The test discount rate to be used in cost-benefit and cost-effectiveness analyses of public sector projects is 4%.
This is the rate in real terms (i.e. excluding projected inflation) and should be applied to a project’s future costs and benefits as expressed in constant prices (i.e. excluding projected inflation). There is a further guidance note on the test discount rate in section E of the The Public Spending Code.
1. The NDFA advises that for Design, Build & Operate projects of more than 10 & less than 20 years duration, a rate of 2.66% be used for discounting project cash flows.
2. In respect of PPPs involving unitary payments over a period of 20 years and more, the NDFA will provide a project specific discount rate, in line with the guidance note mentioned above.
It should be noted that the discount rates above are nominal rates and should be applied to nominal cash flows (i.e. including projected inflation).
When preparing Public Sector Benchmarks (PSBs) or equivalent budgets the appropriate inflation indices and rates are as follows:
1. For services with a labour component below 50%, the Harmonised Index of Consumer Prices (“HICP”) should be applied. The applicable medium to long-term HICP rate is 2%;
2. For services with a labour component in excess of 50%, HICP + 1% is to be applied.
For construction and construction-related services, the relevant technical advisor will advise on the inflation rates to be used, on a project-specific basis.