Economic Appraisal Guidance
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NI Practical Guide to the Green Book

Step by Step Appraisal Guidance

2.4  

Step Four
   

Identify and Describe the Options
2.4.1   Comparison of alternative courses of action is at the heart of appraisal. It is only by comparing the alternatives that the real merits of any particular course of action are exposed.
   

Long Lists, Short Lists and Feasibility Studies
2.4.2   It is useful to begin by identifying a 'long list' of options, containing all the initial ideas about possible solutions. This should include not only the conventional solutions, but also any more innovative suggestions, however outlandish they may at first appear. Imaginative thinking should be encouraged. Appraisal reports should generally record all the long listed options.
2.4.3   Where the technical feasibility of one or more of the long-listed options is in doubt, and if there is a reasonable prospect that they will offer a VFM solution, it may be appropriate to commit resources to exploring further whether the option(s) can be delivered and at what cost. This may be considered, for instance, where particularly innovative solutions are in view. How much effort to devote to this is a matter for case-by-case judgement. Sometimes a separate 'feasibility study' report may be prepared. Such feasibility studies should be treated as inputs to the process of refining the options within an appraisal. They should not be confused with or regarded as a substitute for an appraisal or business case.
2.4.4   The long-listed options usually need to be sifted to produce a more manageable 'short list' of options for in-depth appraisal. This should be done according to specific, stated criteria. These may be expressed in terms of, for example, failure to satisfy the principal objectives of the proposal, or violation of important constraints regarding finance, manpower availability, policy commitments, site suitability and so on. Where options are rejected in this way, the precise manner in which they fail to meet the criteria should always be explicitly explained.
2.4.5   Where approval is granted in stages, as described in Section 9 below, it may be the case that some options can be ruled out at the preliminary option appraisal stage, so that the more detailed analysis is confined to a narrower range of options. However, this will not always be appropriate. In any event, good reasons should always be given for rejecting options.
   

The Status Quo and 'Do Minimum' Options
2.4.6   The options selected for in-depth appraisal should include a baseline or benchmark option2 . This should usually be the "status quo" option3 , representing the genuine minimum input necessary to maintain services at, or as close as possible to, their current level. The status quo should normally be short-listed and appraised even where it is not considered to be a realistic option. Its function is to provide a benchmark so that the VFM of the alternative 'do something' options may be judged by reference to current service provision. The exception to this requirement is where the appraisal concerns the introduction of a wholly new service, that is, where there is no existing provision to appraise.
2.4.7   Sometimes the status quo may represent the realistic "do minimum" option. In other cases, (e.g. where there is a new legal imperative or a policy commitment to develop services), the realistic 'do minimum' will differ from the status quo option. In the latter case, DFP still expects the status quo to be appraised, so that the differences between current and proposed provision are fully clarified. In that event, the 'do minimum' should normally be appraised as a 'do something' option in addition to the status quo.
2.4.8   The amount of effort to be put into appraising the status quo requires judgement. Where it is considered to be a realistic option, it should be appraised in the same detail as the alternative options. Where it is clearly unrealistic, a less sophisticated analysis may be sufficient. However, appraisals should always provide some details of both current costs and current service provision.
   

The 'Do Something' Options
2.4.9   Alternatives to the status quo are referred to as the 'do something' options. These should generally cover a range of levels of provision, for example, from 'minimum acceptable provision' to the highest standards of provision. They should reflect variations in the scale, content, timing and location of services. The range of options considered should be as wide as possible.
2.4.10   Consideration should be given to alternative techniques for delivering the required outputs. Conventional approaches should be considered alongside more innovative methods.
2.4.11   The number of options to be subjected to full appraisal will vary according to the scale and significance of the proposal, the constraints under which it is conducted, and considerations of feasibility and affordability. In relatively straightforward appraisals, the number of options short-listed for full appraisal might be in the range 3 to 6 in addition to the status quo. (This is a very broad guideline, not a stipulated minimum number). In more complex cases, a larger number of options may be appropriate.
2.4.12   Alternative approaches to procurement should be appraised. The scope for solutions involving Public Private Partnerships (PPPs), including the Private Finance Initiative (PFI), should generally be considered as alternatives to traditional procurement methods. Section 5 explains how to do this. Experience suggests that PPP approaches suit some situations better than others, and resources should not be wasted investigating PPP solutions where they are clearly not appropriate. Where there is doubt over the relevance of PPP solutions, advice should be sought from Departmental PPP advisers, the Public Private Investment Unit or DFP Supply.
2.4.13   It is important to consider alternative options for funding of proposals. This is essential when appraising proposals concerning assistance to the private, voluntary or community sectors, as there will usually be various possible scales or types of funding, but it may also be important in other cases. Section 4 explains how to appraise assistance to these sectors.
2.4.14   Completion of an economic appraisal report does not necessarily bring the consideration of options to an end. For instance, changing circumstances may invalidate the report's assumptions and conclusions prior to project implementation, necessitating a review of the options. Also, identification of a preferred option is often followed by a tendering process in which bids are sought from the private sector. The principles of option appraisal should be applied at this stage in order to help determine which bid offers the best VFM.
   

Creating Options
2.4.15   Establishing a range of options can be challenging. The Green Book suggests the following actions:
  • Research existing reports, and consult widely with practitioners and experts, to gather the set of data and information relevant to the objectives and scope of the problem.
  • Analyse the data to understand significant dependencies, priorities, incentives and other drivers.
  • From the research, identify best practice solutions, including international examples if appropriate.
  • Consider the full range of issues likely to affect the objective.
  • Identify the full range of policy instruments or projects that may be used to meet the objectives. This may span different sorts or scales of intervention; regulatory (or deregulatory) solutions may be compared with self-regulation, spending or tax options.
  • Develop and consider radical options. These options may not become part of the formal appraisal but can be helpful to test the parameters of feasible solutions. Well-run brainstorming sessions can help to generate such a range of ideas.

Examples of strategic and operational options include:

  • Varying time and scale
  • Options to rent, build or purchase
  • Changing the combination of capital and recurrent expenditure
  • Refurbishing existing facilities or leasing and buying new ones
  • Co-operating with other parts of government
  • Changing locations or sites
  • Provision of the service, such as maintenance, or facility by the private sector
  • Co-locating, or sharing facilities with other agencies
  • Using IT to improve delivery, as part of wider organisational changes
  • Transferring service provision to another body, or improving partnership arrangements
  • Varying the balance between outsourcing and providing services (or retaining expertise in-house)
  • Engaging the voluntary, community or private sectors
  • Regulation, including private sector self regulation, and voluntary action
  • Different standards or compliance procedures for different groups (eg large and small businesses)
  • Varying quality targets
  • Different degrees of compulsion, accreditation, monitoring, and inspection regimes, including voluntary codes, approved codes of practice or government regulation
  • Action at a regional, national, or international level (eg European wide)
  • Better implementation of existing measures or initiatives
  • Information campaigns
  • Deregulation and non-intervention
  • Changes that will be permanent in the foreseeable future, or initiatives with specified time horizons

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2In keeping with HM Treasury practice, the term 'base case' is avoided here. The term base case is now reserved for 'the best estimate of how much a proposal will cost in economic terms, including allowance for risk and optimism'. Thus every option has its own base case.

3Previous DFP guidance used the term "do nothing" to refer to a status quo option as described here, and people still use "do nothing" in that sense. It is sometimes confused with the option of literally doing nothing i.e. ceasing provision altogether, and for this reason the term "status quo" is considered preferable. However, the underlying meaning is unchanged.