This document summarizes a workshop on investment appraisal practices in the UK Ministry of Defence (MOD). It discusses the importance of value for money in investment decisions and outlines MOD's roles in establishing investment appraisal policy and scrutinizing appraisals. The presentation notes that while appraisal quality is improving, challenges remain such as vague requirements, limited option consideration, and uncertain affordability. It suggests areas of focus could include improving training, guidance on requirements and options identification, addressing optimism bias, and exploring wider applications of appraisal evidence such as at the strategic planning level.

1. SCAF WORKSHOP ON INVESTMENT
APPRAISAL – CURRENT POLICY AND
PRACTICE IN MOD
9 FEBRUARY 2010
NEIL V DAVIES, JOHN OGILVIE, PRABHAT VAZE
MINISTRY OF DEFENCE
Division of Economic Statistics and Advice

2. SLIDE 1
VALUE FOR MONEY
 Value for Money (vfm) is optimal combination of
 Economy – ie Cost of Inputs (1/M):Inputs/Money)
 Efficiency – ie Ratio of Output to Inputs
(O/I:Outputs/Inputs)
 Effectiveness – ie Value of Outcomes from Outputs
(V/O:Value/Outputs
 Hence vfm =
 Vfm is a relative not absolute construct

3. SLIDE 2
OUR ROLES IN MOD INVESTMENT APPRAISAL
AND EVALUATION
 Responsible for MOD policy on Investment
Appraisal (IA) and Project Evaluation (PE) and
ensuring MOD compliance with HM Treasury’s
“Green Book” guidance
 Provide advice and guidance on IAs and PEs eg
JSP507
 Scrutinise IAs/COEIAs, OBCs for all projects
subject to Central Approval (eg Ministers, IAB,
DEC)
 Review sample of TLB IAs/PEs for Health of
Financial Systems Review

4. SLIDE 3
PURPOSE OF IA
 To ensure Value for Money is obtained from
investment decisions
 Effective appraisal and evaluation are fundamental
requirements of Treasury delegations

5. SLIDE 4
MAIN FORM OF IA IN MOD: COST
EFFECTIVENESS OF ANALYSIS
 Compares the costs of alternative ways of
producing the same or similar outputs, which are
not given a monetary value
 While every effort should be made to quantify
benefits, cost benefit analysis is not appropriate or
feasible for most defence projects

6. SLIDE 5
COMBINED OPERATIONAL EFFECTIVENESS
& INVESTMENT APPRAISAL (COEIA)
Military E F
or D
B
Business
Effectiveness C Options
A
45º
Whole Life Cost

7. SLIDE 6
BASIC QUESTIONS FOR IA
 Why is it necessary to commit resources?
 What do we want to achieve?
 What options are available?
 How much will they cost?

8. SLIDE 7
MODEL OUTLINE OF MOD IA
 establish requirement
 define objectives
 identify options
 quantify costs and benefits of (shortlisted) options
 compare these in NPV terms
 evaluate risks and uncertainties
 consider unquantifiable factors
 present results and make recommendation
 plan for Project Evaluation

9. SLIDE 8
QUALITY OF TLB IAs
Quality improving from a low base
Numbers of IAs declining
01/02 02/03 2003 2004 2005 2006 2007 2008 2008 2008 2009
H1 H2 H1
Poor 72% 72% 49% 35% 42% 42% 44% 33% 47% 20% 27%
Adequate 19% 23% 32% 44% 34% 38% 35% 56% 45% 66% 59%
Good 9% 5% 19% 21% 24% 20% 21% 11% 8% 14% 14%
Sample 22 87 78 96 137 74 98 82 38 44 51
of IAs
Total No 1154 1355 1207 831 498 389 334 229 64 165 83
of IAs

10. SLIDE 9
PRACTICAL ISSUES WITH IAs/COEIAs
SUPPORTING CENTRALLY APPROVED
PROJECTS
 We have around 180-200 live projects at any time
 Most IAs at a high standard by the time they go to
IAB
 But at draft stage main problems
• vague/uncertain specification of requirement
• limited consideration of alternative options/case written
around preferred option
• particular challenges with partnering
• affordability often uncertain

11. SLIDE 10
CHALLENGES
1. Increasing competition for resources
- Fiscal position means next comprehensive Spending
Review will bring severe squeeze on spending
- Defence will need to compete with other spending
priorities
2. Strategic Defence Review
- This will provide long-term direction
- Need for evidence on VFM to support direction
- Can appraisal provide more for strategic decisions?
3. Gray Review findings and appraisal
- Highlights problems of Entryism and Optimism Bias
- Findings include skills gaps and technical shortcomings
- Poor information mixes with competing interests and
incentives

12. SLIDE 11
WHERE WE MIGHT FOCUS:
Training & Guidance
Requirements &
options identification
Optimism bias
Integrate
supplementary
guidance
Examples & better
presentation
Training for managers
& practitioners

13. SLIDE 11
WHERE WE MIGHT FOCUS:
Training & Guidance Evaluation
Requirements & Encourage more
options identification evaluation
Optimism bias Share best practise on
IA evaluation
Integrate
supplementary Highlight feedback
guidance role into appraisal
Examples & better Use existing
presentation evaluative results:
optimism bias
Training for managers
& practitioners

14. SLIDE 11
WHERE WE MIGHT FOCUS:
Training & Guidance Evaluation Wider applications
Requirements & Encourage more Could appraisal help
options identification evaluation at concept level?
Optimism bias Share best practise on What role in planning
IA evaluation round?
Integrate
supplementary Highlight feedback What IA evidence can
guidance role into appraisal be used for
prioritisation?
Examples & better Use existing
presentation evaluative results:
optimism bias
Training for managers
& practitioners

15. SLIDE 12
ANY QUESTIONS?