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How government leaders use investment vehicles for public returns
In this episode of the Government Insights podcast, host Kait Borsay discusses with her guests how public investment vehicles can create public returns and what actions government leaders should consider.
Governments are increasingly using investment vehicles to generate public benefits. This episode discusses the evolution of public investment strategies and many governments’ recent turn to a more interventionist approach. The episode features insights on the benefits and risks of different investment vehicles like public equity stakes in the private sector, and how governments can structure these to accelerate public value.
Invest in essential infrastructure: prioritize foundational infrastructure investments that enable further economic and community development
Embrace and communicate risk: accept the risks of public investments and maintain transparency about outcomes, learning from both successes and failures
Strategize for triple returns: create strategies that target financial, economic, and social returns, with thorough planning and post-implementation evaluations to ensure broader public benefits
Teaser
Government Insights from EY-Parthenon.
Kait Borsay
Hello and welcome to Government Insights, a podcast series from EY-Parthenon for government leaders around the world. I’m your host, Kait Borsay, and we’re looking at how governments can transform to strengthen services for their citizens.
In this episode, our focus is on how governments are using investment vehicles for public returns. Joining us to share their insight and opinion on this subject are Shane MacSweeney, EY EMEIA Infrastructure Leader. Hello to you, Shane.
Shane MacSweeney
Hello, Kait. Nice to be here.
Borsay
It’s nice to have you with us. And Simon Phemister, Partner, EY Port Jackson Partners. Hello, Simon.
Simon Phemister
Hi, Kait. Pleasure to be here from Wurundjeri country in Melbourne.
Borsay
Fantastic. Simon, let’s start with you. You spent 24 years in governments in Australia across various roles at senior level. Describe for us the landscape of public investment vehicles today and why we’re hearing more calls for an interventionalist approach.
Phemister
I think there’s a fascinating range of investment vehicles being deployed around the world at the moment actually. Through history there’s been different mechanisms coming in and out of vogue, but right now we’re seeing the coming together of, I think, of a fascinating set of levers that are quite interventionist. So different jurisdictions are taking equity stakes in individual businesses, for example.
In my small corner of the world, thanks to some really thoughtful work by some of my EY partners, the Victorian state government is investing in a toll collection company because they had learned their lessons from dealing with private operators and saw that as the best way to deploy and accumulate public capital.
Globally, we’re taking examples out of Europe, out of the US, out of Asia, and a lot of that’s been prompted from sovereign wealth fund investment and activity in Australia and Canada. The pension funds have really paved the way for different types of equity positions to be taken in businesses that pursue public value. And I think governments have taken note of that and decided to get involved.
There is the lesson out of sovereign wealth funds, and there’s the pursuit of publicly palatable economic activity through the pension funds. But two phenomena, I think, are really weighing heavily in this policy space, Kait. First is hyper localism. Globally, people are far more interested in matters of sovereign capability, of provenance of goods, of capabilities really close to home that they value. And that was brought into stark relief through the second phenomenon, which was the skills and experience through the COVID-19 pandemic.
Governments around the world got really interventionist during the COVID -19 pandemic. They did so out of necessity, and they got involved in areas of operations and areas of strategy and areas of policy that they hadn’t been involved in for decades, in many cases. So, what that’s left is a legacy of skills, capability, appetite, interest from political leaders and civil servants alike to get involved in different parts of the economy, to engage with those different parts of the economy in different ways.
So that, combined with this phenomenon of hyper localism, this appetite for sovereign capability, this desire to do things really close to home, has meant that the government is using a far broader range of policy levers now in the pursuit of these things.
Borsay
Shane, let’s come to you now. How concerned should governments be about receiving tangible benefits from their investments?
MacSweeney
The very simple answer is very concerned, and governments are very concerned. I suppose if you look at it, they’re leveraging and utilizing taxpayers’ dollars for the betterment of society.
And governments have always prioritized not just financial returns, but also economic returns, social policy returns and they are really looking at filling economic gaps that maybe the private sector isn’t currently stepping into. And I think that’s why we’ve really seen an increase in allocation for governments with respect to infrastructure spending over the course of the past number of years.
Because infrastructure expenditure not only ticks the box of an economic return, it is also now ticking the box in terms of moving toward their climate ambitions. So, if you look at something like investment in public transport, not only will it deliver an economic return, but it is now also pushing them toward their own climate ambitions and their own climate goals, and I think that is key as we are moving forward. And I think it is now essential for governments to design all of their strategic infrastructure portfolios with this in mind, but also with clear accountability in mind to ensure that the policy objectives that they set out at the start and that Simon has just spoken about are actually met.
Borsay
That’s fascinating. And Simon, let’s step back a bit with you and ask, where in the economy today is capital best deployed, and how can government leaders then best evaluate the most appropriate investment vehicle?
Phemister
Yeah, capital’s tight, and so around the globe, I think that’s a feature coming out of the COVID-19 pandemic, where public resources were strained and lots of governments find themselves in the position of breaching debt ceilings and having less resources to dedicate to their policy endeavors, which I actually think brings out the best in public policymakers.
It makes trade-offs very real and makes governments and civil servants look for levers other than spending to pursue their policy goals.
So, where to best deploy capital? I’ve always been of the view that government is best at delivering the boring but important stuff. There are lots of really exciting investment vehicles out there and some spectacular successes and failures. And I’ll touch on those when I come to the evaluation point. But I’ve never seen an incredibly exciting investment vehicle deployed into a community where the boring but important stuff hasn’t happened.
The lack of sewers will hold back an incredibly dynamic or well-planned economic precinct; the lack of a skills ecosystem will bring the best endeavors around new industry developments to a screeching halt.
So the best place where governments can deploy capital are in those boring but important dimensions that really provide a platform for success for all of the different, perhaps more exciting investment vehicles that we see bob up.
With regards to evaluation, two thoughts, Kait. The first is, it’s far underappreciated, so if this generation of public policymakers are going to leave a legacy of enhanced literature, enhanced evidence on what succeeds and what fails, they really need to invest in nuanced evaluation and success criteria. Not a single policy endeavor in my experience has got through from initiation to delivery without being impacted by some external force.
So, if we go into these endeavors, be they creative mechanisms or investment in the boring but important stuff, without a really nuanced view, without a really deeply thought through articulation of your assessment criteria or what success looks like, then we’re going to be very binary in our assessment of these mechanisms. And I think doing that we can actually abandon the use of creative vehicles or abandon the pursuit of something that has merit because we got the assessment criteria wrong up front. We didn’t have a conversation with the community about what success looks like in a really nuanced, thoughtful way.
But where does government best deploy capital? Obviously, starting with the first principles and looking for market values for government to intervene in. But primarily getting the boring but important things right.
And with regards to how do you evaluate success? Really, really thoughtfully and deploy as many of your assets as you can into getting that right before you kick off any type of public policy endeavor, Kait. It just leaves the world in a better place when you’re finished, which ultimately is the job of our policymakers.
Borsay
It’s fascinating. Shane, when it comes to investments in developing public infrastructure, is there a sweet spot in terms of blending public and private ownership?
MacSweeney
I’ll answer that Kait in the sense that it varies. There’s a nuanced variation across geographies, across sectors and different — and I’ve had the privilege of working in a number of different countries, and every country will look at that sweet spot in terms of public and private ownership much differently. And a lot of geographies look at public-private partnerships much differently, particularly as to whether it’s a good mechanism or certain areas are better developed or constructed by governments in the first instance.
But if I take a step back and look at the varying roles that different parties within the jigsaw play, if I just look at governments for a second, they are policy setters with respect to infrastructure. They are a recipient of infrastructure, and then quite frequently they’re a buyer of infrastructure services. So, government plays a pretty large layer in terms of different points along the infrastructure lifecycle.
And in some geographies, governments want to retain strategic infrastructure assets. So, they want to retain things like electricity assets. They want to retain gas networks assets and so forth. And then they bring in the private sector over the top to provide that retail layer. And that’s only in some geographies. In other countries they have much different views in relation to some of these strategic assets.
But then if you look at the role in relation to the private sector, so the private sector’s always seen to be an efficient deliverer of infrastructure. I’m not saying it’s always the case, but generalizing they quite frequently have better risk management systems. They bring innovation to the table. They bring a better allocation at times of resources like people resources, capital resources, that kind of know-how in terms of actually getting things done.
So, government really in terms of going back into that enabling, that pump priming up front to get assets actually up and delivered. And we’re having, across numerous different geographies at the moment, really interesting debates on electric vehicles (EV) charging infrastructure. So, what should government’s role be in relation to EV charging infrastructure with the avalanche of electric vehicles coming into country? Should they be playing more of an ownership role? Should they be giving out grants in terms of turning our service stations into broader infrastructure charging assets and so forth.
Different geographies already are taking much different views in relation to it. And then I suppose the last piece is probably in relation to public private partnerships. There are much varying views in relation to that sweet spot, which is the question you originally asked, in terms of how that is calibrated. And it really depends on how much risk appetite both the government and the private sector want to play in relation to it.
Borsay
OK. What examples then do you both have about the successful application of investment vehicles by governments? And let’s take governments around the world for this one, whether they’re public- private partnerships or different equity structures. Shane, let’s come back to you on this.
MacSweeney
There are brilliant examples of this. If I start local, Kait, and then maybe go broader.
So, most countries will have a sovereign wealth fund, and those sovereign wealth funds will invest both domestically and internationally. And a lot of times there’s an allocation to infrastructure within that. And as I mentioned at the very start, that allocation to infrastructure is only increasing for numerous reasons, particularly around sustainability.
So, if I look at the Irish Strategic Investment Fund or ISIF, their responsible investment portfolio has that triple bottom line accounting. So, not only are they looking for a commercial return, but they’re also looking for an economic return, and they’re also looking at an environmental, social and governance (ESG) return on it. So, they’re looking at it through multiple different lenses. And I suppose what that gives their investment vehicle is what I’d call “patient capital.” So not that immediate return, but they have the ability to look at a much broader picture.
And a lot of sovereign wealth funds are like that. If I jump over the water into the UK, they recently used a regulatory asset-based equity model to buy out a Chinese company and take co- ownership of Sizewell C, the nuclear power project there that we’ve been lucky to play a role in as well.
If I jump to India, the Reserve Bank of India established a first loss default guarantee framework, which mitigates the risk of lending to small- and medium-sized enterprises. So, they’re just a couple of examples. I’m sure Simon has many more from Oceania and that region.
Borsay
Simon?
Phemister
I’m going to stick with my theme of being really courageous and having frank conversations with communities up front about the risk of these types of vehicles. Because some of the most profound are investment vehicles (that have been used by governments in my time) were those that failed but were really frank about their failure.
So, to look at some investment in Australia, there is quite a famous investment fund where the government took risk in equity positions in the 80s and 90s. So going back some.
But it was a not only a courageous move, it was also brave enough to be frank about why failure occurred. And so this new generation of equity positions that various governments in Oceania are taking can learn from that experience.
So, define success for me in public policy: Obviously, achieving the articulated goals, number one, but I’m going to come back to that point about leaving the legacy of literature, leaving that legacy of experience and being brave enough to have a conversation with community about where success is achieved and where value has occurred.
It’s one of the, I think, great challenges for the public sector to embrace risk and have a conversation about risk. And the very topic we’re discussing today has risk inherent. If you’re going to be involved in these types of endeavors, risk exists, and if you try to get the risk down to zero, well, you shouldn’t bother.
So, I guess some of my most valuable examples, Kait, weren’t successes; they were failures where civil servants and political actors were brave enough to have a conversation with their community about why they failed. So, they left it at the legacy of the lessons learned for our next generation, and in my corner of the world, there’s an investment vehicle that looks at bridging the gap for early-stage venture capital.
Because we were having a real problem with that, and we were seeing businesses flee our part of the world because very small markets down here flee to larger markets. And after decades of analysis, it actually wasn’t about creating market access. It was about creating an early-stage venture capital capacity that we were lacking — contextual, well-researched, evidence-based and standing on the shoulders of those who came before who were brave enough to describe their failures.
Borsay
And finally, how do you think governments can develop strategies for their investments to better drive financial, economic and social returns for public benefit? Simon, I’m going to come back to you.
Phemister
For most areas of public policy, I have the same answer. Government’s actions can have a really profound consequence on private sector behavior incentives.
And so, I think for the public sector to be really conscious of not displacing positive activity in the private sector is fundamental to any successful policy endeavor.
I mentioned earlier that sometimes it’s a blessing for policymakers not to have money, Kait, because it actually challenges them to use levers other than spending.
I think for a long time, particularly in my part of the world, governments were increasingly taking on challenges in community and economy that, once upon a time, were left to the private sector to solve.
In the last decade or so, we’ve seen, through creative use of partnerships, a rebalancing of responsibility and opportunity and also a better articulation and pricing of risk in a relationship between government and the private sector. And I think as information asymmetries have dissipated and risk has been — not quite equally, I think that would be overstating it — but better understood on both sides of the relationship, we’ve seen more productive public and private partnerships.
So, point being, government needs to be very conscious of how profound their actions are in any type of market so they’re not displacing private sector investment. That would be a terrible shame and a waste of public money.
My two other golden rules for success in this space are for policymakers to be courageous. And for that to happen, the community needs to support them. To think that you can operate in a risk-free environment in the public sector means doing nothing. And I think all of us would really encourage our public sector colleagues to be courageous, but that requires us to back them in with frank and candid conversations about failures as well as successes.
Finally, back to the point I made earlier, Kait, we’ve got to be really thoughtful about how we evaluate what success looks like. It’s not always getting the bridge built or the road open or the hospital open on scope and time.
Sometimes there are external forces that come into play that displace scope, time or budget. We’ve got to be able to be more nuanced in the way we assess what success looks like, which means we have to be more thoughtful right at the front of these projects. And as I keep saying, more candid at the end of them about how we can improve next time round.
Borsay
Shane, let’s come to you on this, how governments can develop strategies for their investments that do better drive financial, economic and social returns for public benefit.
MacSweeney
Two quick thoughts from me on it. Most geographies at this stage have fairly robust infrastructure guidelines that are in place. And those infrastructure guidelines create a framework in terms of analyzing initiatives, analyzing policies and importantly prioritizing initiatives and what next investments to make.
But to just pick up and a similar thought from me, Simon, on it, is we do a huge amount of work up front in terms of writing business cases, economic analysis as to what this project will deliver, what it will do. And then a lot of times we will have robust mechanisms in place to make sure that the KPIs are met along the way. But infrequently we do a look-back.
We do, what, like, I call, a benefits realization study to say, “hey, 10 years later this asset is now very much embedded in our culture, embedded in our society or in our cities, so did it deliver on the original strategic ambition or the original strategic objectives?”
And I think if we do more of that, it can only enable us to develop more and more efficient and strategic pieces of infrastructure. So, that would just be my other point in terms of what we can do. So yes, we always look forward, but I think sometimes it’s important to look back as well.
Borsay
Well, thank you to both of you. It’s been a really fascinating conversation.
Shane, thank you to you.
MacSweeney
Thank you, Kait, it was super.
Borsay
And Simon, thank you.
Phemister
Pleasure, Kait.
Borsay
Well do join us again soon, when we’ll continue to look at how governments can transform to strengthen services for their citizens, and please subscribe to this series so you won’t miss an episode.
From me, Kait Borsay, thanks for listening, and bye for now.
Teaser
Government Insights from EY-Parthenon, back soon.
End of podcast.
Presenters
Kait Borsay
Journalist, author, TV presenter, Radio moderator at Times Radio
Partner, Strategy and Transactions, Ernst & Young Professional Advisory Services; EY Ireland Head of Strategy and Transactions; EY Global and EMEIA Infrastructure Leader