# Division of Economic Statistics and Advice SCAF WORKSHOP ON INVESTMENT APPRAISAL – CURRENT POLICY AND PRACTICE IN MOD 9 FEBRUARY 2010 NEIL V DAVIES, JOHN.

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Division of Economic Statistics and Advice SCAF WORKSHOP ON INVESTMENT APPRAISAL – CURRENT POLICY AND PRACTICE IN MOD 9 FEBRUARY 2010 NEIL V DAVIES, JOHN OGILVIE, PRABHAT VAZE MINISTRY OF DEFENCE

 Value for Money (vfm) is optimal combination of  Economy – ie Cost of Inputs ( 1 / M ):Inputs/Money)  Efficiency – ie Ratio of Output to Inputs ( O / I :Outputs/Inputs)  Effectiveness – ie Value of Outcomes from Outputs ( V / O :Value/Outputs  Hence vfm =  Vfm is a relative not absolute construct SLIDE 1 VALUE FOR MONEY

 Responsible for MOD policy on Investment Appraisal (IA) and Project Evaluation (PE) and ensuring MOD compliance with HM Treasury’s “Green Book” guidance  Provide advice and guidance on IAs and PEs eg JSP507  Scrutinise IAs/COEIAs, OBCs for all projects subject to Central Approval (eg Ministers, IAB, DEC)  Review sample of TLB IAs/PEs for Health of Financial Systems Review SLIDE 2 OUR ROLES IN MOD INVESTMENT APPRAISAL AND EVALUATION

 To ensure Value for Money is obtained from investment decisions  Effective appraisal and evaluation are fundamental requirements of Treasury delegations SLIDE 3 PURPOSE OF IA

 Compares the costs of alternative ways of producing the same or similar outputs, which are not given a monetary value  While every effort should be made to quantify benefits, cost benefit analysis is not appropriate or feasible for most defence projects SLIDE 4 MAIN FORM OF IA IN MOD: COST EFFECTIVENESS OF ANALYSIS

Military or Business Effectiveness Whole Life Cost A OptionsC B E F D SLIDE 5 COMBINED OPERATIONAL EFFECTIVENESS & INVESTMENT APPRAISAL (COEIA) 45º

 Why is it necessary to commit resources?  What do we want to achieve?  What options are available?  How much will they cost? SLIDE 6 BASIC QUESTIONS FOR IA

 establish requirement  define objectives  identify options  quantify costs and benefits of (shortlisted) options  compare these in NPV terms  evaluate risks and uncertainties  consider unquantifiable factors  present results and make recommendation  plan for Project Evaluation SLIDE 7 MODEL OUTLINE OF MOD IA

SLIDE 8 QUALITY OF TLB IAs  Quality improving from a low base  Numbers of IAs declining

 We have around 180-200 live projects at any time  Most IAs at a high standard by the time they go to IAB  But at draft stage main problems vague/uncertain specification of requirement limited consideration of alternative options/case written around preferred option particular challenges with partnering affordability often uncertain SLIDE 9 PRACTICAL ISSUES WITH IAs/COEIAs SUPPORTING CENTRALLY APPROVED PROJECTS

1.Increasing competition for resources - Fiscal position means next comprehensive Spending Review will bring severe squeeze on spending - Defence will need to compete with other spending priorities 2.Strategic Defence Review - This will provide long-term direction - Need for evidence on VFM to support direction - Can appraisal provide more for strategic decisions? 3.Gray Review findings and appraisal - Highlights problems of Entryism and Optimism Bias - Findings include skills gaps and technical shortcomings - Poor information mixes with competing interests and incentives SLIDE 10 CHALLENGES

SLIDE 11 WHERE WE MIGHT FOCUS: Training & Guidance Requirements & options identification Optimism bias Integrate supplementary guidance Examples & better presentation Training for managers & practitioners

SLIDE 11 WHERE WE MIGHT FOCUS: Training & Guidance Requirements & options identification Optimism bias Integrate supplementary guidance Examples & better presentation Training for managers & practitioners Evaluation Encourage more evaluation Share best practise on IA evaluation Highlight feedback role into appraisal Use existing evaluative results: optimism bias

SLIDE 11 WHERE WE MIGHT FOCUS: Training & Guidance Requirements & options identification Optimism bias Integrate supplementary guidance Examples & better presentation Training for managers & practitioners Evaluation Encourage more evaluation Share best practise on IA evaluation Highlight feedback role into appraisal Use existing evaluative results: optimism bias Wider applications Could appraisal help at concept level? What role in planning round? What IA evidence can be used for prioritisation?

SLIDE 12 ANY QUESTIONS?

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