Estimating the Economic Opportunity Cost of Capital for Public Investment Projects : An Empirical Analysis of the Mexican Case

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.

Bibliographic Details

Main Authors:	Coppola, Andrea, Fernholz, Fernando, Glenday, Graham
Language:	English en_US
Published:	World Bank, Washington, DC 2014-03
Subjects:	ACCOUNTING, ALTERNATIVE INVESTMENT, ALTERNATIVE INVESTMENTS, ASSETS, AVERAGE DEBT, BANKING SECTOR, BASE YEAR, BENCHMARK, BORROWING COSTS, BUDGET CONSTRAINTS, CAPACITY BUILDING, CAPITAL ACCOUNT, CAPITAL ASSETS, CAPITAL FUNDS, CAPITAL GAINS, CAPITAL INVESTMENTS, CAPITAL MARKET, CAPITAL MARKETS, CAPITAL SHARE, CAPITAL SHARES, CAPITAL STOCKS, CASH BALANCES, CENTRAL BANK, CLOSED ECONOMIES, COMMODITY, COMPETITIVE MARKET, COMPETITIVENESS, CONSUMERS, CORPORATE BONDS, CORPORATE INCOME TAXES, CORPORATE SAVING, COST OF CAPITAL, COST OF EQUITY, COST OF FUNDS, COUNTRY CREDIT, COUNTRY RISK, COUNTRY RISKS, CREDIT RATING, DATA AVAILABILITY, DEBT, DEBT DATA, DEBT INTEREST, DEBT RATIOS, DECISION MAKING, DEVELOPMENT BANK, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DIRECT INVESTMENT, DISCOUNT RATE, DISCOUNT RATES, DIVIDENDS, DOMESTIC CURRENCY, DOMESTIC PRICES, ECONOMIC COOPERATION, ECONOMIC DEVELOPMENT, ECONOMIC INFORMATION, ECONOMIC REFORM, ECONOMIC REFORMS, ECONOMIC RESEARCH, ECONOMIC RESOURCES, ECONOMIC TRENDS, ECONOMIC VALUE, ENVIRONMENTAL SUSTAINABILITY, EQUIPMENT, EQUITY FINANCING, EQUITY RETURNS, EXCHANGE RATE, EXPANSIONARY MONETARY POLICIES, EXPECTED RETURNS, EXTERNAL DEBT, EXTERNALITIES, EXTERNALITY, FACTORS OF PRODUCTION, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL FLOWS, FINANCIAL RETURN, FINANCIAL SAVINGS, FINANCIAL SECTOR, FINANCIAL SERVICES, FINANCIAL STRUCTURE, FIXED CAPITAL, FOREIGN CAPITAL, FOREIGN EXCHANGE, GDP, GLOBAL EQUITY, GLOBAL FINANCE, GLOBALIZATION, GOVERNMENT BONDS, GOVERNMENT REVENUE, GOVERNMENT REVENUES, GOVERNMENT SECURITIES, GROSS VALUE, HOUSEHOLD SAVINGS, INCOME, INCOME TAXES, INCOMES, INFRASTRUCTURE PROJECT, INFRASTRUCTURE PROJECTS, INSTITUTIONAL INVESTOR, INTANGIBLE, INTANGIBLE ASSETS, INTEREST RATE, INTEREST RATES, INTERNAL RATE OF RETURN, INTERNATIONAL BANK, INTERNATIONAL BORROWING, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL ECONOMICS, INTERNATIONAL MARKETS, INVENTORIES, INVENTORY, INVESTING, INVESTMENT CHOICES, INVESTMENT FLOWS, INVESTMENT FUNDS, INVESTMENT INSTRUMENTS, INVESTMENT MANAGEMENT, INVESTMENT OPTIONS, INVESTMENT PROJECTS, INVESTMENT RATES, LABOR MARKETS, LONG-TERM INVESTMENT, MACRO-ECONOMIC POLICIES, MARGINAL COST, MARGINAL PRODUCT, MARGINAL PRODUCTIVITY, MARKET EVIDENCE, MARKET INFORMATION, MARKET INTEREST, MARKET INTEREST RATE, MARKET PRICES, MARKET RISK, MARKET RISKS, MARKET SHARES, MARKET TRANSACTIONS, MONETARY FUND, MONETARY POLICIES, MONETARY SUPPLY, MONOPOLY, MONOPOLY RENTS, NATIONAL INCOME, NDP, NEGATIVE EXTERNALITY, NET CAPITAL, NET DOMESTIC PRODUCT, OPEN ECONOMIES, OPPORTUNITY COST, OPPORTUNITY COSTS, OPTIMAL INVESTMENT, OUTPUT, OUTPUT OF CAPITAL, OUTPUTS, PARTICULAR COUNTRY, PENSION, PENSION FUNDS, PERSONAL INCOME, PORTFOLIO, PORTFOLIO INVESTMENTS, PORTFOLIO MANAGEMENT, POWER PARITY, PRICE ELASTICITY, PRICE ELASTICITY OF DEMAND, PRICE ELASTICITY OF SUPPLY, PRIVATE CAPITAL, PRIVATE CAPITAL STOCK, PRIVATE INVESTMENT, PRIVATE INVESTMENTS, PRIVATE SAVINGS, PRODUCT MARKETS, PROPERTY TAXES, PROPERTY VALUES, PUBLIC INVESTMENT, PUBLIC POLICY, PUBLIC SECTOR BONDS, PUBLIC SECTOR DEBT, PUBLIC STOCKS, PURCHASING POWER, RATE OF INVESTMENT, RATE OF RETURN TO CAPITAL, RATES OF INTEREST, RATES OF RETURN, REAL INTEREST, RESERVES, RETURN, RETURN ON ASSETS, RISK PREMIUM, RISK PREMIUMS, SAVINGS, SAVINGS INSTRUMENTS, SAVINGS RATE, SAVINGS RATES, SECURITY MARKETS, SHARE OF ASSETS, SHARE OF CAPITAL, SHARE VALUE, SHARES OF INVESTMENT, SHARES OF INVESTMENTS, STOCK EXCHANGE, STOCK MARKET, STOCK MARKET INDEX, TAX, TAX COLLECTION, TAX RATE, TAX RATES, TAX REVENUES, TAXATION, TRANSACTION, TRANSPARENCY, TREASURY, TREASURY BILLS, VALUATION, VALUE ADDED, VOLATILITY, WAGE RATES, WAGES, WEALTH, WITHHOLDING TAX, WORKING CAPITAL, WORLD ECONOMY, WORLD MARKETS,
Online Access:	http://documents.worldbank.org/curated/en/2014/03/19298150/estimating-economic-opportunity-cost-capital-public-investment-projects-empirical-analysis-mexican-case https://hdl.handle.net/10986/17724
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