For most of my academic career, I’ve been working on (more precisely, trying to demolish) the idea of private investment in public infrastructure, exemplified by the Private Finance Initiative in the UK and the Public Private Partnerships program in Australia. Here’s my first published article on the subject, from 1996. I conclude that
The current enthusiasm for private infrastructure, like the enthusiasm for public ownership which it replaced, has been based more on ideological beliefs in the virtues of one sector and the vices of the other than on any systematic economic analysis …Analysis of the relative performance of the private and public sector in different phases of infrastructure provision suggests that, in most cases, the private sector will be most efficient in the construction phase but the public sector will be best equipped to handle the risks associated with ownership.
Twenty years later, this analysis seems finally to have been validated. The UK Auditor-General recently reported that
Analysis of the 2012-13 Whole of Government Accounts (WGA) implies that the effective interest rate of all private finance deals (7%–8%) is double that of all government borrowing (3%–4%)
As a result of the excess costs, and some spectacular failures, bipartisan enthusiasm for the PFI has finally turned to disillusionment. Here’s the Telegraph, correctly putting much of the blame on New Labour. And, for balance, here’s the Guardian. There hasn’t been a similar admission of failure in Australia, but the flow of PPP projects has greatly diminished, and most new ones rely on a substantial component of public capital.
Unfortunately, the failure of private finance hasn’t led governments to resume the high levels of public investment that prevailed in the Keynesian era of the 1950s and 1960s. So, even with central bank lending rates at zero, there has been no real recovery in infrastructure investment. Apart from the direct effect of lower investment, there’s a strong case that infrastructure investment increases the returns from private investment in general and therefore stimulates growth.
I think this analysis applies more broadly. The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.
This raises the question of how the hypertrophied financial sector we observe has succeeded in displacing less costly alternatives. I plan another post on this but my short answer rests on regulatory and tax arbitrage. These, and not the efficient allocation of capital, are the key functions of Wall Street, the City of London and their various counterparts around the world.