Justification of the discounting rate components for the implementation of socially oriented projects

Abstract

The purpose of the study was to provide a theoretical and methodological justification of the key elements that form the discount rate for social projects. Particular attention was paid to the factors that affect its value, taking into account the unique features of social initiatives: a long payback period, low commercial profitability and high social impact. Approaches to determining the discount rate were summarised, focusing on methodologies for economic calculations of different types of projects. Classical models (capital asset valuation model) and alternative methods (comparative sales, related investments, internal rate of return, hybrid approaches) were considered, considering the specifics of industries. For example, in the IT sector, the risks of obsolescence are important, and for infrastructure projects, the long-term nature of investments and government regulation are important. The activities of rating agencies (S&P, Fitch, Moody’s) that assess long-term investment risks were analysed, as well as regulations, in particular, the Order of the Cabinet of Ministers of Ukraine No. 312 “On Approval of the Procedure and Methodology for Assessing an Investment Project with Significant Investments”. The authors substantiated the level of risks that should be considered when determining the discount rate: economic, political, market and social. For social projects, the risks may be of a different nature, as they often have lower profitability but a greater social impact. Approaches to determining the discount rate in developed countries (USA, Japan, Germany) were compared and the possibility of their adaptation to Ukraine was assessed. Methodological recommendations for determining the discount rate for social projects with a more balanced approach to risks, taking into account not only financial but also social, political and regulatory risks, were developed. The proposed recommendations will help investors to better assess the risks and benefits of socially oriented projects.