Discount Rates for State Project Procurement

2010
Michael Regan (Bond University), WA Treasury Corporation

Project Summary

A critical examination of appraisal methods used in government to evaluate provision of economic and social infrastructure. This is a well researched area of public policy and finance although the literature does not fully reconcile the differences that exist in the manner that governments’ measure procurement paid from the public purse, from those investments financed by private firms in the form of design, build, finance, operate (DBFO) and public private partnerships (PPP) transactions. This difference is often explained on the basis of market equivalence and the need to create a level playing field whereby measures of state procurement can be compared with private sector bids to deliver the same assets and services. This research will explore state project evaluation from a different perspective by distinguishing procurement of goods and services that are in the nature of pure public goods from those which possess the characteristics of quasi-public and private goods. The objective is to establish a clearer framework for reconciling differences between state and privately financed investment and suggest an alternative uniform approach to the measurement of capital-intensive infrastructure assets and services.

This research will examine state procurement at three levels. First, it is proposed to undertake a literature review that explores the theoretical and technical approaches to project procurement. Second, a review of OECD countries with a view to establishing methodologies for state provision of economic and social infrastructure. Third, to canvass international state procurement policy frameworks with a view to better understanding the evaluation options available to governments.

The object of the research is to provide a guide to Australian governments on selection of discount rates for economic and social infrastructure appraisal (public goods and quasi-public goods) and provide a benchmark for comparative evaluation involving market equivalence.