The government uses what is known as a 6% discount rate to evaluate the benefits of a project over its whole life. This means the future value of the building would go down 6% each year of its estimated life, allowing for elements such as inflation. It is particularly important to use this figure in predicting the final value of a PFI project, as it is used to illustrate the benefits of PFI against alternative procurement methods.
There have been complaints, however, that it is not clear how this 6% figure is arrived at. The rate is known to account for over-estimations of cost to allow for time overruns.
The discount rate will now be 3.5%, with a separate method, yet to be determined, to incorporate an "optimism bias". This will allow for over-optimistic costing by clients and contractors – for example, the Jubilee Line Extension was expected to cost £2.1bn but came in at £2.5bn.
In a statement the Treasury said: "The new approach will increase the transparency and robustness of the government's public spending decisions, and ensure that investment decisions with long-term paybacks are suitably valued."
The Green Book is now out to consultation. A final draft will be published later this year, to be formally introduced after next year's budget.
n Treasury procurement body the Office of Government Commerce is to publish a new standardisation document for PFI projects next week.
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