Credit VectorMlne/iStock
Credit VectorMlne/iStock
Credit VectorMlne/iStock
Credit VectorMlne/iStock
The financial sustainability of many governments and their public services are at risk from growing indebtedness manifesting in reduction of the services due to limitations on operating budgets and constant underinvestment in public infrastructure, at catastrophic levels in many rapidly urbanizing countries.
Meanwhile, government non-financial assets (NFAs), such as land, buildings, and infrastructure, have been increasingly recognized as a major source of public finance challenges - and a potential part of resolving them. Indeed, constructing, operating, and maintaining buildings and infrastructure constitute major expenses for governments. On the positive side, NFAs are a major part of public wealth: NFAs value is typically higher than that of financial assets and often substantially higher than GDP (1, 2).
A sheer size/value of NFAs and their revenue-generating potential have triggered the idea that better-managed NFAs can generate resources for needed investments and debt reduction, with the main approach being proactive, strategic management of NFAs on the government balance sheet (3 - 5). For example, the government in the U.K. has been trying this in practice (6). Improvements of NFA management in some countries have entailed elements of integration of NFAs into PFM (e.g. incorporating lifecycle costing and management of NFAs into government expenses forecasts and budgeting).
However, despite repeated calls for reform, progress has been limited. For example, among OECD countries, only 24 percent require asset management (AM) plans (7). In many places, the basics are still missing.
Moreover, even advanced AM practices typically center on the needs of NFAs, service delivery, and social goals, but not on NFAs’ ability to improve public finances. The opposite cases – i.e., an excessive pressure on NFAs holders to reach targeted revenues or savings, especially short-term, can jeopardize holders’ mission (e.g. country’s defense capability as happened in the U.K.) or lead to long-term financial losses (the case of Australian office properties privatization).
Further, there are jarring mismatches between potential benefits from better AM and insufficient attention to NFAs within PFM. For example:
Such mismatches and imbalances have several causes: An umbrella nature of the PFM notion, with its contents depending on the users’ purposes; historic inertia; AM, with its the multi-disciplinary nature, not fifing into typical PFM settings; a focus of PFM developments on specific issues (e.g., paying for climate adaptation), not on systemic integration.
However, we think that, above all, the mismatches are caused by inherent fragmentation within governments that penetrates everything: policies, regulations, institutional settings, data management, etc. For example, we investigated the relationship between AM and accrual accounting (AA) as a part of PFM and identified typical disconnects: AA not adjusted for AM needs; NFAs not subordinated to financial entities, etc. (9). Informal feedback from government NFAs managers from Australia, Canada, Indonesia, and Lithuania supports our findings: AA and AM are not sufficiently aligned.
This all indicates that AM cannot remain in its technical silo and short-term links with PFM. Both AM and PFM must transform into a better integrated, strategic system that maintains a fine balance between NFAs own goals (i.e., service delivery, risk management) and PFM addressing government efficiency, financial controls and sustainability, and providing yet-to-be-introduced care for assets long-term value.
A way forward needs a champion among international institutional heavy-weights and requires:
With AM better embedded in PFM, the public can benefit from better services today and stronger public finances tomorrow. That is why AM should become the next frontier of PFM.
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