One of the research areas that I plan to pursue over the coming years is to develop new multi-dimensional methods for project screening and selection. The goal is to develop a more balanced approach to identifying projects that are not only financially viable, but also economically, legally, technically, socially, culturally, environmetally, and politically viable as well! The current theory provided in economics and finance is wholly inadequate in a world that is trying to embrace sustainable development.

Modern finance theory provides methods such as payback period, NPV, and IRR to evaluate between alternative investment opportunities -- but seemingly ignores all of the other important dimensions (technically, legally, politically, socially, culturally, environmentally sustainable?). Modern ecomics theory proposes that a government should invest in capital projects to resolve market failure, so long as such projects promote General Welfare, i.e. that "the gain from the gainers is greater than the loss from the losers" (Kaldor-Hicks Rule). But this in my view is a lousy criteria, as it promotes a "good enough" mentality, and permits a sub-par allocation of resources. For example, rather than doing a comprehensive search of 1000 project opportunities that might be available, and ranking and prioritizing the best ones, the Kaldor-Hicks rule implicitly permits resources to be allocated to projects on a "good enough" basis.

We are making some headway in the world. Indeed, some "socially responsible investors" are beginning to apply "negative screening" to rule out projects that have adverse social and environmental implications. The Equator Principles are a form of negative screen.

But, considering that hundreds of billions of dollars are now being allocated to projects around the world through top-down stimulus programs, much more needs to be done to develop more holistic, muti-dimensional methods for project screening and selection in order to incorporate all of the dimensions that could impact long-term sustainability. And such methods will need to be flexible and customizable, because criteria that are important to stakeholders will inevitably vary across time and place.

This past month, with the help of research assistant Jeremy Tchou, I have started to compile some of my ideas about new methods for project screening and selection into a presentation format. I have drawn from my work with government agencies, rating agencies, contractors, infrastructure funds, and financial institutions, all of which in their own unique ways, go about various forms of project screening and selection. Jeremy and I expect to publish a paper outlining a new method called "Project Viability Screening" sometime in the coming year. Next week I will present this work to a group of public officials in Bangalore India, on behalf of the Planning Commission, and look forward to their feedback.

Posted by rjorr at June 27, 2009 2:42 PM