Notes and communications: How to price the risk of public investment?

There is little disagreement that the choice of the discount rate and the valuation of risk has a decisive impact on the appraisal of public investment projects. There is less aggreement, however, as to the appropriate method of determining the right price of risk and discount rate. The Dutch government has opted for a 4% discount rate Ministry of Finance 1995. This required rate of return is based on the historic average of the real yield on long-term government bonds. Early this year a special commission to the Dutch government tried to fill the gap in the practice of project appraisal Ministry of Finance 2003. This commission aims to offer a framework and a practical method for the assessment of risk in large public infrastructure projects. The framework also applies to the pricing of risks in public-private partnerships. This article discusses the practice of risk assessment in current cost-benefit analysis in the Netherlands and wants to highlight the framework and method proposed by this commission.