By Colin Talbot

24 Dec 2018

Colin Talbot looks at how the government takes stock of what it owns – and how knowledge assets are changing what counts as capital

New dawn: Andrew Likierman (right) at the launch of the government green paper on resource accounting in 1994 with then-chancellor Kenneth Clarke (centre) and ex-paymaster general Sir John Cope. Photos: PA

In 2006 Microsoft was the most valuable company on the planet. Its stock market valuation was around $250bn. But its balance sheet “assets” were only about $70bn – and $60bn of that was cash and other financial resources. Traditional assets such as factories and machinery, buildings and computers, accounted for a mere $3bn, or 4% of Microsoft’s assets and only 1% of its market valuation.

This startling fact is contained in one of the most interesting non-fiction books of this summer – Jonathan Haskel and Stian Westlake’s Capitalism without Capital. Their central thesis is very simple: capitalism is moving into a phase where intangible assets outweigh traditional physical assets.

These “intangibles” include a variety of items such as services or processes, organisational capabilities, platforms, brands, human capital – things that require investment and deliver back over time, just like physical assets.

The government estimates it has around £150bn of intellectual property and other intangible assets, and last month announced, in the Budget Red Book, that it would be reviewing how it can get a better financial, economic and social return on these assets.

Haskel and Westlake argue that intangibles differ from physical assets in a number of ways. They are “sunk costs” in that you generally can’t get much back by selling them, unlike physical assets. They are much more vulnerable to “spillover” – being easily reused with no loss by other actors. They are easily scalable – easy to reproduce at very low or no extra cost. They are also often synergistic – various intangibles often fit together to create extra value.

And, most important of all, they are changing how the economy – and how government – works, even though most economic analysis and accounting simply ignore, or at best cope badly, with intangibles. To understand why this matters, we need first to take a quick look at the recent history of how government took stock of its physical assets

A brief history of RAB

In the early 1990s the UK government began considering part of public spending as investment – and what they owned as a result as assets. Resource Accounting and Budgeting (RAB) – as the new approach was called –  was initially seen largely as a set of technical accounting changes, pioneered by an energetic public finance expert called Andrew Likierman, who was then a managing director in the Treasury and head of the Government Accountancy Service.

Speaking to CSW, Likierman – now a professor at the London School of Business, with a knighthood for his work transforming government accounting – said the purpose of RAB was “to improve the financial information for making the best use of scarce resources, including managing the government’s fixed and working capital”. He added that it also aimed to “provide better information for the accountability of government finances, particularly for parliament” and “a better means of linking financial inputs to outcomes and to remedy the problems caused by purely cash-based accounts”.

But RAB was also seen by the Conservative government as useful in its continuing quest to privatise government assets or contract out services to the private sector. As services were put out to tender through schemes such as Compulsory Competitive Tendering in public services and Competing for Quality in government, they needed much clearer financial accounts, which RAB sought to provide.

Resource accounting introduced two essential changes to public finances. The first was fairly minor for most public bodies: it was to account for what they were owed, and what in turn they owed, at year end. The second aspect of resource accounting was potentially much more important: accounting for what government and public agencies owned – their assets.

This issue had come to the fore during the big privatisations of the 1980s. During these privatisations – and in some cases not until sometime after sell-offs had taken place – it became apparent how much the big utilities such as British Gas, British Telecom, and electricity were really worth.

Take the examples of BT (left) and British Rail. At the time of their respective sell-offs, neither organisation had any real idea of what their assets were or what they were worth. Both owned huge amounts of land, some of which could be freed up to be sold as very valuable development plots. Some of the windfall profits made by privatised public utilities came from simply selling off valuable land that they didn’t even really know they owned until after they were privatised.

New Labour, new assets

When the New Labour government came to power in 1997, resource accounting was already well under way, but new chancellor Gordon Brown planned a very different way of using it. He and his team intended to use it was a way of enhancing public assets, not selling them off.

Labour was concerned that during the successive Conservative governments from 1979, the assets of the public sphere had been neglected. Schools, hospitals and prisons were seen as being in a parlous state, with insufficient resources going to maintenance and replacement of often old and decrepit buildings.

This was not just a political critique of previous policy choices but a systemic evaluation – the old way of doing public finances simply in cash terms didn’t work any more, if it ever did.

So New Labour introduced wholesale reform, with one of its aims being to properly account for, use and maintain public assets. RAB provided part of the framework but another major innovation was to split public spending between operational running costs and investment in buying and maintaining capital assets, like buildings and computer systems. Schools and hospitals were to be seen as assets.

New Labour famously didn’t entirely abandon using RAB as a tool for privatisation or outsourcing in various guises, as the private finance initiative, the London Underground public-private partnership and privatisation of the Defence Evaluation and Research Agency to form QinetiQ illustrate. But the focus definitely shifted to RAB being used as a part of a set of tools intended to rebuild the public realm. They even initiated a “National Assets Register” – a kind of government Domesday Book – that would list every capital asset the government and public sector owned. It was originally published in 1997 and then updated in 2001 and 2007.

In 2009-10 the National Assets Register was replaced with the Whole of Government Accounts (WGA), which consolidate the audited accounts of over 7,000 organisations across the UK public sector including central government departments, local authorities, devolved administrations, the NHS, academy schools and public corporations.

In 2016-17 the latest WGA reported the public sector owned £1.17 trillion in assets, the major parts of which were property (£420bn) and infrastructure (£596bn).

From tangibles to intangibles

In one sense there is nothing especially new in the discussion about intangibles. Two decades ago Professor Diane Coyle, of the Department of Politics and International Studies at the University of Cambridge, wrote a book called The Weightless World, which foresaw a lot of these developments.

“In one way, the distinctiveness of public assets is an old story,” she tells CSW. “The state owns some unique tangible assets for which no market exists – think of all the heritage sites such as the Tower of London or Stonehenge, for instance”.

But intangibles are increasingly important. “The potential scope of intangible public assets is enormous, and what’s more their value could be increased enormously if their importance were recognised,” she says. A clear example of this can be found in the NHS.

In 2014, consultants McKinsey & Co undertook an assessment for the Department of Health on the potential for “digitally-enabled processes” across acute, primary and community care and public and mental health.

They identified somewhere between £8bn and £14bn in savings from the application of digital. But to achieve this would have involved spending around £4bn on initial technology, and more than a further £1bn in training and adoption costs. Ongoing running costs were estimated at between £2.3bn and £3bn a year. That is about 2% a year.

All these investments are mainly in non-medical, basically administrative areas such as booking systems, records of patients and drugs, with only relatively small medical areas like remote monitoring of patients.

“The distinctiveness of public assets is an old story. The state owns some unique tangible assets for which no market exists – think of the Tower of London or Stonehenge”
Professor Diane Coyle

At the time the McKinsey report suggested investing an extra £5bn on digital. The total DH spending on assets – that’s all capital expenditure on buildings, equipment, IT, etc – was just under £5bn. NHS Digital, the body charged with digital strategy and innovation, received just £310m.

Fast forward to September 2018. Matt Hancock, newly in post as health and social care secretary, set out a vision for “a more tech-driven NHS” at the NHS Expo event. His vision included not just digital innovation in administrative functions but in health and social care itself, and it came with £687m of funding for a number of schemes including installing new electronic systems in hospitals and rolling out “global digital exemplars” to pioneer new ways of delivering care.

This investment is welcome, but it is nowhere near the scale envisaged by the McKinsey report. If such investment did take place, it would start to create huge intangible assets of data, apps, human capital and patents.

It would still be nothing like the ratio of intangible to tangible assets of the huge tech giants, but it would start to be a really substantial element of the NHS and social care architecture – and something that would need accounting for and managing.

Ensuring that the public sector can account for its intangible assets to inform the best value spending decisions is one of the opportunities of reform, but it also responds to some of the threats faced by government – threats that can be summarised in one word: Wannacry.

Wannacry was a ransomware cyber attack that took place in May 2017. It affected many organisations worldwide (shown by the map, left), but one of the worst affected was the NHS. It locked computers, denying access to vital data and demanded a payment – in Bitcoin – to unlock them.

According to a chilling National Audit Office report into the attack, published in October last year, one-third of NHS England trusts were affected, seriously disrupting services. Nearly 20,000 appointments and operations were estimated to have been cancelled as a result. It was only sheer luck – the accidental triggering of a kill-switch in the Wannacry ransomware – that prevented even bigger disruption.

The NAO report, and the NHS itself, concluded that relatively simple steps to protect its computer systems could have prevented such an attack.

But what is important here is not the computer systems themselves but what was on them: the massive intangible assets of the NHS patient and process data that keep the system running. Without it, the whole system would have been massively disrupted – only luck saved it.

Some of this data still existed as physical records in patient files, but a lot only existed digitally as appointments and such like. This constituted real “value” to the health service system and its destruction would have had dire consequences.

The value of the software that was vulnerable was trivial compared to the value of the data and process assets, which emphasises the “scalability” issue with intangibles – it creates potentially huge leverage from small investments, which can work for good or ill.

To put this in context, a leaky hospital building (physical asset) might at most harm a few hundred patients. Denial of access to patient records and appointments (intangible assets) due to leaky computers might harm tens of thousands, far more quickly.

So just as crumbling hospital buildings helped spark the New Labour reforms of the public accounting for physical assets, Wannacry ought to be a wake-up call about the need to protect investment in intangible assets in the future, as they become an increasingly important part of the government and public service architecture.

This is recognised in government and sources from the Treasury and the Cabinet Office told CSW that work is underway to address the issue. It is, however, at a very early stage of development. The Office for National Statistics is likewise trying to develop better ways of measuring the intangible economy.

As Cambridge’s Professor Coyle puts it: “Tremendous public value could be realised by linking public datasets and combining these with the trust – or social capital – embodied in institutions like the NHS or BBC or local schools. The government should not be thinking about intangibles only in terms of saving money or defending against risks but also in terms of the benefits that the proper stewardship of intangible assets might deliver.”

Read the most recent articles written by Colin Talbot - Productivity puzzle corner: Can you dig it?

Share this page