How to Get the Most Out of a €50 Billion Asset Sale

Yesterday’s agreement between the Greek government and its creditors includes a condition that requires Greece to sell €50 billion worth of community assets and establish a fund to oversee the proceeds.

Recapitalizing banks will take half, while paying back part of Greece’s debt will take €12.5 billion as well as investing internally to generate development will consume €12.5 billion.

While the privatization of inefficiently managed government assets could well serve the interests of the Greek people, it could well go very wrong.

Here’s how and what Greece could do to prevent that from happening.

Setting the right incentives

The fund is already off to a bad start by setting a target sales number (the €50 billion). Doing so in the outset can distort bonuses.

By that I mean the easiest way to hit that target is to sell property at whatever price you can get, thus well below their true worth, resulting in a lot of bad deals. Greece could effortlessly end up selling €60 billion to €80 billion associated with quality assets just to hit the €50 billion target.

I wrote a Harvard situation a while ago of a hotel organization that had a target of promoting €300 million of resorts per year. But they never specific how many hotels they would market. Not surprisingly, they ended up selling way too many hotels for way too low a price. They reached their sales target, but at the cost of selling far more of the assets than they needed to.

My point is the following: Greece should carefully design a overall performance measurement system that makes sure that assets are sold at the maximum cost that could be obtained in the marketplace. That ought to help get around the pitfalls of setting a target in advance.

Timing of sales and use associated with proceeds

The Greek economy is in wrecks and the government has a liquidity problem – that is, it is short on ready cash. These are exactly the wrong conditions in which to sell assets. Fire sales result in deep discounts.

Moreover, they lead to the sale of the easiest-to-sell assets. The easiest assets to sell are the ones that have the potential buyers. The reason that there are many buyers is that their own economics are attractive; these are high-quality assets.

It is very important that the arises from disposing of these high-quality assets end up being invested in the economy rather being used to repay loans that were made to recapitalize banks or prior loans. These loans have below-market rates of interest and very long maturities (perhaps even Six decades), so their repayment can wait. Indeed the present value of Greece’s debt is just a small percentage of its nominal value.

Investing the actual proceeds in the economy could create the conditions for economic development, raising the prices of the remaining government assets that are still in the portfolio.

Lesson: no need to rush the asset sales, and merely make sure to use proceeds with regard to something productive. That means there should be an effort to renegotiate to ensure that more of the fund goes towards investment.

Governance and transparency

The privatization fund ought to follow world-class standards in terms of government and transparency in the putting in a bid process.

The members of the fund’s board of directors should be carefully chosen to protect the actual interests of the Greek individuals. Directors should be chosen based on merit and be experts within matters of accounting, finance and valuation so they can successfully oversee the sales associated with assets.

Greece can follow best-practice government processes such as those used by the Norwegian pension fund which manages the wealth of the actual Norwegian people from the extraction of oil.

Choosing the right partners

Buyers have standing – good or bad – and the directors should consider them, along with bid cost, when choosing to whom they will market an asset.

Companies, investment funds or even sovereign investment partners who have developed a reputation for responsible business practices and the creation of value for all stakeholders can create more value for the Ancient greek people. Businesses that promote the development of skills, safe working problems, protection of the natural environment, as well as product safety and quality will create competitive advantages for the nation over time.

The right framework

The Greek government uses cash accounting, and for that reason does not prepare a balance linen and does not take inventory of its assets and liabilities.

“You manage what you measure,” and it is obvious when it comes to Greece that not measuring assets and liabilities using internationally accepted sales standards leads to mismanagement of both assets and liabilities.

We need a fresh start and the right framework under which to start creating value for the Greek people. This framework would be to measure, analyze, create and communicate value.

Measure the value of the actual assets and liabilities and the net worth therefore the measures can be analyzed. Analyze performance over time and in accordance with other countries in the Eurozone therefore the analysis can be used as an input on which needs to change to create worth. Create value by adopting policies that will increase the value of the assets. Communicate the value creation story to build trust and confidence in the economy and attract opportunities.

Following some of these guidelines will help ensure that the Greek people get the most out of this fund, and that in turn might bring their economy and livelihoods back to life more quickly.

Greece bailout includes a €Fifty billion asset fund. Here’utes how to avoid wasting it is republished with permission from The Conversation