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Application of Social Discount Rate in Public Projects

Éva Pálinkó
PhD, Associate Professor, Budapest University of Technology and Economics

Márta Szabó
PhD, Associate Professor, Budapest University of Technology and Economics

Published in: Public Finance Quarterly 2012/2 (p. 184-199.)

Summary: 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.

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

Journal of Economic Literature (JEL) kód: H43, G31

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