Using public assets to help nations pull out of debt rut

PUBLIC assets are often undervalued or poorly accounted for, short-changing nations of lucrative revenue streams or improved net debt positions, says a paper from Citi based on a new book by economists Dag Detter and Stefan Fölster.

The book, The Public Wealth Of Nations, argues that policymakers' focus on managing debt over recent decades has left public assets either badly managed or simply ignored.

Citi chief economist Willem Buiter agrees that even countries on the brink of insolvency, such as Greece, "could use their considerable public assets... to help pull themselves out of their bind".

"A surprising fact is that the single largest owner of wealth in nearly every country is not a private company or an individual like Bill Gates, Carlos Slim or Warren Buffett," Dr Buiter writes.

"The largest owner of wealth is all of us collectively; you and your fellow taxpayers.

"And we all have our own personal wealth manager, whom we usually call 'the government'."

Using estimates from the book, the Citi economist calculates that between real estate, state-owned companies, public infrastructure and financial investments, many countries' public assets would be worth more than gross domestic product.

However, much of this intrinsic wealth is either "hidden" for political purposes, undervalued to comply with accountancy conventions or not commercialised efficiently.

"Over recent decades, policymakers have focused almost solely on managing debt while largely ignoring the question of public wealth," Dr Buiter says.

"Given that in most countries, public wealth is larger than public debt, just managing it better could help to solve the debt problem while also providing the material for future economic growth."

The book's authors estimate that governments around the world have US$75 trillion (S$101 trillion) of public assets, "ranging from corporations to forests", and that these are either badly managed or simply omitted from sovereign balance sheets.

This US$75 trillion is equal to total annual global GDP and compares with total global public debt of US$54 billion. If better management or more comprehensive accountability resulted in even a 1 per cent return, these assets would generate some US$750 billion in public revenue

Dr Buiter argues that one of the best ways to extract this value is through national wealth funds (NWF), "a single institution, removed from direct government influence".

"This requires setting up an independent, ring-fenced body at arm's length from daily political influence and enabling transparent, commercial governance," he says.

The NWF differs from the more known sovereign wealth fund (SWF) in that the latter is a more liquid vehicle, investing largely in traded securities across major markets.

A national wealth fund, by contrast, is more concerned with the "active management of operational assets as a portfolio", Citi says.

The US-based investment bank gives Singapore's Temasek as an example of a NWF, while the country's GIC, a national fund manager of reserve liquidity, is a classic SWF.

"An NWF incorporating all the commercial assets owned by the United States federal government alone would most likely be several times the size (in value terms) of all the world's SWFs put together," Dr Buiter says.

"Improving the yield of these assets would not only save vast amounts of money, but also generate an income to the government that could be used to lower taxes, reduce debt, or pay for much needed infrastructure investments," he says.

He argues that poor management of public resources has held back development in many countries, or added to fiscal crises.

The oft-quoted Greek railway system, for example, was spending US$350 million in wages and generating US$250 million in revenues before the country's 2010 bailout.

Annual losses of US$1 billion at the railways had driven debt up to US$13 billion, which was equivalent to 5 per cent of Greece's GDP. The system's obligations made up about 40 per cent of a total debt of US$33 billion at state-owned enterprises.

"Historically, countries have managed their public assets in a fragmented way, depending on the nature of the assets or their history," Dr Buiter says.

"Typically, railways, telecommunications and other similar assets were controlled through, for example, the ministry of transportation/communication, and electricity assets through the ministry of energy and so on.

"This structure was natural in a centrally planned economy and a market economy when the regulation of a sector and the ownership of the state monopoly assets in the same sector was integrated under the same line ministry.

"Moving from this structure towards outsourcing governance to an independent institutional framework, a holding company operating at arm's length from politics... enables the use of the appropriate private sector toolkit," he says.


A version of this article appeared in the print edition of The Straits Times on June 19, 2015, with the headline 'Using public assets to help nations pull out of debt rut'. Print Edition | Subscribe