Government must improve cost benefit analysis, appraisal and budgeting, says new report

The Institute for Government has explored how the UK can improve infrastructure policymaking in areas including transport and energy

A new Institute for Government (IfG) report has targeted three key aspects of policy to improve infrastructure decision-making in the UK. Over the past year, the Institute for Government has explored how the UK can improve infrastructure policymaking in areas including transport, energy, flood defences, digital communication, waste and water. Pulling together the findings of our work, this report identifies how competing needs and perspectives can be balanced to improve three vital aspects of infrastructure policy: time, quality and cost.

The report specifically notes that improvement must be made to cost benefit analysis  and approach to accounting, appraisal and budgeting: 

To improve project appraisal, we recommend that the Government:

• updates cost benefit analysis so that it can better capture the ‘dynamic effects’ of projects
• improves the accuracy of project cost and time estimates
• takes a more consistent approach to assessing projects
• communicates cost benefit analysis results within Whitehall and to the public better.

To ensure that data are collected and used, an Infrastructure and Projects Authority should collate this information centrally and mandate that it is used by departments to enhance cost estimates:

• The Government must improve its approach to accounting, appraisal and budgeting to increase the odds of picking the best finance options.
• This is particularly important in light of the recent collapse of Carillion and the questions it has raised about private finance deals.
• Government must not let arbitrary accounting rules and narrow fiscal targets drive financing decisions, it must implement a more robust appraisal process and it must change the way that the Treasury handles capital investment.

Three key aspects of policy to improve infrastructure decision-making in the UK

Time

The Government does not have a long-term approach to infrastructure and often fails to make timely decisions on individual projects. Resolving both requires a more structured approach to resolving conflict over infrastructure decisions.

• The Government must strengthen the National Infrastructure Commission (NIC). The NIC should be given greater independence as an executive non-departmental public body, draw its commissioners from a more diverse range of professional and geographical backgrounds, engage the public more widely and have its remit extended to include housing.
• The Government must create a Commission for Public Engagement. Learning from the success of France’s Commission Nationale du Débat Public (CNDP), the Government should create a Commission for Public Engagement. This would be an extremely cost-effective way of giving local communities a genuine opportunity to shape infrastructure decisions, helping to deliver major projects faster and more efficiently.

Quality

The quality of the UK’s infrastructure is not as good as it could or should be. Government must pick better projects, both individually and collectively, as a portfolio.

The Government needs a cross-government infrastructure strategy. This should articulate a vision for how the policies and projects of individual departments will interact to achieve infrastructure objectives and explain how the capacity of subnational authorities will be built. In doing so, it must identify the geographic impacts of its recommendations and be written in an accessible way to help facilitate public engagement. To help develop the strategy and monitor its implementation, the Government should reinstate the position of Commercial Secretary to the Treasury.

Parliament must scrutinise infrastructure decisions made by the Government better. In the House of Commons, the Treasury Committee should lead this, working closely with other relevant committees. In the House of Lords, a new infrastructure committee should be established, initially for a year.

Cost

The UK needs to invest more in economic infrastructure. But this investment cannot come at any cost. Picking the most cost-effective options at every stage – from project selection to finance option – is critical.

Individual departments must learn from past projects as this will help the Government to make better investments in the future. Departments must consistently evaluate infrastructure projects, systematically collecting data on:

• cost outturns against estimates
• delivery times against estimates
• the size of project teams
• project length.

To ensure that data are collected and used, an Infrastructure and Projects Authority should collate this information centrally and mandate that it is used by departments to enhance cost estimates.

The Government must improve its approach to accounting, appraisal and budgeting to increase the odds of picking the best finance options. This is particularly important in light of the recent collapse of Carillion and the questions it has raised about private finance deals. Government must not let arbitrary accounting rules and narrow fiscal targets drive financing decisions, it must implement a more robust appraisal process and it must change the way that the Treasury handles capital investment.

The Government needs to up its game in terms of private finance if it is to meet its objective of securing more private investment in infrastructure at a good price. The Government must ensure that civil servants have access to sufficient in-house commercial skills. Ministers need to understand investor perspectives better before making policy. And the Infrastructure and Projects Authority must outline a clear infrastructure project pipeline that provides investors with clarity on which projects will require private finance, how much investment is needed, and how the deals will be structured.

A key reason is the difficulty of striking an appropriate balance between public engagement, expert advice and political leadership. Deciding where to invest limited state resources and which objectives to pursue is inherently political. Yet, infrastructure policy is more likely to be effective if it is evidence-based, long-term and stable. At the same time, the needs of the whole country must be balanced against the negative impact that new infrastructure can have on individual communities.