Budget Issues:

Privatization/Divestiture Practices in Other Nations

AIMD-96-23: Published: Dec 15, 1995. Publicly Released: Dec 15, 1995.

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Paul L. Posner
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Pursuant to a congressional request, GAO reviewed the divestiture experiences of other nations, focusing on the: (1) privatization process; (2) valuation and preparation of assets for sale; and (3) use and display of sale proceeds for budgetary purposes.

GAO found that: (1) in the nations studied, privatization goals influenced how and what entities would be offered for sale; (2) the nations studied used privatization mainly to increase economic efficiency and reduce the size of government; (3) a central agency is responsible for overseeing the privatization process in each of the nations studied; (4) the nations generally privatized entities already in a corporate form; (5) some nations used clawbacks to require buyers to return a share of profits to the government; (6) although the use of clawbacks helps protect taxpayers against undervaluation, they decrease sale prices and may constrain entities' commercial behavior; (7) although the nations used various valuation techniques, all governments hired financial advisors to assist in the valuation process; (8) most of the nations studied attempted to remove liabilities from entities being privatized by restructuring debt, paying unfunded employee obligations, or otherwise removing risks that would reduce the entity's sale price; and (9) most of the governments used any proceeds resulting from privatization to reduce debt and interest costs rather than to offset ongoing spending.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Budget Enforcement Act of 1997 changed the budget scoring rules for asset sale proceeds. This change--although not consistent with GAO's specific proposals--was intended to create a more neutral budget situation in which to make decisions about the sale of assets.

    Matter: Congress may wish to consider ways to neutralize the scoring of privatization proceeds. It would be possible to alter budget rules to permit the use of sale proceeds only to offset any costs associated with implementing the sale plus any loss of net revenues now and in the future. Remaining proceeds could be used to reduce the government's current borrowing requirements.

  2. Status: Closed - Implemented

    Comments: The Treasury Department is creating an Office of Privatization within the Office of the Undersecretary of the Treasury for Domestic Finance. The fiscal 1997 budget contained $300,000 for the office, and President Clinton has earmarked $300,000 for this office's operating budget in the fiscal year 1998 budget. The office has been given authority for three FTEs and has posted a job announcement for three financial analysts.

    Matter: The U.S. Government might usefully consider assigning the lead role in all divestiture preparations and management to a central financial agency, such as the Treasury Department.


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