The Public Private Partnership Paradox

39 Pages Posted: 5 Apr 2010

See all articles by Stephen Gray

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Jason Hall

University of Michigan, Stephen M. Ross School of Business

Grant Stewart Pollard

Value Decisions

Date Written: February 10, 2010


A public private partnership (PPP) is a contractual arrangement between government and the private sector, usually for the delivery of a piece of social infrastructure or a social service. Over the past 10 years, PPP activity around the globe amounts to many billions of dollars. The key features of a PPP arrangement are (a) that government will make a series of cash payments to the private sector, usually over a long “concession” period in excess of 20 years; and (b) that the risk (particularly the systematic risk) of the project is shared between the government and private sector. Governments must determine whether the payments to be made under the PPP (given their amount and risk) represent value for money relative to the cash flows (and risk) that would be involved with traditional or alternative government procurement options. The standard valuation framework based on the Capital Asset Pricing Model (CAPM) suggests that alternative streams of cash flows should be discounted to present value at a rate reflecting their systematic risk. In the context of PPPs, it has been argued that the standard framework produces a paradox whereby government appears to be made better off by taking on more systematic risk. This has led to a range of approaches being applied in practice, none of which are consistent with the standard CAPM valuation approach. In this paper, we demonstrate that the proposed approaches suffer from internal inconsistencies and produce illogical outcomes in some cases. We also show that there is no problem with current accepted theory, and that the apparent paradox is not the result of a deficiency in the current theory, but rather is caused by its misapplication in practice. In particular, we show that the systematic risk of cash flows is frequently mis-estimated, and the correction of this error solves the apparent paradox. In this regard, we show that our results are consistent with thesubstantial 1970s and 1980s literature on the discounting of cash outflows – a literature that was apparently ignored when PPP evaluation frameworks were developed.

Keywords: Public private partnership, systematic risk

JEL Classification: H43, H54

Suggested Citation

Gray, Stephen and Hall, Jason L. and Pollard, Grant Stewart, The Public Private Partnership Paradox (February 10, 2010). Available at SSRN: or

Stephen Gray (Contact Author)

University of Queensland - Business School ( email )

University of Queensland
Brisbane, Queensland 4072

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

Jason L. Hall

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street, Ross School of Business
University of Michigan
United States
+1 734 926 6989 (Phone)

Grant Stewart Pollard

Value Decisions ( email )

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