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

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  • Cuthbert, J.R.
  • Cuthbert, M.

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.

Suggested Citation

  • Cuthbert, J.R. & Cuthbert, M., 2012. "Why IRR is an inadequate indicator of costs and returns in relation to PFI schemes," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 23(6), pages 420-433.
    • Handle: RePEc:eee:crpeac:v:23:y:2012:i:6:p:420-433
    DOI: 10.1016/j.cpa.2012.05.001
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    References listed on IDEAS

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    1. Margaret Cuthbert & Jim Cuthbert, 2010. "The Royal Infirmary of Edinburgh: a case study on the workings of the Private Finance Initiative," Public Money & Management, Taylor & Francis Journals, vol. 30(6), pages 371-378, November.
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    4. Jean Shaoul, 2003. "A Financial Analysis of the National Air Traffic Services PPP," Public Money & Management, Taylor & Francis Journals, vol. 23(3), pages 185-194, July.
    5. Toms, Steven & Beck, Matthias & Asenova, Darinka, 2011. "Accounting, regulation and profitability: The case of PFI hospital refinancing," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 22(7), pages 668-681.
    6. Fenella Maitland-Smith, 2009. "Government financial liabilities beyond public sector net debt," Economic & Labour Market Review, Palgrave Macmillan;Office for National Statistics, vol. 3(7), pages 43-50, July.
    7. Shaoul, Jean & Stafford, Anne & Stapleton, Pamela, 2012. "Accountability and corporate governance of public private partnerships," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 23(3), pages 213-229.
    8. Asenova, Darinka & Beck, Matthias, 2010. "Crucial silences: When accountability met PFI and finance capital," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 21(1), pages 1-13.
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    2. Dimitrios Angelopoulos & Robert Brückmann & Filip JirouÅ¡ & Inga KonstantinaviÄ iÅ«tÄ— & Paul Noothout & John Psarras & Lucie Tesnière & Barbara Breitschopf, 2016. "Risks and cost of capital for onshore wind energy investments in EU countries," Energy & Environment, , vol. 27(1), pages 82-104, February.
    3. Cuthbert, James R. & Magni, Carlo Alberto, 2016. "Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR," International Journal of Production Economics, Elsevier, vol. 179(C), pages 130-140.
    4. Jing Du & Hongyue Wu & Xianbo Zhao, 2018. "Critical Factors on the Capital Structure of Public–Private Partnership Projects: A Sustainability Perspective," Sustainability, MDPI, vol. 10(6), pages 1-27, June.
    5. Carlo Alberto Magni & Ken V. Peasnell, 2015. "The Term Structure of Capital Values:An accounting-based framework for measuring economic profitability," Department of Economics 0060, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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