Describe how a major refurbishment of publicly funded hospital facilities might affect the public sector borrowing requirement.  

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The question asks how a major refurbishment of publicly funded hospital facilities might affect the public sector borrowing requirement. The assumption here is that the term “major” indicates that the project is too large to fund out of excess hospital operating revenues; i.e. it must be financed somehow. Given that this is a refurbishment (i.e. replacement of depreciated assets), the project may have been anticipated and so funded through a sinking fund. This would be the case if the hospital management had set up such a facility in the past and had funded it consistent with the actual physical depreciation of the assets in question (presumably non-structural fixtures, equipment, etc.). Conversely, the government may be in a position to fund the refurbishment out of its general, budgeted tax revenues.

 Assuming neither of these options are available, we are left with the choice of debt versus equity financing. Equity financing would depend on the specific corporate structure of the ownership of the hospital. In general, facilities wholly owned by the government would not have access to equity (stock issuance) financing. Government financing is generally in the form of bonds (debt). Therefore, the expectation is that the project would increase public borrowing. However, if the hospital is privately owned (on either a for or non-profit basis), the owning entity may have access to equity markets.

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