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

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  • Klein, Michael

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.

Suggested Citation

  • Klein, Michael, 1996. "Risk, taxpayers, and the role of government in project finance," Policy Research Working Paper Series 1688, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1688
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Beckers, Thorsten & Miksch, Jan, 2002. "Die Allokation des Verkehrsmengenrisikos bei Betreibermodellen für Straßeninfrastruktur: Theoretische Grundlagen und Anwendung auf das A-Modell," Discussion Papers 2002/10, Technische Universität Berlin, School of Economics and Management.
    2. Dailami, Mansoor & Klein, Michael, 1998. "Government support to private infrastructure projects in emerging markets," Policy Research Working Paper Series 1868, The World Bank.
    3. Timothy Irwin, 2003. "Public Money for Private Infrastructure : Deciding When to Offer Guarantees, Output-based Subsidies, and Other Fiscal Support," World Bank Publications - Books, The World Bank Group, number 15117.
    4. Carlos Contreras & Julio Angulo, 2017. "Valuing Governmental Support in Road PPPs," Hacienda Pública Española / Review of Public Economics, IEF, vol. 223(4), pages 37-66, December.
    5. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, vol. 10(C), pages 76-86.
    6. Klingebiel, Daniela & Ruster, Jeff, 2000. "Why infrastructure financing facilities often fall short of their objectives," Policy Research Working Paper Series 2358, The World Bank.
    7. Patrick Mabuza, 2019. "Is the Public Private Partnership Model the Right Vehicle for Public Infrastructure Delivery in Developing Countries?," Journal of Economics and Behavioral Studies, AMH International, vol. 11(1), pages 211-222.
    8. Clive Harris, 2003. "Private Participation in Infrastructure in Developing Countries : Trends, Impacts, and Policy Lessons," World Bank Publications - Books, The World Bank Group, number 15124.
    9. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2011. "Risk absorption by the state: when is it good public policy ?," Policy Research Working Paper Series 5893, The World Bank.

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