The privatisation illusion

Buttonwood's notebook

Debt crisis

The privatisation illusion

A SMART note from Societe Generale points out what ought to have been obvious, that privatisations are unlikely to cure European state solvency. What is the value of a business? The discounted sum of all future cash flows. So when you sell a business, you lose access to those cash flows, which could have been used to service the debts. Or, as Socgen puts it

privatisations merely front-load future receipts into a single lump-sum as a state asset is sold.

Now it is possible that buyers of the asset might overestimate the cash flows, or apply the wrong discount rate. The seller might get a boost to their solvency if the buyer overpays. But that is unlikely in the current circumstances, when governments are being forced into sales; it is more likely that buyers will underpay.

Of course, privatisation might have virtues for other reasons. The business may be run inefficiently in state hands. Better management in the private sector might improve the running of the economy and, in the long run, this will improve solvency. But it is hardly a cure-all for the debt crisis.

The Economist on line