Unlocking hidden wealth in public commercial assets | Sunday Observer

Unlocking hidden wealth in public commercial assets

15 November, 2020

There is a vast amount of hidden wealth waiting to be unlocked in non-financial public commercial assets in the country. These public commercial assets fall into two categories. First, the operational assets which are the state-owned enterprises (SOEs) do not operate to their true potential in generating returns. Second, the state-owned real estate which is less visible does not generate adequate returns because they are mainly under-recognised or when recognised not put into the best use to maximise returns.

If the Government views these public assets in commercial terms, returns similar to what the private sector earns from its assets can be generated. For this to happen, the country needs to create National Wealth Funds (NWF) that will operate at arm’s length from political interference. The experience of Temasek (Singapore), Shanghai International Group, CITIC, and Central Huijin Investment (China) and many other wealth funds all over the world show that establishing these funds is a sure way to maximise wealth out of public assets.

Public commercial assets

The operational assets, which are crucial for the smooth functioning of the economy are poorly managed and poses a substantial financial risk. Currently, there are 52 strategically important State-Owned Enterprises (SOEs) that hardly provide an overall return to the state coffers. In 2019, out of the 15 SOE sectors, eight sectors have reported a cumulative loss of Rs. 134.6 billion. Energy and Aviation sectors alone have reported losses of Rs. 97 billion and Rs.28.8 billion.

The 7 profitable sectors have contributed Rs. 132.2 billion out of which Banks, Finance and Insurance sectors contributed Rs. 105.6 billion and Ports contributed Rs. 15.8 billion. Overall, the return on assets for the SOE sector has been zero (-0.03%). There has been a downward trend in performance for the past five years though assets in the sectors have grown at around 10 percent annually. If these public assets are operationally and commercially better managed, the returns on them can be improved and the institutions can be made more viable without privatisation.

(See Table 1- below)

The less visible, state-owned real estate which includes land and buildings is generally not considered in terms of commercial assets, hence there is no attempt to generate returns or maximise value out of them. Some of these assets include real estate and land used by civic entities such as schools, hospitals and police stations which provide services to the public but have the potential to be relocated to maximise value for the state. All of these assets can be put to new uses which can generate cash for the state coffers and generate employment.

By looking at non-financial public commercial assets the same way as private commercial assets, there is an opportunity for generating revenue and return for the state. Once that mindset is established, these public assets, whether they are operational assets (SOEs) or real estate assets can be optimally managed to maximise value.

As documented by various research, a common theme that surfaces on the dismal performance of SOEs are related to governance issues. Political patronage, clientelism, corruption and mismanagement, all stem from the absence of good governance. Finding a solution is further compounded by the short-term political cycle that does not coincide with the longer-term view that public asset management requires. In the case of non-operational assets, one of the major issues is the non-identification of hidden public assets, resulting in not knowing which returns to maximise. Once these assets are identified, their hidden wealth can be unlocked.

Policy options

One of the key aspects of unlocking hidden wealth from public commercial assets is to know what these public assets are in the first place. Since the public sector focus is usually on income, expenditure, and budgeting, single-entry book-keeping has been sufficient to operationalise public sector assets without really ascertaining the true value for these assets. Thus, the first step that needs to be taken is to identify the public assets and liabilities through accrual-based accounting and prepare proper balance sheets that reflect the true value of commercial assets. Although many of the large SOEs already have balance sheets, the exercise has to be mainly performed on the non-operational real estate of the public sector – underdeveloped land, brownfield land, outdated and unused buildings, parks, roads and other transportation infrastructure.

Having balance sheets for these entities helps in two major ways:

1. The preparation of balance sheets for designated areas (e.g. City, Urban or local government), so that a unit of wealth can be determined for them and maximised. These public sector balance sheets would account for assets and liabilities hitherto not identified. Without knowing the assets, it is difficult to know what returns are to be made, and without knowing the liabilities, the hidden costs and risk exposure are not known. This accounting exercise would, for the first time, unlock the potential hidden values of these designated entities.

2. Developing these balance sheets could also minimise or prevent corruption, especially when the public becomes aware of the wealth in their locality and who is in charge of the assets. With the adoption of International Public Sector Accounting Standards (IPSAS), greater transparency, accountability, financial management and decision-making can take place.

In any country, the wealth of public assets should be equitably enjoyed by all citizens. This is in contrast to the neoliberal view that most state-owned assets should be privatised in which case the wealth usually ends up concentrated in a few wealthy individuals. Therefore, the majority ownership of public commercial assets should be retained with the state [at least 80%-85%], and if at all and necessary, a bare minimum to be divested (To obtain market value for assets, it may be beneficial to get a listing in the stock market.)

Moreover, steps must be taken to separate the management of these public commercial assets from the short-term political cycle. This minimises political interference, reduces the conflict and financial risks that arise due to the Government being the regulator and the owner of these assets, and aligns the life cycle of these assets with longer-term management of investments.

Three major options available for public commercial asset management:

A. Public-Private Partnerships (PPPs):

The Government can enter into a PPP with the private sector to manage public commercial assets. PPP is “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and where remuneration is linked to performance” (World Bank).

B. Hands-Off Governance:

This is a structure where individual SOEs are incorporated under the Companies Act and the ownership under the Ministry of Finance, whilst operations and management of these public assets are entrusted to professional managers who will bring in the best results in terms of value maximisation and efficiency. In this arrangement, the Government ownership policy will vest real authority in independent supervisory boards and boards of directors. Hence, the daily operations of these SOEs by direct Government involvement will be removed. Also, the arrangement will severely limit the involvement of ministers to only outlining the industrial vision and setting performance targets (ROA, ROE) in addition to the regulatory role they are normally expected to perform.

C. Wealth Funds:

The Government can establish an incorporated holding company to manage public commercial assets. For SOEs, a national wealth fund can be formed to act as a professional steward of public commercial assets and maintained at an arm’s length from short-term political interference. As for non- operative public assets, urban or local area designated wealth funds can be created to maximise their wealth. These wealth funds can be charged with operating and managing public assets and providing the maximum returns to the state. Some of the benefits of these funds are as follows:

• Professionally operated and managed to maximise returns on public assets (wealth of the funds)

• Enhanced borrowing capabilities domestic and international due to higher credit ratings brought about by good governance and professionalism

• Reduction in fiscal deficit through increased revenue generation

• Attract foreign investments due to transparency and good governance

• Finance infrastructure investments (For example, Mass Transit Railway (MTR) Corporation in Hong Kong has funded and managed vast investments in the city’s rail infrastructure, large housing estates, and shopping complexes which are incorporated into its stations)

• Contribute to economic growth and development

Which policies are to be used?

The fundamental reason for poor returns on public commercial assets is mainly as a result of these assets being managed by public servants and politicians who lack the entrepreneurial and managerial skills to handle them. Additionally, the short-term political cycle brings in a different set of goals that run counter to the long-term goals that are required for handling these longer-term public assets.

Due to political interference, lack of accountability and transparency, it is rarely that an SOE can be expected to perform as well as a private sector entity. Therefore, individually, all three policy options that have been discussed stand a better chance of succeeding in terms of higher returns and value maximisation than how they are currently performing.

PPPs have limited use

In general, the option of using PPP as a vehicle for public commercial asset management is not always advantageous. The problem with PPPs arises because they are usually more expensive for the Government hence the taxpayers. The main criticism has been “the ability to take what is essentially government debt out of the public sector balance sheet, which is often more expensive covert obligations” (Page 134.

Dag Detter and Stefan Folster ). In other words, PPP’s can be used to bypass budgetary constraints without having to report any new spending or debt when initially undertaking the investments.

Another problem is that, due to the inability to manage commercial risks, the Government tends to palm off a greater portion of the risk to the private sector partner together with a larger portion of the profit.

However, ultimately, the public sector partner is left with the financial risk should the venture fail (IMF How to Note, 2018).

Nevertheless, there are compelling reasons to use a PPP arrangement when engaging with a foreign party for technology acquisition or for a joint venture which is beyond Sri Lanka’s capability. Therefore, depending on the nature of the projects, PPPs need to be considered.

Hands-off Governance

The hands-off governance structure has great promise and has been used to a certain extent in Sri Lanka for managing some of the public commercial assets. The commercial ventures, such as Sri Lanka Insurance Corporation (SLIC), Litro Gas Lanka Ltd and Hotel Developers PLC are managed like private commercial entities with independent governance structures to maximise value to the public owner. Similarly, Government entities, such as the Fisheries Corporation, Fertiliser Corporation, State Timber Corporation and National Paper Company Ltd can be brought under the hands-off governance structure.

Introducing private sector discipline, equity culture and commercialisation into the public sector asset management are sound as far as these entities adhere to broad strategic objectives and ownership policy set out by the Government. However, if such policies are absent, the hands-off governance with minimum regulatory control can allow these institutions to follow commercial practices counter to the state or public interest.

Two overseas examples are the debacles of Swedish energy producer “Vattenfall” and mobile phone pioneer “Telia” where hands-off governance structure produced results counter to Swedish Government’s interests. To ensure consistent and professional governance of the SOEs in line with the state objectives, the Government can establish a “Governance Coordination Centre (GCC)”, an institution that monitors and analyses the implementation of Government policy in SOEs, like in Lithuania (State-Owned Enterprises in Lithuania – Annual Report 2017).

Active ownership with Wealth Funds

The greatest promise lies in creating wealth funds to manage public commercial assets as they can be established in a way such that the Government can wholly own the assets without having direct involvement, while maximising their returns through independent, professional management. By hiring professional “corporate governors” and “asset managers” to take care of the public assets in the fund, the Government can concentrate on being the regulator for these assets which it has the expertise in doing. The wealth funds thus created will be transparent with clear objectives and politically independent.

A state holding company can be set up by the Government to wholly own all the SOEs. The holding company can be incorporated under the Companies Act, making it wholly Government-owned through the Ministry of Finance. The constitution of the country can set the framework and objectives of the company and the presidential powers to appoint the board.

Alternatively, sub-holding companies can be set up depending on the different sectors in the economy (e.g. 15 sectors). These holding companies would be the wealth funds that would be operated to maximise wealth in the longer-run. Whenever SOE services have to be provided below-market prices due to social aims, the involved subsidies should be handled transparently and the wealth funds should be immediately reimbursed.

The strategic institutions that play a key role in the economy, such as the Ceylon Electricity Board, National Water Board, Ceylon Transport Board (CTB), Ceylon Government Railway (CGR), Sri Lankan Airlines, Ports, Airports are large and subjected to political interference. Some of these institutions which also impact the day-to-day lives of the masses are especially vulnerable to the influence of the politicians due to the short-term political cycle.

Since each of these institutions falls under a specific line ministry, by design they are subjected to political control and lack the autonomy to act similar to private commercial entities that maximise returns. As a result, these institutions lack transparency, good governance and accountability. For these institutions, a holding company structure can be suitable to bring in autonomy, good governance and professionalism.

This same structure can be used for the non-operating assets, such as real estate and buildings of the public sector that belongs to the national as well as local governments. For instance, to create an Urban Wealth Fund, the following steps can be taken:

1. Identify and compile a list of assets belonging to a designated urban area.

2. Set up a balance sheet to form a basis for a first annual report, so that a new board and management can be formed

3. Incorporate the fund (holding company), transfer all the assets and appoint a professional management team, a board and external auditors.

4. Get the professional management to produce a comprehensive business plan for the portfolio of public assets (e.g. real estate, buildings, etc.)

The key to the success of wealth funds lies primarily in building credibility and having good governance in these entities (see Santiago Principles). To achieve this, the holding company(s) should be ring-fenced from Government interference. Thereafter, a professional board of governors should be appointed with local and international personalities with repute and diverse expertise. They should be entrusted with a clear objective of value maximisation. At least for the first few years, until credibility is built, the chairman and the CEO should be selected from experienced individuals from abroad who have held such positions in wealth funds. The Government, on the other hand, should play the role of an “Active Owner” requiring the Wealth Funds to make comparable returns similar to that of the private sector.


Publicly owned commercial assets can generate enormous wealth. Sometimes, these assets are mismanaged and sometimes they lay hidden with no wealth created. The mismanagement is purely due to the lack of good governance stemming mainly from the short-term political cycle that runs counter to the long-term goals that are required for handling longer-term public assets. Hidden wealth is mainly due to the under-recognition of assets in most of the public sector.

To unlock this enormous wealth, Sri Lanka should consider establishing “National Wealth Funds” to act as professional stewards of public commercial assets. Once established, these wealth funds can also be maintained at an arm’s length from political interference. With such a structure, there would be no debates about privatisation or nationalisation and all stakeholders can look forward to improved services and maximum returns from public commercial assets.