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

(Fourth of five parts)

The more specific macroeconomic benefits of privatization are:

1. Lower deficits

Straight sales and leases of assets directly influence the balance sheet of governments. The revenues from either the sale or the continuing lease provide for added cash flows into the government’s treasury that can be used to reduce deficits.

2. Lower debt

The cash flows from privatization can alternatively be used to pay off debt if the priority of the government is improved debt servicing.

3. Reallocation and redirection of resources to other causes and projects

Privatization, in any of its forms, affords the government the ability to shift its spending focus on its other priority programs. Cash from a sale or cash that would have been spent on an investment in an infrastructure facility but was done instead through a Build-Operate-Transfer method can be channeled into other projects.

4. Should the projected efficiencies be achieved after the privatization, several positive effects shall be credited to government:

• Taxes and duties on purchases of the newly privatized asset which then becomes subject to regular tax laws

Unless the government intends to continue the support of the asset through subsidies and exemptions, the newly privatized entity will have to pay taxes and duties the normal way and this benefits the government. If many entities in a certain industry are subject of privatization, then the benefits of having these entities pay the regular taxes and duties to the government are further amplified.

• Increase in revenues of the privatized entity will reflect as an improvement of the Gross Domestic Product, and again if there are many entities that are the target of privatization in that particular industry, then the aggregate increase in revenues becomes significantly larger.

The advantages to government may intensify in the long term if the privatized entity continues to record improvement in operations long after the privatization and can even engender efficiencies in the other entities across the industry.

5. Reduction of government employment hence lower costs

Inevitably, there will be a decrease in government employment after the privatization and this will be a corollary decrease in costs for government. Whether these employees are rehired or not by the new owner is another issue, with the retirement or non-rehiring having a negative effect on the national employment statistics. There are no statistics to underpin this assumption hence it is difficult to argue that there will be considerable unemployment after the privatization. Certainly however, government will reduce its payroll costs for the asset privatized.

6. Reduction of corruption and incompetence

Assuming corruption exists in several areas of the delivery of the service or the product while in government aegis, the exposure to the pressures of the marketplace and accountability-based corporate governance will break down this corruption and push the entity into performing up to private sector standards. Some of the corrupt stakeholders who have been chosen to stay will also be driven to follow the tenets of good governance.

7. Improved access to foreign capital and technology

Many governments, which undertook extensive privatization, especially share issue privatization, noted the participation and in some cases, influx of foreign capital in many of their privatization projects. The World Bank in fact has commented, “One of the prime drivers of privatization has been the need for fresh capital and new investments from firms in developing countries”.1 This has been especially true in many infrastructure and technical projects, such as energy, where local technology is deficient and the need for vast amounts of capital is imperative for the project to achieve significant economies of scale. (To be concluded)

(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])