What does the green book do?

The green book provides “technical guidance” to help officials advise ministers how best to achieve a given policy objective. It does not set policy objectives, but “sets out a rigorous yet pragmatic approach to weighing up the costs and benefits and illuminating the key issues, uncertainties and risks” in potential projects. As ultimate decision makers, ministers are not bound by recommendations arising from green book appraisals.

What were its weaknesses?

The 2020 review of the green book concluded that it failed to support the Government’s objectives in areas such as ‘levelling up’ the regions and reaching net zero. The review said this was because the process relied too heavily on cost-benefit analysis, also known as the benefit-cost ratio (BCR). The review found that the BCR placed too much weight on benefits that could easily be assigned a monetary value, with insufficient weight given to whether the proposed project addressed strategic policy priorities. The review also suggested that the BCR approach discouraged the coordination of separate projects that might address the same issue.

Other concerns noted in the review included:

  • a lack of transparency in the project evaluation process;
  • insufficient expertise and resource, for example in local government, to fulfil all the requirements of a comprehensive green book appraisal; and
  • inadequate evaluation of projects after completion, which could promote better practice in the future.

The review was carried out by HM Treasury. It stated that during the review it consulted with “a wide range of stakeholders”, including:

  • academics;
  • the National Audit Office;
  • the National Infrastructure Commission;
  • analytical experts;
  • users of the green book both in Whitehall and in the devolved administrations; and
  • the northern powerhouse and regional and local government.

External commentators have also criticised previous versions of the green book. For example, in 2018, academics Diane Coyle and Marianne Sensier published a paper that considered how the green book could be changed to improve regional economic performance. They found evidence of a “methodological bias” in BCRs, in that projects in areas where the economy was already strong were more likely to score highly. They concluded that the previous green book was “a poor tool for taking a long-term view about the economy and in particular the spatial aspect of growth”. The authors recommended that the methodology be changed to ensure “decisions about significant investments explicitly incorporate a strategic view about economic development for the whole of the UK”.

In September 2020, the thinktank Centre for Cities also considered the changes to the green book approach that were needed to promote levelling up. Disagreeing with the findings of Coyle and Sensier, the centre argued that BCRs by themselves were not biased towards the south-east. It recommended a less centralised public funding model, in which more local authorities are strengthened and given the resources to utilise the green book methodology.

How has the new version changed?

The new December 2020 version of the green book requires project proposals to contain a much clearer outline of their strategic objectives from the start and how these link to the Government’s priorities. The review said that only options with a “strong strategic case” would now enter the BCR stage of the process. The result of the BCR might therefore be less critical to whether the project is approved. For example, a project with a low BCR could go ahead if it were the best option to achieve a particular objective. Conversely, an option with a very favourable BCR would not be approved if it did not address strategic objectives.

The review also described steps that the Government was taking to improve the quality of submissions. For example, it stated that the Government had put in place:

  • a stronger review process at each stage of a proposal, provided by both HM Treasury and specialist reviewers in government departments;
  • more training and support for those submitting projects for appraisal; and
  • greater emphasis on project evaluation, to help understand “what works”.

The review said these changes would turn the book into “a vital tool for progressing the Government’s priority outcomes and wider public value agenda”. They take place against the background of planned increases in investment and infrastructure spending.

In the March 2020 budget, the chancellor, Rishi Sunak, said that by the end of this parliament, “public sector net investment will be triple the average over the last 40 years in real terms”. To support this aim, the Government published a national infrastructure strategy in November 2020. In the March 2021 budget, the chancellor announced a new UK infrastructure bank to help finance projects.

How does the new green book address ‘levelling up’?

To address the Government’s levelling up objective, the new green book requires projects to assess their “place-based impact”. The aim of the changes is to ensure that proposals “consider the differential impacts on different places and the interaction with other relevant strategies, at UK levels, or more locally”. Projects must now contain such analyses, even if they do not target specific geographic areas.

To support the new requirements, the green book provides further guidance on measuring local impacts. For example, it states that expected outcomes can be weighted to reflect the greater value of additional income to poorer households. The new guidance also emphasises that projects should be aligned with other local and national interventions affecting the targeted area.

The revisions also include new guidance on assessing projects designed to bring about “transformational” change. The green book defines this as a “radical permanent qualitative change” in the subject of the project. It requires that for such proposals, the “nature of the change needs to be transparently explained”, with “a credible explanation of the change process”. The guidance says that because such changes may be irreversible, potentially including intergenerational wealth transfers, they should include more scenario and sensitivity analysis.

Following publication of the review, the Centre for Cities welcomed the greater emphasis on strategic objectives when designing the business case, and the support for local government in developing projects. However, it argued that without an overall national definition of levelling up, the impact of changes to the green book will be limited. It proposed that levelling up should be defined as “closing one-third of the output gap in the eight biggest cities outside of London over the next decade”.

In evidence to the House of Commons Treasury Committee in December 2020, Paul Johnson of the Institute for Fiscal Studies argued that changes to the green book might not themselves drive a major change in the way investment decisions were made in government. He said that they might affect smaller projects, but “on the big decisions across Government, there is a very big judgement overlay”. He welcomed the possibility that such strategic judgements might be made more transparent.

What is changing on environmental impacts?

The new green book requires all projects to consider their impacts on carbon emissions, whether or not they directly target the net zero objective. It provides further guidance on how emissions should be assessed.

The Government has also developed guidance on accounting for climate change and the value of the environment for people and the economy (the “natural capital approach”). The new green book references these, as well as providing further guidance on valuing projects’ impacts on the natural environment, accounting for natural capital stocks and valuing costs and benefits that cannot be measured in monetary terms.

The book also refers to the Government’s net zero review’s final report, due to be published in spring 2021. It said the report will “set out a framework for considering the appropriate policy levers to use in different situations and to manage impacts on households, businesses and sectors”.

Measuring future costs and benefits—discounting

The green book sets out a framework for measuring costs and benefits that arise in the future and comparing them with those that arise today. To achieve this, costs and benefits in future years are converted to a value in today’s money. This is known as a ‘present value’ calculation. It requires a discount rate to be applied to future benefits and costs.

The effect of discounting is to give preference to present benefits over future benefits. This reflects the view that people generally prefer to receive goods and services now rather than later. The green book applies a standard discount rate of 3.5% per annum to future benefits and costs. However, a reduced rate of 1.5% per annum applies to policies that impact health or life outcomes. This means that future health and life benefits are not reduced by as much as other future benefits when performing BCRs.

HM Treasury has previously recognised the standard discounting technique may not be appropriate for projects with long time effects, such as those addressing climate change. It said these raise “fundamental ethical issues concerning the responsibility of the current generation to future generations”. For example, it argued that environmental damage might lead to “irreversible wealth transfers from the future to the present”. Because of this, for periods over 30 years, a reduced discount rate already applied in the previous green book. In addition, slightly lower standard and reduced rates (3% and 1% respectively) can be used to conduct a “sensitivity analysis” for environmental projects that affect future generations.

However, the 2020 green book review was concerned that such adjustments still do not adequately allow for environmental effects. The review therefore announced a further review of discount rates in BCRs. It said the review will involve external experts and will report in 2021.

How do the green book revisions link to the spending review?

The Government said that the revised green book approach will also apply to future spending reviews. For example, departments will need to put forward a strategic case and a place-based impact assessment for their capital proposals. They should also engage with HM Treasury “early” in the development of business cases, to agree the need for the intervention. HM Treasury will challenge these business cases if they do not meet the new green book requirements.

The green book review also referred to each department’s priority outcomes, published alongside the November 2020 spending review. It said that projects put forward for green book appraisals should align with these priorities, several of which were “strongly focused” on levelling up.

What has been added on equalities impacts?

The review found that impacts on equalities tended to be “an afterthought” in project submissions made under the previous green book. Under the new approach, all proposals must take equalities impacts into account. A member of each project assessment panel will have responsibility for challenging and testing the assessment of equalities impacts. The review also noted that the public sector equality duty (PSED) requires public sector bodies to “have due regard to equality of opportunity for persons with protected characteristics, eliminating discrimination and fostering good relations between protected groups and others”.

The Government will offer training in this area to support those writing project applications.

What next?

The House of Commons Treasury Committee issued a call for evidence on the changes to the green book. The deadline for submitting evidence was 5 February 2021. The committee has not yet published its findings.

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Cover image by StockSnap from Pixabay.