Finance & economics | State-owned assets

The neglected wealth of nations

Cash-strapped governments are leaving riches by the wayside

TO SELL or not to sell? That is usually the question cash-strapped governments wrestle with when reviewing public holdings of companies, land and infrastructure. But this public-versus-private, left-versus-right debate is a “phoney war”, argue Dag Detter and Stefan Fölster in an upcoming book, “The Public Wealth of Nations”. They advocate a third way: ring-fencing assets from political meddling in independent “National Wealth Funds” (NWFs)—holding companies whose professional managers are free to sweat them as if they were privately owned. The focus, they argue, should be on yield, not ownership.

Governments have trillions of dollars in assets, from companies to forests. These are typically poorly managed, and often not even recorded at all (Greece, for instance, still has no proper land registry). Dozens of countries have asset-management agencies, but these tend to be run by government departments, not external experts. Only 1.5% of public assets are in politically insulated NWF-style funds with wide latitude to value them at market rates, restructure them, and keep, sell or merge them as they see fit.

Mr Detter sees public wealth as “a huge but sorely neglected asset class”. How big is difficult to say due to gaps in the data, but the authors believe the pool of public “commercial” assets (lumpy stakes in companies, property and the like) is $75 trillion, twice the world’s total pension savings and ten times as big as the holdings of sovereign-wealth funds (which typically hold financial assets such as stocks and bonds. See chart 1). This total is conservative since it fails to capture all the holdings of regional and local governments. Mr Detter thinks these could be two to three times as big as those of central governments.

In terms of sweating assets, the focus to date has been on the most visible bits: state-owned enterprises (SOEs). But there are vast hidden treasures, especially buildings, land and the resources beneath them. The authors reckon that these (excluding things like historic buildings and national parks) could account for up to two-thirds of the world’s state-owned assets (see chart 2). America’s federal government, for instance, owns buildings with a book value of $1.5 trillion and 25% of the country’s land. The potential is huge: almost none of the fracking boosting America’s oil output, for instance, has taken place on public land.

The authors calculate that better management could increase the annual return on state assets by $2.7 trillion—more than current global spending on infrastructure. This would generate funds for much-needed investment in that very sector. It would also help reduce debt and taxes. And it could help the fight against corruption, by reducing opportunities for the discretionary use of state assets by officials, as at Petrobras, a Brazilian SOE ensnared in scandal. Messrs Detter and Fölster “address at a single stroke two of the great problems of our age: the shortage of infrastructure investment thanks to the overhang of the public debt, and the halt in the advance of democracy thanks to the prevalence of bad government,” writes Willem Buiter, Citigroup’s chief economist, in a report published this week. Their message deserves a wide hearing.

This article appeared in the Finance & economics section of the print edition under the headline "The neglected wealth of nations"

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