Dag Detter advises governments on public commercial assets.
For as long as we can remember, the public sector has been crying out about a “mountain of demand” for infrastructure investments. For as many decades, the private sector has been concerned that its “wall of money” − all the pensions and insurance money that we as individuals have contributed in the hope of a decent return on our savings − cannot find enough long-term investment projects. Something seems amiss between the people we have appointed to manage our taxes and those who are set to manage our savings.
The global need for infrastructure investment has reached the towering figure of almost $60-trillion for the next 15 years, which would require an increase in infrastructure investment of almost 1 per cent of global GDP by 2020.
In the meantime, intermediaries have come up with a whole range of financial tools aimed at bridging this gap between supply and demand such as PPPs, concessions, leasing and privatizations. But these have only scratched the surface, it seems − like a modern version of the mythical Sisyphus, who was condemned to roll a boulder to the top of a hill, only to have it invariably roll down again to the bottom of the hill. Moreover, these tools have created a public backlash and aggravated tax-payers owing to the risk of an undue transfer of public wealth to the private sector.
Is the root of the problem to be found in the fact that the two sides speak very different languages? The private sector uses an incomplete version of accrual accounting invented some 700 years ago which allows for the construction of a balance sheet and the pursuit of net worth as the measurement of its efforts. The public sector still uses inherently myopic single-entry bookkeeping, invented 10,000 years ago, with a focus on the budget and the fiscal space it allows politicians to spend the tax money during the mandate period of a political cycle.
The public sector is concerned about funding − the taxes and user fees that actually pay for an investment. The private sector often talks about financing, which is leverage that will eventually increase the public-sector debt burden. Although financing is both substantial and essential, it only concerns the cost of design and construction of an infrastructure investment. The lion’s part, or some four-fifths of the cost of a typical infrastructure investment during its lifetime, is maintenance. This cost will have to be funded from the government budget and will compete with funding education, social welfare, social housing and health care.
The alternative would be to unlock the “hidden goldmine” that can be found in every city or metro area. This is the vast amount of real commercial assets owned by local government that could generate a significant positive future cash flow – if consolidated and professionally managed by an independent government-owned holding company.
Because of the fragmented ownership and control and incomplete, inaccurate and opaque accounting, most cities aren’t utilizing all the available funding tools but instead waste a potential source of funding through suboptimal and outdated governance and management structures. In fact, most local governments are not aware of this hidden goldmine as they don’t even have a list of their assets.
The largest part of the portfolio of public commercial assets is real estate: As much as a quarter of the total real estate by market value in a city or county is often publicly owned. Judging by some of the asset maps that have been created for local governments including Boston and Pittsburgh, the real estate alone would have an indicative valuation of the same magnitude as its GDP. In addition, some local governments across Canada own and operate utilities such as water and sewage, affordable housing or other assets. All these real public commercial assets are in great need of funding.
In total, this public wealth represents a substantial opportunity for investors, local governments and society as a whole. If professionally managed, the yield from this vast portfolio of commercial assets could fund infrastructure investments that are critically needed – or indeed any other desired public goods and services.
The key is to consolidate the portfolio of commercial assets within an independent institution − an Urban Wealth Fund (UWF) − at arm’s length from short-term political influence, independent of the political cycle and with the appropriate capacity to manage the portfolio professionally. Properly set up, such an institution with its independent balance sheet, would use the same accounting methods, have the same performance measure and would in short be capable of speaking the same language as the private sector. As has been done with Temasek in Singapore or MTR in Hong Kong.
Unlike the typical private-sector approach to infrastructure, the UWF would adopt a planning horizon that encompasses maintenance costs and running costs over the entire life of the project – often measured in decades. With transparent, accountable professional management, incentivized for the long term and structured to span the life cycle of the assets instead of the political mandate, it would be capable of unlocking the hidden value of the entire portfolio of commercial public assets and fund infrastructure investments or other public programs from the returns it generates.
Properly designed and implemented, a UWF can act as an investor in and manager of commercially viable new projects, including investments in commercially viable infrastructure, without requiring funding from taxpayers. Dealing with the private sector on an equal footing, it would have the capacity to help provide more attractive rates of return on the massive wealth behind the “wall of money” while controlling the risk of an undue transfer of public wealth to the private sector.
Professional management of public commercial wealth in UWFs would end the futile Sisyphean efforts of local governments and allow them to double their total spending on infrastructure and maintenance.
This would truly be a new way to deliver upgraded transportation, power, water, flood defenses and communications − a true bridge between the public and private sectors, inducing the public and the private sectors to speak a common language, to the benefit of society as a whole.
Mr. Detter is speaking at the CanInfra Summit at The Globe and Mail Centre in Toronto on May 28-29. CanInfra is a private-sector initiative to elevate the national conversation on transformational infrastructure, and includes the CanInfra Ideas Contest, led by the Boston Consulting Group (BCG) with other sponsors including Brookfield Asset Management. The Globe is the media sponsor. For more details, please visit caninfra.ca.