2024 Public Sector Perspectives

The notion of asset monetization extends beyond a simplified transfer of ownership. Rather, the focal point is on the “revenue- rights” bringing up the yield potential generated through public assets in any shape or form, including a corporate entity, a physical asset as well as future receivables. Adopting the same tools of financial management as the private sector enables the government to maintain ownership, identify a wider portfolio of monetizable assets, and manage them professionally, generating an additional income stream. The operational steps of successful execution of asset monetization are readily applicable to each government, including emerging markets. As a prime example, professional use of public commercial assets was a core component of Singapore’s strategy to move the economy from developing to developed status in a single generation of the last century. “Singapore delegated the responsibility for managing public commercial assets to professionals in the public wealth fund, Temasek, that introduced private sector discipline and used governance tools borrowed from the private sector. Many of Temasek’s holdings are now world-leading companies within their sector. 3 ” The asset monetization is a very timely strategy within the current economic environment, paving the way towards alternative financing sources allowing the Government to ease investment and financing needs in return for additional liquidity, enhanced management and operational efficiencies. Setting up a framework Well-designed and executed monetization framework facilitates the supervision, strategy planning and management of public assets. 1. Professionalize the approach by setting up a dedicated public asset management entity , i.e. a holding, a Public Wealth Fund (PWF), an investment trust, seeking exclusively enhanced profitability and operational efficiency mandate. ( Note: PWF differs from a Sovereign Wealth Fund (SWF), which is designed to optimize a portfolio by trading securities ). 4 Most governments around the world have delegated public management of several core financial operations to separate professional institutions, including government debt to the debt management office and interest rates to the central bank. 3 In setting up an PWF, a government needs to pay special attention to three fundamental principles given the inherent shortcomings of public sector corporate governance, including: value maximization through adhering to international accounting norms, promoting transparency, and ensuring political insulation. 2. Run a national inventory process to map out all state-owned assets, to gain comprehensive visibility and allow for targeted management. The public sectors of many countries around the world own a huge variety of operational (i.e. transportation hubs, utilities, financial services) and real (i.e. buildings, land) assets. Often overlooked, stakes in companies, license rights as well as receivable flows can also be considered as part of the mapping exercise. In most instances, the largest segment of portfolio of public commercial assets is real estate, the value of which is several times that of all other assets. 3 3. Identify strategic portfolio , composed of public assets fit for a further monetization purpose. The best candidates should be meeting a variety of (i) operational, (ii) financial, (iii) commercial and (iv) legal and regulatory criteria 5 : i. adequate remaining life to ensure sufficient return on investment ii. track record of positive cash flow generation/revenue generating potential iii. tested market appetite, including investors iv. full compliance with applicable regulatory requirements, remediation of any non- compliance otherwise 3 Citi (2019) Perspectives: Putting Public Assets to Work 4 IMF (2023) The Public Wealth Fund – a Double-Edged Tool. Dag Detter 5 World Bank. Public-Private Partnership Legal Resource Centre. Guidelines for Asset Identification 4. Determine the most appropriate governance structure of the assets considering its strategic importance to the country. The government can opt for one-off revenue boost through standard privatization, transferring full ownership and controlling rights of the entire asset. However, asset recycling offers the opportunity of a recurring revenue stream, by temporarily transferring ownership rights during the agreed period, in return for income rights, i.e. upfront and/or regular fees. 5. Set up strategic and financial objectives per asset. The managing entity outlines qualitative and quantitative goals, roadmap to reach them, and periodically reviews a decision regarding a contract renewal for another term or an exit strategy. Accounting-wise, alignment with the international standards similar to those used by private companies and based on accrual accounting facilitates the comparative assessment for the private sector, and drives further commercial opportunities. 6. Earmark the use of proceeds fromeach asset to another development project . It may be a good practice to reinvest a pre-agreed percentage of the generated incremental flows into another strategic national project, potentially linked to the sustainable development, reducing the investment financing needs. Reinvested revenue streams will trigger a snowball effect, driving a higher revenuemultiplier rather than just allocating the totality of proceeds to reduce debt or finance the budget deficit. The adoption of public asset monetization varies widely from country to country. For example, India has put in place a monetization framework, and consolidated their planned initiatives into a comprehensive execution plan in a form of a National Monetization Pipeline (NMP) FY2022 - 2025 6 for c. USD72 billion in value. 7 The pipeline was published to establish a medium-term roadmap for “monetization-ready” assets, enhance visibility to the private sector on planned projects, and provide a platform to track asset performance and improve efficiency and transparency in public assets management. Converting static public assets into revenue- generating assets Well-designed, implemented and managed asset recycling strategy is effective when it reduces public expenditure for design, financing, construction/rehabilitation, operations, maintenance over the entire lifecycle of the asset. Asset Monetization Models Concessions provide an attractive solution of carrying projects in the public interest supported by private capital and know-how, supplementing restricted public resources. A government can decide which part of the cycle it would like to monetize on both new and existing assets, allowing for a wide array of different models to choose from. 6 NITI Aayog (2021). National Monetisation Pipeline 7 Converted to USD from the official amount of 6 lakh crores at an FX rate of Rs/USD 83.25 8 The Economic Times (2021). Australia has lessons for Narendra Modi’s asset recycling plan “Privatize to increase the efficiency of the economy , or don’t privatize at all.” – Rod Sims , Chairman of the Australian Competition and Consumer Commission. 8 Citi Perspectives for the Public Sector 39 38 Asset Monetization: A ParadigmShift Unlocking the Value of Public Sector Assets by Tapping Private Capital andOperational Efficiencies