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Citi Perspectives for the Public Sector
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2015 – 2016
17
That’s interesting, your research suggests
that these under-performing, but high
potential, assets are not always held at the
central government level?
No, you could say that probably one-third or
even less are at central government level and
at least two-thirds are down at the local or
municipal government level.
Do we know what these assets might
be worth?
Well, we have an estimate that we have
researched for the book, which we believe is
US$750 trillion. Now that is only book value and
only the central governments.
Goodness me, now that is equivalent to
global GDP and is greatly in excess of the
stock of public debt securities in issue in
the global economy?
Yes, and this is only book value. So, if you think
about the local government side, it’s probably
three to four times this value.
Interesting, now in the book and the
report we talk about a phony war between
nationalisation and privatisation. Could you
tell us a bit more about what you mean there?
Yes, we think it is time to stop talk about
ownership of these assets because that hasn’t
led to anything useful in the last 50 years. It
has just led to the two sides of the privatisation
debate arguing for either privatisation or
nationalisation, digging trenches. And in the
meantime, these assets remain unknown and
without any transparency. So, if we start talking
about the quality of asset management instead
and try to get a yield out of these assets which
requires transparency, we will be able to give
much better help to the economy.
Now how could this yield be achieved?
How can governments make that leap to
achieving that yield for future generations?
First of all, governments need to compile an
asset list of what they have, be it real estate,
forests, corporations, etc., and then secondly a
market valuation. Market valuation allows you
to have an understanding of the alternative
use which gives you the possibility to do an
integrated business plan, and that could then
be used in order to segment these commercial
assets so that we can consolidate them into
a holding company that would enable real
professional asset management.
So how much yield might we be able
to generate here? What is the upside of
financial development opportunity for the
public sector?
Well, an improvement of one per cent per
annum in the yield of the global assets owned by
central government would generate new yield
equivalent to the GDP of Saudi Arabia. That
is the size we are talking about. If we were to
achieve something as phenomenal as three-and-
a-half per cent, that yield would be able to fund
the total spending on infrastructure investments
annually in the world.
Given the scale of this, given the global
nature, Dag, and that these assets sit
within central, regional, provincial and local
government levels, it strikes me that the
financial services requirements here to
support this megatrend will stretch from
advisory and restructuring, and across
all of the equity and debt capital markets.
In the report you talk about the potential
impact on inflation-linked securities. There
is a potential renaissance of that market,
as well as a full spectrum of operational
financing requirements for the public assets
themselves. This could be a wholesale change
in one segment of the market place.
Yes, as Willem Buiter, chief economist at Citi
says in the report, this will require significant
innovation from the capital markets, from
investment banks and from investor groups. All
will have to think about this in a completely new
way. The key requirement is to get transparency.
Transparent asset lists need to be compiled by
governments in order to be able to understand
what is in there, and then that will lead to
decisions on appropriate capital structuring.
Dag, thank you for your co-authorship of
this thought provoking GPS report. We look
forward to engaging yourself, our clients
and Citi’s global network of bankers on this
emerging megatrend. We will host various
client discussions on this topic, and let’s
reconvene in a few months’ time to hear and
talk about some of the progress.
Thank you, I look forward to that.