The Ring: discount rates edition

Locked at the bottom of a dark well is a beautiful-looking idea. 

"Set discount rates to very low levels when thinking about intergenerational issues."

It is a beautiful looking idea. We don't discount utilities. Future people matter. Conventional discount rates mean that far-off benefits or costs count for next to nil. Don't we care about future people?

Let the beautiful idea out of the well. 

Surely it will be used only for very long-term lovely environmental projects with century-long returns. 

Who locked it in the well anyway? It had to have been bad people for bad reasons.

Let the beautiful idea out of the well. Free it!

A couple of decades ago, Treasury was the place that warned about public choice considerations. About how this sort of thing might be a bad idea, and the reasons it would be a bad idea, and the safeguards that might be needed if you wanted to let the thing out of the well. 

Lately, Treasury's been drinking from the well instead. 

I was pretty sceptical of the initiative, figuring that the proposed dual discount regime would lead to shenanigans. 

An earlier version of this stuff had a 5% discount rate for social investment projects. Tauranga's business case for the Te Manawataki o Te Papa civic redevelopment consequently claimed that the thing was a social investment project that could get the 5% discount rate. Of course this stuff was going to encourage shenanigans. 

The final version sets a standard discount rate for 'commercial' projects at 8%, and that only 'non-commercial' projects would get the much lower discount rate: 2% in years 1-30, 1.5% in years 31-100, and 1% in years 101+. Along with a 'mandatory' sensitivity test at 8%.

And again without and decent definitions or guardrails - just hopeful suggestions about considerations that might affect whether something is commercial or non-commercial. Or any explanation of what enforces mandatory sensitivity tests in a world where zero other Ministries or Agencies respect Treasury as enforcer on anything any longer. 

But boy this sure sounds hopeful and full of rainbows and unicorns.

Updating the discounting regime to use SRTP as the default for proposals with mainly non-commercial costs and benefits makes the CBA settings more technically robust, especially in a policy environment where there is increasing focus on long-term impacts of policy. 

They let it out of the well. 

And it's going about as well as expected.

NZTA in January decided that "most transport activities undertaken by the public sector" are non-commercial. And, in fairness, there's no commercial case for most stuff NZTA now does. So it's 'non-commercial' in that sense. 

And so earlier this week a pile of new Roads of National Significance got announced, many with very low benefit-cost ratios, with the things assessed at a 2% discount rate. And no sensitivity testing at 8% that I can find. 

It's terrible of course. 

But there's a poetry to it. 

Folks wanted to let her out of the well to justify environmental projects. 

And instead we get more motorways.

Dieter warned you about some of this. And you didn't listen. 

Treasury is a fallen place that has forgotten the faces of its fathers.