The Public Spending Code: B. Expenditure under Consideration
Approvals Required and Scale of Appraisal
‘Approval in principle’ is a decision given by a Sanctioning Authority to a Sponsoring Agency at the end of the appraisal stage. It permits the successive steps in planning a project or scheme to proceed, stopping short of the placement of major contracts or the making of any irrevocable commitments to undertake the project/scheme. It commits relatively limited resources to planning the project. Those resources are expended progressively. If circumstances warrant, it should be possible to revise or drop the proposal during the planning process without incurring all of the planning costs or any of the more substantial liabilities associated with the project itself. If the value of the capital project exceeds €20m then the CBA (or CEA) should be submitted to the CEEU in the Department of Public Expenditure and Reform for their views, prior to the Sanctioning Authority granting the Approval in Principle. The CEEU will give their views to the Sponsoring Agency and may publish their review of the CBA (or CEA) on their website, with any necessary redaction to protect the State’s interest in the tender process and commercial sensitivity. Redactions, if necessary at all, should be kept to a minimum and a justification for the redactions should be published with the document.
For current expenditure proposals expected to incur over €20m (with an annual spend of at least €5m) an economic appraisal should be submitted to the Vote Section who may seek the views of the CEEU. If the CEEU is asked to give their observations on the appraisal of a current expenditure proposal they may decide to publish their review of the appraisal on their website. For more information on appraisal of Current Expenditure proposals see document B-06 Appraising Current Expenditure.
When plans and designs have been finalised, the project proposal should be reviewed. Account should be taken of any major changes in relevant circumstances and the more precise information generated by the design process. In particular, if the expected total cost of the project has increased, then the project should be re-examined and reductions achieved without lowering the quality standard of the project below acceptable levels, in order to bring the project within the approved limit. Works should not be omitted so as to achieve reductions if they will have to be reintroduced later as being essential for the completion of the project, or for the generation of its full benefits, or if they significantly change the nature of the project. The Sanctioning Authority should be notified of any significant changes.
The pre-tender review is necessary to provide the information required by the Sponsoring Agency and the Sanctioning Authority to decide whether or not to approve proceeding to seek tenders.
Review using Tender Prices
When a tender price and other relevant information become available, the case for proceeding with the proposal should again be reviewed. The analysis contained in the detailed appraisal once again provides the framework for undertaking this review. The award criteria in the tender document will be used to select the best proposal received. The best proposal is then compared with what was expected at the Approval in Principle point. If the costs and output from the best proposal do not match the costs and benefits that led to the Approval in Principle then the Appraisal decision may have to be reviewed.
If tenders exceed the approved budget, the project should be re-examined and reductions achieved without lowering the quality standard of the project below acceptable levels, in order to bring the project within the approved limit. As stated above in relation to the pre-tender stage, works should not be omitted so as to achieve reductions if they will have to be reintroduced later as being essential for the completion of the project, or for the generation of its full benefits, or if they significantly change the nature of the project. The Sanctioning Authority must be informed of all significant works omissions.
If serious additional costs have arisen, the sanctioning authority should require the Sponsoring Agency to undertake, as appropriate, a revised cost-effectiveness analysis or cost benefit analysis having regard to the increased costs. Where a revised cost-effectiveness analysis or cost benefit analysis has been carried out and the project is either no longer affordable or the best value option, the procurement should be terminated and the resources diverted to more worthwhile projects.
If tenders are over the approved limit re-appraisal may be required to determine whether the project should be abandoned or proceeded with. If this re-appraisal suggests proceeding at higher cost the approval of the Sanctioning Authority to a raised financial limit must be sought before contracts are placed. If it is decided that the project should be abandoned at this post-tender stage, and if substantial amounts have already been spent on planning etc. at this stage, the position should be reviewed to determine why the project came to proceed to this stage and was then abandoned.
3. Scale of Appraisal
Every spending proposal should be appraised carefully. However, the resources spent on appraisal should be commensurate with the cost of projects (or proposals for current expenditure), and with the degree of complexity of the issues involved. Small and routine projects should be appraised with a readily applicable methodology which is used consistently and which reflects the principles set out in this document.
Simple appraisals involving expenditure of less than €500k may be completed within a matter of days. The appraisal of complex projects involving expenditure of more than €20m, which will involve a Cost Benefit Analysis, may take a number of months.
(i) A simple assessment will be carried out for minor projects with an estimated cost below €0.5 million, such as projects involving minor refurbishment works, fit outs etc.
(ii) Projects costing between €0.5 million and €5 million should be subject to a single appraisal incorporating elements of a preliminary and detailed appraisal.
(iii) A Multi Criteria Analysis (MCA) should be carried out at minimum for projects between €5 million and €20 million.
(iv) Projects over €20 million should be subjected to a Cost Benefit Analysis (CBA) or Cost Effectiveness Analysis (CEA). Prior to Approval in Principle the CBA (or CEA) should be submitted to the Central Expenditure Evaluation Unit in the Department of Public Expenditure & Reform for their views. The CEEU will give its views on the appraisal to the Sponsoring Agency and may publish their review of the CBA (or CEA) on their website, with any necessary redaction to protect the State’s interest in the tender process and commercial sensitivity. Redactions, if necessary at all, should be kept to a minimum and a justification for the redactions should be published with the document.
For current expenditure proposals expected to incur over €20m (with an annual spend of at least €5m) an economic appraisal should be submitted to the Vote Section who may seek the views of the CEEU. If the CEEU is asked to give their observations on the appraisal of a current expenditure proposal they may decide to publish their review of the appraisal on their website.
(v) Programmes with an annual value in excess of €30 million and of 5 years or more duration to be subject to prior and mid-term evaluation at the beginning and mid point of each 5 year cycle or as may be agreed with the Department of Public Expenditure & Reform. Programme Evaluation should consider five key questions:
1. Rationale -What is the justification or rationale for the policies underpinning the programme? What is the underlying market failure justification for Government intervention?
2. Relevance – What are the implications for the programme of changes in the wider socio-economic environment and in the context of overall Government policy?
3. Effectiveness – Is the programme meeting its financial and physical objectives?
4. Efficiency – Could more be achieved for the resources invested?
5. Impact – What socio-economic changes can be attributed to the programme. Most projects will be considered in the context of a sponsoring agency’s business plan or a multi-annual investment programme. The Sanctioning Authority should ensure that there is adequate consultation between sponsoring agencies, relevant Departments and public bodies having functional responsibilities in the sector or cross-sectoral responsibilities.
Cost-Benefit or Cost-Effectiveness Analysis?
There are two basic forms of economic analysis, one of which should be applied in the appraisal of each non-commercial investment proposal valued over €20m (see figure 6 below):
The general principle of cost-benefit analysis (CBA) is to assess whether or not the social and economic benefits associated with a project are greater than its social and economic costs.
Cost-effectiveness analysis (CEA) compares the costs of different ways of achieving a particular objective. A choice can then be made as to which of these options (which all achieve the same or similar ends) is preferable. Cost-benefit and Cost-effectiveness analysis are very similar. Ideally, cost-benefit analysis would always be undertaken. However, there are situations where significant costs or benefits associated with a project cannot be quantified or valued, and where this occurs cost effectiveness analysis may have to be relied on. CEA is employed to determine the least cost way of determining the project objective. Whether undertaking cost-benefit or cost-effectiveness analysis, a number of important considerations arise:
- There may be significant costs or benefits which do not affect the Sponsoring Agency but which are important to other persons or agencies or to society in general. These are usually called ‘externalities’ (i.e. they are external to the sponsor’s direct concerns).
- There may be no market prices available for evaluating some costs or benefits associated with project options as they may not be traded items.
- In some cases, though resources consumed and outputs produced may be traded, the prices may not reflect the real value to society of those resources or outputs.
For further information on Appraisal Techniques see Document D.01.
Project Finance including PPPs:
The Sponsoring Agency is required to seek the advice of the NDFA on all projects above €20 million and should do so at preliminary appraisal stage and in any event no later than before tender documents are finalised. The Agency’s statutory functions include advising public bodies on the optimum means of financing the cost of public investment projects to achieve value for money and providing advice in relation to all aspects of financing, refinancing and insurance including risk analysis of public investment projects.
The option of procuring a project by PPP for projects costing over €20m should be considered by the sponsoring agency as part of the project appraisal. The separate Guidelines on Public Private Partnerships should be followed when considering the PPP option – see www.ppp.gov.ie.
Figure 6: Identifying the Appropriate Type of Analysis