A guidebook on public-private partnership in infrastructure

Net present value: 
It is the sum of the present value of all future cash flows. It refers 
to discounted value
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of cash flows at future dates. A project is considered for 
investment if its NPV is positive. 
Internal Rate of Return: 
It is the discount rate at which the net present value of the 
cash flow of a project is zero. The IRR may be calculated based on either economic, 
or financial (i.e., market) prices of all costs and revenues (or benefits). If the financial 
IRR is less than the cost of capital, it implies that the project would lose money. If the 
economic IRR is less than the opportunity cost of capital (i.e., a predetermined cut-
off rate of investment), the project is not considered economically viable. 
A preliminary financing plan for the proposed project needs to be developed 
based on the outcome of the financial analysis and cash flow analysis. The plan 
should show a broad outlay of the estimated investment required by the government, 
private party and the lenders.
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Discounted present value is a method of measuring the return on investment which takes into account the 
time value of money. If alternative investment opportunities exist, money can be shown to have a time value. 
For example, US$ 100 today invested at 10 per cent will yield US$ 110 in one year's time. Conversely, US$ 
110 to be received in one year would be worth $100 now. The technique used to calculate the present value 
of a known future worth at a given discount rate is called discounting. It is the reverse of compounding which 
calculates the future value of a present investment at a given interest rate. 

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A Guidebook on Public-Private Partnership in Infrastructure
 
 
D. VALUE FOR MONEY 
Theoretically, a PPP project is favoured only when its generated 
benefits/revenues exceed the total costs including the additional costs compared 
with a public sector project. To ensure this, government regulations guiding PPP 
schemes may establish some value for money or public sector comparator (PSC) 
criterion. For example, in the United Kingdom of Great Britain and Northern Ireland 
and in Australia the net present value of the proposed project as a PPP scheme is 
compared with its value if implemented by the public sector. A project is 
implemented through the PPP modality only when it promises to give a superior 
value for money as a PPP project compared with its value as a public sector project.
There are, however, problems in applying the PSC concept ranging from 
methodological issues to various practical limitations involving the concept. Some of 
the major problems include lack of consensus on discount rate, high costs of 
financial modelling, omitted risks, lack of realistic data for meaningful comparison of 
implementation by the public sector, and non-existence of a public sector alternative. 
In view of these serious limitations of PSC, it may not always be a feasible 
proposition to apply the concept in developing countries.