New Green Book emphasises good strategic case over benefit:cost ratios

Appraisal

The Treasury this week published a new version of its  appraisal guidance, the Green Book, which reduces the emphasis on benefit:cost ratios (BCRs), and gives more attention to the local economic impact of projects.   

The Green Book is used for the appraisal of all proposals that concern public spending, taxation, and changes to regulations. A review of the guidance was launched in response to concerns that it may mitigate against investment in poorer parts of the UK, undermining the Government’s levelling-up agenda. 

The Treasury review concludes that too many project promoters end up focusing on BCRs because they fail to make the strategic case for their projects.?

“The strategic case for many proposals is weak. With a lack of strategic direction baked into the appraisal process, the selection of the option to be presented as the best becomes heavily reliant on a BCR that is not aligned to the decision-makers’ objectives. 

“The BCR instead focuses on benefits that it is easy to put a monetary value on. This in turn creates an incentive for proposers to artificially boost the BCR with such benefits that are unlikely to be realised, as well as suggesting a level of certainty around the value of those benefits that is not merited by the evidence.”

The Treasury says BCRs are a “useful metric” but there is “a tendency to place an inappropriate emphasis on it, in a way that frames value for money as an absolute concept”.

“A proposal with a BCR above a certain arbitrary threshold is seen as offering good value for money, whereas a proposal that falls below that threshold offers poor value for money.” 

The Treasury suggests that this over-emphasis on BCRs may be exacerbated by councils relying heavily on consultants. 

“[Consultants] may add value in technical aspects of the appraisal, but may also be less familiar with the strategic policy context of the intervention, and may have been tasked with producing a high BCR rather than a properly well-rounded appraisal.”

The review found that stakeholders believed the Treasury itself placed too much weight on BCRs. 

The Treasury says that, for this week’s spending review, it took a “broader approach to proposals, focusing on strategic alignment with the Government’s objectives, place-based impacts and wider relevant considerations including deliverability, instead of ranking proposals by their BCR”. 

The new Green Book also places more emphasis on place-based impacts. New guidance clarifies how and when employment effects may be included in benefits calculations at a UK, and separately, at a place-based level.

“Some stakeholders were unsure about whether presenting local or regional impacts is permissible,” says the Treasury. “The focus of appraisers on a UK-level BCR has encouraged the assessment of monetisable UK-wide benefits over the proper consideration of the contribution of the project to local, regional or sub-UK strategic objectives and impacts.

“Where an intervention’s objectives have a geographically defined focus this should also be the principle frame of reference for the analysis, with UK-level analysis presented separately.” 

Appraisers should consider how different people within the target area of an intervention will be affected. Distributional weights can be used to reflect the greater value of additional income to poorer households, although they should be used with care.