Economic Appraisal Guidance
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NI Practical Guide to the Green Book

Step by Step Appraisal Guidance

2.5  

Step Five
   

Identify and Quantify the Monetary Costs and Benefits of Options
   

The Relevant Costs and Benefits
2.5.1   The aim of appraisal is to obtain VFM from a broad economic perspective. This requires assessment of costs and benefits to the NI economy as a whole. The relevant costs and benefits include all those falling on Northern Ireland, however wider impacts upon the United Kingdom should also be appraised. In practice, there may often be little to distinguish between the NI and UK impact. However, this is not always the case. For example, a grant to a company in NI may displace business elsewhere in the UK. Such effects should always be appraised and taken into account.
2.5.2   In the case of cross-border projects involving the Republic of Ireland it is generally appropriate to consider both the totality of the costs and benefits, and also those falling specifically to NI and the UK. The primary aim should still be to obtain good VFM from a NI and UK viewpoint, but this should include allowance for any benefits of cross border cooperation.
2.5.3   Appraisals should account for all the costs and benefits to NI and UK residents. They should therefore cover costs and benefits to both the government and non-government sectors e.g. the private, voluntary and community sectors, and individual private residents. The benefits of most public spending programmes fall to private individuals, and these should be included. Where proposals involve the use of private sector or other non-government resources, these should be costed because their use represents a cost to the economy.
2.5.4   Following the latest HM Treasury terminology, the term 'base case' is now reserved for the best estimate of costs and benefits for any option, after adjustment for optimism bias. Thus every option has its own base case. Before discounting is applied, costs and benefits should generally be adjusted for both optimism bias and inflation. Other adjustments may be needed in some cases e.g. for tax differences among options or for displacement. Guidance on most of the necessary adjustments is given in this section together with general principles of cost and benefit measurement. The adjustment for optimism bias is explained in STEP 6.
2.5.5   The relevant base case costs and benefits to government and society of all options should be valued, and the net benefits or costs calculated. The decision maker can then compare the results between options to help select the best. In this context, relevant costs and benefits are those that can be affected by the decision at hand. Although they will vary depending on the scope of the proposal, some general principles apply. It is useful early on in the appraisal process to consider widely what potential costs and benefits may be relevant.
2.5.6   Wider social and environmental costs and benefits for which there is no market price also need to be brought into any assessment. They will often be more difficult to assess but are often important and should not be ignored simply because they cannot easily be costed. Section 2.7 below provides more information on how to take into account the impacts of proposals that can not be expressed in money terms.
   

Principles of Cost Measurement
2.5.7   Costs should generally be valued on an opportunity cost (or economic cost) basis. The opportunity cost of using a resource is its value in its next best alternative use (i.e. its most valuable use other than as proposed in the project). In other words, the cost to the economy of using a resource in one investment is the benefit foregone by keeping it from use in the next best investment opportunity. An emphasis on opportunities foregone is central to the way of thinking that underpins all the costings in an economic appraisal.
2.5.8   It is important to explore what opportunities may exist. An example is to use land in a different, more valuable, way than in its current use. Another is the alternative use of an employee's time. Full time equivalent (FTE) costs should be used to estimate the costs of employees' time, which should include not only basic salaries but also accommodation, superannuation, employer's national insurance contributions, allowances, and other overheads as indicated in the latest HMT Fees and Charges Guide.
2.5.9   Current market prices should generally be used to measure opportunity costs, because they reflect what firms, households or other entities are willing to pay to draw resources into the next best alternative use. Households and firms generally know their own costs and preferences best and have strong incentives to respond to market signals by putting their resources to their best possible use.
2.5.10   It is important to cost all the public resources used in each option, not just those for which cash will change hands, or which fall to a particular Government Department or budget. Resources should be costed even if they are already owned by the public sector; they have an opportunity cost because they could be sold or put to another use.
2.5.11   Costs and benefits considered should normally be extended to cover the period of the useful lifetime of the assets encompassed by the options under consideration, although, if the appraisal concerns the contractual purchase of outputs and outcomes (e.g. in PFI), the appraisal period may be different.
2.5.12   It can be useful to distinguish between fixed, variable, semi-variable and step costs:
  • Fixed costs remain constant over wide ranges of activity for a specified time period (such as an office building);
  • Variable costs vary according to the volume of activity (external training costs, for example, varying with the number of trainees);
  • Semi-variable costs include both a fixed and variable component (maintenance is an example, where there is usually a set planned programme, and a responsive regime whose costs vary in proportion to activity, i.e. the number of call-outs); and,
  • Semi-fixed, or step costs, are fixed for a given level of activity but they eventually increase by a given amount at some critical point (e.g. after telephone call volumes reach a certain level, a new call centre may be required).
2.5.13   Categorising costs in this way can aid sensitivity analysis, but the categorisation should be used carefully. A cost that is fixed relative to one factor may change with another. More complex modelling may be required to describe how costs change over time and with different variables.
2.5.14   For substantial proposals, the relevant costs are likely to equate to the full economic cost of providing the associated goods and services, and for these proposals, the full economic cost should be calculated, net of any expected revenues, for each option. The full cost includes direct and indirect costs, and attributable overheads. The full cost of the base case for each option (i.e. the best estimate of its costs and benefits), as built up in this way, should also equal the total of the analysis of costs into their fixed, variable, semi-variable and stepped elements. A dual cost analysis of this kind enables opportunity costs to be fully considered, and sensitivity analysis to be conducted later on.
2.5.15   Appraisals leading to short-term or non-strategic decisions are likely to have a smaller set of relevant costs. The relevant costs are likely to be those that are marginal to the organisation's overall activity.
2.5.16   Cost estimation can be difficult, depending on the class of costs under consideration. It will normally involve input from accountants, economists and other specialists, depending on the type of appraisal. The appraiser needs to understand and communicate clearly the scope of the appraisal to ensure that specialists provide relevant cost information, whilst ensuring that opportunities have been thoroughly explored.
2.5.17   Depreciation and capital charges should not be included in an appraisal of whether or not to purchase the asset that would give rise to them (although for resource budgeting purposes they may be important). Depreciation is an accounting device used to spread the expenditure on a capital asset over its lifetime. Capital charges reflect the opportunity cost of funds tied up in capital assets, once those assets have been purchased. They are used to help test the value for money of retaining an asset. However, they should not be included in the analysis of economic costs and benefits informing the decision whether or not to purchase the asset in the first place.
2.5.18   Even where an appraisal covers the full expected period of use of an asset, the asset may still have some residual value, in an alternative use within an organisation, in a second-hand market, or as scrap. These values should be included, and tested for sensitivity, as it may be difficult to estimate the future residual value at the present time.
2.5.19   Base case costs and benefits should reflect opportunity cost values. Affordability analysis should be conducted separately. Cash flows are important for this purpose. Proposals are also likely to require resource budgets, so that it is clear how they will be funded, and, ex post, accounted for. However, cash flows and resource budgets do not reflect opportunity costs. See Step 9 for further details on appraisal of affordability.
2.5.20   Public spending should be cost-effective, that is, the ratio of outputs to costs should be satisfactory in relation to experience of similar cases. Judgement of this is aided by comparing the ratios for the proposal in view with those for other similar cases e.g. cost per job, cost per m2 of floor space, cost per trainee place, cost per dwelling. If unit costs appear too high, the costings may need to be reviewed, or the proposal re-designed or rejected.
2.5.21   Assessment of cost-effectiveness is an important element in appraisals concerning assistance to the private, voluntary and community sectors and is explained in more detailed in section 4.4 below.
2.5.22   Expenditures that have already been incurred on goods and services, or resources that are already irrevocably committed, should be ignored in an appraisal. They are "sunk costs". What matters are costs about which decisions can still be made. However, the latter includes the opportunity costs of continuing to tie up resources that have already been purchased. For example, assets such as land, buildings, machinery or vehicles that are already owned have an opportunity cost, because, if the project were not to proceed, these assets could be sold or put to an alternative use. Current market values of such assets should therefore be included as opportunity costs when appraising any option that will make use of them.
   

Total Versus Incremental Costing
2.5.23   Costs and benefits should be measured by reference to a common baseline, to enable fair comparison of options. There are two aims in view here: to clarify the differences between the options; and to ensure that all the resources used in the project are accounted for. The approach that addresses both of these aims best is to include the total resource consequences of all options, including the 'status quo' baseline option. DFP generally requires this approach to be adopted.
2.5.24   However, the project boundary should be sensibly defined. For example, if a new management information system is to be introduced to a Department, then, in regard to staff costs, it should be sufficient to cost only the staff time directly affected by the new system, not the cost of all the Department's staff. Large blocks of cost that are common to all options do not need to be appraised in detail, although they should generally be indicated.
2.5.25   An alternative incremental approach is to set the baseline for cost/benefit measurement equal to those of current provision or a do minimum, so that only the costs and benefits over and above this are included for the alternative options. This incremental resource approach is less informative than the total resource method, provides poorer accountability by distracting attention from the totality of the resources devoted to a proposal, and can pose problems for post implementation evaluation. For these reasons, the total cost approach is generally required.
2.5.26   However, if estimating the total resource consequences of options proves difficult, for example, because of serious data limitations, some flexibility may be needed; and the relevant Departmental economist should be consulted to help determine the most suitable modified approach.
2.5.27   In such cases, where DFP approval is required, DFP's agreement to the use of the proposed modified approach should be sought via the appropriate Supply Officer.
   

Treatment of Taxes and Subsidies
2.5.28   Goods and services procured by government should generally be costed gross of tax and subsidies. The ideal would be to assess all options net of tax and subsidies, but this is not generally straightforward and in most cases the costs of options can be compared gross of tax and subsidies without biasing the appraisal. In practice it is rarely worthwhile to adjust market prices for taxes or subsidies.
2.5.29   However, in some circumstances it will be appropriate to consider adjusting for taxes and subsidies For instance, adjustment may be necessary where land is subsidised - see 2.5.37 and 2.5.51 below. The need to make adjustment arises primarily where the tax structures of options differ very substantially in nature, such that failure to allow for differing tax treatment could distort the choice of best option.
2.5.30   This is particularly relevant when appraising proposals under the Private Finance Initiative (PFI), because the contractor is subject to a different tax treatment than a public provider. Departments should follow the detailed HM Treasury guidance on the required adjustments in PFI cases (see 5.12 below).
2.5.31   It is important to adjust for any tax differences between options arising from different contractual arrangements, such as in-house supply versus buying-in, or lease versus purchase. For example, when considering contracting out a service that was previously provided in-house, at least a part of the tax payable by the contractors and their funders would not have been paid under a "do minimum" option of continued in-house provision.
2.5.32   Adjustment for indirect taxes such as VAT is not generally required. It is appropriate only where the adjustment may make a material difference, and this is a matter for case by case judgement. However, adjustment is required where options attract different VAT conventions e.g. new build versus refurbishment. Such options should usually be compared as if either the same VAT payments or none were made in all options.
2.5.33   Where a decision is taken to exclude VAT or any other tax or subsidy from an appraisal, this fact should be noted in the appraisal report. In such cases, the excluded tax or subsidy should be accounted for in any separate financial or PE appraisal.
   

Treatment of Transfer Payments
2.5.34   A transfer payment is one for which no good or service is obtained in return. Social security payments are an example. They may change the distribution of income but they do not of themselves represent direct economic costs, except for any associated costs of administration or compliance. Transfer payments should be excluded from the costs and benefits in an appraisal, but recorded separately and taken into account in analysis of PE or exchequer costs.
    Estimating the Value of Benefits
2.5.35   The purpose of valuing benefits is to consider whether an option's benefits are worth its costs, and to allow alternative options to be systematically compared in terms of their net benefits or net costs. The general rule is that benefits should be valued unless it is clearly not practicable to do so. Even if it is not feasible or practicable to value all the benefits of a proposal, it is important to consider valuing the differences between options.
2.5.36   In principle, appraisals should take account of all benefits to the UK. This means that as well as taking into account the direct effects of interventions, the wider effects on other areas of the economy should also be considered. These effects should be analysed carefully as there may be associated indirect costs, such as environmental costs, which would also need to be included in an appraisal. In all cases, these wider effects should be clearly described and considered.
2.5.37   Real or estimated market prices provide the first point of reference for the value of benefits. There are a few exceptions where valuing at market prices is not suitable. If the market is dominated by monopoly suppliers, or is significantly distorted by taxes or subsidies, prices will not reflect the opportunity costs and adjustments may be required and specialist economic advice will be needed. An example of this is the effect of EU subsidies on the market for agricultural land.
2.5.38   The results of previous studies may sometimes be used to estimate the economic value of changes stemming from current programmes or policies. There will be increasing scope for using this 'benefit transfer' method as databases expand, though care must be taken to allow for different circumstances. The characteristics of the consumers or client group for which data exist may differ from those of the proposal under consideration. These factors can limit the extent to which values can be transferred or generalised.
2.5.39   In the absence of an existing robust (i.e. reliable and accurate) monetary valuation of an impact, a decision must be made whether to commission a study, and if so how much resource to devote to the exercise. Annex 2 of the Green Book sets out the key considerations that may govern a decision to commission research.
2.5.40   Where it is concluded that a research project to determine valuations is not appropriate, a central estimate, together with a maximum and minimum plausible valuation, should be included if possible. These figures should be included in sensitivity analyses to give assurance that benefit valuation is not critical to the decision to be made. A plausible estimate of the value of a benefit or cost can often be drawn out by considering a range of issues which are summarised in Annex 2 of the Green Book.
2.5.41   Most appraisals will identify some costs and benefits for which there is no readily available market data. In these cases, a range of techniques can be applied to elicit values, even though they may in some cases be subjective. There will be some impacts, such as environmental, social or health impacts, which have no market price, but are still important enough to value separately. Annex 2 of the Green Book describes the relevant techniques, and provides further information on how they are being applied in practice.
2.5.42   Costs and benefits that have not been valued should also be appraised; they should not be ignored simply because they cannot easily be valued. All costs and benefits must therefore be clearly described in an appraisal, and should be quantified where this is possible and meaningful. Guidance on the appraisal of non-monetary cost and benefits is given at section 2.7 below.
   

Cost Savings, Efficiency Improvements and Redundancies
2.5.43   Cost savings and efficiency savings or improvements may be claimed as part of the justification for projects. In such cases, the appraisal report should make it clear whether the projected cost savings are intended to result in financial savings or in re-deployment of resources. Details of the expected financial savings or planned re-deployment should be given. This is particularly important where staff savings are projected. Specific points to note about cost savings include:
  1. When total costs are used for all options including the baseline option (as is generally required by DFP), cost savings are automatically accounted for in the differences in cost between the baseline option and the alternative options. In these circumstances it is incorrect to include cost savings on the benefit side of the calculations as this would be double counting.
  2. Where staff reductions are projected, a detailed analysis of them should be included separately. This should show the numbers and organisation of staff by grade prior to implementation (which should generally be the same as that assumed at the commencement of the baseline option); and how the numbers and organisation of staff by grade are expected to change year by year over the term of the appraisal under the preferred option.
  3. Where it is assumed that staff time savings will be taken up by extra output, or reallocation to other duties, justification must be provided and DFP will reserve the right to challenge the need for it.
  4. Redundancy payments should generally be treated as transfer payments. Details of any redundancy proposals should be explained fully in the appraisal report, including their financial implications. In some cases they may give rise to local economic and social difficulties, in which event their impact should be assessed. Such impacts may be significant where the numbers of redundancies are relatively large and where unemployed workers with characteristics similar to those being made redundant are taking longer than average to find jobs or are becoming inactive.
   

Adjusting for Displacement
2.5.44   Consideration should be given to Displacement. This is the degree to which a promoted activity will be offset by reductions in activity elsewhere. It is important to assess this because appraisal is about identifying a proposal's net impact on the UK. Displacement occurs when a grant-assisted business expansion takes business away from competitors in the same market. It also occurs where a service development in one region (e.g. of health, education, or transport services) will draw customers away from similar service provision in an adjacent region.
2.5.45   Where Displacement can be quantified in money terms, the cost/benefit streams should be adjusted to reflect the proposal's net impact. This is more likely to be the case for a business expansion than a service development. In any case, the nature and extent of anticipated Displacement should be identified and reported fully in appraisal reports. Where significant potential Displacement is foreseen, it may be appropriate to reconsider the nature or scale of the proposed service development or to refuse financial assistance. Fuller guidance on assessing displacement is given at 4.2.7 below
   

Multiplier Effects
2.5.46   In most appraisals it is sufficient to cost direct or 'first round' expenditure and employment effects. Multiplier or 'second round' effects should normally be excluded on the grounds that the alternative uses to which the resources would otherwise be put would also generate multiplier effects; and differences in such effects are often difficult to distinguish with confidence or without disproportionate effort. Also, to include them in some appraisals but not in others would distort project comparisons.
2.5.47   However, in a minority of appraisals, for example, those concerned to regenerate specific sub-regions, there may be justification for calculation of multiplier effects in order to estimate the full impact of a particular proposal. Thus, there is flexibility to calculate multiplier effects in cases where they are of special interest.
   

Appraisal of Land, Buildings and other Assets
2.5.48   The employment of assets including land and buildings should be costed using opportunity cost values. The valuation of property should be based on the higher of the most valuable feasible alternative use, or the best value that could be obtained for its current use.
2.5.49   Determining the right values requires expert advice. The District Valuer in the Land and Property Services (LPS) should be consulted on all property valuation matters relating to appraisals. This applies to all public sector appraisals, including those involving private sector consultants. DFP regards the views of LPS as authoritative, and recommends that Departments should use their services. Details of the services provided by LPS are included at 12.4.4 below.
2.5.50   The LPS can provide assessments of the values of land and buildings in their existing and most valuable alternative use. Where Departments require advice on the market valuation of assets, other than standing timber, a request should be made to the LPS. In circumstances where the LPS is unable to meet the request within the required timescale, advice may be sought from other suitably qualified and experienced valuation surveyors, for instance, members of the Royal Institution of Chartered Surveyors or the Institute of Revenues, Rating and Values. Where there is any dispute over individual values, DFP will rely on the views of LPS, rather than those of any other property experts.
2.5.51   In many cases, an up-to-date market value should provide a satisfactory measure of opportunity cost. However, valuations based on market prices reflect private rather than social costs and benefits, hence they will not always reflect opportunity costs. For example, they may not take full account of the actual or potential amenity value or environmental impact of a particular land use; or where the current use of land is subsidised, market prices may need adjustment to reflect the impact of the subsidy; or where the market value of a site is enhanced by planning permission the property should be valued to reflect the actual planning approval.
2.5.52   Assessing the value of buildings in their most profitable use is fairly straightforward where the building can be readily adapted to different users requirements, such as standard office accommodation. However many public sector buildings, such as prisons and hospitals, may not be readily adaptable to other purposes. In the absence of an alternative use for the buildings, the higher of the value of the site for redevelopment, and a valuation in current use of the site plus buildings, should be used. The latter can be estimated in terms of depreciated replacement cost (DRC).
2.5.53   DRC value may represent what the land and buildings are worth to the occupier, but a DRC approach is normally only used where no market exists for a property for its existing use. It would not be unusual for the alternative use value, which represents market value, to be much less than DRC value. The DRC value should not be used to represent the expected proceeds of any sale/disposal. It is unlikely that the market would pay as much as the DRC value.
2.5.54   Land and buildings should generally be costed in terms of either capital values or annual rents. It is normally appropriate to use capital values in appraising freehold property, properties with development value, and longer leasehold interests. In other cases it is usually appropriate to use annual rentals. Actual rent paid on leasehold property (the passing rent) will often differ from the market rent. It is the market rent that should be used in appraisal. Common errors in appraisal are either to omit the rental or capital value of land and buildings already owned, or to double count the cost by including both the capital cost and rental value.
2.5.55   Capital values of land, buildings and other assets should be attributed as costs at the beginning of any period in which they are employed by an option. Property should be costed whether or not any financial transaction is anticipated. For instance, it should be costed whether or not it is already owned or needs to be purchased. In new build cases, the cost of construction should be included. Costs of refurbishment should be included in the years in which they are expected to occur.
2.5.56   Where assets have a residual life, their residual values should be included as benefits in the year in which they are released by an option, or the last year of the appraisal period, whichever is sooner. Any enhancement of the value of a building during its life, for instance, due to refurbishment should be taken into account in estimating its residual value. Residual values should be attributed whether or not the property is to be sold or retained.
2.5.57   Double counting of the cost difference between options should be avoided. It is generally sufficient to cost in the alternative option(s) the sites actually employed in those options. For example,
  • suppose there is an option to use a site already in ownership worth £5,000 ("Option 1") and an alternative option to acquire and use another site worth £8,000 ("Option 2").
  • The difference in cost between these options is adequately reflected by including a cost of £5,000 in Option 1 and a cost of £8,000 in Option 2.
  • It would be incorrect to add a benefit of £5,000 to Option 2 to reflect the sale or release of the owned site.
  • That would give the misleading impression that Option 2 is less costly than Option 1 by £2,000; whereas it is more costly by £3,000.
2.5.58   Deciding the correct treatment of opportunity costs can be less straightforward than in the above example. For instance,
  • suppose there is another alternative ("Option 3") that involves employing the £5000 site for the first two years and then moving the function to a new £8000 site.
  • In this case, £5000 should be included as an opportunity cost at the start of the appraisal period;
  • a residual value for the same site should be included as a benefit in Year 2;
  • an opportunity cost of £8000 should also be included in Year 2; and
  • a residual value for new site should be included at the end of the appraisal period.
2.5.59   In some cases it may be helpful to separate the value of the land from the buildings. This is because buildings usually depreciate in real terms over their lifetime but site values may appreciate or depreciate. For instance, site depreciation may be attributable to, for example, contamination, mineral workings, or poor ground conditions.
2.5.60   Appraisals should include any land price appreciation as a consequence of the project or programme. This may occur with appraisals of urban regeneration projects, or of flood protection. In such cases great care is needed, as the appreciation itself is likely to be most uncertain. Expert advice is required.
2.5.61   Costs to the public sector as a whole must be taken into account in the appraisal calculation. This will be important in the case of jointly occupied buildings where there might be difficulties in finding a replacement tenant if one occupier were to quit, so imposing additional costs on the major occupier.
2.5.62   Allowance should be made for an appropriate level of ongoing maintenance costs. If maintenance is not carried out to an appropriate standard this will be reflected in the increased costs of refurbishment, or reduced sale price of a freehold property, while in the case of leasehold property dilapidations payments will be incurred at the termination of the lease.
2.5.63   Costs of providing temporary accommodation and other costs of decanting staff should be included in appraisals.
2.5.64   When a building requires refurbishment, the relative merits of refurbishment, and alternative options such as redevelopment, relocation and disposal should be appraised.
2.5.65   Where possible, appraisals should include both freehold and leasehold options to test both for value for money.
2.5.66   The time period for appraisal should relate to the life of the services being provided and be sufficiently distant to cover all the important cost and benefit differences between options. The appropriate period may be shorter than the physical life of the buildings, or longer than the period for which they are leased. A time period of about 25 years is typically used, with suitable allowance for refurbishment costs and residual values. However, there is flexibility to tailor the time period to suit the circumstances of the case in hand.
2.5.67   Property issues are important in appraisals concerning options for accommodation of civil servants. Procedures for undertaking accommodation appraisals are set out in section 7 of the NI Practical Guide.
2.5.68   Annex 3 of the Green Book contains more detailed guidance on the treatment of land and buildings in appraisal. However, the issues can be complex and the Land and Property Services (LPS) of the Department of Finance and Personnel should be consulted where there is any doubt about the correct treatment.
   

The Acquisition and Disposal of Assets
2.5.69   Departments have a duty to dispose of property surplus to requirements within three years and should not hold land speculatively. Departments should seek the advice of the LPS when considering disposal of surplus property.
2.5.70   Projects should not use more land than is cost effective. Available plots of land for new developments may not precisely match requirements, but where a plot exceeds requirements the surplus should be disposed of as soon as possible.
2.5.71   Decisions involving the acquisition or disposal of assets require the application of appraisal with proportionate effort, including, for example, examination of different options and their associated costs and benefits.
2.5.72   The use of appraisal is intended to ensure that Government acquires an asset only where the resulting benefits are greater than or equal to the cost of the asset including any revenue costs. Similarly Government when considering the disposal of an asset should ensure that the options open to it have been subject to appraisal.
2.5.73   The market valuation of the asset will be one of the information requirements of an appraisal involving acquisition/disposal of assets. In rare cases the market value of assets may differ from the economic or resource cost values that should be used in an appraisal. For example the market price of agricultural land may reflect the value of agricultural subsidies in addition to resource costs, and may need to be adjusted downwards accordingly. In such cases it is advisable to seek expert advice in order to make the necessary adjustments.
2.5.74   Disposal of property, the sale of freehold property, or the assignment or subletting of leasehold property, will generally involve significant costs, e.g. legal fees, marketing costs and removal costs. In a depressed market the timing of disposal must be appraised. LPS can advise on this. Timing will be critical where there is excess supply in the market for the particular type of accommodation, or where the property is 'over rented'. In such cases it might be possible to dispose of a lease by paying a reverse premium, which will be at least equal to the present value of the difference between the passing rent and the market rent until the market improves or the termination of the lease.
2.5.75   Strenuous efforts should be made to dispose of surplus property; but in poor markets it may be necessary to include in an appraisal the costs of holding the property until disposal, or to cover such initiatives as refurbishment to enhance marketability.
2.5.76   The service provided by the LPS is intended to provide Departments with assessments of the open market values of assets in order to ensure that Government obtains the highest possible price for an asset which it decides to sell and pays no more than a reasonable market value for an asset which it decides to purchase. Apart from exceptional circumstances, and then only with the prior approval of DFP, Departments should not:-
  1. propose to acquire assets at a price in excess of open market value notwithstanding the appraisal results;
  2. consider disposal restricted to open market value where the appraisal indicates a higher continuing operational use value to Government.
2.5.77   Under the 1994 "Efficiency Scrutiny into the Management and Disposal of Government owned Property", Departments, together with the LPS's Central Advisory Unit (CAU), are now charged with adopting a more active strategy towards disposals. Through the introduction of formal property audits, Departments in future will be required to justify the retention of all property assets.
2.5.78   Departments should note that the requirement to undertake an appraisal embraces cases that fall within the terms of DAO(DFP)12/05 and the associated CAU guide "Disposal of Surplus Land and Buildings by Public Sector Bodies". Use of appraisal in these circumstances will serve to highlight the costs which would be incurred by Government should the market price prove to be inadequate to fully compensate for net benefits foregone. The amount and depth of analysis required however will of course vary from case to case and will, among other things, depend on the size of the asset to be disposed of.


Checklist of Typical Capital and Revenue Costs and Benefits

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