Thursday, 27 September 2018

MBIE discount rates

Treasury's cost-benefit guidelines say that the public sector should normally use a 6% discount rate in assessing normal projects.

People can argue about whether that's the right discount rate, and especially when it comes to very long term projects.

But at least having a single recommended discount rate puts all projects on a common basis. If it's weighted too heavily towards the present, it's so-weighted across all policy areas. No pick-and-choose to put in a high discount rate for projects with back-loaded costs to get it over the line, or a low discount rate for projects with front-loaded costs and later benefits.

MBIE's RIS on the government's Taranaki oil ban uses a different set of discount rates.

First up, we should be giving bouquets to MBIE for putting through advice that it had to know would be unwelcome. The government had already announced the ban - it simply didn't care about normal policy processes or potential costs. MBIE would have felt some pressure to say nice things about an already announced policy, and they didn't do that.

They have taken stick for the choice of discount rates though. They presented a range of costs to the Crown under different scenarios, including a 3% discount rate, a 10% discount rate, and an undiscounted flow of tax, royalties, and industry profits. Their midpoint estimates came from the 3% discount rate figures.

It looks like there's prescription in the rules around assessing permit applications requiring a 3% discount rate normally, and a 10% discount rate when proxying for industry cost of capital.

I don't know why that prescription is there. I am also not nearly a good enough interpretation guy to know whether this requires that rate in this context, or whether these rules were superseded by other rules I don't know about.

But I am curious why a 3% rate is here prescribed. I'm happy to entertain arguments that we should use a lower discount rate for really long term projects, but I'd want that to be set across all really long term projects rather than just some of them.

If anybody knows the backstory here, the comments section is open...

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