Project Appraisal and Capital Investment Decision Making in the Scottish Water Industry

Abstract

Restructuring the Scottish water industry has changed the way in which both project appraisal and capital investment decisions are performed. This article examines the project appraisal and subsequent capital investment decision in the case of a reed bed sewage treatment scheme which is compared with a more traditional scheme. Although the capital profiles of the schemes are similar there are major differences in the revenue costs. In addition, there are potential public benefits to the reed bed scheme. A comparison is made of management mechanisms in the pre‐1996 water industry with that of restructured water authorities. In the pre‐1996 water industry, local authorities had a broad remit which encouraged them to value these factors, in effect an implicit social account. The creation of water authorities with narrow remits and specific performance measures, constructed a framework that does not support the integration of social accounts into the decision making process. The paper demonstrates that investment appraisal is a product of the institutional framework in which the decisions are made. As that framework changes, mechanisms and measures of accountability shift in parallel.