A study to develop the instructions for setting discount rate in PFI model suitability assessment in Taiwan

Abstract

Since 1994, Taiwanese private sector participation in public works projects have been conducted with build-operate-transfer (BOT) models that must be self-liquidating. To expand the scope of private funding for public works and service investment plans, the Taiwanese government proposed the introduction of private finance initiative (PFI) models in 2012. Consequently, Taiwan will encounter issues concerning the selection of traditional government self-financed, BOT, and PFI models for future public works investments. In response to the future introduction of policies related to PFI models in Taiwan, this study developed setting standards for discount rates, a key parameter required for assessing the suitability of PFI models. The theoretical framework is based on the Capital Asset Pricing Model. The parameter data used in trial calculations were collected from the historical case data recorded in the Public Construction Bid Management Information System of the Public Construction Commission, Executive Yuan, and employed in further analyses and imputations. The results indicate that of the six primary categories of public works examined in this study, railway works exhibit the highest risk, with an estimated systemic risk coefficient β of 0.9 and a recommended discount rate of 8.9%. Conversely, mass rapid transit system works exhibit the lowest risk, with an estimated systemic risk coefficient β of 0.3 and a recommended discount rate of 5.3%.