B-01

The Public Spending Code: B. Expenditure under Consideration

Standard Appraisal Process

B-01

Document Update Log

Document Summary: The techniques used in appraising proposals or new areas of expenditure vary depending on the scale of expenditure involved. The more complex techniques are explored in the Standard Analytical Guidance Section of the Public Spending Code. Regardless of the scale or the technique used all appraisal involves a series of steps from objective definition and options exploration through to selection of the preferred option. This document sets out those standard appraisal steps. For expenditure involving less than €5m, following the standard appraisal steps should ensure a good appraisal.

Appraisal involves both the Sponsoring Agency and the Sanctioning Authority being clear about the objectives of a proposal/intervention and consideration of all the options open to the Sponsoring Agency in meeting these objectives. All publicly funded projects or initiatives should be appraised carefully for:

–          consistency with programme/policy objectives;

– value for money (taking account of deadweight[1] and displacement[2])

Appraisal by the Sponsoring Agency should follow the general approach in the checklist below.  Appraisal of all new expenditure (whether capital or current), large or small should be subjected to the general appraisal process described below.

The appraisal and planning stage will often overlap. In reality, it is very difficult to carry out a detailed appraisal unless some planning and/or initial design work has been done.

There are seven standard steps and these are expanded upon below.

(i) Define the objective

(ii) Explore options taking account of constraints

(iii) Quantify the costs of viable options and specify sources of funding

(iv) Analyse the main options

(v) Identify the risks associated with each viable option

(vi) Decide on a preferred option

(vii) Make a recommendation to the Sanctioning Authority

Further guidance on particular techniques and methods are contained in Section D of the Public Spending Code and parameter values are to be found in Section E.

(i) Define the Objective

Define clearly the objective of the proposals i.e. what needs are to be met and what is the planned scale on which those needs will be met, measured as precisely as possible. This is a key step that does not always get the required attention. If the objective changes during the appraisal or planning process then all parts of the appraisal need to be reviewed.

Needs and Objectives

An objective is the explicit intended result of a particular programme or project, measured as precisely as possible. For example, there may be a need to improve traffic flow on a road. To state the objective of works on that road as being “to reduce average journey times” would be unsatisfactory since it would not provide a basis for judging whether investment proposed to improve the roads would produce sufficient benefit. Something more explicit is needed. “To reduce average journey times between Town A and Town B by X percent by the year 2020” is a precise objective. It assists in addressing such questions as what are the various ways in which this objective can be reached; what costs and what results can be expected from each alternative course of action; and are the benefits sufficient to justify the costs.

Project and programme objectives should be expressed in terms of the benefits they are expected to provide and those whom they are intended to benefit. For example, road building programmes are not ends in themselves, as they must be seen in the light of the needs of the economy as a whole, and of the target groups for which the programmes cater (for example, freight traffic, tourist traffic, commuters. etc.). There is a need for realism in stating objectives.

Where programmes have multiple objectives it is necessary to be clear about the relative importance of each and how this should be reflected in resource allocation and in the appraisal process. Objectives should be expressed in a way which will facilitate consideration and analysis of alternative ways of achieving them. They should not be so expressed as to point to only one solution. For example, population growth may put pressure on the schools in a particular area and an objective might be expressed as being “to build new schools in the area” to meet this pressure. The objective “to provide school places to meet population growth within the area” would provide a better basis for considering alternative ways of achieving this objective, such as the provision of new schools, the expansion of existing schools, on a permanent or temporary basis, or making better use of the existing stock of schools by provision of special transport (school bussing) arrangements.

New projects should only be undertaken where there is a clearly established public need for the projects or service provided; existing services should be reviewed to ensure that the kind of service provided is the kind of service required, and is on the appropriate scale. Costly and wasteful over-supply, and/or under-utilisation of resources should be avoided.

Identifying the most appropriate policy response to a “need” can be difficult. Every effort should be made to identify available research that will assist in identifying a problem properly and which may have looked at how different types of solutions work.

(ii) Explore Options – taking account of constraints

  • list the options i.e. realistic alternative ways in which the objective can be achieved; include the option of doing nothing, or consider whether an objective could be met by ways other than expenditure by the State;
  • list the constraints;
  • The output from this step should be a list of realistic options that meet the objective(s). If the objective cannot be met from the available options then the objective should be revisited.

Options & Constraints

All realistic ways of achieving stated objectives should be identified and examined critically when considering project options for the first time. This should be done with a completely open mind, and should always include the option of ‘doing nothing’ or ‘doing the minimum’. Different scales of the same response should be included as separate options, where appropriate. There should be no presumption that public sector responses are the only ones available; options which involve, or rely totally on, the private sector should also be considered. The alternatives should be described in such a way that the essentials of each alternative, and the differences between them, are clear. Options on the appropriate procurement method will also be considered i.e. traditional design build (DB), Design Build Finance (DBF), Design Build Finance Operate (DBFO) and Design Build Finance Operate and maintain (DBFOM) etc.

Constraints

There will invariably be constraints in reaching objectives. There will normally be resource constraints. There may be technical constraints; for instance, there may be only a limited number of ways in which a product can be made, or a service delivered. Constraints may also arise as a result of previous policy or investment decisions, but these may be amenable to change. Constraints must also be explored and fully taken account of, because they will limit the range of solutions which are feasible or acceptable. The following is a checklist of the kinds of constraint which typically should be considered in appraising a proposal:

– Financial

– Technological

– Legal/regulatory

– State Aids rules

– Environmental

– Physical inputs/raw material

– Availability of manpower and skills

– Time

– Administrative /managerial ability

– Distributional (e.g. between regions, income groups, etc.)

– Social

– Spatial policy

– Land use planning

– Co-operation required from other interests

– General policy considerations.

Considering the possible alternatives in the light of the constraints will usually lead to the conclusion that some of the alternatives are not feasible. Others may conflict with existing policies. Objectivity is important in considering options. There is a danger that the selection of options may be manipulated in order to make a case for a course of action which is already favoured. For example, options for which there is a very weak case may be put forward in order to make a poor option look good. If the poor option is the best available it should be considered alone on its own merits.

(iii) Quantify the costs of viable options and specify sources of funding

For capital projects, cost quantification should cover ongoing capital and life cycle costs relating to the operation and maintenance of the project, and receipts generated by the use of capital assets, as well as the costs involved in their creation. The cost of the project should be the expected outturn cost, including construction costs, property acquisition, risk and contingency. The cost of possible future price increases and variations in project outputs should be factored into the calculation of project costs.

Costs of current programmes or capital grant schemes will largely depend on the amount per eligible individual and the expected take-up. Reliable estimation of take-up us key. The costs of current programmes or capital grant schemes can be more difficult to predict. Cash limits on schemes should be used to protect the exchequer from unexpected exposure. Projected administration costs should also be included and external sourcing must be one of the methods of delivery considered for any new service that is to be introduced.

(iv) Analyse the main options

This step and the next step on the consideration of risk will lead to a recommendation on the preferred option. Different forms of analysis provide different kinds of information about investment proposals, and it is important to identify clearly, and to agree with the Sanctioning Authority, which forms of analysis are appropriate. The chief criterion used in deciding on the appropriate forms of analysis is whether or not the project is to be operated on a commercial basis.

The costs of the possible options will have been determined in the previous step. Depending on the scale of the project the analysis of options may involve placing a monetary value on the benefits.

Types of analysis that may be used include:

– Multi-criteria analysis (MCA)

– Financial analysis

– Cost benefit analysis

– Cost effectiveness analysis

– Exchequer cash flow analysis

Further information on when a particular method is required is contained in document B-03 Approvals Required and Scale of Appraisal and further guidance on each type of analysis is available in the Standard Analytical Techniques Section of the Public Spending Code.

Sensitivity Analysis:

Sensitivity analysis involves evaluating proposals over a range of assumptions about key factors (e.g. prices, costs, interest rates on any borrowed funds, growth rates, demographic changes) and should always be undertaken. If an option yields acceptable results only with particular combinations of circumstances, and the results are very sensitive to variations in these circumstances, then it should probably not be undertaken. If the relative merits of options change with variations in the assumed values of variables, those values should be examined to see whether they can be made more reliable. It may be possible to attach probabilities to ranges of values, to help pick the best option.

(v) Identify the risks associated with each viable option

Identify the potential impact of adverse circumstances on each option, and draw up, if possible, a strategy for dealing with risks. Important aspects of an appraisal will necessarily be based on assumed future outcomes and events. Realistic assumptions must be made about future prices, costs, market growth, and other relevant factors. Appraisal reports should always clearly state their assumptions. Over optimism should be avoided. Assumptions should be based on analysis of past performance, bad years as well as good and careful study of possible future developments. Realistic assumptions reduce, but cannot eliminate, the element of uncertainty in the decision-making process, and the risk that decisions made on the basis of the analyses may turn out to be wrong. Good project appraisal highlights the elements which are uncertain, so that the Sponsoring Agency and the Sanctioning Authority are aware of the risks involved in proceeding, or not proceeding, with any proposal. Suitable strategies to minimise risk, and its consequences, should be put in place e.g. in project management organisation, review procedures, information flows, etc. An appropriate level of contingency should be built into the costings.

(vi) Decide on a preferred option

Decide on the preferred option, specify it and a clear and detailed time profile for actions, (including time for planning and decision making) and for expenditure. Excessively high quality and cost specifications should be avoided. A balance must be struck between specifications which are excessive relative to needs and low quality specifications which may generate short-term economies but which lead to greater costs in the long-run.  

(vii) Make a recommendation to the Sanctioning Authority

The Sponsoring Agency should recommend the preferred option – with reasons for its choice and an indication of its sensitivity to changes in key assumptions – for consideration and approval by the Sanctioning Authority.


[1] Deadweight : would have happened anyway in the absence of public funding [2] Displacement: to what extent have existing facilities or activities been displaced by those that are now grant-aided