The role of public funds

I was reminded the other day of a piece of work I looked at several years ago when Governments were first intervening to make broadband widely available which considered the role of public funds in general in commercial projects.

The general rule of thumb in Europe is that public money should only be used where there is evidence of market failure, and even then the funds should only be made available in a manner that minimises the market distortion.

The role of Public Funds

The role of Public Funds

The image above is a very simplified attempt to show the degrees of intervention, balancing some measure of commercial return from the private sector with an arguably more abstract measure social or economic return for the state.

Setting aside the role of critical national infrastructure, which may be commercial viable but the social or economic value is so high its considered too risky to be left solely in private hands, the layers consider the typical types of intervention the state might make.

Simply promoting the sector may be enough to encourage economic activity. Failing that providing some form of investment underwriting may encourage investors to take the plunge, assuring investors that if things are as bad as they fear the state will offset at least some of their losses.

If that doesn’t work, the state could consider co-investing – Government’s are naturally more patient investors so this may provide the assurances other investors need. This is less common in the UK but has been used effectively in part of Europe.

If none of this works, then grants may be necessary. In essence, a grant is co-investment that the Government writes down the principle and forgoes any return from the outset, and is therefore considered the most distorting type of public intervention short of nationalisation.

And if all else fails, and the social or economic need is sufficiently high, then it may be necessary to nationalise the industry.