In my post on Saturday about the appropriate New Zealand public sector discount rate, I linked to an article from the Reserve Bank of Australia’s Bulletin which included the results of a survey in which Australian firms’ CFOs were asked what hurdle rates of return their firm used in evaluating proposed investment projects.
This was the chart of those survey results:
Prompted by a commenter, I was curious whether there was something similar for the US. I found this JP Morgan piece, undated but apparently from last year, which reports the hurdle rates that some major US firms have disclosed. Here was the chart, and a little commentary, from that piece.
If anything, this small sample of US firms had eve higher hurdle rates than the Australian firms.
In both cases, there are a few companies using hurdle rates as low as the 8 per cent real recommended by New Zealand’s Treasury for evaluating public sector investment and regulatory proposals, but not many. As JPM point out, these high hurdle rates are a little surprising, and it may be that firms are missing out on some opportunities, but firms are presumably making decisions that appear rational to them, subject to the threat of takeover if they underperform.
Government finances are quite highly cyclical, and it seems to me that we would need a pretty compelling case for encouraging governments – which face rather weak disciplines – to use our money more freely than private businesses would do. Things governments really need to do – true public goods – should easily pass high hurdle rate tests.