Discounted re-payment flows using a 10% interest rate are shown in column 7 of Table .16 The 10% rate implies a discounted payment stream of 383 million pesos. Recall that the simulated bank's total assets were only 217 million pesos at the start of the period (column 3). To put that 383 million peso figure into better perspective, note that the average size of the residual entities created to date has been about 46% of the pre-privatization assets, 66% of liabilities (Table 2).17 If the simulated bank were typical of the privatized provincial banks created to date, we would expect a residual entity of 125.8 million pesos in liabilities and 100.2 mnillion in assets. In general, the costs associated with capitalizing the privatized entity and its sales price were quite small in comparison with the size of the residual entity (See Section IV for details). Ignoring those factors for the moment, if the province recovered none of the assets of the simulated residual entity, and paid off all its liabilities immediately, _the costs would be less than one-third_ of _the estimates of discounted re-capitalization costs._ Even a province that An appropriate discount rate should account for the inflation-adjusted opportunity cost of capital. The question is whose opportunity cost should be used. An argument can be made that, because the government must divert resources from the private sector through taxes to pay for re-capitalizations, the appropriate discount is the private sector's opportunity cost of capital. Baumol (1968) states the case as follows: *'The appropriate rate of discount for public projects is one which measures correctly the social opportunity cost. The decision to devote resources to investment in a public project means, given the overall level of employment in the economy, that these resources will become unavailable for use by the private sector. And this transfer should be undertaken whenever a potential project available to the government offers social benefits greater than the loss sustained by removing these resources from the private sector." In practice, Quirk and Terasawa (1991) note that this comes down to using a weighted average of the consumer rate of interest and the pre-tax corporate rate of return as the government discount rate. Those authors object to that discount rate because '-the true opportunity cost of a government project is the value of the best available opportunity foregone because of the project, not simply the value of any available opportunity foregone." Determining the value of the best opportunity foregone by the government seems difficult to operationalize, however.

While no single rate is, perhaps, an adequate composite of private rates, recent data indicate that the interest rate on peso loans is presently 10% (International Monetary Fund, _International Financial Statistics (IFS)._ May, 1997). Another school of thought holds that, since the government often borrows to finance its deficit, the appropriate rate is the one at which it can borrow. In the U.S., a reasonable proxy is the Treasury Bill rate. For Argentina, money markets rates (which in the U.S. case are typically slightly higher than the 30-day T-Bill rate), are currently 6%, which might suggest a lower discount rate than 10%. In practice, however, the World Bank uses a 10% discount on many of its long-term projects in Argentina. Given the other rates, that one seems a reasonable estimate.

7 These figures exclude data from Santiago del Estero due to measurement problems. That privatization was finalized in September, 1996. The Fondo Fiduciario data for the residual entity are dated July 3 1, 1996. and should, therefore, be an accurate reflection of assets and liabilities at the close of the sale. The asset and liability figures from the Central Bank for 1995 for Santiago del Estero are much smaller than those in the residual entity.

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