PFM Articles 
A Framework for Evaluating State-Assisted Financing Programs
ROSS GITTELL AND FRED R. KAEN
PFM, Vol. 3 No. 3,
(2003)
State-assisted financing programs provide both economic and
social benefits but can also affect state budgets and credit ratings.
State-assisted financing programs are often touted as programs for
mitigating or solving financial market imperfections, especially credit
market failures. In reality, these programs are designed to: (1)
address borrower credit risk problems; (2) provide a lender of last
resort to small businesses during and immediately after economic
recessions; (3) provide a less costly and more socially desirable
alternative to direct social payments for people living in economically
depressed regions or regions experiencing the strain of structural
adjustment; and (4) direct funds into preferential uses. This paper
provides an historical evolution of State-assisted financing programs
in the United States and a framework for evaluating the financial costs
associated with extending financial assistance to prospective
recipients. Four categories of financing programs are reviewed: (1)
concessionary finance for projects that already have positive private
NPVs; (2) mitigating market imperfections financing for potentially
positive private NPVs; (3) valuing social externalities subsidies for
projects with negative private NPVs, but positive externalities
producing a positive public NPV; and (4) politically compelling
projects with negative private and public NPVs. A framework is
developed that values loan guarantees as put options. Who pays the option premium and who receives the benefits depend on the fee
charged for the guarantee and the interest rate the lender charges to
the borrower whose loan has been guaranteed. Finally, the risks,
moral hazards and policy issues of State-assisted financing programs
are discussed and suggestions for overcoming special interest and
collective action obstacles are offered.
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