The Green Book

DEVELOPING AND IMPLEMENTING THE SOLUTION

INTRODUCTION

6.1

Following the identification and description of all costs, benefits and risks, their valuation where feasible, and their testing through sensitivity and scenario analysis, the best option should be selected. Transparency is important at this stage, so that it is clear on what basis decisions are taken. Judgement over and above the component parts of the analysis is always called for in making decisions, but the following guidelines should be applied.

6.2

Once an option has been selected, it will need to be refined into a solution. Consultation is important at this stage. Further consideration will need to be given to the implementation of the proposal, including the involvement of the private sector, procurement options and processes, and the programme and project management arrangements that may be required.

SELECTING THE BEST OPTION

Decision guidelines

6.3

If a full cost benefit analysis has been undertaken, the best option is likely to be the one with the highest risk adjusted net present value. To the extent that all costs, benefits and risks have been robustly valued, this guideline can be applied with more certainty. In cost effectiveness analysis, the option with the lowest net present cost should be the best, again assuming that the cost estimates are as accurate and reliable as possible.

6.4

If there is a budget ceiling, then the combination of proposals should be chosen that maximises the value of benefits. The ratio of the net present value to the expenditure falling within the constraint can be a useful guide to developing the best combination of proposals.

BOX 19: EXAMPLE – PROJECT CHOICE

Consider the investment costs and expected net benefits of the following proposals:

	£million Initial investment	Expected net benefit (NPV)

A	10	4
B	6	3
C	4	3

(a)	If the budget were constrained to £10 million, proposals B and C would achieve the highest return, rather than proposal A, even though proposal A has the highest individual NPV.
(b)	If it is possible that elements of proposals A, B and C could be combined, within the constraint, to produce a significantly higher return, this should be investigated.

6.5

Other decision criteria can be used to help select options where risk is an important consideration. The ‘maximin-return’ option is the most important to consider. It is the most risk averse option, as it is the option that provides the least bad outcome if the worst possible conditions prevail.

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BOX 20: EXAMPLE – MAXIMIN RETURN

Two government services are being considered, which are mutually exclusive. Their NPVs under different market conditions are shown below:

	Low demand (£)	Expected value (£)	High demand (£)

Service A	1,000,000	1,200,000	1,600,000
Service B	100,000	1,250,000	2,000,000

The maximin criteria points to Service A, as it provides the highest value in the worst market conditions.

6.6

In practice, other factors will also affect the selection of the best option, in particular the cosideration of unvalued costs and benefits. Weighting and scoring techniques are useful in comparing different options in terms of the same criteria. However, as scores are not expressed in monetary terms, judgment is then required to compare the results of weighting and scoring with the cost benefit or cost effectiveness analysis. The two analyses should complement each other, and may indicate that further analysis is required before a decision can be reached. Annex 2 provides further information on how weighting and scoring can be brought into the decision making process. Fully involving stakeholders is very important in making judgments between monetised and non-monetised effects.

6.7

There is always a value imputed by decisions to proceed, and this value should always be clearly identified and analysed.

BOX 21: EXAMPLE – SELECTING THE BEST OPTION

Two lead options are being considered, with net present costs of £1 million and £3 million respectively, after taking into account valued benefits. To select the £3 million option, a decision maker would need to judge that the unvalued benefits of the project must be worth at least £2 million.

He or she needs to judge whether this is reasonable. Several considerations could help inform this judgment. Are there any measures of the unvalued benefits that could be used to derive unit values, which could help assess whether the £2 million is in fact worthwhile? Have values for this kind of benefit been estimated in other studies? Or are there better opportunities elsewhere for using the £2 million? What do the stakeholders think? And importantly, what do the stakeholders representing the opportunity of using the £2 million elsewhere think?

6.8

The ‘pay back period’¹ is sometimes put forward as a decision criterion. But payback ignores the differences in values over time, and the wider impacts of proposals. These drawbacks mean it should not generally be used as a decision criterion.

6.9

Similarly, the ‘internal rate of return’² (IRR) should be avoided as the decision criterion. Whilst it is very similar to NPV as a criterion, there are some circumstances in which it will provide different, and incorrect, answers. For instance, IRR can rank projects that are mutually exclusive differently from NPV.

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Affordability, funding, and cashflows

6.10

The affordability of options should always be considered when developing and selecting options. In addition to the analysis of economic costs and benefits, appraisals usually need three major financial statements, at least for the lead options:

	A budget statement. This should be based on resource accounting and budgeting (RAB) principles, and show the resource costs over the lifetime of the proposal. For strategic initiatives, the budget will often comprise the forecast RAB financial statements of a whole organisation over a number of years.
	A cashflow statement. This should show the additional cash that will be spent on the lead option if it goes ahead.
	A funding statement. This should show which internal departments, partners and external organisations would provide the resources (and in some cases cash) required.

6.11

Contingency arrangements should also be developed to ensure there is sufficient financial cover for risks and uncertainties.

BOX 22: EXAMPLE – DIFFERENCES BETWEEN COSTS

A project affecting 1000 existing employees in Department A involves a new project team of 10 additional people, plus an informal ‘secondment’ from Department B of another 15 people for six months each. Department B has also agreed to fund half of the additional cashflows expected to be incurred.

	The additional cashflows involve the costs of employing the additional 10 people.
	The economic cost of the proposal includes the cashflows of the additional 10 people, the costs to the 1000 employees affected in Department A (for instance, reflecting the cost of their time), and the costs of the 15 staff transferred.
	A brief funding statement could show that Department B is providing half the additional cashflows expected to be incurred.
	Both departments will need to consider how the transfers affect their staff resource profiles, and potentially other internal budgets.

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DEVELOPING THE SOLUTION

Introduction

6.12

The best option is likely to require further refinement before a solution emerges. Options are rarely completely mutually exclusive, so it is useful to review the other options to see if their good parts can be grafted onto the leading option.

Consultation

6.13

Consultation with external experts and with those affected is very important at this stage, whether or not formal or informal consultation has taken place earlier on.

6.14

Consultation on projects will usually be on one or two lead proposals; whereas consultation on policy and programme proposals that have more widespread effects should usually be undertaken both earlier, and on a wide range of options and alternatives.

6.15

Analysis of who is affected by a proposal, undertaken as part of the appraisal, may be very useful in determining who should be consulted, and also in considering the details of implementation. Attention should be drawn to the key assumptions, options and implementation issues. Consultation exercises should be drawn up in line with the following best practice guidelines:³

	Use the most appropriate approach. Written consultation may not the best way to canvass views on a policy or project option. Methods include meetings with interested parties and user surveys.
	Consultation should be easy to respond to (e.g., by electronic means).
	Check if statutory obligations apply.
	Allow sufficient time; consultation should be built into the planning process at the start.
	Be clear about who is being consulted, about what, in what time-scale, for what purpose.
	Consider joining up with other consultations, for instance in other government departments.
	Consultation documents should be clear, concise and focused.
	Ensure that the process reaches the target audience.
	Ensure that people are told the results, and the reasons for decisions taken.

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Involving the private sector

6.16

The extent of involvement of the private sector can vary from minor elements of a proposal being contracted-out through to full privatisation, with various forms of contracting, outsourcing and PPPs (including PFI) in between. Public bodies need to consider carefully which procurement route is likely to be most effective. In some cases, the appropriate balance between public or private sector provision will be clear. In others, the best solution must be identified across a range of public, private and partnership options.

BOX 23: CONSIDERING PRIVATE SECTOR PROVISION

Private sector provision may be more likely to provide a better solution where the scope for the following is greatest:
	Innovation to reduce costs or to improve observable outcomes;
	Generating additional revenue flows by sales to third parties;
	Reduction in risk of cost overrun or benefit shortfall;
	A contractor is able to exploit economies of scale in the provision of services (e.g. IT support or facilities maintenance);
	Savings in whole life costs and/ or for improved outcomes through effective design (e.g.: where a broad range of services may be provided in association with an asset, or when many inputs must be integrated in delivering a service, or where whole life and operating costs are importantly determined by good design);
	Clear specification of quality standards in absolute terms or in terms of client satisfaction;
	Ability of private sector to control discrete elements of the project without excessive oversight or interference; or,
	Clear boundaries and interfaces between public and private sectors.
Provision by the private sector may be less appropriate where:
	Risks which threaten the viability of a project are outside the control of the contractor (and these risks cannot be separated contractually from the project);
	The predominant risks are ones where the public sector has the comparative advantage in managing them;
	A large degree of discretion is required in determining the quality of services, and quality is not observable; or,
	Bidding costs are large in proportion to the value of the project (although there may be means of reducing these costs).

Commercial agreements

6.17

Appraisals are generally made up of estimates that are forecast some time in advance of either the projected costs being incurred or benefits being realised. Any estimate made well in advance may or may not prove to be correct once a project has been implemented. The less well developed an appraisal, the greater the variability there is likely to be between the estimated value attached to a cost or benefit and the outturn.

6.18

By transferring risk away from the public sector in different ways, different procurement options provide procuring authorities with choices about how they might manage and mitigate certain risks around estimated costs and benefits. For example, typically PFI contracts transfer to the PFI partner the risk that capital costs will exceed estimates made by the procuring authority in a way that some conventional contracts may not. Equally, a payment mechanism that calibrates payments made under a contract with the delivery of well-defined benefits provides procuring authorities with a way of ensuring that certain costs are incurred only if certain benefits are delivered.

6.19

The level of confidence that public bodies can have that estimated costs and benefits will be similar to eventual outturn will depend on:

	The length of time between the cost or benefit estimate being made and the date of contract award; and
	The procurement option chosen.

6.20

In relation to the latter, for example, costs which are fixed under contract and which become payable against measured milestones of physical progress in construction will have a higher probability of being incurred than costs which, although fixed under contract, are only payable to the extent that defined benefits, outcomes or contractual outputs associated with the contract are delivered. Comparisons between various procurement options need to take account of the impact that different contractual terms have on the likelihood that, in fact, certain costs will be incurred and benefits realised at the level estimated by the procuring body.

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Procurement processes

6.21

OGC provides detailed guidance on the procurement options that are available, and how to conduct the relevant procurement process.⁴ If the private sector is involved, proposals should be fully developed before tenders are invited. Where implementation will be by procurement, there are extensive requirements that need to be met under European Commission Directives and also under regulations within the United Kingdom.

6.22

Often, these impose requirements over and above those stipulated by the Green Book, and must be complied with at all stages. Specialist advice can be sought from either the procurement unit within a department or agency or from OGC⁵, and from Partnerships UK⁶ for PPP and PFI projects. The OGC also provides guidance on partnering arrangements.

IMPLEMENTATION

6.23

Implementation⁷ plans should be sufficiently complete to enable decisions to be taken on whether or not to proceed. So that evaluations can be completed satisfactorily later on, it is important that during implementation, performance is tracked and measured, and data captured for later analysis.

Programme and project management

6.24

Economically justifiable and financially affordable proposals are of no value if realistically they cannot be implemented. The implementation of proposals must be considered as part of the appraisal process, enough to ensure at least that proposals are viable, risks are manageable, and that benefits can be realised, before significant funds are committed. These aspects of appraisal develop iteratively as with the analysis of costs and benefits.

6.25

Programme management is a structured framework for defining and implementing change within an organisation. It provides a framework for implementing business strategies and initiatives through the management of a portfolio of projects that give organisations the capability to achieve benefits that are of strategic importance. All large programmes should have recognised programme management methodologies.

6.26

There should be an agreed approach to the management of projects, using recognised project management methodologies, such as PRINCE2.⁸ Typically, this will involve identifying tasks and responsibilities and deadlines for completing them, and producing baseline schedules of milestones and activities (often in the form of Gantt charts). Progress against the base schedule should be reported on a regular basis. Guidance on project management is available from OGC.⁹ Specific guidance is available on the management of construction projects.¹⁰

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Performance management and measurement

6.27

Performance management concerns tracking the success of a policy, programme or project in achieving its objectives and in securing the expected benefits. For appraisal and evaluation purposes, it involves the systematic collection of data relating to the financial management and outcomes of the policy, programme or project during implementation.

6.28

This provides an essential source of information, indicating the extent to which objectives are being achieved, giving an early warning of potential problems, and of the possible need to adapt the policy, programme or project to ensure success. Monitoring also provides information for the evaluation stage. To be fully effective, plans for monitoring must form part of the initial planning of a policy, programme or project.

6.29

Effective performance measurement and monitoring means tracking all categories of benefit and ensuring that:
	Projects have defined target benefits and outputs;
	Ownership of the delivery of benefits remains with the programme manager;
	Outputs of a project or policy remain consistent with changing government objectives;
	Targets and achieved benefits are measured, reported and communicated;
	Costs are closely monitored and managed; and,
	Forecast costs and benefits are frequently reviewed.

6.30

A monitoring system should establish:

	Whether management data is actually measuring what it purports to measure; and,
	Put in place sufficient controls to ensure that the data is accurate.

Financial reporting

6.31

Regular financial reporting on policies, programmes and projects should be performed. Reports may be integrated into the normal financial reporting cycle of an organisation, issued separately, or possibly combined with the reporting of progress against plan, benefits, and risks.

6.32

Finance reports are likely to show expenditure to date, forecasts for the year, and variances against budgets. In large complex projects, the financial reporting is likely to integrate with contract management, with contractors providing regular ‘Work In Progress’ statements.

Benefits realisation management

6.33

Benefits realisation management is the identification of potential benefits, their planning, modelling and tracking, the assignment of responsibilities and authorities and their actual realisation. In many cases, benefits realisation management should be carried out as a duty separate from day to day project management.

6.34

Benefits fall into four main categories, which are described below.

BOX 24: BENEFIT CATEGORIES

Benefit		Example

Financial	Quantitative	Operating cost reduction, revenue increase

Non-financial	Quantitative	Number of customer complaints, reduction in road accidents, percentage of government departments on-line

Non-financial	Quantitative	Staff skills, staff morale

Outcomes	Quantitative and qualitative	Improved standards of healthcare

6.35

It is also useful to identify financial savings that release cash for other uses.

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Contract management

6.36

When contracts have been let, it will be important to ensure that the respective roles and responsibilities set out in the contract are fully understood and fulfilled to the contracted standard. The likelihood of the benefits being realised will be affected by the contractual terms, and any incentives built in to the contract. Where contracted standards are not fulfilled, the contracting public body should apply mechanisms established in the contract to rectify any under-performance. Guidance is available from OGC on dispute resolution.¹¹


1	A pay back period is the number of years before a project breaks even; when total (discounted or undiscounted) benefits (net of on-going costs) equal capital costs. This technique ignores all benefits and costs arising after the break-even date and is likely to distort project choice.
2	The internal rate of return (IRR) is the discount rate that would give a proposal a present value of zero. IRR can be used to rank proposals. In the private sector, hurdle IRRs are often used to test whether a proposal should go ahead. The riskier the project is, the higher the hurdle IRR.
3	For further information on carrying out consultation exercises, refer to the Cabinet Office (http://www.cabinet-office.gov.uk/)
4	See OGC website: http://www.ogc.gov.uk/
5	Information on European practice is available from http://europa.eu.int and from OGC http://www.ogc.gov.uk/
6	See http://www.partnershipsuk.org.uk/
7	In this context, ‘implementation’ refers to those activities that are required during the period after appraisal to put in place a policy, or complete a programme or project.
8	See OGC website: http://www.ogc.gov.uk/
9	See http://www.ogc.gov.uk
10	OGC and HM Treasury have produced a series of ten procurement guides for construction projects. These are fully endorsed by the National Audit Office. http://www.property.gov.uk/
11	See http://www.ogc.gov.uk/ back to top