Abstract
Public Private Partnerships (PPP) are viewed by the private sector as investment projects. An investment criterion, such as the internal rate of return (IRR), widely used by practitioners, is thus necessary in order to determine if the opportunity is sustainable from an economic point of view and worth pursuing. However, a cash flow may have multiple IRRs—is it appropriate in the context of PPPs to use this criterion? This paper provides a clear proposition to determine the potential number of real positive IRRs a cash flow may have, depending on the number of sign variations and the value of the net present value (NPV) calculated with a discount rate equal to 0 (NPV(r = 0)). This proposition can sometimes be used when other tests (such as Norstrom’s Criterion) are inconclusive to determine if a cash flow has a single real positive IRR. The proposition is generally met by the typical cash flow of a PPP project, validating the use of IRR as an investment criterion.
Highlights
Public Private Partnerships (PPPs) are arrangements used by the public sector to deliver and manage public sector infrastructures, services and facilities
In order to assess the financial sustainability of a PPP, there is a widespread use of techniques that combine the return and the risk of a particular project, in order to determine if it makes sense as an investment project
One such indicator is the internal rate of return (IRR), a metric used in capital budgeting to estimate and compare the profitability of potential investment projects
Summary
Public Private Partnerships (PPPs) are arrangements used by the public sector to deliver and manage public sector infrastructures, services and facilities. In order to assess the financial sustainability of a PPP, there is a widespread use of techniques that combine the return and the risk of a particular project, in order to determine if it makes sense as an investment project. One such indicator is the internal rate of return (IRR), a metric used in capital budgeting to estimate and compare the profitability of potential investment projects.
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