Dag Detter On Unlocking the Hidden Value of Public Assets

I. Introduction

In part one of my conservation with Dag Detter, we discussed his experience leading the 1998-2001 restructuring of the $70 billion portfolio of Swedish government-owned commercial assets.

This article covers part two our conversation during which we discussed the lessons offered by the Swedish experience, and those of other countries, for how governments can make the best use of their public commercial assets.

Mr. Detter begins by citing research from the International Monetary Fund (IMF) which estimates that governments own assets worth roughly three times global GDP.

These government-owned assets include public companies and real estate.

Mr. Detter argues that these sources of public wealth are unaudited and largely unaccounted for.

He suggests that putting these assets to productive use would generate income for public investments - without increasing taxation or borrowing.

Based on case studies of Sweden, Singapore, and elsewhere, he recommends a two-part strategy for putting public commercial assets to profitable use: 

1. Professional governance: Governments should establish independent public wealth funds to manage these assets professionally and without political interference, and 

2. Modernize government accounting: Governments should adopt an accrual-based financial management system so that they can accurately track the assets they own, assess their value, and record the income derived from them. Governments should also adopt net worth as their key fiscal target. And they should integrate the information obtained via their accrual based financial management system into their decision-making while trying to increase their net worth.

Adopting this strategy, Mr. Detter argues, would help address global financial challenges posed by environmental, geopolitical, and demographic issues. And at the local level, it would help address challenges such as the chronic underinvestment in New York’s MTA subway system and London’s TfL tube network. 

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II. Untapped Public Commercial Assets

B. The Scale Of Public Commercial Assets

Aiden Singh: How large is the global goldmine? What are the estimates of the scale of global public commercial assets?

Dag Detter: The total value of government-owned assets worldwide is larger than all global capital markets combined. 

Most likely, the value of government-owned assets globally is equivalent to three times global GDP, according to estimates from the IMF. 

By comparison, the value of the world’s publicly listed companies is roughly equal to that of global GDP.

C. Unaccounted For Public Real Estate

Aiden Singh: You cite a story about the city of Pittsburgh as an example of governments not correctly accounting for the real estate assets they own. Can you tell me about what happened there?

Dag Detter: The US city of Pittsburgh offers an interesting case study. 

Before mapping its assets, Pittsburgh’s mayor thought the city had some 400 public properties, valued in the city’s accounts at about $57 million. 

Pittsburgh asked us to conduct a simple asset mapping exercise, which took less than a week to complete and cost about $20,000. 

The study revealed that the actual number of city-owned properties was closer to 11,000. And the review valued Pittsburgh’s real estate portfolio at $3.9 billion—70 times its book value. 

If professionally managed and developed to their best use, these holdings could generate income well beyond what the city currently raises in taxes. 

Assets not needed to deliver public services could be sold and the proceeds generated could be used to finance new investments — without increasing taxes or borrowing.

D. Mismanaged Public Real Estate

Aiden Singh: In addition to unaccounted for real estate, you also suggest that government real estate assets that are accounted for are often mismanaged.

Can you share with our readers an example of mismanaged high-value public real estate?

Dag Detter: The Escola Municipal Cicero Pena in Rio de Janeiro is the classic example brought up by the IMF economist Vito Tanzi.

It is a public school located between hotels on the Avenida Atlantica - the avenue that separates Copacabana Beach from the large high-rise five-star hotels that face the beach.

The land on which the hotels are built is very expensive because it is adjacent to the beach, perhaps the most expensive land in Brazil.

This is a great illustration of a misuse of public assets. 

Its location in front of the beach almost surely distracts the students from their school activities.

Furthermore, land with an extremely high market value is being used for an activity that, while socially important, could be located (to benefit the students’ learning) a couple of blocks away from the beach and on much cheaper land. 

This relocation would release the land occupied by the school to be redeveloped into a property with the highest market value.

Such a change would undoubtedly improve welfare because it would generate non-tax revenues for the government while also affording the government the possibility of building an equivalent or better school with the revenues from the development of the land on which the school was built. 

At the same time, the students would move to a location where distractions would be much reduced.

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III: Using Public Wealth Funds To Unlock The Value of Public Assets

Aiden Singh: Over the course of three books - The Public Wealth of Nations, The Public Wealth of Cities, and Public Net Worth- you’ve implored national and local governments to put their untapped assets to productive use. 

And you’ve argued that doing so would enable countries and cities to fund badly needed investments in public infrastructure and meet the financial challenges presented by demographic, environmental, and geopolitical issues.

Your recommendation entails placing PCAs in public wealth funds where they can be managed to earn income.

A. What Are Public Wealth Funds?

Aiden Singh: Let’s clarify some terminology. You make a distinction between sovereign wealth funds (SWFs) and public wealth funds (PWFs). Can you define the difference for our readers?

Dag Detter: A SWF is primarily concerned with managing reserve liquidity, typically by investing it in securities traded on major mature markets. An example of an SWF is Singapore’s GIC. 

A PWF is an asset manager concerned with active management of a portfolio of operational assets and/or real estate. An example is Temasek of Singapore.

PWFs can be further categorized into national wealth funds (at the national level) and urban wealth funds (at the local level).

Aiden Singh: Can you give our readers a few additional examples of countries that currently operate SWFs or PWFs?

Dag Detter: SWFs are often used by resource-rich countries such as Norway, China, Kazakhstan, Kuwait, and the UAE to manage the surpluses generated by their exports.

PWFs have been set up by countries such as Finland, Austria, Greece, the UAE, Malaysia, Ethiopia, Nigeria, Egypt, and Pakistan to manage their operational assets and real estate.

B. Why Use Public Wealth Funds?

Aiden Singh: You’re of the view that the use of PWFs, rather than having government ministries manage public commercial assets directly, achieves the best outcomes in terms of asset performance. Why?

Dag Detter: The best results have been achieved when assets have been consolidated inside an independent holding company, at arms-length from short-term political influence.

This is what Singapore did with Temasek: 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.

Goh Keng Swee, the deputy prime minister of Singapore at the time Temasek was established and the architect of its economic miracle, explained why Singapore chose private sector discipline and governance tools borrowed from the private sector to manage commercial assets: 

“One of the tragic illusions that many countries entertain is the notion that politicians and civil servants can successfully perform entrepreneurial functions. It is curious that, in the face of overwhelming evidence to the contrary, the belief persists.”

Aiden Singh: So your idea is to remove political interference from the operation of public businesses in a manner analogous to how the independence of central banks is meant to remove political interference from monetary policy decisions?

Dag Detter: Yes. Today, most governments around the world have delegated public management of several core financial operations to separate professional institutions, including government debt to debt management offices and interest rates to the central bank.

Now it’s time to do the same for public commercial assets.

C. Who Are These Funds Right For?

Aiden Singh: Would you recommend every country have both a SWF and a PWF?

Dag Detter: Governments at all levels - national or local - would benefit from setting up a PWF holding company. 

Once the government’s assets are placed inside that holding company and made subject to proper accounting standards, they can generate non-tax revenues for the government, to the benefit of society.

Resource rich countries or governments with a considerable budget surplus would benefit from setting up a SWF. 

The SWF would professionalize the management of the government’s foreign reserves and invest those reserves, in financial assets primarily outside of the country.

Aiden Singh: Is there any reason to believe that the use of SWFs or PWFs might be more or less appropriate for certain countries? Perhaps developed or developing countries are more or less suited to their use? Or maybe larger or smaller countries might stand to benefit more or less from their adoption?

Dag Detter: In most countries, public assets exceed public liabilities. So managing that public wealth better could help improve debt sustainability, regardless of the country’s size or level of development. Proper management of public wealth is necessary for any country and every government.

D. Successful Examples

Aiden Singh: Post your time leading the restructuring of the Swedish government’s portfolio of public commercial assets, you’ve advocated for local and national governments around the world to learn lessons from the Swedish experience. 

But you’ve also suggested that there are lessons to be learned from the successes of other countries. 

1. Singapore

Aiden Singh: I know you particularly admire what Singapore has managed to do in terms of managing its public assets to rapidly transform the country into a highly developed city-state. 

Can you tell our readers about how Singapore structures its public assets and the results that’s yielded?

Dag Detter: 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.

The tiny Asian nation had no significant resources, not even essential utilities such as water or the capacity to generate electricity. It was originally part of Malaysia, a country rich in natural resources, from oil to agriculture and water. Separating from Malaysia forced Singapore, a developing economy, to rely solely on its wits to survive.

Compared to Malaysia, with which Singapore is connected by geography, history, economics, and kinship ties, the development in Singapore has taken a different track. 

Both countries developed institutions to manage their public assets inside wealth funds. 

However, the objective and purpose of the asset management systems differed, with Malaysia focused on how to divide and distribute its vast wealth among its population, while Singapore’s focus is on building and maintaining the state.

Singapore’s national wealth fund, Temasek, has generated a compounded and annualized return of 14 per cent since its inception in 1974. Together with its sovereign wealth fund, the GIC, the two holding companies manage a portfolio worth more than twice the GDP. 

The outcome is that Singapore’s GDP per capita today is seven times that of Malaysia’s.

Against all odds, the small Asian country without significant resources and initially lacking even basic necessities such as water or the capability to produce electricity, has thrived thanks to innovative and bold thinking. 

There are many reasons why Singapore performed so much better than its peers over the last half-century, including the development of human capital and a strong rule of law. But a significant source of Singapore’s economic attainment has been its effective use of public assets.

2. Hong Kong’s MTR

Aiden Singh: You consider Hong Kong’s development of its rail network another example of successfully monetizing public assets in the interest of building public infrastructure. What did Hong Kong do?

Dag Detter: Hong Kong MTR built a subway system the size of New York City’s without one tax dollar by developing the real estate adjacent to and above its stations. And, I believe, around 40% of their revenue today comes from commercial operations - rents from shopping malls, residential, and commercial estates.

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IV. The Governance of Public Wealth Funds

A. Financial Transparency

Aiden Singh: You envisage PWFs raising money via the bond markets, which means they’d receive credit ratings from rating agencies and would be monitored by those agencies. You believe this to be an additional tool for facilitating transparency, correct?

Dag Detter: Indeed. PWFs should be financed through independent debt and bond issuances - not through government subsidies or guarantees. This would impose strict commercial discipline and professional accountability on the directors and management.

B. Eliminate Government Subsidies To Public Companies

Aiden Singh: You’ve stated that you are opposed to government subsidies to public enterprises as a tool. Why?

Dag Detter: As Charlie Munger famously said: “Show me the incentive and I’ll show you the outcome”.

Subsidies channelled through government companies distort the incentive to act commercially, maximize value, and compete on equal terms as their privately-owned competitors. 

And they create a potential channel for public corruption.

C. Implement Safeguards Against Corruption

Aiden Singh: So you’re a proponent of eliminating subsidies to public companies in order to reduce the associated risks of public corruption.

What about the risk of public corruption at public and sovereign wealth funds?

Dag Detter: Combatting public corruption is a constant challenge as long as government ownership of assets is involved.

But that risk is reduced when commercial assets owned by the public sector are held and governed in an independent professional ecosystem—a public wealth fund —away from policy-making in the line ministries.

In the scenario where a ministry directly manages government commercial assets, there is a conflict of interest between its role as manager and its role as regulator of the asset.

Still, even with a PWF, monies can be misused if strong safeguards are not in place, as is in the case in countries where PWFs are controlled by the military such as Egypt and Pakistan. Or consider 1MDB, the PWF of Malaysia, where more than US$4.5 billion was diverted to the benefit of government officials, including Prime Minister Najib Razak and other conspirators. 

So a tool as powerful as a PWF or a SWF requires a robust network of stakeholders and safeguards to prevent misuse.

Again the Singaporean case is instructive: there, the government has put in place   legal mechanisms to safeguard the nation’s accumulated net worth from being potentially frittered away by future governments.

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V. The Need For Adopting Modern Standards of Public Sector Accounting

But public commercial assets receive far less attention, despite being more valuable. 

Even the most open and democratic governments offer little formal governance, oversight, or accountability. 

And those that do apparently omit large swaths of holdings, so the true value is probably much higher than the IMF’s assessment, which relies on government data.

Aiden Singh: You’ve encouraged national and local governments around the world to rectify this issue.

Let’s talk about how you suggest they do this.

A. Asset Maps - Finding Hidden Opportunities

Aiden Singh: One tool you’ve suggested is important when attempting to account for public assets is asset maps. Can you discuss what they are and how they should be used?

Dag Detter: Let’s say you have 10,000 pieces of real estate which need to be accounted for and properly managed. 

You can start by building an asset map to get a rough idea of what you have. An asset map is a back-of-the-envelope feasibility study to understand the indicative value of the portfolio. It will help you to see how much of the portfolio consists of residential properties, offices, shopping malls, etc. And it allows you to determine where they’re located physically. 

And once you have this rough asset map, you can start to bring in the right people and put the right management in place who can manage those types of assets.

So an asset map gives a government the information needed to structure a holding company for its real estate, appoint a board with the right people, and give them some kind of idea of why they have been appointed, and an idea of what the government wants them to do strategy wise.

After that, they need to hire a CFO and you need proper accounting as you run the business. Every piece of land you own must then be valued precisely by a certified valuation company. So audits come into play.

B. Governments Should Focus On Net Worth

Aiden Singh: In Public Net Worth, you and your co-authors argued that governments and analysts of government finances neglect to consider the government’s net worth. And you’ve suggested it is a mistake to do so. Why?

Dag Detter: Policymakers in many countries have had a limited focus on whether there is a fiscal deficit or surplus and on the size of the country’s debt.

They have largely ignored consideration of the overall government balance sheet - the government’s assets alongside its liabilities. The result is that they fail to consider how they can grow public wealth and the government’s net worth for future generations.

Ignoring net worth is misleading, mismeasures debt sustainability, and creates a bias against investment.

In contrast, governments that focus on net worth have an incentive to invest in productive assets. 

Over the longer term, a net worth focus would make it easier to hold governments to account for decisions on spending, borrowing, and taxation—and the impact on intergenerational fairness. 

Aiden Singh: Today, when analysts want to assess the fiscal position of a government, they will focus on things like debt-to-GDP ratios and the size of fiscal deficits/surpluses.

But you’ve suggested that focusing solely on these metrics doesn’t provide us with the whole picture. Instead, you recommend focusing on national wealth.

What do the commonly used metrics miss and why is national wealth a better metric?

Dag Detter: A focus solely on debt and cash metrics means governments overlook the value of public assets and the full extent of their liabilities. This narrow perspective leaves politicians without the necessary insight or accountability, leading to suboptimal use of resources and potential unfairness across generations.

Aiden Singh: If countries start to adopt the metrics you advocate, how quickly or slowly do you believe bond market vigilantes and credit rating agencies would follow suit?

Dag Detter: The ratings methodologies of the three global rating agencies — S&P, Moody’s, and Fitch — do not incorporate the net worth of the public sector in large part because they do not have visibility into the full scope of the public sector balance sheet. Since governments do not produce a complete and consolidated picture of all their assets and liabilities, within the proper accounting framework to provide transparency, the agencies do not have the means to make an assessment.

As the rating agencies do not take public sector net worth into consideration in their assessments of sovereign creditworthiness, governments do not in turn produce balance sheets. 

This catch-22 situation could potentially be overcome with an external push, perhaps exerted by a crisis or if the IMF were it to conclude that the full public sector balance sheet should be the proper basis for its debt sustainability analysis.

C. Governments Should Use Balance Sheets For Decision-Making

Aiden Singh: To facilitate the measurement and tracking of their net worth, you’ve argued that governments - like individuals and businesses - should maintain a balance sheet.

Dag Detter: Yes. And not just the publication of annual financial statements many months after the official year-end as in the UK. 

Governments should produce monthly statements as in New Zealand so that their balance sheets and calculations about their net worth play a part in decision-making.

Ultimately, what we need is proper financial statements based on accrual accounting. 

D. Accrual Accounting

Aiden Singh: Can you share with our readers why you believe governments should adopt the use of accrual account instead of cash accounting?

Dag Detter: The reality is that most governments are stuck in the Middle Ages when it comes to accounting. 

They have for too long been influenced by economists whose perspective on the management of public finances is limited to simple measures of cash flows and debt. 

This is like trying to manage a modern corporation using only the information available from the cash transactions recorded in the bank statements. 

Company accounting requires more complex information than this. 

This is equally true of governments. For managing the financial affairs of a modern, highly complex government, the right tool is accrual accounting.

Adopting accrual accounting — which records income and expenses when incurred rather than when cash changes hands — would be an important first step toward implementing a modern system for managing government finances.

A system for managing public finances that is based only on cash flows and debt ignores critical assets (especially physical assets) and non-debt liabilities (such as public sector pensions) and is therefore inadequate for managing the complex financial operations of modern government.

At present, many governments budget, make appropriations, and report on a cash basis. Some governments budget and appropriate on a cash basis, but then report on an accrual basis. Relatively few governments budget and report on an accrual basis, but appropriate on a cash basis. And virtually none budget, appropriate, and report on an accrual basis.

The decoupling that occurs with accrual reporting and cash-based budgeting largely defeats the purpose of moving to accruals. 

So far, only New Zealand has introduced modern accounting and integrated its balance sheet with the budget, using it as a tool for its budgeting, appropriations, and financial reporting.

We rely on engineers using modern technology to design and build robust bridges. To build robust public finances, we need accountants using modern accounting systems.

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VI. Areas of Opportunity

A. London’s TfL & New York City’s MTA

B. Ukraine

Aiden Singh: You’ve written that Ukrainian post-war reconstruction efforts - whenever post-war may turn out to be - would be aided by use of the sort of public commercial asset holding and management structure you recommend. 

Ukraine’s situation is rather interesting because it has such a large state-owned sector and suffers from a serious public corruption issue.

What would you advise the Ukrainian government to do and would you advise them to do it now or wait until the war is over?

Dag Detter: We need to wait until the war is won and Ukraine can secure its independence. 

Then, effectively managing Ukraine’s vast state-owned sector - which houses valuable public assets that can serve as a significant funding source - will be central to the endeavor of Ukrainian reconstruction.

The success of its postwar economic recovery will hinge on private sector investment, which, in turn, will rely on transparency and the efficient management of the country’s state-owned assets.

C. The United States

Aiden Singh: So, thinking about my own country, I’m trying to imagine the sheer scale of the public commercial assets of the United States and what an effort to account for and then manage all of those assets would look like.

But I can also see the political campaign of any politician running on this idea writing itself: “We’re going to unlock the wealth of the world’s richest nation and use it to reduce taxes, fund public services, pay down the government debt, etc etc”. 

Can you give our readers an example of an area where the U.S. could put public assets to better use?

Dag Detter: There is lots of potential at the local and state level in the US. 

For example, the Department of Defense (DOD), administers 26 million acres of land in the United States, consisting of military bases, training ranges, and more. 

The DOD cannot receive a clean audit opinion on its financial statements, partly due to inaccurate records for its 573,000 real property assets. 

Despite efforts over the past several decades, the DOD has yet to develop a department-wide strategy to address this issue. Instead, each military service is left to develop actions to improve its data independently.

For several decades, private sector consultants have tried to value large parts of the property portfolio but have never been permitted to do it conclusively.

Nevertheless, some of the attempts ended up at several trillions of dollars, while the final result was deemed classified information.

Aiden Singh: Have you seen any interest in your proposals in the United States?

Dag Detter: One of the groups working on this at the local level is Putting Assets to Work (PAW) Incubator, led by the former Salt Lake County Mayor Ben McAdams. 

The PAW is a collaboration between the Sorenson Center, the Government Finance Officers Association (GFOA), and geoanalytics firm Urban3.

One goal for the incubator is to build interest in urban wealth funds and move them from “boutique” or “outlier” status into the mainstream of discussions about revenue.

D. The United Kingdom

Aiden Singh: In the UK, we recently saw the Labour Party increase taxes as part an effort to plug a fiscal hole. The public commercial assets of a country such as the UK are substantive. Do you believe that earning an optimized yield from them would offset the need for such tax increases?

Dag Detter: The IMF’s broad-brush estimate is that the annual lost return on under-managed government assets is 1.5% of their value. This suggests that there is scope for improving public finances in excess of 1% of GDP though better management of government assets alone.

In contrast, Rachel Reeves’ plan to help fill the £22 billion fiscal “hole” through sales of unneeded property suggests a fire-sale, rather than a considered strategy to maximise the value of these assets in the public interest.

Even more dramatic are the opportunities opened up by applying the net worth framework to public sector pensions. 

For a start, these would be treated as the debt obligations that they really are. If these pension obligations had been recognised as such when they occurred, and been funded by taxpayer contributions to an investment fund, as would be required in the private sector, then Britain’s public finances would be enormously better off now. 

Even if the government were to fund these pensions today, by borrowing and investing, it could expect a near-certain long-run return on investments well in excess of the cost of servicing debt. Over a generation, the obligations could be fully funded, and public finances improved by around 3% of GDP.

Combining the asset and liability management opportunities suggests that total improvements in public finances of over 4% could be realised over time - very close to the 4 - 5% that the OBR reckons is needed every year, for the next 50 years, to tackle the long-term demographic challenges to public finances.

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Part VII: Political Obstacles

Aiden Singh: Typically the debate over how public commercial assets should be managed is split along party lines. 

The left will argue that public assets should remain under the control of the state, which serves as a representative of the public. 

On the other hand, the right will argue that commercial assets overseen by politicians are subject to being mismanaged and performing poorly. Therefore, the argument runs, the best thing to do is for the state to sell them off: taxpayers get cash and the assets can be put to more productive use by the private sector.

You’ve called this debate a ‘phoney war’, arguing that public wealth funds constitute a third way by which assets are run by professionals on behalf of the taxpayer. 

When you present this idea to governments, economists, and others, do they tend to agree?

Dag Detter: It depends on how deep the financial crisis has progressed and how important additional non-tax income (fiscal space) is to the politicians and the country.

Aiden Singh: (Laughs)

Dag Detter: Why is there so little appetite to improve government asset management? Perhaps political leaders simply have enough on their plates handling known problems and resources. There might also be perverse incentives: what government department will look for invisible assets if it fears that finding them will create demands to spend more or be a mandate to sell them or manage them better? And perhaps the task is too big, or too protracted, to appeal to elected officials with shorter-term horizons.

A modern government needs a different mindset, a mindset that recognizes that correctly managing public assets can generate revenues to pay for public services, fund infrastructure investments and boost the economy—without raising taxes. 

Like in the private sector, this means shifting the focus to net worth instead of a focus on cash and debt alone.

The challenge to manage public commercial assets better is not a technical one. Professional management is done with great results in the private sector every day. 

The challenge is entirely political. 

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