Perspectives 2019 2020 Public Sector

Citi Perspectives 53 National wealth funds enable a shift in state assets toward infrastructure A NWF acting as a holding company for public commercial assets offers a politically palatable way to shift state assets towards infrastructure in a way that could achieve three goals: increasing funding of infrastructure, putting infrastructure decisions on a sounder economic footing, and reducing government’s direct and politically-motivated access to those assets. NWFs can help governments manage projects and encourage FDI by providing a window to international best practices and hands-on experience and management. With the same capacity to manage commercial risk as any private sector partner, any PPP would be on equal terms with any private sector partner thereby significantly reducing, or even eliminating, the risk of an undue transfer of value to the private sector, one of the common criticisms against PPPs. SWFs are in a financial position to invest in large infrastructure projects, but their expertise is financial rather than structural and operational and an important question is whether they have the competence that successful infrastructure investments require. National infrastructure investment can be boosted and managed better by letting an NWF shift or sell state assets in other commercial holdings and invest in infrastructure consortia in their own country. In doing so, three measures that reinforce each other are important. First, an NWF that invests in infrastructure should solely focus on profitability . Its job is to manage the value of operational assets, ensure economic soundness, and try to find structural deals that increase profitability. For example, many roads and railroad investments can become profitable if the increase in land value around these investments is internalized. An NWF is in a position to buy land surrounding an investment, making it profitable, or the NWF may already own the land through another of its holdings. Using an NWF to shift public assets toward infrastructure also helps politically. Governments often keep state enterprises merely because there is no strong political belief in privatization. But a somewhat independent NWF that can sell excess real estate or non-essential SOEs and reinvest the proceeds in profitable infrastructure would not be seen as relinquishing net wealth to the private sector, but merely shifting wealth within its portfolio. Second, infrastructure projects that are not commercially profitable, but have a positive net social value, should be paid for by state or local governments in the form of “payments for use.” For example, a consortium owned by the NWF alone or together with private owners may make a contract with the state or a local government in which the consortium builds a road and the state commits to pay an annual usage fee that can vary depending on road accessibility and other quality parameters. This is already a common model in many PPP projects. For example, governments pay a PPP consortium annually for provision of a road or railroad often in relation to the quality the PPP achieves. That focuses governments on the value of a service to the consumer, rather than entangling them in difficult investment decisions that also offer temptations for corruption. Third, an independent institute should continually evaluate the social profitability of infrastructure services that governments purchase . The evaluation should use internationally accepted tools to determine how to factor in environmental and social values. While the recommendations of such an independent institute probably would not be binding, they would make the economic rationale for various projects more transparent and impose a political cost on governments that invest in bridges to nowhere.