Bad Accounting: The Fire Sale of Assets
Feb 27, 2011

Bad Accounting: The Fire Sale of Assets

We have an accounting problem. When we consider the assets of some jurisdiction like a city or a country we typically focus on the purely monetary assets. Non-monetary assets from public services to forests are given reduced emphasis in our accounting. This asymmetry in accounting leads to declines in the true value.

Nowhere is this so systematically an issue than in developing countries in resource sales. If a government sells a national resource such as the forestry, mining or drilling rights to a foreign company this increases the monetary income for that country. However, a non-monetary asset such as lumber or oil reserves is being depleted, often with significant side consequences. If the assets are sold for far less than they are worth the country is not increasing its wealth, they is decreasing it. Only in a monetary centric accounting is there a positive. Unfortunately, the monetary side is overwhelmingly the thing most considered.

A similar problem occurs in privatizing governmental assets. Time and time again, budgets get "balanced" by the fire sale of assets that provide short term liquidity but result in sometimes enormous net real losses. The true value is often difficult to measure, especially when considered in purely monetary terms, but no less real for this. For example, a service may do excellent work promoting egalitarianism or other social benefit but have a relatively small financial potential for profit. When such a service gets sold off, the government can only hope to recoup the market value of the financial potential. If these social benefit aspects are subsequently cut or diminished, there is a real loss occurring but it isn't easily quantified monetarily. Even then, the unilateral nature of government bargaining at a fixed time regardless of market conditions and players often means sales substantially below true monetary value, let alone social value. Throw in the endemic corruption in developing countries and the problem is even worse.

Rob Ford, Toronto's mayor, plans to do precisely this by privatizing a series of city of Toronto assets and services such that the budget will (possibly) become balanced. The rhetoric of course is that the privatized handling will be more efficient and save money. This is debatable and situation specific, but even granting it this is going to be relatively small and be long term differences. The reason the budgets get balanced in the short term is not because of more efficient private management, but because of a temporary exchange of an asset for money that balances the budget this year alone.

I don't aim to claim the true social values of any given government owned asset. I merely wish to establish that our asymmetrically monetary centric perspective tilts the accounting to preferentially value the monetary side of the equations with far too little consideration for other aspects. The result can be a dangerous propensity to engage in transactions that result in a net decline in wealth.  

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