A2.2 Appraisal should always include an assessment of value for money in terms of the national interest. This is the perspective of Economic Appraisal and its scope therefore is very wide. In fact it seeks to identify all the costs and benefits to the UK resulting from a project, policy or programme.
A2.3 Section 2 of The Option Appraisal Guide explains how costs and benefits should be estimated in an Economic Appraisal, so there is no need to duplicate all that information here. However, in the context of this appendix, it is useful to be reminded of the following key features:
■ All UK impacts, whatever their nature, are taken into account, including not only "economic" factors like income and employment, but also social, health and environmental factors, and any other important identifiable effects.
■ Costs and benefits are valued according to their economic cost or "opportunity cost" (see para. 2.5.7 of the main text for explanation).
■ Costs and benefits are included whether they fall to the public or private sector and whether they are quantifiable in money terms or not.
■ Benefits are adjusted to account for displacement of competing activity, so that a proposal's net impact on the UK is calculated.
■ Economic Appraisal is not restricted to the narrow perspective of a particular public body - it is about putting the nation's resources to the best use.
A2.4 Economic Appraisal always values costs and benefits on an economic cost basis. However, the approach to costs and benefits may fall into one of the following three main categories:
■ Cost Benefit Analysis (CBA) which attempts to quantify all the costs and benefits in money terms;
■ Cost Utility Analysis (CUA) this is like CBA except that it seeks to measure benefits using non-monetary indicators of utility. Utility is an economist's term for the satisfaction or usefulness derived from a product. An example of CUA is the calculation of the cost per quality-adjusted life year ("QALY") resulting from a surgical intervention; and
■ Cost Effectiveness Analysis (CEA) in which either the benefits or the costs are held constant. In the former case CEA compares the costs of different ways of producing the same or similar outputs, which are not necessarily given a monetary value; in the latter case various ways of allocating a fixed sum are considered in order to maximise the benefits.
A2.5 CBA is rarely amenable in its purest form because relevant costs and benefits are often difficult to measure in money terms. Sometimes benefits can only be indicated in terms of intermediate outputs such as numbers of trainee places provided, or numbers of hospital cases treated. Even when appraising projects producing tradable goods and services (e.g. investments by the nationalised industries, grants to commercial firms) there may be non-monetary effects to take into account, such as environmental impacts and other qualitative outputs. CEA is used to some extent, particularly when the emphasis is upon choosing the least cost method of achieving particular objectives. However, many appraisals fall somewhere between CEA and CUA. They involve options which vary regarding both costs and outputs, and it is a matter of judging which of the alternatives is best by comparing the different costs and outputs which they offer.
A2.6 There are some specific forms of appraisal which do not amount to a full Economic Appraisal, but are nevertheless designed to contribute to the aim of assessing how best to use resources in the national interest. For instance, an environmental appraisal (or "environmental impact assessment") assesses the environmental effects of various options. Impact assessments may be conducted on a variety of other specific issues such as Equality, Health, and so on. Another example is regulatory impact assessment, which assesses the costs to industry of proposed changes to regulations and standards. Partial analyses like these may be used to feed into a fuller economic appraisal.