The assessment: public-sector investment

Abstract

A combination of privatization and public-sector expenditure constraints has given rise to a substantial reduction in public-sector investment. Private ownership offers incentives for efficiency in capital investment and forms of equity finance which are particularly needed in developing countries. To avoid distortions between public and private-sector investment, similar investment criteria should be employed in the two sectors. In particular, risk characteristics and premiums should be the same for equivalent projects. However, in those areas where public ownership is most relevant, namely natural monopolies, regulation is required and the private sector will not in general employ appropriate investment criteria. Furthermore, the private-sector cost of capital may be in excess of that of the public sector for distribution and interconnectedness reasons. Careful consideration needs to be given to institutional design to ensure that the private-sector potential is fully realized and to achieve efficiency in public-sector investment where it is required. The paper points to a form of public ownership which has strikingly similar properties to regulated ownership and allows appropriate choices of investment to be implemented.