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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.

Suggested Citation

  • Paul Grout, 2002. "Public and Private Sector Discount Rates in Public-Private Partnerships," The Centre for Market and Public Organisation 02/059, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:02/059
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp59.pdf
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    References listed on IDEAS

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    1. 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.
    2. Bennett, John & Iossa, Elisabetta, 2006. "Building and managing facilities for public services," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2143-2160, November.
    3. 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.
    4. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    5. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages 69-76, March.
    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 364-378, June.
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    Cited by:

    1. Tan, Zhijia & Yang, Hai, 2012. "The impact of user heterogeneity on road franchising," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(5), pages 958-975.
    2. Lozano-Minguez, E. & Kolios, A.J. & Brennan, F.P., 2011. "Multi-criteria assessment of offshore wind turbine support structures," Renewable Energy, Elsevier, vol. 36(11), pages 2831-2837.
    3. Ovando, Paola & Campos, Pablo & Calama, Rafael & Montero, Gregorio, 2010. "Landowner net benefit from Stone pine (Pinus pinea L.) afforestation of dry-land cereal fields in Valladolid, Spain," Journal of Forest Economics, Elsevier, vol. 16(2), pages 83-100, April.
    4. repec:eee:trapol:v:62:y:2018:i:c:p:12-20 is not listed on IDEAS
    5. Roehrich, Jens K. & Lewis, Michael A. & George, Gerard, 2014. "Are public–private partnerships a healthy option? A systematic literature review," Social Science & Medicine, Elsevier, vol. 113(C), pages 110-119.
    6. Michael Spackman, 2011. "Government discounting controversies: changing prices, opportunity costs and systematic risk," GRI Working Papers 67, Grantham Research Institute on Climate Change and the Environment.
    7. Fandel, Günter & Giese, Anke & Mohn, Brigitte, 2012. "Measuring synergy effects of a Public Social Private Partnership (PSPP) project," International Journal of Production Economics, Elsevier, vol. 140(2), pages 815-824.
    8. Soumaré, Issouf & Lai, Van Son, 2016. "An analysis of government loan guarantees and direct investment through public-private partnerships," Economic Modelling, Elsevier, vol. 59(C), pages 508-519.
    9. repec:eee:appene:v:211:y:2018:i:c:p:1095-1105 is not listed on IDEAS
    10. Claude Montmarquette & Iain Scott, 2007. "Taux d'actualisation pour l'évaluation des investissements publics au Québec," CIRANO Project Reports 2007rp-02, CIRANO.
    11. Tan, Zhijia & Yang, Hai, 2012. "Flexible build-operate-transfer contracts for road franchising under demand uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 46(10), pages 1419-1439.
    12. Power, Gabriel J. & Burris, Mark & Vadali, Sharada & Vedenov, Dmitry, 2016. "Valuation of strategic options in public–private partnerships," Transportation Research Part A: Policy and Practice, Elsevier, vol. 90(C), pages 50-68.
    13. Harry Clarke, 2007. "Conserving Biodiversity in the Face of Climate Change," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 14(2), pages 157-170.
    14. Paolo Balduzzi, 2006. "Models of Partnerships," Working Papers 96, University of Milano-Bicocca, Department of Economics, revised May 2006.
    15. Paul A Grout & Margaret Stevens, 2003. "Financing and Managing Public Services: An Assessment," The Centre for Market and Public Organisation 03/076, Department of Economics, University of Bristol, UK.
    16. Athena Roumboutsos, 2010. "Sustainability, Social Discount Rates and the Selection of Project Procurement Method," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(2), pages 165-174, May.
    17. Rachael Nsasira & Benon C. Basheka & Pross. N. Oluka, 2013. "Public Private Partnerships (PPPs) and Enhanced Service Delivery in Uganda: Implications from the Energy Sector," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 4(3), pages 48-60, May.
    18. Marian MOSZORO, 2014. "Efficient Public-Private Capital Structures," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 85(1), pages 103-126, March.
    19. Grout, P.A.Paul A. & Jenkins, Andrew & Zalewska, Anna, 2004. "Privatisation of utilities and the asset value problem," European Economic Review, Elsevier, vol. 48(4), pages 927-941, August.
    20. Paul Grout & Silvia Sonderegger, 2006. "Simple money-based tests for choosing between private and public delivery: a discussion of the issues," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 93-126, September.
    21. Deng, Zhongqi & Song, Shunfeng & Chen, Yongjun, 2016. "Private participation in infrastructure project and its impact on the project cost," China Economic Review, Elsevier, vol. 39(C), pages 63-76.
    22. repec:kap:iaecre:v:16:y:2010:i:2:p:165-174 is not listed on IDEAS

    More about this item

    Keywords

    discount rates; public-private partnerships;

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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