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Article Article August 28th, 2017
Infrastructure • Cities • Finance

Unlocking the public wealth of cities

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City leaders in need of funds don't need to raise taxes or cut services, says @dagdetter

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Cities need to take financial advantage of the huge assets under their control, says @dagdetter

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@dagdetter wants to make *all* cities transparent in terms of their public wealth

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Chances are that you're reading this in a city or on your way to one. In 1800, only 3% of the world's population lived in urban areas, but by 2014 the total had risen to 54%, according to the UN, and this is only set to increase over time.

But while cities may shimmer with economic potential, luring millions of people to their streets from near and far, they are not without their challenges. Their ever-growing populations not only place increasing strain on what is often decades-old infrastructure but also make it harder for city managers to safeguard vital social services, let alone find the funds to increase investment for future generations.

So, what's to be done? The traditional solution would be for policymakers to increase taxes or debt or cut public services. Dag Detter, though, has other ideas.

“Cities are goldmines of assets,” he says firmly. “Local governments have got a huge amount of real estate under their control, as well as things like public transit and utilities, and in some cases ports and airports. But hardly any of them are taking financial advantage of what is right there in front of them.” Detter - a former banker and senior government official in his native Sweden - is on a mission to change that. Starting now.

Getting value for money

Not many opt for a career in government after a successful stint as an investment banker, but that's the path Detter chose to take. Having garnered valuable experience and insights in the banking world, he made the switch to work on the restructuring of public commercial assets at a time - the 1990s - when Sweden was in dire financial straits.

“We'd had a banking crisis, but we were still reeling from the effects of globalisation and new technology, which had adversely impacted the state finances and many of the former state monopolies,” recalls Detter. “We'd just gone through a period of very high interest rates and it was quite a dramatic time. The government realised it had to do something about its vast portfolio of public commercial assets - while the the rest of the developed world was busy privatising its way out of this difficulty.”

Detter, who served as president of Stattum - the Swedish government holding company - and as a director at the Ministry of Industry, soon got to work restructuring the government's state-owned enterprises, which represented a quarter of the domestic business sector.

“It was the first time a government had tried to become an active owner instead of resorting to outright privatisation, and the result was very successful - there were some high returns and the portfolio ended up outperforming the stock market,” he says. “It wasn't easy, though. Governments are quite complex environments in their own right, and managing commercial assets is clearly alien to them. It seems that the only time there is a normal process is when there is a financial crisis, as it gives them the necessary urgency. But everything we were doing was something that the private sector does every day - it's not rocket science.”

As a result of their success, he found himself much in demand with other governments, as well as organisations such as the IMF. Detter, however, remained puzzled as to why this vast public wealth was not being unlocked, if only as a preventive measure. He cites a sporting analogy: athletes know the most common injuries in their sport and can actually do the necessary physical training - so-called “pre-hab” - to reduce their risk of injury. “I kept having the thought about why governments weren't doing this anyway, before a crisis and when things were normal,” he says. It was this question that drove him to write his first book, The Public Wealth of Nations, which soon rocketed up the bestseller charts.

No city limits

Now, though, Detter is focusing squarely on cities. “The leaders of cities are closer to the people who elected them and the commercial assets the city owns, so it is easier for them to get a decision, whereas national leaders are distracted by issues questioning the very ideas of national identities, such as Brexit,” he says. “So, cities are much easier to deal with. The key component is political will. Remember, the technique that we're using to unlock wealth is based on the very tools that the private sector deploys on a daily basis.”

In essence, the process comes down to identifying the commercial assets and assigning them a market value, and then creating an institution - a holding company - to manage them. Staying at arm's length from short-term political influence allows for professional management and long-term investment. To illustrate his point, Detter uses the analogy of a grandmother who is struggling to get by on a meagre pension. “She lives in a big house which she refuses to sell, because it provides a refuge and social safety net for her children and grandchildren,” he says. “But to the bank manager, it represents only a big black hole of endless costs that cut through her life savings and pension every month. As the bank statements clearly indicate, she is not a good risk, being an ageing person with increasing costs and a declining income.

“Now, consider if Grandma set up a holding company to manage her estate, having Airbnb let all the rooms on non-holidays, a professional farmer renting the land, and a professional forest manager overseeing the forest. Suddenly the bank manager would see a balance sheet - and thereby her net worth or ‘wealth' - and a professional company that will survive for generations as a going concern. There will be a yield from all the various assets that were previously just an economic burden. A yield sufficient not only to undertake maintenance but also to build whatever else is needed for a growing family or to sustain the estate, as well as to help the less favoured ones in the family.”

Unfortunately, cities struggle to understand exactly what is on their books because public sector accounting does not use balance sheets like the private sector, and ownership is often split between many government departments and authorities - resulting in balance sheets with inaccurately low estimates of their net worth. Detter's diagnosis is to provide greater transparency - using IFRS - and then transferring asset ownership to a new “urban wealth fund”, free of short-term political influence.

This concept has been used by governments in Europe and Asia for decades - with great success - but has not yet translated to the US. Even in the federal US system, with its more fragmented local government ownership structure, each administrative level of government owning assets within an urban area would have shares in the fund equal to the value of the assets they had contributed. This would facilitate a more professional and coherent management of commercial assets. Professional managers would then be tasked with maximising the value of the portfolio, with government receiving dividends - a valuable revenue stream that would provide another, better option to cutting services or raising taxes or public debt.

“As Mike Bloomberg always said, ‘if you can't measure it, you can't manage it',” says Detter. “We need to attach a value to it in order for us to pay attention to it, but right now every city is sitting on a goldmine that they just don't know about.”

Spreading the word

Detter's argument is set out in more detail in his latest book, The Public Wealth of Cities, which, like his first, is co-authored with Stefan Fölster. Dag is clearly determined to help shine a light on this opportunity, but adds that the most powerful argument will be to demonstrate the approach in practice in those countries, such as the US, that have not yet tried it. “The media have a huge role, and civil society does as well, but the biggest step is to actually show it - just to overcome any disbelief or scepticism which might exist,” he says.

And is he confident that cities will move in this direction? “Absolutely,” he replies. “Our efforts are now very much focused on the US - where they are making real progress - but we are also aiming at Asia and Europe. My ambition, though, is to make all cities transparent in terms of their public wealth. We are also working on a prototype to use blockchain to make this available on a public ledger. When enough cities have done this, it will be impossible for cities not to get involved, because the taxpayers - the voters - will demand it. Why should they cut services and raise taxes when there is a far better way at their fingertips?”

Why indeed? It will be fascinating to see which city is the first to follow Detter's advice - whichever city it is, it's fair to say that it won't be the sole trailblazer for long.

Interested and want to know more? You can get in touch with Dag here



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Written by:

Christopher Malone Partner and Managing Director, The Boston Consulting Group, Ho Chi Minh City
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