Like fashion or dietary fads, there are times when it’s in favour, and times when it isn’t. The UK set the tempo in the 1980s, stripping out vast chunks of the state and selling them on the London Stock Exchange. A decade later it was the turn of former Soviet states such as Poland and the Czech Republic to chop up slices of once all-powerful state monopolies, then sell them to private investors. The courage of far-sighted legislators in Warsaw and Prague paid off as they built Central Europe’s most powerful and influential economies.

Yet the concept can just as easily take a back seat. The governments of Brazil, China and India spent much of the past decade warning of the perils of a smaller state. Only now, as growth slows, are they re-evaluating the benefits of greater private corporate ownership. Indian premier Narendra Modi, elected last year on a ticket of change, is determined to sell off stakes in dominant state-run insurers, banks, and industrials. Even Beijing is quietly rolling out a localised privatisation programme, with regional authorities seeking to sell minority stakes in loss-making industries to deeper pocketed, private-sector investors.

In Europe, the events of recent years have rather muddied the waters. Like everything involving the 19-member eurozone, and the wider 28-strong economic union, there is no one-size-fits-all view on, or attitude towards, privatisation.

Slovenia and Cyprus

Take the examples of Slovenia and Cyprus. With its financial sector facing bankruptcy in late 2013, Slovenia’s government was faced with a distressing choice. Either break its choke-hold on hundreds of powerful and often badly run state firms – to which it had clung assiduously during the post-Soviet era – or go cap-in-hand to the IMF for a bailout. It wisely chose the former, more proactive route (besides, the IMF issued a clear ultimatum: no reform, no cash).

And it stuck to its guns. Plans to privatise the country’s second-largest lender, Nova KBM, and Telekom Slovenije, the main telecoms operator, along with assets in sectors ranging from chemicals to food processing to insurance, were both necessary and long overdue. Nor have legislators dragged their feet. On February 2, Ljubljana rolled out plans to sell a 91.6% stake in local carrier Adria Airways, co-owned by three state institutions, to Qatar Airways, in 2015.

Cyprus was a different kettle of fish: smaller, nimble, more focused on leisure and financial services. Yet by early 2013, having allowed its banking sector to become seriously over-leveraged, it too was faced with a glaring need to push through much-needed structural change. A €10bn (US$11.3bn) international bailout was agreed in March of that year, in exchange for key reforms in sectors including telecoms, banking, and logistics. Parliament agreed to sell the government’s stake in a quartet of institutions: the ports of Larnaca and Limassol, its share of the national telecoms authority CYTA, and its stake in electricity utility EAC, with the aim of raising €1.4bn by 2018.

So far, the plan has shaken out pretty well. Again, parliament has shown no sign of reneging on its promises. Libor Krkoska, Cyprus head of office at the European Bank for Reconstruction and Development, which oversees the reforms, said legislators were “moving with relatively good speed, and hitting their targets. What makes the process easier is that there are only a few major strategic companies [up for sale], and key privatisation advisers are working assiduously to complete necessary reforms over the next 12–18 months”.

Unbundling the energy sector may take “a bit longer’, he said, but advisers were looking to get strategic investment capital “firmly in place over the coming year”.

Krkoska added that the planned privatisation of Cypriot co-operative banks would likely take “several years to complete and will not start probably until 2018. For that to happen, it will require a lot more restructuring of the co-operative banks, working through all the non-performing loans, before moving them back into the private sector”.

Elsewhere in South-Eastern Europe, the picture is far more nuanced. Greece, not surprisingly, is the biggest fly in the ointment. One of Alexis Tsipras’ first acts as the new Greek prime minister, following his Syriza party’s success in January polls, was to row back on a series of austerity reforms, notably the planned privatisations of electricity provider PPC, petroleum refiner HELPE, and the ports of Thessaloniki and Piraeus. The announcement reverberated around the world, being heard as far away as China, which has a major investment in the Piraeus port.

Other SEE nations view privatisation through a different prism, seeing it as a way to grow their economies while breaking up cosy but inefficient state networks that often enrich local oligarchs. So while Greece under its new leftist premier rails against international and strategic creditors, several Balkan states have adopted a different approach.

Romania

Romania has pushed ahead with the sale of a minority stake in oil and gas group Petrom and the Romanian postal service, while divesting its share of power distributor Electrica Muntenia Sud to Italy’s Enel. In January 2015, Bucharest postponed the IPOs of power producers Hidroelectrica and Oltenia until at least early 2016, but stressed that the delays would not prove permanent. The managers of state-run Fondul Proprietatea, a €3bn investment fund that owns minority stakes in leading domestic firms, is still on track for a secondary stock market listing in London in April or May 2015.

Serbia

Serbia is also continuing to push ahead with its own reform programme, in large part because it “fits nicely with their plans to join the EU”, said Marcus Svedberg, chief economist at emerging market investment manager East Capital. Transition countries in SEE as well as Central Asia continue to push ahead with plans to break the state’s hold over key industries, Tajikistan being merely the latest to outline reform plans.

“Some of these countries have done a lot already, but many also have an awful lot of natural monopolies in place, so they are still figuring out the best approach,” said Svedberg.

Russia

Then there’s Russia, ever the outlier. Under former president Dmitry Medvedev, Moscow introduced an ambitious privatisation plan aimed at divesting the government’s stake in a host of vast corporations and lenders, from Russian Railways to carrier Aeroflot, and energy giant Rosneft to diamond miner Alrosa. These were not true privatisations – Moscow retained the right to veto unpalatable decisions made by any “systemically important” corporate through the use of a nominal “golden share”.

Moreover, the plan, launched to much fanfare in 2010, barely got off the ground. Most of the corporates on the list remain firmly in the state’s hands. Some secured a portion of private sector funding. In February, leading state lender VTB raised US$3.3bn by selling a 10% stake, but failed to follow through on plans to divest a further 25.5% stake by 2013. Vladimir Putin’s return to the presidency in 2012 put the plan on ice, and Liza Ermolenko, Russia economist at Capital Economics, said it was “unlikely to see any substantial change soon”.

Putin’s call for greater economic diversification and privatisation at the height of the rouble crisis in December 2014, meanwhile, was “pure rhetoric”, said Ermolenko, noting: “They have talked about diversification for years without doing anything about it.” East Capital’s Svedberg said change would probably only take place if the country’s economic crisis deepened, forcing Putin to re-engage with the reformers that held greater sway in the Kremlin between 2008 and 2012.

Ireland and the Netherlands

The final theme set to emerge over the coming year will be the sale of once dominant financial assets nationalised at the height of the financial crisis, notably a host of insurers and lenders from northern and peripheral eurozone states, including Ireland, the Netherlands and Spain.

First up should be the sale by the Irish and Dutch governments respectively of stakes in Allied Irish Banks and ABN AMRO. The latter is likely to involve the sale of between €3bn and €5bn worth of stock, probably in the second half of 2015, with two further tranches of shares being sold in the coming years, set to value the once-hobbled Dutch lender at around €20bn.

The first tranche of ABN shares will “test investor appetite for repackaged European financial assets”, said Enrique Febrer-Bowen, head of FIG equity capital markets, EMEA and Iberia, at Barclays. If all goes well, the Dutch government and taxpayers should recoup a generous slice of the billions of euros in initial bailout costs. Indeed, the AIB and ABN sales could well “be on a collision course”, said Febrer-Bowen, “set to be sold to private investors at roughly the same time.” Yet more evidence, it seems, of the hot-or-not nature of the privatisation cycle.

To see the digital version of this report, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

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