How to avoid undue transfer of public wealth to the private sector

Rethinking how governments manage public assets is now a moral goal as much as an economic and financial one

While most advanced economies have been focusing on reducing the footprint of state companies, others have gone in the opposite direction. 

The last decade has seen the share of state company assets among the world’s largest firms grow significantly, and state-owned banks account for almost half of banking system assets in some developing countries. 

The growing reach of state companies with government support to compensate for pursuing policy goals distort competition and lower the income and economic growth in the country.

Even if unaccounted for, public commercial assets remain. At best, widely disbursed public commercial assets will likely be managed for the benefit of the few that control the assets for the moment rather than for society as a whole. At worst, they are ignored and not managed at all.

Avoiding proper accounting, a tool that has helped the private sector allocate capital efficiently and create the wealth we all enjoy today is like avoiding modern medical examination methods for fear of being diagnosed with a terminal illness. This is despite knowing that there is a higher survival rate if the illness is detected early. 

Introducing such private sector discipline to public commercial assets is sometimes dismissed with the argument that the public sector has nothing to learn from the private sector, given the private sector’s poor track record of accounting scandals, fraud, and embezzlement. But perhaps it is rather the other way around that the lack of proper accounting in the public sector is not a sign of health but of an undetected illness. 

The challenge to manage public commercial assets better is not a technical one. Professional management is done with great results in the private sector every day. The challenge is entirely political. What is required is political will. A concerted effort supported by the entire government, based on a will to unlock the hidden value in these assets and fully backed by its most senior members is required. The government of Singapore has amply demonstrated the success of such a strategy, while Greece shows what happens in the absence of political will. 

Sweden became the first country in Europe and among developed economies that resisted wholesale privatisation, Instead, Sweden decided to manage its portfolio of assets actively. On the back of the economic and financial crisis in the 1990s, several structural problems were revealed, including outsized public expenditures and a vast portfolio of loss-making state-owned companies and banks. 

The government introduced private sector discipline and an equity culture with value maximisation as the sole objective. This meant, first of all, the need to recruit professionals at every level, starting at the ownership level and continuing through the Non-Executive Board members and the corporate management for all the holdings. This led to more than 85% of the Non-Executive Board members and 75% of the CEOs and senior management in the portfolio being replaced over three years, in total several hundred people. 

Turning around every company required operational improvements and optimising the capital structure, as well as business developments aiming to focus on the core business. This resulted in nearly one-third of the assets within all the holdings being seen as non-core and sold at full value. The portfolio was reduced by almost a third during these three years, which helped boost economic growth and create fiscal space. At the same time, the valuation of the entire portfolio increased by twice that of the local stock market index during the same period.

Even with a government ambition of outright selling the portfolio of public commercial assets, it is critical to undertake such an exercise at an arms-length distance from politics in a holding company that can use all the private sector tools to choose, entirely on commercial grounds, the best timing and process of divestiture. The essential difference is illustrated when a government requires cash for the budget. Selling an asset in haste that has been identified within a government unit is at a commercial disadvantage from the start. While requesting a dividend from a holding company can be delivered from the existing balance sheet of the holding company without necessarily selling an asset at a time that may not be the best moment from a pricing perspective. 

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. 

Rethinking how governments manage public assets is now a moral goal as much as an economic and financial one. Making this change is politically difficult for any government. It involves a shift towards growing the economic pie rather than just focusing on how to divide it. 

If not now, when!

(The writer is the principal of Detter & Co, an advisor to governments, investors and IFIs such as the IMF, World Bank and the Asian Development Bank. He led the restructuring of the Swedish portfolio of state-owned assets and is the author of ‘The Public Wealth of Nations’.