Annex 2: pre-expenditure assessment guidance
Introduction
1. The Government Economic Strategy and National Performance Framework set out the strategic framework for the Scottish Government and its Agencies. It is important that new spending proposals be assessed for how they deliver against that framework. This note provides guidance on how to carry out Pre-Expenditure Assessments (PEAs) to assess new policy proposals, and where to get further help and advice. PEAs are designed to compliment the project management process but the guidance is also appropriate where less formal management structures are in place.
Government Economic Strategy and the National Performance Framework
2. The Government Economic Strategy sets the overarching framework for delivering the Scottish Government’s Purpose. It is against the priorities in this framework that financial and other resources should continue to be aligned. As set out in Figure 1 the Strategy identifies the key components of faster sustainable economic growth – Productivity, Competitiveness and Resource Efficiency, Participation in the Labour Market and Population Growth. It also outlines the Government’s desired characteristics of growth – Solidarity, Cohesion and Sustainability – delivery of which will ensure that growth is shared and sustainable.
Figure 1: The Purpose Framework
3. Each of these drivers and characteristics of growth is underpinned by a Purpose target, which forms parts of the National Performance Framework (NPF). The NPF provides a clear vision for the kind of Scotland that the Scottish Government wants to see, and supports the delivery of the Government’s Purpose and priorities.
What are Pre-Expenditure Assessments?
4. Pre-Expenditure Assessments consider the expected impacts and value for money of a proposal, and should be used as the basis for justifying public expenditure. The PEA process involves assessing:
- the Aims and Objectives of the proposal;
- the Options for addressing these objectives;
- the Evidence Base on the likely economic, social, and environmental impacts and value for money of the proposal, including cost-benefit analyses where appropriate;
- the Financial and Management Arrangements for the proposal, including an assessment of the key risks to successful delivery;
- the plans for Monitoring and Evaluation.
5. PEAs are based on the principles and techniques in the Treasury’s Green Book on appraisal and evaluation and the Cabinet Office’s Magenta Book guidance. Those developing policy whether under a cross agency / office project or programme board, DG, Directorate, Divisional or Team level should be guided in all aspects of PEAs by their Analytical Services Divisions (ASDs), who should be consulted as early as possible in the policy/project development process. Whilst ownership of PEAs should rest with policy divisions or the relevant project or programme board, ASDs and business areas are expected to work closely together to undertake PEAs, drawing on other specialist advice as required.
6. Where proposals have been developed in line with good practice on policy development (see Figure 2 below), little additional work should be required to produce a comprehensive Pre-Expenditure Assessment. Where this is not the case, more effort will be required but the end result should be a better proposal.
7. PEAs allow decision makers to make informed judgements about the relative merits of spending proposals. In particular:
- Are there better ways to address the stated objectives of the proposal?
- Are there better uses for these resources?
When should Pre-Expenditure Assessments be undertaken?
8. It has been agreed that PEAs will be undertaken for:
- All significant capital projects;
- Significant new resource spending proposals;
- Major new spending proposals (both resource and capital) in future Spending Reviews.
Proportionality and thresholds
9. In principle, all spending decisions should be supported by evidence, demonstrating that the money being spent will achieve the desired effect as efficiently and effectively as possible[1]. However, in undertaking Pre-Expenditure Assessments, the principle of proportionality should be adhered to. For relatively small proposals, basic assessments of the evidence base may suffice. For more costly proposals, proposals which are expected to have significant wider impacts, and risky proposals, there is a more pressing need to consider the evidence base in detail before proceeding.
10. Some business areas may consider it appropriate to set specific expenditure thresholds below which the requirement to undertake PEAs is either waived, or the amount of appraisal effort required is reduced. But in all cases the threshold for waiving the PEA requirement should not exceed the following limits:
11. It should be noted that, irrespective of the level of expenditure, proposals which are likely to have significant environmental, economic, or social impacts should be considered for a Pre-Expenditure Assessment - whether they relate to programmes, individual projects, or policy decisions. The latter includes decisions about levels of taxation (e.g. proposed reliefs to Non Domestic Rates).
Undertaking a pre-expenditure assessment
12. PEAs are not intended to replace existing good practice in project appraisal. Nevertheless, where business areas already have specific project or policy appraisal procedures they should aim to ensure that these procedures cover all of the ground required for a PEA[4]. The key steps in the PEA process are as follows:
i) Aims and objectives
13. The first step in the PEA process is to demonstrate (in high-level terms) that there is a clearly identified need/rationale for the proposal, and that any proposed intervention is likely to be worth the cost. Both the specific objectives of the proposal and its fit with higher-level objectives should be assessed.
14. Objectives should generally be set at a fairly high level, as this provides a clearer focus on the ultimate aim of a proposal, and should be informed by the priorities and outcomes set out in the GES and the National Performance Framework. Objectives set at a higher level also makes it easier to generate different options. For example, an objective “to reduce pensioner poverty” has many potential solutions, whereas an objective “to deliver free national bus travel for the elderly” would be restrictive.
ii) Options
15. The next step should be to assess the potential options for addressing these objectives. Initially a wide range of options should be created and reviewed, and the front-running options should then be assessed in more detail. A “do-nothing” or “do-minimum” option should always be included as a comparator.
16. In some circumstances, there may appear to be no alternative options, e.g. where a proposal is considered to be a ‘political commitment’. Even here, however, there may be different ways of delivering the commitment, so it should still be possible to generate options.
iii) Evidence base
17. Policies and spending decisions should be based on the best available evidence. Evidence enables choices to be based on a clearer understanding of “what works and what doesn’t”, and so ensures more efficient and effective use of resources. Evidence should be used to:
- demonstrate poor outcomes under the status quo;
- demonstrate the expected benefits and costs of the proposal, and the options for delivering it.
- Evidence can be either quantitative or qualitative, and comes in many forms, such as:
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It is important to appreciate that evidence is NOT unsubstantiated opinion or anecdote, or accepted wisdom. Where there is little available evidence to draw on, ASDs should be able to determine how best to gather new evidence, e.g. via cost-benefit analysis or further research.
Value for money and cost-benefit analysis
18. Having assessed the evidence base, you should be in a position to assess the likely costs and benefits of the options relative to the “do-nothing” option, any uncertainties, and any trade-offs between different types of impact.
19. Quantified cost-benefit analysis undertaken in line with the Treasury Green Book is the most transparent way of demonstrating value for money. This involves weighing up all of the costs and benefits of a proposal in terms of net additional income and/or non-marketed benefits such as time savings and health benefits. Where possible, such costs and benefits should be monetised based on market valuations or stated preference surveys. ASDs should be able to advise on appropriate methodologies. It is recognised, however, that such an approach may not always be feasible, particularly in the context of assessing the merits of policy proposals. In such circumstances a weighting and scoring approach, or a simple qualitative commentary on the “pros and cons” of a proposal may suffice.
20. In addition to cost-benefit analysis, a more descriptive assessment of the likely economic, social, and environmental impacts will usually add value to the assessment:
Economic impacts
21. The impact of a proposal on the economy is likely to be an important consideration. What impact might the project have on jobs and GDP, both locally and at the Scottish level? What might the impact be on labour markets, housing markets, inward investment, etc? Techniques such as input-output analysis may help here, provided that sufficient recognition is given to issues such as displacement and substitution. Economist advice should be sought on such issues.
22. It should be noted that GDP impacts etc should not simply be “added” to the cost-benefit analysis as this will generally involve double counting. For example, time savings to business traffic may have a consequential impact on productivity and GDP, but this does not necessarily represent an additional benefit over and above that already measured in standard transport cost-benefit analyses. Impacts on the distribution of jobs may be of interest where a proposal has specific regional employment objectives (e.g. consideration may be given to the potential impact on the Government’s Cohesion target), although in general it should be recognised that employment benefits in one area will usually come at the expense of other areas of Scotland[5].
Social impacts
23. “Social impacts” cover the likely impact of proposals on particular priority groups, including:
- Different income groups (and therefore, the potential impacts on the Government’s Solidarity target, which is focused on reducing levels of income inequality);
- Equality groups such as disabled people and minority ethnic groups[6];
- People who live in different areas, particularly rural areas and deprived urban areas.
24. Where priority groups are likely to be disproportionately affected by a proposal, either positively or negatively, the scale of such impacts should be assessed and reported (whether or not these distributional impacts are an intentional aspect of the policy/project). In addition, any other ‘social’ impacts should be covered here, e.g. the impact of a proposal on people’s lifestyles.
Environmental impacts
25. “Environmental Impacts” refer to impacts on the natural and built environment (e.g. impacts on air quality, global warming, biodiversity, fauna, flora, soil, water, cultural heritage, and landscape). It is possible that this assessment will be able to draw on work already done as part of a Strategic Environmental Assessment or individual project assessment.
iv) Financial and management arrangements
26. Key issues that should be assessed include the following:
- The likely cost to the public sector, including allowances for any “optimism bias”[7];
- Funding arrangements and partners;
- The likely procurement route, supported by an assessment of why this procurement route is expected to provide the best value to the public purse;
- Project management arrangements;
- Risk management issues (e.g. an assessment of the key risks to successful delivery, political risks, risk mitigation measures, risk allocation issues, etc).
v) Monitoring & evaluation
27. Monitoring and evaluation are important as they help us to develop the evidence base, avoid previous mistakes, and refine future policies. Clear plans for monitoring the proposal and subsequently evaluating its impacts should be drawn up.
28. Evaluation examines the outturn of a project, programme or policy against its objectives[8]. It adds value by providing lessons from experience to help future management or development of a specific project, programme or policy. Evaluation should be planned from the outset of the project, and should normally include the following steps:
- Establish exactly what is to be evaluated and how past outturns can be measured;
- Choose alternative states of the world and/or alternative management decisions as counterfactuals;
- Compare the actual outturn with the target outturn, and with the effects of the chosen alternative states of the world and/or management decisions;
- Draw up the results and recommendations; and
- Disseminate and use the results and recommendations.
29. As can be seen from the earlier policy cycle diagram, evaluation ‘closes the assessment loop’, ensuring that all spending is assessed for its effectiveness, rather than assessment being confined to new spending proposals. A rigorous and comprehensive evaluation programme is therefore an essential complement to Pre-Expenditure Assessments.
Summarising the information
30. It may be helpful to summarise the information gathered during the PEA process in a form such as Annex A. However, there is no obligation to follow the precise format of this “template” - the key issue is to ensure that all of the relevant issues are covered.
PEAs and project and programme management
31. Since the first edition of this guidance in 2006 formal project and programme management processes have become more common across the public sector in Scotland. These approaches codify the good practice which underpins effective delivery and as such the PEA process provides a useful additional tool for project managers seeking to produce robust business cases to inform decision making. More detailed guidance on delivering business cases to the recommended standard is available for those managing a project on HMT’s website in the “5 case model”. The 5 case model sets out the steps that are required to ensure that a project, programme or scheme;
- Is supported by a robust case for change that provides strategic synergy – the “strategic case”
- Optimises value for money – the “economic case”
- Is commercially viable – the “commercial case”
- Is financially affordable – the “financial case”
- Is achievable – the “management case”
32. By viewing the PEA as a “living” document and revisiting it as the programme progresses project managers will be able to update their board on the likely consequences of changes in the assumptions which underpinned the board’s initial decisions.
33. A PEA can also provide a useful summary of the thinking behind a proposal and the evidence which supports it at Gateway Review.
Sources of advice and information
34. More information on the Government Economic Strategy can be found here. More information on the National Performance Framework can be found on the Scotland Performs website.
35. ASDs have access to a range of more detailed guidance, including:
- Topic-specific appraisal guidance;
- The Treasury Green Book and associated documents;
- Public sector business cases using the Five Case Model;
- The Magenta Book guidance notes on policy evaluation;
- Guidance on Environmental Assessment;
- Impact Assessment Guidance
- The 3Rs Guidance (regeneration, renewal or regional development) on assessing the impact of spatial interventions;
- Input-Output Tables and Multipliers for Scotland;
- Health Impact Assessment guidance;
- Guidance from Cabinet Office on project and programme management
- The Mainstreaming Equality and PRIME websites;
- The Policy toolkit (SG intranet site).
36. In addition, the views of stakeholders and the general public will often be important. Internal knowledge & expertise will, of course, also be fundamental to drafting a good Pre-Expenditure Assessment.
Directorate for the Chief Economist:OCEA
August 2012
Annex
| Aims and Objectives |
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| Options |
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| The Evidence Base |
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| Financial and Management Arrangements |
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| Monitoring and Evaluation |
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Directorate for the Chief Economist:OCEA
August 2012
[1] Where expenditure is completely unavoidable, e.g. spending associated with the CAP regime, or UK-wide legal requirements, PEAs may not be appropriate. However, efficiency will still be of interest.
[2] In some cases, it may make more sense to undertake a PEA of a programme rather than individual projects
[3] Please note that new spending initiatives are considered to be “new” whether or not they can be funded from existing budgets, i.e. PEAs are not restricted to bids for additional funding.
[4] For example, many conventional appraisals and business cases do not assess the fundamental rationale for a project, or set out plans for monitoring and evaluation. These issues should however be assessed in a PEA.
[5] Interventions that improve the operation of the supply side of the economy, e.g. by tackling local labour market failures, may however lead to genuinely net additional employment/GDP impacts. Such impacts may not be fully captured by standard cost-benefit analysis techniques, so economist advice should be sought.
[6] See the Mainstreaming Equality website for more details. Groups who should be considered include men and women; members of minority ethnic communities; disabled people; lesbian, gay, bisexual and transgender people; members of different faith or belief communities; people of different ages; and people with caring needs and/or responsibilities.
[7] “Optimism bias” is the demonstrated systematic tendency for appraisers to be over-optimistic about capital costs, works duration, operating costs, and under-delivery of benefits. Advice should be sought from economists on the extent to which optimism bias adjustments need to be applied to appraisals.
[8] Evaluations may also be undertaken of more specific aspects of a policy/project/programme, e.g. “process evaluations” (as opposed to “impact evaluations”)
Page updated - July 2012