THE power and influence of money makes finance a very critical function and concern anywhere, ad infinitum. Governments and international corporates that have either misused or fallen short of financing their operations have collapsed like Sri Lanka recently, leading to widespread protests and disruption to everyday life.
Meanwhile, private firms like Lehman Brothers, a bank with an asset base of $639 billion as of May 2008, went bankrupt under the pressure of finance, or the misuse of it. Such is the gravitas of finance or capital.
In truth, there is neither public nor private finance, these terms are prefixed to show who has claim or ownership over this essential nerve function at a particular time.
To suggest that there is public finance is to merely propose that such finance is of government use and function at that time.
Likewise, private finance or capital generally refers to funds managed by commercial banks, wealth funds, stock markets and other investable institutions worldwide. These are funds not raised by or for expending by government.
Private capital, in fact, is often referred to as haute finance partly because of its ability to traverse the globe in a matter of minutes, depending on the returns or profit to the owner.
Private finance has led to two immediate things in recent memory: firstly, the economic collapse of nations simply because the environment was not favourable for profit making. This unrelenting pursuit of profit is often referred to as moral hazard.
For example, Zambia was forced to pay excessive interest on its foreign loans (the Eurobonds) simply because the country was said to be a risky destination for debt.
That misperception, right or wrong, while hurting the normal citizens of the country made profit for the Bond holders. This is not to deny the obvious benefits proffered by finance on national economies, whether more hospitals, better salaries and pension, to mention a few.
Secondly, due to this unrelenting pressure of private finance governments have been forced to enact laws and harmonise those laws across international borders. Such regulations are not always enforceable across international borders and most governments are still held captive by private capital. Even within countries it may be difficult to enforce regulation so that possible damage from private finance is limited.
For example, after the 2008 global economic crisis, the United States enacted The Dodd-Frank Act in 2010 to protect “small capital” and make banks pay penalty for wrong actions.
But this was after banks had already made exorbitant profits and paid themselves huge bonuses.
As it stands, there is really no law to hold investors accountable when they withdraw funds from foreign markets suddenly and cause economic chaos in those countries.
For instance, it was difficult for Western governments to stop the Eurobond holders from exaggerating the domestic risk profile of Zambia.
This misperception largely drove the exchange rate and value of the Kwacha on a sliding slope and had an impact on inflation, price of commodities and even impacted to a greater extent, the outcome of the country’s elections.
It was however easier for host Western governments of the private financiers (creditors) to instead propose meetings and resolutions through international finance organisations such as the International Monetary Fund (IMF). After all, private capital when given as loans to other countries earns income for the lender’s government through taxes on foreign investments.
This is to say, if a nation borrows from private investors abroad, interest and fees paid on those loans will benefit the investor’s home country.
From this standpoint, it would be difficult for the host government to request its financiers to stop lending in a toxic manner because those loans provide taxable income for their government.
What is perceived as private capital in one nation provides taxable income in the host country. Furthermore, when government borrows private capital domestically or abroad, that private capital falls in the public finance category because it is in government hands and intended for public use.
Private capital obviously has its benefits and clear downsides. The downsides are not entirely the cause of private financiers because, as long as they are assured of favourable returns, they will direct funds into a given environment that provides the required returns.
It is the responsibility of the borrower to use every available tool at their disposal to understand the terms of the facility they are accessing and thereby avoid default or being taken advantage of.
This intersection of private-and-public finance not only happens when borrowing as will be seen in part 2, but looks at the overall utilisation of funds and the accompanying benefits to both government and the citizens.
