Despite the recent failure of the oil sector, not all government investment is bad
With a series of high-profile and troubled public investments in the oil industry, from “Asphalt Pudding” to Petroleum Railway with Trapezoid XL, It is easy to summarize the view that all government investment is bad.
At the same time, investment in carbon capture and storage has a great boost. Requirements for future government capital In the tens of billions of dollars.
If the only lesson learned from failure is the risk of government involvement, it is easy to see the error repeat itself. Instead, the key is to figure out what the role of the government is, what is the difference between good public investment and those that have become clumsy, and how to handle government investment to maximize results and avoid costly mistakes.
Government intervention theory
Even neoclassical economic theory recognizes the existence of “market failure”, that is, a gap in which the market has problems and requires government intervention.
For example, private companies will underinvest in R&D because they can only get part of the benefits from the resulting innovations, because other companies can copy unpatented innovations and get benefits without prior investment. There may also be challenges surrounding the development of infrastructure for large-scale deployment of new technologies-the “chicken and egg” problem of electric vehicles and charging infrastructure.
See other schools of thought The government plays a bigger role Promote innovation and economic growth, including direct support for radical technological innovation that solves clear problems.
The government cannot stay outside the market, because the market does not happen naturally, but is created and shaped by choices made by the government through laws and regulations.
The role of government in the private sector is not just a theory. It can be seen repeatedly in history.
In Alberta, one of the most obvious examples of the government’s role is the development of oil sands in-situ extraction technology. Key investment In the development and testing of the facility, 100% is funded by the government. Also in the field of fossil energy, the shale gas revolution can be traced back to more than 25 years of history. U.S. government plans and funding.
The important financial support provided by the government for technology development and deployment ranges from agriculture to Cell phone Or the computer where you are reading this story.
However, the clichés about public investment—”Government should not engage in commercial activities” and “Government should not pick winners”—actually hold core truths about how to invest wisely.
Don’t do business
Government funds should not replace private capital, and doing so—at best—only contributes profits to private projects. Instead, the government should focus on doing things that the private sector cannot. For example, divide the risk in the project and allocate it to the entity that can best manage it and achieve investment and economic development-the government or the private sector-otherwise it will not happen.
The key is to ensure that the right risks are given to the right participants.
Governments can manage or hedge policy risks within their jurisdiction well, because they directly control future policy changes, so it is natural to adopt policies such as Monetizing the future growth of current carbon pricingThey can also better hedge the overall price risk in the entire economic market. For example, low electricity prices may challenge individual generators, but they are good for the overall economy.
On the other hand, the government has little control over policy risks in other jurisdictions, such as U.S. government’s decision On the pipeline permit. Similarly, the risk of project construction cost overruns managed by the private sector is not within the control of the government, as in the case of the Sturgeon refinery.
Appropriate risk sharing should be matched with fair returns to avoid using public funds to create windfalls.
Alberta Power System Operator Renewable energy procurement process The government assumed market risks and successfully maintained any market upside space, while leaving construction management and related upside space to developers. Ensuring that the potential upside is fairly distributed will also help keep the government away from the role of the enterprise-if companies really need government support, they will be more willing to give up some upside in exchange.
Don’t choose the winner
Many of the investments that have recently encountered problems are cases where the government directly selects “winners” outside of a transparent and competitive process by supporting specific companies, projects, or methods, in order to find the best solutions to clearly defined problems.
Politicians can avoid this trap by insisting on defining clear goals or mission directions supported by the government. By framing the market’s challenges based on the expected end goal, the private sector can then respond through a wide selection of technologies and methods, rather than presupposing the results by the government.
Those in the government bureaucracy who are responsible for evaluating and comparing options should be isolated from politics and supported by outside experts who can provide technical advice.
Learn from business
The government can learn some lessons from the private sector. Two important factors are structuring the transaction to limit the overall downside risk—as the Petroleum Railway case shows, contract details are important—and the willingness to walk away and accept some losses. Just as no private investor has a 100% success rate, government investment must be judged based on the investment portfolio, where big wins are more than cover losses.
A series of recent Alberta government investment issues have put public investment into question, but it is not a general overview of government investment. Each case provides key lessons on how to ensure that public investment will benefit the public in the future.
As the steward of public funds responsible for ensuring a healthy economy, the government must ensure that they play the correct role according to the services provided, set clear goals, and make fair investments in the public through transparent measurement standards, and establish systems and structures to make investments Decisions are not affected by politics.
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