This Technical Paper outlines our recommended approach to calculating the discount rate and other aspects of modelling local infrastructure contributions using an NPV approach.
We have made three changes to our recommended approach, since the publication of our February 2016 Technical Paper:
- We have updated our method of calculating the cost of debt (which is our recommended discount rate) to adopt a trailing average of sample values. This is consistent with IPART’s current Weighted Average Cost of Capital (WACC) method, which was finalised in February 2018.
- We have updated our method of calculating the expected inflation rate which we use to convert the nominal discount rate to a real discount rate. Our revised method was a five year estimate rather than a 10-year estimate used previously. This change also aligns with the current WACC method, which calculates the expected inflation rate over the regulatory period for the relevant business.
- We have modified our approach to the escalation of contribution rates and now recommend that councils modelling in nominal terms use an escalation factor of 2.5%, which is the midpoint of the Reserve Bank of Australia’s (RBA) target range for inflation.