Are project appraisers chiromancers?

Abstract

The accuracy of ex ante project appraisal has been subject to scrutiny by scholars in recent years. It has often been claimed that the inaccuracy of project evaluation leads to a waste of public spending. In this article I acknowledge that the appraisal of a project consists in long-run predictions of several variables, so that the accuracy of ex ante evaluations should be assessed on the basis of forecasting rationality. I test for the rationality of a sample of World Bank project appraisals and find no significant discrepancy between ex ante and realized rates of return.

Keywords:

• infrastructure; cost–benefit analysis
• project appraisal
• rationality

JEL Classification:

• H43
• H54

Acknowledgement

The author acknowledges the participants of the workshop ‘Mega-projects and regional development’ held at Università Bocconi for their useful comments, and the Università Bocconi for financial support.

Notes

¹The source for the growth rate is the World Development Indicators, while that for the average protection against expropriation risk is IRIS Center (University of Maryland). Lower ratings are given to countries where expropriation of private foreign investment is likely.