Cost–Benefit Analysis and Incentives in Evaluation
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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.
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Chapter 12: Social Discount Rates for the European Union: New Estimates

David Evans


David Evans INTRODUCTION In its current social project appraisal guidance, the European Commission (EC) advocates a benchmark discount rate of 5 per cent for cost–benefit analysis in the case of EU member countries. This is a compromise figure based on market interest rate, cost of capital and time preference considerations, European Commission (2002, Appendix B.2, pp. 104–5). Different discounting practices by governments have resulted in the application of some widely divergent social discount rates (SDR) across European countries. In 2002, for example, the French rate, based on the marginal product of capital, was 8 per cent while the German rate, based on recent values of the real long-term government bond rate, was just 3 per cent. The official rate for the UK, a compromise between cost of capital and time preference considerations, was 6 per cent. See OECD (2001) for the application of these particular rates with respect to investment in road transport. While Germany has continued with the same approach since 2002, the British government reduced its rate, now based solely on social time preference, to just 3.5 per cent, HM Treasury (2003, Annex 6: 97). The French government followed suit in 2005 by reducing its official rate to 4 per cent. There is near convergence now between the official discount rates of three important EU member countries. An important reason for focusing on a possible 3–4 per cent range for the social discount rate in the case of the EU-15...

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