THE PUBLIC WEALTH OF NATIONS
How Management of Public Assets Can Boost or Bust Economic Growth
Dag Detter and Stefan Folster
Pages 211, $40
For the better part of the year, the ruling National Democratic Alliance (NDA) government and opposition parties have been locked in a bitter battle over the contentious land acquisition Bill. In the midst of this intense political bickering, a senior politician casually remarked over a cup of coffee that if the government really thought land availability were an issue, it should simply hand over all its land holdings to the corporate sector.
It was an offhand comment that reflected exasperation at the impasse. Inadvertently, however, it raised the larger issue of the management or rather mismanagement of government assets. It is an issue that requires serious interrogation.
This situation is not unique to India.
Problems with government ownership and management are well known. Government control of assets often leads to political meddling, clientism and corruption. The lack of transparency allows governments to distribute favours and create a patronage system. These assets are used to buy support from vested interest groups who are often able to interfere with their functioning, replacing it with their own agenda.
Economists argue that the best way out of this quagmire is for governments to give up control and privatise. But this where political compulsions trump economic arguments. In many countries privatisation is a bad word and the political class often shies away from taking tough decisions. Privatisation drives in India and in other countries have triggered accusations of corruption and instances of crony capitalism.
But in a new book, Dag Detter and Stefan Folster argue with uncommon eloquence that rather than getting caught in this "phoney" ideological war - public vs private - the focus should be managing these assets better. The book, The Public Wealth of Nations, a title that harks back to Adam Smith, attempts to transcend this ideological debate.
Rather than expend political capital on pushing privatisation, the authors propose the creation of a separate entity - a National Wealth Fund (NWF) - to consolidate public assets under a single institution. Set up in the form of an independent ownership vehicle, NWF would operate at arm's length from government. Incorporating the best elements of corporate governance into better management of public assets, it would be run by professionals who will focus solely on yields rather than other objectives.
Given that government asset holdings are notoriously opaque, the authors propose that the management of these assets be guided by three core principles - transparency, pursuing a clear objective and shielding state assets from commercial assets. This is essentially smuggling elements of private sector governance into public sector undertakings but such a structure, they argue, would reduce opportunities for corruption by reducing the discretionary power of public officials.
Messrs Detter and Folster have cogently articulated an issue that has been barely touched upon. The reality, though, is more nuanced.
One could argue that focus on maximising yields could lead to better management of assets. But the problem with this line of thinking is that governments, especially in developing countries such as India, often have to invest in areas where the private sector is unwilling to, perhaps due to the risks associated with the project or the uncertainty of returns. Further, some government investments are not driven by profit considerations but by the larger societal benefits that accrue. Trade-offs are made. Leaving it solely to the discretion of the private sector would be unwise.
Though this is not to say that governments should continue supporting loss-making units where there is no perceivable social benefit. It makes no sense whatsoever for taxpayer money to be used to support loss-making units like Air India and BSNL.
The other problem is that the authors underplay political opposition to their suggestions. Given how fiercely privatisation is resisted in countries like India, a move to create an NWF ring-fenced from government control would surely run into political opposition. One explanation for the NDA government's timidity on the creation of a bank holding company to lower the governments stake in public sector banks is that the legislation would have to be passed through parliament where the government feared it would be blocked by a cussed opposition. But this not to say that gains are not to be made from better management of public assets.
So how big are the potential gains? That's difficult to say because data simply does not exist. The authors estimate that the total value of assets held by central governments across the world is at least $75 trillion. This is likely to be an underestimation as it does not capture the holdings of regional and local governments. But it's more than the assets of private equity firms, hedge funds, pension funds, sovereign wealth funds, or the super-rich.
The authors contend that better management of these assets could yield roughly $2.7 trillion, which would be enough to generate funds for much-needed investment in infrastructure in transportation, power, water and telecommunications. This income stream could also be used to retire the sovereign's debt burden and lower taxes on citizens. The logic is compelling. The question is whether governments will listen.