Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 10 11 • Ensuring political insulation: The portfolio should be kept at arm’s length from political influence, including avoiding political appointees at every level (as well as on the board and supervisory board levels). This arrangement serves as a protection and deniability for the politicians, if trouble arises. Commercial independence is also the best foundation to attract qualified people from the private sector. A market-based incentive system is vital, but a secondary consideration to a truly professional environment. Once a PWF is established, its first task is to develop a feasibility study, or asset map, of the entire portfolio of public commercial assets within the relevant jurisdiction. Such an indicative valuation would give a rough understanding of the total value, as well as of the potential yield (assuming professional management), of the assets. The asset map should not take more than a few months to produce, as its main purpose is to create political momentum and a rough business plan. Conclusion Comprehensive and relevant numbers are a prerequisite for financial management. A modern government is a highly complex institution that requires audited numbers and accrual accounting to ensure informed and sustainable long-term decision making and management. Moreover, using the hidden strength in their own balance sheets offers governments a better chance to achieve a sustainable and faster way out of the current crisis, to the benefit of society as a whole. The hurdles to adoption of tools such as accrual accounting, and the political will to act on the information generated by such systems, has historically been lacking in most countries. For years, the price of inactivity and an absence of imagination in many countries could be discounted. However, the pressures created by the COVID-19 pandemic, which are likely to strain public finances for a generation, demand radical action. Given that the alternative in many countries could be a prolonged period of austerity, rethinking how governments view public assets is now a moral goal, as much as an economic one. Making this change will be difficult for governments in both developed and developing countries. But the evidence is clear: commercial management of assets by a PWF delivers material gains. This time of crisis calls for the most effective use of public assets — if not now, when? emulate the best international standards of listed companies including those pertaining to corporate governance, transparency and incentive structures. The PWF would serve as the conduit between public and private sector interests, enabling the two sides to speak the same language and to reach a consensus on objectives. It could help sidestep common problems seen with privatizations, PPPs and other financial techniques where the public sector seeks to avoid the commercial risk and debt associated with an investment, thereby giving up the financial upside resulting in an undue transfer of public wealth to the private sector. The structure might therefore help avoid the political backlash that often stems from the interface between the public and private sectors. The establishment of the holding company structure could also better attract private sector funds looking for yield, thereby drawing in the additional resources and expertise needed to help a country or a city develop. In setting up a PWF, a government needs to pay special attention to three fundamental principles given the inherent weakness of public sector corporate governance, including: • Value maximization: This must be the sole objective; additional objectives distort competition and open the door to financial failure, waste and corruption; • Promoting transparency: Accounting, transparency, risk management and corporate governance standards should be identical to those for a listed holding company, including the adoption of IFRS accounting and the provision of timely quarterly and annual reports, made available online; Impact on Sovereign Ratings Could better ratings (which could lead to reduced borrowing costs and potentially greater foreign investment) be a driver for policymakers to pursue the steps outlined in this article to improve the management of public commercial assets? Unfortunately, the ratings methodologies of the three global rating agencies — S&P, Moody’s Investors’ Service, and Fitch Ratings — 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 the IMF were it to conclude that the full public sector balance sheet should be the proper basis for its debt sustainability analysis. Nonetheless, better management of public assets could still help governments improve their ratings, albeit indirectly and in most cases over a long time span. It is also possible that producing a full set of financial statements could help avoid a downgrade, as was the case for New Zealand in 1991. 13 https://www.citibank.com/icg/docs/1883952_Perspectives_2019_Putting_Public_Assets_to_Work.pdf How Smart Public Assets Management Can Drive the Post-COVID-19 Recovery