Bokhus

Economic Dimension/Case:

• the analytical heart of a business case
• detailed option development and selection takes place
• option analysis is driven by the SMART objectives and delivery of the business needs
• estimates the social value of different options
• selection f the preferred option from the shortlist uses the social cost benefit analysis CBA or (where appropriate, the social cost effectiveness analysis CEA)

Effective economic appraisal:

• estimating costs and benefits in a consistent manner
• take account of uncertainties and risks; build them into the appraisal
• based on robust but proportionate analysis
• options that do not meet the objectives cannot represent Value for Money (VfM)
• ensure there are links with the other dimensions/cases:
  • commercial dimension (commercial strategy, arrangements relating to services and assets needed by the proposal, the design of the procurement tender if required)
  • financial dimension )net cost to the public sector of the proposal, affordability, exclusively concerned with the financial impact on the public sector, calculated according to the National Accounts rules)
  • management dimension (practical arrangements for implementation, demonstrates that the preferred option can be delivered successfully, concerned with the development of metrics and targets)

Logical Change Process (HMT Green Book):

• BAU – quantitative estimate
• SMART objectives
• changes needed to bridge the gap from BAU to achieving the SMART objectives – the gap is known as the business needs
• the logical change process = the chain of cause and effect, an explanaton of how meeting the business needs will bring about the SMART objectives
• analysis supported by objective evidence for the data and assumptions used (source of evidence, robustness of evidence, relevance of evidence to the context where it is being used)
• objectively-based confidence ranges should be used instead of single point estimates

The rationale for intervention (strategic dimension)

• Maintaining service continuity, arising from the need to replace some factor in the existing delivery process;
• Improving the efficiency of service provision;
• Increasing the quantity or improving the quality of a service;
• Providing a new service;
• Complying with regulatory changes; or
• A mix of all the above.

The government will intervene to improve the welfare efficiency of existing private sector markets i.e., in the case of market failure, to ensure the provision of a service or investment which would not occur because wider social benefits are ignored by firms.

Improving equity may also be another reason for intervention as social welfare might be increased if resources are redistributed from those with a lower marginal utility of income to those with a higher marginal utility.

It may be the case that the the intervention is correcting an existing ‘government failure’ that itself has resulted in an inefficient allocation of resources.

(?) Based on the rationale, specific intervention objectives will be defined. These will be used to assess options alongside the four other business case lenses – value for money, commercial viability, affordability and deliverability – to arrive at a preferred option.

Appraisal of options

• it is about finding the best way to meet policy objectives that are set out in the strategic dimension and which must be SMART
• Long list appraisal:
  • allows a wide range of alternatives for meeting SMART objectives to be considered so that a short list can be identified for a more detailed CBA
  • options are generated using the Options Framework Filter which identifies options across five separate aspects/Critical Success Factors (Scope, Solution, Delivery, Implementation, Funding)
  • “Critical Success Factors” are the attributes that any successful proposal must have, if it is to achieve successful delivery of its objectives. These include Strategic Fit, meeting SMART objectives, potential value for money, supplier capacity and capability, potential affordability and achievability.
  • When identifying and considering options, constraints, dependencies, collateral or unintended effects and equality, distributional and placemaking effects should be examined.
  • The result of the longlisting will be a short list of five or six options. The short-listed options should include a:
    • Quantified BAU for use as a benchmark counterfactual;
    • Do minimum option (that just meets the business needs required by the SMART objectives);
    • Preferred Way Forward (that may or may not be the Do Minimum);
    • A more ambitious preferred way forward (this may be more expensive, deliver more value, but at higher costs with increased risks); and
    • A less ambitious preferred way forward, unless the preferred option is a do minimum (this option may take longer, deliver less value but cost less and / or carry less risk).

Shortlist options appraisal:

• a more detailed analysis which includes the CBA
• compares the social benefits that options yield to the costs of the option (both are measured relative to the counterfactual).

Options and the counterfactual

• Individual options will need to be assessed against an appropriate baseline or counterfactual.
• This should be the business as usual and be a clear articulation of how things will evolve in the absence of the alternative option being considered.
• The costs and benefits of that alternative option should always be compared relative to the counterfactual.
• Clearly defining the counterfactual allows analysts to understand how far individual policy options change impacts and desired objectives rather than being deadweight – that is, what would have happened anyway. It is important because there is no additional economic benefit from government providing support for an outcome which would have happened anyway (though, there may be if the outcome happens quicker, is of a better quality than it otherwise would be or it redistributes outcomes to different places, e.g. in need of levelling up).
• Once a credible counterfactual has been established, this should be compared against each of the other options. For each option this involves understanding what outcomes can be expected with the policy in place over the lifetime of the intervention.
• The degree to which a market failure is present can provide some insight into the expected additionality of an intervention. A common example is the existence of externalities which impose costs (or benefits) on third parties. For example, the existence of a brownfield site which cannot be developed due to the presence of contaminated land, but which once developed could provide an amenity benefit to society and improved environmental outcomes. In this case, one might expect the deadweight of an intervention to unlock the site’s development to be zero, as the land would not have been developed in the absence of the intervention. Information failures, such as consumers not knowing the standard to which buildings are built, represent another type of market failure.
• Given the importance of market failure in determining the level of additionality, analysts should ensure that the rationale for public sector intervention is clear and is supported by solid evidence.