3.62 Typically, the private sector takes account of risk by discounting future cash flow at a higher rate. A risk premium is therefore made explicit in the private sector cost of capital, and the level of return on capital is competitively determined according to the risks assessed in the project. In PFI, the project discount rate, or expected rate of return for the private sector, takes into account the costs associated with procuring private capital and also seeks to price the wider risks associated with lending to the project.
3.63 The gilt rate, on the other hand, does not make any attempt to calculate risks. This does not mean that the Government is able to borrow and spend money free of risk. Instead it means that, with publicly financed procurement, the taxpayer underwrites the associated risk, and this is reflected in a lower price of capital to the public sector. The taxpayer takes on the risk attached to the project, and where it materialises, bears the cost as a result. It is therefore inappropriate to compare a "risk free" cost of gilts with the cost of private finance: PFI projects provide value for money through the private sector taking on, pricing, and managing more effectively these project risks.