1. These inputs are intended for use in accordance with the National Public Private Partnership Guidelines - Volume 5: Discount Rate Methodology Guidance. That Guidance provides a methodology for the development of discount rates used to assess the relative value for money of the Public Sector Comparator compared to the PPP bids, where the only decision under consideration is whether to procure the project through traditional means or PPP and where there are net cash outflows for government. The methodology is not necessarily appropriate for determining discount rates for other purposes, such as calculating a project's benefit cost ratio.
2. The discount rate for discounting the Public Sector Comparator is the risk free rate.
3. The discount rate for discounting bids for evaluation purposes is the risk free rate plus a proportion (which can be from 0% to 100%) of the project risk premium, reflecting the proportion of the systematic risk that is transferred. The appropriate proportion of the project risk premium is calculated in accordance with the National Public Private Partnership Guidelines - Volume 5: Discount Rate Methodology Guidance.
4. The appropriate portion of the real risk premium should be added to the nominal risk free rate. (A technically correct approach would be to use the Fischer Equation to convert the nominal risk free rate to a real rate, add the appropriate proportion of the real risk premium, and then convert the result back to a nominal discount rate. However, this is unnecessary, as the result will not be materially different to the sum of the appropriate portion of the real risk premium and the nominal risk free rate.)1
5. At the time a Procuring Agency prepares the final Public Sector Comparator for a project, it should consult with DTF and Treasury Corporation of Victoria for advice on the risk free rate that should be utilised for the project.
6. The risk free rate will be determined using a one month moving average of the Treasury Corporation of Victoria 10 year bond yield, unless TCV and DTF determine that this is inappropriate in prevailing market conditions and advise that an alternative rate should be used.
7. The risk free rate for a project should not be changed after the final Public Sector Comparator has been completed. However subsequent movements in financial markets should be considered when determining the range of rates to be utilised in conducting sensitivity analysis as described in section 5 of the National Public Private Partnership Guidelines - Volume 5: Discount Rate Methodology Guidance.
8. DTF will periodically update these discount rate inputs and post the updated figures on the Partnerships Victoria website (www.partnerships.vic.gov.au).
Website: www.partnerships.vic.gov.au
© Copyright State of Victoria 2009
This publication is copyright. No part may be reproduced by any process except in accordance with the
provisions of the Copyright Act 1968.
Published: February 2009
Version 2 published January 2010
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1 This note 4 was updated in January 2010