Coding interviews started when companies realized they could use cheap HR to bring 'talent' in their staff without taking away expensive technical folks from already delayed projects. Even on my current field, Server Administration, there is some belief that a good candidate will be found after asking the guy a few technical questions within one hour. In my particular case, I try to minimize the technical part of the questions and focus on the candidate’s attitude and mental process (how he would solve a problem), as that will likely define if he is just a textbook expert or someone with potential.

On a separate topic, a candidate really looking to work for a company would surely work on a project before getting hired, but someone who has many options available (or just not enough time due to personal/current work issues), would likely reject working a project for free just to get hired, so you could be losing potential candidates as well with the 'project' approach. Add to this that some companies hide through a consultant, and you could even make things worse… as candidate may not have the incentive of pursuing a chance within a company he likes.