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Capital Budgeting under Risk and Uncertainties^163

also has to be accepted that the calculation has to include a factor to allow for the risk

of the project not being completed. Such a factor may be a compound factor, which

includes allowance for all the features of the economic environment that may cause a

project to fail.

It should be recognised that simply postulating a ranking criteria does not resolve the

moral question of how the costs of benefits should be distributed, answer questions

about the macro-economic significance of the proposal, or explain how the calculation

should be made. The moral question is partly answered by assessing public reaction to

a proposal and this point is discussed next under the heading of socio-political factors.

Socio-Political Aspects

When these decisions are considered from the point of view of society, they go beyond

finding out cash inflows and outflows, the benefits to society are also worked out. For

example, whenever a new capital intensive project is undertaken, its impact on the

health of the society is seen in terms of environmental pollution, noise pollution,

employment generation, etc.

Because of the nature of socio-political factors the problems involved in assessing their

significance in decision making are quite different to the problems of assessing technical

and economic factors. Socio-political aspects of a decision are concerned with what

ought to be, and such decisions are quite different from technical judgements which are

concerned with what can be done.

There are four methods for assessing acceptability of socio-political factors:

Method Strengths Limitation Comment

Epidemiological

studies

Relates what has already been

accepted to environment of

decision being considered

Past experience may not be

relevant to the future. Does not

represent a commitment by

public involved

such studies identify past areas

of concern, but do not predict

present or future concerns or

reaction to novel proposals

Consultation Quick, provided appropriate

machinery for consultation

already exists. Can give a

permanent form of contact

between the public and the

project and the decision

makers

Those consulted may not

represent the views of the

whole community affected by

the proposal in question. May

be difficult to organise when

national boundaries have to be

crossed. Does not represent a

commitment by the public

involved

The success of this method

depends upon those consulted

being fully aware of the views

of the community concerned

and understanding the issues

involved. Sometimes it can

take two or three years to

arrive at a view

Sampling A sample survey can provide

structured evidence about

views on acceptability

Does not give every-one a

chance to express their views

about what is acceptable. Does

not represent a commitment by

the public involved

The sample surveyed must be

taken directly from the

population affected by the

decision and for the results of

the sampling process to really

help the decision maker the

population sampled must

understand the issue involved

Voting It is the most comprehensive

way of establishing the views

and wishes of a particular

population

Not appropriate for all projects

particularly small ones.

Expensive and slow to arrange.

Unless some form of

compulsion is used not

everyone will vote. Not

necessarily binding on either

party involved

If the result is clear it gives the

decision maker positive

guidance on the action the

population consider should be

taken. If the verdict is marginal

the issue is not efficiently

resolved for the decision

maker

Contd...