Choose your own adventure: Finding a suitable discount rate for evaluating value for money in public–private partnership proposals

Sebastian Zwalf, Graeme Hodge, Quamrul Alam

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

Abstract

The public sector comparator (PSC) is the key test for determining value for money in public–private partnership (PPP) proposals. Central to the use of the PSC is the discount rate adopted to develop a net present cost for the comparison of privately financed versus traditional delivery options. Several major theories exist informing what the discount rate should be; however, scholarly debate has been inconclusive about which theory is most suitable. This paper considers the two major discount rate theories and examines the discount rate policy applied in eight jurisdictions giving consideration to the rate applied and the theoretical basis on which discount rate policy is developed. It finds that the majority of jurisdictions rely on a variable project specific discount rate formula; a prescribed number is rare; most jurisdictions depart from the major theoretical schools and no two jurisdictions have the same approach; further, that a very wide range of discount rates are in use, ranging from 3.94% (nominal) to 10.15% (nominal) being observed.

Original languageEnglish
Pages (from-to)301-315
Number of pages15
JournalAustralian Journal of Public Administration
Volume76
Issue number3
DOIs
Publication statusPublished - 1 Sep 2017

Keywords

  • Discount rate
  • Infrastructure
  • PPP
  • PSC
  • Public sector comparator
  • Public–private partnership
  • Value for money
  • VFM

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