What it means
HM Treasury published the Green Book to make sure that public money is spent where it does the most good. Any UK central government proposal involving significant spending, from a new railway to a training scheme, must be appraised using its principles.
The guidance also covers how to evaluate a policy after it has been delivered. At the heart of the Green Book is social cost-benefit analysis.
This means counting all the costs and benefits to society, not just the money that flows through the government's accounts. Environmental effects, time savings and health improvements are given a value, and then everything is compared on a common basis.
Because costs and benefits arrive at different times, the Green Book requires future amounts to be discounted, which means converting them into present value using a set discount rate. It also requires planners to compare several options, including doing nothing, and to adjust for optimism bias, which is the tendency for projects to cost more and deliver less than first expected.
Risks and uncertainties must be set out openly. Business cases are written using a five case model.
The cases cover the strategic case, which asks why the project is needed; the economic case, which asks whether it offers value for money; the commercial case, which looks at whether a deal can be struck with suppliers; the financial case, which looks at affordability; and the management case, which looks at whether it can be delivered. Suppliers, consultants and lenders working on public projects often use the same framework when they prepare proposals.
Even if you never work with the UK government, the logic is useful: compare options, state your assumptions, discount future flows and test for risk. Note that in the United States the term Green Book is also used for other documents, such as the federal internal control standards.
In practice
Real-world examples.
Example
A government department wants to build a new flood defence. Following the Green Book, the team lists four options, including doing nothing, prices each in terms of costs and avoided damage, and chooses the one with the best value for money.
Example
A consultancy is hired to write a business case for a regional rail upgrade. It structures the document using the five cases and includes a section on optimism bias, adding a percentage uplift to its construction cost estimate to reflect past overruns.
Example
A hospital trust planning a new diagnostic centre follows the same logic. The finance team discounts the future savings and patient benefits, and presents the benefit-cost ratio to the board to support its funding request.
Formula
Calculation
Net present value (NPV) = Present value of benefits - Present value of costs
Benefit-cost ratio (BCR) = Present value of benefits / Present value of costs
Suppose a project costs $3,000,000 today and, using a discount rate of 5% chosen for illustration, will produce benefits of $2,100,000 at the end of year 1 and $2,205,000 at the end of year 2. The present value of the year 1 benefit is 2,100,000 / 1.05 = $2,000,000, and the year 2 benefit is 2,205,000 / (1.05 x 1.05) = 2,205,000 / 1.1025 = $2,000,000. Total present value of benefits is $4,000,000, so NPV = 4,000,000 - 3,000,000 = $1,000,000, and BCR = 4,000,000 / 3,000,000 = 1.33.Case study
Seen in the real world.
The Department for Rural Connectivity is an illustrative, fictional government body that wanted to spend $90,000,000 on broadband for remote villages. Officials first prepared a business case using Green Book methods.
They compared three options: full fibre to every home, a cheaper wireless network and doing nothing. After discounting, full fibre had a benefit-cost ratio of 1.1, wireless had a ratio of 1.6, and doing nothing was the baseline with a ratio of zero.
The team also added an optimism bias uplift of 20% to the fibre cost, which cut its ratio below 1.0. The minister chose the wireless network for most villages and fibre only for the largest ones, and the illustrative lesson is that the structured comparison changed the answer.
Watch out
Common mistakes.
- Treating the Green Book as only a way to justify spending, when it is meant to compare options honestly, including doing nothing.
- Using a headline cost figure without an allowance for optimism bias, which tends to understate the final cost.
- Assuming the guidance applies only to large infrastructure, when it covers policies, programmes and smaller projects too.
Questions
People also ask.
Who has to follow the Green Book?
UK central government departments and their arm's length bodies must follow it when appraising proposals, and many other public bodies use it as best practice.
Is the discount rate fixed in the Green Book?
The guidance sets a standard rate and updates it from time to time, so users should always use the version currently published.
Is the Green Book the same as the US Green Book?
No, the US uses the name for different publications, such as federal internal control standards, so the context tells you which one is meant.
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