This article originally appeared in The Times.
Government manages its money in a way that no serious business would consider. It focuses mainly on current spending – the money it spends on services and benefits – and hardly at all on the value of what it owns.
Network Rail undoubtedly has big debts. That’s why bringing it onto the Government balance sheet – if the Office for National Statistics decides that’s where it should be – is a headache for the Chancellor. But the value of its assets – train stations and tracks – exceeds these debts.
Private businesses have to focus on their assets as well as their spending so that they can get the best returns for investors. But government’s approach to the combination of assets and liabilities – its balance sheet – is haphazard and inconsistent.
The question, therefore, is whether a big change like moving Network Rail on to the government’s balance sheet will compel government to look systematically at what it owns and maximise returns for its investors
The problem is that Government doesn’t readily prepare information about the value of its assets in a way that private business does. In order to properly value a company’s assets, investors need information about how well they have been maintained, what long term commitments have been made on them, and crucially, what the rate of return has been.
In the case of Government assets, the set-up is lopsided. Future capital investment is scrutinised. But past investment is treated as sunk – even if selling these assets could reap real rewards for the taxpayer.
Of course, there are some assets, such as student loans, where a sale doesn’t make sense. Any investor who buys the loans will have a higher cost of capital than the government, yet it won’t be able to change the terms and conditions of the loans (make graduates pay back faster) to recoup its higher costs. Government would make a loss on any sale, yet the possibility of a sale is nevertheless being explored.
By contrast, both the Ministry of Defence and the NHS have large holdings of land and buildings, the use of which could be rationalised. The proceeds of sales might be used to pay down government debt or to invest in other areas. But, despite ongoing austerity, none of this is happening with any urgency.
Far from being an accounting headache, bringing Network Rail onto the public sector balance sheet could be an opportunity to focus discussion on a more consistent and useful approach to the government’s balance sheet. The real question is whether the Chancellor has the appetite for it.
