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4.1 General Principles

4.1.1Proposals involving financial assistance to the private, voluntary or community sectors should be appraised and evaluated with proportionate effort by the relevant Department or other funding body. Proportionate effort should be judged primarily on the basis of total NI public funds (including EU funds) involved over the life of the proposal under consideration.
4.1.2Financial assistance should not be approved in principle, nor should commitments to funding be given (e.g. 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 below.
4.1.3The type of financial assistance offered should be tailored to the particular case at hand. There should be no presumption that financial assistance should take the form of grant aid in every case - alternative forms of assistance might be equally effective to tackle a particular market failure and at a lower cost to the exchequer. For instance where market failure is restricting a firm's access to capital this might be tackled more cost-effectively with financial assistance in the form of loans or equity.
4.1.4Appraisal should be applied not only to schemes for financial assistance when they are being established but also to individual grants or other assistance subsequently paid out under such schemes. The appropriate level and type of appraisal will be different when a scheme rather than a grant is appraised, bearing in mind the principle of proportionate effort. For example, a major appraisal may be appropriate when considering what scheme to introduce; a large grant or loan application may deserve quite a substantial appraisal; and a small grant or loan may be adequately appraised using a suitable application form or appraisal pro forma.
4.1.5Where a proposal involves more than one source of NI public funds (including EU funds), the relevant funding bodies can avoid duplication of effort by co-operating to produce a single appraisal. As a rule of thumb, the funding bodies should supply resources to the appraisal broadly in proportion to their proposed shares in the funding. It is often appropriate that the major public funder should take the lead in co-ordinating and ensuring completion of the appraisal. When it comes to the stage of assessing completed appaisals, cooperation between funding bodies is also likely to be beneficial.
4.1.6

Where assistance to the private sector is under consideration, there is a need to ensure an adequate private sector contribution to the funding of the proposed investment. One of the important lessons identified by the Committee of Public Accounts following their enquiry into the De Lorean project was that "there must always be a significant contribution of risk capital from the private sector." Further, it is an established principle that there must be at least £1 of private sector investment for every £1 of Government assistance. (Twenty-fifth Report of Session 1983-84, HC 127. Dr Rhodes Boyson, speaking on behalf of the Government in a debate on the De Lorean case on 1 May 1985, stated that for future projects there must be at least £1 of private sector investment for every £1 of Government assistance).

Strictly speaking, this applies only to the private sector, not to the voluntary or community sectors. The latter operate in a different environment and may not be expected to be able to match Government funding in every case, although they should be expected to contribute according to their ability to do so. Whatever the sector being assisted, public funding should generally represent the minimum assistance necessary to bring about the investment.

4.1.7

It is good practice to advise applicants for assistance, from the outset, regarding the appraisal and approval procedures that will be necessary, the timescales that these may require, and the help that is available to them. Scheme documentation for applicants should contain this type of information.

Preliminary Screening

4.1.8It is generally appropriate for funding bodies to subject applications for assistance to preliminary screening. In its simplest form, this involves a basic assessment of the application to decide whether it is eligible for funding under the relevant scheme. More generally, preliminary screening offers the opportunity to test thoroughly the need for the project and its objectives, before committing resources to a full appraisal. It can be aided by the use of relatively simple scoring systems, in which applications are allocated scores by reference to relevant scheme criteria. Departmental economists can assist to establish suitable preliminary screening systems.
4.1.9Where preliminary screening indicates that a proposal is clearly unsuitable, it should be rejected, thus avoiding nugatory expenditure on an unnecessary full appraisal. Funding bodies should be satisfied that applications are eligible and offer a reasonable prospect of success before committing resources to a full appraisal.
4.1.10

Preliminary screening may also be used to help decide what priority an application should carry in relation to other applications, in terms of the order in which all the eligible applications should be subjected to a full appraisal. This is particularly relevant where the resources available to undertake appraisals are scarce in relation to the numbers of eligible applications to be appraised.

Business Case Documentation

4.1.11All proposals should be supported by a suitable business case that addresses all the issues covered in section 4 of NIGEAE. Business cases should confirm that proposals are economically efficient, viable, additional and cost-effective. When submitting business cases for approval, Departments should confirm that the proposals offer value for money and are affordable.
4.1.12Proportionate and appropriate effort should be applied in all cases. Large expenditures require substantial business case documents including thorough economic appraisals. Smaller expenditures require more modest documentation. (See use of pro formas below).
4.1.13

Business case documents should be developed through as many iterations as are necessary to cover the issues in section 4 of NIGEAE adequately. Note that the guidance on SOCs, OBCs and FBCs in section 8 of NIGEAE is designed primarily for procurement projects and does not generally suit assistance to the private, voluntary and community sectors. Until they are finalised and have served their purpose, business case documents should be regarded as living documents to be reviewed regularly and updated to reflect significant changes to key assumptions.

The Use of Pro Formas

4.1.14The appraisal of small grants or other assistance to the private, voluntary and community sectors can be facilitated by designing application forms so that they provide the information that funding bodies need to appraise them. This may be taken to include cases involving total financial assistance (including for example all sources of NI public funding, including EU and IFI funds) of up to £1m over the whole life of a project. Pro formas for appraisal of small grants should be geared towards addressing the issues in this section of NIGEAE, including economic efficiency, additionality, displacement, viability and cost-effectiveness.
4.1.15It is normally the funding bodies who should be doing the appraising using appraisal pro formas. Applicants may complete application forms, but they should not be expected to appraise their own proposals critically. Appraisals must reflect an independent and unbiased view of proposals.
4.1.16

Departments should be satisfied that the relevant application form or pro forma in use for each particular programme presents adequate information to enable the funding body to appraise expenditures. They should also ensure that funding bodies have suitable procedures in place to actually appraise the information submitted by applicants in the forms.

Funding of Consultants

4.1.17It is sometimes necessary to employ external consultants to assist with appraisals, although this should only be considered when it offers VFM and following the approval of an external consultancy business case in accordance with FD(DFP)07/12 and the associated guidance.
4.1.18

At one time, Departments provided funding to project promoters to employ consultants to undertake appraisals. It is now considered that a more independent appraisal will be obtained if the funders rather than the promoters employ the consultant. For instance, this encourages greater objectivity and allows more direct control over the quality of the appraisals provided by consultants. This approach is now generally recommended.

Continuation Funding of the Voluntary Sector

4.1.19Bodies operating in the voluntary sector often receive financial assistance for a specified time period. They will sometimes seek renewed funding for a further period, and in the case of well established organisations, this process may be repeated several times over. This is commonly known as ‘continuation funding’.
4.1.20It is good practice to make continuation funding conditional upon a satisfactory independent evaluation of the activities undertaken during the previous funding period, in addition to a fresh forward-looking appraisal covering the term for which continuation funding is sought.
4.1.21The term for the continuation funding will depend upon the individual circumstances of the project.  A term of 3 years is typical for established projects that are expected to have a continuing useful life, but shorter or longer time periods may be more suitable in particular cases. Where DFP approval is required, the appropriate time period should be agreed with the relevant DFP Supply Division.
4.1.22Each fresh application for funding should be considered to be a wholly new project and treated accordingly for purposes of appraisal, evaluation and delegated limits.
4.1.23

Accordingly, expenditure from previous funding periods should not be counted as a cost in any appraisal of future funding, nor should it be counted when deciding whether the continuation project exceeds a delegated limit. However, it should be considered when evaluating the success of the project in the previous funding period.

The Scope of the Appraisal

4.1.24Appraisals of applications for financial assistance should generally cover the whole of the project for which financial assistance is sought, not just the financially-assisted elements of it. For instance, an appraisal should detail all the sources of funding, and should cover all the costs and all the benefits associated with the proposal, including those falling to the private and voluntary sectors as well as to the public sector. This is to enable a judgement of the overall value for money and viability of the proposal. The same principles apply to ex-post evaluations of financially-assisted projects.
4.1.25

Appraisals of financial assistance to the private, voluntary and community sectors should assess VFM primarily from a broad NI perspective, like appraisals in general. Any significant impacts elsewhere in the UK should also be weighed into the investment decision. The appraisals should generally seek to ensure that four criteria are satisfied. These are:

  • Economic Efficiency;
  • Additionality;
  • Cost-Effectiveness; and
  • Viability.

The meaning of these criteria, and how to assess them, is explained below.

Read on to Economic Efficiency

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