Efficiency of Regional Public Investment: An NPV-Based Spatial Econometric Approach

Abstract

This paper develops a new methodology of spatial econometric modelling for regional public investment in local economies. The approach, based on the financial concept of net present value of cash flows, can be applied in the analysis of regional public investment with long-term financial inputs and outputs. With local public revenues related to spending in the model, one can observe economies of scale of investment with possible saturation effects and a marginal investment multiplier, explaining the extent to which public investment costs translate into public revenues. The main advantage of the proposed model is to behave counter-cyclically due to accumulation over the periods and to cover multi-period investments as well as postponed effects. This paper gives an example of public investment efficiency in Polish NUTS-5 municipalities regions.

L’efficacité des dépenses régionales d’investissement public: une approche économétrique spatiale fondée sur la VAN

Résumé Cet article développe une nouvelle méthodologie à propos de la modélisation économétrique spatiale des dépenses régionales d’investissement public dans les économies locales. On peut appliquer l’approche fondée sur le concept financier de la valeur actuelle nette des flux de trésorerie dans l’analyse des dépenses régionales d’investissement public conjointement avec les entrées et les sorties financières à long terme. Étant donné que les recettes propres des collectivités se rapportent aux dépenses dans le modèle, il est à noter des économies d’échelle de l’investissement avec des effets de saturation possibles et un multiplicateur d’investissement marginal, ce qui explique jusqu’à quel point les coûts de l’investissement public se traduisent en recettes publiques. Le principal atout du modèle proposé c’est qu’il agit contracycliquement à cause de l’accumulation sur les différentes périodes et couvre non seulement des investissements à des périodes multiples mais aussi des effets reportés. Cet article fournit un exemple de l’efficacité des dépenses d’investissement public dans les régions métropolitaines NUTS 5 en Pologne.

Eficiencia de la inversión pública regional: un enfoque econométrico espacial basado en el valor neto actual

Resumen En este artículo se desarrolla una nueva metodología de modelo econométrico espacial para la inversión pública regional en economías locales. Este planteamiento, basado en el concepto financiero del valor neto actual de los flujos de caja, puede aplicarse al análisis de la inversión pública regional con entradas y salidas financieras a largo plazo. Si los ingresos públicos locales se relacionan con el gasto en el modelo, podemos observar economías de escala de inversión con posibles efectos de saturación y un multiplicador de inversión marginal, lo que explica en qué medida los costes de inversión pública se traducen en ingresos públicos. La principal ventaja del modelo propuesto es tener un comportamiento contra-cíclico debido a la acumulación durante los periodos y cubrir las inversiones multiperiódicas así como los efectos aplazados. En este artículo se muestra un ejemplo de la eficiencia de la inversión pública en las regiones municipales polacas NUTS-5.

区域公共投资的效益: 以淨现值法 (NPV) 为基础的空间计量经济方法

摘要 本文为地方经济中的区域公共投资发展一个崭新的空间计量经济模式化方法。该方法根据现金流淨现值之财政概念, 可应用于分析有着长期财政投入及产出的区域公共投资。随着模型中有关支出的地方公共税收,可以观察到投资的经济规模, 并且具有潜在的饱和效应和边际投资乘数, 解释了公共投资成本转化为公共税收的程度。本文提出之模型的主要优势在于对各时期积累的反週期波动,并代替多重时期的投资与延迟效应。本文提出波兰NUTS-5的市政区域之公共投资效益作为案例。

Keywords:

• Regional public investment
• spatial econometrics
• marginal investment-revenue multiplier
• saturation of economy
• spatial externalities

JEL classifications:

• C21
• C23
• R12
• R58

Disclosure statement

No potential conflict of interest was reported by the author.

Supplemental data

Supplemental data for this article can be accessed 10.1080/17421772.2016.1217346.

ORCiD

Katarzyna Kopczewska http://orcid.org/0000-0003-1065-1790

Notes

1. Lloyd (1999) underlines the discretionary nature of public investment, which is not dependent on expectations of economic growth and can be a part of a stability-oriented policy.

2. The debt and financial performance of local municipalities may depend on local government size. As proved by Galariotis et al. (2016), medium-sized municipalities in France in 2000–12 were found to be in a better financial condition, but larger units were more resilient to crisis.

3. Yu et al. (2011) summarize the literature on reasons for decline of public investment in the last three decades all over the world.

4. Alston et al. (2011) propose ‘a weight that measures the contribution of a unit of the knowledge stock created in state j to the knowledge stock used in state i’.

5. In the time-series approach, the multipliers are estimated as the elasticity of output (y) with respect to changes in (stock) of input (x).

6. They construct a self-financing ratio, indicating the stock of tangible capital supported by past national saving, relative to the actual stock of capital.

7. The significance of short- and long-term impacts can be derived from simulation, following the methodology of Vega & Elhorst (2014).

8. For detailed description of the institutional context of the study, including the administrative and territorial division of Poland, public finance definitions with sources of revenues and investment responsibilities, as well the operating conditions of SEZ, see the Appendix in the supplemental data online.

9. Initially the model also included a variable on the distance between municipalities and the regional core city as well as the percentage of forested area, but both were found to be insignificant in any model and were rejected.

10. Amitendu & Bhattacharjee (2008) show that SEZ in local territorial units generate higher public investment requirements and often operate with tax exemptions, but also that they strengthen the local market, and with higher employment and more intensive business activity there should then be increased tax collection. For some local governments it was a part of their development policy to attract and support SEZ.

11. See Kopczewska (2013) for the analysis of spatial range of public goods delivered by local governments.