Article

Investment Appraisal in the Public Sector.

Oxford Review of Economic Policy (Impact Factor: 0.78). 02/1997; 13(4):12-28.
Source: RePEc

ABSTRACT

Recent developments, such as privatization and the private finance initiative, have raised the issue of which assets should be owned by the public sector and whether assets have different values in the public and private sectors. In order to answer these questions, we first note that the allocative considerations that usually motivate government intervention need not require the direct provision of services by the government using government-owned assets. We then argue that the government should own the assets used to provide the services where the private sector fears expropriation by the government, or where ownership confers on the private sector such power as to preclude efficient allocations. Finally, we argue that the discount rate for governments' projects equals the expected return on comparable investments in the capital markets. The government should, however, discount pre tax cash flows at the pre-tax discount rate, for it receives all tax revenues. Copyright 1997 by Oxford University Press.

Download full-text

Full-text

Available from: Michel A. Habib
  • Source
    • "If taxpayers were to apply a riskadjusted discount rate equal to the shadow cost of equity, it would be significantly higher than the cost of debt (Klein 1997). Brealey et al. (1997) argue that the social discount rate is the expected rate of return for comparable capital market investments. The state does not apply this higher discount rate because it sees itself as essentially a risk-free borrower. "
    [Show abstract] [Hide abstract]
    ABSTRACT: The Public Private Partnership (PPP) market in Australia has been in existence since 2001 although many build own operate (BOT) and outsourcing arrangements for the provision of infrastructure services were entered into by public agencies at State and municipal level throughout the 1990s. The market is considered mature with PPP policy frameworks in place at national, state and territory levels. Policy requires that projects nominated for delivery as PPPs undergo a rigorous evaluation that involves a series of gateway assessments at various stages in the procurement, including, project selection, preparation of a business case, the costing of alternative procurement options, risk-weighted life cycle costing of the project, qualitative and quantitative bid criteria and risk transfer. It is the rigorous examination process that PPP policy introduces that has delivered successful outcomes in 88% of the transactions commissioned in Australia. Evidence suggests that PPPs are delivering projects sooner, at lower cost and with higher levels of user satisfaction than traditional procurement methods. It is also attributed to the realignment of incentives that PPPs bring to long-term service contracts and the transfer of service delivery responsibility to the party with most to gain from sustained high performance. PPPs account for around 5% of infrastructure capital spending by Australian governments and are best suited to long-term contracts involving complexity, new technologies and life cycle costing risk. With reference to PPP experience in Australia and the United Kingdom, this paper examines the lessons learnt and the insights this offers for improved practices in traditional procurement, outsourcing and relationship contracting. Keywords: Public private partnerships, public procurement, procurement theory and practice.
    Preview · Article · Jan 2013
  • Source
    • "Many prestigious economists (Samuelson, 1964; Vickrey, 1964; Solow, 1965; Baumol, 1968; Arrow and Lind, 1970), analyzing the social discount rate in the 1960's and 1970's, claimed that the discount rate for public entities should be lower than for the private sector. Other researchers (Hirshleifer, 1964; Diamond, 1967; Bailey and Jensen, 1972; Drèze, 1974; Kay, 1993; Brealey, Cooper, and Habib, 1997; Klein, 1997, among others) claim that the social discount rate should be higher than the plain public borrowing cost, hence equaling both public and private discount rates. They suggest that the public sector's lower borrowing cost reflects the fact that the public sector does not default, that it can levy taxes to repay the debt, and also that the lower cost of funds does not reflect a more efficient management of risk. "
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper presents a rationale for hybrid public-private capital structures in public utilities. The public sector can borrow money cheaper, while private investors can spawn life-cycle cost savings. When investment vehicles enable the internalization of the financial advantage of the public sector and the managerial advantage of the private sector, a Pareto-efficient capital structure is achieved with both the public and private parties as shareholders. I show how different knowledge transfer schemes determine the optimal shareholding structure for the utility company.
    Preview · Article · Dec 2012 · Annals of Public and Cooperative Economics
  • Source
    • "If taxpayers were to apply a risk-adjusted discount rate equal to the shadow cost of equity, it would be significantly higher than the cost of debt (Klein, 1997). Brealey et al (1997) argue that the social discount rate is the expected rate of return for comparable capital market investments. The state does not apply this higher discount rate because it sees itself as essentially a risk-free borrower. "
    [Show abstract] [Hide abstract]
    ABSTRACT: The public – private partnership (PPP) market in Australia is considered to be sophisticated and mature. Yet there have been several major failures that have occurred with economic infrastructure projects. Building on the experiences of Australia, we examine the underlying concepts of PPPs and the pertinent issues that have arisen during the procurement of infrastructure projects. Lessons learnt from implementing PPPs with respect to risk allocation, certainty, incentives, intergenerational equity and fiscal sustainability, and the cost of capital are identified and discussed. We conclude by suggesting that future research should focus on examining how PPP delivery can be improved rather than on determining their usage within the marketplace.
    Full-text · Article · Jan 2011 · Environment and Planning C Government and Policy
Show more