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Investment Banks and Governments

Prachi Juneja
management study guide
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:- Banking Knowledge Banking

Investment Banks and Governments

 

Governments all over the world regularly engage in high-value financial transactions. They often need the help of experts in order to do so. Since investment banks have a lot of experience in mediating high-value transactions, they are often appointed by the governments to be their advisors on these matters. In this article, we will have a closer look at the various modes under which investment banks regularly engage with governments all over the world.

The nature of engagements between investment banks and governments can be many. However, the main modes of engagement have been listed below:

Disinvestment Services

After the Second World War, a lot of governments all over the world ended up with the possession of a lot of public sector companies. For instance, essential services like water, electricity, and telecommunications were owned by the government in most parts of the world. However, as time went by, governments found out that they were not best suited for running these businesses. As a result, governments all over the world started disinvestment, i.e., selling of government-owned assets to private companies. Here, since businesses are being sold, it is obvious that they would require the services of an intermediary like investment banks.

 

  • Identifying Assets: Generally, the government does not know which one of its assets it wants to hold on to and which one of its assets it wants to sell-off. Hence, the task of an investment banker starts with identifying the assets. The investment bankers do so based on the broad strategic guidelines issued by the government. For instance, some governments are more interested in selling their most profitable units since they believe that these units will fetch the best price. On the other hand, some governments want to sell their loss making units since they believe that private industries can run them better. At the end of the day, investment banks have a revenue shortfall which they have to fill by selling assets, and they are often in charge of suggesting to the government the best way to do so.

     

     

  • Valuing Assets: Once the assets have been identified, the investment bank is also in charge of putting a price tag on the assets. This exercise can be quite tricky since the running of a government firm is very different from a private firm. Sometimes, the valuation is done on the basis of positive cash flows. However, at other times there is no cash flow at all! In such cases, the valuation may be done based on the book value of the assets which are held by the firm which is being sold.

     

     

  • Due Diligence: The services of investment bankers are also enlisted by the governments in order to manage the bidding process. The investment banker organizes the bids, collects bids from the private sector buyers, and then evaluates them based on pre-determined criteria. The government relies on investment banks to conduct a thorough background check and due diligence, which is comparable to what is done in the private sector.

     

Bulge bracket investment banks are known to have close relationships with the government since their services are often enlisted while pursuing disinvestment.

Advisory Services

In many cases, the government does not want to sell out the underlying asset. Instead, it simply wants to improve the functioning of these private sector entities. Here too, the services of investment banks are enlisted. Some of the common areas in which the advisory services of investment banks is sought out have been listed below:

 

  • Policy-Making: In many parts of the world, governments are not sure about what the ideal policy for industry should be. They aren’t sure whether protectionism would be a better policy as opposed to a liberalized free market. It is for this reason that they seek the services of investment banks. Investment banks often advise governments about building rules and regulations which govern the operating as well as investing activity that takes place within a sector. It is often argued that the advice of investment banks is often biased. This is because investment banks stand to make more money by enabling more deals if a liberal policy is followed. Hence, there would be an inherent conflict of interest.

     

     

  • PPP Initiatives: The government also relies on the services of investment banks to find partners to execute projects with. Whenever public, private partnership projects are announced, the government asks the investment banks to assist in collecting potential bids and evaluating them. It is the job of investment banks to advise the government about the best possible partner given other constraints.

     

Issuing Securities

Lastly, governments all over the world issue debt on an ongoing basis. Just like private companies, they too need an intermediary who can manage their issue, take it to the market and sell it to final investors. Here too, the services of investment banks are used. In fact, since governments tend to roll over debt, i.e., pay the old debt by issuing new debt, they are often continuously engaged with investment banks who manage one issue after another.

The bottom line is that investment banks share a deep partnership with government agencies as well. They advise the government and even act as intermediaries in several different matters.

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