Rates of Return to Capital, and the Economic Opportunity Cost of Capital in EAC Countries and Ghana

This research provides an analytical framework and an application to estimate the rate of return to capital, and the economic opportunity cost of capital (EOCK) intended for EAC countries consisting of Kenya, Rwanda, Tanzania, and Uganda, as well as the EOCK for Ghana. These parameters have a vital role in the evaluation of public investment projects. They expect to help policymakers at all levels of government improve investment allocations and project selection to ensure that the highest value public projects are chosen and financed in order to achieve more efficient utilization of resources. The marginal productivity of capital is a key variable in estimating the economic opportunity cost of capital. This study estimates the real economic rates of return to reproducible and remunerative capital of the EAC economies. The results indicate that the rates of return to reproducible capital in real terms over 1999 –2016 have averaged 10.70% in Kenya and Rwanda, while it averaged 12.05% and 9.86% in Tanzania and Uganda, respectively. With regard to the marginal rates of return to remunerative capital, the results suggest that EAC countries have averaged 16.28%, 16.21%, 15.07%, and 14.49% in Tanzania, Rwanda, Kenya, and Uganda, respectively, over the same period. The economic discount rate is derived for the East African Community (EAC) countries and Ghana on the base of the economic opportunity cost of funds sourced through domestic and international capital markets. The economic opportunity cost of each different source of funds, namely, the return to domestic investment, the rate of return of household saving, and the marginal economic cost of foreign financing, have been estimated for each country. Using a weighted average method, the results indicate that the EOCK are: 11.5% for Kenya, Uganda and Ghana, and 12.5% for Rwanda and Tanzania. Keywords: Discount Rate; Capital Return; Opportunity Cost; Public and Private Investment; Cost-Benefit Analysis; Economic Growth.