1.1 Overview

For specific processes during a PPP project, Discounted Cash Flow (DCF) Analysis is required to compare different cash flow streams. This guidance provides specific recommendations on calculating and using Discount Rates when undertaking DCF analysis for the purposes of:

• Evaluating the Public Sector Comparator (PSC)

• Evaluating Public Private Partnership (PPP) bids.

These two processes are required to assist in determining whether government can obtain better Value for Money (VFM) by:

• Delivering the project itself through more traditional means, the whole-of-life, risk-inclusive cost of which is estimated by the PSC; or

• Delivering the project through a PPP, the cost of which is represented by the private sector bids.

As the cash flow profiles of the PSC and private sector bids will differ, DCF analysis is used to compare them on a consistent basis.

This Discount Rate Guidance for Public Private Partnerships Projects ('Guidance') provides a methodology ('Methodology') for the development of the Discount Rate used to assess the relative VFM of the PSC compared to the PPP - this is the Financing Decision. The underlying principle is that the Investment Decision has already been made, ie the investment has merit and should proceed, and the only decision under consideration is whether to procure the project through traditional means or PPP.

This Guidance focuses upon the development of the discount rate for Social Infrastructure projects, ie, projects with net cash outflows for government. Appendix D sets out the required approach for Economic Infrastructure projects, ie, user pays.