The Practice of Capital Budgeting in Irish StateOwned Utility Companies

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The Practice of Capital Budgeting in Irish
State-Owned Utility Companies
Presentation by Desmond Gibney MBS Doctoral
Conference 22nd 23rd May 2008
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The topic of my investigation
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Topic of my investigation

• This research proposal examines the practice of
  capital budgeting in Irish State-Owned utility
  companies.
• A case study methodology will be used to examine
  the capital budgeting decision-making processes
  of Irish Rail, the 100 State-owned company that
  operates railways in Ireland.
• Prior literatures on accounting in the public
  sector have focused on the financial calculations
  involved in the capital budgeting process.
• This study will contribute and extend this
  literature by focusing on understanding capital
  budgeting as a process in the public sector.

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Topic of my investigation

• Much of the recent research of capital budgeting
  in the public sector has focussed on the impact
  of two applications, private finance initiative
  (PFI) and public private partnership (PPP).
• These two applications grew out of the frameworks
  of new public management (NPM) and new public
  financial management (NPFM).

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Why is it interestingand worth studying?
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Gap in the literature

• In the literatures on public sector accounting,
  few have investigated the capital budgeting
  process despite recent investment in public
  sector assets.
• The Irish public sector has undertaken a
  substantial programme of capital expenditure in
  recent years. The transport sector is the subject
  of an investment framework called Transport 21,
  which will result in a capital investment of 34
  billion between 2006 and 2015.
• This experience provides the opportunity to
  better understand how such processes occur and
  may provide lessons for other countries intending
  to undertake similar investment in public
  infrastructure.

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Irish Capital Budgeting research

• Capital budgeting has been neglected as a
  research area in Ireland, with only two
  significant studies in the last two decades. Both
  of these studies used survey methodology to
  examine practices in the private sector.
• Green and McIlkenny (1991) examined the impact of
  capital budgeting practices on the evaluation,
  control and administration of capital investment
  decision making and the irreversibility of
  projects.
• Lucey, McCabe et al. (1995) analysed the extent
  of usage of techniques and to examine why
  discounted cash flow (DCF) techniques were not
  used in investment appraisal.

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Key pointersfrom the literature
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Management Accounting
Public Sector
Methodology
Dean (1953 1954) Hopper Powell (1985) Graham
Harvey (2001 2002)
Berry, Capps et al (1985) Gomez-Ibanez de Rus
(2006) Olson,Guthrie et al (1998)
Eisenhardt (1989) Yin (2003a and 2003b) Mason
(2002) Miles Huberman (1994)
Classic Papers Books
Scapens (2006, 1994, 1990 1992) Llewellyn
(1992) Keating (1995) Miller OLeary (2007)
Olson, Humphrey et al (2001) Basu, Dirsmith et al
(1999) is also referenced in Yin (2003b)
Jick (1979) Modell (2005) Basu,Dirsmith et al
(1999)
Case Studies
Lapsley (1988)
Lapsley (1988) Brealey, Cooper et al (1997)
Pike (1982,1988, 1996 etc) Rappaport (1979)
Capital Budgeting
Lapsley Wright (2004) Moll Humphrey (2007)
Hood (1995a and 1995b) Broadbent
Laughlin (2002) Broadbent,Gill et al (2004)

Public Sector Reform
McDonald (2006) Much of what we know about
capital budgeting is anecdotes and surveys, with
little process based analysis
Power Laughlin (1992) Coining of the
term Accountingization, whereby accounting
as method eclipses accountabiliy
Chow, Humphrey Moll (2007) Provides a
template for a possible research agenda
One Key Insight
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Why have I chosen aCase Study methodology?
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Case Study Methodology

• To understand capital budgeting as a process, a
  longitudinal case study will be undertaken in
  Irish Rail.
• An advantage of undertaking a part-time PhD is
  that it enables such a longitudinal study to
  focus on an in-depth analysis of the capital
  budgeting practices in Irish Rail by following
  the progress of particular capital projects.

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Case Study Methodology

• The initial focus of the research will examine
  two capital projects.
• The intention behind the selection of these two
  projects is to use one project as an introduction
  to the capital budgeting processes of Irish Rail,
  and to the various actors in those processes,
  and to apply this knowledge to a much larger
  project that will form the basis of the
  longitudinal study.

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Cases to be researched

• The Kildare Route Project has a cost in excess
  of 350 million and an estimated completion date
  of early 2010. This is a traditional pure public
  sector investment.
• The Dublins Interconnector project has a cost
  in excess of 1 billion. It is currently at the
  design stage, with construction expected to start
  in 2010 and finish by 2015.
• The Dublins Interconnector project is
  significant because the Irish Government have
  decided that this will be a PPP project, and this
  is the first time Irish Rail will have used PPP.
• Initial meeting held with Irish Rail in April
  2008.

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Why will my researchhave an impact?
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Primary purpose of my research

• The primary purpose of my research is to
  contribute to literature on capital budgeting as
  a process in the public sector.
• There is a relative scarcity of PPP projects in
  Ireland, in contrast with the recent experience
  in the United Kingdom.

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Secondary purpose of my research

• A secondary purpose of my research is to examine
  the effect of PFI and PPP on the capital
  budgeting process, through a contrast between the
  experience of the United Kingdom and Ireland, and
  through an in-depth longitudinal study of the
  first project to be undertaken by Irish Rail as a
  PPP project.
• The Dublins Interconnector project is
  significant because the Irish Government have
  decided that this project will be a PPP project.

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Secondary purpose of my research

• The significance of the application of PFI and
  PPP in public sector capital budgeting is that
  they illustrate the changing role of the
  management accountant in the public sector (Moll
  and Humphrey 2007).

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Policy implicationsof my research

• My research may have significant policy
  implications.
• There is a need for further investigation of
  public sector reform to evaluate whether such
  practices are delivering their said benefits.
• The Irish Minister for Finance has drawn
  attention to the need to maximise the benefit of
  capital expenditure for the countrys development
  and to ensure that value is achieved for
  taxpayers (Cowen 2005).

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References
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