This column is an opinion of Sara Hastings-Simon, Assistant Professor in the School of Public Policy at the University of Calgary. For more information on CBC Opinion Section, please consult the Faq.
With a series of high-level and struggling public investments in the oil sector, the “bitumen mess” at oil by rail and XL keystone, there is a temptation to generalize by considering that all public investments are bad.
At the same time, there is a strong push to invest in carbon capture and storage, with demands for future public capital in the tens of billions of dollars.
If the only lesson learned from failures is the risk of government involvement, then it will be too easy to see mistakes repeating themselves again. Instead, it is essential to clarify the role of government, what differentiates good public investments from those that become waste, and how to approach public investment to maximize results and avoid costly mistakes.
The theory of government intervention
Even neoclassical economic theory admits that there are “market failures”, or gaps where things go wrong in markets and government intervention is needed.
For example, private firms will underinvest in research and development because they get only part of the benefits of the resulting innovation, since other firms can copy the unpatentable innovation and thereby reap the benefits without having to invest upfront. There may also be challenges around developing infrastructure to deploy new technologies at scale – the “chicken and egg” issue for electric vehicles and charging infrastructure.
Other schools of thought see an even more important role for the government enabling innovation and economic growth, including direct support for radical technical innovations that solve a clearly defined problem.
Governments cannot stay out of markets because markets are unnatural, rather they are created and shaped by the choices governments make through laws and regulations.
The role of government in the private sector is not just a theory. It can be seen repeatedly throughout history.
In Alberta, one of the clearest examples of the role of government is the development of in situ mining technology for the oil sands, where critical investments in the development of a facility and in the trials were funded 100 percent by the government. Likewise in the fossil fuel sector, the shale gas revolution dates back more than 25 years. U.S. government programs and funding.
Government funding essential for the development and deployment of technology can be found behind everything from agriculture to smartphone or the computer you’re reading this story on.
However, the clichés about public investment – “governments shouldn’t be doing business” and “governments shouldn’t pick winners” – actually contain elements of the truth about how to invest wisely.
Don’t be in business
Public funding should not replace private capital, doing so – at best – only contributes to the profits of a private project. Instead, governments should be looking to do things the private sector cannot do. For example, dividing the risk in a project and assigning it to the entity – government or private sector – that can best manage it and enable investments and economic development that would not otherwise occur.
The key is to make sure the right risks go to the right player.
Governments are well placed to manage or hedge policy risks in their jurisdiction, as they directly control future policy changes, making it natural to take actions such as monetize future increases in carbon pricing today. They can also better hedge aggregate price risks in an economy-wide market, for example where low electricity prices might challenge individual producers but benefit the economy as a whole.
On the other hand, governments have little control over policy risks in other jurisdictions, such as US government decision on a pipeline license. Likewise, the risk of cost overruns for the construction of a privately managed project is beyond government control, as is the case with the Sturgeon refinery.
The appropriate allocation of risk must be accompanied by an equitable sharing of rewards to avoid creating windfall with public money.
The operator of the Alberta Electricity System renewable energy supply process managed to keep the market on the rise with the government taking the market risk, while leaving the direction of construction and the associated rise to the developers. Ensuring that the potential hike is evenly distributed can also help keep government out of the business role – if businesses really need government support, they will be more willing to forgo a certain hike in return.
Don’t pick the winners
Many of the recent investments that have encountered difficulties are instances where governments have directly chosen a ‘winner’ by supporting a specific business, project or approach, outside of a transparent and competitive process to find the best solution to the problem. a clearly defined problem.
Politicians can avoid this trap by sticking to setting a clear goal or direction of mission that the government supports. Defining the market challenge in terms of desired end goals then allows the private sector to respond with a wide range of options across technologies and approaches, rather than government presupposing the outcome.
Those within the government bureaucracy responsible for evaluating and comparing options should be isolated from politics and supported by external experts who can provide technical advice.
There are some lessons that governments can apply from the private sector. Two important elements are the structuring of the agreements to limit the overall downside risk – as illustrated in the case of oil by rail, the details of the contract are important – and the willingness to pull out and accept some losses. Just as no private investor has a 100 percent success rate, public investments should be judged on the basis of a portfolio where big gains should more than cover losses.
The recent spate of issues with Alberta government investments calls public investments into question, but rather than generalizing around broad government investments, each case contains key lessons on how to ensure future investments public benefit the public.
As stewards of public funds charged with ensuring a healthy economy, governments must ensure that they are playing the right role based on what they have to offer, setting clear goals that are pursued with transparent measures that are fair to the public for their investment, and put in place systems and structures to keep politics out of investment decisions.
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