A critical assessment of discounting policies for transport cost-benefit analysis in five European practices

Abstract

Cost-Benefit Analysis (CBA) has a long tradition as a broadly-used instrument for assessing transport infrastructure investments. In a CBA, the discount rate often determines whether a project passes the benefit-cost test. One concern is that literature on the subject offers widely differing recommendations regarding which discount rate should be used. What has not yet been studied is the way practitioners translate these (inconclusive) recommendations into the discounting policies applied to transport CBA. This paper aims to bridge this gap by analyzing how the rationales and arguments for underpinning discounting policies provided in literature are translated into five practices: the Netherlands, the United Kingdom, Norway, Sweden and Denmark. It does so by studying the countries’ transport appraisal guidelines and interviewing experts. This study observes that the five practices attempt to fully substantiate the discount rate in empirical results from (academic) studies. However, apart from empirical evidence, discounting policies in the five countries are based on practical arguments, political-administrative arguments and judgmental arguments. In some cases these judgments are inevitable because the empirical evidence is inconclusive, but in other cases discretionary decisions are made without any references to empirical evidence. The most important conclusion of this study is that both the political-administrative arguments and judgmental arguments are not – or are poorly – communicated in the guidelines of the five countries. This makes it difficult for the user of the CBA to decide whether s/he agrees with the reasonableness of the judgments. Finally, this study discusses solutions to improve the transparency of discounting policies.