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SCAF WORKSHOP ON INVESTMENT APPRAISAL – CURRENT POLICY AND PRACTICE IN MOD 9 FEBRUARY 2010

SCAF WORKSHOP ON INVESTMENT APPRAISAL – CURRENT POLICY AND PRACTICE IN MOD 9 FEBRUARY 2010. NEIL V DAVIES, JOHN OGILVIE, PRABHAT VAZE MINISTRY OF DEFENCE. SLIDE 1 VALUE FOR MONEY. Value for Money (vfm) is optimal combination of Economy – ie Cost of Inputs ( 1 / M ):Inputs/Money)

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SCAF WORKSHOP ON INVESTMENT APPRAISAL – CURRENT POLICY AND PRACTICE IN MOD 9 FEBRUARY 2010

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  1. SCAF WORKSHOP ON INVESTMENT APPRAISAL – CURRENT POLICY AND PRACTICE IN MOD9 FEBRUARY 2010 NEIL V DAVIES, JOHN OGILVIE, PRABHAT VAZE MINISTRY OF DEFENCE

  2. SLIDE 1VALUE FOR MONEY • Value for Money (vfm) is optimal combination of • Economy – ie Cost of Inputs (1/M):Inputs/Money) • Efficiency – ie Ratio of Output to Inputs (O/I:Outputs/Inputs) • Effectiveness – ie Value of Outcomes from Outputs (V/O:Value/Outputs • Hence vfm = • Vfm is a relative not absolute construct

  3. SLIDE 2OUR ROLES IN MOD INVESTMENT APPRAISAL AND EVALUATION • Responsible for MOD policy on Investment Appraisal (IA) and Project Evaluation (PE) and ensuring MOD compliance with HM Treasury’s “Green Book” guidance • Provide advice and guidance on IAs and PEs eg JSP507 • Scrutinise IAs/COEIAs, OBCs for all projects subject to Central Approval (eg Ministers, IAB, DEC) • Review sample of TLB IAs/PEs for Health of Financial Systems Review

  4. SLIDE 3PURPOSE OF IA • To ensure Value for Money is obtained from investment decisions • Effective appraisal and evaluation are fundamental requirements of Treasury delegations

  5. SLIDE 4MAIN FORM OF IA IN MOD: COST EFFECTIVENESS OF ANALYSIS • Compares the costs of alternative ways of producing the same or similar outputs, which are not given a monetary value • While every effort should be made to quantify benefits, cost benefit analysis is not appropriate or feasible for most defence projects

  6. SLIDE 5COMBINED OPERATIONAL EFFECTIVENESS & INVESTMENT APPRAISAL (COEIA) Military or Business Effectiveness E F D B C Options A 45º Whole Life Cost

  7. SLIDE 6BASIC QUESTIONS FOR IA • Why is it necessary to commit resources? • What do we want to achieve? • What options are available? • How much will they cost?

  8. SLIDE 7MODEL OUTLINE OF MOD IA • establish requirement • define objectives • identify options • quantify costs and benefits of (shortlisted) options • compare these in NPV terms • evaluate risks and uncertainties • consider unquantifiable factors • present results and make recommendation • plan for Project Evaluation

  9. SLIDE 8QUALITY OF TLB IAs • Quality improving from a low base • Numbers of IAs declining

  10. SLIDE 9PRACTICAL ISSUES WITH IAs/COEIAs SUPPORTING CENTRALLY APPROVED PROJECTS • We have around 180-200 live projects at any time • Most IAs at a high standard by the time they go to IAB • But at draft stage main problems • vague/uncertain specification of requirement • limited consideration of alternative options/case written around preferred option • particular challenges with partnering • affordability often uncertain

  11. SLIDE 10CHALLENGES • Increasing competition for resources • Fiscal position means next comprehensive Spending Review will bring severe squeeze on spending • Defence will need to compete with other spending priorities • Strategic Defence Review • This will provide long-term direction • Need for evidence on VFM to support direction • Can appraisal provide more for strategic decisions? • Gray Review findings and appraisal • Highlights problems of Entryism and Optimism Bias • Findings include skills gaps and technical shortcomings • Poor information mixes with competing interests and incentives

  12. SLIDE 11WHERE WE MIGHT FOCUS: Training & Guidance Requirements & options identification Optimism bias Integrate supplementary guidance Examples & better presentation Training for managers & practitioners

  13. SLIDE 11WHERE WE MIGHT FOCUS: Training & Guidance Requirements & options identification Optimism bias Integrate supplementary guidance Examples & better presentation Training for managers & practitioners Evaluation Encourage more evaluation Share best practise on IA evaluation Highlight feedback role into appraisal Use existing evaluative results: optimism bias

  14. SLIDE 11WHERE WE MIGHT FOCUS: Training & Guidance Requirements & options identification Optimism bias Integrate supplementary guidance Examples & better presentation Training for managers & practitioners Evaluation Encourage more evaluation Share best practise on IA evaluation Highlight feedback role into appraisal Use existing evaluative results: optimism bias Wider applications Could appraisal help at concept level? What role in planning round? What IA evidence can be used for prioritisation?

  15. SLIDE 12 ANY QUESTIONS?

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