UNIVERSITY OF ULSTER FINANCE DEPARTMENT INVESTMENT APPRAISAL AND BUSINESS PLANNING IN THE UNIVERSITY

Transcription

1 Investment Appraisal and Business Planning in the University of Ulster 15 January UNIVERSITY OF ULSTER FINANCE DEPARTMENT INVESTMENT APPRAISAL AND BUSINESS PLANNING IN THE UNIVERSITY 15 JANUARY 2008

2 CONTENTS SECTION INTRODUCTION - WHY INVESTMENT APPRAISAL AND BUSINESS PLANS? 1 OVERVIEW AND SCOPE OF THE APPRAISAL PROCESS 2 PROCESSESS FOR PREPARATION, APPRAISAL AND APPROVAL OF INVESTMENT PROJECTS WITHIN UU 3 PROCESSES FOR CONDUCT OF POST EVALUATION REVIEWS 4 APPENDICES DEL Pro Forma Template Guidance Notes for the preparation of a Business Plan Checklist template A B C 2

3 SECTION 1 INVESTMENT APPRAISAL AND BUSINESS PLANNING 1. INTRODUCTION - WHY INVESTMENT APPRAISAL AND BUSINESS PLANS One of the underlying Financial Strategies of the University is the need to generate cash surpluses from its general operations. Such funds are required for investment both in the physical infrastructure and for the development of its core activities to ensure it can both maintain and improve its competitive position. However the scale of demand for funds for investment will almost always exceed the monies that can be made available. Consequently it is essential that a rigorous process be applied to all investment proposals. Such a process will assist senior management and the Council of the University to deploy its scarce resources in the manner that will enable it to best to achieve its Mission and Objectives. Irrespective of whether projects are funded by the Department of Employment and Learning, or from the University s own resources, the Vice Chancellor is the accountable officer. Consequently all University projects which fall within the Vice Chancellor s jurisdiction should be the subject of a defined business planning process. The purpose of this manual is to define that Business Planning Process. Investment projects can originate from a number of sources:- Bottom Up o Where staff in Schools/Faculties/Departments generate proposals for the future development of their particular area. Top Down o Where Senior Management develop proposals at an Institutional level to support the achievement of the University Mission and Objectives. External Initiatives o Where,for example Government makes Capital and or Revenue funds available, to either fully or partially fund developments for the Higher Education Sector. HEFCE/DEL s financial memoranda with Higher Education Institutions 3

4 require them to demonstrate that sound option appraisal and business planning techniques have been applied to investment projects as part of the process of obtaining Value for Money. 1.5 HEFCE/DEL expect that appraisal techniques are applied, as good management practice, to investment decisions involving public funds, but also for projects that are funded entirely from an Institution s private sources. 1.6 Whilst capital expenditure in property represents the University s main investing activity, HEFCE/DEL regard investment in, or choosing between options involving internal resources, eg staff time, to be equally valid for the application of appraisal techniques. Examples include:- Possible changes to teaching methods, such as increased use of information technology Developing the academic portfolio Early retirement schemes Investing in a joint venture or a subsidiary business venture Developing the quality of service Possible partnerships or mergers Bidding for new business contracts 1.7 It should be noted that it is not possible to provide a one size fits all Business Plan template to cover every eventuality. Indeed some project plan formats are dictated by funders or scheme co-ordinators. Consequently the following should be regarded as a guide and where necessary it should be modified to meet the particular circumstances of each proposal. If the proposed project represents a wholly new and incremental activity for the University, then the Business Plan and financial projections can focus on the total income and expenditure arising directly from it. However, if the project represents an alternative mode of service delivery, e.g where an existing service is considered not to be viable and that Faculty/University performance could be improved by introducing an alternative service. In these circumstances then the Business Plan must show the expected improvement by comparing present and estimated future income and expenditures. 1.8 The conduct a of Post Project Evaluation Review for each investment is an integral part of the overall Economic Appraisal 1.9 The process of appraisal itself uses resources. The effort that should go into the appraisal process, and the level of detail to be considered, is a matter for case by case judgment. But the general principle is that the resources to be devoted to appraisal should be proportionate to the 4

5 scale or importance of the objectives and resource consequences involved A substantial proportion of the university s capital expenditure is funded by Government monies. HM Treasury, as well as its Northern Ireland equivalent, Department of Finance and Personnel (DFP) and the University s funding department, DEL, require that project proposals involving investment of public funds should be subjected to a process of economic appraisal. The underlying principles and methodology to be adopted in the appraisal process is set out in a set of guidelines known as 1 The Green Book. DFP have produced a Practical Guide to the Green Book which is a condensed version of the Treasury original, modified to reflect the needs of the departments within the Northern Ireland system of public administration. This document can be accessed at :- 1 The Green Book is the name given to the HM Treasury Guide "Appraisal and Evaluation in CentralGovernment" (ISBN ) which may be per copy from the Stationery Office. It is also available together with supplementary guidance on the Treasury website at _index.cfm 1 5

6 SECTION 2 2. SCOPE AND APPLICABILITY 2.1 Business Plans are required to be prepared for internal approval for all projects which require significant investment in:- Land and Buildings Plant and Machinery Equipment I.T. Facilities Human Resources 2.2 Investment in the development of new academic courses is outside the scope of this manual and is subject to a separate approval process under the supervision of the Pro Vice Chancellor PVC (Academic Development & Student Services). Development of business plans associated with new courses is normally carried out by the relevant academic staff in conjunction with Faculty Financial Advisors from the Management Accounts team.for details of the underlying rationale and treatment of course costings see the undernoted hyperlink: Where proposals are being developed which involve investment in the categories of expenditure indicated at 2.1 above, the appraisal and approval processes which the University is implementing will differentiate projects according to value as follows:- Expenditure Range( 000 s) Type of Business Plan Approval Level 0-250K Pro Forma Deans/Heads of Department 250K- 1M + 1M Full Business Plan/Economic Appraisal to Green Book standard Full Business Plan/Economic Appraisal to Green Book standard VCAG Finance VCAG Finance/Honorary Treasurer/GP&FC 6

7 The template to be used for Pro Forma style business plans is the same as that which the University is required to use when applying to DEL for funding support for projects under 250K. The template is attached as Appendix A. All Pro Forma style business plans should be submitted to the Finance Development Manager for review.all Pro Forma plans are required to be signed off by the Director of Finance. In cases where the University is seeking substantial financial support from external funding agencies it is likely that the funders will have their own particular business plan requirements. e.g. Invest NI has a complete checklist of business plan contents which is oriented to Commercial/ Private Sector activities. If funding is to be secured then the funders information requirements must be met. The University Finance Department will advise whether the form and content of the prospective funder s business plan is consistent with the underlying requirements of the Green Book. An economic appraisal will not be required by the university where a faculty or department secures 100% external funding for capital expenditure and there are minimal revenue consequences or commercial risks associated with the project. However Project leaders will need to satisfy the appropriate funding body s requirements for economic justification for the expenditure, if any. 2.4 Current guidance on business planning for investment projects recommends a 10 step process. The table below shows the full 10 steps to be completed when carrying out a full economic appraisal and the 8 steps which are required to complete the Pro Forma based business plan:-. Process Step Step Number Pro Forma Explain the Strategic context Step 1 Establish the need for the expenditure Step 2 Define the Objectives and Constraints Step 3 Identify and Describe the options Step 4 Identify and Quantify Monetary Costs Step 5 and benefits Assess Risks Step 6 Assess Non Monetary Costs and Step 7 benefits Assess Net present Values Step 8 Arrangement for Financing, management, procurement, Marketing, monitoring and evaluation Step 9 Conclusions & Recommendations Step 10 Economic Appraisal 7

8 2.5 Brief commentary on each of the steps in the process is set out below and is explained fully in the Guidance Notes which are attached as Appendix B to the manual:- Step 1 - Explain the Strategic Context OR How does this fit in with University s strategies and objectives A short description cross referencing aspects of the institution s strategic and corporate plans to the proposed activity. Step 2 - Establish the need for the expenditure OR WHAT current problem or shortcoming, or prospect of improving, present university activity, does the expenditure address. In the case of proposed new services provide an analysis of the expected demand for the services. And in all cases quantify and justify the proposed level of service Step 3 - Define the Objectives and Constraints OR WHAT do we hope to achieve and WHAT might prevent us from achieving those objectives. Define the expected outcomes and outputs Specify targets and objectives that are SMART:- Specific Measurable Achievable Realistic Timely Consequently an objective to:- 8

9 Increase student numbers on Course X is not SMART Whereas an objective to:- Increase student numbers on Course X from 100 to 150 by the 2006/07 Academic Year is SMART The use of volume and value targets and milestone dates will facilitate subsequent monitoring and evaluation. To indicate the relative importance of the various objectives identified, these should be ranked in order of importance. It is also important to identify key areas of constraint, i.e. issues which may adversely impact on the successful implementation of the proposals. These may be technical, financial legal or timescale related. Step 4 - Identify and Describe options OR Here s a long list of possible solutions. After initial screening, here is a short list of options for full appraisal Identify a suitable wide range of options, one of which is the status quo, which consider variations as to scale, quality, technique, location, timing and funding mechanism. Provide explanatory comments for the options that are eliminated at this stage. Step 5 - Identify and Quantify Monetary costs and benefits OR How much will each option cost? First of all identify the life of each option. For Example - is it building oriented with a life of say 20 years? Or, is it Technology driven - with a life of 5 years? Detail the capital costs, including refurbishment costs, and identify the annual recurrent costs and income streams associated with the project. It would be normal for staff from Finance (and Physical Resources, where appropriate) to advise HFAs, Faculty and 9

10 Departmental managers in the collation of financial and economic data required at this stage. Step 6 - Assess Risks and Uncertainties OR WHERE might it go wrong Prepare a Risk log identifying and quantifying the main risks which threaten the success of the Project. Consider how the risks compare for each option and also how they may be mitigated or eliminated under each option. Step 7 - Assess Non-Monetary Costs and Benefits OR WHAT are the Intangibles. Identify relevant Non Monetary Costs and Benefits. Some examples of which are:- Academic reputation Proximity of new service to existing students and staff Speed of implementation and lack of disruption to existing services Etc Where possible, rank the Non-Monetary factors in order of importance and potential impact and then score each shortlisted option against those factors. Provide explanations for the assumptions made for the weighting and scoring of Non Monetary factors and options and provide comments on the conclusions arising from the exercise. Step 8 - Assess Net Present Values OR WHICH is the best option in financial terms This is a standard practice developed by Economists and Accountants to equate a range of Capital and Revenue cash flows, Opportunity Costs, Property Resources etc to a single Net Present Value. This process thereby identifies, in monetary terms the option with the lowest Present Cost or the highest Present Income 10

11 It would be normal for staff from Finance (and Physical Resources, where appropriate) to input the data previously agreed with the HFAs, Faculty or Departmental staff into a financial model to generate the information required for this step. It would also be normal for Finance/Physical Resources staff to assess the potential impact on the Net Present Values of the various options being considered by modelling changes to the cost/income assumptions. Arising out of this sensitivity analysis it is necessary to consider whether it causes any changes to the ranking of the options. Step 9 - Financing, Management, Procurement, Marketing, Monitoring and Evaluation OR PROCESSES for making it happen Under this section it is necessary to cover all of these implementation issues:- o Financing - is the project to be funded from internal University resources or are there external sources of funding available for some or all of the finances required? o Management - what are the arrangements to manage the project? If there are personnel resources to be recruited, what are the procurement arrangements. o Procurement - if there are substantial capital resources to be acquired, i.e. land, buildings and equipment, specify the procurement arrangements and whether there are any EU requirements to be met for the tendering of products and services, etc. o Marketing - if it is appropriate for the project, provide details of any market research, market assessment and marketing plan. o Monitoring - indicate how the proposed option will be monitored during and after implementation. o Post - Evaluation - it is regarded as good practice after a project has been fully implemented to evaluate the actual outcomes against the key assumptions made at the planning stage. The Business Plan should therefore indicate the key factors, linked to the SMART objectives 11

12 in Step 3, which need to be evaluated, specifying when, how and by whom. Step 10 Conclusions and Recommendations o This section should draw together the results of the various elements of the process indicated above and identify the balance of advantages and disadvantages of the short listed options and the basis for recommending the preferred option. 12

13 SECTION 3 3. PROCESSES FOR PREPARATION, APPRAISAL AND APPROVAL OF INVESTMENT PROJECTS WITHIN UU 3.1 Where a Business Plan is being prepared to support a bid for funding the staff involved must seek the assistance of the Finance Department in the preparation of the plan. Such assistance may be provided by the relevant HFA, Faculty Financial Advisor or staff from the specialist planning team in the Finance Development unit within the Finance Department. In particular the member of Finance staff taking responsibility for the project will develop spreadsheet models to enable financial projections to be prepared. It is not feasible to develop a standard computer model, as the essence of financial modelling is to represent the financial structures and mathematical relationships particular to each project. 3.2 Finance Department staff should be regarded as integral members of the team preparing the Business Plan and will be expected to input their professional expertise and experience into the production of the plan. 3.3 If project sponsors wish to review samples of previous economic appraisals carried out by UU, a library of completed projects, which comply with Green Book principles, is held by the Finance Department. For purposes of confidentiality these are not directly accessible to internet users. However Faculty Financial Advisors, or members of the Finance Development team will be able to provide details to UU staff to facilitate access to the most appropriate examples of previous appraisals. 3.4 Project sponsors within Faculties and Departments are responsible for establishing many of the key assumptions set out in the 10 step process above. Similarly, as many of the larger investment projects involve new/refurbished building expenditure, staff from Physical Resources will also be responsible for key assumptions relating to those aspects. Financial Advisors will assist in the process of providing financial analysis relating to the various options in line with the methodology recommended as best practice by HEFCE/DFP. In response to recommendations from the University s internal auditors the General Purposes and Finance Committee have requested that all completed Business Plans with investment in excess of 250K should include signed checklists identifying those responsible for the key elements of the plan. In addition, GP&FC have also requested that for such projects, each plan is also signed by:- The relevant Dean or Head of Department The relevant Pro Vice Chancellor of either Research and Innovation or Academic Development and Student Services. 13

14 A Checklist Template is attached as Appendix C 3.5 Para 2.3 above identifies the layered approach which the University is implementing:- VCAG Finance must approve all capital investment projects, and has full authority to approve projects up to 1M. Projects in excess of 1M must be submitted to GP&FC for approval, having firstly been approved by VCAG Finance and the Honorary Treasurer. Projects with a capital value of less than 250K should be submitted using DEL s Pro Forma document. Projects with a capital value in excess of 250K should be prepared in a format to meet external funders requirements (where applicable). This may be in a form to comply explicitly with Green Book requirements, e.g. DEL funded projects, or in a form to comply with the underlying principles of Green Book appraisals, e.g. Invest NI funded projects. Finance Department will determine and advise whether such departure from standard procedure meets the university s requirements. 14

15 SECTION 4 4 PROCESSES FOR CONDUCT OF POST PROJECT EVALUATION REVIEWS 4.1 Introduction The University has embedded the principles of HM Treasury s Green Book in its decision making processes for the investment of its capital resources. The Green Book is HM Treasury s guide to all publicly funded bodies to ensure consistency of process in the appraisal and evaluation of expenditures to demonstrate Value for Money. In Northern Ireland, the Department of Finance and Personnel (DFP) has produced a localised version of the Green Book, The NI Practical Guide (to the Green Book). Using the NI Practical Guide, the University has developed standard methodologies for the preparation of economic appraisals and these have been communicated to Faculty and Departmental staff throughout the institution. It is a requirement to carry out an evaluation of all expenditure however, as with the appraisal process itself, the level of resources used in the evaluation process should be proportionate with the level of investment in the project. Every appraisal of substance (i.e. expenditure over 250K). should indicate how the project will be evaluated after completion. Ex Poste Evaluations examine the outturn of a project with the express purpose of ensuring that whatever lessons can be learned are fed back into the business planning process for future project investment activities. For those projects which have received specific funding from Government, particularly UU s primary funder, DEL, the University will be required to submit evaluation reports to funders in line with the evaluation proposals included in the appraisal report. However, the University s Senior Management Group is fully supportive of the implementation of Post Evaluation Reviews on the basis of good management practice rather than merely meeting a bureaucratic obligation The purpose of this document is to set out the methodology which the University has adopted for the conduct of Post Evaluation Reviews of completed projects. 15

16 4.2 Why Evaluate Evaluation reports should summarise:- Whether, and if so, why the outturn differed from that foreseen in the appraisal How effective the activity was in achieving its objectives The cost effectiveness of the activity What the results imply for future management and policy decisions The purpose of a Post Evaluation review is to identify failures/deficiencies in the planning process and consider how these can be improved or eliminated in future projects, e.g.:- The quality of the financial assumptions The process of estimating costs/benefits The identification of associated risks and evidence of Optimism Bias How to Evaluate? The appraisal procedures which the University has implemented have been designed with Post Evaluation in mind. Economic Appraisal reports should contain sufficient information to support the conduct of any subsequent evaluation and the Appraisal should clearly identify the specific proposals for the subsequent evaluation review on completion. Once the appraisal has been approved and prior to implementation of the project/programme, it is appropriate to plan for the evaluation, for two main reasons. First, the arrangements for collecting the relevant information can be put in place, and second, the position prior to the programme s implementation can be identified (baseline), enabling a before and after methodology to be used. 4.4 When to Evaluate The Appraisal Report should normally identify the most appropriate timing for conduct of the Post Evaluation Review. In general terms the timing of the review should allow for any capital development to be completed and the activity being conducted to achieve a high percentage of its potential capacity. The Finance Development Department will develop and maintain a rolling programme of Evaluation Reviews based on the content of completed Appraisal Reports and/or Senior Management s views of the progress of completed projects. 16

17 4.5 Who should conduct Evaluation Reviews? In order to ensure objectivity of the evaluation process, evaluation reviews should be carried out by teams comprised of staff that have NO previous responsibility for the management or implementation of the project under review. However it is important that staff that were involved in the implementation of the project, or are involved in its management, should provide full co-operation to the Review team including provision of all data and relevant information. Ideally, a joint working group should be formed comprising staff involved in the project and internal or external specialists which will combine detailed insider knowledge with the objectivity and expertise that specialists can provide. Responsibility for appointing Review teams normally rests with the Project Manager this responsibility should be clearly stipulated in the appraisal. It is important that a team leader is appointed and that their responsibilities are clearly defined. In the process of appointing Review teams the Project Manager should aim to identify members of University staff, and if necessary, specialist external resources, with appropriate skills and experience to ensure that a thorough evaluation review is conducted with independence and rigor. As a general rule of thumb, if an evaluation is commissioned externally, the cost of the evaluation should be no more than 1 per cent of the total project expenditure, however, this will depend on the complexities of the project. 4.6 What should be Evaluated? The basic process of Evaluation involves the comparison of projected/estimated inputs and outcomes with actual outturns in both monetary and non-monetary terms, and to assess whether assumptions have proved accurate and what lessons can be learnt. The principle of proportionate effort should be applied to the evaluation. As was indicated in para 3.1 above, Appraisal Procedures have been designed, and individual Economic Appraisal Reports should be completed, to facilitate the process of Post Evaluation Review. Where there is a number of closely related programmes or projects with the same overall aim and similar objectives, it would be useful to evaluate at the same time to assess any overlap or complementarity. 4.7 Establish Need, Aims, Objectives and Targets of the project or programme Evaluation teams will need to clearly set out the need, aims, objectives and targets of the project as defined in the Economic Appraisal to aide 17

18 scrutiny. To facilitate a meaningful review it is therefore critical that the Objectives and targets were expressed in SMART terms,viz:- Specific Measurable Achievable Relevant Timely Therefore evaluation teams will need to develop methodologies appropriate to the specific needs of their project to enable them to compare the actual outturns, in both quantitative and qualitative terms, with the projected outputs, outcomes and timescales. Where the economic appraisal identified factors which could act as Constraints on the achievement of the Objectives, evaluation teams should consider to what extent these factors have materialised and their potential impact. In addition, if further factors have arisen which have had a material constraint on the achievement of the projects objectives and which were not considered in the original appraisal, these should be identified and commented upon. The final conclusions and recommendations should consider whether these constraint factors are relevant for inclusion in future appraisals. 4.8 Evaluation methodology Setting out the scope of the study is an important part of the planning process. The evaluation should set out the boundaries and purpose of the study. The Terms of Reference should be detailed as well as the methodology employed to conduct the evaluation. 4.9 Define Assumptions It is often necessary during an evaluation to take certain things for granted and to make assumptions about the project under scrutiny. Assumptions should also be stated relating to the external environment which can have an influence on whether project objectives are achieved or not. External factors are changing all the time, for example, what was once an innovative technology may now be a routine application in industry Establish a Counterfactual Case for Comparison with Actual Outcome The NI Practical Guide to the Green Book recommends that evaluators also consider the Counterfactual or base case, i.e. estimate what would have happened if the intervention had not occurred. The difference between the base case and what actually happened is the net additionality of the project or programme. However this is a complex procedure and should only be considered where it is practical, feasible and cost effective to do so keeping the rule of proportionate effort in mind. Evaluation teams should seek advice from the Finance 18

19 Development Team as to whether evaluation of the counterfactual case is required. The Status Quo option used in the original appraisal should normally inform the counterfactual analysis. However, viewing events from a Poste Hoc position, evaluation teams may judge that the counterfactual would actually have been quite different from what was envisaged at the time of the appraisal, due to, for example, alternative states of the world and/or alternative management decisions. In such circumstances it may be helpful to consider other counterfactuals in addition to the baseline option. The stream of costs and benefits that would have occurred in the counterfactual should be estimated and set out so that the actual outturn and benefits can be compared with them and an assessment of additionality made Analysis and results Monetary Costs and Benefits The original appraisal should include full details on the projected income and costs together with the financial assumptions for the preferred option. Evaluation teams must therefore extract the relevant data from the University s financial systems for comparison with original projections and estimates. Based on this comparative analysis, evaluation teams must then draw conclusions and make recommendations on any significant variances and their underlying causes. Risks The original appraisal will have considered a range of risks associated with the preferred option. Evaluation teams should therefore assess to what extent the identified risks have materialised and their impact on the project outcomes. Furthermore consideration should be given to risks which have materialised, and the scale of their impact, which were not included in the Risk Assessment section of the original appraisal. The final conclusions and recommendations should identify any significant differences between the assessed risks and the actual outturn together with the underlying causes. Optimism Bias The Green Book advises those preparing economic appraisals for capital projects to include a cost uplift factor to estimates of capital expenditure. Research has indicated that forecasters have a bias to be 19

20 optimistic in the estimation of capital costs, particularly on large complex projects. Government advice in 2006 for the adjustment to capital cost estimates for optimism bias is to apply an uplift factor of 20%, unless appraisers have empirical evidence from their own organisation s recent history of implementing capital projects to justify using an alternative factor. The university has established an optimism bias monitoring database to facilitate the use of an institutional optimism bias factor. The database is currently demonstrating that actual outturns of capital costs are less than 5% above the estimated costs. Evaluation teams should monitor each project s outturn of capital cost against the capital estimate in the appraisal report. Non Monetary Costs & Benefits Appraisal reports will have identified and scored the relative nonmonetary costs and benefits of the various short-listed options. Evaluation teams should therefore endeavour to develop appropriate methodologies to enable them to identify the non-monetary costs and benefits of the implemented option and compare these with the assumptions in the original appraisal for the preferred option. Whilst the evaluation of the Monetary Costs and Benefits is relatively straightforward and requires the extraction of data from the University s financial system, the evaluation of Non-Monetary Costs and Benefits will require less formal data collection methods, e.g. student/customer satisfaction surveys, published market research data, published academic research, etc.etc. Financing, Management, Procurement, Marketing, Monitoring Evaluation teams will also need to compare and contrast how each of the above noted aspects of the project with the arrangements proposed in the original appraisal report. In particular teams will need to consider the impact any shortcomings in these arrangements have had on the achievement of the project objectives or on the cost effectiveness of their delivery. Evaluation reports should make recommendations, where appropriate, for changes to management and control procedures across all of the above noted areas. Value for Money Having identified the objectives that the programme hopes to achieve, the evaluator should specify the indicators and performance measures that will be used to assess if the programme is achieving Value for 20

21 Money, that is, how effectively, efficiently and economically did the programme meet its objectives. Effectiveness measures should show the extent to which the aims, objectives and targets are being achieved. The effectiveness of the project is usually assessed by output and outcome measures, which can be both quantitative and qualitative. Efficiency measures (generally expressed as a ratio of inputs to outputs) are concerned with achieving the maximum output from a given set of inputs, for example, cost per job or output per unit of staff; or construction cost per sq m. Ratios can be compared with those generated for alternative similar projects. Economy measures are concerned with showing that the appropriate inputs have been obtained at least cost, e.g cost of administering project in comparison to other similar projects. Identify side effects and distribution effects An attempt should be made to quantify the externalities of the project (both positive and negative), i.e. the costs or benefits falling to third parties. The project should also be reviewed to assess its impact upon New TSN and Section 75 groupings. In summary the results should indicate: The costs and benefits of the project (both quantifiable and unquantifiable) The net additionality of the project An overall assessment of value for money Recommendations for the future Once the evaluation has been completed the final stage is to consider the implication of the project for the future, which should include identification of any lessons learnt Who to tell Finally, evaluation teams need to consider how best to disseminate the results of their review. Whilst all Evaluation Reviews will be submitted to Senior Management group for initial approval, it is important that for each review all relevant parties involved in the implementation or management of the project are advised of the Review s conclusions and recommendations. In addition, reports and their future recommendations should be circulated widely to those staff concerned with future project design, planning, development and management. 21

22 APPENDIX A PROFORMA ECONOMIC APPRAISAL FOR SMALL PROJECTS IN HIGHER EDUCATION INSTITUTIONS To be completed in respect of all capital projects costing up to 250,000. For those projects less than 100,000 please retain on files for future Departmental inspection. 1. Establish the Need for the Project Establish the need for the project explaining why the expenditure is being considered. Where appropriate provide details of deficiencies in current facilities and describe how the project fits with any relevant strategic policies. 2. Define Objectives and Constraints Explain what the expenditure is meant to achieve in terms of expected outputs and outcomes and provide details of key constraints on the project. Objectives should be SMART Specific, Measurable, Agreed, Realistic and Timebound to enable option generation and option performance assessment. 22

23 3. Project Options Identify and describe at least 3 options, where feasible, available to meet the need described in sections 1 and 2 above. This should include a status quo (the option which continues to deliver the current level of service) even if not considered realistic. This will provide a benchmark to assess the VFM of other options. Other options could include, for example, variations around timing, phasing, scale, or specification. Give the reasons for ruling out any options. 23

24 4. Costs and benefits of viable options List the monetary costs and benefits of the viable options left as a result of section 3 (to include professional fees and VAT). It is recommended that a minimum of 2 options (where feasible), in addition to the status quo, be considered at this stage (more will enhance the robustness of the case). The appraiser should also examine the robustness of costs at this stage. 5. Non-monetary Costs and Benefits / Distributional Impact List and describe what factors other than monetary costs and benefits (shown in section 4) have been taken into account in reaching a decision on which option is preferred. Also use this section to explain how the distribution of costs and benefits of this project will impact across different groups in society (focus on Section 75 & New TSN categories). 24

25 6. Appraise Risks and Uncertainties Identify the main risks and uncertainties associated with the project. Assess the likelihood of risks occurring and how they would impact on the ranking of options. 7. Recommendation Make a positive recommendation for one option and explain why it is recommended and others are rejected. 25

26 8. Financing, Management, Monitoring and Post Project Evaluation Show proposed sources of finance over time. Describe the proposed arrangements for management, monitoring and post project evaluation. Director of Finance: I am satisfied that all factors of all feasible options have been considered in this appraisal and that the recommended option is the optimum. Signed: Name: Date: 26

27 ECONOMIC APPRAISAL/BUSINESS PLAN APPENDIX B GUIDANCE NOTES EXECUTIVE SUMMARY STEP1 EXPLAIN THE STRATEGIC CONTEXT STEP 2 ESTABLISH THE NEED FOR THE EXPENDITURE STEP 3 DEFINE THE OBJECTIVES AND CONSTRAINTS STEP 4 IDENTIFY AND DESCRIBE THE OPTIONS STEP 5 IDENTIFY MONETARY COSTS AND INCOMES STEP 6 ASSESS RISKS STEP 7 ASSESS NON-MONETARY COSTS AND BENEFITS STEP 8 PRESENT CASH FLOW PROJECTIONS/NET PRESENT VALUES STEP 9 ARRANGE FINANCING, MARKETING AND EVALUATION STEP 10 CONCLUSIONS AND RECOMMENDATIONS 27

28 1. EXECUTIVE SUMMARY 1.1 The Executive Summary should distil the key points of the proposal into, a maximum of, two A4 sheets. 1.2 The Summary must include at the outset a financial summary in tabular form which shows:- Capital Expenditure, Capital Grants and Net Capital Expenditure Incremental Revenue Expenditure and Revenue Grants Cost of Existing Staff General Overhead Costs Net Revenue Surplus or Deficit Net Cash Flow, showing peak funding requirement 28

29 STEP 1 - STRATEGIC CONTEXT 1.1 In 2006 the University s Vision Statement was articulated as:- Vision 1.2 Aims To be a University with a national and international reputation for excellence, innovation and regional engagement. To achieve its Vision and to ensure that it is enshrined in the day-today operations of the University the institution has set five core strategic aims. Four of these core strategic aims relate to what the University will seek to achieve and one relates to how the University will seek to go about its business. The detailed Aims can be accessed as follows:- As part of the process of realising the strategy each prospective investment project must be able to demonstrate how it will contribute to the University s vision as shown above. 29

30 STEP 2 - ESTABLISH THE NEED FOR THE INVESTMENT 2.1 Deans and Directors seeking investment funds for new ventures must focus on the market need which the proposal seeks to meet. Projections of need or demand should be quantified and details of supporting calculations and assumptions should be provided. Therefore Business Plans must demonstrate that, where appropriate, market research and analysis activity has been carried out to provide objective data and information which support the proposition. 2.2 Where the proposal relates to investment in existing activities, then the business plan must specify in what respects the present arrangements are deficient and how they impact on the University s core business objectives. 2.3 The Business Plan should also comment on how the proposed investment will counteract current deficiencies and improve the way in which the University will achieve its core objectives. 30

31 STEP 3 - DEFINE THE OBJECTIVES AND CONSTRAINTS 3.1 Objectives In this section project sponsors must define the outcomes and outputs that are expected as a result of the investment-taking place. These should be expressed using volume and value targets as well as milestone dates for the achievement of targets. Objectives can often be specified in terms of a hierarchy of outcomes, outputs, and targets that should be clearly set out in an appraisal: 3.2 Outcomes: These are the eventual benefits to society that proposals are intended to achieve. Often, objectives will be expressed in terms of the outcomes that are desired. Example: improvements in Northern Ireland s stock of intellectual capital and the employability of its present and future workforce. 3.3 Outputs: Sometimes outcomes cannot be directly measured, in which case it will often be appropriate to specify outputs, as intermediate steps along the way. Outputs are the results of activities that can be clearly stated or measured and which relate in some way to the outcomes desired. Example: numbers of undergraduates recruited, numbers of degrees awarded. 3.4 Targets can be used to help progress in terms of producing outputs, delivering outcomes, and meeting objectives. Example: the number of extra student places provided by a certain date. 3.5 Objectives should initially be stated broadly enough so that a wide range of options to meet them can be identified. However, they must be developed in more specific detail, including targets that are "SMART" Specific, Measurable, Achievable, Relevant and Time-dependent: Objectives must be defined in specific detail, in order to:provide a clear basis for identifying and defining options, enable appraisal of how well the options perform, facilitate ex post evaluation, and provide for accountability. 31

32 It is particularly important that objectives are measurable -otherwise it will not be possible to gauge whether or how well they have been achieved. Vague, qualitative objectives do not provide for any of these things and should be avoided. Objectives should not normally be expressed in terms of inputs however, targets for the process of project implementation should be stated, including, for example, milestones for achievement of various stages. Where there are numerous objectives, or there is a potential conflict between objectives, it is helpful to indicate their relative priority, both to inform option assessment and to assist in post project evaluation. Objective setting should normally precede option appraisal. However, if circumstances change, or as appraisal reveals more about the options, it can be appropriate to revisit initial objectives and revise them during the course of an appraisal. Output specification generally should occur only after needs and objectives have been identified, but the precise point at which it occurs thereafter may vary. 3.6 The following questions may help to set suitable objectives and targets: What are we trying to achieve? What are our objectives? What would constitute a successful outcome or set of outcomes? Have similar objectives been set in other contexts that could be adapted? Are our objectives consistent with strategic aims and objectives as set out, for example, in the University s Corporate Plan? Are our objectives defined to reflect outcomes (e.g., improved access to education, or enhanced sustainable economic growth,) rather than the outputs (e.g. student numbers, or job placements), which will be the focus of particular projects? How might our objectives and outcomes be measured? Are our objectives defined in such a way that progress toward meeting them can be monitored? What factors are critical to success? What SMART targets can we then set? What targets do we need to meet? 32

33 3.7 Constraints Identify here any factors that may adversely affect the successful implementation of the proposals Important constraints upon the proposals should be explained. These may be technical, legal, financial or political in nature, or they may have to do with timing or location. Sometimes an existing University policy may be regarded reasonably as a constraint upon appraisals, but this should not always be taken for granted. Policies may deserve to be reviewed, particularly when a significant time has elapsed since they were decided. This can apply equally to other apparent constraints - they may be reasonable in some cases but should not always be taken at face value. 33

34 STEP 4 - IDENTIFY AND DESCRIBE THE OPTIONS 4.1 Comparison of alternative courses of action is at the heart of appraisal. It is only by comparing the alternatives that the real merits of any particular course of action are exposed. 4.2 Long Lists, Short Lists and Feasibility Studies It is useful to begin by identifying a long list of options, containing all the initial ideas about possible solutions. This should include not only the conventional solutions, but also any more innovative suggestions, however outlandish they may at first appear. Imaginative thinking should be encouraged. Appraisal reports should generally record all the long listed options. 4.3 The long-listed options usually need to be sifted to produce a more manageable short list of options for in-depth appraisal. This should be done according to specific, stated criteria. These may be expressed in terms of, for example, failure to satisfy the principal objectives of the proposal, or violation of important constraints regarding finance, manpower availability, policy commitments, site suitability and so on. Where options are rejected in this way, the precise manner in which they fail to meet the criteria should always be explicitly explained. 4.4 The Status Quo and Do Minimum Options The options selected for in-depth appraisal should include a baseline or benchmark option. This should usually be the status quo option, representing the genuine minimum input necessary to maintain services at, or as close as possible to, their current level. The status quo should normally be short-listed and appraised even where it is not considered to be a realistic option. Its function is to provide a benchmark so that the VFM of the alternative do something options may be judged by reference to current service provision. The exception to this requirement is where the appraisal concerns the introduction of a wholly new service, that is, where there is no existing provision to appraise. 4.5 The amount of effort to be put into appraising the status quo requires judgement. Where it is considered to be a realistic option, it should be appraised in the same detail as the alternative options. Where it is clearly unrealistic, a less sophisticated analysis may be sufficient. However, appraisals should always provide some details of both current costs and current service provision. 4.6 The Do Something Options The number of options to be subjected to full appraisal will vary according to the scale and significance of the proposal. In relatively 34

35 straightforward appraisals, the number of options short-listed for full appraisal might be in the range 3 to 6 in addition to the status quo. (This is a very broad guideline, not a stipulated minimum number). In more complex cases, a larger number of options may be appropriate. 4.7 Alternative approaches to procurement should be appraised. The scope for solutions involving Public Private Partnerships (PPPs), including the Private Finance Initiative (PFI), should generally be considered as alternatives to traditional procurement methods. Experience suggests that PPP approaches suit some situations better than others, and resources should not be wasted investigating PPP solutions where they are clearly not appropriate. 4.8 It is important to consider alternative options for funding of proposals. 4.9 Completion of an economic appraisal report does not necessarily bring the consideration of options to an end. For instance, changing circumstances may invalidate the report s assumptions and conclusions prior to project implementation, necessitating a review of the options. Also, identification of a preferred option is often followed by a tendering process in which bids are sought from the private sector. The principles of option appraisal should be applied at this stage in order to help determine which bid offers the best VFM Examples of strategic and operational options include:- Varying time and scale Options to rent, build or purchase Changing the combination of capital and recurrent expenditure Refurbishing existing facilities or leasing and buying new ones Co-operating with other parties Changing locations or sites Provision of the service, such as maintenance, or facility by the private sector Co-locating, or sharing facilities with other agencies Using IT to improve delivery, as part of wider organisational changes Transferring service provision to another body, or improving partnership arrangements Varying the balance between outsourcing and providing services (or retaining expertise in-house. The Faculty and Departmental Financial Advisor should be consulted on these issues at an early date. 35

36 STEP 5 - IDENTIFY AND QUANTIFY MONETARY COSTS AND INCOMES 5.1 The process of preparing a business plan includes the production of financial projections that identify all of the relevant incomes and costs, both capital and revenue. In this section of the business plan project sponsors should provide information on the basis of the assumptions that have been used and cite any specific sources of information that supports the estimates used, e.g. supplier quotations, Physical Resources Department, etc. For this element of the Business Plan the sponsor must work closely with their Faculty Advisor. When establishing these costs the sponsor should work towards including ALL costs and revenues. It is important to capture all the costs as whilst the incremental impact may be the most important aspect to the sponsor s Faculty or Department the total cost and /or revenue can have particular implications for the University. 5.2 The relevant base case costs and benefits to the University 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. 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. 5.3 Costs should where possible be collated under a variety of headings: Fixed constant over the planning period Variable vary according to other factors such as volume Semi-Variable an initial fixed cost but with an element depending on usage e.g. maintenance contracts Semi-Fixed fixed for a particular level of activity that once exceeded will require additional expenditure multi user software license that applies to a fixed number of users. Within these heading then costs should be collated under various categories such as staff costs, recurrent, equipment etc. This will allow for ease of analysis and modelling. 5.4 It is important to note the basis of estimation for each category of cost. This is straightforward enough with items of specific equipment, lease charges, telephones etc. where a number of quotations can be easily obtained. Staff costs should be included at gross salary plus 36