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 total NI public funds (including EU funds) involved over the 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.
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 State aid is an important consideration. State aid refers to forms of public assistance that have the potential to distort competition and affect trade between member states of the European Union. Where proposals to provide financial or non-financial assistance to an undertaking have potential State aid implications, these must be considered at the earliest stage of business case development. For more details, see sub-section 4.8 on State aid below or visit the DfE State aid website.
4.1.6 Where a proposal involves more than one source of NI public funds (including EU funds), the relevant funding bodies can avoid duplication of effort by co-operating to produce a single appraisal. As a rule of thumb, the funding bodies should supply resources to the appraisal broadly in proportion to their proposed shares in the funding. It is often 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 appaisals, cooperation between funding bodies is also likely to be beneficial.
4.1.7 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." Further, it is an established principle that there must be at least £1 of private sector investment for every £1 of Government assistance. (Twenty-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).
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 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.
4.1.8 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.
4.1.9 It is generally appropriate for funding bodies to subject applications for assistance to preliminary screening. In its simplest form, this involves a 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.
4.1.10 Where preliminary screening indicates that a 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.
4.1.11 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.
Business case documentation
4.1.12 All proposals involving financial assistance should be supported by an independent assessment document which addresses the issues covered in section 4 of NIGEAE. This document should confirm that proposals are economically efficient, viable, additional and cost-effective, and should cover affordability and appropriate arrangements for management, monitoring, evaluation and benefits realisation. When submitting cases for approval, Departments should confirm that the proposals offer value for money and are affordable.
4.1.13 Proportionate and appropriate effort should be applied in all cases. Large expenditures may require substantial business case documents including thorough economic appraisals. Smaller expenditures are likely to require more modest documents such as pro formas or checklists. (See Use of Forms and Checklists below).
4.1.14 Note that the guidance on SOCs, OBCs and FBCs in section 8 of NIGEAE is designed primarily for procurement projects and does not generally suit assistance to the private, voluntary and community sectors.
4.1.15 DoF does not generally require a separate free-standing business case document in financial assistance cases. A perceived need to have free-standing business cases may have caused excessive duplication in the past, but DoF accepts that there is generally no such need. For example, for some programmes, acceptable business case documentation may comprise an application form, a business plan and a brief pro forma or checklist recording independent assessment of the applicant’s proposals. These documents together can constitute the business case.
4.1.16 Minimal information is required on background and strategic context. Many business cases have contained excessive background material on relevant policies, strategies and so on. Sometimes DoF has seen cases with 20 or more pages of such material. This is an unnecessary waste of time and resources. DoF guidance was altered in 2013 to state that business cases should not generally contain more than 2 pages of this type of information. In financial assistance cases, all that is generally required is a very brief reference to the relevant programme under which the assistance is sought.
4.1.17 Duplication of effort and documentation is unhelpful and should be avoided. It is not necessary to repeat all the material provided in applicants’ application forms or business plans in a separate business case document. While the funding body should complete a separate form, checklist or other document to record independent assessment, duplication is discouraged. For example, if an applicant has made a case for the need for its project, the funding body should not generally need to reproduce it; it may be sufficient to record that the applicant’s need assessment has been considered and that it is accepted or rejected.
4.1.18 Thus economical use of documentation is generally recommended for financial assistance programmes. However, it is recognised that there may be some types of projects or individual cases for which Departments will require a more substantial business case document to be developed, such as, for example, particularly large or difficult cases.
4.1.19 The appraisal of financial assistance cases should be facilitated by designing application forms so that they provide as much as possible of the information that funding bodies need to appraise them. This can help reduce subsequent documentation requirements substantially.
4.1.20 As noted above, financial assistance cases do not necessarily require lengthy or free-standing business cases. Forms (or ‘pro formas’) and checklists will be adequate in many cases.
4.1.21 The recommended approach in most financial assistance cases is for funding bodies to supplement information provided by applicants with brief forms or checklists recording independent assessment. Pro formas and checklists should be designed to address the issues in this section of NIGEAE, specifically economic efficiency, additionality, displacement, viability and cost-effectiveness. They should also allow for appropriate consideration of affordability, and arrangements for management, monitoring, evaluation and benefits realisation.
4.1.22 It is normally the funding bodies who should be doing the appraising using appraisal pro formas and checklists. Applicants may complete application forms, but they should not be expected to appraise their own proposals critically. Appraisals in forms, checklists and (where required) business cases must reflect an independent and unbiased view of proposals.
4.1.23 Departments should be satisfied that the relevant application forms, pro formas and checklists in use for each particular programme contain 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.
4.1.24 As emphasised above, while funding bodies are encouraged to use pro formas or checklists to record independent assessment of applications, they need not duplicate material contained in applicants’ documents such as application forms or business plans. The focus of the independent assessment document should be to add value by recording assessment according to NIGEAE appraisal criteria, not by regurgitating applicants’ information.
Funding of consultants
4.1.25 DoF does not recommend extensive use of external consultants to complete business cases for financial assistance cases. In-house appraisal should be sufficient for most cases, using suitable pro forma documentation or checklist-style documents. Departments should seek to reduce reliance on external consultants by this means.
4.1.26 There may be some cases where it is necessary to employ external consultants to assist with appraisals, for instance in large or complex cases. However, this should only be considered when it offers VFM and following the approval of an external consultancy business case in accordance with FD(DFP)07/12 and its associated guidance; and FD(DFP)13/12 in the case of relatively large scale, complex or innovative assignments.
4.1.27 The use of external consultants does not guarantee good quality business cases. It can result in many exchanges between funding bodies and other stakeholders before projects are accepted and approved. This may raise questions such as whether consultants are being given adequate terms of reference, whether they are being managed effectively, and in some instances whether they are capable of delivering satisfactory business cases. Departments should consider the scope to improve processes by providing better terms of reference, by managing consultancy assignments more effectively and by not re-employing consultants who have performed badly.
4.1.28 Critical to success is ensuring that consultants are given effective terms of reference (ToR). The ToR should be specific and detailed. For example, it is not generally sufficient to ask consultants to 'conduct a Green Book appraisal' for a proposal. This is too broad, allowing consultants too much scope for interpretation and excessive effort. The specific requirements for each key element of the business case should be spelt out in detail to suit the case in hand and minimise effort and cost.
4.1.29 For instance, depending upon the case in view, the ToR may stipulate that a maximum of 2 pages is devoted to background/strategic context; that alternative options should not be considered; that non-monetary factors should just be listed and described; that duplication of applicants’ information should be avoided; that reports should be no more than a certain length; and so on.
4.1.30 Different stipulations may be included for the minority of larger/complex cases where Departments require formal option appraisal. The key point is that the ToR for assignments should be carefully designed to suit the cases in view and avoid excessive effort. Departmental economists can assist with the design of suitable ToR.
4.1.31 At one time, Departments provided funding to project promoters to employ consultants to undertake appraisals. It has long been recognised that a more independent appraisal will be obtained if the funders rather than the promoters 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.
Continuation funding of the voluntary sector
4.1.32 Bodies operating in the voluntary sector often receive financial assistance for a specified time period. They will sometimes seek renewed funding for a further period, and in the case of well established organisations, this process may be repeated several times over. This is commonly known as ‘continuation funding’.
4.1.33 It is good practice to make continuation funding conditional upon a satisfactory independent evaluation of the activities undertaken during the previous funding period, in addition to a fresh forward-looking appraisal covering the term for which continuation funding is sought.
4.1.34 The term for the continuation funding will depend upon the individual circumstances of the project. A term of 3 years is typical for established projects that are expected to have a continuing useful life, but shorter or longer time periods may be more suitable in particular cases. Where DoF approval is required, the appropriate time period should be agreed with the relevant DoF Supply Division.
4.1.35 Each fresh application for funding should be considered to be a wholly new project and treated accordingly for purposes of appraisal, evaluation and delegated limits.
4.1.36 Accordingly, expenditure from previous funding periods should not be counted as a cost in any appraisal of future funding, nor should it be counted when deciding whether the continuation project exceeds a delegated limit. However, it should be considered when evaluating the success of the project in the previous funding period.
Ex post evaluation and benefits management/realisation
4.1.37 Evaluation involves ex post examination of outturns to ensure that lessons are learned and fed back into the decision-making process. Departments should generally have arrangements in place to measure outturns, compare them with initial estimates and use the results to consider how to improve the quality of assumptions in future appraisals, including, for example, estimates of costs, benefits and risks. All programmes, including those involving financial assistance, should be evaluated.
4.1.38 However, there is room for flexibility over details of how evaluation is carried out and excessive effort should be avoided. It is good practice to record outturns for all financial assistance cases, but evaluation may in some cases be focused at programme level without conducting detailed evaluations of individual projects. Substantial free-standing evaluation reports should only be required for the largest projects. NIGEAE indicates that where a programme consists of a large number of small scale projects or activities, it may be appropriate to select only a representative sample of them for detailed evaluation. This may apply to a number of financial assistance programmes.
4.1.39 Benefits management and realisation are generally important, since delivery of benefits is crucial to the success of any project. Programme managers should actively seek to ensure that financially-assisted projects are implemented and actually deliver the benefits claimed for them.
4.1.40 Again, there is room for flexibility over details and excessive effort should be avoided. Departments should note the availability of a simplified ‘Benefit Profile for Small Projects’ template, which can enable all the benefits of a project to be profiled on a single sheet. This is located at the Successful Delivery NI templates page. For large projects, the standard ‘Benefit Profile’ template (available at the same page) should continue to be used for each individual benefit claimed.
The scope of the appraisal
4.1.41 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.
4.1.42 Appraisals of financial assistance to the private, voluntary and community sectors should assess VFM primarily from a broad NI perspective, like appraisals in general. Any significant impacts elsewhere in the UK should also be weighed into the investment decision. The appraisals should generally seek to ensure that four criteria are satisfied. These are:
- Economic Efficiency;
- Cost-Effectiveness; and
The meaning of these criteria, and how to assess them, is explained below.
4.2.1 Every proposal to provide assistance to the private, voluntary or community sectors should be appraised, with appropriate and proportionate effort, to determine whether it is ‘economically efficient’. A project is economically efficient if it offers net benefits to the NI economy. The economic efficiency criterion is satisfied by demonstrating that the benefits to NI from the proposal exceed the costs, taking account of all the costs and benefits arising, both quantified and unquantified. As indicated above, any significant impacts elsewhere in the UK should also be considered.
4.2.2 Economic efficiency is tested by applying appraisal principles similar to those indicated in the Basic Steps table above. For example, there should generally be assessment of project need, objectives, costs, benefits, risks and funding.
4.2.3 When appraising mainstream departmental expenditure, consideration of alternative options is regarded as vital to identify best VFM solutions. However, in many financial assistance cases DoF accepts that there should be much less focus on identification and appraisal of alternative options and more emphasis on assessing the proposal put forward by the applicant. However, in many financial assistance cases there is less focus on identification and appraisal of alternative options.
4.2.4 Note therefore that DoF does not generally require formal consideration of alternative options in cases involving grant applications. In most cases it is sufficient to base assessments on the proposal put forward by the applicant. There may sometimes be room for negotiating with applicants over the details of their proposal, but that does not require formal assessment of alternatives.
4.2.5 It is generally good practice to consider the counterfactual position, that is, what the outcome will be in the absence of financial assistance. It is usually adequate to consider it by direct assessment of the additionality of the applicant’s proposal and its potential to displace existing provision. In some cases Departments may require formal appraisal of a counterfactual or “do nothing” option. For instance, this can help to reveal whether additionality is full or partial, and hence determine more precisely the benefits attributable to the financial assistance. However, DoF does not generally require formal assessment of the counterfactual as a separate option.
4.2.6 Efforts should not be wasted generating options for the sake of it. For instance, there is no need for slavish consideration of increases or decreases in the scale of the applicant’s proposals. However, there should remain discretion to examine options in particular cases where it is considered appropriate to do so, for example some large or complex projects. Departments must decide for themselves when it is appropriate to do this. Note also that any procurement projects must comply with the general requirements for such projects.
4.2.7 Costs and benefits should generally be considered only for a single option, based on the applicant’s proposal, except in those specific cases where Departments consider it appropriate to examine a range of options. The capital and resource costs should be identified year by year in much the same way as for any project. It can also generally be useful to calculate the net present cost (NPC) to provide a summary indicator of total project costs. However, there is room for flexibility over this. For instance, calculation of NPCs will not be regarded as necessary for small projects or any that have no significant recurring costs over time.
4.2.8 It should normally be sufficient to list and describe non-monetary costs and benefits. It may also be helpful to quantify them in suitable non-monetary units where it is convenient and cost-effective to do so. However, use of more sophisticated analyses such as detailed impact statements or weighted scoring should only be considered for those larger or more difficult cases where several alternative options need to be examined.
4.2.9 Assistance is provided in various contexts and for numerous different reasons, for instance in pursuit of economic, social or environmental objectives. Thus the appraisal requirements can vary significantly from area to area, and the precise approach often needs to be tailored to suit the type of spending under consideration.
4.2.10 For example, DfE has specific methods for assessing assistance to industry, tourism and research and development. Likewise, DAERA has specific guidance on appraising assistance to the agricultural industry and other Departments have their own guidance suited to the types of assistance they offer.
4.2.11 For details of the methods used in particular programmes of assistance, the relevant Departmental economists should be consulted.
4.2.12 Displacement should be taken into account in economic appraisals for all types of financial assistance. Displacement is the degree to which an activity promoted by government policy is offset by reductions in activity elsewhere. Displacement reduces economic efficiency. A modest degree of displacement may be acceptable, but more substantial displacement may constitute grounds to refuse an application for assistance.
4.2.13 For instance, this may be the case where a proposal appears likely to succeed largely by diverting business from other 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. The assessment should focus on displacement within NI, but if there are likely to be important displacement effects elsewhere in the UK, these should also be identified and appraised.
4.2.14 Displacement may occur in the product, service or factor markets in which the applicant operates. For example, in a product or 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 Northern Ireland? (They may be other firms producing similar products, or other voluntary groups or community 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?
- Are there likely to be any important displacement effects elsewhere in the UK?
4.2.15 Displacement may also occur in the labour market. For example, an applicant's proposal may displace significant labour from other employers in 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.
4.2.16 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.
4.2.17 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 suppliers;
- the newer and more efficient the capacity that will be displaced.
4.2.18 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, the benefit stream in the relevant NPV calculation 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 both with and without adjustment for displacement in such cases.
4.2.19 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.
4.2.20 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.
Competition effect of subsidies
4.2.21 In December 2006 the Office for Fair Trading published specific Guidance on how to Assess the Competition Effects of Subsidies. This guidance focuses on assessing the impact of displacement in cases where the government provides support, in the form of a subsidy, to firms engaged in the production of goods and services. A subsidy is defined in the OFT guidance as a “grant, soft-loan, loan guarantee, tax break or benefit in kind, granted through government resources that affects the costs of at least one recipient undertaking”.
4.2.22 This guidance, which applies to subsidies of more than £500k to a firm with greater than 5-10% of the affected market, sets out a number of steps which must be undertaken to fully assess the likely impact of subsidies.
4.2.23 Should the results of this analysis indicate that the subsidy is likely to affect the competitiveness within markets these impacts must be included in the economic appraisal. Combining the results of the competition assessment into the economic appraisal will allow one of four conclusions to be reached;
- the subsidy is unlikely to distort competition significantly and the competition effects have no influence on the decision to proceed;
- the subsidy is likely to give rise to significant distortions but can be redesigned to reduce these. The redesigned subsidy would proceed if it is likely to give rise to benefits which exceed the costs;
- the subsidy is likely to give rise to significant distortions that cannot be reduced further. However the benefits of the subsidy outweigh its costs and therefore the subsidy is justified; or
- the subsidy is likely to give rise to distortion to competition that outweigh the likely benefits and therefore the subsidy is not justified.
4.2.24 The following specific issues should be addressed in the appraisal and evaluation of regeneration projects:
- The Rationale. This needs to make clear:
- 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:
- 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.
4.2.25 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.
4.2.26 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 can be important to assess displacement effects at both the local and regional levels, particularly if the programme or project is substantial.
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. All public sources of financial assistance to the project should be taken into account when assessing its additionality.
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 another NI 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 satisfied. The Northern Ireland Audit Office, in its 22nd February 1993 report (No. 418) on IDB selective financial assistance criteria, recommended specific recording of the assessment of additionality, addressing points similar to those listed here. This is good practice for all forms of public sector financial assistance.
Accordingly, 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.
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 (i.e. the denominator) should generally include all sources of NI public funding (including e.g. EU and IFI 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).
- the effectiveness element (i.e. the numerator) should include the number of outputs 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.
4.5.1 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;
- 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 or environmental rather than economic aims, the viability criterion applies less strictly, to the extent that such projects need not be expected to achieve overall financial profitability. However:
- any commercial elements of social or environmental 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 Where a project depends on the cooperation of several partners, it is important to ensure that they are all committed to it. The strength of the commitment of all partners, including any relevant third parties, should be fully tested before funding is approved.
4.5.6 One means of helping to ensure commitment is the use of a Memorandum of Understanding (MOU) to record formal agreement between the relevant parties. Departments should consider using a MOU in cases that depend on the cooperation of several parties.
4.5.7 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.
4.5.8 Applications for grant assistance should generally be supported by a business plan in addition to an economic appraisal, covering the following key elements:
The key management personnel, their roles, their relevant experience and qualifications, and the proposed organisational structure should be identified and explained fully.
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. All financial assumptions should be stated.
A financial NPV should be calculated and viability should be assessed by refernce to the commercial returns achieved by comparable businesses facing a similar level of risk. Currently the normal range of rates is 5-10 per cent but rates as high as 15 per cent may be appropriate for the very highest risk businesses.
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.
The current and projected market for the planned productsor services should be assessed. Specific planned marketing activities should be identified and costed.
Monitoring and evaluation plan
The proposed arrangements for monitoring and evaluationshould be explained, including who will do these activities, what factors will be examined and when.
In larger projects, the department responsible for the assistance may wish to mandate the application of the gateway review process as an effective assurance mechanism.
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 1.4.1. Where EU financial assistance to the non-government sectors is in view, the guidance in sections 4.1-4.5 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 The European Commision (Directorate General Regional Policy) has published a Guide to Cost-Benefit Analysis of Investment Projects (latest version July 2008). The principles are broadly similar to those in DoF's appraisal guidance, but there are differences in the detail, for instance a requirement for a more detailed financial analysis. Major projects should comply with this guidance. A major project generally involves EU funding of €50 million or more, but the threshold is lower for environmental projects (€25m) and instrument for pre-accession (IPA)-assisted projects (€10m).
4.6.4 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, Environment & Rural Affairs.
4.6.5 Advice on applying for EU financial assistance and general EU matters is available from DoF's European Division.
4.7.1 IFI funding consists largely of monies pledged by foreign 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 NI, represents a beneficial injection to the NI 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 NI's share of IFI funds has been pledged, it has become effectively a NI resource, which, if not committed to one project within NI, 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 NI 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 NI by the IFI has an opportunity cost, and that the alternative uses to which they might be put deserve to be appraised with the same rigour as other resources which are pledged to NI.
4.7.4 Thus IFI funds, once pledged to NI, should be treated as NI 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 NI. They represent a beneficial injection to the NI economy, but once pledged to NI, 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 NI and would be lost to NI if the individual option or project under consideration did not proceed.
4.8.1 Public authorities in Northern Ireland who are planning to provide assistance (either financial or non-financial) to an undertaking (that is an organisation engaged in economic activity) must consider the State aid implications of their plans at the earliest stage.
4.8.2 State aid refers to forms of public assistance that have the potential to distort competition and affect trade between member states of the European Union. The Treaty on the Functioning of the European Union (TFEU) defines State aid as follows:
“Save as otherwise provided in the Treaties, any aid granted by a Member State, or through State resources in any form whatsoever which distorts, or threatens to distort competition by favouring certain understakings or the production of certain goods shall, in so far as it affects trade between Members States, be incompatible with the Internal Market." [Article 107(1)]
4.8.3 For example, State aid can include the following:
- grants to firms for investment, training or research and development;
- cash injections to public enterprises;
- loans and guarantees;
- consultancy advice;
- infrastructure projects benefiting identifiable end users;
- provision of goods or services on preferential terms;
- contracts not open to competitive tendering.
4.8.4 State aid can be described as any form of assistance provided to an undertaking by a public body, publicly-funded body or body under public sector control, which provides the undertaking with an advantage and has the potential to distort competition between Member States of the EU.
4.8.5 The first step in the state aid assessment is to establish whether the beneficiary is, or is likely to become, an undertaking. An undertaking is an organisation which is involved in economic activity, i.e. it is involved in activities that result in the production of certain goods or the supply of certain services for which there are actual or potential commercial competitors. If none of the activities or potential activities are economic, the beneficiary organisation is not an undertaking and the aid cannot be state aid.
4.8.6 Once it has been established that the beneficiary is an undertaking, there are 5 questions that must be considered in order to establish whether aid constitutes state aid. (See checklist below). Only if the answer is ‘Yes’ to all 5 questions is state aid involved. If ‘No’ is the answer to any one of the questions, the funding is not state aid and therefore the state aid rules do not apply.
State aid identification checklist
(i) Is the aid granted by the State or through State resources?
This test is usually straightforward and the answer is usually ‘yes’. As well as central government departments, ‘by’ or ‘through’ means aid from regional or local authorities, as well as other public or private sector bodies designated or controlled by the State. State resources include grants, tax exemptions, loans, guarantees, services, loans of staff, etc. Other funds not permanently belonging to the State but under State control, e.g. lottery funding, are also regarded as being analogous to State resources. This includes European Structural Funds as the State has direct control over these.
(ii) Does it confer an advantage?
State aid rules are concerned primarily with the effect on competition and trade, not the form of a measure, nor the intention behind it. Therefore, it is important to establish the effect of the aid on the beneficiary (i.e. does it provide an advantage). If the aid reduces a beneficiary’s costs or provides the beneficiary with facilities, staff, equipment or infrastructure, which have been partly funded by the State, it will usually be concluded the aid has provided an advantage. It is also important to establish, when aid is provided through intermediary bodies, that they are not also getting an advantage as the aid flows through them.
(iii) Is it selective, favouring certain undertakings?
Measures are either ‘selective’ or ‘general’. Therefore, when a measure applies only to a specific group of companies or sector or geographic region, e.g. Northern Ireland, it will usually be considered as being selective. General measures are those that affect all undertakings in the whole of the State’s economy (e.g. nationwide tax and fiscal measures). State aid rules do not apply to such general measures. Since aid schemes in Northern Ireland tend to target aid to undertakings located in Northern Ireland, they are almost always selective and the answer to this question is almost always ‘yes’.
(iv) Is the activity tradable between Member States?
The Commission’s interpretation of this is very broad – it is sufficient that a product or service is subject to trade between Member States, even if the aid beneficiary itself does not export to the EU. Consequently most activities are viewed as tradable and the answer to this question is almost always ‘yes’.
(v) Does the activity distort or have the potential to distort competition?
If the aid has the potential to strengthen the position of the beneficiary relative to other competitors, then it has the potential to distort trade and competition. Significantly, the distortion of competition does not have to be substantial or significant, and includes small amounts of aid and firms with little market share. Therefore most interventions have the potential to distort competition.
There is some limited scope to conclude that a measure does not distort trade between Member States (and is therefore not State Aid) if it can be demonstrated that aid is limited to financing ‘local activities’. However, the Commission does not clearly define what is meant by ‘local activities’ and each case needs to be considered in isolation. It is strongly advised that funders wishing to demonstrate an activity is local take specialist state aid advice, including advice from economists and the Departmental Solicitor’s Office or legal council with proven expertise in State Aids law.
If a measure is judged to be state aid, it will either be notified to the European Commission (i.e. a full notification) or be registered and comply with the requirements of a block exemption regulation e.g. the General Block Exemption Regulation (GBER) or it must comply with the de minimis regulation.
4.8.7 The 'State aid rules' encompass various European regulations, frameworks, articles and guidelines. They aim to ensure that aid is well targeted to address market failures and avoid negative effects on competition.
4.8.8 Where there is a genuine market failure and a policy objective of common interest, such as, for example, to encourage more enterprises to engage in research and development, State aid may be considered necessary and justified. It is the responsibility of aid providers and implementing bodies to ensure that aid schemes comply with the State aid rules.
Advice and Guidance
4.8.9 NIGEAE does not provide detailed guidance on the indentification or assessment of State aid because DfE rather than DoF, is responsible for providing central advice and guidance on State aid.
4.8.10 NI Departments should refer to DfE's introductory document titled: "State aid: A Beginner's Guide for Public Bodies in Northern Ireland." This provides a basic understanding of State aid concepts and rules, and how to identify State aid and assess whether it will affect proposed policies, programmes or projects. It also includes signposts to more detailed information and useful points of contact.
4.8.11 Where more specific advice is required, it should be sought from the DfE State aid team. Queries may be directed by email to: firstname.lastname@example.org.
4.8.12 Further information on State Aid can be obtained at the following links:
Project returns and the cost of capital: some simple examples
A company has a £10m project for which it is seeking financial assistance. The cost and benefits of the project to the company are outlined in the table below. (This information can usually be derived from the applicant's financial forecasts and NPV calculations).
|Year 0||Year 1||Year 2||Year 3||Year 4||Year 5|
|Variable Cost £k||-3000||-3000||-3000||-3000||-3000|
|Capital Cost £k||-10000|
If the company has a cost or internal hurdle rate of 12 per cent then it is clear that the project should generate a satisfactory return for the firm's investors without the aid of financial assistance. (The relevant return is normally the Internal Rate of Return, i.e. the discount rate at which the NPV of a project is zero).
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.
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|
|Variable Cost £k||-3000||-3000||-3000||-3000||-3000|
|Capital Cost £k||-10000|
If the company has a cost of capital or internal hurdle rate of 12 per cent 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|
|Variable Cost £k||-3000||-3000||-3000||-3000||-3000|
|Capital Cost £k||-10000|
The table above indicates that if a grant of £490k were offered to the firm then the return on the project would become 12 per cent. 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.
Financial assistance to the private, voluntary and community sectors: a general checklist
- Has eligibility for assistance been established?
- Is a full economic appraisal required?
- Does the proposed assistance represent a state sid?
- Does the proposal have clear objectives and targets?
- Are there alternative options to consider?
- Are costs and benefits identified in sufficient detail?
- NPVs calculated correctly?
- Is displacement considered - with adequate supporting evidence?
- Any adjustments needed for foreign ownership?
- Are risks and uncertainties assessed adequately?
- What are the wider costs and benefits?
- Is the project worth doing?
- Has the applicant's financial position and ability to fund the project been examined?
- Have details of the negotiations with the applicant on the level of assistance been recorded?
- What is the evidence that assistance will make a difference to the project's location, scale, quality or timing?
- Where project mobility is claimed, is there substantial evidence of a viable alternative location?
- Are reasons recorded for the proposed level of assistance, related to the location, nature, scale or timing of the project?
- Is the proposed assistance the minimum needed to bring about the project?
- Are appropriate ratios included? eg total public assistance to total project cost, cost per job, other unit costs.
- All NI and EU funding taken into account?
- Is the proposal cost-effective?
- Business plan provided?
- Are the project management arrangements clear?
- Are the key management personnel identified and do they have the right experience and qualifications?
- Are anticipated cash flows set out in suitable detail?
- Will the proposed assistance enable the project to (a) cover all its costs and (b) earn a commercial rate of return?
- Are the applicant's financial position and previous track record stated?
- Are arrangements for funding clear and unambiguous?
- Is there a sound marketing plan?
- Is the project sustainable beyond the proposed period of funding? Is there a clear exit strategy?
- Do plans provide for suitable monitoring and evaluation?
- Is the project viable?