1. Fiscal Principles or Rules (Strength—High; Effectiveness—High)

17. The UK has a fiscal framework to support debt sustainability and affordability. The revised Charter for Budget Responsibility (2022) sets out how UK’s management of public finances operate.¹⁰ The stated objective of fiscal policy is to “ensure sustainable public finances, economic growth (...) and intergenerational fairness.” Instead of setting numerical debt targets or limits, the Charter includes a fiscal mandate to have public sector net debt (excluding the Bank of England) as a percentage of GDP falling by the third year of the rolling forecast period. The Charter also makes a reference to the need to monitor debt affordability given current high debt levels and the growing sensitivity of debt to changes in interest rates and inflation. Given that the Charter for Budget Responsibility and the associated fiscal rules have been in place less than a year, the effect of the pandemic and subsequent fiscal policy reactions, and the frequency with which rules have been changed in the recent past (see below), the high score in institutional design and effectiveness is the result of considering a longer-term perspective of two decades.

18. The Office of Budget Responsibility (OBR) provides authoritative independent fiscal forecasts and assesses the long-term sustainability of public finances. Since its creation in 2010, the OBR produces detailed five-year forecasts for the economy and public finances twice a year, which the government uses to produce its Autumn and Spring Budget documents. These forecasts also incorporate the impact of any tax and spending measures announced by the Chancellor and are the basis for OBR’s assessment of the government’s performance against its own targets and fiscal rules. In its most recent analysis of the 2021 Spending Review and the Spring Budget, published in March 2022, the OBR concluded that the public sector net debt (which has increased as a result of shocks such as the global financial crisis and the pandemic) and the debt-interest ratio are expected to decline by the end 2024/25 and therefore the fiscal mandate in terms of sustainability and affordability will be met (Figure 3.3). A unique feature of the OBR is that it also looks beyond the 5-year horizon and publishes fiscal risks and sustainability reports which assess the long-term trajectories of major fiscal aggregates and the public sector’s balance sheet providing a view on the overall sustainability of public finances. The independence and quality of OBR’s analyses confirm that the institution plays a central role in the UK’s fiscal framework.

Debt Sustainability and Affordability

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: Office of Budget Responsibility (2022)

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Debt Sustainability and Affordability

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: Office of Budget Responsibility (2022)

• Download Figure
• Download figure as PowerPoint slide

Debt Sustainability and Affordability

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: Office of Budget Responsibility (2022)

• Download Figure
• Download figure as PowerPoint slide

19. The fiscal anchor is supported by operational fiscal rules with rolling targets. To support the declining debt mandate, which serves as the anchor for fiscal policy, the main operational fiscal rule states that the current budget should be balanced by the end of that same rolling period. Additionally, there is a target to ensure that expenditure on welfare is contained within a predetermined cap and margin set by the Treasury, and another target to ensure that public sector net investment does not exceed 3 percent of GDP on average over the rolling forecast period.¹¹ Both the debt and current budget rules have rolling targets to be achieved in the third year of the forecast. There is also an escape clause, but no definition of what constitutes a significant economic shock. According to the OBR, while these features reduce the possibility of missing the rules or abandoning them during economic crises, it is possible to push forward the actual date for meeting the rolling target indefinitely, which could result in public finances progressively deteriorating.¹² To secure that the institutional design and effectiveness of the fiscal framework remains high, the IMF has recommended to the UK authorities (see Art. IV 2021) that every time the design of fiscal rules is altered, the OBR provides the Parliament with a structured commentary as to whether the new calibration aligns with higher-order fiscal objectives of debt sustainability, before the members of Parliament vote on the new rules.

20. The introduction of an investment cap may create PIM challenges. While HMT considers the introduction of an investment cap consistent with future debt sustainability, the economic rationale to fix it at 3 percent of GDP is not evident. In fact, giving that reaching the average level of public investment in the OECD (also 3 percent of GDP) is a declared policy objective for the UK, both the target and the cap could coincide making the latter binding. In such circumstances, the investment cap may in fact limit the capacity to invest further in support, for example, of the Net Zero Strategy and the Levelling Up Agenda or require amendments in capital plans. In this context, it would be advisable to develop guidelines on the phasing or reprioritization of investment spending if it appears the cap is likely to become binding.

21. The UK Government is required to have fiscal rules, but the rules themselves are not legally binding and can change frequently. Contrary to some other countries, fiscal rules in the UK do not have a binding legal status and rules contained in the Charter can be changed via a vote in Parliament. Every time the Chancellor wishes to modify the Charter, a revised version is presented to Parliament, and it comes into force as soon as is approved by simple majority in the House of Commons. In the last twenty-five years, there have been many different sets of fiscal rules (see Table 3.1). While the core themes of the fiscal rules persist, governments have tended to change the metrics or time horizon of the rules when the outlook shifted, instead of adjusting policy to meet the pre-established fiscal rule. In this context, OBR warns that “relative to a world in which fiscal rules acted as a greater constraint, the path of debt can be expected to be higher.”¹³

^{Table 3.1.}

Major Changes to UK’s Fiscal Rules, 1998–2021

Source: Staff analysis. *Represents an update to the Charter for Budget Responsibility. These rules were announced in the 2019 Conservative Party manifesto and adopted at the Spring Budget 2020. However, they were never formally adopted in the Charter for Budget Responsibility as the fiscal framework was reviewed.

^{Table 3.1.}

Major Changes to UK’s Fiscal Rules, 1998–2021

Years	Rules
1998–2008	The current budget to be balanced on average over an economic cycle; and The national debt to be less than 40 percent of national income.
2008–2010	Fiscal rules were suspended during a the financial crisis and replaced with a target to reduce the cyclically-adjusted current bud get deficit “once the economy emerges from the down turn,” ultimately returning to balance.
2010	Government borrowing as a percentage of GDP to fall in each year 2010/11 to 2015/16. Government borrowing to halve between 2009/10 and 2013/14. The national debt to fall as a percentage of GDP in 2015/16.
2010–2014*	The cyclically-adjusted current budget to be in balance or surplus at the end of a rolling, five-year forecast horizon. The national debt as a percentage of GDP to be falling in 2015/16.
2014–2015*	The cyclically-adjusted current budget to be in balance by the end of the third year of the rolling five-year forecast period and the national debt to fall each year in 2016. Introduction of a welfare cap, limiting the amount that government can spend on certain social security benefits and tax credits set. The level of the cap is set by HMT at the start of each parliament and the Office of Budget Responsibility would report on whether the cap has been met.
2015–2016*	The national debt as a percentage of GDP to be falling in every year. The budget(public sector net borrowing)to be in balance by 2019/20. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.
2016–2020*	Reduce cyclically-adjusted deficit to less than 2percentofGDP by 2020/21. The national debt as a percentage of GDP to be falling in 2020/21. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.
2020–2021 +	The current budget to be in balance by no later than the third year of the forecast period. Public sector investment to average no more than 3 percent of GDP on average over the forecast. If debt interest payments consistently exceed 6 percent of revenue, the Government will reassess its fiscal plans. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.
2021	The public sector net debt (excluding the Bank of En gland) as a percentage of GDP should be falling by the third year of the rolling forecast period. The current budget should be balanced by the third year of the rolling forecast period. The public sector net investment should not exceed 3percentofGDP on average over the rolling forecast period. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.

Source: Staff analysis. *Represents an update to the Charter for Budget Responsibility. These rules were announced in the 2019 Conservative Party manifesto and adopted at the Spring Budget 2020. However, they were never formally adopted in the Charter for Budget Responsibility as the fiscal framework was reviewed.

View Table

^{Table 3.1.}

Major Changes to UK’s Fiscal Rules, 1998–2021

Years	Rules
1998–2008	The current budget to be balanced on average over an economic cycle; and The national debt to be less than 40 percent of national income.
2008–2010	Fiscal rules were suspended during a the financial crisis and replaced with a target to reduce the cyclically-adjusted current bud get deficit “once the economy emerges from the down turn,” ultimately returning to balance.
2010	Government borrowing as a percentage of GDP to fall in each year 2010/11 to 2015/16. Government borrowing to halve between 2009/10 and 2013/14. The national debt to fall as a percentage of GDP in 2015/16.
2010–2014*	The cyclically-adjusted current budget to be in balance or surplus at the end of a rolling, five-year forecast horizon. The national debt as a percentage of GDP to be falling in 2015/16.
2014–2015*	The cyclically-adjusted current budget to be in balance by the end of the third year of the rolling five-year forecast period and the national debt to fall each year in 2016. Introduction of a welfare cap, limiting the amount that government can spend on certain social security benefits and tax credits set. The level of the cap is set by HMT at the start of each parliament and the Office of Budget Responsibility would report on whether the cap has been met.
2015–2016*	The national debt as a percentage of GDP to be falling in every year. The budget(public sector net borrowing)to be in balance by 2019/20. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.
2016–2020*	Reduce cyclically-adjusted deficit to less than 2percentofGDP by 2020/21. The national debt as a percentage of GDP to be falling in 2020/21. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.
2020–2021 +	The current budget to be in balance by no later than the third year of the forecast period. Public sector investment to average no more than 3 percent of GDP on average over the forecast. If debt interest payments consistently exceed 6 percent of revenue, the Government will reassess its fiscal plans. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.
2021	The public sector net debt (excluding the Bank of En gland) as a percentage of GDP should be falling by the third year of the rolling forecast period. The current budget should be balanced by the third year of the rolling forecast period. The public sector net investment should not exceed 3percentofGDP on average over the rolling forecast period. Welfare cap: expenditure on welfare will be contained within a predetermined cap and margin set by HMT.

Source: Staff analysis. *Represents an update to the Charter for Budget Responsibility. These rules were announced in the 2019 Conservative Party manifesto and adopted at the Spring Budget 2020. However, they were never formally adopted in the Charter for Budget Responsibility as the fiscal framework was reviewed.

22. A medium-term fiscal framework (MTFF) aligns budget preparation and public investment plans with fiscal policy. The Charter of Budget Responsibility stipulates how the MTFF works and the interaction between the Treasury and the OBR during the budget process. The MTFF is developed prior to budget preparation. At the start of the process, the OBR issues economic forecasts that the Treasury uses for its multiyear budgeting exercise. The Treasury then works with departments to prepare a budget proposal that differentiates between multiyear current and capital spending. HMT provides the OBR with costings for all DEL expenditure, including capital. The OBR plays a role in costing AE (Annually mandated Expenditure) which is more volatile than investment expenditures.

2. National and Sectoral Planning (Strength— High; Effectiveness—High)

23. The National Infrastructure Strategy (NIS) and social infrastructure sectoral plans identify major investment projects. The NIS is the overarching plan for economic infrastructure and encompasses investment across transport, energy, water and wastewater, waste, flood risk management, and digital communications.¹⁴ The Strategy has three broad objectives: to boost growth and productivity across the whole of the UK, levelling-up and strengthening the Union; to put the UK on the path to meeting its net zero emissions target¹⁵ by 2050; and to support private investment in infrastructure. In addition to funding commitments across economic infrastructure sectors, the NIS also commits to a range of reform initiatives to enhance delivery. The NIS sets an ambitious plan to return UK public sector net investment to the highest sustained levels since the 1970s. Investment plans for social infrastructure, for example schools and healthcare, are set out in discrete sectoral strategies. Total Spending Review 2021 investment (including economic and social infrastructure), shown in Figure 3.4, is consistent with the NIS.

Trends in Public Sector Gross Investment

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: HMT Autumn Budget and Spending Review 2021

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Trends in Public Sector Gross Investment

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: HMT Autumn Budget and Spending Review 2021

• Download Figure
• Download figure as PowerPoint slide

Trends in Public Sector Gross Investment

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: HMT Autumn Budget and Spending Review 2021

• Download Figure
• Download figure as PowerPoint slide

24. The NIS is the product of a strong policy architecture for economic infrastructure planning (see Box 3.1). The National Infrastructure Commission (NIC) is currently working on an updated National Infrastructure Assessment (expected in 2023) which will inform the next NIS.

25. Sectoral investment strategies complement the NIS. Sectoral strategies cover investment in areas such as digital infrastructure, rail transport and flood defense as well as social infrastructure such as healthcare and housing. The mission’s analysis revealed there is scope to streamline sectoral investment strategies and embed stronger links between sectoral plans and the overall national strategy. There is a large number of sectoral investment targets and this risks fragmentation of policy coherence.

26. Broadening the scope of the NIS could ensure alignment with social infrastructure delivery and assist in achieving the Levelling-Up agenda. Widening the policy architecture to incorporate social investment spending into the NIS¹⁶ will increase comprehensiveness of overall policy plans, enabling better planning and sequencing of public investment across sectors and levels of government. A unified economic and social infrastructure strategy, consistent with a vision of regional development, would support the commitment to “hardwire” spatial considerations in investment planning as set out in the Levelling Up White Paper (see Box 3.2). National Investment Strategies for Wales and Scotland are good examples of incorporating social infrastructure plans and economic infrastructure. Internationally, a number of jurisdictions plan social infrastructure and economic infrastructure in tandem (see Box 3.3).

27. Projects are costed in advance of inclusion in investment strategies. The Spending Review provides the funding framework for the NIS and social infrastructure. Departmental level settlements contained in the Spending Review are based on bottom-up costing of all capital spending projects. HMT and the IPA review business cases for investment proposals prior to inclusion in the budgetary plans. This includes an assessment of delivery capability. SR21 provides budgets for a three-year period, however the investment strategy takes account of early-stage total project costs and is consistent with longer-term assumptions on available fiscal space. In certain cases, HMT provides longer term indicative budgets beyond the Spending Review period for projects, which are still within scope at future SRs. Departmental settlements provide approval for medium-term project budgets. Examples include major transport and energy projects and Project Gigabit, the Government’s long-term plan for digital connectivity.

28. Sectoral strategies do not uniformly include measurable output and outcome targets for investment plans, however a number of reporting channels aim to track investment outcomes. In particular the Public Value Framework requires departments to produce Outcome Delivery Plans to demonstrate spending impact. While not limited to capital spending, the indicators generated can be used to monitor progress against key policy targets set out in the NIS and related policy initiatives such as Net Zero and Levelling Up.

3. Coordination Between Entities (Strength-Medium; Effectiveness-Medium)

29. The level of fiscal decentralization in the UK is limited, as fiscal policy is controlled by the UK government. As stated in the Statement of Funding Policy 2021,¹⁷ the responsibility for UK fiscal policy, macroeconomic policy and funding allocation across the UK remains with HMT. In the UK there are four nations (England, Northern Ireland, Scotland, and Wales) and three devolved national administrations (in Northern Ireland, Scotland, and Wales).¹⁸

30. Devolved administrations do not fully control their budgets, as grants from the UK Government significantly sustain them. Table 3.2 provides a summary overview of the devolved spending powers in Northern Ireland, Scotland, and Wales.¹⁹ The devolved administrations also have revenue-raising powers, notably elements of income tax in Scotland and Wales. The devolved governments fund their activities from their own Consolidated Funds. These funds are the vehicles into which the funding from the UK government, called the “block grant,” and other allocations from the UK Government are paid, together with the funding raised by the devolved administrations themselves. During every Spending Review, Fiscal Event, and Parliamentary Estimate, the existing block grant is updated using the rules-based “Barnett formula.” ²⁰,²¹

^{Table 3.2.}

Devolved Powers in Northern Ireland, Scotland, and Wales

Source: Civil Service: Introduction to Devolution

^{Table 3.2.}

Devolved Powers in Northern Ireland, Scotland, and Wales

Health and social services	Economic development	Tourism, sport, culture and heritage
Education, training, and skills	Agriculture, forestry, and fisheries	Fire and rescue services
Local government	Environment and planning	Water and flood defense
Housing	Transport

Source: Civil Service: Introduction to Devolution

View Table

^{Table 3.2.}

Devolved Powers in Northern Ireland, Scotland, and Wales

Health and social services	Economic development	Tourism, sport, culture and heritage
Education, training, and skills	Agriculture, forestry, and fisheries	Fire and rescue services
Local government	Environment and planning	Water and flood defense
Housing	Transport

Source: Civil Service: Introduction to Devolution

31. Local authorities receive funding through various funding channels such as capital grants, formula funding, competitive bidding, and taxes. As can be seen in Table 3.3, the OBR estimates that public investments are expected to grow by around 16 percent between 2022–23 and 2026–27, from £124.3 billion to £143.9 billion, while public investment by local governments is expected to grow between 2022–23 and 2026–27 by around 17 percent, from £26.3 billion to £30.7 billion. Local governments in England show the strongest growth in investments (18 percent), as compared to Scotland (8 percent) and Wales (13 percent).

^{Table 3.3.}

United Kingdom: Local Government Capital Expenditure¹

Source: Office of Budget Responsibility, Economic and Fiscal Outlook, March 2022.

^1/This analysis does not include Northern Ireland as services there are provided by their devolved government, the Northern Ireland Executive, and not by local governments.

^{Table 3.3.}

United Kingdom: Local Government Capital Expenditure¹

	2022/23	2023/24	2024/25	2025/26	2026/27	Growth 2022-26
Total UK public investment (PSGI), bn £	124.3	133.5	133.3	138.7	143.9	16%
Total public investment by LGs, bn £	26.3	29	28.7	29.8	30.7	17%
LG public investment in ENG, % of total investment by LGs	80%	80%	80%	81%	81%	18%
LG public investment in SCT, % of total investment by LGs	14%	14%	14%	14%	13%	8%
LG public investment in WAL, % of total investment by LGs	6%	6%	6%	6%	6%	13%

Source: Office of Budget Responsibility, Economic and Fiscal Outlook, March 2022.

^1/This analysis does not include Northern Ireland as services there are provided by their devolved government, the Northern Ireland Executive, and not by local governments.

View Table

^{Table 3.3.}

United Kingdom: Local Government Capital Expenditure¹

	2022/23	2023/24	2024/25	2025/26	2026/27	Growth 2022-26
Total UK public investment (PSGI), bn £	124.3	133.5	133.3	138.7	143.9	16%
Total public investment by LGs, bn £	26.3	29	28.7	29.8	30.7	17%
LG public investment in ENG, % of total investment by LGs	80%	80%	80%	81%	81%	18%
LG public investment in SCT, % of total investment by LGs	14%	14%	14%	14%	13%	8%
LG public investment in WAL, % of total investment by LGs	6%	6%	6%	6%	6%	13%

Source: Office of Budget Responsibility, Economic and Fiscal Outlook, March 2022.

^1/This analysis does not include Northern Ireland as services there are provided by their devolved government, the Northern Ireland Executive, and not by local governments.

32. Coordination of local authority capital spending plans with the central government takes place in the context of the central government’s capital spending priorities. Currently, there is no single, overarching framework in place through which the central government and local governments share information about their multi-annual capital spending plans, and shape investment priorities and capital spending plans in a collaborative manner. Coordination of capital spending plans mainly takes place in the context of department’s investment priorities. For example, in the context of climate change, coordination takes place through sectoral networks such as the Local Adaptation Advisory Panel,²² the Department for Business, Energy & Industrial Strategy (BEIS) provided £587 million in 2021 to local authority investments in heat decarbonization and energy efficiency as part of the UK Public Sector Decarbonisation Scheme.²³

33. UK Government capital grants to local governments are spread over different funding instruments, with different criteria, procedures, and funding horizons per instrument. Local governments can bid for capital grants from various central governments funds such as the “The Pothole Action Fund”, “New Stations Fund,” “Ideas Fund” and “Levelling Up Fund.” These funds transparently set out their funding criteria and processes and allow local governments to finalize their bids well before the start of a new financial year. The departments responsible for administering the different funds have delegated flexibility to determine issues like selection criteria, applicable procedures, and fund-specific funding horizons, with HMT scrutinizing these via the Treasury Approvals Process.

34. The system is complex. The bureaucracy and variety of bidding procedures, selection criteria, and funding flexibility could potentially constrain the capability of local governments to develop integrated multiannual capital spending plans; a fact that is acknowledged in the Levelling Up White Paper.²⁴ This issue of complex coordination was also recognized in the Spending Review 2021 as it stated that policy problems at the local level often fall under the responsibility of multiple departments, and emphasized the need for joint programmes, cross-cutting investment priorities and jointly funded programmes. In response, the Spending Review 2021 announced the establishment of a multi-department Levelling Up Fund,²⁵ aimed at removing funding siloes to better match local needs.

35. In general, the funding horizon of these funding arrangements is constrained by the Spending Review horizon. This limits the capability of local governments to develop multi-annual capital spending plans. Central government may set out longer horizons for certain funds on a case-by-case basis, for example based on deliverability considerations, which may be determined in conjunction with local government.

36. Contingent liabilities from all public sector entities are disclosed in financial reports and published in the Whole of Government Accounts (WGA). Information about contingent liabilities in financial reports are to be published in accordance with the International Financial Reporting Standards. The WGA provides a comprehensive, financial accounts-based picture of the financial position of the UK public sector, for which it needs to consolidate the audited accounts of over 9,000+ public sector organizations. Whilst information about contingent liabilities related to capital projects of specific organizations can be found in the financial reports, these contingent liabilities are only explicitly mentioned in the WGA if they are material in terms of the overall account, such as the contingent liability of £3.5 billion reported in 2018–19 related to the Department for Transport.

4. Project Appraisal (Strength- High; Effectiveness-High)

37. Major projects are systematically subject to rigorous technical, economic and financial analysis, but greater independent review and transparency could improve effectiveness further.

• The documented Treasury Approvals Process²⁶ (TAP) and the Consolidated Budget Guidance (CBG) set out the need for project appraisal as part of project development. The Better Business Case Guidelines²⁷ outline the requirements to undertake project appraisal through a series of business cases that are developed as the project progresses in maturity (Figure 3.5). All projects joining the Government Major Project Portfolio (GMPP) require an Integrated Assurance and Approval Plan²⁸ validated by HMT that sets out the assurance requirements that must be followed, including the sequencing of reviews and approvals from HMT, Cabinet Office and Infrastructure and Projects Authority (IPA) (Box 3.4). HMT guidance also requires departments and Arm’s Length Bodies (ALBs) to scrutinize the business cases of projects in their portfolios before they goto HMT for approval.

• These processes together deliver strong analysis and compliance with business case requirements, but truly independent review is limited. While the IPA is not an independent body,²⁹ reporting formally into both HMT and Cabinet Office, it does however provide expert and independent assurance of GMPP projects. The Major Projects Review Group panel that reviews the business cases of projects that are above £1 billion, or that are highly novel and/or contentious, includes two independent individuals selected from a pool of senior public and private sector experts.

• Public information on appraisals is currently limited. In its response to the Green Book Review in November 2020,³⁰ the Government committed that from April 2021 it would commence publishing summary business cases for infrastructure projects on the GMPP within four months of projects having reached final approval. However, the IPA confirmed that no business cases have been published yet due to timing, and security and commercial sensitivities. To date, publication of business cases has occurred only in limited circumstances, often in response to requests from Parliament. Stronger transparency would promote: the sharing of best practices; sharing of information relevant to other projects and the community; transparency and greater accountability for (and quality of) appraisals.

Business Case Development Framework

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source:HM Treasury and Welsh Government, Guide to Developing the Project Business Case: Better Business Cases for Better Outcomes, 2018.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Business Case Development Framework

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source:HM Treasury and Welsh Government, Guide to Developing the Project Business Case: Better Business Cases for Better Outcomes, 2018.

• Download Figure
• Download figure as PowerPoint slide

Business Case Development Framework

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source:HM Treasury and Welsh Government, Guide to Developing the Project Business Case: Better Business Cases for Better Outcomes, 2018.

• Download Figure
• Download figure as PowerPoint slide

38. A clear, robust methodology for project appraisal is in place-and supported actively by HMT to drive continuous improvement in culture and practice.

• The Green Book and related Supplementary Guidance establishes the detailed standard methodology to be followed in undertaking economic appraisal throughout the development of project business cases.³¹ Business cases are prepared following the five-case model (strategic, economic, commercial, financial and management). Whole of government methodologies, templates, tools and examples are publicly available, including March 2022 guidance on Value for Money assessment. Targeted guidance is provided for some sectors, including Health, with the Department for Transport having the most comprehensive guidance in the form of the Transport Analysis Guidance.³² The conduct of assurance by HMT tests that these methodologies are applied in practice.

• The UK Government has been perceived as a standard setter for project appraisal methodology, with the earliest versions of the Green Book dating back to the 1970s. The Green Book has informed similar frameworks in other countries and is an example of leading practice internationally. HMT also has a commendable commitment to improving the effectiveness of appraisals which is already high against the PIMA framework. A public Green Book Review was undertaken in 2020, in part to address concerns that the appraisal framework had biased development towards South-East England. That review, and a 2021 survey of government agencies’ experience in applying the Green Book have informed the HMT Green Book and the strategy of the Major Projects Unit (a team within the Public Spending Group in HMT) to improve the culture and practice of project appraisal.³³ Regular training to those involved in business case preparation is provided by private providers based on a HMT syllabus, and HMT provides training to those involved in performing assurance functions in HMT and Cabinet Office. A network of business case practitioners has also been established and receive updates from the Unit.

39. Risk assessment and mitigation is a core part of project development and appraisals, and efforts are underway to improve the rigor of cost estimation.

• The Orange Book, which forms part of the Green Book Supplementary Guidance, deals specifically with risk in project appraisal and development.³⁴ Detailed methodologies cover specific risks, including optimism bias and climate risks. For GMPP projects, a Risk Potential Assessment³⁵ is completed and shared by the lead department with HMT, IPA and Cabinet Office to inform decisions on the assurance process to be followed and promotes early risk identification. Risk identification and mitigation plans are updated and reviewed as the business case progresses in maturity. HMT, the IPA and the Cabinet Office, oversee compliance with these requirements as part of project assurance. Large delivery departments also have sophisticated risk management practices to manage risks at the project and portfolio level.

• Notwithstanding these tools, the quality of cost estimation remains a major challenge in project implementation (also see Institution 13 on Project Implementation). The Department for Transport and HMT currently are reviewing the approach to management of transport project contingencies. In addition, agencies are increasingly moving to estimation of cost by ranges in line with the IPA’s Cost Estimation Guidance.

5. Alternative Infrastructure Financing (Strength- High; Effectiveness-High)

40. There is an extensive regulatory framework supporting effective competition in all key markets for economic infrastructure, and independent regulators are well established. All key markets for economic infrastructure have been privatized, except for railway infrastructure in the UK and railway services in Northern Ireland. Many infrastructure companies are subsidiaries of multinational companies. Independent regulators (Ofgem, Ofcom, Ofwat, and the Office of Rail and Road) are long-established and enshrined in legislation. The Principles for Economic Regulation released in 2011 have guided the design and evolution of the regulatory frameworks in energy, water and digital infrastructure over the past decade, incorporating: periodic price reviews; statutory obligations for regulators, strategic policy statements from government; competition; and expert bodies to hear appeals. Government has committed to consult in 2022 on a package of measures to strengthen this framework, with a focus on ensuring the framework will deliver the investment needed, increase innovation, promote growth and deliver better outcomes for consumers and investors.

41. The UK Government prefers alternative approaches to private sector finance in infrastructure delivery after ending the PFI scheme-although PFI type arrangements are still implemented by devolved administrations and local government.

• The UK was a pioneer in the use of PPP, through the Private Finance Initiative (PFI) introduced in 1992 and the successor PF2 from 2012. PF1 and PF2 have been governed by extensive regulatory and management arrangements, including comprehensive guidance materials (Green Book Annex A4 deals specifically with designing and assessing PPPs), training and central support to departments and sub-national governments. In 2018, the UK Government decided to suspend new approvals under the PFI scheme noting the model was “inflexible and overly complex” and that the OBR had “also identified private finance initiatives as a source of significant fiscal risk to government.”³⁶ Strong policies are in place for the management of existing PFI contracts-which, given their number and value, is a very important issue for the UK (Box 3.5).

• PPPs are still used by devolved governments, which have established their own modalities for such contracts, and local governments. In Northern Ireland, PPPs may be entered into subject to specific rules and Northern Ireland Department of Finance approval. The Welsh Mutual Investment Model is similar to PFI/PF2 but includes a requirement that the project delivers community benefits. Scotland implements managed investment model contracts and non-profit distributing PPP models, with these arrangements overseen by the Scottish Futures Trust.³⁷ There is collaboration between jurisdictions on the design and operation of PPP schemes, including with support from IPA. Local governments may also implement PPPs, as done by Transport for London.

• The UK Government’s position to facilitating private sector involvement in infrastructure delivery was reviewed through the 2019 Infrastructure Finance Review.³⁸ The Government’s response was included in the 2020 National Infrastructure Strategy, where the Government concluded that forming the UK Infrastructure Bank (UKIB), improving independent economic regulation and continuing to develop innovative tools to support investment were the preferred approach to accessing private sector finance (see Box 3.6). It noted that the Government is open to considering other PPP structures, such as joint ventures and concessions, where the benefits outweigh the costs. Discussions with private sector participants highlighted other issues relevant to private sector finance in infrastructure (Box 3.7).

^{Box 3.5.}

Management of Existing PPP (PFI) Contracts in the UK

At the time the Government announced the ending of the PFI Scheme, more than 700 projects had been executed with a capital value of £57 billion (2.7 percent of GDP), which were to run to the end of the contract period. These PFI contracts provided a range of public services, including schools, hospitals, social care services, waste services, roads, housing, prisons, and military capability. As of mid-2021, there were over 550 PFI contracts operational in England, representing assets with an initial capital expenditure of £46 billion. In 2020, there were around 120 Scottish PPP projects across the education, health, office, and prison sectors.

Most PFI contracts result in the asset being returned to government once the contract ends. In 2020, the NAO estimated that assets to be transferred back to the central government in the period to 2026 were valued at £3.9 billion.

Chart: PFI Contracts by Capital Value (£billion, 2018)

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Chart: PFI Contracts by Capital Value (£billion, 2018)

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

Chart: PFI Contracts by Capital Value (£billion, 2018)

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

In its report, NAO highlighted the need for strong management of these assets to ensure their quality is being maintained. There are also heightened risks and challenges for government at the point of the hand back of assets including continuity of service and potential financial costs that can be managed through active contract management.

IPA’s PFI Centre of Excellence supports management of legacy contracts at the UK Government level. In February 2022, the I PA released new guidance on PFI contract expiry, which incorporated lessons learned from contracting authorities with experience in the expiry process and from the IPA’s process of expiry health checks. It includes guidance on the impact of climate targets as recommended in the Climate-PIMA. It followed similar guidance from the Scottish Futures Trust.

Sources: Infrastructure and Projects Authority, Preparing for Contract Expiry, February 2022; Scottish Futures Trust, PPP projects nearing the end of contract, April 2020; and National Audit Office, Managing PFI assets and services as contracts end, June 2020.

42. Oversight of public corporations is undertaken by UK Government Investments (UKGI) and departments, with centralized financial reporting and oversight of large projects. Given the extent of privatization, public corporations (PCs) play less of a role in UK infrastructure delivery than in most other countries. UKGI is the ownership authority for some public corporations, including the Nuclear Decommissioning Authority and National Highways. Major projects are subject to scrutiny through standard processes for project development and approval in accordance with HMT and IPA guidance.

• Going forward, the UKIB (which is an operationally independent ALB of the Treasury) will be expected to make a sustainable return overtime, recycling capital and reinvesting returns from its initial £22 billion of financial capacity. While it is envisaged to be operationally independent³⁹ in its day-to-day activities (such as its investment decisions), the UKIB will operate within a strategic framework set out by government and it is expected that there will be overarching coordination to ensure conflicts between UKIB and other government activities are minimized. The government plans that UKIB will be put on a statutory footing this year.

• There is no requirement in place to publish a consolidated report of public corporations’ expenditure plans but there are strong procedures for accountability and transparency of individual PCs. The CBG requires that departments agree forward plans with PCs, and that they monitor capital expenditures as part of portfolio management. The Guidance also requires departments to obtain and monitor wider performance information on their PCs and report this information to HMT for the purposes of the preparation of the whole of government accounts. Individual entities also disclose capital plans and financial information through their Annual Reports.

Recommendations for Planning Institutions

Issue 1: National and Sectorial Strategies A unified economic and social infrastructure strategy, consistent with a vision of regional development, could help achieve the Leveling-Up agenda, ensure the comprehensiveness of overall policy plans and enable better planning and sequencing of public investment across sectors and levels of government.

Recommendation 1. To ensure full alignment of investment planning and maximum efficiency in investment execution, broaden the scope of the next NIS to incorporate social infrastructure. (HMTbyQ4 2022).⁴⁰

Issue 2: Management of construction sector capacity to deliver the infrastructure program. As the UK scales up its infrastructure investment agenda, the capacity of the construction sector to deliver on this agenda also needs to ramp up. Government could do more to identify potential bottlenecks and proactively develop industry’s capacity to deliver by better coordinating across relevant agencies, including potentially education, skills, employment, industry, and other policy areas. The current challenges of the post-COVID recovery, heightened competition for skilled labor and global supply chain limitations make this more important.

Recommendation 2.1 Review coordination mechanisms between IPA, NIC, HMT and BEIS on managing future construction and infrastructure sector workforce and capacity (BEIS to lead in consultation with IPA, HMT, NIC by Q3 2022).

Recommendation 2.2 Develop a strategy to improve construction sector capacity and workforce to meet the national infrastructure construction pipeline (BEIS by Q3 2022).

Issue 3: Investment planning at the local level. As the UK scales up its investments in local communities, the Government could pursue to better match the horizon of its funding mechanisms with the investment planning horizons of local communities, consolidate funding mechanisms to reduce the bureaucratic burden and enable local communities to develop integrated multi-annual capital investment plans.

Recommendation 3.1. Increase the funding horizon of capital grants for local governments to match their capital planning horizon (HMT in coordination with DLUHC byQ4 2022).

Recommendation 3.2. Continue the consolidation of existing funding instruments for local governments (HMT in coordination with DLUHC by Q4 2023)

Issue 4: Strengthening the transparency, independence and implementation of project appraisal and assurance. Greater independent scrutiny of businesses cases and publication of business case summaries would improve the robustness of the appraisal process. Occurrence of cost and schedule overrun on major investment projects is frequently caused by optimism bias in early-stage forecasting. Truly independent scrutiny can provide a more robust challenge function and help de-bias forecasts. Greater transparency of business cases would help to sharpen accountability and provide information for wider planning purposes. Continuing to better organize the timing of assurance process will help minimise project delays.

Recommendation 4.1. Putin place procedures to increase independent scrutiny and project challenge and validate cost and schedule forecasts for major capital investment projects (HMT/IPA by Q4 2022).

Recommendation 4.2. Commence publication of business case summaries in line with Government’s existing commitment to do so (HMT in consultation with departments, Immediately).

Recommendation 4.3. Publish business case summaries retrospectively for already approved major projects (HMT in consultation with departments byQ3 2022).

Recommendation 4.4 Implement HMT’s existing plans to streamline project approvals and assurance, making it easier for agencies to navigate HMT, IPA and Cabinet Office approvals (HMT, Q2, 2022).

Issue 4.1: Cost overruns on major projects can have significant budgetary consequences. IPA guidance requires the use of the P-50 or median forecast as the project’s Anticipated Final Cost.⁴¹ However, cost overruns on the most complex projects can have significant budgetary consequences and understanding the potential impact of overruns at the outset should be key information in decision making.

Recommendation 4.5. Establish protocols for risk appetite and governance of contingencies in major projects (HMT by Q4 2022).

6. Multi-year Budgeting (Strength—Medium; Effectiveness—High)

43. HMT carries out Spending Reviews to determine government plans for public spending, which include, multi-year departmental budget allocations for public investment. Spending Reviews set budgets over multiple years, typically on a three-yearly basis,⁴² with the overall spending envelope set in line with fiscal rules. Spending Reviews sets out the Government’s spending and investment plans and the maximum amount each government department can spend in a year on capital and recurrent spending by setting Departmental Expenditure Limits. More information about the budgeting framework in the UK can be found in Box 3.8.

44. Capital allocations are typically made for only the period of the Spending Review, though in recent years some steps have been taken to improve certainty for departments about future allocations.

• Generally, multi-year Spending Reviews set budgets for three to five years, providing capital allocations to departments for the same period. For example, Spending Review 2021 set budgets to 2024–25. However, by design, the length of the period of each department’s planning certainty shrinks with the passing of every year. This is because capital budgets are not rolled over for an additional year in each subsequent budget but are only extended at each Spending Review.

• On a case-by-case basis, the government makes longer-term spending decisions to provide more planning certainty to specific projects or programs of certain departments. For example, the 2020 Spending Review (which had a 1-year horizon given COVID-related uncertainty) provided multi-year capital settlements for 21 capital programs⁴³ in the sectors of Transport, Climate Change, Housing, Public Services and Defense, Security and Science. Longer term allocations have also been made for specific projects e.g., the allocation for Project Gigabit in the 2020 Spending Review. As can be seen in Table 3.4, 42 percent of CDEL was part of the multi-annual settlements in the Spending Review-period 2021–22.

• Therefore, whether departments have a medium-term planning horizon for capital projects depends on discretionary decisions made by the Chancellor about the timing and coverage of Spending Reviews and varies across different Spending Reviews. This reduces the certainty and increases the volatility of capital budgets for departments (and also devolved administrations) who must plan capital across longer horizons given the often-long lead and delivery times of capital projects notwithstanding the shorter period of funding certainty.

^{Box 3.8.}

Spending Reviews and Budget Process

Spending review.The UK government has set out a forward look at likely expenditure since the Plowden Report on the control of public expenditure published in 1961. However, Spending Reviews, in their current form which seeks to set fixed multi-year ceilings for departmental spending and hold departments to those ceilings, were introduced in 1998. For capital investment, Spending Reviews make allocations for (i) continuing projects and programmes, (ii) new projects that are selected in the SR-process, and (iii) broader capital allocations not tied to specific projects or programmes (for example, on-going maintenance investment).

Although multi-year SRs set budgets for three to five years, in recent years, due to Government changes and COVID-19, the Government presented Spending Reviews for three successive years, 2019, 2020 and 2021. The 2019 and 2020 reviews set total departmental budgets for one year.¹ However, through the 2020 Spending Review, the UK government sought to provide more multiannual funding certainty for key capital programmes beyond this one-year period (to 2024–25).²

Spending Review allocations are determined by the Chancellorof the Exchequer, in consultation with the Prime Minister and other Cabinet Ministers and set out in documents presented to Parliament.

Key stages of the budget process. Within the overall spending framework multi-year Spending Reviews set fixed departmental budgets over multiple years, with Parliament then voting on and approving spending for each specific year via Supply Estimates processes each year. This process is implemented in the following way:

• Spending review: Sets fixed department budgets for the Spending Review-period.

• Parliament votes on and approves spending for each specific year via the annual Supply Estimates process. Mains Estimates presents budgets to Parliament for the upcoming financial year, with Supplementary Estimates setting out any further adjustments to budgets ahead of the end of the financial year.

• Additional spending announced outside of a Spending Review may be accounted for at Annual Budgets, which usually take place in the autumn.

• Annual reports and accounts are presented to Parliament by Departments and report spending outturn against provisions in the estimates. These are audited by the NAO.

Spending Review 2021. Spending Review 2021 set departmental budgets from 2022/23 to 2024/25. The departmental budgets are binding for the SR-period. The ten departments with the largest budgets for capital spending Capital Departmental Expenditure Limits (CDEL) are shown below, with the biggest investment budgets being for the two major economic infrastructure sectors (Energy and Transport).

Source:Table SR2021, p.42, Table 1.18: Departmental Capital Budgets.

£ billion		2022/23	2023/24	2024/25
Total Managed Expenditure		1045.4	1081.4	1107.6
Total Departmental Capital Budgets (CDEL)		106.8	115.5	111.9
	Business, Energy, and Industrial Strategy	17	20.8	21.2
	Transport	19.5	19.9	20.5
	Defense	15.6	15.8	16.2
	Health and Social Care	10.6	10.4	11.2
	DLUHC Levelling up, Housing and Communities	8.9	6.9	6.8
	Education	6.3	7	6.1
	Foreign, Commonwealth and Development Office	2.6	3.5	4
	Environment, Commonwealth and Development Office	2.2	2.9	2.7
	Levelling Up Fund	0.9	1.4	1.4
	Justice	1.7	2.2	1.4
	Other	21.5	24.7	20.4

Source:Table SR2021, p.42, Table 1.18: Departmental Capital Budgets.

View Table

£ billion		2022/23	2023/24	2024/25
Total Managed Expenditure		1045.4	1081.4	1107.6
Total Departmental Capital Budgets (CDEL)		106.8	115.5	111.9
	Business, Energy, and Industrial Strategy	17	20.8	21.2
	Transport	19.5	19.9	20.5
	Defense	15.6	15.8	16.2
	Health and Social Care	10.6	10.4	11.2
	DLUHC Levelling up, Housing and Communities	8.9	6.9	6.8
	Education	6.3	7	6.1
	Foreign, Commonwealth and Development Office	2.6	3.5	4
	Environment, Commonwealth and Development Office	2.2	2.9	2.7
	Levelling Up Fund	0.9	1.4	1.4
	Justice	1.7	2.2	1.4
	Other	21.5	24.7	20.4

Source:Table SR2021, p.42, Table 1.18: Departmental Capital Budgets.

^1/ With the exception of the Ministry of Defence, for which Spending Review 2020 set budgets to 2024–25. ^2/ These included health, transport, further education, nuclear security, justice, defence, housing, R&D and digital infrastructure. See: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938052/SR20_Web_Accessible.pdf

^{Table 3.4.}

CDEL and Multi-year Programme Settlements

Source: SR2021, p. 111, Table C.6: Multi-year capital program me settlements.

^{Table 3.4.}

CDEL and Multi-year Programme Settlements

	SR period	Forecast period
	2021/22	2022/23	2023/24	2024/25
CDEL, £ billion	100.4	107.3	109.1	112.8
Multi-year settlements, £billion	41.8	47.1	49.2	37
Multi-year settlements,% CDEL	42%	44%	45%	33%

Source: SR2021, p. 111, Table C.6: Multi-year capital program me settlements.

View Table

^{Table 3.4.}

CDEL and Multi-year Programme Settlements

	SR period	Forecast period
	2021/22	2022/23	2023/24	2024/25
CDEL, £ billion	100.4	107.3	109.1	112.8
Multi-year settlements, £billion	41.8	47.1	49.2	37
Multi-year settlements,% CDEL	42%	44%	45%	33%

Source: SR2021, p. 111, Table C.6: Multi-year capital program me settlements.

45. Departments have some flexibility to carry forward expected CDEL underspends related to significant investment programs. Managing large projects can pose significant challenges to departments that have to manage spending within annual budgets, which may have been set several years before the start of the project. Consolidate Budgeting Guidance (CBG) sets the conditions under which departments can request approval from HMT to qualify for carrying forward CDEL underspends. Conditions include: the program must be bigger than £50 million in the year in question; the carry forward may not exceed 20 percent of the program’s CDEL in the year from which it is being carried forward; and if approved, the carry forward may be spread across multiple years. An ‘allowance for shortfall’ is calculated by OBR based on historical capital underspends and an expected forecast. It reflects the impact expected future capital underspends are expected to have on fiscal aggregates and targets.⁴⁴

46. The total costs for major projects are estimated and published, but there is no multi annual capital spending plan with information about how costs are spread over each project’s horizon. As laid out in the Green Book, and the CBG, the valuing of a new investment project should cover the lifetime period of the assets and therefore be based on a whole-life costing approach. The total costs of major projects are published in the GMPP Data documents, but the Spending Review and annual budget documents do not publish information about the distribution of the yearly costs of projects over an, e.g., five-year horizon. Without such information, it is difficult to compare total project costs vis-a-vis available resources over the medium term, how projects are prioritized over a multi-year horizon and how they are accommodated within the long-term fiscal constraints.

47. The government does not transparently explain changes in the estimated costs of investment projects in the budget documents. Total costs of major investments are published in GMPP data document, and as stated by HMT, changes in costs of projects are discussed with departments in the context of changes to spending approval as agreed when approving the business case. However, budget documents do not comprehensively and systematically publish in-depth information that explains all these changes. If budget documents do not explain when and why cost estimates are changed and do not provide a reconciliation of such changes over time, the relevance of cost estimation and publication is reduced.

7. Budget Comprehensiveness and Unity (Strength-High; Effectiveness-High)

48. Capital spending is undertaken through the budget. The CBG sets out the budgeting framework for expenditure control for public bodies. Budgets are prepared comprehensively, with budget estimates (including capital estimates) covering UK government departments. Departments are required to present estimates covering their ALBs, PPPs, non-departmental public bodies, Local Authorities and PCs.

49. All capital spending of the entire public sector is published in fiscal reports. Disclosure about the total amount of capital spending in the UK public sector is full and comprehensive. The Main Estimates presented in April each year contain information by department on the capital spending in the budget year under each of the government’s main policy areas⁴⁵ and the same line is included for the Department’s ALBs. HMT publishes the annual Public Expenditure Statistical Analyses (PESA) report, which brings together recent outturn (capital and recurrent) budgetary data, estimates for the latest year, and spending plans for the rest of the current SR period for the entire public sector (Table 3.5).

^{Table 3.5.}

Summary of Information Available in PESA Reports

Source: PESA 2021

^{Table 3.5.}

Summary of Information Available in PESA Reports

Sections	Chapters
Budgets	Departmental budgets Economic analysis of budgets Changes in departmental budgets
Public sector spending	Trends in public sector expenditure Public sector expenditure by Classification of the functions of government (COFOG) subfunctions, and economic category
Sectoral analyses	Central government own expenditure Local government financing and expenditure Public corporations
Country and regional analysis	Public sector expenditure by country, region and COFOG subfunction Public sector expenditure by country, and COFOG subfunction.
	Public sector expenditure by country, and COFOG subfunction.

Source: PESA 2021

View Table

^{Table 3.5.}

Summary of Information Available in PESA Reports

Sections	Chapters
Budgets	Departmental budgets Economic analysis of budgets Changes in departmental budgets
Public sector spending	Trends in public sector expenditure Public sector expenditure by Classification of the functions of government (COFOG) subfunctions, and economic category
Sectoral analyses	Central government own expenditure Local government financing and expenditure Public corporations
Country and regional analysis	Public sector expenditure by country, region and COFOG subfunction Public sector expenditure by country, and COFOG subfunction.
	Public sector expenditure by country, and COFOG subfunction.

Source: PESA 2021

50. Capital and recurrent budgets are prepared in an integrated process and spending for both is presented together in the same budget documentation. As required by the MPM and the Green Book, the department responsible for capital projects reviews the whole life costs of an investment project, which includes the current cost estimations of a capital project. Subsequently, investments projects are approved based on the estimated capital and recurrent spending. Ideally business cases from one department incorporate the consequential impacts on other spending departments of decisions to proceed with infrastructure projects so that a complete cost picture is presented.

51. Capital and recurrent costs are presented by department against standard program classifications. The capital and recurrent costs are reported in budget documents, when they require approval through the budget process and PESA presents information on capital and recurrent costs based on the COFOG-framework. However, budget documents do not provide detailed breakdown of capital and recurrent costs per capital project over the project’s horizon.

8. Budgeting for Investment (Strength—Medium; Effectiveness—High)

52. The UK Parliament appropriates budgets annually but is not systematically provided with information on total project costs and project specific multi-year commitments. UK Parliament approves the annual budget for each department for the budget year ahead. Projections of multi-annual spending published in budget documents are grouped by department, not project, and they are subject to confirmation or revision in the future annual budget decisions. For some very large projects, such as High Speed 2, the legislation provides planning consent for the project and the Government reports to Parliament on a six-monthly basis with information on project progress and contracts awarded under the allocated budget. ⁴⁶

53. Departments can switch expenditure from capital budgets to current budgets only with approval by HMT. As stated in CBG, HMT should retain control over the level of current spending via the resource budgets.⁴⁷ Exceptions on this rule are laid down in the CBG and require approval of HMT. Approval by the UK Parliament would normally take place as part of the net adjustments made through the Supplementary Estimates process, through which reallocation of funds between capital and current spending is presented to Parliament. HMT oversight is effective at ensuring capital spending is protected, and HMT indicated that departments do not frequently request approval for such transfers. A more common adjustment involves HMT allowing capital expenditure that is not spent due to delays in project execution to be rolled forward into the following year in line with Budget Exchange rules set out in CBG.

54. There is a mechanism in place to protect funding of ongoing projects in the annual budget. HMT provides a delegated responsibility to departments to implement all ongoing projects for which they have been allocated funds for the Spending Review period and have delegated authority over their budget.⁴⁸ Subsequently, departments cannot use the allocated funds for ongoing projects for alternative purposes without approval of HMT. Ongoing major projects receive the required funding.

9. Maintenance (Strength— Medium; Effectiveness—Medium)

55. There are standard methodologies in place for both routine and capital maintenance, and capital maintenance is addressed in sectoral plans. Maintenance is a delegated responsibility and accounting officers of Government departments are responsible for managing their assets. MPM⁴⁹ stipulates that “each organization needs to have a clear grasp of the content of its current asset base, the assets it needs to deliver efficient, cost-effective public services; [and] what this means for asset acquisition, use, maintenance, renewal, upgrade and disposal.” For example, the Department for Transport provides strategic direction and funding to Network Rail, which is the Non-Departmental Public Body with delegated responsibility for managing and maintaining approximately 20,000 miles of rail track, 6,000 level crossings, 30,000 bridges and 2,500 stations. However, there is also evidence of certain maintenance backlogs, for example, SR21 provided £8 billion for local roads maintenance and upgrades.

56. Costs for routine and capital maintenance of capital projects are estimated during project design and added to departmental budgets through the budget process. When preparing a project, the Green Book requires that costs of investment projects should be calculated over the lifetime of the capital project and that maintenance and renewal costs associated with the servicing of the asset should be included when estimating the total cost of a capital project. Costs for maintenance need to be based on organization-specific maintenance policies. To support government departments with management and maintenance of government property, the Office for Government Property, part of the Cabinet Office, develops standards and tools for planning, managing, and costing maintenance over the whole life cycle of government estate.⁵⁰ Accounting Officers can request additional funding for maintenance through budget allocation processes (e.g., at Spending Reviews).

57. Routine and capital maintenance spending information is not systematically disclosed in budget documents. Routine and capital maintenance spending is published mostly through agency-specific financial reports. There is no comprehensive centralized reporting on routine and capital maintenance in departmental budgets. Budget documents mention maintenance spending on a case-by-case basis. For example, the Spending Review 2021 announced expenditure of £22 million over the Spending Review period for maintenance of flood defenses, which was a Manifesto Commitment. Because information on maintenance spending is minimal, budget documents do not provide the legislature with the information to develop a view on the adequacy of short, medium, and long-term allocation for routine and capital maintenance of all public organizations.

58. The framework does not sufficiently ensure that maintenance of public assets is prioritized over new construction. As recognized in the Balance Sheet Review, underinvestment in maintenance negatively impacts the useful life and value of public sector assets. Deferring maintenance creates backlogs and can multiply costs, while asset maintenance can support operational improvements to public services.⁵¹ Key budgetary framework documents such as MPM, Green Book and TAP provide little guidance to public sector organizations on how to structurally strengthen their asset maintenance in the context of the findings as, for example, are published in the Balance Sheet Review or maintenance reports of public organizations. HMT indicated that it introduced tools and processes to identify value for money maintenance investment at the two most recent Spending Reviews (2020 and 2021). However, the incentives and institutions are still to be fully developed. Box 3.9 highlights country examples on incentivizing maintenance.

^{Box 3.9.}

Incentivizing Maintenance of Public Assets

The New Zealand Transport Agency introduced an intervention approach that requires that alternative and option selection should start with lowest cost alternative and option, including making the best use of existing transport capacity, before considering higher cost alternatives and options.

• Integrated planning: Align development with existing transport infrastructure and services, and plan for urban form which reduces travel demand.

• Demand management: Address demand through supply-side measures: active modes, public transport and school orworkplace travel plans.

• Best use of existing network: Through optimized levels of service on roads and public transport services.

• New infrastructure. Where affordable, to meet desired outcomes.

NZ Intervention Hierarchy

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

View Full Size

NZ Intervention Hierarchy

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

NZ Intervention Hierarchy

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

The Netherlands uses public scrutiny to incentivize maintenance and renewal of major infrastructure sectors, such as flood prevention management, by publishing information on maintenance and renewal spending in its budget documents, and also information about maintenance-performance targets.

Sources: PBC-intervention-hierarchy.pdf (nzta.qovtnz), https://www.gov.scot/publications/analysis-responses-consultation-draft-infrastructure-investment-plan-2021-22-2025-26/pages/5/ and (Dutch) 7 Deltafonds – Deltaprogramma2021

10. Project Selection (Strength-Medium; Effectiveness-Medium)

59. Spending Reviews are the primary means of determining budget allocations for major public investment projects. As explained in institution 6, multi-year Spending Reviews set capital and recurrent budgets for three to five years. For capital investment, Spending Reviews make allocations for (i) continuing projects and programmes, (ii) new projects that are selected in the SR-process, and (iii) broader capital allocations not tied to specific projects or programmes (for example, on-going maintenance investment). Spending Review allocations are determined by the Chancellor of the Exchequer, in consultation with the Prime Minister and other Cabinet Ministers and set out in documents presented to Parliament.

60. Projects can be considered for funding in the Spending Review process regardless of the stage of the project and the maturity of the business case (i.e., the stage in Figure 3.5). As discussed at Institution 4, business cases are subject to robust review and assurance as part of the business case development process. This is not synchronized with the process for allocation in the Spending Reviews. This means the competition for allocations in the Spending Review is between all potential projects, not just appraised and mature projects, which is more typically considered best practice.

61. Within the constraint of the Spending Review, HMT attempts to ensure robust central review of projects. At each spending review since the 2015 Spending Review, HMT has undertaken a simultaneous assessment of all potential projects regardless of the level of project maturity—the capital appraisal process. At Spending Review 2021, this process stipulated that investment proposals, whatever their stage, be supported by a business case, with key details captured in a Business Case Summary Sheet. This includes all proposals that have a budget impact managed by departments, including projects delivered with the private sector. Business case summaries are prepared by departments before review by HMT, and depending on the proposal, the IPA and Cabinet Office, before Spending Review allocations are made. The nature of the Spending Review process, which considers all proposals at the same time places a high burden on all involved in this process (from HMT officials to Ministers) to assess the large amount of complex information in a narrow window. Where projects have already been reviewed by HMT, IPA and Cabinet Office, this information is also drawn on to inform Spending Review allocations. As described in Institution 4, true independent scrutiny is encouraged but often limited in project business cases.

62. The Business Case Summary Sheet template prepared by HMT for the 2021 Spending Review summarizes the five cases and other data to inform decisions on budget allocations. Summary information requested is organized around the five-case model (strategic, economic, commercial, financial, and management). Information on the impacts of the project on the achievement of Net Zero; alternative options considered, and geographic impacts are also captured. The IPA advised on project deliverability and risk of major projects as an input to the project selection process. There are no additional specific selection criteria for projects to receive budget funding in place.

63. Formal approvals to proceed with funded projects are governed through a separate process to the Spending Review budget allocations process. The well-articulated Treasury Approvals Process sets out the approvals that must be sought through a project’s development and prior to contracting of funding. This process is de linked from the budget process (Box 3.10).

64. Pipelines of future projects are maintained at a sector level they cover appraised and unappraised projects and are generally shared with HMT. To some extent, these are consolidated by HMT for the periodic Spending Review process, but they are not otherwise formally maintained consistently across sectors. Some sector teams in HMT are involved in regular reviews with relevant departments. Government can include projects that have not been appraised in Spending Review allocations and some projects have been announced and/or committed to prior to appraisal, or subject to business case requirements being met. A consolidated pipeline of appraised projects ready for consideration for budget funding is not maintained. Some examples of countries who do this are at Box 3.11. Different approaches to handling proposals identified by the private sector and submitted to government for consideration is set out at Box 3.12.

Recommendations for Allocation Institutions

Issue 5. Multi-year budgeting: providing more certainty for capital planning. Effective capital planning requires longer-term funding certainty. In general, the Spending Review horizon only provides certainty for 3–5 years, and the funding horizon shrinks with the passing of every year. The timing and duration of Spending Reviews is set at the governments’ discretion, providing further uncertainty.

Recommendation 5.1. HMT to provide and publish five-year departmental capital budgets and add an additional year on a rolling annual basis (HMT, upcoming Spending Review).

Issue 5.1. Multi-year budgeting & budgeting for Investment: developing comprehensive multi-annual spending plans. Effective capital planning requires integrated decision-making about allocation of funds across the planning horizon. Departments currently do not publish integrated multi-annual capital spending plans, nor information on distribution of costs of investment projects over the project’s horizon.

Recommendation 5.2. HMT to instruct departments to publish a multi-annual overview of major capital programs and projects—including the cost distribution for each project, identifying and explaining significant changes (HMT and departments, Q4, 2023).

Recommendation 5.3. Departments to record multi-annual commitments and report to HMT, as requested (HMT, Q2 2023).

Issue 6 Incentivizing maintenance. The importance of adequate capital and routine maintenance of public assets is not sufficiently acknowledged in the PIM-framework, and more complete information relating to capital and routine maintenance funding in budget reports should be made available.

Recommendation 6.1. Publish information about maintenance spending in budget reports. (HMTbyQ3 2023).

Recommendation 6.2. Integrate maintenance-performance indicators in the Outcome Delivery Plans. (HMTbyQ3 2023).

Issue 7. Spending Reviews may allocate budget funding before project proposals are ready for an investment decision. Under current practice, Spending Reviews may make allocations to projects before business cases are fully developed and assessed and this happens in some cases. Agreeing budget allocations for projects and announcing them at an early stage may make it harder for government to change course if the proposals have weak business cases. Setting a minimum project maturity for consideration in the Spending Review would help ensure projects are locked in’ to the budget only after they have been adequately developed and considered. Companion reforms could be considered, including increasing the amount of unallocated capital expenditure and establishing a periodic and prioritized process to consider budget funding for maturing proposals.

Recommendation 7.1. Set a minimum level of project maturity to receive a Spending Review allocation (HMT by Q2 2023).

Recommendation 7.2. Consider companion reforms including increasing the reserve for unallocated capital expenditure and allow maturing bids to come forward for consideration in an interim round at least once within each Spending Review period (HMT by next Spending Review).

11. Procurement (Strength— Medium; Effectiveness—Medium)

65. Procurement of major projects is open and competitive with requirements to advertise tenders for public works contracts, concessions, and utilities. UK Government Authorities are required to publish details of all procurements in excess of £10,000 (£25,000 for sub-central Authorities).⁵² The majority of procurement is undertaken through e-procurement systems: Contracts Finder for procurements in excess of £10,000⁵³ and Find a Tender for contracts valued over £118,000.⁵⁴ Results of contracting processes are published online. The Open Government National Action Plan, 2019–21 set targets to achieve up to 90 percent of publication of in-scope tender notices by April 2021. This target was achieved in March 2021 (Figure 3.6).

Rate of Publication of In-Scope Tender Notices

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: Staff analysis of Cabinet Office data ¹¹ Progress Against the Open Contracting Commitments in the Open Government National Action Plan 2019–21.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Rate of Publication of In-Scope Tender Notices

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: Staff analysis of Cabinet Office data ¹¹ Progress Against the Open Contracting Commitments in the Open Government National Action Plan 2019–21.

• Download Figure
• Download figure as PowerPoint slide

Rate of Publication of In-Scope Tender Notices

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source: Staff analysis of Cabinet Office data ¹¹ Progress Against the Open Contracting Commitments in the Open Government National Action Plan 2019–21.

• Download Figure
• Download figure as PowerPoint slide

66. Transparency requirements mandate the publication of contracts upon tender award, with certain arrangements for redaction where necessary.⁵⁵ Once a contract has been awarded, the Contracting Authority is required to publish, at a minimum, the full company name of the winning contractor, the date on which the contract was entered into, the total value of the contract and an indication of whether the contractor is an SME or a Voluntary, Community or Social Enterprise. Government departments are also required by policy to publish contract documents in addition to the award notices. Internal monitoring data has shown that the extent of document publication varies substantially across Departments. In the period from January 2020 to April 2021, while six departments were found to have published more than 80 percent of awards with full documentation attached, a further six departments were found to have published less than 40 percent of awards with documents attached. Planned procurement reforms, including the recent Procurement Bill aim to enhance transparency⁵⁶

67. Through the Construction Projects Pipeline (see Box 3.13), the IPA provides information on forthcoming market opportunities arising from major investment projects. Government bodies are required to provide advance notice on planned procurements in the coming 18-month period. This provides transparency and is a valuable tool to help prime the supply chain. The most recently published pipeline detailed more than 400 contract opportunities commencing procurement in the 2021/2022 financial year. The Pipeline also includes estimates of the likely construction workforce required to deliver the planned contracts.⁵⁷ To further assist the supply chain in preparing for opportunities, the IPA could consider publishing greater detail on expected opportunities including additional information on project maturity, risk and link to overall national and sectoral investment strategies. The publication of project business cases would also assist the construction industry in understanding the strategic context for major projects and support enhanced benefits realization.

68. High-level analytical reports for monitoring elements of the procurement system are published as part of the Open Government National Action Plan. Progress against targets for contract publication is published with remedial action taken where necessary. While there are requirements to publish data on individual contract awards,⁵⁸ there is not a timely, comprehensive overview of the operation of the system including information on the number of bids received, details of winning contractors and aggregate data to identify trends across the procurement system. Introducing a new periodic reporting process would support greater transparency, allow for timely identification of potential barriers to effective procurement and enable prompt detection of emerging market trends.

69. Planned procurement reforms and actions under the Open Government initiative aim to strengthen transparency in public procurement.⁵⁹, ⁶⁰ A new central digital platform will be established and will hold comprehensive data on procurement notices and awards and wide-ranging KPIs. Transparency requirements will include mandatory reporting of contract performance throughout the project lifecycle, not just at tender publication and award stage.

^{Box 3.13.}

Infrastructure and Construction Pipeline and Modern Methods of Construction

The IPA publishes the Infrastructure and Construction Projects Pipeline on an annual basis. The Pipeline presents future planned procurements and levels of investment consistent with the NIS. A core focus of the pipeline is to provide construction industry participants with advance notice of forthcoming procurement opportunities to assist in preparing for contracting opportunities. To assist in supporting enhanced construction sector productivity, procurement is supporting greater deployment of modern methods of construction (MMC). The Pipeline includes advanced notice of contract to include MMC components.¹

Estimated forecast of pipeline to include Modern Methods of Construction (£m)

Source: IPA, Analysis of the National Infrastructure and Construction Pipeline 2021 August 2021.

^1/Modern methods of construction includes a range of techniques designed to improve productivity, output and delivery time frames in the construction industry. This includes off-site production and deployment of manufacturing approaches in place of traditional on-site building.

Estimated forecast of pipeline to include Modern Methods of Construction (£m)

Sector	2021/22	2022/23	2023/24	2024/25	Total
Transport	12,037	11,723	11,663	12,262	47,685
Utilities	5,500	5,526	5,299	4,433	20,758
Social infrastructure	3,124	1,809	1,754	1,747	8,434
Digital Infrastructure	239	400	375	464	1,478
Flood and coastal erosion	1.2	1.2	1.1	1	4.6
Science and research	86	123	95	89	393
Total	20,988	19,582	19,186	18,996	78,751

Source: IPA, Analysis of the National Infrastructure and Construction Pipeline 2021 August 2021.

^1/Modern methods of construction includes a range of techniques designed to improve productivity, output and delivery time frames in the construction industry. This includes off-site production and deployment of manufacturing approaches in place of traditional on-site building.

View Table

Estimated forecast of pipeline to include Modern Methods of Construction (£m)

Sector	2021/22	2022/23	2023/24	2024/25	Total
Transport	12,037	11,723	11,663	12,262	47,685
Utilities	5,500	5,526	5,299	4,433	20,758
Social infrastructure	3,124	1,809	1,754	1,747	8,434
Digital Infrastructure	239	400	375	464	1,478
Flood and coastal erosion	1.2	1.2	1.1	1	4.6
Science and research	86	123	95	89	393
Total	20,988	19,582	19,186	18,996	78,751

Source: IPA, Analysis of the National Infrastructure and Construction Pipeline 2021 August 2021.

^1/Modern methods of construction includes a range of techniques designed to improve productivity, output and delivery time frames in the construction industry. This includes off-site production and deployment of manufacturing approaches in place of traditional on-site building.

70. The Devolved Administrations publish reports on aspects of the procurement system. For example, the Scottish Procurement Reform (2014) act places a requirement on public bodies with procurement spend in excess of £5 million per annum to prepare an annual report on activities. At the aggregate level, the Scottish Government publishes an annual report presenting a range of information included limited data on transparency.

71. The Construction playbook presents a new approach to foster more efficient procurement of major projects and is mandatory for all public works projects and programs (see Box 3.14). The playbook is mandated for central government departments and ALBs on a ‘comply or explain’ basis. A common suite of contracts is used for the procurement of major projects. These include international standard forms of contract.⁶¹ In the event that Contracting Authorities choose an approach from beyond the standard suite, they must seek explicit approval as part of the Treasury Approvals Process (see Institution 10).

72. Following the UK’s exit from the EU, a program of procurement reform is underway.⁶² At present, the main provisions of procurement regulations enacted in line with EU Procurement Directives are still in place. A White Paper published in 2020 outlines a range of potential reforms designed to speed up and simplify procurement processes and provide more opportunities for small businesses. In particular reforms will aim to rationalize the parallel regulations in place for procurement of public contracts, utilities, concession and defense and security and replace with a single, uniform set of rules for all contract awards.

73. Legal challenges to procurement processes are handled through the courts and so there are no fixed time limits on the resolution of cases.⁶³ At present the standard remedies and processes which derived from the EU Procurement Directives are still in place. These include the standstill period of at least ten days between the conclusion of the tendering process and the award of the contract, during which unsuccessful bidders can challenge the decision. The planned procurement reforms seek to streamline arrangements for legal challenge of procurement outcomes and broaden access to what can be a timely process. This includes rationalizing the trial process for challenges considering characteristics such as urgency of contract award, value of the contract and the degree to which the facts of the case are not in dispute.

74. In addition to legal remedies, a Public Procurement Review Service (PPRS) is run from the Cabinet Office. PPRS is free of charge and allows suppliers and potential suppliers to raise issues of concern about public sector procurement practices. The service can also be used to highlight potential issues with the sub-contracting practices of prime contractors on Government contracts. The process and timing from initial acknowledgement to case conclusion varies depending on complexity and case load. However, issues relating to live procurement are handled more promptly—including potentially recommending remedial action to the Contracting Authority. Individual cases are anonymized and reported. Monthly updates document key issues in each case, the nature of the complaint and the outcome of the review including whether the procurement decision was overturned. At an aggregate level, the Cabinet Office publishes an annual report providing details on the number of cases recorded, the key issues raised and the progress in disseminating lessons learned across the system.⁶⁴

12. Availability of Funding (Strength- High; Effectiveness-High)

75. Procedures for cash management and the related banking arrangements are well aligned with advanced international standards. Accounting officers, generally the highest-ranking civil servant in each department, are responsible for managing their cash requirements efficiently and actively under MPM guidance issued by HMT. It is long-standing practice that departments adhere to this administrative guidance, which under common law has an equivalent effect to more formal obligations.

76. Strong management of within year commitments is in place, along with established practices for cash flow forecasting and management covering both capital and recurrent expenditure. Each public sector organization is expected to plan its cash requirements as they need it, down to the daily level, while remaining within their voted provisions in Estimates for the fiscal year that are approved in Supply and Appropriation Acts. Guidelines on the preparation of cash forecasts are provided in Box A5.6A of MPM. Generally, departments will include ALBs’ flows in their own projections and departments can update cash flow projection information at any time. Departments and entities surveyed indicated cashflow forecasts for capital spending are generally prepared by project teams and aggregated to the entity level monthly. The cash flow forecast information entered by departments is also visible to the Exchequer Funds Accounts team in real time. The Exchequer Funds Accounts team use this information for managing the government’s daily cash requirements who undertake a full review of the forecast data at least monthly.

77. Cash is released for payments in a timely fashion in line with annual appropriations. Appropriations may be amended during the year and approved in Supplementary Estimates. Agencies are required to pay invoices within 30 days to first tier suppliers/prime contractors and report on compliance with this requirement over the previous 12 months as part of their Annual Reports. This also provides evidence of timely availability of cash for infrastructure projects. No evidence of delays in cash availability to departments or other governments was found.

78. Together these arrangements give departments confidence to make commitments in line with annual appropriations, but there is more uncertainty about availability of funding for future years. Departments are permitted to enter longer-term contracts for infrastructure projects despite the absence of appropriations covering total project costs. Departments may use funding settlements made as part of Spending Reviews (at the department, project or program level) to guide these commitments; however, they are not constrained from taking longer term, or larger, contracts than their Spending Review allocations. HMT considers that departments take the risk if they enter into contracts that extend beyond Spending Review allocations-in that they may need to constrain other activities in the future to ensure the contract can be fulfilled. In practice, HMT set Delegated Authority Limits with an eye to giving departments a level of discretion that makes it less likely they will ‘overcommit’ against likely future budgets.

79. Until Brexit is fully complete, some external official funds from the European Union are used to fund infrastructure spending through the 2014–20 Multiannual Fiscal Framework. The Treasury banking policy requires departments to minimize balances outside of the main banking structure. Agencies are required to have a policy to manage bank accounts and report to Treasury on balances under rules setout in MPM. These rules provide oversight of accounts created for infrastructure delivered in collaboration with the private sector. Maintaining close scrutiny of both on and off-balance sheet liabilities related to infrastructure provision, and the potential transactions related to them, is also important for the UK.

13. Portfolio Management and Oversight (Strength- High; Effectiveness-Medium)

80. Major projects are monitored through the Government’s Major Project Portfolio (GMPP). The Portfolio covers projects which are subject to HMT approval for reasons of financial cost and/or because the project is novel, complex, contentious, or requires primary legislation. The GMPP brings together information on the implementation status of all major projects in one place. GMPP projects are classified in four categories-infrastructure and construction, transformation and service delivery, military, and information technology. The 2020–21 GMPP annual report included 66 construction and infrastructure projects with whole life costs of £236 billion. Projects in this category had an average cost of £3.8 billion and schedule of 11 years.⁶⁵

81. Central monitoring of the GMPP is overseen by the IPA and includes systematic data on performance against budget and schedule. A report on overall trends across the portfolio is published annually and departments submit detailed quarterly reports to the IPA covering data on costs, schedule, benefits and a range of internal management information (see Box 3.15). As part of the annual reporting process, departments are required to explain changes in cost from the previous year and individual departments’ returns are published at the project level. Each project is assigned a Delivery Confidence Assessment.⁶⁶ In the future, the IPA’s assessment will be refocused on the readiness of a projector program to pass through a stage-gate. This will inform HMT approval decisions.

82. Monitoring information is used to inform resource allocation and improve project performance. GMPP data was an important input into Spending Review 2021. Each project’s Delivery Capability Assessment (DCA) was a key consideration in funding allocation. The IPA’s Annual Report on Major Projects provides a consolidated view of performance across the portfolio. The most recent report suggests that a project’s inclusion on the portfolio is associated with an improvement in delivery confidence over time: focusing on those projects that had been on the GMPP for over a year, the DCA improved for 32 projects, remained the same for 42 projects and deteriorated for 12 projects.

83. Quarterly assessment of projects on the GMPP involves detailed scrutiny of project cost and schedule performance. Projects that fall outside of a tolerance of +/- 10 percent on cost or schedule are subject to further challenge. Recent data shows that forecasts for the large majority of GMPP projects fall within these limits.

84. The GMPP covers the largest and most complex programs and projects. Portfolio management for the remainder is managed by departments and ALBs, within their overall capital allocations. The Government’s Project Delivery Functional Standard details requirements for portfolio management (Box 3.16).⁶⁷

85. Maturity of portfolio management capacity varies across departments. Departments with substantial programs of technology and business transformation have longer-established portfolio management practices. IPA is working to develop capacity across other bodies and, as part of the Government Project Delivery Framework, will shortly publish new guidance on portfolio management.

86. The NAO has reviewed portfolio management across government and made recommendations to improve the assessment of portfolio performance.⁶⁸ The review found that successful portfolios have clear objectives and purpose; are established with clarity on resourcing, governance and funding; and are managed in a way that is responsive to changes in the project context. The report recommends a framework for reviewing portfolios, made up of six elements: purpose, information, planning, governance, alignment and risk.

87. Departments have autonomy to portfolio manage allocations within agreed limits, however HMT approval is required to reallocate from ring-fenced project budgets. Ringfences are designed to isolate the effect of major investment projects and programs on the remainder of a department’s budget. While the objective is to incentivize efficient estimates of project budgets at spending review and during delivery, ringfences may limit the capacity of departments to portfolio-manage their allocations. There is some flexibility to carry-over unspent allocations from one year to the next, which can aid portfolio management. The importance of ensuring adequate latitude for managing the portfolio is underscored by the high rate of capital investment underspends experienced in recent years. By putting in place arrangements to allow re-allocation, spending bodies will be better enabled and incentivized to exploit opportunities to expedite more advanced projects that can absorb underspends from less advanced projects. In 2020, Project Speed was established to review each stage of the infrastructure project lifecycle and identify where improvements could be made in order to deliver infrastructure projects better, faster and greener. As part of this process, HMT Authorities should ensure that departments have sufficient flexibility to portfolio-manage their allocations and exploit opportunities to expedite individual projects.

88. Guidance requires undertaking ex-post reviews upon project completion, however compliance is mixed. The Government’s Project Functional Standard includes outcome review as the final stage in the project lifecycle and best practice guidance for evaluation is contained in the Green Book and Magenta Book on evaluation.⁶⁹ Gate 5 reviews are undertaken on projects exiting the GMPP, however these do not constitute comprehensive ex-post evaluations. Periodic ex-post reviews have been undertaken for projects and programs in certain sectors. An example is in highways where Project Outcome Performance Evaluations are undertaken as a matter of course. In 2019 the Department for Transport and IPA jointly undertook a study⁷⁰ to learn lessons from major transport investments and the findings have been incorporated into project management guidance. Stronger adherence to the requirements for ex-post reviews, and periodically reflecting lessons learned in project appraisal and management guidance, would improve project delivery performance.

14. Management of Implementation (Strength- High; Effectiveness-High)

89. Implementation is managed in line with robust project delivery requirements set out in the Green Book, Five Cases Model⁷¹ and supplementary guidance. The Five Cases Model requires the systematic identification of the Senior Responsible Owner and the preparation of the project delivery plan prior to approval. Specifically, the Management Case requires detailed information on project governance (including roles and responsibilities), arrangements for use of specialist advisers, change and contract management arrangements, benefits realization arrangements, risk management arrangements, post-implementation and evaluation arrangements, contingency arrangements and plans.

90. A suite of guidance documents and procedures for project management are set by HMT and IPA. The Project Delivery Functional Standard is the approved reference for all government departments and ALBs. The Standard sets out clear definitions of portfolio, projects, programs and work packages. Governance requirements are articulated relating to assurance, decision-making, and accountabilities and roles. Within this framework, further detailed guidance describes the role of the SROs.⁷²

91. The Project Delivery Functional Standard is widely understood and found to be useful. Survey data shows that 75 percent of respondents in the project delivery function stated that the Standard is improving work practices across the function.⁷³ Project Delivery is one of the designated civil service professions and is made up of over 14,000 professionals in government who are involved with the delivery of projects, programs and portfolios (see Box 3.17). Monitoring data shows a high level of vacancies across projects and stretched resources for SROs. This is a risk to successful delivery.

92. For major projects, there are standard criteria for classifying delivery confidence, which are systematically applied across the portfolio and used to inform project adjustment where necessary. The IPA undertakes a quarterly review of major projects. Projects are assigned a Red/Amber/Green status, which correspond to conditionality on project progression (See Box 3.18). As part of IPA’s Quarterly Assessment of the portfolio, projects with schedule and/or cost profiles beyond tolerances of +/- 10 percent are typically subject to further scrutiny.

93. A set of follow-up reviews and escalation procedures—including potential escalation to the relevant minister—is in place. IPA annual reports show evidence of project redesign and/or early project closure in some cases. Smaller scale and less complex projects that are not on the GMPP are managed by departments in line with the Government Project Delivery Standard that establishes procedures for change management.

94. Despite strong institutional arrangements, cost overruns, schedule delays and benefits shortfalls occur from time-to-time on high profile projects. In a UK context, the NAO has pointed to contributing factors such as shortcomings in forecasting, issues with scope, system interdependencies and governance. Internationally, a growing body of literature focuses on biases in cost and schedule forecasting as root causes of problems during delivery.⁷⁴ While such issues may present as challenges in implementation, their roots can usually be traced to decisions taken during planning, appraisal and selection. Different countries have put in place governance steps to tackle cost and schedule overrun including strengthening Gate Approval processes, debiasing forecasts and introducing more independent scrutiny of business cases (see Box 3.19).

^{Box 3.19.}

International Examples of Major Project Challenge Models

In Australia, all investment proposals are reviewed by Infrastructure Australia, the country’s independent statutory infrastructure advisor. Assessments are undertaken against a standard framework and consider a range of questions including deliverability. At a subnational level, the statutorily independent Infrastructure New South Wales’ Infrastructure Investor Assurance Framework consists of: project monitoring; regular project reporting; expert and independent Gateway Reviews supplemented by Health Checks and Deep Dives; and insights sharing and capability building for public sector professionals engaged in the delivery of infrastructure projects.

In 2000, Norway introduced a new quality assurance process for major pub lie investment projects. This consists of external scrutiny of the cost forecast of major projects prior to parliamentary approval (QA2) and was extended to include scrutiny of the conceptual solution prior to section by cabinet (QA1). Independent evaluation has shown that the scheme is achieving its objectives of reducing cost overrun.¹

Proposal progression through the QA1 stage

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Proposal progression through the QA1 stage

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

Proposal progression through the QA1 stage

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

• Download Figure
• Download figure as PowerPoint slide

In 2022, Ireland’s Department of Public Expenditure and Reform introduced a similar approach to project challenge on major investment projects (>€100 million). Under the External Assurance Process, Government Departments are required to commission reviewers (from a framework of service providers established by the Department of Public Expenditure & Reform) to assess key project characteristics set out in the Business Case such as the validity of cost and schedule forecasts and the degree to which estimates adequately account for risk. Prior to Government Approval of the project at two key Decision Gates, the Business Case and External Assurance Report are presented to the Major Projects Advisory Group. The Group – made up of independent experts on a range of disciplines relevant to project planning and execution -provides advice to the Minister for Public Expenditure and Reform on the deliverability of the project in advance of Government decision.

^1/ Odecket al (2015). The Impact of External Quality Assurance of Costs Estimates on Cost Overruns: Empirical Evidence from the Norwegian Road Sector. European Journal of Transport and Infrastructure Research, 75(3)

95. Despite the absence of an automatic review of major projects, the NAO frequently examines major projects and results are scrutinized by Parliament. The NAO has produced comprehensive reports on lessons learned and recommendations for reform.⁷⁵ The approach consists of both department-specific focus and analysis of cross-cutting themes. The NAO may wish to consider introducing triggers or protocols for routine review of major projects, potentially based on scale or complexity.

96. The NAO monitors and reports on the implementation of its recommendations.⁷⁶ Since 2019, the NAO has published a tracker of the rate of acceptance and implementation of its recommendations. Table 3.6 shows a snapshot of the follow-through on recommendations from reports that focus on major projects or public investment more widely, it shows a high rate of implementation of recommendations.

^{Table 3.6.}

Implementation of NAO Recommendations from Public Investment-Related Reports

Source: Staff analysis of NAO Recommendations Tracker

^1/Nine recommendations were fully implemented, and one partially implemented.

^{Table 3.6.}

Implementation of NAO Recommendations from Public Investment-Related Reports

Report	Date of publication	Number of Recommendations	Recommendations implemented
Completing Crossrail	May 2019	3	3
HS2 Progress update	January 2020	9	9
Improving Broadband	May 2019	10	9.51
Improving the A30	October 2020	5	4
Westminster renovation	April 2020	21	12

Source: Staff analysis of NAO Recommendations Tracker

^1/Nine recommendations were fully implemented, and one partially implemented.

View Table

^{Table 3.6.}

Implementation of NAO Recommendations from Public Investment-Related Reports

Report	Date of publication	Number of Recommendations	Recommendations implemented
Completing Crossrail	May 2019	3	3
HS2 Progress update	January 2020	9	9
Improving Broadband	May 2019	10	9.51
Improving the A30	October 2020	5	4
Westminster renovation	April 2020	21	12

Source: Staff analysis of NAO Recommendations Tracker

^1/Nine recommendations were fully implemented, and one partially implemented.

15. Asset Management (Strength— High; Effectiveness—Medium)

97. Responsibility for asset management is delegated to departments. MPM Annex A4.15 sets out requirements for departments to manage assets and suggests that the maintenance of asset registers updated at least annually is good practice. The UK’s practice of preparing comprehensive, audited financial accounts effectively requires agencies to know their asset base and means assets are recorded. Oversight of some aspects of asset management is provided by sector and asset specific bodies.

• Sector maintained asset information is not currently made available in a comprehensive or coordinated way and is not shared with HMT.⁷⁷ The ongoing development of the National Underground Assets Register and the Digital National Assets Register recognizes the importance of making information available about assets, their location and their condition to help public and private decision makers make better decisions about assets, their use and complementarities across sectors (Box 3.20).

• The Office of Government Property establishes Functional Standards for the management of land and buildings and monitors performance against these standards. Departmental asset management plans are prepared on the management of land and buildings, and brief summaries of these are published.⁷⁸

• Network Rail’s asset management plans includes rail assets owned by the government.⁷⁹ The Office of Road and Rail also monitors Network Rail’s license condition on asset management, including the management of asset information, and uses independent technical experts to support its oversight.

• The IPA is responsible for maintaining a register of PFI contracts and assets, helping departments to manage PFI contracts (including overseeing asset quality while still in private hands) and helping agencies prepare for the return of PFI assets to the public sector.

98. The government is required to publish a full balance sheet annually that reflects the current condition of infrastructure assets—though there are some delays, and challenges in valuation, reducing effectiveness. The Government Resources and Accounts Act 2000 establishes requirements for the production of financial statements under guidelines set by HMT that should reflect recognized accounting standards. (This is provided through the Government Financial Reporting Manual). The latest 2018–19 Whole of Government Accounts (WGA) contain over 9,000 entities including central government departments, local authorities, devolved administrations, and public corporations.⁸⁰ Property, plant and equipment comprises 60 percent of assets in the WGA the largest component of which is infrastructure assets (largely road and rail networks). The WGA contains discussion of the valuation methodologies used for the road and rail networks and the associated uncertainties.

• The 2018–19 WGA were qualified⁸¹ by the NAO on the basis that a material misstatement arises from differences between the financial reporting frameworks used by local government⁸² and public corporations, which require infrastructure assets to be valued using historical cost, and the requirements of the Financial Reporting Manual (which determines that central government should value these assets at their depreciated replacement cost). While Treasury made certain adjustments to account for these, NAO considered asset values to be materially understated (estimated by NAO to be at least £58.8 billion, up from £47.8 billion in 2017–18). The NAO highlighted the importance of strengthening local authorities reporting of asset condition and timeliness of end of year financial accounts to improve future cost estimation.

• The Department for Transport’s annual reports discloses the accounting assumptions for the road and rail network, the methodology used for estimation of valuation, the expert advice sought by the Department and the technical reviews done by the auditor as part of the audit. The audit opinion in the 2020–21 departmental accounts concluded the asset values were reasonable.⁸³

99. Depreciation is recorded in operating expenditures in departmental financial statements based on asset specific assumptions and subject to audit. Guidance to departments on calculating depreciation is included in the Financial Reporting Manual, including specific advice for road assets, and is consistent with IFRS standards. The WGA report outlines that depreciation is calculated for each asset individually based on its estimated useful economic life and residual value The general timescales for each category are disclosed in the WGA and range to up to 150 years for Scottish water infrastructure.

Recommendations for Implementation Institutions:

Issue 8 Comprehensive and timely procurement reports are not routinely published. Regular and wide-ranging reporting of procurement information and publication of awarded contracts can ensure transparency and support confidence in the public procurement system.

Recommendation 8.1. Continue and expand the coverage of monitoring reports on execution of project procurement processes as part of the Open Government initiative (Cabinet Office, Q3 2022).

Recommendation 8.2. In line with procurement regulations, ensure the publication of contracts for major public investment projects, with minimal redaction. Publish timely reports on the rate of contract publication (Cabinet Office, Q2 2022).

Issue 9 There is inflexibility in reallocating funding within and across departments. To exploit opportunities to expedite more advanced projects that can absorb underspends from less advanced projects and enable more strategic portfolio management, arrangements should be developed to allow re-allocation within and between departmental allocations.

Recommendation 9.1. Ensure there is sufficient flexibility to reallocate funds within and across departmental budgets in order to expedite delivery of projects that are ready to proceed (HMT by Q3 2022).

Issue 10 Ex post project evaluations are not routinely undertaken. Mandating post-project reviews for major projects and periodically reflecting lessons learned in project appraisal and management guidance, would improve project delivery performance.

Recommendation 10.1. Undertake and publish ex-post project evaluations for major investment projects. (All departments, Q2, 2022).

Recommendation 10.2. Document lessons learned and update project guidance on a periodic basis (All departments, Q2, 2022).

Issue 11 Strengthening management of assets. Departments are not required to maintain asset registers and share information on assets. Some initiatives are underway to improve digital registers for some assets, however, strengthening the expectations on departments would improve practices across the board.

Recommendation 11.1 Strengthen MPM guidance so that entities with material non-financial assets are required to maintain asset registers and establish minimum standards for their upkeep and transparency (HMT, Q3 2023)

Legal Framework

100. The UK operates a common law system and does not have a written constitution. In this context, the powers used to manage public spending, including investment, consist of common law, primary and secondary legislation, parliamentary procedure, the duties of ministers, and other well-established practices.

101. Parliament has a key role within the legal framework for public investment management. Parliamentary agreement is required to set annual departmental budgets. As part of the Supply Estimates process, departmental estimates are put to Parliament annually and represent departmental budgets for the year ahead. Parliament has a central role in scrutinizing public investment. The Public Accounts Committee hold public hearings on central government accounts and frequently examine NAO reviews relevant to public investment management.

102. Under devolution. Northern Ireland, Scotland and Wales each have distinct legislatures and governments. Each devolved parliament has a separate devolution settlement and holds powers that were previously the preserve of the UK government. The specific arrangements are expanded through Acts of UK Parliament which set out the legislative competence of devolved administrations. Within this legal framework, a range of public investment functions are devolved (see Table 3.7).

^{Table 3.7.}

United Kingdom: Devolution of Competence for Economic Infrastructure

Source: IMF staff

^{Table 3.7.}

United Kingdom: Devolution of Competence for Economic Infrastructure

Sector	Scotland	Northern Ireland	Wales
Transport	Devolved	Devolved	Devolved, except rail
Energy	Largely devolved	Largely devolved	Partially Devolved
Water and sewerage	Devolved	Devolved	Devolved
Flood risk	Devolved	Devolved	Devolved
Waste	Devolved	Devolved	Devolved
Digital infrastructure	Not devolved	Not devolved	Not devolved

Source: IMF staff

View Table

^{Table 3.7.}

United Kingdom: Devolution of Competence for Economic Infrastructure

Sector	Scotland	Northern Ireland	Wales
Transport	Devolved	Devolved	Devolved, except rail
Energy	Largely devolved	Largely devolved	Partially Devolved
Water and sewerage	Devolved	Devolved	Devolved
Flood risk	Devolved	Devolved	Devolved
Waste	Devolved	Devolved	Devolved
Digital infrastructure	Not devolved	Not devolved	Not devolved

Source: IMF staff

103. Primary and secondary legislation covers certain aspects of the public investment system, however regulatory and guidance documents play a central role. The legal framework for public investment covers public procurement law and the planning process, both of which are the subject of reform initiatives at present. A number of independent institutions relevant to public investment management have been established including economic regulators, the NIC and the OBR. MPM sets the administrative framework within which public investment is executed. MPM sets explicit requirements and establishes the fiduciary duty of public servants to use public money responsibly. Further detailed rulebooks are issued by the Devolved Administrations.

Information Systems

104. Information systems for financial reporting information are comprehensive. HMT maintains an integrated financial Online System for Central Accounting and Reporting (OSCAR) to manage financial reporting, the budget estimates, and collect key datasets for government. OSCAR 2 has recently been introduced to replace OSCAR and is currently being refined. Key datasets captured in OSCAR include:

• Financial plans for the year ahead covering legal authorities to spend based on the Main Estimates and Supplementary Estimates

• Outturns, both Forecast and Outturns to track spending through the year and inform monthly reporting, and actual outturns

• The PFI database, which includes UK government departments and devolved administrations’ PFI/PF2 data. Data collection takes place annually and includes key dates such as start of the contract, estimated original capital investment, and forecasted future annual payments. This was last published in 2018.

• Whole of Government Accounts data (including from devolved and local governments), and

• Country and regional analysis data for certain larger areas of spending.

105. The IPA maintains the GMPP dataset, which includes a set of information used for project implementation monitoring and reporting. A subset of this information is published in the IPAs Annual Report. A more complete internal dataset is used by the IPA.

106. Plans to link HMT data on approved spending for projects with GMPP data will improve oversight of project costs. Currently the cost data in GMPP is from a variety of sources and does not necessarily line up with allocations made for projects made in Spending Reviews. This inconsistency in data makes it more difficult for the IPA to monitor project costs.

107. The UK does not have a public portal on public investment projects that have been approved and/or are in delivery by location and value. Portals of this sort have been adopted in other countries and aid transparency and accountability for project delivery in a way that is easy for citizens to access.⁸⁴ The most comprehensive data made available is via the National Infrastructure and Construction Pipeline, which is targeted to the construction sector and available in excel format. Wales produces a similar Infrastructure Investment Pipeline.

108. Initiatives underway to improve readily available digital information on existing infrastructure assets will be useful to the public and private sectors. As outlined in Box 3.20, work underway to create a digital register of land and buildings and a National Underground Assets Register will support improved asset maintenance and planning.

Capacity Building

109. The UK Government is actively developing the project delivery and leadership capabilities of its investment project professionals. As the government’s center of expertise for infrastructure and major projects delivery, the IPA has developed a range of instruments to increase the capability of every government project professional who works across all infrastructure sectors and at all levels of government. Ramping up the capability is needed not only because of currently planned investment projects and labor market shortages, but also because the government plans to increase public investment and to invest in new areas such as a net-zero and climate adaptive infrastructure.⁸⁵ Examples of instruments to build project delivery and leadership capabilities include:

• The IPA “Project Delivery Capability Framework”. The framework describes the roles, capabilities, and learning for all government project delivery professionals across government. It contains three elements: a career pathway/common set of job roles (see Figure 3.7), a set of competencies, and a signpost for development opportunities specific to job roles. It further provides a common language to describe job roles and the knowledge, skills, and abilities needed to perform project work across all areas of the government.

• The Government Function Standard GovS 002: Project Delivery. GovS 002 sets expectations for governance, portfolio management, program and project management, planning and control practices, and solution delivery practices.

• The Major Projects Leadership Academy and the Government Projects Academy. Both institutes offer training curriculums for government officials at all levels, ranging from Senior Responsible Owners (SROs) of major government projects to project delivery specialists such as project support officers.

UK Project Delivery Career Pathways

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source:IPA, Project Delivery Capability Framework.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

UK Project Delivery Career Pathways

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source:IPA, Project Delivery Capability Framework.

• Download Figure
• Download figure as PowerPoint slide

UK Project Delivery Career Pathways

Citation: IMF Staff Country Reports 2022, 287; 10.5089/9798400220005.002.A001

Source:IPA, Project Delivery Capability Framework.

• Download Figure
• Download figure as PowerPoint slide

110. The IPA also monitors the resources needed for successful delivery of projects in the GMPP. The IPA monitors varied information about the number and composition of project professionals and investment projects across the GMPP-portfolio (e.g., the skills of the current project professional population, vacancies, and understaffed teams). This information provides insights for better allocation of project professionals across the government, informs recruitment activities to replenish capacity shortages, and builds a workforce that is adaptive to new commercial developments and opportunities.

111. Having sufficient skills at the devolved and local government levels is also important to effective infrastructure delivery. It is often more difficult for local authorities to attract and retain needed skills, though reforms underway should contribute positively—namely the move to create local combined authorities in England, and for the UKIB to provide advisory services to local governments who wish to engage in private sector projects.

112. HMT’s Green Book and Major Projects Unit is also working to improve the capacity for the public sector to undertake high quality project appraisals. The unit is ensuring training is available for staff preparing business cases and those that who are overseeing. More information is available in Section 3.C.4.

Recommendations for Cross Cutting Themes

Issue 12: More capacity is likely to be needed to identify and develop quality projects across sectors and regions. With the scaling up of the infrastructure program, and a desire to spread it more across the regions, it is likely there will be a growing need for more staff skilled in project identification and preparation across all regions. Existing skilled staff in such locations may also be attracted to higher profile projects, exacerbating the shortage.

Recommendation 12.1: Continue to build capacity across government sectors and regions to develop project proposals and build a diverse pipeline of quality projects (Q4 2022, HMT, DLUHC, UKIB, IPA)

Issue 13: Improving interfaces between information systems for public investment management would streamline management and improve efficiency. Current information systems are used for different purposes. Improved interfacing and sharing of relevant information across systems could improve the quality of management information and reduce duplication costs for all agencies in collecting similar data for different purposes.

Recommendation 13.1 Explore opportunities for improved data sharing between information systems for public investment management. (Q4 2023, HMT, IPA in consultation with implementation agencies).