What is economic appraisal and when is it required?

1.1 What is economic appraisal?

1.1.1 Economic appraisal, hereafter referred to simply as 'appraisal', is about getting a good deal from public expenditure. It is a key tool for achieving value for money and satisfying public accountability requirements. It is a systematic process for examining alternative uses of resources, focusing on assessment of needs, objectives, options, costs, benefits, risks, funding, affordability and other factors relevant to decisions. Appraisal is:

• designed to assist in defining problems and finding solutions that offer the best value for money (VFM)
• a way of thinking expenditure proposals through, right from the emergence of the need for a policy, programme or project, until its implementation
• the established vehicle for planning and approving public expenditure policies, programmes and projects

1.1.2 The scope of appraisal is very wide. It is about assessing VFM from a broad Northern Ireland (NI) perspective. This means it should:

• cover all the costs and benefits impacting on NI residents
• assess not only the costs and benefits falling to the public sector, but also those affecting other sectors in NI such as the private and voluntary sectors
• take account of the full range of impacts, including for example economic, social, environmental and distributional effects

1.1.3 See the summary of the basic steps of appraisal for a quick introduction to the key elements of appraisal. The ten key steps are explained in full detail in the Step by Step Economic Appraisal Guidance.

1.1.4 Good appraisal leads to better decisions and VFM. It facilitates good project management and project evaluation. Appraisal is not optional; it is an essential part of good financial management, and it is vital to decision-making and accountability. Its principles must be applied, with proportionate effort, to all spending decisions, including small expenditures.

1.1.5 There is a role for narrower appraisals, for example of the commercial or financial impact upon a particular public body, but these should generally supplement an appraisal from a NI perspective, they should not generally be conducted instead of it.

1.2 When is economic appraisal required?

1.2.1 The principles of appraisal apply to all decisions and proposals involving expenditure or resources. They apply equally to policies, programmes and projects. DoF requires the principles of economic appraisal to be applied, with appropriate and proportionate effort, to all decisions and proposals for spending or saving public money, including EU funds, and any other decisions or proposals that involve changes in the use of public resources.

1.2.2 For example, appraisal must be applied irrespective of whether the relevant public expenditure or resources:

• involve capital or current spending, or both
• are large or small
• are above or below delegated limits

Examples of decisions that require appraisal:

• policy and programme development; decisions on the level and type of services or other actions to be provided, or on the extent of regulation
• new or replacement capital projects; decisions to undertake a project, its quality, scale, location and timing, and the degree of private sector involvement
• use or disposal of existing assets; decisions to sell land, or other assets, or relocate facilities or operations, whether to contract out or market test services
• specification of regulations; decisions on the standards for health and safety, environmental quality, sustainability, or to balance the costs and benefits of regulatory standards and how they can be implemented
• procurement decisions; decisions to purchase the delivery of services, works or goods, usually from private suppliers

1.2.3 It is important to begin applying appraisal early in the gestation of any proposal that has expenditure or resource implications. The justification for incurring any expenditure at all should be considered. Appraisal should be applied from the emergence of a need right through to the recommendation of a particular course of action. It should continue to be applied, where applicable, in the subsequent assessment of bids from the private sector obtained through a tendering process, until a contract is awarded.

1.2.4 Retrospective appraisal, that is, going through the motions of appraisal after decisions have been taken or expenditure committed, is bad management practice and is unacceptable. Appraisal should not be used merely as the means to refine the details of a predetermined option. It must not be used to provide post hoc justification for decisions that have already been taken, expenditure that has already been committed, or projects that have already commenced.

1.2.5 Approvals in principle should not be granted, nor should commitments to funding be given (for example, through a letter of offer), prior to the completion of a satisfactory appraisal and business case. The importance of appraisal to the approval process is elaborated in section 9.

1.2.6 Expenditure that is incurred without the necessary approvals is irregular. Retrospective approval will not generally be granted. It will only be considered in exceptional circumstances and then only under specific conditions as defined in MPMNI (see NIGEAE section 9 for details).

1.2.7 Appraisal reports contain information on the relative merits of different potential investments. Departments should use the results of appraisals as an input to the prioritisation of their spending plans.

1.3 Appropriate and proportionate effort

1.3.1 Appraisal itself uses up resources. The effort that should go into it and the detail to be considered is a matter for case-by-case judgement, but the general principle is that the resources to be devoted to appraisal should be in proportion to the scale or importance of the objectives and resource consequences in view. Decisions on small expenditures need relatively little appraisal, while those with major spending implications require significant resources to be devoted to appraisal. Similar principles apply to ex post evaluation.

1.3.2 Judgement of proportionate effort should take into consideration the totality of the resources involved in a proposal. However, particular weight should be given to the total public funds involved, since it is primarily for these that public bodies are accountable to the taxpayer. In this context, public funds includes:

• all expenditures by departments and their sponsored bodies, including direct spending and all forms of financial assistance
• European Union (EU) funding
• International Fund for Ireland (IFI) funding
• Lottery Fund monies
• district council spending

1.3.3 It is also important that the appraisal is appropriate in the sense that the correct methodology is used and tailored to suit the case in hand, because there are variations in how the steps of appraisal apply in different spending areas. Judging this is a matter of experience and departmental economists should be consulted where there is any doubt.

1.3.4 Irrespective of the amount of effort applied, appraisals should normally seek to take account of all the costs and benefits arising from a proposal, whether they fall to the public sector or to other sectors of the economy. This is because the general aim is to make best use of all the resources in the economy. However, some appraisals are more restricted in scope, as is explained at 1.5 below.

1.3.5 Appraisal is a way of thinking which is indispensable even when dealing with small amounts of expenditure or resources. It is always appropriate to establish the need for a proposed expenditure or change of resource use, consider alternative options, and weigh up the costs and benefits of the alternatives. However, small scale decisions do not require as much appraisal or evaluation as larger scale decisions. The section on appraisal and evaluation of small expenditures provides practical advice on how to decide the proportionate appraisal effort when dealing with small expenditures, including the use of pro formas.

1.4 Basic elements of appraisal

1.4.1 Appraisal may take various forms. Comparison of economic and commercial appraisal explains the main forms of economic appraisal and how it is distinguished from commercial appraisal. However, irrespective of the precise form of an appraisal, a number of basic elements are common to most of them. The following ten key steps should generally be addressed:

1. explain the strategic context
2. establish the need for expenditure
3. define the objectives and constraints
4. identify and describe the options
5. identify and quantify the monetary costs and benefits of each option
6. assess risks and adjust for optimism bias
7. weigh up non-monetary costs and benefits including sustainability, equality and lifetime opportunities
8. calculate net present values and appraise uncertainties, including appropriate sensitivity analysis
9. assess affordability and record proposed arrangements for funding, management, marketing, procurement, benefits realisation, monitoring and post project evaluation
10. assess the balance of advantage between the options and present the results and conclusions

1.4.2 Where funding of the private or voluntary sectors is in view, then, in addition to the ten key steps, assessment of the following three criteria is also a basic appraisal requirement:

• additionality
• viability
• cost-effectiveness

1.4.3 For a fuller summary, see the summary of the basic steps of appraisal. The ten key steps are explained in full detail in the step-by-step economic appraisal guidance in Section 2. Section 3 explains them in relation to policy and programme appraisal. Section 4 explains additionality, viability and cost-effectiveness, and expands on the appraisal of funding of the private, voluntary and community sectors. The particular requirements for certain cases such as public private partnerships (PPP), information and communication technology (ICT) and accommodation projects are explained in subsequent sections.

1.5 Other forms of appraisal

1.5.1 Other forms of appraisal may be required in addition to an economic appraisal. For example, an affordability appraisal is generally required. (See section 2.9.2 for elaboration). Another example is the necessity to assess the commercial viability of proposals when appraising assistance to the private, voluntary and community sectors, as is explained in section 4 below. This normally includes assessment of the general financial position of the applicant, consideration of its management capability, marketing appraisal, identification of relevant financial cash flows, and calculation of net preset values (NPVs) on a commercial appraisal basis.

1.5.2 The differences between economic appraisal and commercial appraisal can be a cause of confusion. Comparison of economic and commercial appraisal defines the main forms of economic appraisal, lists some common errors in appraisal and explains how economic appraisal is distinguished from commercial appraisal. It also includes a checklist to help identify what items to include in each. Commercial appraisal calculations, where required, should normally be done separately from, and in addition to, the calculation of NPVs on an economic appraisal basis.

1.5.3 A commercial appraisal, or affordability appraisal, or any other appraisal of some specific aspect of a proposal, should never be seen as an alternative to an economic appraisal covering the ten steps listed in the basic steps summary.

1.6 Management of appraisals and evaluations

1.6.1 Appraisal and evaluation are stages in the general management of projects, programmes and policies. Responsibilities for carrying out appraisals and evaluations should be clearly defined. Departments should ensure that appropriate procedures are in place, and that they are properly applied and kept up to date. It is essential that staff engaged in public expenditure (PE) and resource decisions recognise the need to undertake appraisal and evaluation, seek specialist help where appropriate and ensure that appraisals and evaluations are carried out.

1.6.2 Conducting an assessment can be resource-intensive. Appraisals and evaluations should be carried out collaboratively wherever possible between stakeholders, but lead responsibilities need to be well defined, and accountability for accuracy and thoroughness clearly understood. Carrying out assessments should never be regarded as a specialist activity, and therefore sidelined.

1.6.3 It should generally be the responsibility of policy and executive divisions to take the lead in carrying out appraisals, drawing on expert advice, where appropriate.

1.6.4 In order to ensure an independent and objective approach, evaluations should be led by individuals or teams who have had no responsibility for or involvement in the management or implementation of the proposal under consideration. However, they must have the co-operation of those who have been involved and possess the necessary information.

1.6.5 Departments and agencies should consider how appraisals and evaluations are integrated with decision-making processes and governance structures. To ensure a coordinated approach to conducting assessments, consideration should be given to:

• establishing formal evaluation or assessment units, or other centres of technical expertise
• formalising access to internal and external auditors. In complex cases, it may be helpful to discuss appraisal methodology with sponsor departments, DoF or the Northern Ireland Audit Office (NIAO)
• providing incentives for conducting thorough and timely appraisals; and evaluations
• maintaining an accessible archive

1.6.6 For individual assessments, early consideration should be given to:

• the availability and cost of financial and specialist resources that may be needed
• the possible need for quality assurance, for example, by economists and other experts and by service providers
• how the findings are to be disseminated (for example, publication of assessments; dissemination via web sites)
• the possibility of deferring a proposal pending further research
• establishing a project plan for the assessment, setting out key milestones, resources and work streams

1.7 Advice and guidance

1.7.1 Departmental economists have an important role to play. They can advise on the full range of issues relating to business cases, including for example appraisals, feasibility studies, business plans and evaluations. They can supply advice on the appropriate techniques to use, help to draft terms of reference, provide quality assurance, assist with the selection and management of external consultants and help to undertake relevant analysis. Where possible, those undertaking appraisals, evaluations and other studies should be independent of those quality-assuring them.

1.7.2 It is particularly important to involve economists in the more costly, complex or contentious cases before committing resources to them. Departments should consult their economists in all cases requiring DoF approval, and should take account of their views before submissions are made to DoF.

1.7.3 NIGEAE is NI departments' primary general guide to expenditure appraisal and evaluation. However, departments may need to supplement it with more specific guidance to suit particular areas of expenditure and different types of spending proposals. Such guidance should accord with the general principles of NIGEAE and should be agreed with DoF prior to use. Departmental economists can advise on the supplementary guidance currently relevant to their spending areas.

1.7.4 NIGEAE is tailored to suit the specific needs of NI and therefore takes precedence over the Her Majesty's Treasury (HMT) Green Book and any other guidance external to NI. However, its principles are broadly in accord with those in the HMT Green Book and in general NIGEAE advocates a Green Book-style approach. The HMT Green Book and the resources available at the Green Book guidance web pages should be used as additional supporting guidance.

1.8 Issues relevant to appraisal and evaluation

1.8.1 There are a wide range of generic issues that may need to be considered as part of any assessment. The following list should be checked for relevance to options under appraisal, and used for later evaluations:

• strategic impact; new proposals can be said to have strategic impacts on organisations if they significantly affect the whole or major part of an organisation over the medium to long term. Proposals should therefore be considered in terms of their potential scale of impact, and how they fit in with the strategy of the organisation(s) they affect
• economic rationale; proposals need to be underpinned by sound economic analysis, which should be provided by a cost benefit analysis in an option appraisal. See sections 2.1 &·3.1.3
• financial arrangements and affordability; proposals need to be affordable, and an affordable financial plan needs to be developed. See section 2.9
• achievability; all proposals should be assessed for their achievability, and recognised programme and project management arrangements set up as necessary. See·section 10
• commercial and partnering arrangements; proposals need to take account of commercial, partnering and procurement arrangements; what can be delivered in the market; how costs and benefits can be guaranteed through commercial arrangements; how contracts will be managed through to completion. See·section 5
• regulatory impact; the impacts of new proposals on businesses, voluntary sector and charities should be assessed. Regulatory impact assessment (RIA) is a policy tool that assesses the impact, in terms of costs, benefits and risks of any proposed regulation that could affect businesses, charities or the voluntary sector. It is government policy that all government departments and agencies where they exercise statutory powers and make rules with general effect on others must produce an RIA. They should also produce an RIA for proposed European legislation that will have an effect on businesses, the public sector, charities or the voluntary sector in the UK. Although the trigger for producing an RIA is that the proposal could affect businesses, charities or the voluntary sector, the RIA itself should cover the full range of economic, social and environmental effects. Departments should continue to use the local RIA guidance which is at the DfE Online web pages and The Executive Office (TEO) Policy Toolkit
• legislation; consideration should be given to legislation specific to the case in hand, as well as statutes that affect many proposals, such as the Human Rights Act, or the Data Protection and Freedom of Information Acts.
• information management and control; the information requirements of proposals, including the data needed for later evaluation, and the supporting IT that may be required. Further guidance is available from Delivery and Innovation Division (DID)
• social clauses in public procurement contracts; the Programme for Government (PfG) includes a commitment to “include social clauses in all public procurement contracts for supplies, services and construction.” Construction and Procurement Delivery (CPD) issued a new procurement guidance note (PGN) PGN 01/13 on integrating social considerations into contracts in November 2013. It is important to identify the approach to including social considerations in contracts at the earliest possible stage. Social considerations should be addressed at two stages in strategic appraisals and business cases, that is, when defining needs and objectives; and when assessing costs and benefits. Having completed the business case and obtained expenditure approval, departments should work with the appropriate Centre of Procurement Expertise (CoPE) to agree a specification for the procurement. This is the appropriate time to consider in detail what social clauses to include in the contract
• environmental impacts; the effects on the environment should be considered, including air and water quality, land use, noise pollution, and waste production, recycling and disposal. Further guidance is available from the Department of Agriculture, Environment and Rural Affairs (DAERA) and in Workbook 4 of the Policy Toolkit
• rural issues; the government is committed to ensuring that all its policies take account of specific rural circumstances. Appraisers should assess whether proposals are likely to have a different impact in rural areas from elsewhere. Further guidance is available from the DAERA and in Workbook 4 of the Policy Toolkit
• equality; impacts on various groups in society should be considered as part of an appraisal. Section 2.7.24 describes how equality and other distributional issues should be brought into the appraisal process
• health; The impacts of proposals on health should be considered, and evaluation made of the impact on health of poverty, deprivation and unemployment, as well as poor housing or workplace conditions. Further guidance on Health Impact Assessment is available from the Department of Health (DoH) and in Workbook 4 of the Policy Toolkit
• health and safety; the health and safety of people at work or arising from work activity may need to be safeguarded. Obviously this is of particular concern in construction. The Health and Safety Executive for Northern Ireland, Department of the Economy (HSENI) and CPD (DoF) can provide further advice
• consumer focus; assessments may need to involve consideration of the cost and quality of goods and services, as well as access to, choice of, and information about them
• regional perspectives; the policy hub provides guidance on how regional perspectives are best incorporated into the policy making process
• European Union; it will often be important to take account of proposals and activities in other European Union countries, as well as specific legislation and regulations. For treatment of EU funding in appraisals, see section 4.6 below. State aid rules are particularly important to consider, as these prescribe the extent to which government can intervene - see section 4.8 below. DoF's European Division can provide general advice on EU matters
• design quality; the design quality of facilities can be important in ensuring that objectives are successfully achieved. Relevant advice can be obtained from DoF's CPD. See the Design Council website for additional information. The Commission for Architecture and the Built Environment (CABE) was absorbed into the Design Council on 1st April 2011. CABE's website was archived in 2011 but it still contains some useful material
• climate change; if a policy, project or programme is likely to be affected by climate change it is important to consider this risk appropriately. Her Majesty's Treasury (HMT) and the Department for Environment, Food and Rural Affairs (DEFRA) have published supplementary Green Book guidance on how to assess these risks and incorporate the uncertainty of climate change and the value of flexibility into decision making. This guidance titled 'Accounting for the Effects of Climate Change' can be found on the Green Book Website
• carbon valuation; the Department of Energy and Climate Change (DECC) has published guidance on the valuation of carbon and its use in appraisal. This guidance, titled 'Carbon Valuation in UK Policy Appraisal: A Revised Approach' sets out a range of carbon prices which may be used in appraisals where the policy, project or programme is expected to have a significant effect on carbon emissions