Public Versus Private Capital: Is There a Difference?
38 Pages Posted: 6 Feb 2008
Date Written: 2006
Abstract
Large capital investments present some significant conceptual difficulties when it comes to accounting for cost recovery, economic life and economic return. When the private sector owns and operates such assets, there are relatively standard, if sometimes controversial, accounting concepts to deal with such issues, most notably depreciation. When the public sector is the owner and operator of such capital, the general absence of private equity and the consequent lack of a P&L basis for accounting makes the issue more problematic. Some argue that the public sector has perverse incentives to mismanage its capital assets as a result. And with the rise of public-private partnerships (PPP), the issues may be even more complex.
This paper will review various approaches that are being developed in the United States to account for the economic life of public assets and report and budget for them to ensure effective management (or at least avoid mismanagement). These approaches include GASB Rule 34; the economic capital stock model that is being used by the Federal Highway Administration and the US Army Corps of Engineers; and performance budgeting for assets. In reviewing and analyzing these approaches the following questions will be considered: Is public capital different from private capital and if so, why so and how so? How should accounting and budgeting procedures differ in the public versus the private case? What public processes will ensure optimal management of capital? What pubic policies are recommended? What unique challenges do PPP's represent?
Keywords: capital budgeting, PPP, public-private partnership, GASB Rule 34, public finance, public accounting, budgeting, public capital, capital stock
Suggested Citation: Suggested Citation