The UK's Prudential borrowing framework:a retrograde step in managing risk?

The contemporary understanding of public sector risk management entails a broadening of the traditional bureaucratic approach to risk beyond the boundaries of purely financial risks. However, evidence suggests that in reality public sector risk management does not always match the rhetoric. This paper focuses on the apparent inadequacy of any risk framework in the current Prudential Borrowing Framework (PBF) guidance in relation to that which was developed under Public Private Partnerships and Private Finance Initiative (PFI). Our analysis shows that the PBF and its associated indicators for local authorities adopt a narrow financial approach and fail to account for the full range of potential risks associated with capital projects. The PBF does not provide a framework for local authorities to consider long-term risk and fails to encourage understanding of the generic nature of risk. The introduction of the PBF appears to represent a retrograde step from PPP/PFI as regards risk and risk management.

Accommodating energy price volatility in life cycle cost analysis of asphalt pavements

Energy price is related to more than half of the total life cycle cost of asphalt pavements. Furthermore, the fluctuation related to price of energy has been much higher than the general inflation and interest rate. This makes the energy price inflation an important variable that should be addressed when performing life cycle cost (LCC) studies re- garding asphalt pavements. The present value of future costs is highly sensitive to the selected discount rate. Therefore, the choice of the discount rate is the most critical element in LCC analysis during the life time of a project. The objective of the paper is to present a discount rate for asphalt pavement projects as a function of interest rate, general inflation and energy price inflation. The discount rate is defined based on the portion of the energy related costs during the life time of the pavement. Consequently, it can reflect the financial risks related to the energy price in asphalt pavement projects. It is suggested that a discount rate sensitivity analysis for asphalt pavements in Sweden should range between –20 and 30%.