Procuring Agencies are to consult DTF on the appropriate Discount Rate for use in assessing project finance. Discounted cashflow analysis is required to compare differing PSC and bid cashflows on a consistent basis. The National PPP Guidelines provide a methodology for determining the discount rates to be used in making this comparison and determining whether PPP delivery offers value for money (refer Volume 5: Discount Rate Methodology).
The methodology for determining the discount rate under the National PPP Guidelines is different from the previous Victorian approach. Under the previous Victorian approach, special rules applied to large and unusual projects, while general rules applied to all other projects. Under the National Guidelines, the special rules apply to all projects. Both methodologies adopt the Capital Asset Pricing Model (CAPM) to derive discount rates that factor in systematic risk when discounting PSC and bid cashflows for evaluation purposes.
The discount rate methodology under the National Guidelines is not appropriate for use in making the investment decision, that is, it is not appropriate for deciding at business case stage whether the investment has merit and should proceed.
The national guidance focuses upon the development of the discount rate for social infrastructure projects, i.e. projects with net cash outflows for government. Different considerations will apply to economic infrastructure projects.
For a summary explanation of the change in methodology as it relates to Victoria please refer to Annexure 4. The appropriate national guideline is Volume 5: Discount Rate Methodology.
For further information on the determining the general inflation rate for use in Partnership Victoria projects please refer to Annexure 5.
Current discount rate inputs that apply in Victoria are available in Annexure 3.