Fixing the foundations: A case-based reform model on the cost of capital determination for Albania’s PPP project framework

This paper provides the first comprehensive analysis of public–private partnership (PPP) financial discount rate determination in Albania. It highlights systemic flaws in the financial evaluation of infrastructure projects while using, for the first time, a CAPM-based model for the cost of capital determination in Albanian PPPs. Despite the increasing reliance on PPPs to deliver public services, Albania lacks official guidance on project-level financial discount rate determination, undermining feasibility assessments and risk-sharing clarity. Using two real-life road PPPs approved in 2018, this study applies the Australian government’s risk-adjusted discount rate model, which is grounded in the capital asset pricing model (CAPM), and Damodaran’s country and industry data to estimate appropriate project-specific rates on the basis of market conditions and risk allocation. The findings reveal that the 5% discount rate used in the original feasibility studies was significantly below the nominal risk-free rate in national currency and risk-adjusted benchmarks, leading to overstated project viability and underpricing of public liabilities. By recalculating net present values under more realistic assumptions, the study demonstrates the urgent need for reform in PPP appraisal practices. The findings highlight the risks of arbitrarily low discount rates, including potential project failure, inflated project cash outflow projections, hidden fiscal liabilities, and misaligned risk transfer between public and private partners. Importantly, the paper helps practitioners apply the Australian model by overcoming limitations linked to the absence of an officially set market risk premium, while also offering policymakers guidance for establishing official benchmarks that can enhance consistency in PPP evaluation. It proposes a replicable, data-driven model for financial discount rate estimation that can be used in future PPP contracts in Albania and other emerging economies seeking fiscal transparency, value for money, and sustainable infrastructure delivery.