Estimates of ρ

A6.9 The estimate of ρ (rho) is the sum of:

an allowance for time preference (δ)

an allowance for unpredictable risks not normally included in appraisal, known as 'catastrophic' and 'systemic' risk (L)

A6.10 The risks contained in L could, for example, be disruptions due to unforeseeable and rapid technological advances that lead to obsolescence, or natural disasters that are not directly connected to the appraisal. L also includes a small premium for 'systemic risk' because costs and benefits are usually positively correlated to real income per capita. With regard to time preference, δ, Freeman, Groom and Spackman (2018)43 survey the evidence and show that plausible values range from 0% to 1%. Coupled with an estimate of 1% for the risk component, L, this is compatible with a value of 1.5% for the overall value of ρ.

A6.11 For the purposes of the STPR the estimate of δ is retained at 0.5% and the estimate of L is retained at 1%. The estimate of ρ is therefore 1.5%.

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43 ibid.