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Application of Social Discount Rate in Public Projects

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  • Éva Pálinkó

    ()
    (Budapest University of Technology and Economics)

  • Márta Szabó

    ()
    (Budapest University of Technology and Economics)

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    Abstract

    The ongoing co-financing system of the Cohesion and Structural Funds of the European Union will come to an end in 2013. Based on the experiences of the 2007–2013 financing period, the allocation of public resources will be reconsidered. By analysing the difference between the evaluation of private and public projects as well as the interoperability between the two methods, the application of the EU project evaluation model shows several anomalies. The case of a public project for public lighting illustrates well that in case actual investment return (financial rate of return – FRR) is higher than the discount rate applied by the European Union for the calculation of the financial net present value, but lower than the expected return on private projects, projects of value to the community will not be implemented. Regarding the post-2013 period, in our view, in the case of the projects co-financed by the European Union, the increased protection of environmental values through the discount rate is of utmost importance, which assumes the relinquishment of the principle of a discount rate that is constant in space and time and the expansion of consistency criteria applied in private projects to public projects.

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    Bibliographic Info

    Article provided by State Audit Office of Hungary in its journal Public Finance Quarterly.

    Volume (Year): 57 (2012)
    Issue (Month): 2 ()
    Pages: 184-199

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    Handle: RePEc:pfq:journl:v:57:y:2012:i:2:p:184-199

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    Related research

    Keywords: evaluation of public projects; social discount rate; capital budgeting;

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    1. Traeger, Christian P., 2011. "Sustainability, limited substitutability, and non-constant social discount rates," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 215-228, September.
    2. Mark A. Moore & Anthony E. Boardman & Aidan R. Vining & David L. Weimer & David H. Greenberg, 2004. "“Just give me a number!” Practical values for the social discount rate," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 23(4), pages 789-812.
    3. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    4. Schelling, Thomas C, 1995. "Intergenerational discounting," Energy Policy, Elsevier, vol. 23(4-5), pages 395-401.
    5. Jan Schumacher & Wolfgang Buchholz, 2008. "Discounting and Welfare Analysis Over Time: Choosing the ç," CESifo Working Paper Series 2230, CESifo Group Munich.
    6. Markandya, Anil & Pearce, David W, 1991. "Development, the Environment, and the Social Rate of Discount," World Bank Research Observer, World Bank Group, vol. 6(2), pages 137-52, July.
    7. Hansen, Anders Chr., 2006. "Do declining discount rates lead to time inconsistent economic advice?," Ecological Economics, Elsevier, vol. 60(1), pages 138-144, November.
    8. Saez, Carmen Almansa & Requena, Javier Calatrava, 2007. "Reconciling sustainability and discounting in Cost-Benefit Analysis: A methodological proposal," Ecological Economics, Elsevier, vol. 60(4), pages 712-725, February.
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