Why IRR is an inadequate indicator of costs and returns in relation to PFI schemes

J.R. Cuthbert and M. Cuthbert

CRITICAL PERSPECTIVES ON ACCOUNTING, 2012, vol. 23, issue 6, 420-433

Abstract: The Internal Rate of Return (IRR) is a commonly used indicator of the performance of Private Finance Initiative (PFI), schemes in the UK. Treasury guidance recognises, however, that IRR is potentially misleading, unless the relevant payment streams are of a flat, annuity, type. This paper uses data on a number of actual PFI schemes to examine whether the payment streams involved are sufficiently flat for IRR to be a reliable indicator. There is clear evidence that the assumption of flat payment profiles in PFI schemes is violated. As a result, quoting IRR alone in the PFI context is liable to understate both the true opportunity cost of PFI finance to the public sector, and the potential scale of private sector profit.

Keywords: Public interest; Public sector; Critical; Internal rate of return; Private finance initiatives; Intérêt public; Secteur public; Critique; 公共利益; 公共部门; 批判性; Interés Público; Sector Público; Crítica (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:crpeac:v:23:y:2012:i:6:p:420-433

DOI: 10.1016/j.cpa.2012.05.001

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