The Basic Steps of an Economic Appraisal

1. EXPLAIN THE STRATEGIC CONTEXT

• Refer to underlying policy or strategy, e.g. policy statements, statutory requirements, or business plans.
• Indicate how the proposal is expected to contribute to the relevant strategic aims and objectives.

NIGEAE section 2.1

2. ESTABLISH THE NEED FOR EXPENDITURE

• Establish the need for expenditure by:-
  • analysing the expected demand for services; and
  • identifying deficiencies in current service provision.
• Justify and quantify the proposed level of service provision over the appraisal period.

Where funding the non-Govt sectors is in view:-Assess Additionality i.e. establish that the proposed assistance is the minimum necessary.

NIGEAE section 2.2

NIGEAE section 4.3

3. DEFINE THE OBJECTIVES AND CONSTRAINTS

• Define the expected outcomes and outputs.
• Specify targets that are SMART i.e. Specific Measurable Achievable Relevant and Time-dependent.
• Include implementation targets e.g. dates, milestones.
• State the key constraints on the project, e.g. technical, financial, legal, timing etc.
• Indicate the relative priority of individual objectives or elements of the proposals
• Provide sufficient detail to enable option generation and option performance assessment.

4. IDENTIFY & DESCRIBE THE OPTIONS

• 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.

5. IDENTIFY & QUANTIFY THE MONETARY COSTS AND BENEFITS OF OPTIONS

• 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-Govt sector is in view:-Assess Cost-Effectiveness by reference to relevant ratios such as cost per job, public assistance to project cost, etc.

NIGEAE section 2.5

NIGEAE section 4.4

6. APPRAISE RISKS AND ADJUST FOR OPTIMISM BIAS

• 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.

7. WEIGH UP NON MONETARY COST & BENEFITS (INCLUDING SUSTAINABILITY, EQUALITY & LIFETIME OPPORTUNITIES)

• 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 e.g. "list and describe" in simpler cases; use "impact statement" or "weighted scoring method" in others.
• Consider need to screen for and/or assess in detail Sustainability, Equality & Lifetime Opportunities.
• Decide whether any specific types of impact assessment are required e.g health, environmental, transport, equality or integrated impact assessment.
• Explain assumptions clearly e.g. basis of quantification. Where employed, weights and scores should be explained individually.
• Interpret the results of the non-monetary analysis.

8. CALCULATE NET PRESENT VALUES (NPVs) AND ASSESS UNCERTAINTIES

• Identify phasing of monetary costs and benefits over suitable time period, adjusted for inflation, optimism bias and (where relevant) displacement and tax differences.
• Calculate NPV (or NPC) for each option, using correct discount rate.
• 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 e.g. estimate the probability of various possible outcomes and implications for option ranking.
• Provide sufficient detail to enable checking of calculations.

9. ASSESS AFFORDABILITY AND RECORD ARRANGEMENTS FOR FUNDING, MANAGEMENT, PROCUREMENT, MARKETING, BENEFITS REALISATION, MONITORING, AND EX POST EVALUATION

• 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 etc.
• 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-Govt sector is in view:-Assess Viability i.e. examine cash flows, management & financial arrangements to ensure that funding is not wasted on proposals that will fail prematurely.

NIGEAE sections 2.9, 10 & 11

NIGEAE section 4.5

10. ASSESS THE BALANCE OF ADVANTAGE BETWEEN THE OPTIONS AND PRESENT THE RESULTS & CONCLUSIONS

• 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 (i.e. NPVs/NPCs, unquantifiables and uncertainties) for each option.
• Draw out the balance of advantage among options, assess VFM and affordability, and record conclusions and recommendations.