An analysis of government loan guarantees and direct investment through public-private partnerships

Authors: Soumaré, IssoufLai, Van Son
Abstract: This paper compares two forms of government support: loan guarantee and direct investment through public-private partnerships (PPPs). With loan guarantee, government provides financial guarantees to enhance project creditworthiness. With direct investment, government invests capital directly in the project. In both forms of support, the government receives shares proportional to its financial commitment. We find that loan guarantees are more effective in reducing project borrowing costs. In a perfect information environment, loan guarantee support will yield more wealth to the government than a cost equivalent direct investment. But, in an informationally asymmetric environment where the government knows less about project quality than do private partners, in other words the so-called plum problem rather than the familiar lemon problem, this implication is mitigated. We show how the portion of shares given to the government can be a bargaining tool and can mitigate information asymmetry when structuring PPPs.
Document Type: Article de recherche
Issue Date: 31 August 2016
Open Access Date: Restricted access
Document version: VoR
This document was published in: Economic modelling, Vol. 59, 508-519 (2016)
Alternative version: 10.1016/j.econmod.2016.08.012
Collection:Articles publiés dans des revues avec comité de lecture

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