Perspectives 2019 2020 Public Sector

Citi Perspectives 51 GIC is the sovereign wealth fund, the vehicle that helped professionalize management of the foreign reserves of the government, which is invested in financial assets outside of Singapore. But the public sector also needed a vehicle to manage its portfolio of domestic operational assets in a way that is recognized as the accepted international standard of asset management. In the private sector that vehicle is a corporate holding company with internationally accepted corporate governance and accounting standards. In the public sector the professional management vehicle for commercial assets is called a national wealth fund (NWF). There can be no professional management without such a vehicle. In Singapore the NWF is Temasek. The joint market value of GIC and Temasek significantly exceeds Singapore’s public liabilities and is more than 1.7 times the annual GDP of the city state. As a result of this strong balance sheet, Singapore has consistently received the top credit rating — AAA — from the three main credit-rating agencies. Both funds deliver a significant surplus to the government. Box 2: Sovereign vs national wealth funds A Sovereign Wealth Fund (SWF) is primarily concerned with managing reserve liquidity, typically investing in securities traded on major mature markets. SWFs are designed to optimize a portfolio by trading securities to achieve balance between risk and returns. An example is GIC of Singapore. A National Wealth Fund (NWF) is an asset manager, concerned with active management of a portfolio of operational assets. NWFs seek to maximize the portfolio value through active management including the development, restructuring, and monetization of the individual assets. An example is Temasek of Singapore. While policymakers in many countries have focused on managing debt for decades, they have largely ignored the question of public wealth. In most countries public wealth exceeds public debt: managing that wealth better could help to reduce excess indebtedness while providing the basis for future economic growth. The longstanding debate between those who argue for privatized economies and those who champion nationalization misses the point: what matters is the quality of asset management. When it comes to public wealth the focus should be on yield rather than ownership. Improvements in public wealth management could generate returns greater than the world’s current combined investment in infrastructure. Improvements in the transparency of public wealth management could also help fight corruption. Professionalizing the management of public commercial assets Government ownership has historically given rise to complex governance and regulatory risks that often prevented SOEs from creating optimal value for the economy. Inefficient SOEs and other public assets, such as real estate that remains underdeveloped or mismanaged, create a drag on the economy and crowd out private sector initiatives and foreign direct investment. In the worst case, SOEs are used for political patronage or self-enrichment, which erodes the trust of citizens, international investors, and potential partners. Moreover, government ownership is often decentralized along line ministries with an inherent conflict of interest between the ministry’s ownership and its regulatory responsibility, 2 which can add to the suboptimal use of public resources. Governance of public commercial assets is further constrained by a lack of transparency and adherence to international accounting standards. 2 OECD, Corporate Governance in MENA, 2019