Dag Detter on Restructuring the Swedish Government’s Portfolio of Public Commercial Assets

Introduction

Beset by economic crisis in the late 1990s, the beleaguered government of Sweden faced pressure to sell off public commercial assets in order to help pay off its debts and put those assets in a position to be run more productively. 

Reluctant to privatize state-owned companies, the Social Democratic Prime Minister decided instead to reorganize the ownership structure of government assets. Under this plan, the first such attempt by a developed economy, the government would consolidate the businesses it owned under a single leadership and allow them to be managed as if they were privately owned. Placed on a stronger footing and managed by professionals on behalf of the government, the companies could then return a yield to the taxpayer. 

The Prime Minister of Sweden tapped Dag Detter to oversee this restructuring effort.

Mr. Detter proposed that the government-owned companies be placed in a holding company - a national wealth fund that would manage them on behalf of the taxpayer. 

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Sweden In The Late 1990s

Aiden Singh: Sweden experienced a series of economic shocks through the 1990s - a speculative attack on and relinquishing of its fixed exchange rate regime, a real estate crash, and a banking crisis. Moreover, the nation’s public debt was becoming unsustainable.

During this period, the Swedish government was the nation’s largest owner of commercial enterprises measured by both number of employees and value. At the time, how were Swedish public assets managed?

Dag Detter: Like in most countries, Sweden’s government-owned companies were seen simply as an extension of the Swedish government’s policies.

Aiden Singh: You’ve stated that many governments don’t even have a full accounting of the public assets they own. In the Swedish case, did the government have a full accounting of what it owned?

Dag Detter: No, Sweden and most countries around the world do not have proper accounts as required for corporations.

Just as a company or a household would look at their balance sheet when making investment decisions, so should a government. 

But a proper balance sheet was unavailable.

Aiden Singh: Many during this turbulent period were calling for the government to sell off (i.e. privatize) the companies it owned in order to get its debt under control and allow for more productive use of those assets.

But the government opted instead to reorganize its ownership structure for its assets, allow them to produce income for the taxpayer, and use that income to help get its fiscal situation in order. 

Can you tell me a bit about the political situation during this time - who pushed for privatization and who pushed for restructuring the government’s portfolio rather than selling it off?

Dag Detter: After a recession in the 1980s, governments focused on selling public commercial assets such as state-owned enterprises (SOEs) and real estate in the hope that this would improve their efficiency and productivity, generate cash for much-needed capital expenditures, remove the related debt from the government balance sheet, and avoid a conflict with public sector borrowing targets.

This recipe became part of the standard reform package promoted for crisis-wracked countries by Washington, D.C.-based institutions such as the IMF, the World Bank, and the US Treasury.

Government ownership has historically given rise to complex governance and regulatory risks that often prevented SOEs from creating optimal value for the economy. Inefficient SOEs and other public assets, such as real estate that remains underdeveloped or mismanaged, create a drag on the economy and crowd out private sector initiatives and foreign direct investment. 

In the worst case, SOEs are used for political patronage or self-enrichment, which erodes the trust of citizens, international investors, and potential partners. 

Moreover, government ownership is often decentralized along ministry lines, producing an inherent conflict of interest between the ministry’s ownership of a company and its regulatory responsibility, which can add to the suboptimal use of public resources. 

Strong governance of public commercial assets is further constrained by a lack of transparency and a lack adherence to international accounting standards.

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Appointment To Lead The Restructuring Effort

Aiden Singh: So the Prime Minister decides to restructure the government’s assets and place them under a single management that would operate the enterprises on behalf of the government. 

And he taps you to lead this restructuring effort.

Prior to being selected to oversee this restructuring of the public commercial asset portfolio and run Stattum, you were an investment banker in London. 

Tell me about the selection/vetting process you went through when the government was looking for someone to lead this endeavor.

Dag Detter: The Prime Minister, a die-hard Social Democrat, wanted a professional from the private sector to turn around the vast portfolio and run it ‘as if privately owned’ to avoid wholesale divestures. (The word ‘privatization’ was banned from day one as this would never win any election.) 

The relationship between him and me became a successful working relationship based on mutual professional trust, putting any ideological differences completely on the side.

Aiden Singh: So you were a Director at the Ministry of Industry and you were also President of Stattum. Just to clarify, were those appointments taken up simultaneously?

Dag Detter: Yes. We didn’t manage to put every asset into the holding company, Stattum, so to be able to oversee a restructuring of all the state-owned companies - those within the holding company and those that remained outside of it - I was appointed both head of the holding company and also a director at the Ministry of Industry.

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Early Days In The Role

Aiden Singh: So you’re selected to oversee this restructuring of the public commercial asset portfolio and lead Stattum. 

What did your early days in this role look like? What were the first things you pushed to get done?

Dag Detter: The first issue was to get a real understanding of the portfolio – a consolidated financial statement – as if a proper holding company.

Before I came in, nobody knew the value of the portfolio. Nobody knew the value of sixty-something companies that weren’t publicly listed on the stock exchange because the government didn’t have proper financial statements for the portfolio of state-owned enterprises or its real estate holdings.

So it was a shock when it turned out that the value of the government’s portfolio of companies was much bigger than the biggest private Swedish family owner of businesses - the Wallenbergs. So when leading the restructuring effort, I was running a portfolio that was bigger than the Wallenbergs, who were the people that had basically brought me up in banking.

Just seeing the sheer size of the portfolio, being the biggest corporate owner in Sweden, significantly larger than any of the private owners on the stock exchange surprised everybody. The state-owned enterprises most likely represented around a quarter of the domestic business sector.

The result on a financial and human scale was massive.

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Assets Overseen By Mr. Detter

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Breaking The Link Between State-Owned Banks & State-Owned Enterprises

Aiden Singh: So you dealt with the entire government portfolio apart from the state-owned bank (Nordea). You said this arrangement, though not your ideal scenario, ended up being pretty reasonable. Could you elaborate on why?

Dag Detter: At first I was disappointed about not managing Nordea. But in the end what I realized is most important - and what I recommend to every country I advise - is to take away funding of state-owned companies from a state-owned source because such funding is never competitively allocated.

I, in the Swedish case, tried to put the state-owned bank in a separate holding vehicle.

Ideally, you want to sell it off because it’s no good to have a state-owned bank. But the first step can be to put such a bank, let’s say, under the Ministry of Finance or under the central bank, just so you can get an arms length separation between it and the portfolio of operational state-owned enterprises. 

And then I take the big operational companies and try to outsource their funding away from the state-owned bank to the capital markets. So they borrow on the bond markets and receive a debt rating. 

A first benefit of doing so is that the companies get more competitive interest rates and cost of capital.

Second, this issuance of bonds helps deepen the capital markets, which, though it wasn’t an issue for Sweden, can be particularly helpful in developing countries.

A third benefit is that, once the company has bondholders, it has additional stakeholders who now have an incentive to keep an eye on the company’s management. 

And a fourth benefit is that the state-owned bank is then freed to start lending money to small and medium enterprises (SMEs), instead of state-owned enterprises. In a smaller country this can be very important. For example, we’re trying to implement this in Ethiopia right now. And there this is very important because the small and medium enterprises barely have any access to credit - most of the credit from the state-owned bank goes to state-owned enterprises. If we can instead outsource the borrowing of state-owned enterprises to the bond market, the country can free up that lending for private sector SMEs, which helps grow the economy.

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The Mechanics Of Transferring State-Owned Companies Into A Holding Company

Aiden Singh: From a legal perspective, the process of transferring assets into Stattum, how’d that go and how long did it take? Was it a simple matter of passing legislation? 

Dag Detter: The PM made each appointment to the cabinet on the condition that the candidate to lead a ministry surrendered the government companies that ministry owned. For those that managed to resist this bargaining, he simply abolished the independent legal structure of each department/ministry and created one singe legal entity and hence a single owner of all assets.

An attempt was made to transfer all shares of all the companies into Stattum. But this proposal never reached the parliament floor and was stopped before it became a bill.

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Starting With Non-Consumer Facing Assets

Aiden Singh: How did you prioritize your efforts during your time leading the restructuring? How did you decide what to focus on and when?

Dag Detter: The Prime Minister had a very clever way of approaching this. He had me start with companies that were not consumer facing. So railways and the post office, we tried to work on as late as possible.

To be able to demonstrate some success and show that we were actually capable of executing successful turnarounds, we started with industrial companies first. 

I was looking at it from the perspective of what’s easiest to turn around, what’s timely, where’s the biggest need, etc.

But the PM thought about it very differently - ‘hold off on restructuring the companies that touch my electorate’.

So the railways and the post office were the companies we restructured last.

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Managing People

Aiden Singh: I imagine staffing was a major challenge - Sweden was placing the literal wealth of the nation under a single command and tasking you with earning a yield on behalf of the nation’s citizens. 

How much of your time was dedicated to putting the right people in the right places? How much of a challenge was it to find the right people? How long did it take? And where did you pull staff from?

Dag Detter: It was a mix of people with extensive experience from government and from the private sector and the financial markets.

We were fortunate in that there are always good people with great experience that are keen to make a contribution to do something good for their country.

This is something I have found true also in almost every country. Good people are willing to take a break from their career and do a service to their country, even if that means leaving a lucrative job in London or New York.

Aiden Singh: What sorts of people with which kinds of skills did you look for? I’d guess it was largely people with a background in investing?

Dag Detter: We built a team modelled around what any private investor or private equity fund would have with sector teams and specialists to support each team.

Aiden Singh: Tell me about your leadership style. You’re overseeing this massive restructuring effort, there’s lots of moving pieces, and there’s tens of billions of dollars in assets involved. How’d you approach it?

Dag Detter: We started by introducing private sector discipline and an equity culture with value maximization as the sole objective.

This meant first of all the need to recruit professionals at every level, starting at the ownership level and continuing through the Non-Executive Board members and the corporate management for all the holdings. 

This led to more than 85% of the Non-Executive Board members and 75% of the CEOs and senior management in the portfolio being replaced over a three-year period, in total several hundred people.

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Personal Challenges

Aiden Singh: For you personally, in the early days on the job, how much of what you were dealing with did you feel you were immediately qualified to handle and how much learning on the job was there?

Dag Detter: Apart from Temasek in Singapore, there was no real precedent to learn from and not one single person that could straddle the entire spectrum of challenges that were thrown at us.

Fortunately, I had a great team and managed to recruit more as we went along. 

We had to learn from each other and from every professional expert that was able to support us in each individual case.

Aiden Singh: So you’re working with a vast array of companies across different industries. You’ve got everything from forestry to telecommunications to airlines, railways. Do you believe your background as a banker put you in a good position to go in and turn around all these companies across different industries?

Dag Detter: Yes. I had been a banker for decades prior to taking up this role, and so I had tried to do these things from the outside. So I was quite familiar with these companies.

And also, I was able to get really good help from advisors.

So the difficulty was really to be able to determine what was good information and what was not.

Certain sectors, of course, I was more or less familiar with.

So forestry, for example, was pretty new to me. If you’re a forestry banker in the Nordic region, that’s all you do because we have such big companies in that industry and in those days it was a huge part of the stock market. And I hadn’t dabbled in that. So I had to learn a lot about forestry. 

The pharmaceutical industry was also something I was not very familiar with. 

Defense, telecoms, and transportation were more familiar territory for me.

Aiden Singh: I imagine there was a sense of urgency in your efforts given the difficult fiscal situation the government was facing. How much pressure was there to get these public assets producing returns in a hurry?

Dag Detter: When making such a radical changes that affect the entire society, you really only have about 18 months until the Overton window will close without mercy.

Aiden Singh: How much sleep are you getting in those early days?

Dag Detter: Not much. But I was young and just blessed with my first child, a son. A year later my second child, a daughter was born. It was quite intense.

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The Political Challenges

Aiden Singh: Did you face resistance to your efforts to restructure the Swedish public asset portfolio? Where’d the resistance come from? Perhaps you faced some political opposition?

Dag Detter: Restructuring government-owned assets is all about political will, creating and swiftly using a window of opportunity, the ‘Overton window’, the range of policies acceptable to the mainstream population at a given time.

The PM was a formidable politician, if not ruthless. Even the unions supported the effort at first and we managed to unite behind the slogan: “Valuable Companies Create Valuable Jobs”.

On the whole, the turn-around was a resounding financial success for Swedish industry and business climate, the Swedish economy, and the Swedish taxpayers.

Naturally, we made mistakes but on the whole it worked out well for all stakeholders.

But managing public commercial assets is not something that wins elections.

Political power is built on ‘winning friends’ and the perception that the individual is better off than before. When the wind turns and window closes, somebody needs to be sacrificed.

Aiden Singh: I imagine during this time you are interacting on some regular basis with politicians and updating them on developments. 

How did that relationship between you and elected officials play out? Was it arms-length or did they regularly have input for you?

Dag Detter: It is always a constant struggle to keep short-term politics out of the equation. In the beginning when the need for non-tax revenues and debt sustainability to put Sweden back on track were critical, there was little friction. But as the results came through and the world started to recognize the turn-around, the table turned.

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The Restructuring Effort

For example, Telia, the Swedish telecom incumbent, was ultimately listed on the Stockholm Stock Exchange and then merged with a Finnish incumbent. At the end of this restructuring, the Swedish and Finnish governments jointly retained a majority interest in the newly merged company while the rest of the shares were publicly listed.

Another significant initiative included the three-way merger of the listed companies constituting SAS, the national airline controlled by the three Scandinavian governments.

We transformed SJ into one of the more profitable rail operators in Europe.

There was also a sale of the US$ 2 billion shareholdings in Pharmacia & Upjohn listed on the NYSE.

Additionally, nearly one-third of the assets within all the holdings were ultimately determined to be non-core and so were subsequently privatized at full value. The portfolio was reduced by almost a third during these three years including SEK 140 billion from divestitures. The total level of divestitures (‘privatization’ was a banned word) were nearly five times the amount that was sold during the eight years prior to the formation of the Social Democratic government when divestitures was the main policy objective of the previous conservative government.

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Public Sentiment

Aiden Singh: How did public sentiment develop over this three year period when this restructuring was taking place? Is there polling data on this?

Dag Detter: No, there was no polling data on this specifically. 

But what the politicians really cared about was what was in the news. This was 25 years ago, so there was only television mainstream media. And what I found very interesting was they were so keen to see what the national news was saying. And I realized how close attention they paid to this. It was like a banker watching the stock market. It was how they measured if we had done a good job and had communicated well. 

And then we would create a response - ‘OK we got whacked [by the media] in this area, so how do we respond’. So then I would have to work over night or very early in the morning. We met often very early in the morning to go through the morning news and then figure out how the PM or I should follow up. 

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Producing Results

Aiden Singh: How quickly did this restructuring effort start producing a yield for the taxpayer and contributing positively to the government’s fiscal situation?

Dag Detter: Just communicating and changing the perception of public assets being viewed as an integrated piece of policymaking to being viewed as a fiscal tool for improving the wealth of the country had an enormous impact on the performance of each company and the entire portfolio.

Then adding professional non-executives and managers to lead each company created a very powerful boost that produced concrete results within six months.

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Measuring Success

Aiden Singh: How are you measuring the success of your restructuring effort? Are you trying to beat the S&P500? Or do you have some internal metrics you’re tracking?

Dag Detter: It was mainly value. We tried to have that as the main benchmark.

The trick with this is to have something that is easy for people to understand, including the politicians, whom you need to keep happy. You have to make things easy to communicate - it helps the Prime Minister, who needs to be able to explain what you’re doing to everyone.

Using growth in the value of the assets as the metric was a break with policy globally which had been that state-owned companies are just an extension of policy. 

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The Results

Aiden Singh: I know you consider the effort a tremendous success. Can you tell me about the accomplishments of the restructuring efforts, its returns, and the benefits it's provided to Swedish taxpayers? 

We also took in USD 7 billion in dividends, which helped boost productivity, economic growth, and debt sustainability, as well as create fiscal space. 

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After The Restructuring Effort

Aiden Singh: What became of Stattum and your restructuring efforts after your time overseeing them ended?

Dag Detter: As soon as our restructuring effort was done, the entire structure was dismantled and the holding company was closed down. 

In the following decades, the government portfolio underperformed the local stockmarket and taxpayers would have been better off having that wealth in a diversified fund.

Aiden Singh: So Stattum is no longer in operation?

Dag Detter: It’s no longer in operation. The reason for it is that Sweden sold off all the assets that were held by Stattum.

Aiden Singh: Why was the entire structure dismantled? Did something change politically? 

Dag Detter: This was most likely due to the fact that the fiscal pressure was now off the government. The Overton window had closed and the Social Democratic party now wanted to take back control of the companies and appoint their people as Non-Executive Directors to the companies instead of the professionals. The private sector discipline left the building and politics were back.  

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Fatherhood

Aiden Singh: You mentioned that in those early days assuming control of the government portfolio of assets, you weren’t getting much sleep. How did you balance family life with the demanding task of overseeing Sweden’s public wealth?

Dag Detter: I didn’t find it very troublesome. And I think the reason is that, compared to being on the ‘sell-side’ as an investment banker, on the ‘buy-side’ I was much more in control of my calendar. So I managed to have a great time with my kids. I got home and put them to bed pretty much every night. I never took working dinners with people - I just had non-dinner meetings. So I got home and put them to bed. And then I’d start working again. For me, it felt like a win-win. I took the major responsibility for the kids because I love kids and had so much look forward to being a father. So for me, this was the biggest time of my life actually. 

It helps if you can decide your calendar.

Aiden Singh: Thanks for the life advice.

Dag Detter: My pleasure.

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In part two of my conversation with Dag Detter, we discuss the untapped potential of governments’ commercial assets, how it can be unlocked, and how doing so could fund transformations of public infrastructure and services.

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