One of the more frequently used and interesting forms of public enterprise experienced in many developed and less-developed countries is the * ‘mixed public-private enterprise.” Such special forms of public enterprise have both public and private joint ownership of the equity shares issued by a commercial corporation.’ Although public ownership is often more than 50% of the common stock, it is not uncommon for a government to take only a minority position in the mixed enterprise.

There are three reasons for a government to choose to enter into a joint venture agreement with private interests. First, the partial ownership of the voting common stock of a firm enables the government to control, or at least influence, decisions made by the management, without removing altogether private interests who may provide efficient management skills or superior technologies. Second, through partial ownership of the capital, the government has a claim to a portion of the profits of a firm; often the revenue can be used for distributional purposes or to finance the production of public goods. Third, by investing capital in the form of equity, the government shares with the private sector the risk inherent in many capital projects and thus encourages entrepreneurs to invest in projects that have uncertain future profitability.

This chapter will concentrate on the third reason for the creation of mixed public-private enterprises, namely, the desire of the government to share risks with the private sector. This risk-sharing role of the government in mixed enterprises entertains many important issues that, to the best of my knowledge, have not been considered in public-finance theory.