5.33 It is important that the distributional implications of each option are considered during appraisal. This type of analysis enhances the understanding of the fairness of proposals, their social impacts and their scale.
5.34 The impact of a policy, programme or project on an individual's well-being will vary according to his or her income; the rationale being that an extra pound will give more benefit to a person who is deprived than to someone who is well off. In economics, this concept is known as the 'diminishing marginal utility of additional consumption'.
5.35 Other distributional issues may also arise, and should be considered during appraisal. A proposal may have differing impacts according to age, gender, ethnic group, health, skill, or location. These effects should be explicitly stated and quantified wherever feasible. For example, the costs and benefits of a proposal might be broken down according to the ethnic group they accrue to, providing appraisers with a basis for comparison and analysis.
5.36 Generally though, these other distributional issues are largely correlated with income. Therefore, if more in depth analysis is undertaken, it should focus on how the cost and benefits of a proposal are spread across different socio-economic groups.
5.37 For the purposes of project appraisal, relative prosperity may often be best defined by relative income, adjusted for household size, and divided into quantiles (e.g. quintiles or deciles).5 The equity impact of competing options can be compared by charting the impact each has on different 'quantiles' of the income distribution. Proposals that deliver greater net benefit to households or individuals in lower income quantiles are rated more favourably than those that benefit higher quantiles.
5.38 A more in depth analysis uses distributional weights to adjust explicitly for distributional impacts in the cost-benefit analysis. Benefits accruing to households in a lower quantile would be weighted more heavily than those that accrue to households in higher quantiles. Conversely, costs would be weighted more heavily for households in lower quantiles. Annex 5 provides further guidance in this area.
5.39 A project aiming to improve market efficiency through the correction of market failure needs also to consider equity outcomes. In this case, an explicit adjustment would be particularly helpful as an equity check for the proposal. Similarly, an adjustment is desirable when faced with a decision between competing equity motivated projects, aimed at regenerating areas containing different socio-economic populations.
5.40 Applying an explicit distributional adjustment requires quite detailed information about the affected population. A judgement must be made as to whether the necessary socio-economic information is available at an acceptable cost, given the importance of the proposal and the likely scale of the impact of distributional analysis.
5.41 Where appraisers decide not to adjust explicitly for distributional impacts, they must provide a justification for this decision. This judgement should be informed by the following considerations:
❑ The significance of the impact of distributional analysis to the proposal under consideration;
❑ The ease with which distributional impacts can be measured; and
❑ The scale of the impact associated with a particular project or proposal.
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5 The relative prosperity of a household depends on its size and composition as well as income. The varying costs of living of different households can be adjusted for by calculating equivalised income ranges. Further detail is provided in Annex 5.