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Private Profits from Public Investments

March 21, 2011 By Riordan Frost, Policy Associate

The private sector: an economic sector that has become a political buzzword. It is often referred to as an abstract super-powered entity that would swoop in and make everything right, if only the public sector weren't standing in its way. Conversely, those in the public sector trying to improve systems or invest in an economy's future are often criticized.

The major difference between public and private investment is that the former is motivated by public interest, and the latter is motivated by financial interest. There are a variety of public investments that people take for granted (e.g. roads, schools), and even more that the public sector leads the private sector toward. Investments in renewable energy and high-speed rail illustrate this point well.

Renewable energy development—primarily wind, solar, geothermal, and hydroelectric power—has been largely spurred by public investment. Public entities on all levels have done this through direct investment and smart policy planning, such as setting goals for alternative energy adoption.

Minnesota's Next Generation Energy Act of 2007 set a goal to have renewable energy account for up to 25% of the state's energy use by 2025. It's helped incentivize development and adoption through grants and tax credits.

Renewable energy critics argue two points: The technology isn’t yet reliable. And if the private sector isn't investing in them, that proves their lack of viability. First, the private sector is investing in renewable energy technology—some companies are because of public standards goals and others because of future economic benefits.

Many utility companies offer customers renewable programs (like Xcel's Windsource), though these programs usually carry extra costs to enroll.

NPR’s Marketplace show covered a Houston energy conference, which major oil industry players attended. Scott Tong reported that "A lot of these oil companies invest in those renewables. They invest in wind, in solar ... [but] what a lot of the projections say is all these things are not going to get there in time."

This brings in a second problem with the criticism. It’s very short-sighted to use an energy source’s fledgling status as a reason to cease investment, especially when we know we’re going to need some kind of alternative to petroleum-based fuels. You might as well stop watering a plant when it doesn't grow fast enough—especially since plants use solar energy.

Still, no one knows for sure how quickly alternatives need to be viable on a national scale, so basic cost-benefit economics direct private companies to go with the sure thing. That’s where direct public investment and pressure does what the private sector won’t do on its own.

High-speed rail is another good example of the public sector leading the way on investment. Though politics has unnecessarily plagued the budding rail system, the private sector has noticed its value. Unfortunately, it usually realizes it too late. In Florida, when concerns were raised about the state's budgetary burden for the Tampa to Orlando fast rail route, several private companies came forward.

As the Transport Politic reports, Siemens, Alstom, and JR East all stepped forward with offers to cover the budgetary risks and the state's tab, in return for being able to run the service. So why didn't they? Governor Scott cancelled the project before the deadline for their proposals, as well as before the Florida Department of Transportation's projections, which reported that the train would have been profitable.

Closer to home, private train manufacturing company Talgo set up shop in Milwaukee presuming high-speed rail was on the way. Now that Governor Walker has axed the Milwaukee to Madison route, the company has announced its plans to close shop by 2012.

The best benefit of public investment is the demand it creates for good things. Private companies haven't invested in building their own high-speed rail systems throughout the country, but they start to show significant interest in investing and even operating services once the tracks have been laid by the public sector. Those routes also open up private investment opportunities along the rail lines.

Similarly, energy companies that have enough fossil fuels to supply their customers may see little need for wind or solar, until there are incentives behind it. These incentives come on the small-scale from environmentally-conscious ratepayers and on the large-scale from public sector investment.

The public sector is not a big, blundering entity that needs to 'get out of the way'. As we've seen in Minnesota, it’s an entity that can inspire investments and growth in places the private sector isn’t looking or willing to take a risk. Companies might not see the immediate financial benefits in something like renewable energy or transit but it’s good for the environment and the public. Cleaner air and healthier workers will produce an economic impact for Minnesota companies.

In many cases, public investments limit private industry’s risk exposure for new products. Publicly funded research and development, like the numerous projects going on at the University of Minnesota, can sometimes make a new technology more attractive for a private company looking to build on the initial research.

These two sectors can and should work together. When they do effectively, this symbiotic relationship benefits more than just bank accounts—it benefits people and communities.

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