Of course the Government can borrow at the cheapest rate since its obligations are backed by the ability to raise taxes and, in the last resort, to print money. The cost of borrowing for a private sector company and the expected return of its shareholders' equity, which together make up the company's cost of financing, reflect the risks that the company runs during the life of a contract under the Private Finance Initiative.
These potential costs are not included in the Government's risk-free rate of borrowing. Instead taxpayers bear these risks.
The purpose of the so-called public sector comparator used in determining value for money in PFI projects is to reflect these risks fully in the evaluation of the Government-funded project against the PFI alternative. It is essential to do a proper like-for-like comparison. There are some risks that the private sector can manage more effectively than the public sector and hence achieve better value for money for the taxpayer.
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