Social discount rate for Russia: sectors’ Social discount rate for Russia: sectors’ imbalances and value selectionimbalances and value selection

Tatiana Kossova, PhD in EconomicsMariia Sheluntcova, PhD in Economics

National Research University Higher School of Economics

This paper is an output of a research project implemented as part of the Basic Research Program at the NRU HSE

Importance of a social discount rate

Allocation of scarce budget resources requires selection of efficient investment decisions

Public investment projects are carried out in different sectors of economics

In international practice, the tool of estimating public investments is a social discount rate which allows to compare budget expenditures and social benefits

In Russia methodologies for performance estimation in the public sector don’t provide recommendations concerning the value of a social discount rate

Approaches to social discount rate evaluation

•Social rate of time preferences – SRTP – based on identification of time preferences for consumption.

Ramsey (1928), Marglin S. (1963), Bradford D. (1975), Kula E. (1985), Pearce D. (1995), Lopez H. (2008), Azar S. (2009), Mareike S. (2010), etc.

•Social opportunity cost of capital – SOC – allows to take into account the possibility of alternative use of resources in the private sector.

(Marglin S., 1963), Baumol W. (1968), Young L. (2002), Pearce D. (2003), Rambaud S. (2005), Kohyama H. (2006), Halicioglu F. (2011), etc.

Social Rate of Time Preferences approach

Social Rate of Time Preferences is the very

popular approach in both government

methodologies and research papers. Main reasons

are:

•clarity about methodology;

•availability of statistics;

•possibility to conduct cross-country

comparisons.

Evaluation of SRTP: methodology

1*1

1)( tt CСU

U(Ct) – society’s utility from consumption in moment “t”;µ - the parameter of the utility function;ρ – the rate of time preferences;SRTP – social rate of time preferences.

11

),(max1

)()(

21

212

1

SRTP

CC

CCCU

CU

1)1()1( gSRTP

Maximizing the utility function with the restriction based on consumption:

Social opportunity cost of capital approach

Usefulness of the Social Opportunity Cost of Capital

(SOC) approach

Possibility to take into account the specificity of a particular sector

where public investments can be

implemented

Budget performance evaluation

Evaluation of SOC: methodology

Evaluation of SOC: methodology

SOC – social opportunity cost of capital;

SPC – shadow price of capital;

SRTP – social rate of time preferences;

i – the rate of return on private capital;

s – the fraction of the return that is reinvested;

f – the fraction of an annual depreciation in the capital stock.

SRTPsifSRTP

siiSRTPSPCSOC **

(Lyon R., 1990), (Small K., 1998), (Zhuang et. al., 2007)

Evaluation of SOC for Russia

Parameter Value

The rate of return on private capital, (i) 0,148

Fraction of the return that is reinvested, (s) 0,07

Fraction of an annual depreciation in the capital stock, (f)

0,06

Social rate of time preferences (SRTP) 3,3%

Social opportunity cost of capital (SOC) 5,5%

We use official Russian statistics starting from 2000 to 2011. All parameters are calculated as averages for this period.

Public investments

Values of a social discount rate for different sectors

Sectors Rate of return on private

capital, (i)

Reinvest-ment

rate, (s)

Deprecia-tion rate,

(f)

SRTP,%

SOC,%

Russia as a whole

0,148 0,07 0,06 3,3 5,5

Pre-school education and primary general education

0,09 0,22 0,05 3,3 3,3

General & specialized hospital activities

0,1 0,22 0,06 3,3 3,5

Values of a social discount rate for different sectors

Sectors Rate of return on private

capital, (i)

Reinvestment

rate, (s)

Depreciation rate, (f)

SRTP,%

SOC,%

Russia as a whole

0,148 0,07 0,06 3,3 5,5

Livestock farming

0,11 0,13 0,05 3,3 4,7

Construction of bridges, highways, tunnels and subways

0,18 0,09 0,06 3,3 6,8

Conclusions

• SRTP is 3,3%, and SOC is 5,5% for short-term and medium-term public sector projects in Russia;

• SOC methodology allows to estimate the social discount rate for Russia and take into account particular sector features of public investments;

• The suggested procedure of estimating the social discount rate can be applied for various government initiatives in different sectors of economics. In addition to government agencies it may be helpful for private firms that implement projects bearing social effects.