It could generate funds to help pay down the national debt as well as open up space in the economy for new investors and entrepreneurs
In the wake of the global financial crisis, how Barbados can best manage its fiscal affairs has been debated extensively by politicians, business leaders and ordinary Barbadians.
In recent weeks the debate has heated up as the country anticipates the Government’s upcoming Budget Review and Proposals for the fiscal year 2014-2015. The news media has devoted generous amounts of editorial space to comments and calls for action from social commentators, financial analysts, economists and former bankers.
In most cases, it is the size of the annual deficit – along with the growing national debt – that fuels their writings and their concerns. And it is not hard to understand why.
In its draft estimates for the current fiscal year (2014-2015), Government says it expects total revenue to be about $2.5 billion. On the other hand, it expects to spend about $3.9 billion in the same period. The shortfall – the fiscal deficit – is about $1.4 billion.
To finance this deficit, Government will have to borrow, and it is this accumulated borrowing that has pushed the country’s national debt to unprecedented levels.
With an economy still recovering six years after the financial crisis, the country can’t grow its way out of the debt and deficit problems. Despite new taxes and other measures, Government’s revenues continue to be significantly below expenditures.
Recently, at the urging of the International Monetary Fund, government has been striving to reduce the annual deficit by cutting expenditures. The “big-ticket” items include the annual bill for public sector salaries, wages and benefits of close to $800 million; over $1 billion to more than 20 statutory corporations and agencies; and of course the more than $600 million that goes to paying interest on the debt.
Amid considerable controversy, there have been cuts in public sector jobs, but it could take several years to shrink the deficit through this single measure. Drastic cuts to any form of government spending can have a hugely dislocating effect on the country’s already strained economy to say nothing of its society. On the other hand, if fiscal consolidation efforts are too mild, the situation will not improve.
Two partners at PricewaterhouseCoopers in Barbados believe that more effort needs to be put into reducing the debt, and they have a specific approach in mind.
Oliver Jordan, leader of the firm’s Consulting Services, and Stephen Jardine, leader of the firm’s Private Company Services, believe that by adopting a more aggressive – but strategic – approach to divestment of certain state-owned assets, Government could achieve a greater reduction in the national debt.
So much of the debate has been on how we can reduce the deficit, by either increasing revenue or cutting spending, but we believe there also needs to be increased focus on how we might reduce our overall debt.
“If you cut into the debt you will automatically help to reduce the deficit, because more than $600 million of that deficit consists of interest payments,” he says. “We believe the quickest and most effective way the Government can do this is through a process of well-planned divestment.”
As Jordan explains, the Government has a sizeable portfolio of assets which, if judiciously divested, could generate literally hundreds of millions of dollars that could be used to pay off debt or invested into income-generating initiatives.
“This is exactly what the Government is proposing to do though the planned sale of the Barbados National Oil Terminal Co. Ltd., to a private investor,” he says. “We see this as a step on the right path, and we urge Government to keep going.
Stephen Jardine agrees, but acknowledges the sensitivity around the issue of state-owned assets passing into the hands of private investors. “This is a very emotional topic in Barbados, and there is often the comment about selling the family silver.”
However, divestment does not have to mean selling out to foreign interests or to a mere handful of local private investors, he says. “In some cases, it can mean Government retaining some ownership while taking on strategic partners with capital and expertise that can make an essential service even better and more profitable. In other cases, ownership can be opened up solely to Barbadians, and these are the scenarios that we favour the most.”
Jardine says that restructuring state-owned entities so private investors, rather than Government, become majority shareholders, could be a “game-changer” for the country’s economy.
Instead of being saddled with loss-making entities, the Government could take a share in the profits of well-managed businesses, financed by the right mix of equity and debt, and tax them as well.
As long as Barbadians have a genuine opportunity to have a stake in an attractive investment and share in its profits, I don’t see the downside. But we must ensure the broadest possible ownership.
Oliver Jordan shares the sentiment about local ownership: while foreign partners or large investors may be needed for larger, more complex entities, he is adamant that future participation by more Barbadians in the economic activities of the country is critical to the success of any program of divestment the Government might consider.
“We should all want more Barbadians to own more of this country’s assets, and it is time to look seriously at opportunities to make this happen,” he says. “Ordinary Barbadians should be given the opportunity to have shares in public sector assets such as the airport or the Barbados Hilton.”
“We need to continue building on recent efforts to restore foreign investor confidence in our country and our economy,” he says. “So it is important to show those investors that our Government is willing not only to tackle the debt, but also to make more room for the private sector to expand in our economy.”
Stephen Jardine sees additional long-term benefits for the island’s economy from this approach: as Government occupies less space in the economy, it creates opportunities not only for large investors but for many entrepreneurs
and small businesses as well.
“We have talked for years now about encouraging an entrepreneurial mind-set in Barbados and about how the growth of small businesses could literally re-shape and re-energize our economy,” he says. “Barbadians can grow successful businesses if Government frees up some of the space.”
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