Social discount rate: theoretical models and their application in assessment of public investment projects

Vilma Kazlauskiene

Abstract


Purpose. The article is aimed to analyze problems of social discount rate (SDR) determination applied in cost-benefit analysis of public investment projects. SDR is critical parameter of cost-benefit analysis method, which allows calculating the present value of cost and benefit of public sector investment projects. The relevance of this problem analysis is determined by both discussions and different viewpoints of scientists from different countries to the choice of the most appropriate method to determine SDR and in Lithuanian national level the methodically based SDR, which would be applied when performing the analysis of public sector investment projects’ cost-benefit was not identified.

The aim of the article is to investigate peculiarities of application of SDR models in assessment of public investment projects and evaluate possibilities for application in Lithuania.

Methodology. In order to implement the article’s aim critical analysis of methods for determining SDR is performed, practical examples of SDR determination in foreign countries are analyzed. Possibilities to apply SDR models in Lithuania are evaluated by referring to criteria of sufficiency and accessibility of the statistical data necessary for SDR determination. References for further researches related to SDR application in assessment of investment projects in Lithuanian public sector are presented. The research is performed by applying methods of scientific and methodical literature analysis, systematization, interpretation as well as analysis of statistical data.

Results. The importance of SDR determination in analysis of public project cost-benefit has been disclosed. The critical analysis of SDR determination models by disclosing their advantages and disadvantages, application peculiarities in evaluating public investment projects has been performed. Examples of foreign countries’ practice in determining SDR have been analyzed. Possibilities to apply SDR models in evaluating public projects of Lithuania have been assessed.

The theoretical contribution. This article expands and complements researches in the field of determination of public investments’ social discount rate. The results of the performed research make premises for designing the SDR evaluation model, which in complex evaluates factors of investment projects determining SDR and enables to determine valid SDR size. This article also pursues to encourage discussions of Lithuanian scientists related to evaluation of SDR in the analysis investment projects cost-benefit.

Though foreign scientific literature started to analyze problems of SDR determination in the third decade of the XX century, nowadays active discussions of foreign scientists related methods of SDR determination, their advantages and disadvantages, the need for countries to determine the SDR size based on their detailed data disclose the relevance of SDR researches. Scientific literature analyzes problems in choosing the appropriate method for SDR determination in evaluating public investment projects, initiates discussions related to suitability of SDR determination methods, presents practical examples of SDR methods’ application in different countries.

The works of Lithuanian scientists fragmentarily analyze the problem of SDR determination. Kuodis (2004), Ginevičius, Bruzgė (2008) analyzed problems of analysis of public project cost-benefit. Baranauskienė (2013), who named the problems related to SDR determination as one of the disadvantages to apply these methods, presented the critical standpoint to the application of cost-benefit analysis.

Practical implications. The article pursues to develop practical researches of Lithuanian researchers in the field of SDR evaluation. The results of this article make premises for further SDR researches aimed to prepare the methodology for determining SDR based on Lithuanian data. Such methodology would give the possibility to apply the SDR size based on Lithuanian empirical researches in the analysis of investment projects’ cost and benefit in Lithuanian public sector.

In Lithuania greater attention is paid to SDR only in methodical publications; however, they present instructions how to discount cost and benefit related to investments. Though, in preparing investment projects funded by the EU, the European Commission recommends to apply 5 percent SDR, this rate is of recommendatory character and it is not confirmed at the national level. The Guide to Cost Benefit Analysis of Investment Projects (2014) points out that the countries, when evaluating investment projects, can apply the SDR based on calculations of a particular country; however, such rate has to be regulated by law acts. At present in Lithuania there are no researches performed and the SDR size based and regulated by law acts.

Keywords: social discount rate, public investment projects, cost-benefit analysis.

Paper type: Research paper.


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