Summary of the basic steps of an economic appraisal

Step one: explain the strategic context

Main procedures include:

• refer to underlying policy or strategy, for example; policy statements, statutory requirements, or business plans
• indicate how the proposal is expected to contribute to the relevant strategic aims and objectives

Strategic context sections should be very short and normally no more than two pages of any business case.

Step one in full

Step two: establish the need for expenditure

Main procedures include:

• Establish the need for expenditure by:
  • analysing the expected demand for services
  • identifying deficiencies in current service provision
• justify and quantify the proposed level of service provision over the appraisal period
• where funding the non-government sectors is in view, assess additionality; that is, establish that the proposed assistance is the minimum necessary. Further guidance can be found in NIGEAE section 4.3

Step two in full

Step three: define the objectives and constraints

Main procedures include:

• define the expected outcomes and outputs
• specify targets that are SMART; that is, specific, measurable, achievable, relevant and time-dependent
• include implementation targets, for example; dates and milestones
• state the key constraints on the project technical, financial, legal, timing
• indicate the relative priority of individual objectives or elements of the proposals
• provide sufficient detail to enable option generation and option performance assessment

Step three in full

Step four: identify and describe the options

Main procedures include:

• identify and describe a baseline option, usually the status quo, and a suitably wide range of alternative options
• consider variations in scale, quality, technique, location, timing and funding method
• choose a suitable number of options for full appraisal
• where some are rejected before full appraisal, explain reasons for rejection

Step four in full

Step five: identify and quantify the monetary costs and benefits of options

Main procedures include:

• detail capital costs, including any refurbishment costs, and annual recurrent costs and benefits of all options
• express costings in total rather than incremental terms, to expose full resource consequences
• include opportunity costs and residual values for all assets employed, whether already owned or not
• assess displacement, and adjust costings accordingly
• adjust for inflation and (where relevant) tax differences
• where cost savings or efficiency improvements are projected, indicate whether they will represent financial savings or redeployment of resources
• consider costs and benefits to other parts of the public and private sectors

Where funding the non-government sector is in view, assess cost-effectiveness by reference to relevant ratios such as cost per job, public assistance to project cost, etc. Further guidance can be found in NIGEAE section 4.4.

Step five in full

Step six: appraise risks & adjust for optimism bias

Main procedures include:

• prepare a risk log identifying and quantifying the main risks associated with the proposal
• consider how risks compare under the different options
• adjust costs, benefits and timing assumptions for optimism bias
• develop suitable risk management and risk reduction strategies

Step six in full

Step seven: weigh up non monetary cost and benefits

Main procedures include:

• identify all relevant non-monetary costs and benefits; economic, social, environmental and others
• quantify them in suitable units where possible
• show how they compare under the different options, for example; list and describe in simpler cases and use impact statement or weighted scoring method in others
• consider need to screen for and/or assess in detail sustainability, equality and lifetime opportunities
• decide whether any specific types of impact assessment are required, for example; health, environmental, transport, equality or integrated impact assessment
• explain assumptions clearly, for example; basis of quantification. Where employed, weights and scores should be explained individually
• interpret the results of the non-monetary analysis

Step seven in full

Step eight: calculate net present values (NPVs) and assess uncertainties

Main procedures include:

• identify phasing of monetary costs and benefits in real terms over a suitable time period adjusted for optimism bias and, where relevant, relative inflation, displacement and tax differences
• calculate NPV (or net present cost (NPC)) for each option, using correct discount rate (usually 3.5 per cent per annum in real terms)
• include spreadsheets detailing the calculations, including disaggregation of cost/benefit items
• show, for each year, the discount factors used, the total NPV for the year, and the cumulative NPV to that year
• identify the price basis and base year for discounting
• test and interpret the sensitivity of the NPVs (or NPCs) to changes in important assumptions, and explain choice of variations covered
• interpret the results, for example; estimate the probability of various possible outcomes and implications for option ranking
• provide sufficient detail to enable checking of calculations

Step eight in full

Step nine: assess affordability and record arrangements for funding, management, procurement, marketing, benefits realisation, monitoring and ex post evaluation

Main procedures include:

• affordability; include budget, cash flow and funding statements, phased over time
• management; give details of proposed personnel, procurement method, timetable, benefits realisation plan, accommodation needs, staffing issues
• procurement; assess alternative procurement options
• marketing; provide market assessment and marketing plan as appropriate
• benefits realisation; include draft BRP in OBC and final version in FBC
• monitoring; indicate how the proposed option will be monitored during and after implementation
• evaluation; record pre-implementation levels of resource use and service provision; indicate factors to be evaluated, when, how and by whom

Where funding the non-goverment sector is in view, assess viability; that is, examine cash flows, management and financial arrangements to ensure that funding is not wasted on proposals that will fail prematurely. Further guidance can be found in NIGEAE section 4.5, section 10 and section 11.

Step nine in full

Step 10: assess the balance of advantage between the options and present the results and conclusions

Main procedures include:

• write up the steps of the appraisal in the order shown here
• give details of assumptions and calculations, using appropriate appendices
• include summary of main results (that is, NPVs/NPCs, unquantifiables and uncertainties) for each option
• draw out the balance of advantage among options, assess value for money (VFM) and affordability, and record conclusions and recommendations

Step 10 in full