Download 11 Investment in the public sector

11 Investment in the
public sector
© John Tribe
© John Tribe
Learning outcomes
• By studying this section students will be able to:
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identify the sources of public sector investment
identify different types of public sector investment
describe different methods of public sector investment
appraise public sector investment projects
identify public sector incentives for private sector
investment
– understand private public partnership agreements
– identify sources of funds for public sector investment
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Sources
• National level
– government channels leisure and tourism
investment through public corporations,
quangos such as Sports Councils and
government departments
• Local government
• Supranational level
– e.g. the EU
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Types
• Buildings and land
– E.g. parks, leisure centres and museums.
• Plant and machinery
– E.g. playground apparatus, computerized
booking systems and canal lock equipment.
• Infrastructure
– E.g. roads, railways and airports, water and
sewerage, power and telecommunications.
• Research and development
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Infrastructure
• Piarco International
Airport, Trinidad,
Caribbean
• Check-in at Rail
Station for Hong Kong
Airport
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Methods and aims
• Methods
– projects which are wholly public sector-financed
– projects which are jointly financed by the public and
private sectors
– private sector investments which are eligible for public
sector investment incentive grants.
• Aims
– provision of goods and services which have
significant public benefits, but which might not be
profitable enough to attract private sector investment.
– economic development or regeneration of a particular
area.
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• Public-funded
restoration projects
on the island of
Chios, Greece.
• Aims
– Preservation of
cultural capital
– Economic
regeneration
– Provision of jobs
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Investment appraisal
• Cf private sector
• Cost–benefit analysis
– all the costs and benefits of a project are
identified and weighed up, including social as
well as private ones.
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Cost / benefits of canal restoration
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Investment incentives
• Governments offer incentives to encourage
investment particularly:
– in areas of high unemployment
– where there are clear social benefits offered by a
scheme
– where structural changes in the economy have led to
geographic areas of economic decline (for example
inner city decline, rural decline etc.)
• Incentives can include
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matched funding
tax relief
subsidised loans
simplified planning procedures
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Sources of funds
• Sources of funds for public investment
include:
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operating profits
taxation
borrowing
national lotteries
Public Private Partnerships (PPPs)
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Funding projects
• Restoration of Pottery
near Ironbridge,
Shropshire UK,
financed by
– Lottery Funding
– Charity
– AWM (Local
Government
Consortium)
– EU Regional
development fund
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Sydney Opera House
• The first estimates for the
costs of the Sydney
Opera House were $7
million.
• An appeal fund raised
about $900,000
• The rest of the $102
million that the Opera
House ended up costing
came from the profits of a
series of lotteries.
(Top photo courtesy of Sydney Opera House)
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The public sector investment
debate: Cons
• The public sector is not a good interpreter of
people’s wants and thus often invests in ‘white
elephants’.
• The public sector is not good at ensuring
efficient use of funds and tends to allow waste.
• Public sector investment causes an increase in
taxation or public borrowing.
• Public sector investment ‘crowds out’ private
sector investment.
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Opportunity Cost of Public Sector
Investment
• An increase
in public
sector
investment
means either
– A reduction
of other
expenditure
(BC)
– Or an
increase in
taxes (YZ)
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White Elephants?
• Concorde: The
supersonic
plane built with
French and UK
public funds
makes its last
journey by boat
to a museum
– Waste of
money?
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The public sector investment
debate: Pros
• There is insufficient incentive for the private
sector to invest in public goods.
• The private sector under invests in goods which
have mainly social benefits.
• The private sector may not be able to undertake
the finance or risk for very large projects.
• Public sector investment can help regenerate
parts of the economy which have suffered from
restructuring.
• Public sector investments can generate jobs
when unemployment is high.
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Review of key terms
• Infrastructure =
– construction needed to support economic development.
• Cost–benefit analysis =
– full analysis of public and private costs and benefits of project.
• ‘City boosterism’ =
– investment in projects to regenerate city centres in economic
decline.
• European Regional Development Fund =
– EU fund for projects and infrastructure to bring jobs to
designated areas.
• Opportunity costs of public sector investment =
– alternative uses the funds could have been used for
• Public Private Partnerships (PPPs) =
– where governments contract a private company to finance,
design, construct, operate and maintain a project in return for
future income.
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11 Investment in the
public sector:
The End
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