US spinoffs to private sector on track? Selling Conrail, long blocked in Congress, could be a start
Washington — President Reagan and his team arrived in Washington with grand hopes -- illusions, as it turned out -- of selling off bits and pieces of the government. ``For sale'' signs would soon hang on post offices, petroleum reserves, hydroelectric facilities, railroads, and billions of dollars' worth of loans. But Congress resolutely rebuffed their efforts.
Now, however, the government is on the verge of its first victory. It's about to sell a railroad.
Investment bankers, who stand to gain a good deal of business if ``privatization'' takes off, say the sale of the freight carrier Conrail will be the kickoff for more such deals.
``A public offering of Conrail will be a real boost to privatization in the US,'' says Jay Moorhead, a vice-president at E. F. Hutton & Co., which is forming a group to work on advising or participating in the sale of government assets. A successful sale, he says, ``will alleviate many congressmen's and senators' concerns about potential problems with other asset sales.''
But people on Capitol Hill are more cautious. ``There may be a flurry of interest, but as people look at [each individual case] it becomes more and more difficult,'' one congressional aide says.
Conrail has become a symbol of the government's frustration over transferring services and assets to the private sector.
It seemed a prime candidate. It had a history of private ownership. Created by combining six bankrupt railroads in 1976, it had turned its losses into profits, which were nearly $450 million last year. And it attracted several bidders, including Norfolk Southern, the Department of Transportation's choice for owner.
But the House, concerned about employees' jobs and the loss of competition that a sale to Norfolk Southern would mean, resisted the railroad's $1.9 billion bid for 18 months. Two weeks ago, the private railroad withdrew its offer.
Ironically, the Norfolk Southern setback may put the President's privatization agenda back on track. Over the next two weeks, Transportation Secretary Elizabeth Dole will try to reach an agreement with congressional leaders to sell the government's 85 percent stake in Conrail to the public.
Though there's little time before the term ends in October, many on Capitol Hill think the two sides will reach an agreement.
The sale of Conrail would come none too soon. ``The Reagan people have '87 but probably don't have '88'' to get privatization off the ground, says an investment banker working on the Conrail sale.
``They need that one big success to convince people that many of the dangers [of selling government assets] simply don't exist,'' says Ronald Utt, deputy chief economist at the United States Chamber of Commerce. ``Conrail is no guarantee that others will follow, but it will help.''
With record deficits, Congress may be more amenable to such sales. ``Gramm-Rudman is what places this issue on top of the pile,'' says Mr. Moorhead.
Conrail could fetch anywhere from $1.7 billion to $3.6 billion on the open market, making it the largest initial public offering in United States history. If it is done shrewdly, says another investment banker involved in the Conrail deal, it will create an appetite for more such deals.
``The administration will be very conservative, because it wants [the Conrail sale] to be a success,'' he says.
He expects the government to adopt the British strategy in selling British Telecom in 1984. That was the largest public offering in British history (about $6 billion), and Prime Minister Margaret Thatcher's government priced the shares very competitively and they were bought up right away. On the first day, the share price nearly doubled.
This investment banker thinks the Reagan administration will put a $2 billion price tag on Conrail, even though the Congressional Budget Office has valued it at $3.2 billion to $3.6 billion. Even if the CBO figure is discounted by 15 percent, which is typical of initial public offerings, that is still about $750 million low.
But the bargain-basement price would whet the public's appetite for more such sales. That's what happened in Britain, says Gus O'Donnell, first economic secretary at the British Embassy here. The wild success of British Telecom stock is leading to more and equally large public sales. British Gas, which will probably fetch at least $5 billion, will go on the block this fall. Coming down the road are British Airways, Rolls-Royce, the British Airports Authority, and eventually the water authorities, among others.
The next target in the US, investment bankers and congressional sources say, is the government's loan portfolio. This is an interim step to full-fledged privatization, since the government doesn't always need congressional approval for such sales.
The government now holds about $250 billion worth of loans -- to students, homeowners, veterans, farmers, small-business people, and others. Starting in October, agencies such as the Federal Housing Administration, Small Business Administration, Farmers Home Administration, and the Veterans Administration will hire outside advisers (investment bankers) to estimate what the market will pay for their loans.
The Office of Management and Budget (OMB) figures it will fetch about $1.76 billion for the first batch of loans that go to market, which have a face value of $4.4 billion.
But investment bankers think this ``pilot program'' is the tip of the iceberg. Already there are rumors that the government will sell off closer to $8 billion worth of loans in the next fiscal year. And while investment bankers don't expect to package and sell off the government's entire portfolio, they expect to get a large share of them.
Apart from the pilot program, the government is ridding itself of its stake in Continental Illinois Bank. When the big Chicago bank nearly failed in 1984, the Federal Deposit Insurance Corporation took over 80 percent of its stock.
Now the FDIC wants to sell its stock, currently worth $960 million, either to the public or to a company. The FDIC has hired Morgan Stanley & Co. to estimate what the stock would sell for on the open market, and Continental Illinois has hired Goldman, Sachs & Co. to do the same. FDIC spokesman Alan Whitney says the agency will dispose of its holdings within a year.
But beyond loan sales, selling public assets becomes much more difficult to get past Congress.
``For the most part, Congress is uncertain of privatization,'' says Susan Slater, a lecturer at the University of Maryland and a former employee at the OMB and Senate Budget Committee. ``Losing control [of government assets and services] goes against every piece of political logic,'' she says.
Some movement, however, can be seen. The Overseas Private Investment Corporation, which insures companies investing abroad against political and other risks, has hired Shearson Lehman Brothers to estimate its market value. But spokesman Buck Jordan says nothing will happen in the next few months; others express reluctance about selling OPIC.
The OMB is doing a similar study about turning the Federal Housing Administration into a private corporation, a spokesman says. But ``there's too much emotion wrapped up in FHA loans'' to get congressional approval, predicts Dr. Utt at the Chamber of Commerce.
Attempts to do something with the US Postal Service, such as taking away its first-class monopoly, have received a cool reception. The same is true of the government's five power marketing administrations, which supply subsidized electric power. Even Wall Street, eager for privatization business, says that now is not a good time to sell petroleum reserves.
Still, investment banks believe the federal government will sell off hundreds of billions of dollars' worth of assets over the next 10 years. They already see it as a lush market, since even small government sales are large by corporate standards.
In the Conrail sale, the lead investment banker will probably receive $10 million to $20 million. Investment bankers think this line of business will grow at more than 50 percent a year.