IMF Working Papers

Public versus Private Cost of Capital with State-Contingent Terminal Value

By Luciano Greco, Mariano Moszoro

March 10, 2023

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Luciano Greco, and Mariano Moszoro. Public versus Private Cost of Capital with State-Contingent Terminal Value, (USA: International Monetary Fund, 2023) accessed December 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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: Private financing of infrastructures, Public utilities, Public-private partnerships, Social discount rate

Publication Details

  • Pages:

    26

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/056

  • Stock No:

    WPIEA2023056

  • ISBN:

    9798400235276

  • ISSN:

    1018-5941