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

Luciano Greco and Marian Moszoro

No 2023/056, IMF Working Papers from International Monetary Fund

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; discount rates of infrastructure project; A. public financing; financing of infrastructure; private firm; cost of capital; Discount rates; Infrastructure; Public sector; Public investment spending (search for similar items in EconPapers)
Pages: 26
Date: 2023-03-10
New Economics Papers: this item is included in nep-cfn and nep-ppm
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