Policy instruments (1) - Transport Policy and Planning in Great Britain - page 201

• All figures are shown net of inflation and expressed in £s for a common base year.
• All future costs and benefits are discounted at a standard annual rate. (The
'discount rate' reflects the extent to which we prefer benefits to be enjoyed - or
costs avoided - in one year rather than the next.)

The discount rate which the Government chooses to use in its investment appraisal
is a policy decision which is significant in a number of ways:

1 In a technical sense - the lower the discount rate the longer into the future

impacts have to be estimated since they will have a significant bearing on the
assessment of overall economic performance.

2 In a practical sense - the choice of discount rate will alter the relative performance

of schemes (even schemes which are superficially similar) according to the profile
of costs and benefits over time.

3 In an ethical sense - any discount rate greater than zero potentially leads to the

selection of schemes which give benefits to the current generation at the expense
of losses to future ones. This raises issues of inter-generational equity which are
central to the concept of sustainable development. (Hanley and Spash 1993
chapter 8)

In 2003 the Treasury introduced a major change by revising down the discount rate
from 6% to around 3%, thus giving considerably more weight to costs and benefits
experienced over the medium and longer term.
The overall worth of an investment (within the terms of CBA) can be summarised
in one or more of the following ways:

• the net present value (NPV), i.e. the sum of discounted benefits minus the sum
of discounted costs
• an overall benefit-cost ratio (BCR), i.e. the sum of the discounted benefits divided
by the sum of the discounted costs, or
• a public sector benefit-cost ratio, i.e. the sum of the discounted net benefits to
users, business and private sector providers divided by the sum of discounted net
costs to the public sector.

The same NPV can derive from a small difference between the benefits and costs
of a very large project, or a large difference between the benefits and costs of a smaller
one. The latter will have a higher BCR and, £ for £, represents a more productive use
of scarce resources. This can be extended a stage further with the public sector BCR
to identify the rate of return derived from the public investment component alone.
In practice the scope of any appraisal is limited by the ability to identify and
measure the full range of impacts in a systematic manner. CBA is further limited by
the ability to assign monetary values to these impacts. To date the application of CBA
in transport planning has been limited to a small sub-set of the issues included in the
NATA framework (see Box 12.1) although in practice these are frequently taken to
comprise the most important impacts relevant to a decision. Nevertheless DfT sees it
as desirable to extend the range of issues for which monetary values are incorporated
in the CBA and has commissioned research on noise, greenhouse gases, journey time
reliability and option values. The results of this work are progressively being included
in the Department's guidance on scheme appraisal (Chapter 21).