Project appraisal - Transport Policy and Planning in Great Britain - page 350

an economic perspective it also raises the opposite danger - that a non-monetised
impact recorded in the AST may be seen as reason for 'vetoing' a project otherwise
offering a good benefit-cost ratio. This would imply (probably unreasonably) that the
sub-objective concerned had some over-riding, potentially limitless value.
To address these difficulties the Department has developed further guidance
under the heading of 'value for money' (DfT 2006c). This sets out to standardise the
way in which the results of cost-benefit analysis are presented and integrated with a
(professional) assessment of non-monetised impacts in the advice given to Ministers.
Interestingly such guidance would normally only be known to civil servants (i.e.
circulated internally within the DfT). However it was released publicly on the DfT
website:

Our objective in doing so is to encourage and facilitate the assessment of the
opportunity cost of different investment choices, by making clear the value for
money considerations that will be put to Ministers. We expect this to be of interest
not only to scheme promoters and their partners/consultants, but also to those
whose role at local and regional level includes advising on choices between projects.
(ibid.)

Advice on value for money is based on the relationship between three main
components:

1 the costs of the scheme to the public sector

2 the value of its monetised impacts

judgement as to the net cost or benefits represented by its non-monetised impacts.

3

The last two in combination represent the overall net benefit of the scheme which
is then assessed relative to its cost to arrive at an overall 'value for money' (VfM)
categorisation. Each of these is now considered in turn.

Scheme costs

Projects are appraised over the period of their useful life or 60 years (whichever is less).
Maintenance and renewal costs anticipated during this period need to be incorporated
as well as the initial costs of construction. Account also needs to be taken of any
'residual value' of an asset at the end of its useful life.
The Assessment column in the Public Accounts row of the AST shows the total
Net Present Value of all costs and revenues borne by central and local government.
(NPV was explained in 12.7.) This figure is derived from the Total figure shown in the
accompanying worksheet (Table 21.1).
Achieving accurate estimates of costs is a subject to which the Treasury has devoted
much attention in recent years. This has been prompted by experience that the figures
presented at the planning stages of a project tend to understate those ultimately
incurred by a substantial margin - a feature referred to as 'optimism bias'.
The estimation and treatment of scheme costs is the subject of TAG unit 3.5.9.
This identifies three main elements of a scheme cost estimate - a basic cost, a risk
adjustment cost and an optimism bias cost. The basic cost is what traditionally would
have been regarded as the cost estimate. It incorporates promoters' best estimates of
the various cost components, necessarily making assumptions about factors beyond its