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 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. Maximizing the utility function with the restriction based on consumption:

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

7. Evaluation of SOC: methodology

8. 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 ParameterValue The rate of return on private capital, (i) 0,148 Fraction of the return that is reinvested, (s) 0,07 Fraction of an annual depreciation in the capital stock, (f) 0,06 Social rate of time preferences (SRTP) 3,3% Social opportunity cost of capital (SOC) 5,5% We use official Russian statistics starting from 2000 to 2011. All parameters are calculated as averages for this period.

10. Public investments Evaluation of public investments requires determining the social discount rate for a particular sector Public investments involve projects in different sectors of economics: education, health, agriculture, building, etc. Sectors of the Russian economy are substantially different

11. Values of a social discount rate for different sectors Sectors Rate of return on private capital, (i) Reinvest -ment rate, (s) Deprecia- tion rate, (f) SRTP, % SOC, % Russia as a whole 0,1480,070,063,35,5 Pre-school education and primary general education 0,090,220,053,3 General & specialized hospital activities 0,10,220,063,33,5

12. Values of a social discount rate for different sectors Sectors Rate of return on private capital, (i) Reinvest ment rate, (s) Depreciation rate, (f) SRTP, % SOC, % Russia as a whole 0,1480,070,063,35,5 Livestock farming 0,110,130,053,34,7 Construction of bridges, highways, tunnels and subways 0,180,090,063,36,8

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.