Public and Private Sector Discount Rates in Public-Private Partnerships
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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