The knowledge economy, intangible assets and public wealth

By: Charles Price, Deputy Director at HM Treasury, United Kingdom

In a recent talk at the UCL Institute of Innovation and Public Purpose, Brian Eno said “I like bureaucrats…They get a bad deal because they don’t look as glamorous as artists. But actually what they’re doing is stabilising knowledge, keeping things running, and sometimes innovating quite radically”. A good example of this is the UK Government’s initiative to improve the measurement and management of public sector assets through its first Balance Sheet Review. The IMF wrote recently that “Once governments understand the size and nature of public assets, they can start managing them more effectively.” In 2018 the OECD highlighted the importance of “linking [such] information to economic and social issues – such as how the government sustains economic growth” in order for innovative financial management to drive change.

But there is value for taxpayers in the UK and around the world above and beyond these approaches. What government accounting statements miss a tricky accounting category known as “Intangible Assets”. In literal terms, these are things that you cannot touch, – assets like know-how, intellectual property, and data. These are often grouped together under the heading of Knowledge Assets. In accounting terms they remain very small. The UK, which publishes a balance sheet for the whole public sector – the most comprehensive exercise of its kind in the world – states that of its £2 trillion of assets just £36bn (2%) are attributed to Intangible Assets. This is drawn up in line with private sector accounting rules – International Financial Reporting Standards. In the private sector, there is a growing conversation about how these formal accounting rules miss out on a lot of broader intangible value, with the ICAEW noting that 84% of publicly listed companies is attributed to intangible value. And the companies that are prospering in today’s world of technology show an even high quotient of intangible value – the world’s five most valuable companies are worth £3.5 trillion together but their balance sheets report just £172 billion of tangible assets. 95% of their value is in the form of intangible assets. In October 2018, HM Treasury published a paper Getting smart about intellectual property and other intangible assets which made 10 recommendations on how the public sector can increase its focus on Knowledge Assets. Focussing on these can deliver social, economic and financial benefits for citizens and the Exchequer.

What causes this mismatch between public and private sectors? One perceived reason is that the UK public sector’s main investments are in land and infrastructure – schools, hospitals, roads. It is not a global technology business. However, in fact the UK and other governments around the world have a long track record of delivering ground-breaking innovation. The UK’s Ministry of Defence research laboratories re-purposed a military technology to create waterproof covering for smart phones. The Rwandan Ministry of Health is developing innovative logistics pathways using drones to deliver medical supplies in partnership with a start-up. Public servants in US government laboratories played key roles in developing microchips and the internet.  In many of these areas, rather than being a laggard in the generation of new technology, the public sector is ahead of the private sector. Under a broader definition of Intangible Assets, an EU academic project called SPINTAN, estimate the value of Intangible Assets in the UK public sector to be £150bn.

This is a critical time to be focussing on knowledge assets in the public sector. Recent technology booms – like social networking, the gig economy, and ecommerce – have had little input from governments, though there is an increasing discussion about appropriate regulation. The next generation of technology investments will be in fields like digital health, cyber security and transport – where governments often own underpinning tangible and intangible infrastructure. This is a time where there is a role for the public sector to both “stabilize knowledge and innovate quite radically” to use Brian Eno’s phrase, with a combination of social, economic and financial benefits. Reflecting these trends, HM Treasury is now preparing a strategy to implement the recommendations in its October 2018 report . This work will report later in the year.

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