124 MULTIPLE PURPOSE RIVER DEVELOPMENT 



Actual resource projects are not free of risks, however. Where 

 outputs are marketable, there is no assurance that the expected 

 revenues will be collected; even in the case of nonmarketable out- 

 puts, such as recreation and flood control, there is no guarantee 

 that the expected benefits will actually accrue. In the case of water 

 resource projects, there are always the risks caused by meteorologic 

 and hydrologic uncertainties. Yields on government securities do 

 not reflect these risks, since the federal taxing power stands behind 

 the bonds and any losses on projects will be paid out of taxes. 



To discover a risk premium which reflects individual willingness 

 to bear risks, we would need to estimate the cost of raising money 

 for water resource projects that would be incurred by a public 

 corporation unable to employ the taxing power to guarantee its 

 securities. The cost of financing some of the purposes, such as 

 navigation, electric power, and municipal water supply, would be 

 similar to the cost incurred by private utilities, since the service 

 and the risk is almost the same. These companies typically could 

 raise capital at an average cost of 4.5 per cent in 1955,*^ which 

 serves as a first approximation for these purposes. The financing of 

 irrigation would, in part, depend upon the security of the repay- 

 ment contracts and, in part, on the likelihood that the settlers 

 would realize the projected benefits. Nonreimbursable purposes, 

 such as flood control, for which there are no comparable private 

 industries, are subject to the risk that benefits will not be fully 

 realized. To impute risk premiums for these purposes, we would 

 need to take account of the fact that in some instances, particularly 

 in the case of flood control, the projects also serve to reduce risks — 

 a factor which should lower the interest rate. We shall not venture 

 an estimate. Suffice it to say that, taking the water resource pro- 

 gram as a whole, the interest rate derived from these assumptions 

 would be well above the pure rate of interest as measured by the 

 long-term government bond rate, but would be far below the 

 highest rates prevailing in the private economy. 



ate School of Business Administration, Harvard University, 1953) especially 

 Chapters 2, 4-7, 9, 10, and 17. 



■" This assumes 50 per cent of the funds to come from bonds paying 3.22 per 

 cent, 15 per cent from preferred stock paying 4.25 per cent, and 35 per cent 

 from common stock with an earnings price ratio of 6.5 per cent. All figures 

 are net of taxes. For a more detailed discussion of these figures see Chapter 

 VII, Table 38. 



