Patient and impatient capital: time horizons as market boundaries

Aug 2018 | 165

Authors: Avner Offer

Since the 1980s privatisation and outsourcing have been promoted on grounds of efficiency and fiscal convenience. The argument here is that the appropriate choice between business and public enterprise is determined by the interaction between two time horizons, a financial time horizon and a project time horizon. The prevailing interest rate defines a credit time horizon. Among  project appraisal methods, the payback period defines a unique temporal outer bound for private sector break-even. Net present value break-evens (and other forms of business credit) are always shorter. Any project which has a break-even longer than the payback period cannot be funded by business alone. Long-term projects encounter uncertainty and attempt to control it by means of rigid contracts, which also lead to inferior outcomes. This analysis accounts for historical patterns of enterprise. It also provides normative guidance.  Public-private partnerships for infrastructure development intended to overcome credit time boundaries. They have given rise to inefficiency and corruption and are currently in decline. It is possible to overcome the temporal boundary with a  ‘franchise’ i.e. protection from uncertainty provided by social and government agencies. This allows longer credit break-evens, but at a cost in competitive efficiency. It is also prone to corruption.  The time-horizon model undermines the standard argument for market superiority. It turns Hayek on his head: it is financial markets that require certainty, whereas social and public agencies manage in its absence.

JEL Codes: H4, H43, H44, L32, L33, L38

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