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4.3 Additionality

4.3.1The success of government intervention through assistance to the private, voluntary or community sectors is usually assessed in terms of its 'additionality'. This is its net, rather than its gross, impact after making allowances for what would have happened in the absence of the intervention. To put it another way, additionality is the extent to which an activity takes place at all, or is undertaken on a larger scale, or earlier, or to a higher standard, or within a policy target area, as a result of public sector intervention.
4.3.2Additionality needs to be appraised to help ensure that assisted projects receive the minimum Government assistance required to bring them about. Any excess over this amount is "deadweight". Additionality should be measured at programme and project level, adjusting the form of the assessment to the nature and objective of the activity. All public sources of financial assistance to the project should be taken into account when assessing its additionality.
4.3.3

A project is regarded as fully additional if, without assistance, it would not happen at all. However, additionality may be partial. For example, without assistance:-

  • The project might have been carried out in another NI location of some lower priority;
  • The same project might have been carried out later;
  • A different project might have been carried out, or the same project on a smaller scale or to a lower standard of quality.
4.3.4

The appraiser needs to probe the claims made by the applicant regarding additionality. There are several possible avenues to pursue, including:-

  • direct questioning of the applicant - regarding the applicant's need for assistance, the financial resources at its disposal, its efforts to obtain other sources of funds, its contingency plans if the grant application should fail, and so on. Does the applicant make a credible case for needing the assistance?
  • checking and monitoring of information supplied by the applicant - for instance, site visits to check whether the project has actually started, checks on the financial and staffing/personnel information provided. Does the applicant's behaviour match its claims?
  • drawing on the knowledge of the appraiser's own organisation, where it has experience of dealing with similar applications or has had previous dealings with the applicant. Does the application stack up with past experience?
  • consulting other organisations who are experienced in the relevant field of activity, or who have previous experience of the applicant - for example, partner organisations, other funding bodies, banks, and so on. Does others' experience confirm the bona fides of the application?
4.3.5

Whatever the methods, it is important to record reasons why the additionality criterion is considered to have been satisfied. The Northern Ireland Audit Office, in its 22nd February 1993 report (No. 418) on IDB selective financial assistance criteria, recommended specific recording of the assessment of additionality, addressing points similar to those listed here. This is good practice for all forms of public sector financial assistance.

Accordingly, appraisal reports should:-

  • demonstrate the additionality of the proposal by reference to the criteria at 4.3.3 above, indicating its nature and extent.
  • record reasons for the proposed level of assistance, related individually to the nature, scale and timing of the project;
  • summarise the negotiations with the applicant on the level of assistance;
  • review the applicant's financial position and ability to fund the project from non-Government sources; and
  • where relevant, assess the project's mobility, including, where possible, substantive evidence of a viable alternative location.
4.3.6

Assessments should not be based on unsubstantiated claims by applicants, for example, that a project's return was too low compared to its internal hurdle rates, or that an alternative location was being considered:-

  • In the case of very high hurdle rates, the applicant should have to demonstrate that it does in fact use high hurdle rates, and justify their use. Generally, a very high hurdle rate indicates an inefficient investment criterion, and is therefore a good reason to reject an application, as the government should not encourage inefficient behaviour. An applicant using an inefficiently high hurdle rate is likely to offer poor prospects for future investment.
  • Where an applicant claims that an alternative location is being considered, for instance, where it claims assistance is being offered elsewhere, then sound evidence to support the claim should be provided, normally including detailed appraisals of each option.
4.3.7The effort used to appraise additionality should be appropriate to the scale of the project. The effort needed for a small grant to a community group is much less than that required for a major industrial assistance proposal. Where small sums are involved, judgement based on direct questioning of the applicant may be sufficient, or it may be possible to define the qualifying conditions in a way that ensures that any accepted proposal is additional.
4.3.8In larger cases, a more in-depth analysis will be appropriate and a full examination of the financial factors driving the need for a certain level of assistance should be undertaken to ensure that any offer of assistance is the minimum required to bring about the project. Claims of lack of funds should be backed with an analysis of the applicant's ability to fund the project using internal reserves, additional equity, debt financing, or some combination of these. Where the investment in a project spans a number of years the applicant's future finances, and not just its current finances, will be relevant to its ability to fund the project from non-Government sources.
4.3.9In some cases it will be appropriate to consider the returns to the applicant in light of the cost to it of financing the project. Broadly speaking, from the applicant's perspective a project will only be attractive as long as the anticipated return from the project is the same or better than the applicant's (marginal) cost of capital. An analysis of the extent to which the project's return falls short of the applicant's cost of capital can provide valuable information on the minimum level of assistance required to bring about the project. An example of how this might work in practice is included below.
4.3.10In summary, additionality should be appraised and documented in detail, and assertions that the additionality criterion is met should be supported by substantial evidence and analysis. Partial additionality should be reflected in the levels of assistance offered. Assistance should not be awarded to projects that have already gone ahead without it.

Project Returns and The Cost of Capital: Some Simple Examples

Read on to Cost-Effectiveness

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