Title: The public private partnership paradox

Language: English

Type: Document

Nature: Website

Published: January 1, 2010

Region: Global

Country: Global / Non-Specific

Keywords: PPP Cycle, PPP Reference Guide, Online Guide

Document Link(s):

Document Summary:

A public private partnership (PPP) is a contractual arrangement between government and the private sector, usually for the delivery of a piece of social infrastructure or a social service. Over the past 10 years, PPP activity around the globe amounts to many billions of dollars. The key features of a PPP arrangement are (a) that government will make a series of cash payments to the private sector, usually over a long “concession” period in excess of 20 years; and (b) that the risk (particularly the systematic risk) of the project is shared between the government and private sector. Governments must determine whether the payments to be made under the PPP (given their amount and risk) represent value for money relative to the cash flows (and risk) that would be involved with traditional or alternative government procurement options. The standard valuation framework based on the Capital Asset Pricing Model (CAPM) suggests that alternative streams of cash flows should be discounted to present value at a rate reflecting their systematic risk. In the context of PPPs, it has been argued that the standard framework produces a paradox whereby government appears to be made better off by taking on more systematic risk. This has led to a range of approaches being applied in practice, none of which are consistent with the standard CAPM valuation approach. In this paper, we demonstrate that the proposed approaches suffer from internal inconsistencies and produce illogical outcomes in some cases. We also show that there is no problem with current accepted theory, and that the apparent paradox is not the result of a deficiency in the current theory, but rather is caused by its misapplication in practice. In particular, we show that the systematic risk of cash flows is frequently mis-estimated, and the correction of this error solves the apparent paradox. In this regard, we show that our results are consistent with the substantial 1970s and 1980s literature on the discounting of cash outflows – a literature that was apparently ignored when PPP evaluation frameworks were developed.

Document Details:

Gray, Stephen, Jason Hall, and Grant Pollard. 2010. The public private partnership paradox. Brisbane, Australia: University of Queensland. [#4270]

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Updated: June 27, 2022