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Public Investment, Private Profit: A Decision  Tree

Nicholas Johnson

February 26, 2004

Note: This represents a first effort at thinking about how one might go about thinking about the considerations that ought to be involved when there is a proposal for using public money (e.g., tax revenues) to support the construction or operation of an enterprise that will be operated for the financial benefit of private investors. It was prompted by my thinking about the "Iowa Child" ["Iowa Environmental/Education Project"] proposal for an indoor rain forest in Coralville, Iowa. Since subsequently discovering that the project was to be operated as a non-profit venture I have postponed further analysis and revision of this proposed "decision tree." Reactions and suggestions for revision and refinement are solicited. -- Nicholas Johnson, Iowa City, May 1, 2004.

1. Is the proposed project or expenditure something for which there is a demonstrable need, popular support, and for which public (i.e., governmental) involvement, execution or participation is traditional or otherwise appropriate? Does this particular contribution of public funds primarily serve a purpose that is public, as distinguished from private (i.e., gift, or financial return, to private investors)? If both are answered Yes go to question 2; if either is answered No the project should be removed from further public financial participation.

2. If the proposed project or expenditure is something traditionally provided exclusively by government (e.g., highway maintenance, public K-12 education) are there persuasive, decisional reasons why, in this instance, a mixed public-private operation better serves the public interest than an exclusively (a) governmental operation or (b) marketplace, private capital operation? If Yes go to question 3; if No public funding of the proposal should be rejected.

3. Will the requested public money constitute a one-time gift or investment of capital, or does it contemplate a continuing commitment to pay some or all of the ongoing operating costs, or a guarantee (or likelihood) that the public will pay those costs in the event the project is not self-supporting? If the venture is represented to be self-supporting, are those projections thorough, detailed, reliable and independent? If Yes go to question 4; if No public funds should not be used.

4. Does the proposed quantity of public funding represent the minimum necessary to bring the public-private funded project into existence? If Yes go to question 5; if No reevaluate the quantity of public contribution.

5. Do the quantifiable (and intangible) public benefits exceed the quantifiable (and intangible) projected costs (including the negative impact of lost businesses, jobs and taxes)? If Yes go to question 6; if No public participation in the project should be rejected.

6.  Are there alternative uses for the public money that are (a) equally or more capable of serving public purposes and producing benefits in excess of costs and (b) capable of attracting sufficient political/public support to become feasible? If Yes do a benefit-cost analysis of the proposal and these alternatives, select the one that produces the greatest benefit-cost ratio, and go to 1, above; if No, go to question 7.

7. What conditions, governance structure, transparency, avoidance of conflicts of interest, and reporting procedures are most appropriate to insure that (a) the promised benefits will, in fact, be delivered, (b) there will be a financial return on the public investment, and (c) there will be consequences for the private beneficiaries if the benefits are not forthcoming or the conditions are violated?