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CMPO Working Paper Series No. 03/059 Public and Private Sector Discount Rates in Public-Private Partnerships Paul A Grout CMPO, University of Bristol September 2002 Abstract Whether public sector projects should be discounted at a lower rate than private sector projects is a highly contentious issue and one that has spawned an enormous literature. The purpose of this paper is to assess the appropriate private and public sector discount rates in the context of public private partnerships. It is shown that there are powerful arguments for using a higher rate to discount private projects than public sector projects and that failure to recognise this may lead to excessive reliance on public provision. It is important to emphasise, however, that the reason for the divergence is not related to the conventional arguments of incomplete markets or taxation. Finally, we suggest that the results may have far broader implications for private sector involvement in public services. JEL Classification: H43 Keywords: Discount Rates, Public -Private Partnerships Acknowledgements This paper was given at a CMPO session of the Royal Economic Society Conference 2002 (University of Warwick) on ‘The Private Delivery of Public Services’. It is forthcoming in the Economic Journal (2003). This paper has als o benefited from comments at seminars at the University of Brunel, University of Manchester, HM Treasury (UK) and the Projects International Conference, 2001, Paris. Address for Correspondence Department of Economics University of Bristol 12 Priory Road Bristol BS8 1TN Tel: +44 (0)117 928 9844 p.a.grout@bristol.ac.uk CMPO is funded by the Leverhulme Trust. 1. Introduction In the las