Learn more about the book: The Public Wealth of Nations
1. Discussing “The Public Wealth of Nations,” what drove you and your colleague to write the book?
Developed economies haven’t discovered the other side of the balance sheet – assets. Especially public commercial assets, which provides a very appropriate tool to create economic growth, strengthen democratic institutions, and fund infrastructure investments. This book was written to highlight these issues. We wanted to raise the awareness of these vast opportunities and give a different perspective on how to manage these vast assets.
2. In broad strokes, can you highlight some points about public wealth and perhaps give some definition to it?
Public wealth is the less well-known side of the public sector balance sheet – in essence, that is the value of total assets minus total debt. Public commercial assets are those assets that are not funded by taxes and that themselves can generate an income from sources such as real estate, land, buildings, forests and toll roads, as well as corporates and banks owned by the government. These are either on a central government level or local level.
When we talk about state assets, it is really only assets held at the national or federal level. This is the tip of the iceberg.
3. How large is this wealth segment?
Most governments own commercial assets that are worth more than government debt. Globally, the value is on the same order of magnitude as annual gross domestic product (GDP), or US$ 75 trillion, and well over the value of global public debt. We argue that how public wealth is governed is one of the crucial institutional building blocks that divide well-run countries from failed states.
Unchecked, public wealth can ruin entire countries and undermine democracy. Public wealth can be a curse if it is left as an open cookie jar, tempting its overseers into corruption and clientelism. Even in successful countries like the U.S., which are by and large, well organized, public wealth invites democratic perversion that can incite huge policy failures and impose unreasonable hardship and social costs on at least some of its people.
Every percentage point of improvement in the return on government-owned assets globally is equivalent in value to the GDP of Saudi Arabia – means less money wasted or used for corruption, clientelism, and rent seeking.
5. You mention several ways to raise returns in public wealth assets. Which is the easiest?
Just increasing transparency creates an enormous boost to productivity – including setting up a list of assets, obtaining a market valuation and thereby understanding the alternative use of each asset. Consolidating the entire portfolio of commercial assets within a ring-fenced holding company, similar to that of a private sector PE fund, at arm’s length distance from short-term political influence.
If governments managed its assets efficiently, it could generate annual returns more than the yearly investment in infrastructure including transportation, power, water, and telecommunications.
6. Putting state-owned commercial assets into an independent ring-fenced holding company at arm’s length from short-term political interference with professional management brings strategic and financial expertise and advantages to the operations, as well as economic benefits to the country. How can the public and policymakers be educated on this issue?
Media and the financial sector plays a key part in explaining the benefits to the two main stakeholders taxpayers and investors. Media can debate the concept, especially to the public and taxpayers, who are paying the taxes funding governments. Investment banks and financial advisors analyze and discuss with investors who are currently funding public debt.
There is a huge wall of money looking for assets. They cannot find these assets; most portfolios are not transparent or even visible. The more efficiency in public finance, the better the economic growth.
Willem Buiter, Chief Economist of Citi, said in a recent research paper on this topic, “with better information, the monetization of these under-exploited real commercial state assets will likely require considerable innovation in capital markets and investment banking.”
7. You mention Temasek Holdings in the book and a bit about the story of Singapore. What countries should mimic the Temasek model?
Any developed economy could mimic Temasek’s approach and emulate their model, either on a federal, state or city level. Many emerging markets would also benefit from this concept. The first movers will most likely be at the local level. Smaller portfolios would most likely embrace this easier compared to the complex Federal government level. At the local level, a city like Chicago might resolve its financial difficulties. Other cities like London and New York could use it to help solve the need for increased investments in housing and infrastructure.
8. What is the difference between a SWF and a NWF?
Sovereign wealth funds (SWF) resemble hedge funds, managing liquidity generated from exports. National wealth funds (NWF) handle the existing domestic operational assets. For example, with regard to Singapore, Temasek Holdings is the country’s national wealth fund, while the GIC is its sovereign wealth fund. A sovereign wealth fund and national wealth fund should never mix as they have very different operational culture and objectives.
9. Why should governments limit or not have political appointees in corporate governance roles at national wealth funds?
Setting up a NWF has a similar rationale as setting up an independent central bank, responsibilities are delegated to professionals. NWF’s management and board members need to be true professionals in order to be able to understand and manage the commercial risks involved and be incentivized accordingly.
With responsibility and accountability delegated to an independent institution, the chairman and/or the CEO of the NWF will be held accountable not the Prime Minister.
10. Isn’t is easier for smaller countries to implement these changes?
Small or large portfolios comes down to communication and organization. Smaller countries, or cities are however far more likely to feel the competitive pressure, and therefore realize they need all assets to be productive and competitive against competitors.
A National or Urban Wealth Fund enables a government to consolidate its commercial assets, which allows professional managers to create an integrated inventory and business plan for the assets as a whole. With such an initiative, the governments could not only pay for vital infrastructure improvements, and restore its public finances to good health, but also strengthen democratic institutions and fight corruption.
About Dag Detter
Dag Detter is Managing Director of Whetstone and a Fellow at Legatum Institute. Previously he was the President of Stattum, the Swedish government holding company and Director of State Enterprises at the Ministry of Industry.
Numerous financial media outlets, including the Wall Street Journal (WSJ), are reporting that Ben Meng is in key position to become Chief Investment Officer of CalPERS. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
Abu Dhabi-based Mubadala Investment Company released its pro forma half-year 2018 financial and operational highlights. What’s interesting to note is that the financials now include the figures from the Abu Dhabi Investment Council (ADIC). ADIC merged into Mubadala a while back. Total assets of Mubadala, which now include ADIC, totaled 832 billion AED (US$ 226.484 billion), while total equity was at 583 billion AED for the period ended June 30, 2018. Profit for the half year period totaled 10.9 billion AED. Mubadala is in the midst of portfolio realignments. The state-owned entity took over International Petroleum Investment Company (IPIC) and then ADIC.
According to the release, Group Chief Executive Officer and Managing Director, Khaldoon Khalifa Al Mubarak, said, “In the first half of the year, we continued to deploy capital in new sectors and geographies, in line with our long-term strategy. We also monetized select assets at good valuations, to deliver financial returns. And, the decision to bring the Abu Dhabi Investment Council into the Mubadala Group has increased the scale and breadth of our portfolio.”
For Mubadala, some of these changes include investing more in technology and ramping up capital spending in the petrochemcial sector. During the first half of 2018, Mubadala revealed plans to form a US$ 400 million venture fund to invest in leading European technology companies. Mubadala also increased activity in Silicon Valley by backing startups and founder-led growth companies.
The U.S. Federal Reserve’s balance sheet has been set to decline automatically since 2017, as the central bank has been liquidating funds from its US$ 4 trillion in Treasury bonds and mortgage-backed securities. As holdings matured, the Fed refrained from reinvesting them. This amounts to US$ 40 billion in monetary tightening monthly. Meanwhile, interest rates have slowly, and continuously, risen. The maturation of these Fed assets could exert upward pressure on long-term yields.
Mortgage rates, applications, and home sales have been falling, likely due to the rising rates. While rates are still historically low, U.S. President Trump has criticized the rate hikes. However, the Fed has no interest in changing course, and rates are set to continue to rise. According to Fed meeting minutes, “The Chairman suggested that the Committee would likely resume a discussion of operating frameworks in the fall.”
The size and content of the Fed balance sheet going forward will be a point of discussion for Chairman Jerome Powell. While there is no end in sight for the Fed’s plans to tighten economic policy, changing conditions may warrant further examination. With the U.S. stock market thriving, there is no indication that tightening has had a material impact on the economy. However, conventional wisdom asserts that the Fed will raise rates “until something breaks.” Market commentators have also suggested that, in the event of an emergency, the Fed will have a harder time stepping in due to the size of its balance sheet. A large part of the Fed’s monetary strategy is based around communications, and Fed-watchers have made a habit of hanging on every word. The Fed announced a shrinking balance sheet well in advance, and made gradual moves in that direction. The process has been smooth thus far. The Fed’s tightening will reach its peak, US$ 50 billion, in October. It is unclear exactly how much stimulus is still needed in the economy to reach the Fed’s 2% inflation target. The Fed’s easing policies have been criticized for the lopsided benefits they provided, more for Wall Street than Main Street. However, the easing will reduce their role in the market.
The End of Maiden Lane I
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