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March 16, 2020

In Defence of the Green Book: Don’t Blame the Tools

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Posted by Simon Groom[1]

The United Kingdom’s Green Book[2] is often held up as an example of good practice when it comes to guidance on project appraisal. However, in recent months it has come in for criticism, mostly in relation to an alleged bias against projects in lagging regions of the United Kingdom[3]. These accusations are worth examining, both because of the light they shed on good practice in this area and because of what they tell us about the relationship between technical tools and decision-making.

The argument against the Green Book approach—a related debate has been taking place in Korea—seems to be that the focus on valuing benefits is too restrictive, missing important benefits from infrastructure investment in lagging regions, and that when benefits can be valued, valuation methods favor richer over lagging regions. On closer examination, neither argument seems to hold water.

In valuing benefits, the Green Book uses an ‘egalitarian’ approach, meaning that for competing transport projects in different regions, for example, the hourly value of time used to estimate the benefits of time savings is the same, although regional disposable incomes may differ significantly. Many would argue, legitimately, that this is only fair and to do otherwise would undermine the cohesiveness of a national system. But the Green Book goes further than this, allowing for benefits flowing to poorer member of society to receive a higher weighting in the NPV calculus. The option of applying ‘distributional weights’ is rarely used, but it exists and could, in theory, be used as a mechanism for influencing investment decisions in pursuit of regional policy objectives.  

The Green Book approach goes beyond the application of social cost-benefit analysis at the national level. It also includes a requirement for an analysis of the differential impacts of a project ‘…on different groups of people or parts of the UK’.  Supplementary guidance goes further and sets out a methodology for assessing the impact of projects with a regional development dimension. Fully consistent with the Green Book, this guidance allows for project boundaries to be drawn for assessment purposes that reflect the target area for distributional impacts and the area over which desired economic impacts are expected. It also accepts the need to consider gains and losses outside this area and the impact on national economic efficiency. This is consistent with the Green Book requirement that analysis of local effects should be presented alongside, but separate from, estimates of UK-wide net present social value (NPSV).

As for the charge that the Green Book only allows for costs and benefits that can be valued, this is unfair. Appraisal is supposed to determine ‘…which option provides the best balance of costs, benefits, risks and unmonetizable factors’ [emphasis added]. Appraisers are warned against relying on a single measure, like NPSV, where there are significant non-monetized costs and benefits or varying levels of risk attaching to different options.

But is the distributional analysis and attention to unmonetizable factors just ‘window dressing’ and, in the final analysis, do decisions rest on a single number, the UK-wide NPSV? The intention and the practice seem to be otherwise. The Green Book describes a generic appraisal summary table to assist decision-makers. As well as NPSV, this table leaves room for identifying ‘significant unmonetizable costs/benefits’ and ‘significant unquantifiable factors’ to be considered in the appraisal decision.

When operationalised for transport, the table takes account of 23 other factors relating to the local economy, the environment, social impact and the national budget. Under ‘economy’, for example, economic regeneration and wider economic impacts are two of the four factors identified. And when it comes to final spending decisions, the United Kingdom’s National Audit Office found that ‘Final prioritisation also reflected other factors [in addition to the results of cost-benefit analysis], including the government’s political and strategic priorities, deliverability, commitments and regional distribution.[4]

It is not for want of tools able to take account of the regional dimensions of projects that public investment has been skewed towards the better-off parts of the UK. This has been a policy choice by successive governments. The danger is that in blaming the tool, it will be changed in such a way as to make legitimate policy choices regarding the geographic distribution of investment less transparent and diminish decision-makers’ accountability. This is the real benefit of the Green Book approach. It represents a flexible framework for facilitating coherent and transparent analysis and decision-making. It has the potential to hold decision-makers accountable for their decisions, while leaving scope to take a variety of factors into account in reaching those decisions.

 

[1] Simon Groom is an expert in public investment management.

[2] ‘The Green Book: Appraisal and Evaluation in Central Government’, HM Treasury, 2018 (revision of 2003 edition). More broadly, the ‘Green Book approach’ encompasses the business case model and supplementary guidance on various specialist areas.

[3] See for example ‘Johnson to overhaul public spending rules to boost UK regions’, Financial Times, 27 December 2019.

[4] Review of the 2010 Comprehensive Spending Review by the NAO.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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