| Abstract: | Governments face a lower apparent cost of capital than privatefirms. However, the low cost of borrowing by governments doesnot reflect superior capabilities to choose or manage projects.Instead, it reflects the fact that governments have recourseto taxpayers, who de facto provide a fairly open-ended creditinsurance to the government. If taxpayers were remunerated forthe risk they assume in the case of tax-financed projects, thenex ante there would be no capital cost advantage to governmentfinance. The risk premium on government finance would, in principle,be no different from that of private investors. There is thusno justification on the basis of capital cost advantages forgovernment funding or guaranteeing the provision of privategoods or services. Privatization is, therefore, valuable, ifit improves business efficiency when evaluated at the risk-adjustedprivate cost of capital. No more need be demonstrated in a value-for-moneytest. |
