Abstract

This section presents data on the scale of gross privatization proceeds and the amounts accruing to the budget for the case study countries. It then considers the factors affecting budgetary proceeds and their treatment in the fiscal accounts.

This section presents data on the scale of gross privatization proceeds and the amounts accruing to the budget for the case study countries. It then considers the factors affecting budgetary proceeds and their treatment in the fiscal accounts.

Scale of Privatization Proceeds in the Case Study Countries

Table 1 presents data on gross privatization receipts and the amounts accruing to the budget. Data on cumulative gross privatization proceeds collected during the years of active privatization through 1997 are derived from a privatization database prepared by the World Bank. Privatization proceeds were on average 1¾ percent of GDP a year during the active privatization period. For the transition case study countries, this figure was 2 percent of GDP a year, while for nontransition countries it was 1½ percent of GDP.4

A somewhat different picture is provided, however, by data on privatization proceeds accruing to the budget as recorded in the IMF’s fiscal accounts. These proceeds were on average ¾ percent of GDP a year during the active privatization period (see Table 1 and Table 2). It is striking that in many countries the privatization proceeds actually received by the budget were less, and in some cases significantly so, than the gross privatization receipts. The institutional, operational, and accounting reasons for these differences are discussed in the next section.

Table 1.

Gross and Budgetary Privatization Proceeds in Case Study Countries

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Sources: World Bank; and IMF staff estimates.

World Bank Privatization database. Data are available for 1988–97.

Executive Board documents and staff estimates. Data through latest available observation.

Ratio calculated for the period of active privatization for which information is available in both sets of data. Differences in coverage in the two series may account for the higher proceeds recorded in IMF data for Russia and Ukraine.

Average of annual ratios of privatization proceeds to GDP during the period of active privatization. For the Philippines, ratios to GNP.

Annual data in national currency converted to U.S. dollars using annual average exchange rates.

Transition case study countries comprise the Czech Republic, Estonia, Hungary, Kazakhstan, Mongolia, Russia, Ukraine, and Vietnam.

Nontransition case study countries comprise Argentina, Bolivia, Cote d’Ivoire, Egypt, Mexico, Morocco, Mozambique, Peru, the Philippines, and Uganda.

Table 2.

Privatization Proceeds Accruing to the Budget in Case Study Countries1

(In percent of GDP)

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Source: IMF staff estimates.

Shaded years indicate periods of active privatization.

Average of annual ratios of privatization proceeds to GDP during the period of active privatization.

Data for Egypt, Morocco, and Uganda are on a fiscal year basis, shown in the table as the year in which the fiscal year begins. In 1996, Morocco switched from a January–December fiscal year to a July–June fiscal year. As a result, 1996 data are for the first half of 1996 only, 1997 data are for July 1996–june 1997, and 1998 data are for July 1997–june 1998.

In percent of GNP.

Transition case study countries comprise the Czech Republic, Estonia, Hungary, Kazakhstan, Mongolia, Russia, Ukraine, and Vietnam.

Nontransition case study countries comprise Argentina, Bolivia, Côte d’Ivoire, Egypt, Mexico, Morocco, Mozambique, Peru, the Philippines, and Uganda.

Factors Affecting Budgetary Proceeds

Gross receipts that can be transferred to the budget are affected by actions prior to sale, the sales process, and the postprivatization regime. In some countries, these receipts have been limited by investments to physically restructure public enterprises prior to privatization, restrictions on potential bidders, and postprivatization commitments on the new owners.5 Actions in those various areas may also give rise to governance issues. Factors affecting the sale price of assets are reviewed in Appendix I.

As noted above, in many countries the budgetary proceeds from privatization have been less than the gross sales value of the assets divested. This reflects extrabudgetary management of the privatization proceeds and the fact that budgets have tended to receive the net value of divested assets after certain costs have been subtracted.

Extrabudgetary Management of Privatization Proceeds

From an institutional point of view, privatization revenues may accrue in the first instance to the budget or to off-budget public institutions. The case study countries illustrate the prevalence of off-budget treatment of privatization transactions (see Table 3). In several cases, the proceeds initially accrued to an extrabudgetary fund, which then made transfers to the budget of a portion of the receipts. In a few instances, the proceeds are recorded entirely off budget. These institutional and operational arrangements may have reflected two concerns on the part of governments: first, the notion that privatization proceeds should be held off budget as a means of protecting them from parliaments that might be inclined to spend them inappropriately; and second, the one-off nature of privatization proceeds and the perception that they constitute an unexpected windfall.

Table 3.

Budgetary Treatment and Classification of Privatization Proceeds

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Sources: Data provided by country authorities; and IMF staff.

Under Bolivia’s capitalization scheme, investors bid for a 50 percent stake in the public enterprise in exchange for a commitment to undertake investment. The remaining shareholding Is retained by the government and used to finance a minimum pension scheme, The capitalization program is treated as off-budget investment in the firms partly divested.

In the official classification, all financing is treated as “revenue.”

The privatization agency makes transfers to the budget.

The revenue accruing to the privatization agency is consolidated in the budget and in the IMF budget accounts since 1998. The fiscal balance is shown including and excluding privatization receipts.

Only includes the privatization proceeds transferred to the government by the privatization agencies.

The privatization agency does not make transfers to the budget.

Only the part accruing to the budget.

Proceeds from the privatization of Telmex and commercial banks were kept off budget.

Recorded on a separate line in the IMF presentation between the overall balance (excluding privatization receipts) and financing.

Proceeds used for social expenditure and to recapitalize the pension fund were kept off budget. The Ministry of Finance shows budgetary proceeds as revenue, and the central bank as financing.

The accrual of privatization receipts to off-budget agencies and/or their exclusion from the budget may hamper fiscal policy control and reduce transparency and oversight. Although in some countries the financial transactions related to extrabudgetary funds—including those with responsibility for privatization and state enterprise management—are transparent and subject to parliamentary or other oversight (for instance, in Hungary), this is not always the case. The privatization receipts that do not flow through the budget may then be subject to less public scrutiny on their accrual and use than regular budgetary spending.6 In addition, the use of the proceeds may not be subject to priority-setting within the budget process.

In Uganda, for example, privatization receipts were placed off budget in a “divestiture account,” which was charged with paying off the debts of public enterprises, compensating workers who were laid off as a result of divestiture, and other unspecified purposes meant to promote successful privatization. The legislation setting up the divestiture account was vague on accounting and audit procedures, and allegations of misuse of the funds that passed through it—as well as widespread asset-stripping—have led to frequent complaints by parliament, among others, that governance issues in the privatization process needed to be addressed.

Privatization proceeds should be transparently recorded and subject to effective oversight. This could be achieved through full consolidation of the privatization accounts in the budget that is approved by parliament to ensure that the claim on government resources arising from privatization expenses, as well as the revenues, are adequately accounted for; that financing decisions are taken with due regard to all government assets and liabilities; and that all operations affecting the government’s balance sheet are reported to parliament. If, however, extra-budgetary institutions are in charge of privatization, their operations must be subject to clear rules and regulations, and they should be publicly reported, audited, and subject to parliamentary oversight. Consolidated general government fiscal performance, inclusive of privatization transactions, should also be reported.

Reporting Gross Versus Net Privatization Proceeds

In virtually all of the case study countries, privatization proceeds were reported on a net basis (in both the IMF and the authorities’ accounts), after taking account of the overhead costs of the privatization agency, and usually after subtracting the costs of any preprivatization restructuring. Moreover, it is difficult to form an accurate picture of the overall gross amount of sales proceeds, and relatively little information is available on the actual disposition of the assets that were allocated to the costs of privatization.

In many cases, only cash privatization revenues are included in the budgetary or fiscal accounts. Payments made by buyers in the form of debt instruments previously issued by the government selling the assets have often not been included in the privatization revenues reported in the fiscal accounts. Since payment in the form of government debt instruments represents amortization of public debt, a clearer picture is conveyed by including in the privatization receipts the market value of the debt extinguished, and by showing debt amortization as counterpart.

These considerations suggest that a transparent approach to recording the transactions related to disposing of state assets would be on a gross basis. This would involve reporting expenditures for restructuring, recapitalization, or for writing off public enterprise debt as expenditures on the budget that are financed by the gross proceeds of the sales.7

Fiscal Reporting of Privatization Proceeds

The accounting treatment of privatization proceeds does not itself predetermine use. However, the way that privatization receipts are presented in the fiscal accounts may have a bearing on decisions regarding their use, as well as on public perceptions of the fiscal stance.

This issue involves the question of whether such proceeds should be regarded as government revenue or as financing. The current version of A Manual on Government Finance Statistics (IMF, 1986) takes the position that transactions involving nonfinancial assets are part of capital revenue or expenditure, and that financial asset transactions undertaken for policy purposes are part of net lending. Hence, it recommends that privatization receipts be treated as a deficit-determining (“above-the-line”) item and recorded as capital revenue in the case of sales of equipment, and (negative) net lending in the case of shares. The suggested classification ensures consistency in the intertemporal treatment of the assets in question. If the acquisition of the productive asset or original investment in the public enterprise were undertaken for policy purposes and classified as deficit-determining items, on grounds of symmetry a similar treatment would be required in the case of privatization proceeds.

This treatment of receipts from the sale of assets has been regarded as an unsatisfactory basis for fiscal analysis for some time. Privatization receipts have characteristics that warrant differentiating them from other government revenues in the design and assessment of fiscal policy: privatization is an exchange of assets, and spending the proceeds affects the government’s intertemporal budget constraint; these receipts represent one-off resources and should not be counted upon to support the fiscal position permanently; their lumpy nature can distort analysis of the underlying deficit and provide a misleading view of the sustainability of the fiscal position; and, in general they are more uncertain in timing and size than other government revenues. Because of these considerations, it is preferable to treat privatization proceeds as a financing (“below-the-line”) item in the fiscal accounts (Mackenzie, 1998).

A revision of A Manual on Government Finance Statistics is under way, which will address the problems in the treatment of privatization proceeds by clearly separating asset/liability transactions from government operations that change net worth. Also, a distinction will be made between asset/liability transactions that are undertaken for policy purposes and those intended to manage the liquidity position of the government. In this new treatment, privatization proceeds will have no impact on the balance of government operations that determines the change in net worth, but the proceeds will be a determinant of the volume of transactions required for managing the government’s liquidity position.

In most of the case study countries, the proceeds from privatization that go through the budget were classified above the line by the authorities, either as revenue or as negative net lending. The fiscal accounts compiled by IMF staff for the countries in the sample, however, increasingly record privatization receipts as an element of deficit financing; currently, this is done in about two-thirds of the cases in the sample (see Table 3).

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