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The Forgotten Side of the Government Balance Sheet: Assets

09/12/2011 11:32 am ET | Updated Nov 12, 2011

Why are we only talking about government debt, why not assets? Looking for a tool to help revive economic growth politicians do not have to look very far. Many governments around the world have a substantial portfolio of commercial assets yielding often a very small return to its ultimate owner -- the taxpayer. Making these assets sweat is an under utilized device to help revive the economy and create sustainable economic growth, whether we are talking about China, Europe or even the US.

State-owned Commercial Assets ('SOCAs') are probably one of the largest asset classes globally, worth many times over the value of private equity and hedge funds put together. These forgotten assets are less visible and often lacking professional management, with an almost unlimited upside if managed correctly.

Worldwide their total value is estimated well over USD 12 trn, or representing 20 per cent of global GDP in value terms. However, in some BRIC-countries such as India and China it could be more than half of GDP. Even in the US there is a wide range of state-owned commercial, including US Postal Services, Amtrak, commercial banks and financial institutions, as well as commercial assets held by state or local governments.

These state-owned assets have the potential to affect our lives both as taxpayers and through their effect on the development of the global economy. They are the suppliers of vital services such as energy, transportation and finance.

Can a developed economy really afford poor performance of key infrastructure and compensate the drag they have on the economy with taxes? In contrast, some emerging economies see them as the engine for growth and put vast financial resources behind their international expansion. Both sides of this question, be it in a developed or an emerging economy have an effect on economic growth and should therefore deserve our attention.

Privatization is the instinctive response from a financial perspective when putting the spotlight on commercial assets owned by a government. However, at the moment each side of the coin has their reason for not proceeding down the road of privatization and selling off their assets in a rush.

The concept of a state acting as a professional owner is not new. Singapore has shown how to organize these in a separate portfolio, Temasek, their professional holding company and National Wealth Fund. Following the financial crisis in the 90's, Sweden led the way as one of the first countries to actively manage its portfolio of commercial assets, including restructuring the postal services, railways, electricity and telecoms to become one of the most proficient in Europe. As a result profits materialized within a year and the value of the portfolio quickly outperformed the local stock market.

The start of such transformation is no doubt -- 'transparency'. A financial overview through an aggregated Annual Report is fundamental and would be the self-evident start for any similar undertaking in the private sector.

Secondly, separating the assets away from political influence under a centralized command, a National Wealth Fund, with clearly defined objectives will achieve results in a surprisingly short time.

China has undertaken a phenomenal transformation of its state assets. The federal portfolio is divided between SASAC, the ministerial body managing the large industrial assets and Huijin, the holding company managing the commercial banks. Further commercial pressure would nevertheless help create a more balanced and sustainable domestic economic development in China, such as introducing more commercially based funding of the state companies, gradually decreasing its dependence on the state commercial banks and thereby allowing more bank financing to support the private sector.

In the MENA-region, state commercial assets correctly managed in countries such as Egypt and Tunisia could also act as a tool for social transformation to form a new social contract post the Arab Spring.

Significant political will is needed to challenge the vested interests wanting to preserve these assets as a forgotten resource. The current financial crisis is a unique opportunity to finally demonstrate the financial upside outweighing the political risks of such a structural reform -- to the benefit of taxpayers, employees and the world economy.