THE ASSESSMENT - PUBLIC-SECTOR INVESTMENT

A combination of privatization and public-sector expenditure constrain ts has given rise to a substantial reduction in public-sector investme nt. Private ownership offers incentives for efficiency in capital inve stment and forms of equity finance which are particularly needed in de veloping countries. To avoid distortions between public-and private-se ctor investment, similar investment criteria should be employed in the two sectors. In particular risk characteristics and premiums should b e the same for equivalent projects. However, in those areas where publ ic ownership is most relevant, namely natural monopolies, regulation i s required and the private sector will not in general employ appropria te investment criteria. Furthermore, the private-sector cost of capita l may be in excess of that of the public sector for distribution and i nterconnectedness reasons. Careful consideration needs to be given to institutional design to ensure that the private-sector potential is fu lly realized and to achieve efficiency in public-sector investment whe re it is required. The paper points to a form of public ownership whic h has strikingly similar properties to regulated private ownership and allows appropriate choices of investment to be implemented.