Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Sostenibilidad

Just another web-blogs Sites site

  • HOME
  • CATEGORIES
    • Agriculture and Food Security
    • Climate change
    • Ecosystems and Biodiversity
    • Environmental and Social Safeguards
    • Infrastructure and Sustainable Landscapes
    • Institutionality
    • Responsible Production and Consumption
  • Authors
  • English
    • Español

Project Evaluation and the Role of Discount Rate

February 11, 2016 por Tomás Serebrisky Leave a Comment


On the role of discount rates when evaluating infrastructure projects, and what happens when a project’s benefits – environmental or those positively affecting a region’s natural capital – come about in the long term.

In an unprecedented act of generosity, and in order to promote reading the blog, the undersigned have collected all we had in our pockets to give it away to the one millionth reader of this post (we hope no one will think we are too optimistic about this blog’s success). We have gathered, in total, 3 dollars.

Another idea came to mind. We offer the lucky one, either of two options: a) to receive the prize money at once – he will receive 3 dollars on a single day – or, b) to receive it after 50 years.

We understand most of our readers would prefer receiving the money today. And of course, as time passes by, money tends to depreciate. But, by how much (or less)? Well, look, 3 dollars in 50 years’ time would be the equivalent of 0.02 dollars of today, assuming an interest rate of 10%. That means in 50 years we’d have to give the lucky one 235 dollars so as to compensate for the period of time passed. In the same manner we can express 3 dollars in future money; I can “bring back” money from the future and know how much it would be worth today by using a discount rate.

When we make an investment for an infrastructure project – such as developing roads, electrification or water for rural zones – we know there will be expenses, not only financial, but also environmental and social ones, and that we will receive a series of benefits. We are often faced with several project alternatives to solve a problem, all entailing their own costs and benefits in the long term. How do we compare all the different options? Easy, by “bringing” costs and benefits back from the future. This way we get a single figure for each project and may choose the option with the greater benefit for society.

The value used in order to reconcile flows of costs and benefits over time is crucial, and it clearly impacts project evaluation. This value is known as discount rate. The higher the rate, the less importance we confer to our future and thus to the resources of which future generations will make use. Therefore, a 10% discount rate implies all that happens in 50 years does not matter too much (1 dollar in 2066 equates 0.008 of today’s dollars), versus a 1% rate, where a 2066 dollar would equate 61 of today’s cents. Imagine, therefore, the importance of establishing one rate or another when evaluating different projects in which the environmental component is crucial.

If we were to establish high rates, what would happen with those projects whose benefits are generated in the very long term, such as some of the projects aimed at protecting the region’s natural capital? They wouldn’t have much weight in our decision making today. In short, we would prioritize projects with short-term benefits. This argument has led many countries to establish lower rates for projects with a strong environmental character or with great impact over the exploitation of their natural resources. For instance, countries such as Sweden or France have started to even consider, within their evaluation processes, a higher and more explicit concern for projects whose environmental implications have a very long-term effect.

There are multiple approaches, both methodological and philosophical around the value and calculation of the discount rate. Unfortunately, there is no consensus over them but instead ample variety around the rate used among countries and international credit institutions.

Thus, while the UK or the European Union settle rates at 5 and 3.5% respectively, some countries such as Colombia, Bolivia, Argentina, Uruguay, Costa Rica or India keep 12% rates, in addition to Peru (9%), Australia (7%) or the USA (7%).

It is quite possible for the rate’s observed variations to not only reflect the existence of different theoretical approaches, but also differences in the cost of social opportunities received from public funds, or regarding the degree to which inter-generational equity is considered (a central argument when debating about the environment and resource exploitation).

We, at the Department of Infrastructure and Environment of the IDB, wish to explore this matter and keep the debate going. Here is the link to our last report regarding social discount rates in project evaluation, where we offer some practical reflections for Latin America and the Caribbean. Proper project and public policy evaluation requires profound reflection over this topic, further than just accepting traditional criteria, for the light under which the future is assessed will condition decisions made today in the present.

If you are interested in Natural Capital and Biodiversity, follow us on Twitter @BIDecosistemas.

Photos:
Shutterstock,  ©hin255

Filed Under: Institutionality, Uncategorized

Tomás Serebrisky

Tomás Serebrisky, ciudadano argentino, fue nombrado Gerente del Sector de Infraestructura y Energía (INE) a partir del 1 de marzo de 2024. El Sr. Serebrisky es economista, y ha trabajado durante más de 20 años en desarrollo, enfocándose en infraestructura, asociaciones público-privadas, regulación y antimonopolio. A lo largo de su carrera, el Sr. Serebrisky ha dirigido o trabajado como economista en una amplia gama de proyectos de inversión y basados en políticas en transporte, energía, agua y desarrollo del sector privado en América Latina y el Caribe. En 2012, el Sr. Serebrisky se incorporó al BID como Asesor Económico Principal de INE. En este cargo, dirigió un equipo para brindar análisis y orientación estratégica en campos transversales como infraestructura sostenible, desempeño de servicios públicos, financiamiento privado de infraestructura y análisis de impacto de inversiones. El Sr. Serebrisky publicó extensamente en revistas académicas y es coeditor de la publicación insignia del BID en el 2020 “De estructuras a servicios: el camino hacia una mejor infraestructura en América Latina y el Caribe”. Antes de unirse al BID, el Sr. Serebrisky trabajó diez años en el Banco Mundial en varios cargos operativos, de capacitación y de asistencia técnica. Anteriormente trabajó en consultoría económica y fue Economista jefe de la Comisión Antimonopolio de Argentina. El Sr. Serebrisky tiene un doctorado en Economía de la Universidad de Chicago y es Licenciado en Economía (summa cum laude) de la Universidad de San Andrés en Argentina.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

SEARCH

Sustainability

This blog is a space to reflect about the challenges, opportunities and the progress made by Latin American and Caribbean countries on the path towards the region’s sustainable development.

SIMILAR POSTS

  • Big Data Bridging the Environmental Information Gap
  • How Transportation Affects Nature and Vice Versa
  • How Much Do We Care about Biodiversity?
  • Involuntary resettlement basics: Listen to others before you act!
  • What is participatory monitoring and how does it help prevent conflicts

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

    Blog posts written by Bank employees:

    Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


    For blogs written by external parties:

    For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

    The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

    Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



    Privacy Policy

    Derechos de autor © 2025 · Magazine Pro en Genesis Framework · WordPress · Log in

    Banco Interamericano de Desarrollo

    Aviso Legal

    Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

    facebook
    twitter
    youtube
    This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser.
    To learn more about cookies, click here
    x
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
    Non-necessary
    Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
    SAVE & ACCEPT