THE RISK PREMIUM FOR EVALUATING PUBLIC PROJECTS

Governments face a lower apparent cost of capital than private firms. However, the low cost of borrowing by governments does not reflect sup erior capabilities to choose or manage projects. Instead, it reflects the fact that governments have recourse to taxpayers, who de facto pro vide a fairly open-ended credit insurance to the government. If taxpay ers were remunerated for the risk they assume in the case of tax-finan ced 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 thu s no justification on the basis of capital cost advantages for governm ent funding or guaranteeing the provision of private goods or-services . Privatization is, therefore, valuable, if it improves business effic iency when evaluated at the risk-adjusted private cost of capital. No more need be demonstrated in a value-for-money test.