The effects of reducing the discount rate used in evaluations of initiatives funded from the National Land Transport Fund (NLTF) were assessed during 2007–09. Over 160 projects across a range of project types were collated and the relative effects of different discount rates were documented.
As lower discount rates are applied, the demands on the budget become greater, and every dollar in the budget becomes more valuable. Thus any project that releases an extra dollar of cost is valued more than any project that produces an extra dollar of benefit. A lower discount rate would probably be most favourable to initiatives that reduce the total cost of maintaining and operating the network, and are favourable to major long-lasting infrastructure investments. Initiatives with large future operating and maintenance costs decrease in relative priority. The NLTF is now funded from hypothecated transport revenues, so raising revenues is more likely to displace private consumption than private investment. Therefore, using a social time preference rate is most appropriate. This might range from 3-5% real rather than the current 8% real, with 4% being appropriate. However, the final decision should lie with policy makers rather than economists, given the normative judgements required.
Keywords: BCR, benefits, cashflow, cost benefit, costs, discount rate, evaluation, land transport investment, New Zealand, transport