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Public and Private Sector Discount Rates in Public-Private Partnerships

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  • Paul Grout

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    Abstract

    Whether public sector projects should be discounted at a lower rate than private sector projects is a highly contentious issue and one that has spawned an enormous literature. The purpose of this paper is to assess the appropriate private and public sector discount rates in the context of public private partnerships. It is shown that there are powerful arguments for using a higher rate to discount private projects than public sector projects and that failure to recognise this may lead to excessive reliance on public provision. It is important to emphasise, however, that the reason for the divergence is not related to the conventional arguments of incomplete markets or taxation. Finally, we suggest that the results may have far broader implications for private sector involvement in public services.

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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp59.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 02/059.

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    Length: 14 pages
    Date of creation: Sep 2002
    Date of revision:
    Handle: RePEc:bri:cmpowp:02/059

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    Keywords: discount rates; public-private partnerships;

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    1. Bennett, John & Elisabetta Iossa, 2002. "Building and Managing Facilities for Public Services," Royal Economic Society Annual Conference 2002 22, Royal Economic Society.
    2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
    3. Oliver Hart, 2002. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," The Centre for Market and Public Organisation 02/061, Department of Economics, University of Bristol, UK.
    4. Sandmo, Agnar & Dreze, Jacques H, 1971. "Discount Rates for Public Investment in Closed and Open Economies," Economica, London School of Economics and Political Science, vol. 38(152), pages 395-412, November.
    5. Brealey, R A & Cooper, I A & Habib, M A, 1997. "Investment Appraisal in the Public Sector," Oxford Review of Economic Policy, Oxford University Press, vol. 13(4), pages 12-28, Winter.
    6. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
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