§ Mr. Llew SmithTo ask the Chancellor of the Exchequer what discount rate was adopted by Her Majesty's Government for public sector spending in the periods(a) 1979 to 1989 and (b) 1989 to the present; what considerations underpinned the change made in 1989; and if he will make a statement on Her Majesty's Government's future plans for the discount rate.
§ Mr. PortilloThe Government specify a standard rate of discount for the public services. It is set on the basis of long-term factors, and is changed infrequently.
The 1978 White Paper, "The Nationalised Industries", Cm 7131, introduced the concept of the required rate of return—RRR—a real return on the whole of each enterprise's investment programme. No discount rate was centrally specified for the enterprises, but in practice a rate 205W of 5 per cent. in real terms—the same as the RRR—or sometimes a higher rate, was used as a discount rate for investment appraisal.
At the same time as Cm 7131 an announcement was made about the discount rates to be used in the public services—Official Report, 5 April 1978, columns 147–48. A discount rate of 5 per cent. in real terms was specified for appraisals of choice of techniques, and a rate of 7 per cent. for other appraisals. In practice 7 per cent. was used only for the appraisal of roads.
A new regime was announced on 5 April 1989—Official Report, column 187. The RRR for public enterprises was raised from 5 to 8 per cent., and the discount rate for the public services from 5 to 6 per cent. However for central Government trading activities selling commercially into private markets the discount rate should usually be at least 8 per cent. Other special cases are listed in "Economic Appraisal in Central Government: A Technical Guide for Government Departments"—the "Green Book"—annex G, paragraph 12.
The 1989 changes were a consequence of the long-term trend in the real rate of return on private sector assets between the late 1970s and late 1980s. The increase in the discount rate for the public sector services was more modest, reflecting the smaller increase in the cost of capital to a private sector company raising funds for low-risk purposes.
The discount rate is intended to reflect long-term conditions, rather than cyclical factors.
§ Mr. Llew SmithTo ask the Chancellor of the Exchequer what assessment he has made on the effect on public sector investment in energy technology projects of the current level of discount rates.
§ Mr. EggarI have been asked to reply.
My Department's investment in energy technology projects is for research or regulatory purposes, for which assessment on a discounting basis is not appropriate. All the programmes are, however, subject to regular review. The public sector energy industries, which operate in a commercial environment, assess their investment programmes according to the appropriate Treasury guidelines.