Public Capital Project Appraisal: A Real Cause for Concern and for Whom?

Abstract

This study finds further evidence of discrepancies between theory and practice in the evaluation of capital schemes in the public sector. This is a common pheno menon in the private sector too, despite its apparently greater incentive to use the formal approach recommended by the Treasury.

Proposals by the Controller and Auditor General - that the public sector should alter its practice to conform to the Treasury's guidelines - may be less appropriate than fresh thinking about what these guidelines should be, especially the uses of discounting (DCF) to represent the opportunity cost of capital, and of sensitivity analysis and probability theory to cope with risk and uncertainty. In other respects there is evidence of much more conformity of practice with theory than a study by the Controller and Auditor General would suggest.