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Estimating the economic opportunity cost of capital for public investment projects : an empirical analysis of the Mexican case

Author: Andrea Coppola; Fernando Fernholz; Graham Glenday; World Bank. Latin America and the Caribbean Regional Office. Economic Policy Sector Unit.
Publisher: [Washington, D.C.] : World Bank, [2014]
Series: Policy research working papers, 6816.
Edition/Format:   eBook : Document : International government publication : English
Summary:
"This paper offers an assessment of the methodologies employed to estimate the economic opportunity cost of capital for public sector projects, relying on the Mexican case for an applied empirical exercise. The traditional weighted cost of capital (top-down) approach used in the estimation of Mexico's economic opportunity cost of capital is reviewed and compared to the supply price (bottom-up) approach. With respect  Read more...
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Material Type: Document, Government publication, International government publication, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Andrea Coppola; Fernando Fernholz; Graham Glenday; World Bank. Latin America and the Caribbean Regional Office. Economic Policy Sector Unit.
OCLC Number: 874860559
Notes: "The World Bank, Latin America and the Caribbean Region, Economic Policy Unit."
"March 2014."
Description: 1 online resource (41 pages) : color illustrations.
Series Title: Policy research working papers, 6816.
Responsibility: Andrea Coppola, Fernando Fernholz, Graham Glenday.

Abstract:

"This paper offers an assessment of the methodologies employed to estimate the economic opportunity cost of capital for public sector projects, relying on the Mexican case for an applied empirical exercise. The traditional weighted cost of capital (top-down) approach used in the estimation of Mexico's economic opportunity cost of capital is reviewed and compared to the supply price (bottom-up) approach. With respect to previous studies using the top-down approach, this paper explores the contribution of domestic savings and expands the analysis to include a more detailed examination of the available macroeconomic, labor, financial, and tax information. The re-estimated top-down economic opportunity cost of capital for Mexico comes to 10.4 percent. To confirm these results and provide additional insights regarding the alternative bottom-up approach, the economic opportunity cost of capital is estimated using the supply price plus externalities method. For the case of Mexico, this paper recommends using a combination of estimation models (both the top-down and bottom-up approaches) to check the consistency of results and re-estimating the economic opportunity cost of capital every five years to accommodate for macroeconomic and fiscal changes. More broadly, the paper acknowledges the complexities involved in the estimation of the economic opportunity cost of capital for public investment projects and underlines the relevance of additional considerations, such as changes in global economic trends and country risk ratings, tax distortions, financial sector improvements, the impact of reforms, and data availability"--Abstract.

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