Why Better Public Investment, Not Bigger Budgets, Holds the Key to Private Sector Growth

The World Bank finds that public investment can unlock up to 2.2% more private investment for every 1% increase in public investment, but only when supported by strong institutions, sound fiscal management, and efficient project implementation. The report urges governments, development partners, and investors to prioritize better governance, SOE reforms, stronger capital markets, and high-quality infrastructure planning to transform public spending into sustainable economic growth, job creation, and private sector investment.

Public investment is often seen as government spending on roads, railways, power grids and public services. However, a new World Bank report argues that its real value lies in its ability to attract much larger volumes of private investment. The study finds that every 1 percent increase in public investment as a share of GDP can raise private investment by up to 2.2 percent over five years, but only when governments maintain sound fiscal policies, strong institutions and effective governance. For policymakers, the message is clear: increasing public spending alone is not enough. Better planning, stronger institutions and improved project execution are essential if public investment is to generate faster economic growth, create jobs and encourage private businesses to invest.

From Government Spending to Economic Growth

The report shows that Europe and Central Asia (ECA) invested around 5.6 percent of GDP in public infrastructure during 2020–2024, compared with 3.5 percent in the European Union, but still below the 7 percent of GDP often associated with high-growth economies. Despite relatively high spending, many countries are not receiving maximum economic returns because projects are delayed, poorly planned or inadequately maintained.

Transport, energy and digital infrastructure continue to offer the strongest opportunities for attracting private investment. Better roads and railways reduce transport costs, improve access to markets and strengthen export competitiveness. Modern electricity grids and digital infrastructure increase productivity while making countries more attractive for domestic and foreign investors. However, the report warns that infrastructure quality matters more than the amount spent. Electricity transmission and distribution losses remain around 10 percent across ECA, nearly twice the level of high-income economies, highlighting the need for greater investment in maintenance and modernization rather than simply expanding infrastructure.

Why Better Governance Matters More Than Bigger Budgets

One of the report's strongest messages is that governments need to improve how they invest rather than simply spend more. Across Europe and Central Asia, around 20 percent of public capital budgets are not fully implemented, largely because of procurement delays, weak planning and limited implementation capacity. In countries such as Moldova, capital budget under-execution has reached 25–40 percent, delaying infrastructure delivery and reducing economic benefits.

The report recommends stronger public investment management through better project appraisal, transparent procurement systems, realistic budgeting and improved monitoring. Governments should also integrate climate resilience and long-term maintenance into investment planning to ensure infrastructure continues generating economic value for decades. Improving governance can help governments achieve better results even without increasing public expenditure, while also strengthening investor confidence.

Private Investment Needs the Right Business Environment

Although private investment remains an important driver of growth, it has remained below the levels seen in East Asia and many other emerging economies since the global financial crisis. Businesses continue to face regulatory uncertainty, geopolitical risks, limited market size and underdeveloped financial markets. The report notes that private participation accounted for only about 20 percent of total infrastructure investment between 2000 and 2024, with transport and energy attracting most projects. Türkiye alone represented nearly 60 percent of all private infrastructure investment in the region.

State-owned enterprises (SOEs) also continue to discourage private investment in many countries. The report highlights that SOE liabilities in Kazakhstan are around 30 percent of GDP, while several governments continue providing substantial financial support to loss-making public enterprises. Reforming SOEs, improving transparency and creating fair competition between public and private firms would encourage greater private investment while reducing long-term fiscal risks.

The report also identifies major opportunities in education and healthcare. Only 17 percent of tertiary students in Europe and Central Asia study in private institutions, while healthcare remains dominated by public providers. Better regulatory frameworks, commercially sustainable public-private partnerships and stronger private insurance systems could encourage greater private participation without reducing access to essential services.

A Roadmap for Governments, Development Partners and Investors

For governments, the report recommends protecting fiscal space for productive investment while strengthening public investment management, reforming state-owned enterprises and developing stronger capital markets. Instead of focusing only on increasing infrastructure budgets, policymakers should prioritize projects that generate the greatest economic returns and create conditions for private businesses to expand.

For international development partners such as the World Bank, IFC, EBRD, MIGA and IMF, the findings suggest that financing alone is not sufficient. Greater emphasis should be placed on helping countries strengthen institutions, improve project preparation, modernize procurement systems and build pipelines of bankable infrastructure projects. Technical assistance that improves governance may ultimately generate larger development benefits than financing individual projects.

For private-sector stakeholders, the report highlights growing opportunities through guarantees, blended finance and public-private partnerships. Well-designed government guarantees can mobilize more than four dollars of private investment for every dollar of public contingent liability, making them highly effective tools for infrastructure financing. However, investors will continue to prioritize countries that offer predictable regulations, transparent procurement, commercially viable projects and sound fiscal management.

The report concludes that public investment should be viewed not as a replacement for private capital but as a catalyst that creates the conditions for businesses to invest with confidence. Countries that improve governance, strengthen institutions, reform state-owned enterprises and deepen financial markets will be better positioned to attract investment, improve productivity, create employment and achieve stronger long-term economic growth.