An optimised multiple test framework for project selection in the public sector, with a nuclear waste disposal case-based example

Abstract

Since 1967 the real (net of inflation) discount rate used to assess public sector projects in the UK has changed four times: from 8% to a peak of 10%, then to 5%, then to 6%, and then to the current position of 3.5% for years 1–30 declining in increments to 1% by year 300. This paper argues that the trend is in the right direction, but the associated decision process remains inappropriate, because the rationale for the changes has been flawed. Many other countries use discount rates of 6% or more in decision processes which are probably even more inappropriate. The fundamental problem stems from attempts by economists to embed too many conflicting considerations in a discount rate which is used in a single hurdle rate test. A multiple test approach is needed to address all the issues that the associated decision processes need to consider. This paper offers a way forward based on alternative economics perspectives, operational research perspectives, and established practice in a project risk management context. A case-based example concerned with the disposal of intermediate level nuclear waste in the UK illustrates how it works, and the implications of current UK practice, suggesting a very different view of a decision a decade ago which is a topical again. The proposed framework should be of interest to anyone interested in public sector projects, in the UK and elsewhere, and its generalisation has implications for private sector projects and private public partnerships (PPPs). Generic project risk management processes concerned with the whole of the project life cycle could embed a generalised form.