Appraising Assistance to the Private, Voluntary and Community Sectors

General Principles

4.1.1

Proposals involving financial assistance to the private, voluntary or community sectors should be appraised and evaluated with proportionate effort by the relevant Department or other funding body. Proportionate effort should be judged primarily on the basis of the totality of the public element (including EU funds) of the expenditure or resources over the whole life of the proposal under consideration.

4.1.2

Financial assistance should not be approved in principle, nor should commitments to funding be given (e.g. through a Letter of Offer), prior to the completion of a satisfactory appraisal and business case. The importance of appraisal to the approval process is elaborated in section 9 below.

4.1.3

The type of financial assistance offered should be tailored to the particular case at hand. There should be no presumption that financial assistance should take the form of grant aid in every case - alternative forms of assistance might be equally effective to tackle a particular market failure and at a lower cost to the exchequer. For instance where market failure is restricting a firm's access to capital this might be tackled more cost-effectively with financial assistance in the form of loans or equity.

4.1.4

Appraisal should be applied not only to schemes for financial assistance when they are being established but also to individual grants or other assistance subsequently paid out under such schemes. The appropriate level and type of appraisal will be different when a scheme rather than a grant is appraised, bearing in mind the principle of proportionate effort. For example, a major appraisal may be appropriate when considering what scheme to introduce; a large grant or loan application may deserve quite a substantial appraisal; and a small grant or loan may be adequately appraised using a suitable application form or appraisal pro forma.

4.1.5

Where a proposal involves more than one source of public or EU funds, the relevant funding bodies can avoid duplication of effort by co-operating to produce a single appraisal. There are no hard and fast rules about how to cooperate in these circumstances but a sensible rule of thumb is that the funding bodies should supply resources to the appraisal broadly in proportion to their proposed shares in the funding. It may also be appropriate that the major public funder should take the lead in co-ordinating and ensuring completion of the appraisal. When it comes to the stage of assessing completed appraisals, cooperation between funding bodies is also likely to be beneficial.

4.1.6

Where assistance to the private sector is under consideration, there is a need to ensure an adequate private sector contribution to the funding of the proposed investment. One of the important lessons identified by the Committee of Public Accounts following their enquiry into the De Lorean project was that "there must always be a significant contribution of risk capital from the private sector"⁷. Further, it has been an established principle since 1985 that there must be at least £1 of private sector investment for every £1 of Government assistance. Strictly speaking, this applies only to the private sector, not to the voluntary or community sectors. The latter operate in a different environment and may not be expected to be able to match Government funding in every case, although they should be expected to contribute to funding according to their ability to do so. Whatever the sector being assisted, public funding should generally represent the minimum assistance necessary to bring about the investment.

4.1.7

It is good practice to advise applicants for assistance, from the outset, regarding the appraisal and approval procedures that will be necessary, the timescales that these may require, and the help that is available to them. Scheme documentation for applicants should contain this type of information.

Preliminary Screening

4.1.8

It is generally appropriate for funding bodies to subject applications for assistance to preliminary screening. In its simplest form, this involves a very basic assessment of the application to decide whether it is eligible for funding under the relevant scheme. More generally, preliminary screening offers the opportunity to test thoroughly the need for the project and its objectives, before committing resources to a full appraisal. It can be aided by the use of relatively simple scoring systems, in which applications are allocated scores by reference to relevant scheme criteria. Departmental economists can assist to establish suitable preliminary screening systems.

4.1.9

Where preliminary screening indicates that the proposal is clearly unsuitable, it should be rejected, thus avoiding nugatory expenditure on an unnecessary full appraisal. Funding bodies should be satisfied that applications are eligible and offer a reasonable prospect of success before committing resources to a full appraisal.

4.1.10

Preliminary screening may also be used to help decide what priority an application should carry in relation to other applications, in terms of the order in which all the eligible applications should be subjected to a full appraisal. This is particularly relevant where the resources available to undertake appraisals are scarce in relation to the numbers of eligible applications to be appraised.

The Use of Pro Formas

4.1.11

The appraisal of small grants or other assistance to the private, voluntary and community sectors can be facilitated by designing application forms so that they provide the information that funding bodies need to appraise them. This may be taken to include cases involving total financial assistance (including for example all sources of PE, EU and IFI funding) of up to £250k over the whole life of a project. Pro formas for appraisal of small grants should be geared towards addressing the issues in this section of the NI Practical Guide, including economic efficiency, additionality, displacement, viability and cost-effectiveness.

4.1.12

It is normally the funding bodies who should be doing the appraising using appraisal pro formas. Applicants may complete application forms, but they should not should not be expected to appraise their proposals critically. Appraisals must reflect an independent and unbiased view of proposals.

4.1.13

Departments should be satisfied that the relevant application form or pro forma in use for each particular programme presents adequate information to enable the funding body to appraise expenditures. They should also ensure that funding bodies have suitable procedures in place to actually appraise the information submitted by applicants in the forms.

Funding of Consultants

4.1.14

Previously some Departments provided funding to project sponsors to employ consultants to undertake appraisals. It is now considered that a more independent appraisal will be obtained if the funders rather than the sponsors employ the consultant. For instance, this encourages greater objectivity and allows more direct control over the quality of the appraisals provided by consultants. This approach is now generally recommended.

The Scope of the Appraisal

4.1.15

Appraisals of applications for financial assistance should generally cover the whole of the project for which financial assistance is sought, not just the financially-assisted elements of it. For instance, an appraisal should detail all the sources of funding, and should cover all the costs and all the benefits associated with the proposal, including those falling to the private and voluntary sectors as well as to the public sector. This is to enable a judgement of the overall value for money and viability of the proposal. The same principles apply to ex-post evaluations of financially-assisted projects.

4.1.16

Appraisals of financial assistance to the private, voluntary and community sectors should assess VFM from a national perspective, like appraisals in general. This requires an economic appraisal covering basically the same elements of appraisal as those identified at section 1.4 above. A project that offers a satisfactory economic appraisal result is said to satisfy the National Economic Efficiency criterion. However, in addition, appraisals of applications for financial assistance should also ensure that the criteria of Additionality, Viability and Cost-Effectiveness are satisfied. The technical meaning of these criteria, and how to assess them, is explained below.

4.2

National Economic Efficiency

4.2.1

Financially-assisted projects should be subjected to a National Economic Efficiency assessment, which is an appraisal of VFM from a national perspective, involving estimation of the net economic benefits arising from the project. There are two broad approaches to National Economic Efficiency, according to the nature of the financial assistance in view. One is designed for 'economic cases' e.g. financial assistance to industry or agriculture; while the other is appropriate for 'social cases' i.e. most other financial assistance. These approaches are described in turn.

National Economic Efficiency in 'Economic' Cases

4.2.2

'Economic' cases are financially-assisted projects with primarily economic objectives. These include those assisted by Invest Northern Ireland (Invest NI) including inward investment and other industrial assistance cases, cases involving assistance to small businesses, and cases involving assistance for research and development and assistance for tourism projects. The relevant methodology for most of these cases has been developed by the Department of Trade and Industry (DTI)⁸. It includes the following main elements:-

a DCF Test, that is, a discounted cash flow of the costs and benefits of supporting a project based on the applicant's financial forecasts. This test is designed to measure the project's impact upon National Income;
an appraisal of wider national costs and benefits, including displacement;
where relevant, an allowance for the effects of foreign ownership; and
where necessary, an analysis of regional benefits.

4.2.3

Financial assistance to the agriculture industry provide another example of economic cases. DARD economists can advise on the details of how to appraise such cases.

4.2.4

There are a number of points regarding National Economic Efficiency which DFP would emphasise in relation to 'economic' cases. These arise both from DFP experience and from comments made by NIAO. They also apply in varying degrees to other grant assistance cases:

The appraisal of National Economic Efficiency should be undertaken at a stage early enough to influence negotiations and decisions, since it indicates the prospective economic benefits of a proposal.
Offers of assistance should not be made before the impact upon National Economic Efficiency has been appraised and the results fully considered.
The utmost caution should be exercised in considering whether to assist projects which fail to demonstrate a positive impact upon National Economic Efficiency. For example, where a project is considered to fail the National Economic Efficiency Test, taking account of the DCF calculation and any wider national costs and benefits, it should generally be assisted only if the failure is marginal, and if specific regional economic or social benefits of sufficient magnitude to offset the national loss are demonstrated. The DTI guidance explains both the concept of a marginal failure that should be applied, and the difference between wider national and regional costs and benefits.
Wider national and, where appropriate, regional costs and benefits should be fully appraised and documented. The appraisal should specify how, why and on what scale such benefits will occur (and why they would not occur in the absence of the project) with supporting evidence. Projections of job creation should be analysed in depth, including, for example, an assessment of the skills mix and other characteristics of the jobs, in addition to their anticipated numbers and phasing.
It is recognised that the scope for appraising options in financial assistance cases can be more limited than in other cases where the public sector has fuller control over project expenditure. Nevertheless, it is still good practice to consider options. Alternative funding packages should generally be examined. Variations in the scale, content, location and timing of proposals should be given appropriate consideration and appraised, for instance, during the negotiations between the funding authority and the applicant.
The counterfactual to be used in the DCF calculations should be designed carefully to reflect the details of the case. For example, where investments would be delayed or reduced in the absence of assistance, the counterfactual should reflect this rather than a simple without-project scenario; or where a NI-owned company is claiming assistance for a mobile project, the counterfactual should reflect the fact that the post-tax profits from such a foreign investment will return to NI.

National Economic Efficiency in 'Social' Cases

4.2.5

The DTI method is designed for cases where it is possible to estimate the impact upon National Income based on the projected financial sales and costs of commercial firms. This is not usually possible or appropriate regarding other forms of financial assistance for which the objectives are primarily social or environmental, and in which the benefits are more difficult to measure in money terms. These include many cases of assistance to urban and rural regeneration projects, assistance to community groups, and so on

4.2.6

In the case of non-industrial financial assistance, the National Economic Efficiency criterion is normally satisfied by addressing the usual steps of appraisal, as indicated at section 1.4 above, and by thus demonstrating that the benefits of the proposal exceed the costs. This approach still involves DCF calculations and consideration of wider costs and benefits, including displacement, but there is no requirement to demonstrate a positive impact upon National Income. The methodology at each stage should normally reflect the general guidance in the NI Practical Guide, rather than the DTI method, but judgement is required to decide the precise approach that is most suited to particular cases.

Displacement

4.2.7

Consideration of displacement should be included in the assessment of National Economic Efficiency for all types of financial assistance, whether economic or not. Displacement is the degree to which an activity promoted by government policy is offset by reductions in activity elsewhere. A modest degree of displacement may be acceptable, but more substantial displacement may constitute grounds to refuse an application for assistance. For instance, this may be the case where a proposal appears likely to succeed largely by diverting business from other UK or NI firms or service providers. To provide assistance in such circumstances can represent poor value for money and may result in a legal challenge by competitors whose businesses are threatened. Thus it is generally important to identify the potential for displacement and assess its impact nationally and regionally.

4.2.8

Displacement may occur in the product/service or factor markets in which the applicant operates. For example, in the product/service market, assisting a firm to develop its business may cause a reduction in the business of other companies in the same sector; or development of community facilities may lead to a reduction in the use of other similar facilities in the surrounding area. Basic questions which appraisals should address regarding the product/service market include:

Who are the applicant's competitors within the UK and Northern Ireland? (They may be other firms producing similar products, or other groups/service providers producing similar facilities/services).
Is the market growing, and what share of the business is the applicant likely to take?
Is the applicant's proposal likely to have a significant impact on the business of particular competitors? Will it damage their viability or threaten closure?

4.2.9

Displacement may also occur in the labour market. For example, an applicant's proposal may displace significant labour from other employers in the UK or NI labour markets. The level of displacement of an employment creation programme, or of individual proposals to safeguard jobs or that involve redundancy, should be assessed by examining the characteristics of the relevant jobs, in relation to the characteristics of the local labour market. Where potentially large changes to employment are in view, a thorough analysis of the local labour market may be required. If, however, only small changes in employment are likely, then a less detailed analysis may be more appropriate.

4.2.10

When considering whether to offer assistance designed to safeguard employment in a particular firm, a basic consideration is whether the assistance is necessary to do this. The local labour market might also be analysed in terms of age, skills and experience of those whose jobs are being safeguarded, and how these compare with the characteristics of the unemployed, particularly the long term unemployed, and those who have recently found employment. The analysis might also assess the likelihood of new investment in the region in the event that the job losses occurred, accounting for the inflow onto the local labour market of labour with particular skills and experience.

4.2.11

Generally, displacement will tend to be greatest, and of most concern, under the following circumstances:-

the greater the existing excess capacity in the market;
the larger the increase in market output arising from the project;
the longer the excess capacity is expected to persist, that is, when it is structural rather than cyclical;
the greater the share of the market to be served by the project which otherwise would be served by other NI or UK suppliers;
the newer and more efficient the capacity that will be displaced.

4.2.12

Where displacement is expected to be small, it is normally enough to document its likely nature and extent. Where it is considered to be significant, as for example in many tourism projects, the benefit stream in the relevant NPV calculation or DCF test should be reduced accordingly, in order to provide a more meaningful calculation of the prospective stream of net benefits to the economy. It may be helpful to undertake the NPV calculation or DCF test both with and without adjustment for displacement in such cases.

4.2.13

Substitution is a particular form of displacement in the labour market which should be considered in relevant cases. It is the extent to which those who gain from a policy do so at the expense of an equivalent loss to others in the labour market. This may occur when a firm substitutes one activity for another similar activity to take advantage of government assistance. For example, if an incentive is given to employ long term unemployed workers, then a firm may substitute an applicant who is in long term unemployment for another applicant who is not, leading to no overall increase in employment.

4.2.14

In general, substitution is undesirable and should be minimised. For instance, if substitution is significant, the net exchequer cost of the programme may be unacceptably high. However, some substitution may be acceptable when the totality of a proposal is taken into account. In some cases it may even be desirable. Taking the previous example, redistribution of jobs may contribute to a specific policy aim, such as getting more of the long-term unemployed to work.

Regeneration

4.2.15

Annex 1 of the Green Book sets out a number of specific issues that should be addressed in the appraisal and evaluation of regeneration projects. These are:

The Rationale. This needs to make clear:
- Who the intended beneficiaries of the project are;
- Who the intended beneficiaries of the project are;
- What structural benefits are expected as a result of the project; and
- The means by which these will be achieved.
The Objectives. The objectives of regeneration programmes are likely to include improvements in one or more of the following:
- The Rationale. This needs to make clear:
  - Labour supply and skills;
  - Quality of Life;
  - Physical environment; and
  - Local business opportunities.
Outcomes. These should be identified with respect to the relevant intermediate objectives. Regeneration outcomes might include:
- Reductions in crime;
- Improvements in the capacity of community organisations; or
- Increases in local income or employment.
Partnerships. Partnerships between the local community, business and government are important for the sustainability of regeneration projects and the well being of local communities. Most local regeneration projects involve partnerships, and are likely to have some effect on existing institutional relationships. An appraisal should include a description of the partnership and, where possible, its expected impact on the area. The use of social capital indicators, such as those developed by DSD, may help to capture the value added of voluntary and community-based activity in addition to conventional performance indicators of economy, efficiency, equity and effectiveness⁹.

4.2.16

Government intervention in the economy is sometimes undertaken with an employment objective in mind. In other cases, although employment is often retained as a principal objective, the justification for intervention is more far-reaching and the objectives tend to be more broadly cast. This is typical of regeneration projects.

4.2.17

Where programmes have multiple objectives, such as environmental improvements, these other additional benefits (and any associated costs) should be covered in the appraisal, together with employment impacts. The geographical focus of regeneration projects means that it is particularly important to assess displacement effects at both the local and national levels, particularly if the programme or project is substantial.

4.3

Additionality

4.3.1

The success of government intervention through assistance to the private, voluntary or community sectors is usually assessed in terms of its 'additionality'. This is its net, rather than its gross, impact after making allowances for what would have happened in the absence of the intervention. To put it another way, Additionality is the extent to which an activity takes place at all, or is undertaken on a larger scale, or earlier, or to a higher standard, or within a policy target area, as a result of public sector intervention.

4.3.2

Additionality needs to be appraised to help ensure that assisted projects receive the minimum Government assistance required to bring them about. Any excess over this amount is "deadweight". Additionality should be measured at programme and project level, adjusting the form of the assessment to the nature and objective of the activity.

4.3.3

A project is regarded as fully additional if, without assistance, it would not happen at all. However, additionality may be partial. For example, without assistance:-

The project might have been carried out in a location of some lower priority;
The same project might have been carried out later;
A different project might have been carried out, or the same project on a smaller scale or to a lower standard of quality.

4.3.4

The appraiser needs to probe the claims made by the applicant regarding additionality. There are several possible avenues to pursue, including:-

direct questioning of the applicant - regarding the applicant's need for assistance, the financial resources at its disposal, its efforts to obtain other sources of funds, its contingency plans if the grant application should fail, and so on. Does the applicant make a credible case for needing the assistance?
checking and monitoring of information supplied by the applicant - for instance, site visits to check whether the project has actually started, checks on the financial and staffing/personnel information provided. Does the applicant's behaviour match its claims?
drawing on the knowledge of the appraiser's own organisation, where it has experience of dealing with similar applications or has had previous dealings with the applicant. Does the application stack up with past experience?
consulting other organisations who are experienced in the relevant field of activity, or who have previous experience of the applicant - for example, partner organisations, other funding bodies, banks, and so on. Does others' experience confirm the bona fides of the application?

4.3.5

Whatever the methods It is important to record reasons why the additionality criterion is considered to have been satisfied¹⁰. Appraisal reports should:-

demonstrate the additionality of the proposal by reference to the criteria at 4.3.3 above, indicating its nature and extent.
record reasons for the proposed level of assistance, related individually to the nature, scale and timing of the project;
summarise the negotiations with the applicant on the level of assistance;
review the applicant's financial position and ability to fund the project from non-Government sources; and
where relevant, assess the project's mobility, including, where possible, substantive evidence of a viable alternative location.

4.3.6

Assessments should not be based on unsubstantiated claims by applicants, for example, that a project's return was too low compared to its internal hurdle rates, or that an alternative location was being considered:-

In the case of very high hurdle rates, the applicant should have to demonstrate that it does in fact use high hurdle rates, and justify their use. Generally, a very high hurdle rate indicates an inefficient investment criterion, and is therefore a good reason to reject an application, as the government should not encourage inefficient behaviour. An applicant using an inefficiently high hurdle rate is likely to offer poor prospects for future investment.
Where an applicant claims that an alternative location is being considered, for instance, where it claims assistance is being offered elsewhere, then sound evidence to support the claim should be provided, normally including detailed appraisals of each option.

4.3.7

The effort used to appraise Additionality should be appropriate to the scale of the project. The effort needed for a small grant to a community group is much less than that required for a major industrial assistance proposal. Where small sums are involved, judgement based on direct questioning of the applicant may be sufficient, or it may be possible to define the qualifying conditions in a way that ensures that any accepted proposal is additional.

4.3.8

In larger cases, a more in-depth analysis will be appropriate and a full examination of the financial factors driving the need for a certain level of assistance should be undertaken to ensure that any offer of assistance is the minimum required to bring about the project. Claims of lack of funds should be backed with an analysis of the applicant's ability to fund the project using internal reserves, additional equity, debt financing, or some combination of these. Where the investment in a project spans a number of years the applicant's future finances, and not just its current finances, will be relevant to its ability to fund the project from non-Government sources.

4.3.9

In some cases it will be appropriate to consider the returns to the applicant in light of the cost to it of financing the project. Broadly speaking, from the applicant's perspective a project will only be attractive as long as the anticipated return from the project is the same or better than the applicant's (marginal) cost of capital. An analysis of the extent to which the project's return falls short of the applicant's cost of capital can provide valuable information on the minimum level of assistance required to bring about the project. An example of how this might work in practice is included below.

4.3.10

In summary, Additionality should be appraised and documented in detail, and assertions that the Additionality criterion is met should be supported by substantial evidence and analysis. Partial additionality should be reflected in the levels of assistance offered. Assistance should not be awarded to projects that have already gone ahead without it.

Project Returns & The Cost of Capital: Some Simple Examples

Example 1: A company has a £10m project for which it is seeking financial assistance. The costs and benefits of the project to the company are outlined in the table below.
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Turnover £k		6500	6000	6000	6000	6000
Variable Cost £k		-3000	-3000	-3000	-3000	-3000
Overheads £k		-362	-362	-362	-362	-362
Capital Cost £k	-10000
Net Cash Flow	-10000	2638	2638	2638	2638	2638
Return (IRR)	15%

If the company has a cost of capital or internal hurdle rate of 12% then it is clear that the project should generate a satisfactory return¹² for the firm's investors without the aid of financial assistance.

On the other hand if, say, access to finance was the factor underpinning the additionality argument then there might still be a role for financial assistance. In this event assistance in the form of loans would tackle the market failure without the need to resort to more costly forms of assistance such as grant aid.

Example 2: A company has a £10m project for which it is seeking financial assistance. The costs and benefits of the project to the company are outlined in the table below.
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Turnover £k		6000	6000	6000	6000	6000
Variable Cost £k		-3000	-300	-300	-300	-300
Overheads £k		-362	-362	-362	-362	-362
Capital Cost £k	-10000
Net Cash Flow	-10000	2638	2638	2638	2638	2638
Return (IRR)	10%

If the company has a cost of capital or internal hurdle rate of 12% then the project would not go ahead, as the return from the project would be insufficient to provide the return expected by its investors or financiers.

However, if financial assistance in the form of, say, a capital grant were offered to the company then the effective capital cost of the project to the firm is reduced and the return on the project for its investors is increased.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Turnover £k		6000	6000	6000	6000	6000
Variable Cost £k		-3000	-3000	-3000	-3000	-3000
Overheads £k		-362	-362	-362	-362	-362
Capital Cost £k	-10000
Capital Grant £k	490
Net Cash Flow	-9510	2638	2638	2638	2638	2638
Return (IRR)	12%

The table above indicates that if a grant of £490k were offered to the firm then the return on the project would become 12%. A return at this level would be sufficient to persuade the company's investors and financiers to fund the project. In this example £490k would represent the minimum Government assistance required to bring about the project.

4.4

Cost-Effectiveness

4.4.1

It is important that public expenditure on projects or programmes is cost-effective. This is achieved when the ratio of the outputs from a project or programme to the costs to the taxpayer of producing them is satisfactory.

4.4.2

Judgement of cost effectiveness is aided by benchmarking, that is, by comparing the ratios for a specific project with those for other similar projects. This helps to indicate whether the cost-effectiveness is acceptable. If the unit costs are considered too high, this should lead to redesign of the project, or to it being rejected.

4.4.3

Relevant indicators of cost-effectiveness should be presented. These should normally include the ratio of total public assistance to total project cost, but other measures will also be appropriate depending upon the particulars of the case, for example, cost per job, cost per m² of floor space, cost per room, cost per trainee place provided, cost per dwelling and so on.

4.4.4

When calculating these indicators, the cost element should generally include all sources of UK and EU funding, not just the costs to an individual budget or programme. This is particularly important where there is more that one source of funding. (It is recognised that funding bodies may also wish to monitor the unit costs to their own budgets or programmes, for their own management purposes). On the benefit side, the number of outputs included should be net of displacement, so that the indicators reflect the net additional outputs arising from the activity.

4.4.5

It is important that all forms of assistance from public sector sources are counted. Where assistance takes the form of cash grants, this cost is obvious, but there are many other possible forms of assistance, for some of which the true cost is less transparent. Common examples include participating grants, equity finance, cheap loans, premises at low rents, and land, infrastructure, training support or advice provided free of charge.

4.4.6

A basic condition for cost-effectiveness is that the activity assisted should actually occur, that is, that the project should proceed and achieve the additionality claimed for it. Where a grant is paid, arrangements to secure repayment of that grant in the event of premature closure, or failure to deliver the promised outputs, should help to ensure this.

4.5

Viability

4.5.1

Project Viability should be assessed to help ensure that public money is not wasted on projects that will fail prematurely. There should be evidence of sound business planning, which requires thorough analysis of:

the anticipated cash flows, and
the planned financing, marketing and management arrangements.

4.5.2

In cases where the aims are primarily economic, assistance should be given only to firms which are themselves considered to be viable. This requires appraisal of:

the firm's financial position; and
the quality of its management,

both in general terms and with specific regard to those charged with carrying out the project. Any previous track record may help to inform judgement of viability.

4.5.3

If assistance is awarded, it should generally be just sufficient to enable the project cash flows including subsidy to satisfy commercial investment criteria. In these cases, a viable project is one which, having received assistance on a once for all basis, is expected to earn sufficient profits to be self-sustaining without continuing subsidies other than those available as of right to all eligible enterprises. There should be a strong presumption against projects receiving assistance more than once, because this would encourage grant-dependency and poor management in both the assisted firm and the responsible Department.

4.5.4

In the case of financially-assisted projects pursued primarily for social rather than economic aims, the Viability criterion applies less strictly, to the extent that socially-oriented projects need not be expected to achieve overall financial profitability. However:

any commercial elements of 'social' projects should still be expected to achieve financial profitability; and
in all cases it should be confirmed that there is sound business planning and specifically that adequate arrangements for finance and management are in place.

4.5.5

Sustainability should be considered. Where funding is awarded for a limited period, consideration should be given to a suitable 'exit strategy'. In particular, the assumptions about subsequent funding should be made clear. If it is assumed that funding will continue, confirmation of agreement to this should be provided from the relevant funding body. It is good practice to make continuation funding conditional upon a satisfactory independent evaluation of the activities undertaken using the initial funding, in addition to a fresh forward-looking appraisal.

Business Plan

4.5.6

Applications for grant assistance should generally be supported by a Business Plan in addition to an Economic Appraisal, covering the following key elements:

MANAGEMENT PLAN

The key management personnel, their roles, their relevant experience and qualifications, and the proposed organisational structure should be identified and explained fully.

FINANCIAL PROJECTIONS

The estimated financial costs and revenues arising from the proposal should be set out year-by-year over its life. This should be disaggregated to show all individual cost and revenue items.
For commercial activities, a financial NPV should be calculated at 8% p.a. in real terms, or as advised by Departmental economists. All financial assumptions should be stated.

FUNDING PLAN

The financial position of the applicant should be analysed, including assessment of its ability to contribute own funds to the proposal. Where applicable, the most recent statement of accounts should be supplied.
All sources of funding should be identified, including names of relevant funding bodies, the corresponding amounts of funds, and their phasing.
The status of each funding application should be indicated e.g. Confirmed, Awaiting Response etc

MARKETING PLAN

The current and projected market for the planned products or services should be assessed.
Specific planned marketing activities should be identified and costed.

MONITORING AND EVALUATION PLAN

The proposed arrangements for monitoring and evaluation should be explained, including who will do these activities, what factors will be examined and when.

4.6

Treatment of European Union (EU) Financial Assistance

4.6.1

All proposals involving EU financial assistance are subject to the general requirement to undertake appraisal and evaluation. Relevant appraisals should address the main steps of appraisal as indicated at section 1.4. Where EU financial assistance to the non-Government sectors is in view, the guidance in sections 4.1 to 4.5 should generally also be followed.

4.6.2

The nature and extent of EU assistance proposed should be clearly identified for each option under consideration. When costing options, EU grants and other forms of financial assistance should generally be treated in the same way as UK Exchequer grants and included in appraisals at their full cost.

4.6.3

Special arrangements exist in relation to the treatment of assistance to agriculture under the Common Agricultural Policy. In appraisals involving such assistance, it is advisable to consult the relevant economists in the Department of Agriculture and Rural Development.

4.6.4

Advice on applying for EU financial assistance and general EU matters is available from DFP's European Division. Their website address is http://www.dfpni.gov.uk/index/finance/european-funding/

4.7

International Fund for Ireland (IFI) and other ex-UK Grants

4.7.1

IFI funding consists largely of monies pledged by non-UK countries including, for example, the USA, Canada and Australia. It also includes an element of EU funding. Clearly, IFI funding, to the extent that it is sourced from outside the UK, represents a beneficial injection to the UK economy. It enables more projects to be undertaken than would be the case in its absence. This might suggest that IFI-funded expenditures should be included as benefits in appraisals.

4.7.2

However, in appraising individual projects, it should be recognised that, once Northern Ireland's share of IFI funds has been pledged, it has become effectively a UK resource, which, if not committed to one project within Northern Ireland, will be committed to another. Thus, the use of IFI funds in one project means the loss of the opportunity to undertake another project. In short, all expenditure funded by the IFI represents a UK resource cost at project level.

4.7.3

None of this conflicts with the position of the IFI as a body which is independent of Government, draws up its own policies for the deployment of its resources, and considers and approves each project. However, the proposed approach recognises that the use of funds committed to Northern Ireland by the IFI has an opportunity cost, and that the alternative uses to which they might be put deserve to appraised with the same rigour as other resources which are pledged to Northern Ireland.

4.7.4

This issue has been discussed with HM Treasury and they have agreed that IFI funds, once pledged to Northern Ireland, should be treated as UK resources. Accordingly, all expenditures funded by the IFI should be included at their full cost in all relevant options in economic appraisals.

4.7.5

The principles for IFI grants apply equally to any other grants and donations from outside the UK. They represent a beneficial injection to the UK economy, but once pledged to the UK, they have an opportunity cost which should be accounted for in appraisals. All such grants or donations should be considered to have an opportunity cost unless they are not pledged to the UK and would be lost to the UK if the individual option or project under consideration did not proceed.

4.8

State Aids

4.8.1

State aids are transfers of state resources which provide selective support to particular companies. When the state confers even a limited advantage on an undertaking, there is usually a distortion, or risk of distortion, of competition. To protect competition across the EU, the European Commission provides a complex body of treaty-based legislation, frameworks and case law to establish which aid is, and is not allowable.

4.8.2

Aid is payable through a large variety of measures and instruments, including tax relief, soft loans and provisions to help prepare an undertaking for privatisation as well as grants and subsidies. As such, it is important that the state aid rules are considered from the onset of any proposal to ensure that proposed measures will be compatible with EU competition rules. Further general information is provided on the European Commission's website on competition http://www.europa.eu See also the State Aid website http://www.dti.gov.uk/bbf/state-aid/index.html

4.8.3

Advice is available from the DETI Policy Services Unit, which has an awareness generation, co-ordination and advisory role in relation to State Aid issues. DETI carries out this role for all aspects of public sector activity, with the exception of agriculture matters on which DARD take the lead. See 12.4.11 below for contact details.

4.8.4

The following checklist indicates the issues that need to be addressed in determining whether policy proposals, existing policies or programmes to implement them, fall within the State Aid ambit. It is recommended that where any doubts exist that initial contact be made with the DETI Policy Services Unit.

State Aid Identification Checklist

Financial Assistance To The Private, Voluntary and Community Sectors: A General Checklist

⁷Twenty-fifth Report of Session 1983-84, HC 127. Dr Rhodes Boyson, speaking on behalf of the Government in a debate on the De Lorean case on 1 May 1985, stated that for future projects there must be at least £1 of private sector investment for every £1 of Government assistance.
⁸For a full explanation of the DTI methodology and how it is applied in Northern Ireland, contact the Departmental economists in DETI or INI.
⁹See Report on Research into Evaluating Community-Based and Voluntary Activity in Northern Ireland (DSD Voluntary & Community Unit, 2003).
¹⁰This was emphasised by the Committee of Public Accounts in its 1986-87 examination of the Additionality criterion in relation to industrial development cases. The Northern Ireland Audit Office, in its 22nd February 1993 report (No. 418) on IDB selective financial assistance criteria, recommended the preparation of a separate file paper on additionality, addressing points similar to those listed here.
¹¹ This information can usually be derived from the applicant's financial forecasts and the DCF test.
¹²The return, measured by the Internal Rate of Return, is the discount rate at which the NPV of a project is zero.

NI Practical Guide to the Green Book