Efficiency of public investment and implications for the optimal level of public investment

Since the late 1990s, public investment inefficiency - the fraction of investment that does not pass into the value of capital, such as waste - has attracted a large attention. Even so, public investment inefficiency remains sizeable according to data envelopment or stochastic frontier analysis which compare money spent to actual outputs. This chapter takes stock of this literature to describe how public investment inefficiency is defined, measured, and how it could be reduced. Public investment management can significantly contribute to a higher efficiency. It can be improved at all stages of the project cycle, from the planning, appraisal and selection of projects to their implementation, operation and maintenance. However, this is easier said than done and infrastructure governance reforms take time. This chapter thus also provides distinct original results on optimal public investment to GDP ratio in a golden-age growth path in the presence of constant public investment inefficiency. In most cases, a lower public investment to GDP ratio is advisable in the presence of higher inefficiency. However, when complementarity with private factors of productions is high, lower efficiency implies higher utility-maximizing public investment even if financed by costly taxation.