A study by Dr. Fernando Fernholz and Dr. Graham Glenday of the Duke Center for International Development (DCID) and Dr. Andrea Coppola of the World Bank prompted the Mexican government to change the economic discount rate used in public investment decisions. The government announced in January that it would be lowering its discount rate to 10 percent, down from 12 percent used previously.
The study was in response to the government of Mexico’s request for consultancy services to review and update the discount rate used to evaluate public investment proposals. The country is experiencing a period of significant economic development and an improved credit rating.
“The Mexican government should be commended for its progressive thinking and proactive approach to using modern, evidence-based methods to keep its policies up-to-date,” Glenday said.
The study, Mexico: Estimation of the Economic Opportunity Cost of Capital for Public Investment Projects, was conducted from July to December of 2013 with World Bank support. It is available on the Mexican Ministry of Finance website.
Dr. Andrea Coppola from the World Bank formed a team and enlisted the services of Dr. Fernholz and Dr. Glenday based on their reputation for teaching, research and publications in the area of project appraisal.
The team, in a collaborative effort with counterparts at the Secretaria de Hacienda (Ministry of Finance, Mexico) reviewed the previous methodology used in Mexico, showed the effectiveness of an expanded and improved analytical approach, extending the results to the year 2012 and included analytical methods for risk considerations and the appropriate discount rate.
The analysis in the study included domestic savings, as well as a detailed analysis of the macro economy, the national accounts, labor and capital income and stocks, capital markets, and financial and tax information.