Value for Money

How does government define value for money?

The Green Book is the UK government's guidance on appraisal — the process of assessing the costs, benefits and risks of options for achieving government objectives. It defines value for money as the balanced judgement about the optimal use of public resources to achieve the objectives of a proposal.

That judgement requires consideration of: how well the proposal performs against its objectives; the monetisable and non-monetisable costs and benefits to society; the public sector financial impact; how costs and benefits are distributed across social groups and places; and the risk and uncertainty inherent in the proposal. A proposal that does not deliver its objectives cannot represent value for money regardless of its cost.

The Green Book structures the policy and spending cycle through the ROAMEF framework: Rationale (why does government need to act?), Objectives (what are the intended outcomes?), Appraisal (what options exist and how do they compare?), Monitoring (how will progress be tracked?), Evaluation (did the intervention perform as expected?) and Feedback (how will lessons learned inform future policy?). The Green Book primarily addresses the first three stages.

Why do accounting officers need to apply value for money principles?

Managing Public Money sets out the four standards that accounting officers are personally responsible for applying to every significant decision. Value for money is one of those four standards, alongside regularity, propriety and feasibility.

Regularity requires that a transaction has sufficient legal basis, Parliamentary authority and Treasury authorisation, and is compatible with the relevant spending framework.

Propriety requires that proposals meet high standards of public conduct and comply with Parliamentary control procedures, conventions and cross-government policies.

Feasibility requires that a proposal can be implemented accurately, sustainably and to the intended timetable without wasteful or nugatory spend.

Value for money requires that, in comparison to alternative proposals or doing nothing, the proposal delivers its stated policy objectives in a way that represents good value for the Exchequer as a whole, taking into account the chances of different degrees of success or failure.

Accounting officers carry personal responsibility for these standards and are directly accountable to Parliament through the Public Accounts Committee when they are not met.

How is value for money assessed in a business case?

HM Treasury's business case guidance applies a five-case model which requires value for money to be addressed explicitly at each stage of development.

The five cases are: the strategic case (the need for intervention and alignment with policy); the economic case (the identification and appraisal of options against value for money criteria); the commercial case (the procurement and contractual arrangements); the financial case (affordability and public sector cost); and the management case (deliverability and assurance arrangements).

Within the economic case, the guidance requires a minimum of four shortlisted options for further appraisal: business as usual (the benchmark); a "do minimum" option (a further benchmark for cost justification); a recommended option (the preferred way forward); and one or more alternative options of greater or lesser ambition. Value for money is assessed by comparing all options against business as usual and do minimum, not simply by evaluating the preferred option in isolation.

What is the four Es framework for value for money evaluation?

Government evaluation guidance extends the traditional three Es of economy, efficiency and effectiveness to a fourth — equity — reflecting the distributional dimension of public spending decisions.

Economy concerns minimising the cost of inputs: acquiring the right resources, in the right quantity and quality, at the right time, and at the best price.

Efficiency concerns the relationship between inputs and outputs: getting the maximum output from a given set of inputs, or delivering a given output at minimum cost.

Effectiveness concerns outcomes: the extent to which a policy or programme achieves its intended results, whether quantitative or qualitative.

Equity concerns distribution: whether the costs and benefits of a programme fall fairly across social groups, regions and generations.

Value for money evaluation uses these four dimensions as an organising framework, synthesising findings from process evaluations (which examine how a programme was delivered) and impact evaluations (which measure outcomes) into a comprehensive assessment of whether the public resources deployed were justified by the results achieved.

What is performance audit?

Performance audit — also described as value for money audit — is defined by INTOSAI as an independent, objective and reliable examination of whether government undertakings, systems, operations, programmes, activities or organisations are operating in accordance with the principles of economy, efficiency and effectiveness, and whether there is room for improvement.

Performance auditing aims to contribute to improved economy, efficiency and effectiveness in the public sector. It also aims to contribute to good governance, accountability and transparency. Unlike financial audit, which examines whether accounts give a true and fair view, performance audit examines whether public resources have been used to achieve the intended results — and whether better results could have been achieved with the same or fewer resources.

Performance auditing seeks to provide new information, analysis or insights and, where appropriate, recommendations for improvement. It does not assess policy merit — the question of whether government's objectives were the right ones — but examines how effectively those objectives were pursued.

What are the three Es — economy, efficiency and effectiveness — in value for money?

The three Es are the foundational principles of performance audit, defined in INTOSAI's Performance Audit Principles standard (ISSAI 300) as follows.

Economy means minimising the costs of resources. The resources used should be available in due time, in appropriate quantity and quality, and at the best price. Economy is concerned with inputs — what was spent and whether it was the minimum necessary to achieve the required quality.

Efficiency means getting the most from the available resources. It is concerned with the relationship between resources employed and outputs delivered in terms of quantity, quality and timing. Efficiency examines whether a given level of output could have been produced at lower cost, or whether more output could have been produced with the same resources.

Effectiveness concerns meeting the objectives set and achieving the intended results. Effectiveness examines outcomes — not just what was produced but whether it made the intended difference. A programme may be economical and efficient while still failing to be effective if the outputs do not produce the desired outcomes.

Together, the three Es provide a structured framework for diagnosing where value for money has been lost: at the input stage (economy), the process stage (efficiency), or the outcome stage (effectiveness).

What are the central concepts of performance audit?

INTOSAI's guidance on central concepts for performance auditing (GUID 3910) elaborates the conditions under which performance audit produces reliable, actionable findings. Three concepts are central: independence, ethics and evidence.

Independence is defined in two dimensions. Independence in fact allows the auditor to perform activities without being affected by influences that compromise professional judgement; to act with integrity and exercise objectivity and professional scepticism. Independence in appearance is the absence of circumstances that would cause a reasonable and informed stakeholder to doubt the auditor's integrity, objectivity or professional scepticism. Independence matters because of the judgements that must be made at every stage: identifying the topic; establishing the objective; identifying applicable criteria; determining the methodological approach; assessing evidence and forming conclusions; and writing a fair and balanced report. Threats to independence include self-interest, advocacy, familiarity, intimidation, self-review and management participation.

Ethics encompasses the moral principles that underpin the conduct of any independent examination of government activity: independence, integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. INTOSAI emphasises that to be independent, and to be seen as such, the examiner must be free from situations which could impair professional judgement. These principles are not confined to statutory audit — they apply to any form of independent analytical scrutiny.

Evidence is the factual basis on which findings and conclusions rest. Performance audit evidence must be sufficient (enough of it to support the conclusion), appropriate (relevant and reliable), and obtained through systematic methods. The quality of evidence determines whether findings can withstand challenge. Conclusions that are not grounded in robust, verifiable evidence cannot credibly support recommendations for improvement or hold organisations to account.

Together, these three concepts — independence, ethics and evidence — define what distinguishes genuinely independent analytical scrutiny from advice, advocacy or internal review.

What is the performance audit process from planning to follow-up?

INTOSAI's performance audit process guidance (GUID 3920) sets out the four phases through which a performance audit is designed, conducted and completed.

Planning covers topic selection, audit design and managing audit risk. Good planning defines the audit objective clearly, identifies the criteria against which performance will be assessed, and determines the evidence approach. The choice of criteria — the standard against which government performance is judged — is one of the most important methodological decisions in performance audit.

Conducting covers evidence gathering, the development of findings, and the determination of cause and effect. Findings should be based on sufficient, appropriate evidence and should distinguish between what went wrong, why it went wrong, and what the consequences were. Preliminary findings are discussed with the audited entity before the report is finalised.

Reporting covers the content of the report, the formulation of recommendations, communication with the audited entity, and distribution. Good performance audit reports are clear about the evidence base, present findings fairly, and make recommendations that are practical and actionable.

Follow-up examines whether the audited body has implemented the recommendations from a previous audit. Follow-up is essential to the accountability cycle: without it, audit findings become advisory rather than consequential.