'Privatization of government assets as a tool of budgetary strategy'

(Second of five parts)

C. Reasons for privatization

There exist many reasons for a country to privatize its assets but the following constitute the most common and compelling why many countries undertook or advocate privatization:

1. There is little latitude to raise taxes on the part of government, and doing so could either contravene statutory restrictions or economic wisdom or compromise political strategies.

Countries that are at the brink of their taxation threshold can use privatization as an option to bring in funds to afford the needed expenditure or balance their budgets. The obvious limitation however, is unless that country has an endless supply of assets for sale or a long string of infrastructure projects; privatization can only contribute up to a limited amount of time and funds.

But even in instances where there is room for more taxes, politicians-in-power may hesitate to do so as this may imperil their political standing, so privatization of assets can serve this end, but again to a limited extent.

2. The undeniable need for foreign and private capital to push certain projects, particularly infrastructure

Virtually all infrastructure projects require massive amounts of capital to implement, a case that many governments do not have the capacity to undertake. Privatizing allows the government to bring in the capital, execute the project and share or even transfer the risk altogether to the private contractor.

3. The disappointment in the performance of its state-owned-enterprises (SOE’s)

Many governments, through either self-realization or pressure from its citizenry to enhance the delivery of the service or the quality of the product, undertake to privatize its assets to try to improve the performance of the SOE. This has been one of the most compelling reasons to privatize for many governments as a good number of SOE’s record substandard performance compared to private enterprises’ standards.¹

4. Acceptance of the empirically founded belief that exposing certain assets and facilities to the “discipline of the capital markets” and the “pressures of the marketplace” will “spur greater efficiency²”.³

This is a widely held hypothesis that has had strong empirical evidence with the past privatizations around the world. It has its own detractors but history has proved that there is a majority of SOE’s which when privatized, significantly improved their performances. Some governments accept this without reservation but some approach it with skepticism. Those who accept it have carried out their privatization programs and have seen the effects of the improvements. (To be continued)

(This article was originally published at the Financial Executives Institute of the Philippines [FINEX] publication entitled, “Getting to Know the National Budget, A Series of Discussion Papers to Create Awareness and Interest in Budget Reform [An educational service of the FINEX Public Affairs Committee through its National Budget Study Group]” released on January 2010.)

(Vicente Julian A. Sarza is a Principal of Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])