Monday, April 16, 2007

Brown Bottom

Now the money's run out, Gordo has been reduced to rummaging around down the back of the sofa for any loose change (aka those ludicrous Gershon "efficiency savings"), and roaming the house trying to find anything he can flog.

Last month in the Budget he told us he was going to sell £36bn of assorted family silver by 2011, double the figure he'd given us just three months earlier in the Pre-Budget Report (see this blog).

Unfortunately, as we are all painfully aware, whether buying or selling, government is hopeless at getting value. And with Gordo so strapped, the worry for taxpayers is that he'll be holding a fire sale which will leave us seriously skinned.

The precedents are not good. Just yesterday, we got a fresh insight into those disastrous official gold sales.
As we know, in a truly historic re-enactment of King Midas in reverse, he somehow managed to flog more than half of Britain's painfully acquired gold reserves just before the gold price took off, costing us a mind-boggling £2bn. He actually managed to trade at the worst prices in the last quarter century.
We now discover that a key reason was that once he and his usual cronies had made the decision to sell, no amount of common sense input from people who actually knew about the gold market could stop him. So when they said "400 tons is an awful lot of gold to drop on market which is already at a low point, and where total annual supply is only just over 2,000 tons", he just ignored them and ploughed on regardless.
No wonder the resulting further dip in gold prices has become known in the market as the Brown Bottom. And just like with that other colourful triumph of government foreign exchange wizardy- Black Wednesday- it cost us a packet.
As for other recent asset sales, the appalling case of defence company Qinetiq stands out. Underpricing on that sale cost us a reported £300m (and see this blog).
But we shouldn't just blame Gordo. Further back, the asset sales made under the Tories were hardly a triumph of taxpayer value. Studies such as this academic paper consistently show that most of the privatisations realised sums substantially below true value- the shortfall averaging out at 20-25% (eg the first tranche of BT shares made their lucky recipients an instant one-day profit of 33%).
Of course, most of those early privatisation issues were sold at a fixed price. And even our government eventually realised a competitive auction was much more likely to get the best price. So when it came to selling those 3G spectrum licences, Gordo appointed a game theory expert to extract the maximum price from mobile phone companies terrified of "losing out". Which is why he's so keen to sell more bits of spectrum now.
But as Keith McMahon has consistently pointed out at Telebusillis, the next spectrum sales will include a load of rum leftovers from the army surplus store. Its market value is questionable, even setting aside the fact that the telcos are still smarting from having been bounced last time into paying through the nose for spectrum they have still not been able to convert into paying services (eg Vodafone’s 3G service currently operates at only 16 per cent capacity-see here).
Scraping together £36bn of new asset sales will be problematic. And the pressure to raise money means there is a very high risk we will not get value.
So as lean and hungry property developers eye the MOD's massive ranges in primelocation Surrey and Hampshire, we taxpayers (not to mention residents of Surrey and Hampshire) need to keep our wits about us.


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