The total worldwide public wealth in government hands,
conservatively calculated, is so vast that a higher return of just
1% would add some US$750 billion annually to public revenues.
[…] democracy has the best chance of working in the public interest
when governments are restricted from direct access to public
wealth. This does not mean that all wealth must be privatized.
The process of privatization itself offers tempting opportunities
for quick enrichment, risking crony capitalism, outright
corruption, counterproductive regulations, and selling assets
at big discounts to placate vested interests.
Dag Detter and Stefan Fölster, The Public Wealth of Nations
Guillermo Máynez Gil: What is a National Wealth Fund?
Dag Detter: It is a ring-fenced corporate vehicle owning all public commercial assets at arm’s length from short-term political influence. The government is the owner but not the manager, and in that sense it sets the business objectives and evaluates performance in a transparent way.
Not all public assets, then…
‘Commercial assets,’ those that if properly managed can generate an income, should be distinguished from ‘policy assets,’ those that are funded by taxes and might serve a not-for-profit goal. Policy assets should not be mixed with commercial assets and included in a NWF. An oil field or land property in a business area may be commercial assets which should yield profits for the public sector; the operations of a hospital or bird-haven would most likely be a policy asset, while the real estate of the hospital can be seen as a commercial.
For you, what would be the starting point to create a NWF?
The first step is a list of assets, something that most countries have in a very incomplete way and some don’t even have in any way. Nations like Singapore, Sweden, Austria, and Finland have perhaps the best. Even the United States doesn’t have a really good one. This is a process, where the fact that you’re trying to have one is good in itself, such as in the case of Lithuania: it gives you an idea of all the wealth in the hands of the public sector that could and should yield more value. In some cases it could be better to start at the local level and then build up from there.
Supposing a country does have a reasonable list of assets, the next challenge is to create the single vehicle you mentioned, and this is where it can get politically rough. Many people would say that putting all assets into one single institution would mean creating an all-powerful entity able to rule the government. What would be your main advise when trying to create this single vehicle?
We should fear fragmentation and lack of transparency more than a consolidated vehicle. A professional vehicle will be able to demonstrate the market value of how much the government owns and the yield it is able to produce from these assets, and to compare that yield with the private sector. Only this will enable a debate on what can be done to minimize the gap in yield between the private sector and the government portfolio. Most governments have created an independent national debt office, consolidating our public debt, so why not for the assets? Also we have independent central banks and pension funds, so why not a professional management of our commercial assets?
How to manage the consolidation?
There’s a story coming from the Swedish experience. The government decided: we don’t want to privatize, we need to show that we can manage public wealth as well as the private sector could do it or even better, so we need to consolidate assets under a single vehicle and recruit professionals to manage the portfolio according to best practice. The main point in favor of consolidation is that it is precisely the fragmentation into multiple departments and agencies which creates vexed interests and lack of transparency, as well as the management of assets with political objectives in mind. Frequently, this fragmentation leads to corruption. When consolidating assets, the main resistance will come from inside, but if you ask the head of each department if they have any idea of the value of the assets in their charge, they usually have no answer, even less if you ask them what the yield on those assets is.
The first thing the Swedish government did was to consolidate all legal departments of ministries to make up one single legal entity. This meant that all assets belonged no longer to a separate ministry or department, but to the Government as a whole. The second step was that the prime minister asked each new proposed minister: “Do you want to be my minister of Finance, Labor, Defense, etcetera, without the assets?” This is the only point where a prime minister has leverage over ministers; after that there is always bargaining for various decisions, every day. And the third thing was that he merged five ministries into one, eliminating every resistance against consolidation. So the main starting point is having the political will.
Communication is important. If we know that a one percent increase in return on world public assets, just at the federal level, would mean an increase of one percent of world gdp, you would have to find the equivalent number for your country and show the people how much they have to gain from this.
But you would still recommend some kind of pilot program at the local level…
That might be a practical approach. Mexico has a strong business community, a good industrial climate, a strong financial sector, and also an active civil society, so despite all the challenges the country is facing, there should be a very attractive opportunity. Introducing this approach would no doubt change and further develop the financial sector and banking in a very interesting way. It would enable investors who are trying to find new investment opportunities to understand the Mexican market risk better. Transparency is indispensable. Once international investors have visibility to these assets, they will not only be able to help the government develop them; they will also have a better visibility of the sovereign balance sheet and its risks. They don’t need to buy the assets in their entirety. They just have to develop them and take a stake in them, and this is extremely attractive for their clients, like sovereign wealth funds, infrastructure equity funds, hedge funds, etc. This would completely change their business.
Corruption almost always happens in the interface between business and government, so when you separate ownership from management you can better deal with this problem. Independent central banks are a successful example even in Mexico
Would this mean privatization? As you know, Mexico and other countries have had negative experiences with privatization…
In the book we call this argument over public versus private ownership a “phony war”. We should stop talking about ownership of public assets and start talking about the quality of asset management. Privatization is absolutely not necessary for good management; separation between ownership and management is. Now, when you’ve developed an asset to its maximum value, then you can start thinking about who is really the best owner. The problem is that, even in countries like the United Kingdom, public assets have been privatized way before they are properly managed, and so they have been sold to vested interests at a discount, to the detriment of the public interest. First you manage well and develop an asset, then maybe you can discuss whether there are better owners for such an asset.
So is it possible to make the case that what you are proposing is the right alternative to just getting rid of assets in a disorderly fashion or a fire sale?
If managed correctly, the yield from a government portfolio would be able to generate far more than what you get from a desperate fire sale.
Now, once you create this single vehicle, a NWF or an UWF with a professional management, independent from the government but responsible before it for increasing value and yield, would you have to create, within the holding, specific firms for each kind of asset (oil, gas, forestry, fisheries, etcetera) and replicate the professional management of the holding in each one of them?
Each business segment should be managed by specialists, just like in the private sector, investment companies or private equity funds.
Many government-owned enterprises (GOE) have very powerful trade unions. What should be done about them?
Politics is the main challenge to this concept due to the vested interest involved, so the main challenge is the initial separation of ownership from regulation. Once the assets are in the wealth fund at an arms-length distance from short-term political influence it is the strength of the governance system and the individuals involved that will determine how well you can develop the portfolio and the relationship with any vested interest, including the unions. The strength of the governance will determine how far to increase efficiency and minimize corruption. Corruption almost always happens in the interface between business and government, so when you separate ownership from management you can better deal with this problem. Independent central banks are a successful example even in Mexico.
Yes, but the difference between a central bank and the oil industry is that in the former you don’t have a huge mass of blue-collar workers, grouped in powerful trade unions, willing to organize mass demonstrations…
The beauty of a NWF is that politicians can avoid direct responsibility and culpability such as in the case of Petrobras in Brazil if separation is clearly institutionalized in a credible governance system. Then politicians clearly delegate accountability to the management of the NWF. To make this happen, we have to delegate all management decisions to a professional team answerable to the people via the Parliament and the government by delivering a professional yield from the portfolio, to help fund infrastructure investments, health care or even the pensions system. With a transparent purpose of these assets we can agree or not that this would be good for the country. Then it is easier to accept the NWF to rationalize the companies and make them more competitive. Criticism of this transparent purpose can then be launched directly at the fund, where the government and the taxpayers could have a common cause. Performance is the responsibility of the managers, regulation is the responsibility of the government, as with any private-sector firms.
Where should these managers come from, what should their profiles be?
Recruitment should naturally be based on merit and the more professional, the better. The profile of the members of the board would depend on the profile of the assets themselves. For example, in Greece, the bulk of assets were real estate, but in other countries it could be oil, forests, agricultural land, etcetera. It also depends on the point in the life-cycle of business at the moment—mature or early-stage or development, etcetera. For example, in oil: are you only at the development phase, or is the sector mature and possibly declining? Mexico has a very diverse portfolio of assets in the hands of the public sector, at different levels of government, so you should evaluate the relative weight of each type and decide on the best profiles.
Should there be public servants on the board?
No, unless they are qualified. If they are qualified, they should be employed as private sector employees, losing all public sector benefits. Managers should be focusing on creating more value, so I find it unlikely that politicians will want to be there.
Should there be trade union representatives?
The restructurings we did in Sweden, which were quite substantial, could never have been done without the trade unions. The general experience in the Scandinavian countries, and also in Germany, is excellent, but perhaps this is harder to transport to another political culture and legal context.
What should be the reasons for firing a chairman of the board?
As with any commercial company, a failure in fulfilling the business objectives set out by the government. With world class transparency, the entire population will feel involved. If you take a look at the national reports, for example the Lithuanian, they are really easy to understand, so they can give everybody an idea whether or not objectives are being met, if compensations to executives are excessive, or if they are incurred by corruption. In the end, it’s going to be a reflection of the situation in the country: whether or not you have a strong civil society and functioning media. The political leadership should make clear that the board members will be held accountable. If they fail, the government will side with the people to demand results. That’s one of the huge advantages of the NWF: politicians stop managing assets and turn instead to procuring the general good.
What about regulation? Should there be any differences in regulation between public and private companies?
Regulation should be the same for every firm, independent of ownership; that’s one of the cornerstones of the whole idea. Then, the government can be impartial and demand results from the NWF.
So then, clearly, this idea would not only positively impact economic performance, but also the democratic process…
Exactly, when people see transparently what assets they have, what their value is, and how they are being managed, and when they know that the government regulates and supervises their performance with the general good in sight, the quality of democracy is improved. The trust of the people in their government will be improved. It will be easier to see how good management of public assets has a positive effect on budgets for health, education, infrastructure, etcetera, and harder for the money to fall into corrupt hands.