Public-Private Partnership To Keep Public Investments Going

By W.A Wijewardena -January 6, 2014

Dr. W.A. Wijewardena

Sustaining economic growth: Public-Private Partnership to keep public investments going

So many traps to avoid in stepping up growth

Sri Lanka’s avowed goal has been to maintain a high economic growth in the next few decades to elevate the country from a lower middle income country to a higher middle income country in the first instance and then to a rich country not long after that. But this path is marred with pitfalls and traps.

Having recognised these traps, the Central Bank in its Strategic Plan for 2014 – an annual rolling plan which the Bank has had since 2007 – an opportune theme has been pronounced: ‘Step up! Avoid the trap’. There are many possible traps the country may get into but one important trap which impedes the country’s ‘stepping-up’ initiative is the inability of the government to continue with a high public sector investment program to meet the growing investment needs of the country without going for costly commercial debts.

Need for enhancing and sustaining public investments

The construction of buildings, roads, ports, airports, power plants and so on – commonly known as physical infrastructure facilities – provides ground conditions conducive for subsequent economic growth to take place. Governments contribute to such infrastructure facilities by allocating funds for capital expenditure, known as ‘public investment’. To do so, several fiscal policy options are available to a government. It could cut down the consumption expenditure, known as current expenditure, generate savings in its revenue account and divert the resources to capital expenditure programs. It is like saving money and building a house so that a person is not under obligation to anyone after he has had his desired house.

Crowding-out of private initiatives 

Or else, it can borrow money from local markets and foreigners to finance the capital expenditure programs. But when it borrows from local markets in excessive amounts, local interest rates will go up making it more expensive for private people to undertake similar capital expenditure programs. Economists call this ‘crowding out’ of private investments.

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