In April this year, outside the Milan court, you told the media: “I believed and still believe that citizen Berlusconi should be given the credit for preventing the stripping of state assets. I deserved a gold medal (civil class) for having earned the state five times as much from the sale of SME.”

The divisions of SME were sold in 1993-96 for a total of around 2 trillion lire to different buyers compared with the price of around 500 billion lire offered by Buitoni in 1985. That is four times – not five times, as you claimed.

But to make a valid comparison, calculations rather more complex than your simple maths are necessary. The proceeds from the aborted sale were to have been received in instalments up to December 1986. Likewise, the actual privatisation proceeds were received in tranches. The privatisation finished near the end of 1996, so December 31st 1996 is an obvious comparison point.

In 1985-86, the Italian government could have done two things with the instalments from the sale of SME: either reduced its debt (and therefore saved on interest payments), or re-invested in equities (after all, SME was an equity investment).

To compare validly the lost 1985-86 SME privatisation proceeds with actual proceeds in 1993-96, an assumption needs to be made that the instalments in 1985-86 would have been invested from the date of receipt up to December 31st 1996.

500 billion lire invested in reducing government debt in 1985-86 would have cut the government’s interest bill by over 1.1 trillion lire up to December 31st 1996. That makes a comparative total of 1.6 trillion lire.

The actual sale proceeds of about 2 trillion lire in 1993-96 were in effect used to pay down government debt. Up to 31st December 1996, this would have reduced the government’s interest bill by around 500 billion lire. So the comparative total for the actual privatisation is about 2.5 trillion lire.

On this basis, the payoff from the actual privatisation sale is 1.5 times that of the aborted sale in the previous decade.

Similar calculations have been made for the expected return from investment of the two sets of privatisation receipts in a basket of equities (from the date of receipt up to December 31st 1996). As you will know, economic theory says investors demand a higher return on equities than on bonds, because equities are riskier.

Assuming a modest risk premium (3%), the proceeds from the aborted sale of the 1980s would have been projected to turn into almost 2.2 trillion lire by the end of 1996, while those of the actual sale in the 1990s would have yielded almost 2.7 trillion. As a result, selling SME in the 1990s would have given the Italian government an expected payoff only 1.2 times that of the aborted sale in the 1980s. With a more demanding risk premium (6%), this ratio comes down to 1.1.

In addition, the nature of the two sales was quite different, and so was their market environment. The 1993-96 sale was a break-up of SME to different buyers in a mature privatisation market. The 1985 privatisation was to be a sale of the whole group to Buitoni. In addition to SME, Buitoni had an obligation to take on its nearly bust sister company (Sidalm), which needed an immediate injection of 30 billion lire. And the 1985 sale of SME was to have been the first big privatisation in Italy. The delay in this privatisation (and hence in others) was to Italy’s detriment.

Why do you deserve a gold medal?

*http://www.lavoce.info/, an Italian website on economic policy issues, is the source of the calculations in this section. In May this year it published an article by Marco Pagano and Carlo Scarpa entitled “Vendita SME: il prezzo era giusto?” (The SME sale: was the price right?). Using more precise data about the timing of the instalments of the aborted 1985-86 sale and of the actual 1993-96 privatisation receipts, www.lavoce.info published on July 10th an updated version of its calculations.

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