The Public Wealth of Nations book review: Book Review Financial Express Sept 6, 2015

The Public Wealth of Nations book review: A way & some will

The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth
Dag Detter & Stefan Fölster
Palgrave Macmillan
Pp 230
$40
WE NORMALLY talk a lot about the extent of government debt and the concerns that go along with it. In these discussions, an argument that comes up often is why not also evaluate government assets or public wealth of a nation? This is the starting point of Dag Detter and Stefan Fölster’s book, The Public Wealth of Nations, in which they highlight the importance of the assets of the country that can be effectively used by the government to generate income, reduce debt and improve efficiency. This combined wealth of all governments in the world has been estimated to be the equivalent of world GDP, at around $75 trillion.
Now, when we talk of government wealth, it is fairly diverse in concept, ranging from state-owned enterprises (SOEs) to departmental assets covering property associated with, say, railways or roadways and other physical assets such as buildings. In commercial terms, the authors are talking of monetising government assets by putting them to better use. In countries like France, Germany, the UK and Japan, the sum of the government’s financial and non-financial assets exceeds their debt. Now, this idea will strike a bell for us in India, where the government has also been mooting the idea of use of railway land and other property to generate revenue.
The treatise in the book is basically two-fold. The primary focus is on SOEs in various countries and the methods used by governments to make them more efficient. The other is a discussion on real estate-related assets of the government that can be used more effectively. Along the way, the authors bring to fore the point that for all these enterprises to succeed, we need to have less government interference, which can be achieved by ring-fencing them from politicians. The problem with government intervention is corruption, crony capitalism and serious conflict of interest.
A heartening revelation that will provide a lot of comfort for us in India is that the problems facing SOEs in other territories are not very different from that in our country, as SOEs are structured and operated on similar lines everywhere. The major challenge is government interference, where both majority and coalition governments use these enterprises to dispense favours. Hence while the authors keep harping on the point that there should be no government interference in the operations of SOEs, they do admit that countries have a tough time implementing this. In this context, the authors also emphasise the requirement of an independent central bank for better governance. This should again strike a chord in our context, where there is an ongoing debate about the RBI’s independence in the light of the proposed monetary policy committee to decide on interest rates.
The authors suggest the concept of a National Wealth Fund (NWF), which takes ownership of all SOEs and then runs them like a private-sector entity. This concept of a ‘holding company’ for public-sector units is also not new for India, where we have been talking of it for all public-sector banks. Now, the authors argue that if we do have such NWFs that are free from interference from the government, we would get superior solutions.
In fact, they speak of either ‘fragmented’ ownership or ‘consolidated’ ownership, where these funds manage all SOEs under different levels of the government, as almost all countries have federal structures starting from the central government to state or provincial ones and moving to local set-ups. Such a large company that is professionally run would have an advantage in raising both debt and equity.
With a larger balancesheet, raising funds for infrastructure purpose becomes easy for the NWF even in global markets, which will be difficult for individual companies that are not well-run. Also, for any kind of disinvestment, selling through an NWF becomes easier than for individual companies.
Quite interestingly, in the area of disinvestment, the authors do point out that all countries go through the same pain of apprehension when deciding on the pricing of such sales. As late as 2013, the UK government came under fire for the privatisation of Royal Mail, when the share price rose by 38% on the day of listing. It was lambasted by critics, who claimed that tax payers lost 1 billion pounds on account of poor pricing. This seems to be a major fear for bureaucrats in India as well when taking a decision on when to disinvest shares in a company. Having an NWF carry out the same sale would carry more credibility, as there would be professional decisions taken.
Detter and Fölster argue that the objective of these NWFs is to create value, inculcate professionalism and pursue the highest standards of governance. While this is okay on paper, we do see that SOEs have been used by politicians everywhere as per their wishes. This is one reason why they tend to fail, but never collapse, as they keep getting support from governments. This is a question that only individual countries can answer. In India, too, we often see that all SOE appointments are made by the government and even if a holding company is created, a similar pattern may follow.
Hence, while the authors’ governance principles relating to independent survival, professional decision-making and day-to-day execution are sound, these are the very same domains that governments like to capture, as these empower them. We all lament that in India, public-sector banks are not free from interference from politics and several unsound commercial decisions are taken on this score. Hence, there is no guarantee that such models will work everywhere unless the government has the willpower. The authors give examples of the NWF, Temasek, in Singapore, which has operated on these principles and even gone out of Singapore, with significant presence in other countries, too, today. There are other examples as well of such structures working in countries such as Finland, Scotland, Peru, Spain, Abu Dhabi, etc.
Besides SOEs, which is the core of this book, the authors also explore the leveraging of real estate owned by the government through the NWF, which, however, has not been very common, as land records are not in place.  They focus on three kinds of assets—administrative buildings, department assets (defence land, airports or ports) and property owned by various departments, including forests and farmland not being used, etc. Intuitively, such assets can be leased out or sold for revenue. Alternatively, administrative offices could shift base to cheaper areas and the prime land could be used for generating revenue.
The Public Wealth of Nations is quite interesting, as it outlines several possibilities of making government assets work. But the fundamental clue to this model working is the absence of government—read as political interference—which in several countries is hard to come by. But as there have been several success stories, though confined mainly to  developed countries, there is hope that this could be accomplished in other nations, too. But the initiative has to come from the government.