Evaluation of beta (β) by the external control in public-private partnership (PPPs) contracts

Abstract

One of the External Control’s constitutional responsibilities is to appraise the financial and economic viability of Public-Private Partnership projects (PPPs). In this context, it is important to evaluate the Weighted Average Cost of Capital (WACC) – the enterprise’s appropriate rate of return – according to the Federal Court of Accounts – Brazil (TCU). One of the components in the WACC calculation is beta (β), which represents the systemic risk of a firm or sector. Calculating beta in PPP contracts involves some problematic issues, because it usually includes construction, purchase of equipment and service provision, i.e., more than one economic sector. This paper aims to show that, according to the financial theory, it is more appropriate to use the weighted average of the betas of each sector involved in the project rather than using only the beta of the predominant sector. This conclusion was applied to the Health PPP analyzed by the Court of Accounts of the Federal District (TCDF).