Public Private Partnerships, the Public Sector Comparator, and Discount Rates: Key Issues for Developing Countries

When a government considers using a public private partnership (PPP) – a long-term contractual arrangement with a private sector company to provide public infrastructure or services – an important question is whether the PPP will bring more value than using conventional public procurement methods. In some countries a “public sector comparator” (PSC) analysis, which compares the expected PPP with a similar hypothetical public sector project, is used to assess whether the PPP is likely to bring greater value for money (VFM). The PSC exercise has been subjected to increasing criticism. This paper focuses on just one aspect: the discount rate to be used in the comparison. Since the comparison between the PPP project and the PSC is made in terms of present values, the discount rate used can have an significant impact on the result. Countries have taken widely different approaches to determining the correct or most appropriate discount rate (or rates) to be used. There is no consensus. This paper does not attempt to provide a definitive solution to the problem. Instead, it aims to lay out and clarify some of the main issues and suggest possible approaches as a way to bring more light to the debate and give guidance to governments that use the PSC method in their assessment of PPPs.