Government, when it chooses to use traditional procurement is investing directly in infrastructure and is thereby, in effect, adding an infrastructure asset to its investment portfolio. Recently, governments in Canada have even taken the step of including these assets, such as roads, bridges, schools and hospitals, on their balance sheets.
The financial return from holding this type of asset is in the form of a reduced cost: that is, not having to pay a private sector partner for the provision of infrastructure services. This means that where government payments to a private sector partner are the partner's only source of revenues, the revenue return to government from a PPP investment is very similar to, if not exactly the same as, the revenue return to the private sector partner.
For the purposes of the business case analysis, it is typically assumed that government, under a traditional procurement model, would build the same infrastructure asset as the private sector would under a PPP, and would deliver the same quality and quantity of services. It can therefore be assumed that government would face a very similar profile of costs and risks.
Given that the risks are similar on both the revenue and cost side of the equation, a government investment in infrastructure should have roughly the same risks and returns as the corresponding investment by the private sector. It follows then that government should value the asset in the same way the private sector does. That is, government should discount costs and revenues using roughly the same cost of capital. As a matter of practice, the most practical approach is for government to estimate or obtain a measure of the private sector's cost of capital, and to use this amount as an estimate of its own cost of capital.
A similar argument holds even when the private partner has its own revenue sources, such as tolls. In the case where the private partner's revenues are revenues that would otherwise be received by the public sector, such as tolls, the public sector would likely have to separately forecast the revenues it would receive were it to use traditional procurement.