A capital allocation process for public projects

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Virginia Tech


This research was initiated to address a shortfall in some of the previous work reviewed with respect to capital budgeting and allocation. This shortfall has to do with the very general manner in which the public sector is addressed. The public sector poses problems which are unique to its environment and the simple extension of private sector tools to this domain is considered ineffective.

The central aim of this research is to develop an initial methodology for capital allocation to projects in the public sector. In developing this methodology the fundamental differences between the public and private sectors are pointed out. The methodology devised utilizes knowledge from the fields of Engineering Economy, Capital Budgeting, and Multi-Attribute Decision Analysis. Basic principles of Engineering Economy and Capital Budgeting are reviewed.

The Multi-Attribute Decision Model selected for implementation in this research methodology is the Analytic Hierarchy Process (AHP). The procedure followed by the AHP is presented and its benefits and limitations are discussed. The research addresses the quantitative and qualitative aspects of assessing projects in the public sector. A hypothetical example is presented to demonstrate the manner in which the methodology works. The thesis concludes with recommendations and proposes areas for further research.