Project Appraisal Techniques
Techniques of Project Appraisal
ARNOLD C. HARBERGER
UNIVERSITY OF CHICAGO
In this paper, I attempt to bring into focus what I believe to be some of the important practical issues that face development planners in the field of project appraisal. I shall try, insofar as possible, to recognize the handicaps under which planners operate, most importantly the handicaps imposed by imperfect foresight and by the virtual necessity of decentralized decision-making. To elaborate briefly on these handicaps, I think we must take it for granted that our estimates of future costs and benefits (particularly the latter) are inevitably subject to a fairly wide margin of error, in the face of which it makes little sense to focus on subtleties aimed at discriminating accurately between investments that might have an expected yield of 10',4 per cent and those that would yield only 10 per cent per annum. As the first order of business we want to be able to distinguish the 10 per cent investments from those yielding 5 or 15 per cent, while looking forward hopefully to the day when we have so well solved the many problems of project evaluation that we can seriously face up to trying to distinguish 10 per cent yields from those of 9 or 11 per cent.
Moreover, in what follows, I shall try to bear in mind the virtual necessity of decentralized decision-making. Rules and procedures can be imposed which assure a certain rough harmony among the decisions taken in such vastly different areas as roads, irrigation projects, and educational investments, but one cannot realistically expect all investment decisions to be funneled through a single office or authority that exercises more than a general supervisory power. Most of the real work connected with project appraisal must, I believe, be done "close to the ground"; this fact alone limits the range of workable procedures to those
in which a substantial amount of power can in fact be delegated to
decentralized
ARNOLD C. HARBERGER
UNIVERSITY OF CHICAGO
In this paper, I attempt to bring into focus what I believe to be some of the important practical issues that face development planners in the field of project appraisal. I shall try, insofar as possible, to recognize the handicaps under which planners operate, most importantly the handicaps imposed by imperfect foresight and by the virtual necessity of decentralized decision-making. To elaborate briefly on these handicaps, I think we must take it for granted that our estimates of future costs and benefits (particularly the latter) are inevitably subject to a fairly wide margin of error, in the face of which it makes little sense to focus on subtleties aimed at discriminating accurately between investments that might have an expected yield of 10',4 per cent and those that would yield only 10 per cent per annum. As the first order of business we want to be able to distinguish the 10 per cent investments from those yielding 5 or 15 per cent, while looking forward hopefully to the day when we have so well solved the many problems of project evaluation that we can seriously face up to trying to distinguish 10 per cent yields from those of 9 or 11 per cent.
Moreover, in what follows, I shall try to bear in mind the virtual necessity of decentralized decision-making. Rules and procedures can be imposed which assure a certain rough harmony among the decisions taken in such vastly different areas as roads, irrigation projects, and educational investments, but one cannot realistically expect all investment decisions to be funneled through a single office or authority that exercises more than a general supervisory power. Most of the real work connected with project appraisal must, I believe, be done "close to the ground"; this fact alone limits the range of workable procedures to those
in which a substantial amount of power can in fact be delegated to
decentralized