Guidance on Value for Money

Summary

• This guidance is for all those putting advice to Ministers on spending proposals, including transport projects that are funded by the Department or require the Department's approval
• Submissions making recommendations of such transport projects should contain a section on value for money (VfM). This should be cleared with local economist divisions and with Analysis and Strategy Directorate. Finance still need to clear the whole submission.
• This section on value for money should:
• • Set out the estimated Benefit Cost Ratio (BCR) of the project
  • Assess whether it has any significant benefits or costs which cannot be put in money terms ("non-monetised impacts") and
  • On the basis of this analysis, describe the project as "poor", "low", "medium" or "high" value for money.
• A project will generally be:
• • Poor value for money if its BCR is less than 1
  • Low value for money if its BCR is between 1 and 1.5
  • Medium value for money if its BCR is between 1.5 and 2
  • High value for money if its BCR is over 2

Unless the non-monetised impacts are sufficiently significant relative to the costs to shift the value for money categorisation.

• Advice to Ministers should reflect the presumption that, purely on grounds of value for money, we should generally fund:
• • No projects with poor VfM
  • Very few projects with low VfM
  • Some, but by no means all, projects with medium VfM
  • Most, if not all, projects with high VfM
• No submission should recommend agreement to a project with low value for money without the agreement of the relevant Director General. No project with poor value for money should be recommended without the agreement of the Accounting Officer.
• Advice on value for money should also set out the arrangements for ensuring the benefits materialise and for evaluating the BCR of the project after implementation.
• Advice on the interpretation of this Guidance can be obtained from Mark Weiner in Analysis and Strategy Directorate on ext 4379. General guidance on project appraisal is available from Chris A Smith on ext 4910.

Purpose

1. The Department uses appraisal information as one of the key inputs into decisions about whether transport schemes and proposals should go ahead. The impacts identified in the appraisal and the BCR are used to make an assessment about whether a proposal will help meet DfT/Government objectives and offers value for money. It is obviously important that how the information is used and presented is consistent across the Department.
2. Value for money is only one of a number of key factors which will influence whether a proposal should be recommended for acceptance by Ministers. However, in a world of tight financial constraints it becomes increasingly important.
3. The Permanent Secretary has asked for guidance to be produced about how the value for money of proposals is described. This paper sets out some guidance in paragraphs 29 to 34 and some background to the issues.

Introduction

1. Appraisal of transport policies, schemes and programmes is based on an assessment of costs and benefits to society. Social costs include not only financial costs but also any negative impacts, on the environment for example, that may result. The balance between the benefits and costs can then be used to appraise whether an initiative is worthwhile and how it compares with competing interventions.
2. Appraisals attempt to identify and measure all the positive and negative impacts that a proposal may have. The Appraisal Summary Tables (ASTs) that we have for DfT schemes and projects summarise all these impacts under the broad headings of economy, environment, safety, accessibility and integration. These are quantified and monetised where possible.
3. Assessing value for money and the individual impacts takes time. It is therefore important that economists, and other people who can help with appraisal, are engaged early in the project/policy development process.

Benefit Cost Ratios

1. Benefit/Cost Ratios (BCRs) only include those impacts that we are able to both measure and place a monetary value on. This means they exclude impacts such as social exclusion, liveability and the environment (monetary valuation of some environmental impacts is now possible, but not yet incorporated into official appraisal guidance).
2. BCRs for DfT projects/schemes should include the following monetised impacts:

• Time savings
• Safety
• Overcrowding (rail)
• Construction/Financing Costs
• Operating and Maintenance Costs
• User charges/ticket revenues
• Disruption during construction

1. The Benefit/Cost Ratio is generally defined as:

Net Benefits (benefits minus costs) to users, business, private sector providers

divided by

Public Sector Cost

where benefits and costs are measured in Present Value terms (i.e. measured over 60 years and then discounted).

1. The BCR offers an estimate of the value of the benefit generated for every £1 of public expenditure on a project/scheme ¹ and is therefore an indication of the value for money of different options. It is however, only an indication.
2. There are cases where the non-monetised impacts are significant enough to radically alter the overall picture of value for money suggested by the BCR alone. This needs to be, to some extent, a subjective assessment, although it is possible to bring evidence to bear, on the amount of environmental emissions or the number of jobs created in a regeneration area for example.

Value for Money Implications

1. A BCR of less than 1 indicates that monetised costs actually outweigh monetised benefits, and suggests that on value for money grounds the option should not be pursued unless there are substantial non-monetised benefits.
2. In principle, the BCR should also take account of the distortionary impacts of general taxation on the economy. This implies increasing the public expenditure cost of a proposal to reflect the distortionary cost of raising funds to pay for it. This principle (known as the Social Opportunity Cost of Exchequer Funds or SOCEF) might imply a 30% uplift to expenditure costs, although that is not current appraisal guidance. Applying the SOCEF would mean that any projects or expenditure with a BCR of less than 1.3 would not be value for money.
3. The current Green Book does not however require the SOCEF to be applied, so any expenditure with a BCR over 1 might be considered as worthwhile pursuing. But financial constraints will mean that in practice not all proposals over this threshold will be fundable. So we need to try to identify which projects offer better value for money.
4. It is helpful to categorise expenditure into 4 value for money groups:

VfM category	Generally options which have:
Poor VfM	BCR less than 1
Low VfM	BCR between 1 and 1.5
Medium VfM	BCR between 1.5 and 2
High VfM	BCR over 2

1. The second column makes it clear that the starting point for the groupings is the BCR, but significant non-monetised impacts also need to be examined to see how they increase or reduce the overall value for money assessment. So, for example, in earlier analysis along these lines a guided bus scheme with a BCR of 1.46 was placed in the medium value for money category because there was clear evidence of the significant regeneration benefits relative to costs.

Non-monetised Impacts and Value for Money

1. Understanding and estimating the implications of non-monetised impacts for value for money is by its nature very difficult.
2. The impacts need to be significant relative to costs to change the value for money indicated by BCRs alone. They would need to be worth more than 40% of the value of the costs in order to notionally shift the BCR by more than 0.4, and therefore move an option with a BCR of 1.1 from the low to medium value for money category for example. In practice they are often comparatively small. In our experience, non-monetised impacts need to be unusually high to move an option two or more 'value for money' categories. Building new infrastructure through an environmentally sensitive area might be an example of the latter. Some road schemes with very high BCRs have been rejected because the negative environmental impacts are so big they end up being 'poor' value for money.
3. How much the non-monetised impacts affect value for money will always be to some extent a subjective assessment and is very dependent on the case being considered. But ASTs and the (recently-introduced) Economic Impact Reports usually have some quantitative information that can help inform this.
4. There is also evidence available on the value of emissions and average cost per job of regeneration schemes from DEFRA and ODPM respectively, which can be used to try to help gauge the relative importance of such currently non-monetised effects. Neither of these are part of the formal appraisal methodology and guidance, although the relevant DEFRA valuations may be included in the relatively near future. The evidence from ODPM on "cost per job" does not have the same status, and simply represents a way of trying to identify the significance of such effects.

Environmental Emissions

1. DEFRA research and recommended values for environmental emissions suggest the following weights (all in 2000 prices) can be used to try to assess the magnitude of environmental impact of transport projects relative to cost:

• £70 per tonne of carbon
• £1064 per tonne of NOx
• A range from £40,000 - £385,000 per tonne of PM10 depending on area type: £40,000 in rural areas; £130,000 in large urban areas; £225,000 in Metropolitan areas and up to £385,000 in London.

1. Applying these values to the change in environmental emissions where available as a result of a project ² , and then comparing the total value to cost gives some idea of their relative importance in assessing value for money. If they are worth ¼ of the cost, for example, they may be significant.
2. These values are the best available central estimates. It should be noted that DEFRA are currently reviewing some of these recommended values.

Regeneration

1. There is no generally accepted way of trying to value regeneration benefits from Government policy/expenditure. However, in appraising regeneration schemes the ODPM consider how the "cost per job" of a scheme compares to their average benchmark cost of £27,000 (NPV). Schemes may not be funded if they exceed that benchmark, and questions will certainly be asked about value for money. Applying this benchmark value to the increase in the number of jobs in a regeneration area, as a result of a transport scheme, can give some idea of the significance of regeneration benefits being generated relative to cost.

Projects that have the Potential to Unlock Indirect Benefits

1. There is a broader issue: how value for money assessments can take into account a scheme's potential contribution to a, potentially longer-term, wider package of proposals. Normal appraisal techniques pick up effects that are fairly direct, such as the local consequences of a proposal covering both demand management and improved transport services. The issue arises where the contribution is less direct. One example would be where a scheme promotes behavioural change which, because of its scale, can help to facilitate later scheme or policy proposals. Another example might be widening the scope of a project (beyond the minimum necessary strictly to deliver its direct benefits) because doing so might pave the way for further projects or developments whose long-term strategic outcome is greater than the sum of the parts. We would in principle like that indirect contribution to be recognised in assessments of value for money.

Post-implementation Review

1. This note applies to advice to Ministers about projects that might go ahead in the future or, where additional Ministerial decisions might be necessary, are underway. We also need to ensure that the benefits are as large as anticipated and do materialise; and that we learn lessons from the project for the future.
2. That points to reviewing, after implementation, the impacts of a project, including both the monetised and non-monetised benefits and costs. Such a review (also called an evaluation) needs to start early. For example, identifying the impacts of a scheme involves an assessment of what would have happened without it and that in turn often needs preliminary analysis and data collection before the scheme even starts.
3. The arrangements for post-implementation review need to be considered early on, and this should be included in the value for money section of the submission, together with a description of the arrangements proposed for ensuring the benefits do materialise. Further information and guidance on post-implementation review is available from Adrian Leigh on ext 5244.

Guidance

1. An indication of the value for money of different expenditure options can be reached by:

• using the BCR to place an option into one of the categories in the table above;
• assessing whether there are significant non-monetised impacts which are likely to impact on value for money;
• placing the option into a final value for money category taking into account any of these significant non-monetised impacts.

1. Proposals which fall into the 'poor' category should, on value for money grounds, not be pursued. Proposals in the categories above that are value for money and worth pursuing in a world of unconstrained resources. But when expenditure is highly constrained we cannot fund all projects that have (notionally adjusted) BCRs greater than 1. The threshold needs to be higher - probably somewhere between medium and high - to ensure we get maximum value for money from limited funds.
2. This suggests that in a world of constrained resources (and leaving other factors to one side) we should generally fund:

• no projects with poor VfM
• very few projects with low VfM
• some, but by no means all, projects with medium VfM
• most, if not all, projects with high VfM.

1. In putting forward spending proposals to Ministers, the value for money terminology described here (poor, low, medium, high) should be used. The value for money assessment should reflect both the BCR and non-monetised impacts.
2. Any submission on a spending proposal should contain a section on value for money which sets out the BCR, a short commentary on any significant non-monetised impacts and the overall value for money assessment. It should also include the arrangements for post-implementation review. This should be cleared with local economist divisions, Finance Directorate and Analysis and Strategy Directorate.
3. This guidance will be updated from time to time in the light of appraisal, valuation and other developments. The latest transport appraisal guidance can be found at www.webtag.org.uk . That website includes information on all aspects of appraisal including risks, optimism bias and ensuring that alternative options are considered.

Annex: Treatment of Policies or Projects which Raise Net Revenues

1. When this guidance was first published, a separate note was promised on assessing the value for money of congestion charging schemes (or other proposals that raise significant amounts of revenue for Government). In such cases it takes a little more insight to assess the value for money.
2. This annex (published in January 2006) fulfils that remit, explaining what happens in the case of proposals which raise net revenues. The primary purpose of transport proposals is not to raise revenues. However revenues may be generated as a by-product of a scheme and this guidance applies to the minority of proposals - such as demand management - that raise more revenues than they cost.
3. The original guidance already covered proposals to increase or reduce government spending: if it went ahead, the spending would be poor/low/medium/high value for money.
4. The principle of value for money remains the same: the assessment helps to identify the proposals which produce the most net benefit to society from the available resources. This guidance is therefore consistent with the original value for money guidance. The table below seeks to clarify the position when revenues raised mean the denominator of the BCR is negative.
5. In such circumstances it is useful to separate the cost of the proposal to government and the net benefits (i.e. benefits minus costs) to society.

1. As described in the original guidance, where a proposal has a cost to government, then the question is what the benefits are per pound spent. Schemes with the highest benefits (once all of the impacts have been included) per pound of government spending represent the highest value for money.
2. Proposals which have revenues greater than public costs to government are attractive (high value for money) if they generate social benefits that are greater than social costs.
3. A scheme which makes society as a whole worse off will generally represent poor value for money. However the use of the revenues could affect the value for money case.

Further Considerations

1. Projects which raise significant amounts of revenues present issues which - while not unique - may require further consideration. These include:

• Affordability - Whilst a project may have negative costs over its lifetime, there may be short term financial constraints which need to be taken into account. For example a demand management scheme may have up front setup costs with revenues spread over time.
• Comparison between options - This is particularly important for proposals which raise net revenues. For example different levels of tolls may have significant impacts on both costs and social benefits of a proposal. Such trade-offs would need to be demonstrated.
• Impact on benefits to society - Some revenue raising projects may have wider impacts and distributional issues which can be particularly important. Consideration of who wins and who loses - and whether this is a desirable outcome - may be needed.

1. Further advice on this Guidance can be obtained from Mark Weiner in Analysis and Strategy Directorate on ext 4379. General guidance on project appraisal is available from Chris A Smith on ext 4910.

¹ The value for money of congestion charging schemes (or other proposals that raise significant amounts of revenue for Government) is more complex. More detailed guidance on the treatment of these schemes is included in the annex to this document.

² Totalled over the whole appraisal period, and discounting future benefits and costs by the discount rate - usually 3½% p.a. in real terms. Some values increase in real terms over time, eg carbon by £1 and local air pollutants by 2% a year.

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