“A discount rate of 8% for public sector projects is too high”
On 23 November, 2012, at the Old Government Building Lecture Theatre 1, John Yeabsley (the Proponent) and Martin Lally (the Opponent) presented their cases on whether a discount rate of 8% for public sector projects is too high. Bronwyn Croxson (the Commentator) provided a summary of both sides.
Above (left to right): Norman Gemmell, John Yeabsley, Martin Lally, Bronwyn Croxson
John argued that there were many examples of public sector investment decisions where the social rate of time preference, not the shadow price of capital, was the appropriate discount rate to use and this was clearly less than 8% - perhaps around 3-4%.
John has kindly shared his presentation with us.
Martin’s starting point was that the (weighted) average real cost of capital (WACC) was the best tool to use in setting the discount rate, and moved quickly to demonstrating that a range of reasonable parameter values for New Zealand produced a discount rate not very different from 8%.
Martin has kindly updated his presentation with a conclusion.
Bronwyn then brought a novel use of Lego people to illustrate her critique of both sides!
A show of hands indicated a very evenly divided audience, perhaps evidence of the strong arguments by both sides. The debate generated much discussion as everyone enjoyed the drinks and canapés.
It was a great finish to our series of Public Finance debates. Please let us know if you have suggestions for a future series of debates and look forward to seeing you in the new year.
Thank you to all the presenters for their work on making this debate a success. Again, to Katherine and Aidan Meerman for their video work, which will be made available shortly on our website.
Enquiries to Cherry Chang, Administrator, Chair in Public Finance, firstname.lastname@example.org or 04 463 9656