Cost–Benefit Analysis and Incentives in Evaluation

Cost–Benefit Analysis and Incentives in Evaluation

The Structural Funds of the European Union

Edited by Massimo Florio

This book provides an authoritative contribution to applied cost–benefit analysis (CBA) and other evaluation methods in the context of the regional policy of the European Union. Through the use of Structural Funds and other financial and regulatory mechanisms, the EU will help to promote thousands of infrastructure projects in the next decade. CBA will be a key ingredient in the investment decision process and the authors provide important insights from their international experiences in project appraisal and evaluation and point to some valuable lessons to be learnt for the future.

Chapter 11: Social Discount Rates for the European Union: An Overview

Michael Spackman

Subjects: economics and finance, public sector economics, valuation, environment, transport, valuation


Michael Spackman INTRODUCTION It is standard practice in project or policy analysis to discount costs and benefits over time, usually at a constant percentage rate per year. A private sector company discounts projected company expenditures and often revenues. The public sector usually discounts public spending, and sometimes consumption, or other welfare impacts valued in consumption equivalent values. In the private sector the discount rate is based on the cost of capital for the activity in question. The cost of capital is the rate of return required by financiers (adjusted as appropriate for taxes). The private sector cost of capital is the weighted average cost of the relevant debt and equity financing. The government cost of capital is the market cost of government borrowing. In government however the cost of capital does not (except in the model described below as the efficient markets hypothesis model) define the social discount rate. This chapter reviews the main conceptual approaches to the social discount rate. It is not concerned with the concept described in EC guidance as the financial discount rate for publicly supported commercial projects.1 This chapter reviews in the second section the three most frequently promoted conceptual frameworks for social discounting. The third section examines the quantification, from a welfare economics perspective, of social time preference, following the approach recommended for cost–benefit analysis in EU guidance. The fourth and fifth sections review the issues of discounting over the very long term and of comparing public and...

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