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11 Investment in the public sector

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Learning outcomes• By studying this section students will be able to:

– 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 – matched funding– tax relief– subsidised loans– simplified planning procedures

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Sources of funds

• Sources of funds for public investment include:– 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