Public investment funds: The triumph of technocracy over democracy

Legacy institutions are broken. Frustration has grown around the inability of governmental bodies to manage investments. Concerns over the lacking performance amongst government-sponsored incubators and related organizations remain and stands in contrast to the high political priority to entrepreneurial activity (see here).

Consequently, commercial organizations owned or controlled wholly or partly by the government (the ‘parastatals’) are spreading faster than any other institutional form because they have been necessary and successful in the absence of alternatives today, even against more democratic options.

Particularly in emerging markets that need to correct for the market failure by which private capital prefers the stability of developed markets will parastatals have a major role to play. Locally, in Denmark, industry & government insiders agree that the current return on investment infrastructure in emerging (as well as developed) markets can be better. There is sufficient evidence that highlights the inefficiencies in understanding the markets and actually delivering value. Low performance is partly due to a slower response to the speed and demands of globalization. Today we require faster-paced bodies that are more responsive and more technocratic to harness capital flows while asserting national political control.

This should come as no surprise as sovereign wealth funds are widespread – Abu Dhabi Investment Authority, Norway’s Government Pension Fund, and China’s SAFE Investment Company to name a few – and these funds have begun to embrace the emerging markets. Temasek (of Singapore) has begun diversifying into developing-world assets; Norway’s oil fund is preparing for a venture into emerging markets; and the property arm of Qatar’s sovereign wealth fund was reported to consider moving into emerging markets.

The parastatals are important even if part of the portfolio relies on public financing to keep them afloat due to massive inefficiencies. Why? Because parastatals not only have public support but also support the public: Saudi Aramco generates approximately 90 percent of government revenue; Russia’s Gazprom’s tax payments generate 10 percent of Russia’s GDP; and up to 60 percent of Singapore’s GDP is linked to companies owned wholly or partially by Temasek and associated holding companies.

As a reply to the current performance and return on public investment in investment infrastructure, we encourage the Danish government to: Initiate further initiatives that dramatically improve the efficiency of governance, investment initiatives that are publicly supported, yet privately operated, that don’t fear international linkages, are happy to encourage diverse minority ownership, and embrace competing aggressively internationally. This represents to some extent the triumph of technocracy over democracy, but there is little evidence to date that sovereign wealth funds should be a point of concern. In fact and beyond doubt, it is a better means of creating jobs and value.