Public versus Private Cost of Capital

Abstract

Should projects funded with taxpayer money be discounted at a lower rate than privately funded projects? I analyze the discount rate applied to long-term cash flows in public (in-house) versus private (contracting out) provision of public goods subject to regulatory burdens. I develop a model and provide evidence of lower cash flow volatility for government-sponsored enterprises when tail risks materialize. Finally, I propose a dual treat: a common (market) discount rate for cash flows during the forecast period and divorced---public lower than private---discount rates for cash flows embedded in the terminal value.

Keywords: Social Discount Rate, Cost of Capital, Utilities, Public-Private Partnerships

JEL Classification: D78, H43, L32, L97, L98