By Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba)
If we are going to dig ourselves out of the economic hole created by Covid-19, we need to change the way we account for public assets.
We need to move from expense to asset accounting, and then “Uberise” public assets so they can be rented on a pay-for-play basis but still remain assets of the state.
This is little different than the business model adopted by companies like Uber and Airbnb, which turned otherwise sterile assets such as vehicles and homes into revenue machines.
Think what additional revenue could be generated by renting out use of our public parks, railways, our Safari nuclear reactor, our under-utilised property portfolios and vehicle fleets.
It will take some creative thinking to get the public sector to embrace the “Uber” model, but it can and should be done. This is starting to creep into the national discourse in many countries battling the economic devastation of Covid-19, and has been recommended by the likes of Willem H. Buiter, former chief economist at Citigroup and now visiting professor at Columbia University in New York.
There are many benefits from the state adopting accrual accounting:
- Increased revenue streams through the rental of public assets
- Strengthened asset values as new revenue-generating opportunities are accounted for
- Strengthened balance sheets and improved sovereign credit ratings
- Reduced reliance on already over-stretched taxpayers
- Reduced risk of the state having to honour debt guarantees to banks and state-owned entities.
As Buiter points out, a reasonable model for other countries to follow is New Zealand’s Public Finance Act, which was passed in 1989 and required the government to produce a proper balance sheet. Part of the problem we have in SA is that we have no real idea of what the state owns, or what these assets are worth. It will take some time to gather all the information, apply a suitable valuation model to these diffuse and scattered assets, and then measure this against the state’s liabilities.
New Zealand was the first country to do this with any certainty, and it has helped immeasurably in bringing financial honesty to its public purse. Ian Ball, professor of Practice-Public Financial Management in the School of Accounting and Commercial Law at Victoria University of Wellington, and one of the architects of this act, points out that by 2019 New Zealand had turned from net liability of NZ$14 billion to a positive net worth (assets exceeding liabilities) of NZ$134 billion, equivalent to 45% of GDP. What this act did was promote fiscal responsibility and force the government to run budget surpluses (which it did in all but four years after the 2008 financial crash).
One of the benefits of such an approach is the ability to tap into emergency debt funding when it is needed. As things stand, SA is careening towards a debt-to-GDP ratio of 86% with a massive and dangerous interest bill. Low interest rates may be with us for a while, but not forever.
We need a proper accounting of our public assets, but we don’t have to wait for such a momentous exercise to be wrapped up, or even started. We can begin by opening our railways to private entrepreneurs and let them rent or import locomotives and carriages wherever they can get the best deals. Instead of running a single nuclear reactor at Pelindaba, why not leverage our immense nuclear skills and license the Russians, Americans and French to operate modular reactors for medical and specialised applications, using our intellectual property? Can we not licence our parks, or parts of them, to entrepreneurs who see an opportunity to turn a profit through the undoubted rise in domestic tourism we will see in the next few years before international tourism returns to some kind of normal?
If we close our minds to these possibilities, we will beat our heads against a wall trying to tax or borrow our way out of this crisis. Just look at the government-backed guarantees to banks. A certain percentage of these guaranteed loans which will be unrecoverable, which means these guarantees, or at least a portion, will be called on at some point in the future. Neither is it certain that all banks will survive this crisis. We are staring down the barrel of endless borrowing to dig ourselves out of this hole instead of looking at the asset side of the public balance sheet.
There is another benefit to increasing revenues from state assets that should mollify the trade unions: we will not be forced into emergency privatisation sales just because the fiscus suffers a temporary shock.
The time for fresh thinking on the use of public assets has long passed. Let’s not delay any longer.