Perspectives 2019 2020 Public Sector

Citi Perspectives 47 Putting Public Assets to Work Dag Detter  David Walker  Laura Gibson  Hanan Amin-Salem Governments around the world face pressure on their finances as well as a need to diversify their economies. By reassessing the potential of the commercial assets on their balance sheet, most notably real estate, they have the opportunity to bring about transformative change. When Singapore and Jamaica achieved independence in the early 1960s, both island nations had roughly the same population, life expectancy, and GDP per capita. Today they are poles apart. Not only has Singapore’s population grown three times faster than Jamaica’s, its per capita GDP is 10 times bigger, and its average life expectancy is 9 years longer. Against all odds, the tiny Asian nation with no significant resources, not even basic utilities such as water or the capacity to generate electricity, has thrived thanks to innovative and bold thinking. There are many reasons to explain why Singapore performed so much better than its peers over the succeeding half century, including the development of human capital and a strong rule of law, but a major source of Singapore’s economic attainment was the creation of robust economic institutions and the effective use of public assets. Proper use of public commercial assets has been a core component of Singapore’s strategy to move the economy from developing to developed status in a single generation. Singapore’s founders introduced an innovative and unorthodox separation of economic policy from the management of public assets. At a time when free market capitalism was seen as essential to rebuilding the post-World War II global economy and creating full employment in many countries, Singapore opted to go the other way and recognized that a government, just like a corporation, has a balance sheet with both assets and liabilities that need active management. Most other governments around the world, many endowed with plentiful natural resources, kept managing their economies as if they only consisted of a current cash budget and a stock of public debt. The founding fathers of Singapore incorporated portfolios of assets inside public wealth funds; they delegated to professionals the responsibility for managing public commercial assets in holding companies that introduced private sector discipline and used governance tools borrowed from the private sector. Professionalizing public financial management Today, most governments around the world have delegated public management of several core financial operations to separate professional institutions, including government debt to the debt management office and interest rates to the central bank. Similarly, some governments have delegated the management of surplus revenue from exports to sovereign wealth funds (SWFs). These SWFs — often in resource rich countries — have succeeded in generating wealth for society and future generations, by investing surplus revenue in well-developed international stock markets or in real estate in stable developed markets. In many instances, high commodity prices — most especially of hydrocarbons — have benefited commodity exporters over the past decade both directly, by supplementing tax revenues with income from exports, and indirectly, through the dividends from the SWFs. In addition, public sector balance sheets have been bolstered by the continuous growth in the value of the SWFs. The proceeds have been used to modernize infrastructure and create employment. 1 1 Fasano-Filo and Iqbal, 2003