Investing Public Funds

Review of the Topic

Most governments around the world are under immense pressure to provide proper stewardship of their economies through prudent public financial management. Undertaking sound investments stems from the proper use of public resources and the maximization of returns from the same (European Commission, 2014). Public resources refer to different types of financial instruments. According to the New Zealand Controller and Auditor General (2017), they represent “all monetary assets, which are collected, received, maintained, distributed and spent by public sector entities that consist of revenues, expenditures, loans and grants for public sector entities” (p. 3). Governments have a duty to exercise care in the use of such resources, regardless of how they have been acquired (through taxes, custom duty fees, tariffs or otherwise). Typically, that process should be devoid of waste, errors, and fraudulent activities (European Commission, 2014).

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Background Information

Governments around the world are holding and amassing large pools of cash as custodians of their people’s wealth. These resources are known by different names, such as futures, sovereign wealth, and government investment funds (Owen & Mason, 2016). They provide different opportunities and risks in the development of the respective nations and in the promotion of their citizens’ welfare, depending on how well they manage the resources. As these public funds continue to grow, they are attracting widespread international attention, relative to how they affect the financial health of local and global institutions. The same attention stems from how they provide nations with international clout over others. Subject to these developments, experts, citizens and international financial bodies are exploring the nature of these public funds and how they should be managed. Promoting sound investments of public resources is the main topic of this review.

The justification for Selecting the Topic

Many levels of government are always plagued by the problem of mismanagement and the ineffective use of public resources. This issue permeates different levels of society and its greatest effect is felt on national and state budgets (Khan, 2016). This topic is important to this study because the prudent investment of public funds is integral to the development of a country. Furthermore, the management of public sector resources is a key pillar in the proper functioning of economies because it affects the operationalization of financial instruments (European Commission, 2014). The topic selected for this study is important to the field of public resource management because it helps to improve governance standards for the “greater good” of all stakeholders. Relative to the need for countries to effectively manage their public resources, some governments have struggled to achieve prudent financial management, thereby suffering huge financial damages (Khan, 2016). These losses arise from the mismatch that exists between common and desired practices in public resource investment plans.

Common Practice vs. Desired Practice

Best practice in the management of public funds needs to be analyzed using three criteria, as described by the World Bank: governance, accountability, and investment (Khan, 2016). Governance refers to the ability of governments to establish systems and processes that reduce conflict among stakeholders and maximize the “public good.” Accountability refers to the ability of the same entities to disclose and report information concerning public investments to their shareholders (Schillemans, 2015). Lastly, investments refer to the ability of governments to establish income-generating profiles that yield the greatest return for their stakeholders, while minimizing risks. The common practice in public funds investment is that authorities should follow a predetermined set of rules of investment, which are typically outlined by an existing legal framework. Different jurisdictions have their unique set of rules, but they are often aimed at maximizing shareholder value. Typically, authorities invest these funds in mutual and unit trusts. Their main considerations are the liquidity of the funds and the safety of their investments (Schillemans, 2015). Other considerations are cash flow forecasting, short-term investment options, long-term investment options and credit risk. Ordinarily, authorities have a lot of power in making such investment decisions (Schillemans, 2015).

The desired practice is that shareholders should have more rights. This view comes from studies which have shown that governments which promote shareholder rights have a better record of investing public funds (Halpern & Edelman, 2017). The adoption of good corporate governance principles is at the center of this proposal because the same studies have shown its association with good operational performance and market valuation principles (Halpern & Edelman, 2017). The importance of these governance concepts is profound in countries that have a weak legal framework.

Shortcomings

The main challenge influencing how public funds are invested is the lack of a common metric for evaluating the performance of agents associated with the process. These agents may include policymakers, public sector employees, and taxpayers. Evidence shows that the involvement of government bodies in the investment sector could cause conflicts of interest which may negate some of the gains to be made if investments were free from this issue (Halpern & Edelman, 2017). The European Commission (2014) supports these sentiments and points out that, from a governance perspective, this issue requires a careful assessment. The conflicts of interest may manifest in different forms, but the most common one is the involvement of the government as both an investor and regulator. The problem also arises through the participation of the government as a direct participant in the market.

The incorrect planning of public resources is another shortcoming associated with the process of investing public funds. This issue partly relates to the inability of governments to have clearly defined goals and objectives for each stakeholder involved in the investment process. Indeed, without a clear vision, it is difficult to effectively plan how to use or invest public funds. Zaidi (2017) says that the problem often starts during the implementation phase of public sector processes. Later, it permeates through the approval processes (Zaidi, 2017). Some policymakers suggest that part of the problem is how investment plans are financed because the process is not always done on the project-level, or using the real costs of the investment (Halpern & Edelman, 2017). Consequently, money is often disbursed in small amounts, leading to the dismemberment of funds.

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Recommendations

Most of the shortcomings identified above could be solved by clarifying the objectives of fund managers. There should also be appropriate rules set out by policymakers to eliminate conflicts of interest and provide clear accountability standards for each stakeholder involved in the process of investing public funds (Zaidi, 2017). To improve existing accountability standards, there needs to be a strong disclosure of decisions and performance standards governing the activities of agents involved in making investment choices on behalf of the people. Recommendations for improving the accountability of public funds should also be made according to the proposals of the Peterson Institute of public funds management, which suggest the formation of a scoreboard for comparing the management practices of sovereign wealth funds (Zaidi, 2017). Here, four categories of fund management should inspire the reform agenda for corporate governance: structure, governance, transparency/accountability, and behavior.

Boosting the administrative capacity of local governments to invest prudently would also help in solving the prioritization problems that affect the process. This goal could be achieved by improving the structure, human resource capacity, and tools for investing public resources. At the same time, there should be a firm focus on ensuring that administrative systems are working well to avoid communication, implementation and approval issues that inhibit the prudent investment of public resources. These efforts should aid in the improvement of the existing capacity to invest public funds. Such an approach has been successfully implemented in the European Union (EU) through the establishment of the Cohesion Policy Funding, which was launched in 2014 (European Commission, 2014). It has led to significant gains in the development of institutional capacities and in the promotion of EU’s reform agenda (European Commission, 2014).

Conclusion

The insights highlighted in this study are useful in improving the use of public funds through the enhancement of public sector goals and investment initiatives. The same contributions are instrumental in improving accountability standards of different managers regarding their use of public funds, thereby preempting some of the problems that affect the management of public sector resources. When effectively implemented, the recommendations highlighted in this study would significantly contribute towards the improvement of public sector efficiency and, by extension, lead to the prudent management of public resources. While these recommendations are timely in the management of current public sector challenges, future research should focus more on identifying specific investment issues affecting different levels of government.

References

European Commission. (2014). Quality of public administration – a toolbox for practitioners. Web.

Halpern, P., & Edelman, R. (2017). U.S. investment funds: Public and private response to cyber risk. The Journal of Investing Spring, 26(1), 104-116.

Khan, M. (2016). Management accountability for public financial management. Web.

New Zealand Controller and Auditor General. (2017). Principles for good management of public resources. Web.

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Owen, R., & Mason. C. (2016). The role of government co-investment funds in the supply of entrepreneurial finance: An assessment of the early operation of the UK Angel Co-investment Fund. Environment and Planning: Politics and Space, 35(3), 434-456.

Schillemans, T. (2015). Managing public accountability: How public managers manage public accountability. International Journal of Public Administration, 38(6), 1-10.

Zaidi, A. (2017). The “buy one, get one free” ethics of investing public and philanthropic funds in health and climate. AMA Journal of Ethics, 19(12), 1193-1201.

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StudyCorgi. (2021, February 21). Investing Public Funds. Retrieved from https://studycorgi.com/investing-public-funds/

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"Investing Public Funds." StudyCorgi, 21 Feb. 2021, studycorgi.com/investing-public-funds/.

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StudyCorgi. 2021. "Investing Public Funds." February 21, 2021. https://studycorgi.com/investing-public-funds/.

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StudyCorgi. (2021) 'Investing Public Funds'. 21 February.

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