Government Loans all Over the World

For both loans and loan guarantees, the interest rates and other fees charged to borrowers have rarely included enough of a premium to cover the large defaults on which the government must make good.  These high default rates are probably due both to the fact that the government lending targets more higher risk ventures than do private lenders, and to less stringent risk assessment prior to approving loans.  For example, defaults on direct and guaranteed loans from both the U.S. Export Import Bank and the U.S. Rural Electrification Administration (the predecessor of the Rural Utilities Service) have historically been a large percentage of outstanding obligations. 

Lenders normally charge higher interest rates for riskier loans, and the differences in rates between borrowers of different grades can be quite large.  This is graphically illustrated using actual data from the oil industry.  The private cost of capital (PDF file) to oil and gas extraction companies is twice the cost of government debt.   Rates to smaller exploration firms would be even higher.  For many industries, the larger the portion of capital that can be met through access to federal loans, the better.

Government-provided insurance programs have many of the same characteristics as loan and loan guarantee programs.  Premiums often don't cover policy losses, and government risk-bearing is often cheaper than the equivalent service on the private market due to economies of scale and no required rate-of-return. As with loan programs, not every competing energy service has similar access to federal insurance, introducing inter-fuel market distortions.

Some government insurance programs are run by a government agency, collect at least some premiums, and make at least some attempt to set those premiums based on actuarial assessments of the risk being insured.  While net subsidies often exist, there are some revenues being returned to the government as well.  In contrast, indemnification programs hold a private entity harmless for the costs of particular activities  (e.g., a nuclear reactor accident) by agreeing to pay damages, or by shifting risks to the public.  These programs usually require more extensive analysis to value.  This is because they often shift low probability, but extremely expensive, risks off of private industry.  Unlike insurance programs, these market interventions do not have premiums, and do not have any federal agency responsible for regularly assessing risk exposure.  Even the government itself may not have a comprehensive view of its exposure.  Insurance programs exist on a continuum, with full indemnification at one extreme, and private insurance (with no public subsidies) at the other.

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