By Dag Detter
Nigeria continues to face massive development challenges, including the need to reduce the dependence on crude oil for exports and revenues, diversify its foreign exchange sources, close the infrastructure gap, build strong and effective institutions, address governance issues and strengthen public financial management systems.
The good news is that in the public sector, at all levels of government, the asset side of the government balance sheet offers immense untapped potential in the short and long term. These assets include public infrastructure, real estate, and operational assets such as state-owned enterprises (SOEs).
An IMF research shows that the total value of public sector assets globally is approximately twice the gross domestic product (GDP).
For Nigeria, this would amount to more than $950 billion. As in most countries, this data does not include the value of government-owned real estate, which could add another $470 billion to the public sector balance sheet.
More generally, the International Monetary Fund (IMF) research illustrates that public sector assets could act as a buffer that allows governments with stronger public net worth (assets minus liabilities) to weather recessions better than those with weaker net worth.
Stronger balance sheets—a statement of what you owe and own at a given time—allow governments to boost spending in a downturn. This cushions the impact of the shock and results in shorter and shallower recessions.
Furthermore, stronger net worth would also lower borrowing costs for governments. A comprehensive public financial management system enables leaders to make better-informed decisions and allows their actions to be measured and judged by the broader public. This means looking beyond easy-to-measure near-term flows (e.g., public spending, tax revenues, net borrowing, or for that matter, GDP) that governments tend to focus on and looking at more fundamental measures, including the use of public assets, the incurrence of liabilities, and the creation or destruction of public net worth from one period to the next, or one generation to the next.
Measuring a sustainable economy and debt levels, using standard accrual accounting and budgeting techniques have been included in IMF manuals for over two decades.
Investing the proceeds of borrowing in profitable assets will make net worth stronger than if using debt to finance consumption spending.
The failure to reflect this difference by focusing on debt rather than net worth fails to measure debt sustainability accurately. It is also misleading and has an anti-investment bias.
Understanding and managing the entire public sector balance sheet will incentivise investing in public infrastructure, as productive borrowing is distinguished from borrowing for consumption.
Professionally managed, this portfolio of assets could generate additional revenues to the government equivalent of at least 3% of GDP, every year. Perhaps even closer to 5% if including the real estate assets.
It is not unusual in countries with a substantial portfolio of state-owned enterprises (SOEs) that just a handful of these largest companies instead cause a considerable fiscal drain.
Managing public assets professionally will not only offer a longer-term solution to stop this leakage, but can also help diversify the economy and its foreign exchange sources. The additional revenues generated by a portfolio of public commercial assets could instead be put toward better schools, hospitals, or other priority spending.
The evidence is overwhelming that politicians and civil servants are unsuccessful in performing entrepreneurial or asset management functions. Nor is a political bureaucracy designed to manage commercial risk, so the ownership and governance of public commercial assets require an independent institutional structure, a holding company. This could take the form of a public wealth fund which can work in the same way as a private sector owner. Such public wealth funds bring the same governance, management, accounting, and accountability arrangements to specific asset pools as are used in the private sector. It will be an important contribution to building strong and effective institutions that would help strengthen the public financial management systems.
With a public wealth fund, the benefits of efficient management can be realised without wholesale privatisation.
At the same time, well-managed non-core assets could be disposed of in a way that gives a better return to the taxpayer. A capable team of expert managers would do this as part of the broader business plan for maximising the yield of the entire portfolio of government assets, to the benefit of society as a whole.
Detter, principal of Detter & Co, an advisor to governments, investors and IFIs as the IMF, World Bank and the Asian Development Bank, led the restructuring of the Swedish portfolio of state-owned assets. He is the author of ‘The Public Wealth of Nations’.