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

1. Social discount rate for Russia: sectors’ imbalances and value selection Tatiana Kossova, PhD in Economics Mariia 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

2. 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

3. 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.

4. 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.

5. Evaluation of SRTP: methodology Maximizing the utility function with the restriction based on consumption: 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.

6. Social opportunity cost of capital approach Possibility to take into account the specificity of a particular sector where public investments can be implemented Usefulness of the Social Opportunity Cost of Capital (SOC) approach Budget performance evaluation

7. Evaluation of SOC: methodology

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

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

10. Public investments

11. Values of a social discount rate for different sectors

12. Values of a social discount rate for different sectors

13. 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.