●Research Trends and Results

Research to advance the evaluation methodology ofpublic works projects
OTANI Satoru, Senior Researcher
Research Center for Land and Construction Management, Construction Management Division(Key words) Social discount rate, uncertainty, sensitivity analysis
1. Introduction
Public works projects of the Ministry of Land,
Infrastructure, Transport and Tourism (MLIT) areevaluated three times: when a project is newly adopted,
when re-evaluated, and after the project is completed,and many evaluations are done every year. Evaluation
methods are not completed, so to perform more
appropriate project evaluations, it is necessary tocontinuously review the methodology and to improveit based on social and economic conditions andongoing survey research. So now since setting thesocial discount rate and dealing with uncertainty havea great impact on project evaluation results, thesurveys and points of contention are organized withthe two themes.
2. Setting the social discount rate
In an incomplete market where there are distortions
caused by taxes and by asymmetric information, there
is no agreement on which rate to use as the social
discount rate, and each country and organization sets
this rate based on its own information. Table 1 shows
the values of the social discount rates and their setting
methods in the major industrialized countries.
As overall trends, in the industrialized countries ofNorth America and Oceania, it is set as relatively highvalues between 7% and 8% based mainly on the return
rate on investment of private sector, but in the United
Kingdom, France, Germany and other industrializedcountries of Europe, the rates are between 3% and 4%,
mainly as values based on the social time preference.
In Japan, 4% is set as the average of real yields onlong-term government bonds as the opportunity costof capital, making Japan a member of the lower group
among the major industrialized countries.
The major points of contention concerning a more
appropriate social discount rate in Japan are as
follows : [1] suitability of the method of calculating
the social discount rate, [2] consideringintergenerational equity related to policies which
impact multiple generations, [3] propriety of adopting
a time declining discount rate, and [4] the appropriate
way to deal with the uncertainty of the social discountrate.
3. Dealing with uncertainty
Because public works projects are long term, thefuture cost, effectiveness, and project duration etc.

may change. So when a project is evaluated, these
Table 1. Social Discount Rates in Major Industrialized
Countries
Country

Socialdiscountrate

United States.

7%

Canada8%

New Zealand

8%

UnitedKingdom

3.5%

France4%Germany

3%

Japan

4%

Calculation method
Return rate on investment of private secter
Weighted mean of private sector return rate
and market interest rate
Return rate on investment of private secter(capital asset pricing model)Social time preference (Ramsey equation)
Social time preference (Ramsey equation)
Yield on long-term government bonds
Yield on long-term government bonds

changes, or in other words, the uncertainty, must beconsidered. One method of considering uncertainty issensitivity analysis of cost-benefits analysis, and theTechnological Guidelines to Cost-Benefits Analysis of
Public Works Project Evaluation (General Principles)(revised by MLIT in June 2009), stipulates
implementing the sensitivity analysis when making
cost-benefits analysis.
The major points of contention concerning dealing
with uncertainty including sensitivity analysis are as
follows: [1] methods of systematically accumulating,organizing and analyzing the results of foreign anddomestic project evaluations (particularly, the postproject evaluation), [2] organizing and analyzing
causes of and response to uncertainty, [3] improving
technologies for sensitivity analysis, and [4]establishing uncertainty evaluation methods including
items which cannot be converted to monetary value.
4. Future initiatives
Setting the social discount rate and dealing withuncertainty will continue to be organized and analyzed
with the focus on points of contention, contributing to
the advance of project evaluation methods.