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Relevant Costs and Benefits

2.5.1The aim of appraisal is to obtain value for money (VFM) from a broad economic perspective. This requires assessment of costs and benefits to the Northern Ireland (NI) economy as a whole.
2.5.2Appraisals should account for all the costs and benefits to NI residents. They should therefore cover costs and benefits to both the government and non-government sectors (including the private, voluntary and community sectors) and individual private residents. The benefits of most public spending programmes fall to private individuals, and these should be included. Where proposals involve the use of private sector or other non-government resources, these should be costed because their use represents a cost to the economy.
2.5.3While the primary focus should always be upon the costs and benefits to NI, there is flexibility to consider significant impacts upon other territories, including other parts of the United Kingdom (UK), the Republic of Ireland (RoI) and elsewhere in the EU. In practice, there is often little to distinguish between the NI and UK impact. However, this is not always the case. For example, a grant to a company in NI may displace business elsewhere in the UK, or a tourism project may attract tourists away from other parts of the UK. Such effects should always be appraised and, if considered to be material, taken into account alongside analysis from a NI perspective.
2.5.4Impacts on RoI are usually considered relevant only where a policy or programme has an explicit cross-border dimension. Normally, in such cases, NI will be primarily interested in impacts and VFM from a NI perspective, while RoI's primary interest will be in impacts and VFM from a RoI standpoint. However, the relative weight to be given to these impacts is a matter for decision-makers to judge in relation to the policy or programme objectives in view, taking account of the individual circumstances of the case in hand.
2.5.5

The term 'base case' is reserved for the best estimate of costs and benefits for any option, after adjustment for optimism bias. Thus every option has its own base case.

Before discounting is applied, using the general discount rate of 3.5%pa in real terms, costs and benefits should normally be adjusted to include allowance for optimism bias and to remove the general effects of inflation. Other adjustments may be needed in some cases e.g. for tax differences among options or for displacement.

  • Guidance on adjustments for tax and displacement is given below at 2.5.29 and 2.5.45 respectively.
  • The adjustment for optimism bias is explained in STEP 6.
  • The treatment of inflation is explained under STEP 8.
2.5.6The relevant base case costs and benefits to government and society of all options should be valued at up-to-date prices, and the net benefits or costs calculated. The decision maker can then compare the results between options to help select the best. In this context, relevant costs and benefits are those that can be affected by the decision at hand. Although they will vary depending on the scope of the proposal, some general principles apply. It is useful early on in the appraisal process to consider widely what potential costs and benefits may be relevant.
2.5.7Wider social and environmental costs and benefits for which there is no market price also need to be brought into any assessment. They will often be more difficult to assess but are often important and should not be ignored simply because they cannot easily be costed. Section 2.7 below provides more information on how to take into account the impacts of proposals that can not be expressed in money terms.

Read on to Principles of Cost Measurement

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