Modified Discounting and its Application to Forestry

Abstract

In this chapter the forestry project considered in Chapter 3 will be evaluated using the modified discounting method, which is also called the sum of discounted consumption flows. In this method, in view of the intergenerational distribution aspect of public sector investment projects, the conventional rules are altered yielding a much more moderate discounting pattern than the one in the net present value criterion. Forestry is an excellent example of the way in which many public sector projects redistribute income between generations. Its long gestation periods make it obvious that there is more than one generation involved in this venture. When felling takes place now, the present generations reap the benefits of a plantation which was established by earlier generations a long time ago. When planting takes place now, the benefits that will arise from it will be captured mostly by future generations. This phenomenon, however, is not confined to forestry. Almost all public sector investment projects do this to varying degrees depending upon the gestation periods involved. Evaluating these projects by means of the net present value or the discounted cash flows criteria results in discrimination against future generations. Let us prove how this happens. The following argument is extracted from the author’s publications in the journal Environment and Planning A. Here it is presented in a modified form in order to provide easy reading. For full details of these publications see Kula (1981, 1984b and 1987a) and Price (1984b, 1987).