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

(Conclusion)

E. Forewarnings when undertaking a privatization program

Virtually all proponents of privatization have issued caveats when discussing and evaluating the benefits of privatization, which statements are backed up by empirical evidence over the past 20 or so years. The extensive pursuit of privatization programs alone will not consistently add to a government’s fiscal position nor will it guarantee the efficiency of the operations of the asset privatized. There are in fact some critical things to watch out for and imperative conditions, which must be created before, and after the privatization to ensure that the benefits are derived.

1. Privatization must be accompanied by other well thought out and executed improvements in the industry that the privatized asset belongs to.

The ADB has noted that “privatization works best when accompanied by reforms promoting markets and efficiency”.

Government now has the challenging role of either formulating new regulations to control the industry or do the opposite, which is to liberalize it. And it must take on this responsibility, if it wants to see the efficiencies it projected before the privatization happen. Government must decide and calculate if the introduction of more competition in the industry or the reframing of more regulations will enhance the performance of the industry or not. It is by no means an easy task as the expected efficiencies have not been achieved in some countries due to the inaccurate reading of what policies to implement. Indeed, there have been privatizations which did not accomplish the expected microeconomic and market efficiencies.

2. Government must be very careful and astute in crafting the rules for the disposition of the asset.

Jones, Tandon and Vogelsing2 asserted that “the highest bidder is not always the best bidder”. A case of a bidder having more money does not necessarily mean he will be the best operator of the asset that can deliver more revenues and better returns for the stakeholders. This has been proved in some privatizations that failed to realize the anticipated economic and social returns. Thus government must very meticulously plan and consider the criteria for the disposal of the asset. It is not only important to think about who to sell the asset to, but it is equally important how it is sold and when it is sold. This will undoubtedly create a complex road map that’s a challenge to navigate yet government has no option but to undertake this challenge lest it will fail to achieve the efficiencies it desires.

3. In cases where government is one of operators or the biggest operator in the industry where one asset is being privatized, and it is also the regulator of that industry, government must know, commit to and unequivocally prepare for its post-privatization role in that industry, which must be defined well before the asset is privatized.

The government has to reframe its role in that asset and industry as a whole, which in some cases has caused some problems. Examples of major problems that arose were: government was not able to conclusively define the regulatory framework by which the newly privatized asset would operate under, such that the new management of the asset could not optimally plan its business course; government failed to strengthen its regulatory technology and complement allowing the industry to go unregulated for sometime.

B. Conclusion:

Privatization thus can have beneficial effects on the fiscal position of any government and can be used as an invaluable tool for formulating budgetary strategy. But as noted in the previous section, it has to be accompanied by market and structural reforms and government has to be very astute in crafting the privatization guidelines and must undertake its own role redefinition if the privatization were to succeed. A World Bank report stated “Properly structured, privatization yields substantial and enduring benefits”, a dictum shared unequivocally by the other authorities on privatization, from Megginson and Netter, Ramamurti, and Alfred Schipke; their conclusions empirically founded on data for the past 30 years. It cannot be denied then that government role in privatization is crucial in determining its success, which can only come if government were to be judicious and perceptive in its responsibilities in privatization.

(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])