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The Risk Premium for Evaluating Public Projects

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  • Klein, Michael

Abstract

Governments face a lower apparent cost of capital than private firms. However, the low cost of borrowing by governments does not reflect superior capabilities to choose or manage projects. Instead, it reflects the fact that governments have recourse to taxpayers, who de facto provide a fairly open-ended credit insurance to the government. If taxpayers were remunerated for the risk they assume in the case of tax-financed projects, then ex ante there would be no capital cost advantage to government finance. The risk premium on government finance would, in principle, be no different from that of private investors. There is thus no justification on the basis of capital cost advantages for government funding or guaranteeing the provision of private goods or services. Privatization is, therefore, valuable, if it improves business efficiency when evaluated at the risk-adjusted private cost of capital. No more need be demonstrated in a value-for-money test. Copyright 1997 by Oxford University Press.

Suggested Citation

  • Klein, Michael, 1997. "The Risk Premium for Evaluating Public Projects," Oxford Review of Economic Policy, Oxford University Press, vol. 13(4), pages 29-42, Winter.
  • Handle: RePEc:oup:oxford:v:13:y:1997:i:4:p:29-42
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    Cited by:

    1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2013. "The Basic Public Finance Of Public–Private Partnerships," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 83-111, February.
    2. Kenneth A. Small, 2009. "Private Provision of Highways: Economic Issues," Transport Reviews, Taylor & Francis Journals, vol. 30(1), pages 11-31, July.
    3. Mark Hellowell, 2010. "The UK’s Private Finance Initiative: History, Evaluation, Prospects," Chapters,in: International Handbook on Public–Private Partnerships, chapter 14 Edward Elgar Publishing.
    4. Michael Spackman, 2011. "Government discounting controversies: changing prices, opportunity costs and systematic risk," GRI Working Papers 67, Grantham Research Institute on Climate Change and the Environment.
    5. repec:ces:ifodic:v:12:y:2014:i:3:p:19131884 is not listed on IDEAS
    6. Marcel Boyer & Éric Gravel & Sandy Mokbel, 2013. "The Valuation of Public Projects: Risks, Cost of Financing and Cost of Capital Current," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 388, September.
    7. Checherita, Cristina & Gifford, Jonathan, 2007. "Risk Sharing in Public-Private Partnerships: General Considerations and an Evaluation of the U.S. Practice in Road Transportation," 48th Annual Transportation Research Forum, Boston, Massachusetts, March 15-17, 2007 207820, Transportation Research Forum.
    8. Vecchi, Veronica & Hellowell, Mark & Gatti, Stefano, 2013. "Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK," Health Policy, Elsevier, vol. 110(2), pages 243-270.
    9. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2014. "Risk and Public-Private Partnerships," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(3), pages 03-07, October.
    10. Engel,Eduardo & Galetovic Potsch,Alexander, 2014. "Urban transport : can public-private partnerships work ?," Policy Research Working Paper Series 6873, The World Bank.
    11. Nina Budina & Hana Polackova Brixi & Timothy Irwin, 2007. "Public-Private Partnerships in the New EU Member States," World Bank Publications, The World Bank, number 6743.
    12. Frédéric Blanc-Brude & Hugh Goldsmith & Timo Välilä, 2009. "A Comparison of Construction Contract Prices for Traditionally Procured Roads and Public–Private Partnerships," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(1), pages 19-40, September.
    13. repec:eee:epplan:v:63:y:2017:i:c:p:18-28 is not listed on IDEAS

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