A common practice in project evaluation is to test NPV results by varying the discount rate. This practice is not recommended for the PSC. Varying the discount rate simply varies the NPV value of both the PSC and private sector bid(s), and does not in itself provide any useful information as to the risks of the project, which in any event have already been incorporated in the PSC's numerator cashflows.
Agencies may nevertheless wish to be satisfied that the difference in the PSC and private sector bid cannot be explained entirely in terms of differences in private sector cost of capital and the PSC discount rate. In this event, the variation in the discount rate should be constrained to no more than 2% pa either side of the PSC discount rate. The manipulation of discount rates to achieve target values is of course entirely unacceptable.
The private sector bid must be valued in NPV terms at the same discount rate as the PSC. It is therefore unlikely that agencies will need to apply sensitivity tests to the discount rate for the purposes of comparing private sector bids.
Further information on public sector discount rates is provided in Appendix 3.