WEALTH

MACRO
Economic logic would have demanded a
different investment approach. Hoarding
government bonds condemns insurers and
pension funds to low returns, aggravating the
looming pension threat and depriving the
private economy of much-needed long-term
risk capital. If only governments were to use
this cheap financing to boost investments, for
example in infrastructure.
TRANSPARENCY IS KEY
Unfortunately, this is not happening. In the
eurozone between 2007 and 2014, public debt
increased by €3,200 billion and annual general
expenditures by €730 billion, while annual
gross investments decreased by €27 billion.
Before the crisis, more than 7% of all
expenditures were earmarked for investments;
today the share is only 5.5%.
The lamentable state of the eurozone
economy requires a boost to real investments
such as infrastructure. There is certainly
no lack of opportunities: climate change,
poverty and migration, digital revolution,
aging societies – to name a few. The common
denominator is better infrastructure that can
withstand extreme weather conditions, foster
growth and productivity, close the digital
divide, and serve the elderly. However, most
governments have underinvested in public
infrastructure for many years.
What is needed is a new mind-set and
framework to transform the flow of capital
into infrastructure. This is why radical ideas
should not be dismissed easily. One proposal is
a clever idea from Dag Detter and Stefan Fölster
in their book The Public Wealth of Nations. It
observes that while most states own assets
that easily exceed their public liabilities, these
assets are often poorly managed.
This situation arises for the reason that
governments lack a clear view of the true
value of public assets. While the financial
crisis forced countries to acquire a better
understanding of public debt structures and
contingent liabilities, they still underrate their
assets, especially on the sub-national level.
There is no comprehensive public balance
sheet with accounting rules comparable to the
private sector. But, as Detter and Fölster write,
“transparency is a key to better management.”
Every euro that can be earned by better
management of public assets is a euro less in
taxes or debt. Detter and Fölster’s solution
includes an integrated inventory of public
assets at all levels of government with
valuation at market prices. Furthermore,
to ensure effective management and a
comprehensive business plan for asset
development, assets should be transferred and
consolidated into a single corporate entity.
At the national level, this would mean, for
example, the creation of a national wealth
fund (NWF) that has the mandate to increase
public wealth by maximizing the return on
public assets. Asset management would be
shielded from short-term political influence,
and the time-proven tools and frameworks of
the private sector and professional governance
would be employed.
The idea may not sound revolutionary.
There are already many sovereign wealth
funds around. But applying this approach to
a wider range of public assets would mark
a decisive turn: public assets would no longer
be seen primarily as cost items – gobbling up
money for maintenance – but as wealth that
generates positive returns and revenues.
INVESTORS AS RISK ABSORBERS
What is elegant about the idea is that it
avoids the fruitless ideological debate about
privatization versus nationalization. The
emphasis is efficient management. However,
the barriers are large. Politicians are unlikely
to surrender influence to independent
managers, as public assets – from roads to
railroads – are often intertwined with political
and social objectives. Although the fund
approach does not hinder these objectives per
se, it would reveal associated costs. It is not
difficult to see then why some policymakers
might favor the opaque status quo.
This would be a pity because wealth funds
should boost investment in infrastructure.
First, the mandate would sharpen the focus
on needed infrastructure – because it is
the most valuable asset yielding the highest
returns. Second, a professional fund would be
more open to pooling with private partners,
giving the public-private partnerships (PPP)
concept a new lease of life.
MICHAEL HEISE
Chief economist of
Allianz SE and the
author of Emerging
from the Euro Debt
Crisis: Making the Single
Currency Work
58 • Allianz