Dag Detter, investment advisor and author on public commercial assets

26.06.2017 14:15

Ukraine is virtually sitting on a gold mine, which is unknown and unmanaged

Improvement of public asset management is a key issue in Ukraine, and if in this case standards and level of living without tightening belts will be improved it is our dream. In fact, this is not a dream but a grounded theory that has become real in different parts of the world. Dag Detter, the investment advisor and the co-author of the book The Public Wealth of Nations, which was recognized as the Best Book 2015 by the Financial Times, shared his views in an exclusive interview with Ukrinform on whether Ukraine can demonstrate such leap in development as Singapore and what it needs for this, why we underestimate what we have at the state level and at the individual level, and how to use our assets in the most effective way.

- Having co-written the two reports on the International Monetary Fund that I have found (at least two; I’m sure there could be more), the Public Financial Management Overview and Oversight of State Assets does show me that you know a lot of details that 99.9 percent of Ukrainians don’t know about Ukraine, let alone foreigners. Here are some questions that I have come up to ask you. You seem to come to quite paradox conclusions that in spite of the fact the Ukraine owns a vast amount of commercial assets of great value, nevertheless, it has a negative impact on the public finance. Why, on your opinion, do the state assets, instead of becoming the drive for the economic growth, act like a vacuum cleaner that weakens our economy, sucking out additional resources?

- I think that we shouldn’t be too negative about Ukraine, first of all, because, I think Ukraine is a fantastic country. I think we should keep that in mind. It’s a country with huge opportunities. But like a football team that hasn’t been winning for a while, sometimes it’s a matter of getting the right culture or the right spirit in a team, and suddenly there is a winning streak again. One of the tricks for a good culture or a football team or even more a foreign country is to understand the value of public wealth. It’s like in a private individual. If we own something and we think it’s worth nothing, we don’t take a lot of care about that. But if somebody suddenly tells us that this watch that you have is not actually worth $200, it’s worth $20,000, you would, maybe, stop wearing it every day, you would put it in a safe, you would do all kinds of things, you would ask it to be maintained every year. All kinds of things. So, knowing the value of what you own is absolutely crucial for the way you treat those assets. Most governments, Ukraine is not alone on this, most governments around the world, whether it’s a national government or a local government, they don’t know what they own. First of all, they don’t have a list of assets, and even less they don’t know the value of those assets. So, that is a good start to start treating this much better. But the other thing is if you think about your parents or maybe your grandparents, they may have a big house where you all grew up, now you have moved to the big city, nobody lives there anymore, maybe you’ll come to visit it on Christmas. Maybe, your grandmother really can’t afford that house. All the maintenance costs more than she has in her pension. But if she starts renting out, like, in some countries there is Airbnb, or if you have a car, you start driving as a Uber driver, you can suddenly afford having that big house, which is quite handy during the summer, because then the children and grandchildren can come to visit and it’s quite nice to have that house. And she can afford it because she is renting out all those rooms during the year. That is a smart management of an asset that she happens to have. And it’s quite similar with governments. But if you don’t realize that this is an asset that can be utilized in a much more economical way, than it’s difficult.

- Would you say that the Ukrainian Government as well doesn’t have the full account and full understanding of the assets that Ukraine has? One of your quotes, one of your phrases that I’d like to quote is “Most countries’ public wealth is larger than their public debt.” That would be nice to understand what the Ukrainians have.

-It’s even better than that. The rule of thumb is that any country, any city has public assets, commercial assets that are at least one times GDP. The number that my co-author Stefan Fölster and I came up with is that (that is verified through research with the IMF and the World Bank, etc.), but this in a number which indicates book value, so the market value is much higher. And that number also indicates what we know about the national level. The local level is usually much more. You could say the number that we can verify, which is one times GDP, is usually the tip of the iceberg. And because the assets that we have easiest to understand are the operational assets: anything like transportation, airports, railroads, post offices, etc., or utilities for electricity, water. Those are operational assets. The real asset, the real estate, is the most hidden part of the public portfolio. So, the rule of thumb is that once you get the transparency, once you start to understand the value, operational assets are one third of the value, and real estate is two thirds. And the bulk of all this is usually at the local level, which is even more hidden. So, yes, Ukraine like every other country is virtually sitting on a gold mine, which is unknown and unmanaged.

- For many years we observe the fact of intentional efforts to hamper and block the liberation of a land market, the reformation of a healthcare industry. And all is quoted as protection of people’s interests and national interests. And I’m talking about all kinds of reforms that we still need to undergo, but we are moving so slowly so that people grow weary about this. They want it now, they want the answers now, because it’s been 25 years of independence, and we are still on a transition stage. On your opinion, what does it take to boost the reforms? Is the political will something that will do the job or it takes a bit more?

- The political will is everything. It won’t do the job. Technical people have to do that. But if you don’t have a political will, nothing will happen. The political will is the patrol in the car, but you still need someone to drive. The reason that decides whether there is enough political will is that you can visualize the financial gain from this. The reason that politicians hesitate about doing this kind of reforms or manage public assets more professionally is because of that there are a lot of vested interests that are using assets today or benefiting from the status quo and then by refusing to have the reforms. That’s why you need the political will to fight those vested interests that would prefer status quo. If you can visualize that it’s going to be worth it, because than we don’t need to raise taxes, we don’t need to have more austerity, we don’t need more public debt, but instead there is an alternative way. You could claim that even if it requires a lot of political will, it’s less painful for the people. It’s painful for the vested interests that are today benefiting from using that or using the old system. But if we all can see a modernized system would benefit more people and would get more people to the country and will boost the economy, than a strong leader would be able to have that political will and do the reforms.

- Now I would like to move to a very interesting subject. In your book The Public Wealth of Nations you explore how some countries are experimenting with institutional setups, such as National Wealth Funds. That’s a new term for me and something I’m very curious about. These kinds of funds achieve sounder management and cleaner democracy. On your opinion, whether or not Ukraine is ready for such an institution?

- It is a difficult question for Ukraine, because there are so many reforms that are needed in order to make this work more efficiently. Stronger institutions, whatever they are, can’t operate in an isolation, in a vacuum. Of course, Ukraine needs a more independent press, civil society. It needs stronger institutions both on the securities market, stock market, and all the regulatory functions. It needs a stronger legal framework for public assets, because it’s definitely not sufficient today. It needs to strengthen property rights, all kinds of environment to make this work. You could argue, which many people do – well, I kind of agree with them – that it would be a huge risk to institutionalize the public wealth in a country like Ukraine which has so many other reforms to undertake before it really is ready for such an institution. On the other hand, if you would have the value of all these assets, let’s say that they are two times GDP, so USD 200,000,000,000, and we also assume that the yield from this is negative. We don’t talk about the fiscal risk which is quite large, which the IMF has estimated (I don’t know, if it’s in the report that is public), but that is possible, too. And there is quite a substantial fiscal risk. But if the financial yield from these assets is negative, then you can ask the question: maintaining status quo is quite expensive for the country, expensive for society, expensive for the people and it’s hurting the country, taking a risk where you have so much to gain, would that be an important pilot, perhaps, for the country to start introducing stronger, more efficient and better institutions into the country and into the society? That is the question that can only be answered by a responsible politician and the people as such. But I would argue that the more information we have about the pros and cons and the cost that public assets today incur on the society and the potential benefits, if we would manage this more professionally, that is the discussion that is absolutely worth having. The conclusion of such a discussion might be ‘yes, it’s worth taking this risk’. And if we have the whole society behind, the majority at least, then it’s also possible to do this despite the protest from the vested interests.

- Please, give us an example of where this process has already gone further than in Ukraine.

- The most suitable comparison is, probably, Greece, which has similar problems with the civil society, with oligarchs, and institutional figures and transparency as Ukraine. Thanks to the pressure from the international community, they are setting up a holding company for the national assets. They would also benefit from doing this on the urban level. But they are, actually, trying.

- So their efforts are worth studying.

- Yes. The devil is in the detail. If they are able to withstand the pressure from the vested interest and not dilute the governing structure, so the three important principles that are required to make this work, which is political insulation, that the institution is insulated from short-term political influence, so that it is allowed to run professionally, and that the transparency is there, so that there it can be the checks and balances that are not running away with the money, and that there is a clear objective, so that it’s a value maximization that is the objective of the fund, the holding company, and not maximizing any policy efforts or policy objectives.

- On August 1, 2017, your next book, is going to be released. The Public Wealth of Cities: How to Unlock Hidden Assets to Boost Growth and Prosperity. You talked about national wealth and now you are talking specifically about cities’ wealth. How does the reformation of communal property management differ from the reformation of the state property management and wealth?

- There is a tactical issue about this, which is, I think, quite easy to explain. At the national level, a lot of countries are going through complex changes. We have US, UK... Almost every country is, on the national level, going through quite complex time, which means that taking both decisions is difficult at the national level. While we think that doing these kind of reforms and managing public assets on a local level could be easier, because local leaders are much closer to their community and could, perhaps, easier feel the pressure to do something about this. It’s also, because of your question about Ukraine, it might also be seen as a smaller risk to do it in a city than for the whole nation. Perhaps. But also the fact, that you recognize that every city is sitting on a gold mine, virtual or real, is extremely important, and the citizens of every city like to realize this and start asking questions: What are you doing with this wealth? What is the value? What is the yield?

- Any examples with cities?

- Yes, we have many successful ones. The most successful city and the country is, of course, Singapore. They have Temasek. They’ve done this in 1974 and they have had a yield of 15 per cent since the first year.

- So we need to send students there to take some lessons...

We have done this with the railways. They founded a whole railway without one tax money. It’s all been done with development of properties. You have Hamburg which has done this with their own harbour. They created a holding company and developed all the assets, which has funded universities, schools, concert halls, hospitals. All kinds of things. And then you have Copenhagen who has done this with a part of the harbour and a big part in the airport and the city, which is now funding a build-up of the local metro. So, there are a lot of cities that are making this effort to manage their public wealth much better to the benefit of society, building infrastructure, and boosting economic growth for the benefit of the people and the country.

Serhz Velychanskyi, Kyiv.