Public sector investment appraisal

: the place of flexibility in the decision making process

Abstract

This thesis reviews the main methodological developments in public sector investment appraisal and finds growing evidence that appraisal techniques are not fulfilling their earlier promise. It is suggested that an important reason for this failure lies in the inability of these techniques to handle uncertainty except in a highly circumscribed fashion. It is argued that a more fruitful approach is to strive for flexibility. Investment projects should be formulated with a view to making them responsive to a wide range of possible future events, rather than embodying
a solution which is optimal for one configuration of circumstances only.
The distinction drawn in economics between the short and the long run is used to examine the nature of flexibility. The concept of long run
flexibility is applied to the pre-investment range of choice open to the decisionmaker. It is demonstrated that flexibility is reduced at a very early stage of decisionmaking by the conventional system of appraisal which evaluates only a small number of options. The pre-appraisal
filtering process is considered further in relation to decisionmaking
models. It is argued that for public sector projects the narrowing down
of options is best understood in relation to an amended mixed scanning model which places importance on the process by which the 'national interest ' is determined. Short run flexibility deals with operational characteristics, the degree to which particular projects may respond to
changing demands when the basic investment is already in place. The
tension between flexibility and cost is noted. A short case study on
the choice of electricity generating plant is presented. The thesis
concludes with a brief examination of the approaches used by successive British governments to public sector investment, particularly in relation
to the nationalised industries

Date of Award	Sept 1983
Original language	English
Supervisor	David Collingridge (Supervisor)