Risk, taxpayers, and the role of government in project finance

Michael Klein

No 1688, Policy Research Working Paper Series from The World Bank

Abstract: The author concludes that government, through the tax system, cannot really do better than private financial markets at funding infrastructure projects. All the financial advantages of sovereign finance are due purely to its coercive powers and are of no social value. Under government finance the taxpayers would bear a contingent liability that, if properly remunerated, would wipe out any cost advantage of sovereign borrowing. Governments should then refrain from investing in projects or firms, whether with equity or with debt. They should not cover commercial risks. Overall, the government cannot be expected to improve on the outcome of free financial markets, but this does not mean that it has no role: Private markets may not always find the best solutions although they solve whatever trade-off there is. More importantly, governments can significantly reduce the cost of risk-bearing by following prudent macroeconomics policies, supporting secure property rights, and deregulating and liberalizing financial markets so that private players can take the best advantage of low-cost funding opportunities. But government's offsetting the risks created through bad policy by taxpayer-supported funding, amounts to stealing from investors and compensating them by taking from the taxpayers. Multilateral finance institutions can support the development of better government policies by granting guarantees against policy failures where new policy regimes are not credible instead of simply investing in projects and guaranteeing the full credit risk of loans.

Keywords: Labor Policies; Banks&Banking Reform; Payment Systems&Infrastructure; Environmental Economics&Policies; Health Economics&Finance; Environmental Economics&Policies; Health Economics&Finance; Public Sector Economics&Finance; Financial Intermediation; Banks&Banking Reform (search for similar items in EconPapers)
Date: 1996-12-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi_page.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:1688

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().