Amidst the backdrop of falling public expenditure, a limited flow of credit and depressed incomes, we are witnessing the emergence of a new kind of social economy. Unconventional actors and organisations are occupying a growing space between the public and private sectors, challenging established wisdom about how we create and distribute value in our society. Initiatives such as Care4Care, Community Land Trust and the Green Investment Bank, are working in new and innovative ways – somewhere between public services and the market – to deliver social and environmental benefits.
Much of the policy debate on the left has traditionally focused on questions about the interventions of a centralised government, but it’s becoming increasingly accepted that social and environmental welfare can be improved via the private and third sectors, and through public sector partnerships with each of these.
While ideological arguments about the pros and cons of this complex political economy continue, increasingly relevant is how actors (including the state itself) effectively negotiate it. This is not to discount the importance of democratic legitimacy and accountability on decisions about public assets, but to accept that there are other considerations – such as agility, industry knowledge and long-termism – that are also key to the practical delivery of social benefits. So the onus is increasingly on the state to respond to this emerging dynamic in the UK’s political economy.
UK governments of all colours have flirted with the market as a mechanism to improve the efficiency of social service delivery e.g. PFIs, privatisation and the franchising of public services. But rarely has government explicitly recognised or adopted its role as a as a proactive agent in that space. It hasn't, for example, allowed public bodies to both generate and invest revenues independently of the state. This is exemplified in the management and sale of public assets - which have most often been simply handed over to the private sector in return for a welcome boost to Treasury coffers, the sales of 4G and Royal Mail being only the most recent examples.
Indeed the UK appears to lag behind other parts of the world in the way that public assets are managed. For example, all other oil-producing nations in the world (and even Texas) have created sovereign wealth funds to stabilise and increase the competitiveness of their markets and/or make strategic investments to improve well-being for current or future generations. In the UK, Thatcher took a different path, essentially “selling off” North Sea oil to the highest bidder and using the associated revenues to fund tax cuts and cover the costs of unemployment in the 1980s. Today, it’s arguably those private companies that bought the right to extract the oil that are enjoying the greatest benefits from this very public asset.
So this begs the question: could revenues from the use or sale of UK public assets be undertaken in more innovative and productive ways, to deliver social benefits more efficiently than traditional public services? Which assets are we talking about, how would they be managed and to what ends?
There is much to suggest that revenues from the use or sale of public assets can and should be used in more innovative and nuanced ways. It means a state that makes intelligent decisions for the benefit of its citizens, thereby embodying a good capitalism. While this demands a new expediency in governance, it also calls for intense interrogation of the principles and theories of change that underpin any novel use of public assets.
Drawing on international best practise
When rethinking the possible use and management of public assets we can find inspiration from a range of international practises. To help frame the discussion it might be helpful to view the different models of public asset management along a spectrum. At one end are funds where the return on investment is long-term, the benefits indirect and the remit for the nature of investment predominantly unrestricted. Working examples are the Government Pension Fund of Norway (GPFN) or Singapore’s Temasek Holdings.
The GPFN is particularly interesting because the logic behind its existence has changed as it has become more successful. It was established in 1990 to counter the effects of the decline in income (oil production is said to have peaked and is now in decline) and smooth out the disruptive effects of fluctuating oil prices. Its remit has grown as the government has sought to reap greater rewards for its people through investments in the international stock market (the fund now holds approximately 1 percent of global equity markets). The fund is managed in similar ways to a private investment bank – it has target returns and spreads risk across multiple sectors – though differs in that an Ethical Council and the Ministry of Finance set rules which restricts investment in certain industries.
At the other end of the spectrum, there are funds that actively seek to intervene to deliver social or environmental outcomes in the short-term. A good example is Realdania. In 2000 the Danish government sold publicly-owned mortgage lenders ‘Realkredit Danmark’ (worth €2.7bn) to make way for a private association with the remit to improve wellbeing specifically through investment in the built environment. Its legal structure is that of an association operating as a business.
The case for independently managed funds that work for the public good
Central to the management of any assets are questions relating to accountability and measuring success. On the former, there are arguments to suggest that any public fund should be independent of direct accountability to the state. There are three reasons for this. First, having parliamentary or executive oversight of the fund would likely raise conflicts in interest as, directly or indirectly, the state would prescribe its uses. There might, for example, be an incentive for government to give a tax break to sectors where the fund has major interests.
Second, there are some aspects of fund management where discretion by the controlling authority will need to be exercised. Particularly within the financial sector, some information is highly sensitive and cannot be subject to the same transparency rules applicable to other public bodies, not least to preserve a competitive advantage over other firms operating in the same space.
Finally, some key benefits available to an independently managed fund - such as agility, long-termism, industry knowledge - may be unobtainable with a direct public accountability processes. In particular, it is important to separate the activities of the fund from the short-term annual spending review cycle that is required of government departments.
A fund that is managed independently of the state, however, must go some way to quantify its activities. This is particularly difficult if the fund is to be used to deliver social or environmental benefits, as reliable data is often hard to come by. One potential solution is to use frameworks such as Social Returns on Investment (SROI) that help measure and account for value more broadly than simply tracking monetary exchanges. SROIs measures can be built into both the forecasting of investment and/or the retrospective evaluation of a fund’s use, and can also be tracked over time.
An alternative would be to establish a set of principles or criteria that guides uses of the fund within certain (ethical) parameters. This could be set by the government when initially establishing the fund, similar perhaps to the way it sets the target inflation rate for the Bank of England. There then could be a specialist ethics committee that evaluates compliance with these principles.
Regardless of these quantifications, there will likely need to be some trust placed in the ability and discretion of those managing the fund, given the inherent intangibility of many social or environmental outcomes.
Opportunities for creating a new UK fund
There are a number of opportunities for raising capital to create a significant independent fund in the UK. First, revenues from the eventual complete sale of Lloyds and RBS would see revenues of over £70bn. This may represent a loss when compared to the money originally spent to bail out these banks during the financial crash but there are clearly important debates to be had about how this money is used rather than assuming it should simply boost Treasury coffers. Like the Norwegian government used oil revenues to make their economy more resilient to energy price shocks, might the UK government reduce the domestic economy’s exposure to a future banking crisis? An independent fund could be established to invest in non-financial sectors, thus reducing the UK’s risk exposure to financial shocks.
Second, there may be scope to reform regulation on the management and use of assets controlled by the Crown Estate (estimated to be worth £8.1bn) by replacing the Crown Estate commissioners with professional asset managers, widening their remit to allow them to make investments that improve social and environmental wellbeing, and liberalise their criteria for investment and risk exposure.
Third, there is potential to rationalise and integrate the management of Local Authority pension funds, estimated to be worth in the region £178bn. While it is a significant undertaking to pool these assets, each of which have their own mandate and contractual relationships, it offers sizable figures that might be invested to meet societal needs, like providing credit for house building or public infrastructure works, while taking a low-risk approach to asset management.
Finally, revenue for a new public fund does not necessarily have to be raised through the sale of an asset but could be generated through special taxes, licenses or levies. Could we, for example, avoid a similar mistake to the scuppering of North Sea Oil revenues by issuing public licenses for fracking? We might think more innovatively about the tax system and how it works for the population - there may be scope for inheritance taxes, stamp duty or a mansion tax to fund new public assets, thereby also challenging some of the most entrenched forms of inequality in the UK.
There certainly remain some grand questions about whether, by creating new publicly-owned investment funds, we are abandoning the left’s historic goal of developing an alternative to capitalism and simply reinforcing the existing political economy. But historic malpractice in past management of the UK’s public assets demands, at the minimum, that we think carefully about the role and use of public assets in the future. The multitude of international success stories should encourage us to be more ambitious in our thinking.
What is clear, however, is that creating a new public fund will require courage from politicians, particularly in the light of budget deficits and pressure on public services. Funds such as these, by their nature, require long-term planning and the ceding of power to market forces, but arguably they offer a nimbler and more resilient model for negotiating the capitalist economy