Getting a Handle on National Wealth
It’s time to unleash the untapped potential of public assets — and that doesn’t have to mean privatization.
The single largest owner of wealth in nearly every country is not a private company; nor is it an individual like Bill Gates, Carlos Slim, or Warren Buffet. The largest owner of wealth is all of us collectively, otherwise known as “taxpayers.” And we all have our own personal wealth manager — whom we usually call “the government.” According to data from the International Monetary Fund and other sources collected in our new book, The Public Wealth of Nations, governments own a larger stock of assets than all very wealthy individuals put together, and even more than all pension funds, or all private equity funds.
What’s more, most governments — including the many nations caught in the grip of debt crises — have more wealth than they are aware of. Many of these troubled countries own thousands of firms, land titles, and other assets that they have not bothered to value, let alone manage for the common good. Public wealth is like an iceberg, with only the tip visible above the surface.
For decades, a phony war has raged between those in favor of public ownership and those who see privatization as the only solution. We argue that this polarized debate is partly to blame for neglect of a more important issue: the quality of public asset governance. Only through proper management can public wealth yield proper value to its owners, the citizens. Even public assets that are privatized can achieve widely differing outcomes depending on the quality of government regulation, the privatization process, and the competence of private owners. The costs of the phony war between privatizers and statists have been enormous: lack of transparency, financial waste, and underperformance in the public sector. The only winners are vested interests on both sides of the debate.
The most visible public assets are government-owned corporations, often called state-owned enterprises (SOEs). According to one study, over 10 percent of the world’s top firms are SOEs — and their combined sales are equivalent to 6 percent of the world’s GDP.
Beyond the corporations owned by governments at different levels lie vast stretches of productive real estate — by far the largest component in public wealth portfolios. More than two-thirds of all public wealth ownership remains opaque. Many assets are owned by local and regional governments or quasi-governmental organizations that, while formally independent, actually work at the behest of the politicians who sit on their boards.
We argue that the professional management of public commercial wealth among central governments around the world could easily raise returns by as much as 3.5 percent, to generate an extra $2.7 trillion worldwide. This is more than the total current global spending on national infrastructure — the combined amount we spend on transport, power, water, and communications, according to a study by McKinsey Global Institute.
Many cities and states in rich countries have similarly mismanaged land holdings that could be an integral part of public finance and used to lower taxes or pay for vital infrastructure. In many cities managing public commercial assets more professionally could help close the housing gap.
Mismanagement of public assets often has severe consequences. For example, many regions in India suffer from both droughts and monsoons, but most of all poor management of state-owned water utilities. India is estimated to lose the equivalent of two-thirds of new dams and other water storage it builds to siltation. The main culprits are India’s corrupt, underfunded, and overmanned state irrigation departments that often carry out no maintenance at all. Just one of them, in Utter Pradesh, has over 100,000 employees. Inter-state rivalries and bad planning add to the malaise.
Better management is not just about financial returns, but other important social gains as well. An Italian economist, Vittorio Tanzi, and his co-author, Tej Prakash, illustrated the misuse of public assets with two examples of schools located in prime locations — one in Rio de Janeiro, squeezed in between large hotels on a splendid avenue next to the famous Copacabana beach, and another in the heart of Bethesda, Maryland, established in 1789 when the area was agricultural and the land inexpensive. A relocation of the schools only a few blocks away would bless students with a quieter, healthier, and more peaceful environment. The sale of the more expensive property could be used to hire more teachers. On top of that, new real estate investment on the current school site would raise national income and tax revenue.
The location of a school might seem to be a minor issue. But it becomes a major one when such mismanagement of public real estate is the rule rather than the exception. In Brazil, pervasive abuse of public wealth is illustrated by the never-ending scandals in the huge state-owned oil conglomerate, Petrobras. Dozens of politicians are under investigation for receiving kickbacks on inflated contracts that Petrobras signed with 23 other large firms, many of them also state-owned.
As things stand, the vast bulk of public wealth in many countries is in the hands of civil servants inside the government bureaucracy. They manage state-owned firms, real estate, and other holdings with minimal public oversight. This is, at best, a bureaucratic system designed for handling the allocation of tax money. At worst it is an arena for political meddling and, occasionally, downright profiteering. Public commercial assets could also constitute a significant fiscal risk, as well as an outright cost for the government. The cost could sometimes be in the double digits of GDP, as is probably the case in many former Soviet states.
These examples help illustrate how public wealth within easy reach of governments creates incentives for abuse, such as buying political support from unions and interest groups. In a clientelist state, governments have little interest in making the management of state assets more transparent. It is hardly an accident that Greece had no consolidated accounts of its considerable state assets — not even a well-functioning land registry. As long as state ownership stays murky, it is easier for government institutions to distribute favors without scrutiny.
Those who profit from shady accounting will always argue that revealing the monetary value of public assets places economic agendas over social aims. We show the opposite to be true. When the value of public assets is revealed and managers are told to focus on value creation, a government can make informed, transparent choices about how much to pay SOEs for achieving social aims. Without such transparency, interest groups with selfish agendas will all too often succeed in interfering with sound management by exaggerating the social benefits of their demands.
As long as politicians are directly responsible for governing SOEs, they will be hesitant to demand better performance on behalf of consumers, because such demands would call their own management into question. Freeing governments from having to run public firms changes politicians’ mission and focus. This goes to the heart of a well-functioning democracy: accountability, transparency, and disclosure.
In our view, the best way to foster good management and democracy is to consolidate public assets under a single institution, removed from direct government influence. This requires setting up an independent body at arm’s length from daily political influence and enabling transparent, commercial governance. Examples include Austria’s state holding company ÖIAG (now undergoing reforms), Singapore’s Temasek, and Finland’s Solidium.
A similar international trend has been to outsource monetary and financial stability to independent central banks. This was initially very controversial in many countries. Over time, however, experience with independent central banks has been positive and has been widely copied.
Similarly, independent governance of public wealth can bestow significant economic and democratic benefits. We use the term National Wealth Fund (NWF) for these institutions, which independently govern public commercial assets. As with independent central banks, such organizations do not offer a watertight guarantee of better governance in countries with kleptocratic leadership. Vietnam set up its NWF, the SCIC, in 2005 as a holding company for some 400 SOEs — but it still has some way to go to reach private sector levels of returns. Nevertheless, setting up NWFs would help most countries that are trying to make their democratic institutions more robust.
Despite the successful examples, only a small percentage of global public commercial assets are managed in these independent and more transparent NWFs – that is, at arm’s length from daily politics. In particular, the vast real estate portfolios held by governments around the world would benefit from a more professional approach removed from short term political influence. Just as large corporations separated their real estate from their operations starting in the 70s and 80s to improve transparency and the value of their shares, governments are now discovering the importance of managing their assets for value. After the financial crisis of the 90s, Sweden created several real estate holding companies under corresponding ministries, such as Vaskronan, Vasallen and Akademiska Hus, while Finland established Senate Properties and Austria established BIG as consolidated real estate holding companies.
Our proposals extend beyond the governance of just commercial assets. An NWF with sufficient independence from government control could be allowed to rebalance its portfolio and not only help finance infrastructure investments, but also act as the professional steward and anchor investor in newly formed infrastructure consortia. Managed in this way, NWFs can encourage investment in much-needed infrastructure.
When a financial crisis hit parts of the world in the early 90s, many governments had limited knowledge of the scale and value of the debts they had incurred. Today, it is self-evident for countries to have a centralized debt management administration. Capital markets and policymakers thoroughly analyze sovereign debt, and the general public keeps a careful eye on the level of public indebtedness. In the wake of the more recent financial crisis of 2008, many countries remain heavily indebted and fettered by fiscal austerity, attempting to restore budgetary balance and thereby economic growth.
At the same time countries own huge portfolios of commercial assets. Even heavily indebted countries like Greece and Ukraine are often asset-rich. This is why we should start looking at the other side of the public sector balance sheet and ask: “What can public wealth do for our economy and for democracy?”
In the photo, workers from a company under contract for the Brazilian state-owned oil company Petrobras demand payment of three months of wages in arrears in February 2015.
Photo Credit: VANDERLEI ALMEIDA/AFP/Getty Images