Development of social discount rate for affordable housing project appraisal in Malaysia

Abstract

There are growing concerns on how public projects should be evaluated as they bring long-term economic, social and environmental impacts to the nation. As such, to assess the feasibility of public projects such as affordable housing, forest reserve, and community part, cost-benefit analysis is used by project appraisers. One of the inputs for costs and benefits analysis is the discount rate, which has been widely debated as it was felt that the traditional discount rate should be replaced with a social discount rate for assessing public projects. The justification is that the social discount rate is concerned with the welfare of society, whereas the traditional discount rate focuses on profitability. There are limited studies on social discount rates in Malaysia, and the appropriate social discount rate to be applied for public projects is unknown. The question arises as to what should be the social discount rate for affordable housing development projects in Malaysia. Therefore, the purpose of this study was to propose a social discount rate for affordable housing development projects in Malaysia, which has recently become the priority for the nation. This study used a mixed-method research design which consisted of five objectives. Firstly, was to propose a systematic framework to construct a social discount rate for Malaysia, secondly, to construct a social discount rate for Malaysia based on the proposed systematic framework, thirdly and fourthly, to investigate social discount rate for an affordable housing development project in Malaysia based on the opinions of the project appraisers and registered valuers, and finally, to compare and justify the constructed social discount rate and recommended social discount rates for affordable housing development project in Malaysia. To construct the social discount rate, Social Time Preference (STP) approach was selected after systematically reviewing all social discount rate approaches. Later, project appraisers and registered valuers answered a questionnaire survey to propose social discount rates for Malaysia. The collected data were analysed using descriptive analysis. To achieve the last objective, a focus group discussion was conducted among experts from both private and public sectors to discuss and agree on a social discount rate which is applicable for affordable housing development projects in Malaysia. The findings revealed that the social discount rate constructed based on the STP approach was 5.99%, and the recommended social discount rates from project appraisers was 6%, and the registered valuers was 6%. To conclude, a focus group was conducted among the experts and they agreed that 5.99% (lowest rate among the three rates) which was constructed by using the STP approach, was more appropriate to be applied for assessing affordable housing development projects in Malaysia. The justification given was that they agreed with the theory of social discount rate which states that the rate should be lower, as the current traditional discount rate used by project appraisers is high. The findings provide a reference point to the project appraisers from both private and public sectors in determining and applying social discount rates in the study and assessment of public project feasibility.