ADDITIONALITY

12 The success of government intervention in terms of increasing output or employment in a given target area s 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. Additionality can also be referred to as a 'supply side' or 'structural' impact, which operates by altering the productive capacity of the economy. This can occur either because of a change in the size of the workforce or a change in the productivity of the workforce. Examples of interventions that promote supply-side benefits include improving the working of markets and economic institutions, strengthening capabilities, and facilitating greater participation in the workforce. The extent to which a proposal may produce a supply side benefit is an important component of an appraisal.

13 If there are no grounds for expecting a proposal to have a supply side effect, any increase in government expenditure would result in a matching decrease in private expenditure, (known as 'crowding out'). If, however, the supply-side impact of a proposal is expected to be positive, the net additional impact on economic welfare will need to be measured. This may consist of additional employment or output, and constitutes a real net benefit which the appraisal should take into account.

14 Estimating this type of additionality will normally require an analysis of the product, labour, and in some cases, capital markets affected by the intervention. For example, when assessing the level of displacement of an employment creation programme or the impact of recruitment and redundancy decisions on a particular local area, it is necessary to examine the characteristics of the jobs created, or protected, in relation to the characteristics of the local labour market. They must then be compared with similar jobs in other local areas that are not subject to the policy. Such a comparison establishes the 'do nothing' case: what would have happened if the intervention had not gone ahead.

15 In some cases, the best source of information for assessing additionality may be from those who clearly have an interest in the outcome of the decision. In these circumstances, the information and forecasts should be confirmed by an independent source. For example, the implied growth in demand for services might be compared to other forecasts for the same region, and contrasted with past performance. Sensitivity analysis should also be carried out, using alternative values for the key variables.

16 After developing the 'do nothing' case, the next step is to assess the net impact or benefit of these different options. This net benefit is the 'additionality' of the option. Additionality must, however, be calculated with consideration of 'leakage', 'deadweight', 'displacement' and 'substitution' effects. These are explained below.

❑ 'Leakage' effects benefit those outside of the spatial area or group which the intervention is intended to benefit.

❑ 'Deadweight' refers to outcomes which would have occurred without intervention. Its scale can be estimated by assessing what would have happened in the 'do minimum' case, ensuring that due allowance is made for the other impacts which impact on net additionality.

❑ 'Displacement' and 'substitution' impacts are closely related. They measure the extent to which the benefits of a project are offset by reductions of output or employment elsewhere.

17 For example, a project may attract scarce skills, or investment, which would otherwise have gone to other parts of the country; or, if the policy involves support for local businesses, these may compete for resources and / or market share with non-assisted businesses.

18 The appropriate area for analysis of displacement effects will depend on the type of project. In the case of employment displacement, the area considered should usually approximate the local labour market.1

19 The effect on net employment and net output is likely to be much smaller than the direct employment and output effects of the project. Evidence should support the assessment of the scale and importance of any net employment and net output benefits, taking account of multiplier effects. A multiplier measures the further economic activity, (whether output or jobs), resulting from the creation of additional local economic activity. Where it is considered appropriate to calculate multipliers, guidance is available from English Partnerships and the Regional Development Agencies.2

20 If there is no improvement in national economic efficiency, local employment and output effects, net of any local displacement effects, may be considered in parts of the appraisal where the project has a strong distributional rationale. For example, a policy may aim to reduce the rate of unemployment in a particular deprived area, as opposed to reducing the rate of unemployment overall.

21 Where potentially large changes to employment, (either as a result of employment creation, protection or redundancy) are concerned, assessment will normally require a thorough analysis of the local labour market. This should cover the age, skills and experience of those whose jobs are at stake, and how these compare with the characteristics of the 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 these job losses occurred.

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1 Detailed guidance on methodologies for assessing displacement effects is available from the DTI Central Evaluation Team web site at http://www.dti.gov.uk. The recent DTI/ SBS evaluation of 'Smart', available on the same web site, provides an applied example. Also useful is research undertaken for DTI by the University of Durham (http://www.dur.ac .uk) and DWP's Travel to Work Areas.

2 For example, see 'Additionality: A Full Guide' (English Partnerships, 2001)