Required Approach

The PSC model should be developed using observed returns private sector entities are seeking for similar projects to develop the model.  This will naturally include a market premium for Systematic Risk since economic infrastructure cash flows are subject to such risks.

The PPP bids will include either a payment to, or from the state independent of the actual future revenue experience and are thus devoid of systematic and project risk, from the government perspective and hence should discounted by the risk free rate. There is no need to adjust this rate since the PSC directly values the cost of Systematic Risk and therefore there is no differential between valuation approaches as there is in social infrastructure projects.

In summary:

•  The PSC is evaluated at the Project Rate; and

•  Bid revenue streams are evaluated at the risk free rate.