Discounting for Economic Analysis of Long-Lived and Short-Lived Water Resource Investments

With reference to the Cost-Benefit Analysis (CBA) of water resource projects, this paper intends to show the effects of discounting cash flows on the evaluation results. These are projects that commonly involve the use of unique and irreplaceable natural sites, often with potentially irreversible consequences and considerable effects on the community. Therefore, in the analyses it is of absolute importance to give the right “weight” to costs and benefits progressively more distant in time. In other words, the Social Discount Rate (SDR) must be chosen correctly. In this way, decision-makers can orientate themselves towards investment choices aimed at safeguarding the proper management of water resources. This research proposes a discounting approach that distinguishes between long-lived and short-lived water projects. Specifically: (i) a constant and dual discounting approach for interventions with a useful life of 30 years or more; (ii) a declining dual discounting approach for investment decisions with very long lifespan. The main novelty is the introduction in the logical-mathematical structure of the SDR of the environmental quality, expressed as a function of the Water Resource Index. An application compares the CBA results obtained both using the discount rates proposed here and the constant discount rates suggested by the European Commission. The substantial differences obtained show the importance of the defined model on the whole process of allocation of resources to water projects.