Look to the professional management of assets for fiscal innovation

29 May 19

Now that we have professionalised the management of debt and the management of interest rates then why not do the same with assets? Financial adviser Dag Detter asks.  


Looking for the wallet under the lamp post rather than where its lost is a well-known joke.

For hundreds if not thousands of years, sovereigns have borrowed to fight foreign military campaigns. The more recent increase in public-debt-to-GDP ratios, has not so much been due to wars and crises but rather has been a response to popular demands on governments for pensions, healthcare, and other often unfunded social services. Often without a modern public sector balance sheet to track the total value and cost of debt.

The increasing recourse to debt to finance public expenditures has required governments to professionalise public debt management. The overall objective of such an institution is to minimise the costs of central government financial management without taking excessive risks. This to ensure that taxpayers’ money is managed as transparently and as efficiently as possible.

Similarly, before independent central banks were the norm, it was not unusual for politicians to manipulate interest rates to boost their own popularity. That led to a plague of inflation and prompted many countries shifting to a system in which politicians set broad economic policy goals and left the job of keeping steady prices to independent central bankers.

Now that we have professionalised the management of debt and the management of interest rates, then why not assets? In the 1970’s, the recently independent state of Singapore did just that and delegated also the other side of its public sector balance sheet – the asset - to be managed by a few independent professional institutions. It delegated the responsibility for managing its commercial assets to professionals inside independent public wealth funds.

The argument in favour of private sector discipline and appropriate governance tools borrowed from the private sector in the management of commercial assets, was explained by Goh Keng Swee, the deputy prime minister of Singapore at the time, as follows; “One of the tragic illusions that many countries entertain is the notion that politicians and civil servants can successfully perform entrepreneurial functions. It is curious that, in the face of overwhelming evidence to the contrary, the belief persists.”

'While policy makers have focused on managing debt for decades, they have largely ignored the question of public wealth.'

Since then Temasek and Singapore Government Investment Corporation (GIC), two of the public wealth funds, have helped fund the economic development of the city-state, while the Housing Development Board (HDB) has provided almost 80 per cent of its citizens with affordable and well-maintained public housing.

Now, some people would claim that governments should not own commercial assets in the first place and wholesale privatisation is the only remedy. According to the International Monetary Fund, public assets are estimated to be worth at least twice annual gross domestic product (GDP).

Given the size of public assets, it would not be operationally feasible to undertake a wholesale privatisation, nor would it be financially desirable. Flooding a market with assets risks pushing prices below acceptable levels and can lead to an undue and unpopular transfer of value and wealth to the private sector.

While policy makers have focused on managing debt for decades, they have largely ignored the question of public wealth. In most countries public wealth is larger than public debt: managing it better could help to solve the debt problem while also providing the material for future economic growth.  

The polarised debate between privatisers and nationalisers has missed the point—that what really matters is the quality of asset management. The focus when it comes to public wealth should be on yield rather than ownership. Improvements in public wealth management could yield returns greater than the world’s current combined investment in infrastructure such as housing, transport, power, water and communications. Improvements in the transparency of public wealth management could also help to win the war against corruption. In some countries it would even be able to generate more money than developed countries collect in corporate taxes.

This approach of independent professional management of publicly owned real commercial assets through public wealth funds is proven across the world.  Hong Kong, acutely aware of its own fiscal constraints, found a way to build a subway and railway system comparable to New York City’s without using a single tax dollar: it developed the real estate adjacent to its stations. Japan has created what is probably one of the world’s most efficient and undoubtedly fastest railway system through a similar model.

Such public wealth funds are managed at arm’s length from short-term political influence, in a transparent, accountable manner, guided by a political mandate but directed by dedicated professional staff to keep it free from political influence. As a publicly owned holding company, it will cooperate with the private sector, sharing the risk as well as the upside on an equal footing, and aligning the interests of every stakeholder.

This sounds challenging, but it can be done also at the local level. Hamburg’s HafenCity GmbH, and parts of Copenhagen were revitalized by setting up Urban Wealth Funds. They not only increased the supply of residential housing, they also funded vital infrastructures such as schools, universities, and in Copenhagen the Copenhagen Metro - without using a single tax dollar.

Now that we have professionalised the management of debt and the management of interest rates, then why not assets- to the benefit of society as a whole.

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