NERA Topics #23: Risk and the Cost of Risk in the Comparison of Public and Private Financing of Public Services

Thu Mar 01 15:24:38 EST 2001
By Michael Spackman

Private financing of public services can help to give private sector suppliers stronger incentives, and more freedom, to improve value for money. It also creates extra transactions costs of setting up the contract and increases the cost of capital.

This rationale is not generally contentious among private sector practitioners or public sector officials. However on the cost of capital a different view is widely held among financial economists. This "perfect capital markets" maintains that any apparent lower cost of capital achieved by by public financing is an illusion: it must be concealing some costs which with public financing are hidden, but are still falling on taxpayers or others.

This paper examines the issues.