Public versus Private Cost of Capital with State-Contingent Terminal Value
IMF Working Paper 2023/056
25 Pages Posted: 18 Oct 2015 Last revised: 8 May 2023
There are 2 versions of this paper
Public versus Private Cost of Capital with State-Contingent Terminal Value
Public Versus Private Cost of Capital with State-Contingent Terminal Value
Date Written: March 2023
Abstract
The economic debate underlines the reasons why discount rates of infrastructure projects should be similar, regardless the public or private source of financing, during the forecast period when flows are risky but predictable. In contrast, we show that the incompleteness of contracts between governments and private firms beyond the forecast period (i.e., when flows of net social benefits are state-contingent) entails expected terminal values that are systematically larger under government rather than private financing. This effect provides a new rationale for applying a lower discount rate in the assessment of projects under public financing as compared to private financing.
Keywords: Social discount rate, public utilities, private financing of infrastructures, public-private partnerships
JEL Classification: H43, L32, L97
Suggested Citation: Suggested Citation