Professional management of public assets is the gateway to recovery

9 May 23

The best way to reduce sovereign debt is by boosting economic growth. By tapping the hidden value in its balance sheet, governments can exit the crisis faster and more sustainably, writes Dag Detter.

The value of public assets globally is twice that of global stock markets, twice the global GDP and much larger than public debt. However, unlike listed equity assets, public commercial assets are often unaudited, unsupervised, and unregulated. Even worse, in most countries, it is almost entirely unaccounted for.

The traditional counterargument that mobilising such non-tax revenues during a fiscal crisis is a complex and time-consuming process, often resulting in a significant value giveaway, is incorrect. This is mainly because generating revenues from public assets is not about divesting but developing and managing assets more professionally – just as a country would benefit more from the value added to the economy by refining its natural resources and developing the capacity to produce the entire range of downstream products, instead of simply exporting the raw material at a much lower value.

To develop and manage assets professionally, it is essential to frame the process in financial terms with well-defined financial targets and a clear timetable. The main challenge is to improve the weak governance practices arising from opposing objectives, political interference, and a lack of public scrutiny. This is done by consolidating the ownership and governance of the entire portfolio of commercial assets into an independent limited liability holding company, typically called a Public Wealth Fund.

Some of the most recent examples of countries taking these steps can be found in Ethiopia and Nigeria. This makes it possible to introduce private sector discipline, establishing political insulation with an arms-length distance from short-term political influence and separating the government's roles as regulator and as owner of commercial assets. This allows the companies to focus on a single objective of value maximisation – as if privately owned – and introducing international standard accounting – as if a listed company.

Within the confined structure of the limited liability company, it is possible to manage the risk within a contained balance sheet and thereby limit the fiscal risk for the government. An independent holding company could also build the necessary capacity by recruiting professional management, non-executive board, and professional advisors, at a competitive market, but not market-leading rates.

Professional management of public commercial assets has been a core component of Singapore’s strategy to move its economy from developing to developed status in a single generation. Sweden became the first country among developed economies that decided to manage its portfolio of assets actively.

Turning around every company required operational improvements, optimising the capital structure, and strengthening business developments to focus on the core business. This generated substantial fiscal space, increased productivity, and economic growth.

Government-owned companies are less productive and profitable by up to a third compared to their private sector peers. Therefore, in order to focus on value maximisation, any subsidy and public service obligations should be outsourced to a separate entity owned directly by the government and paid for by taxes.

In Jordan, the cost of subsidies nearly bankrupted the electricity company. To address this, financial support was given directly to the people who most needed it. This allowed the electricity company to charge market rates and paved the way for profitability improvements by driving continuous sales and cost-cutting efforts as if a privately owned operation.

Optimising the capital structure through the introduction of a competitive capital structure and a commercial dividend policy will help install a much-needed financial discipline to the portfolio of government-owned companies.

Separating the ownership of government-owned creditors and debtors will help improve capital allocation. Such has been done in China and many countries in the MENA region where the government is a dominant owner of financial institutions and large borrowers.

Ideally, the state-owned banks could release their largest corporate customers to the capital markets while obliging the banks to turn to private companies and SMEs instead. Moving the lending for the largest government companies to the capital market would help improve the depth of local capital markets.

Government-owned operations tend to become unwieldy conglomerates with poor capital allocation. They are overburdened by non-core assets, such as the Swedish railways that were transformed into one of Europe's more profitable rail operators by demerging the operations into its three business lines, including passenger, cargo, and real estate, as well as a separate vehicle for all the other non-core assets to be divested. Through the separation, it was possible to gain better visibility of each operation and eliminate historic mismanagement, inefficiency, and waste. With a clear objective, it was easier to hold each board and management accountable for the value creation of each company.

Government companies can often end up as hoarders of assets with poor returns on capital partly because they can only raise additional equity through a very painstaking political process in which their commercial requirement for additional money will compete with the need for social spending and other public welfare requirements in the budget. Consequently, managers of government-owned enterprises are incentivised to avoid paying dividends by keeping profitability low. Capital allocation within a holding company is, however, no different from that of a private company and done on a strictly commercial basis.

Properly restructuring the management of public assets is the gateway to productive investments in the country and a faster recovery on the path to a sustainable market economy.

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