Is this the simple solution that could fix public funding?
Poor infrastructure means people in São Paulo spend one month per year sitting in traffic. Image: REUTERS/Nacho Doce
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Long-Term Investing, Infrastructure and Development
People in São Paulo are said to spend more time in traffic jams – making their way to family dinners, late-night parties, yoga classes, romantic dates – than they do enjoying those activities. The solution to this problem is often seen as more and better infrastructure, including public transport and affordable housing. Such a boom in infrastructure investments would not only make life better and boost the economy, but also help improve the environment and cut CO2 emissions.
But the political will to convert such plans into action will only happen if all sides open up to new ways of thinking about how to pay for these badly needed investments.
It is often claimed that there is a great wall of money in the private sector searching for assets but a dearth of investment opportunities. To be sure, the private sector already finances billions of dollars of public investment around the world, including schools, hospitals, roads, trains and housing, using methods such as Public Private Partnerships (PPPs).
The private sector would undoubtedly be able to invest much more if there was a sustainable way for it to work with public commercial assets.
The need for investment is undeniable across all sectors, be it transport, housing or energy – yet the projects are strikingly absent and the results wanting. The political backlash against many past efforts for the private and public sector to cooperate has made key actors mindful of any undue transfer of public wealth to the private sector, as well as any attempt to outsource public debt to the private sector.
Governments are not set up with a capacity to manage commercial risk, nor do they use modern accounting methodology and a balance sheet in the same way as the private sector. This institutional mismatch will consequently force government to give away commercial risk to the private sector along with any potential upside.
Ultimately any public investment will be paid by the taxpayers or the users of an asset (such as toll roads), because there are only two ways of actually funding public investments and that is through taxes and user fees. (Although borrowing does not pay for the cost of the infrastructure, loans are critical during the time of design and construction.)
It is funding where the real bottleneck lies, since it is seldom popular for politicians to raise taxes or introduce higher use fees. There is, however, an alternative way of funding public sector infrastructure investments, and that is through the professional management of the existing ‘public wealth’. This does not involve higher taxes, privatizations or austerity.
Governments at all levels own commercial assets – those able to generate a non-tax income, if properly managed. These include operational assets such as airports and utilities, as well as real estate. The rule of thumb is that a local government owns commercial assets of a value at least equivalent to its entire GDP. Professional management of this portfolio of public wealth would enable governments to double the total current spending on infrastructure and maintenance.
Publicly-owned real estate in a city is not only the most opaque part of the portfolio but also the most valuable. Its value is often equivalent to the GDP of the city, or about one-quarter of the city’s total real estate market. Most governments lack the proper accounting methodology and do not have a consolidated list of all their assets, let alone a valuation of their portfolios. Ownership is fragmented, which results in poor governance.
The way to enable professional management of these assets is to consolidate as many of them as possible under an independent institution, or holding company. The wider and more varied the portfolio that is consolidated, the larger the funding capacity.
At the city level, such an institution is called an Urban Wealth Fund (UWF) and would have a professional governance structure and the transparency of the highest international standards. It would be run as if it were a listed company, although it would be wholly-owned by the government, since this would be a truly public company.
This ought to be as self-evident as the need for an independent central bank. Consolidating its commercial assets inside such a UWF would enable the government to use all the tools available in the private sector.
Placing so much wealth in a government-owned company might raise doubts about trust, given the history of corruption in Brazil and Latin America. However, the alternative of having such vast wealth remain hidden and governed in a fragmented way would expose it to a higher risk of being squandered without the public even being aware of the loss.
Just as efforts to strengthen institutions, such as the police and the court system, will take time in a well-functioning democracy, there needs to be an effort to take control of public wealth. It will require long-term and constant vigilance for the governance of the institution, about its political independence, transparency and objective to maximize value for the benefit of the many and not the few.
A properly structured and managed UWF would give government a professional counterparty to take on commercial risk and become a truly professional partner working with banks, investors and the entire business community.
It would act as a professional investor and manager of infrastructure projects, without requiring funding from taxpayers; allocating capital efficiently and achieving a more favorable outcome for taxpayers and future users. Properly implemented, São Paulo commuters would no longer have to lose one month per year sitting in traffic, and would have cleaner air to enjoy life in the city.
A new way to deliver upgraded transport, public housing, power, water and healthcare is something all political forces can get behind, to the benefit of society as a whole.
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