Cost Benefit Analysis – Pacific Example 1

Cost Benefit Analysis – Pacific Example 1

Cost-Benefit Analysis Workshop23-25 April 2012

Jonathan Bower, Resource Economist, Land Resources Division, Secretariat of the Pacific Community

Example 1: drain in Vanua LevuProblem statement• A valley in Vanua Levu is getting flooded several times a year

– ruining 1000 tonnes of sugar cane crop/year on average– blocking the main road that runs down the valley– school days lost – lack of access to healthcare

• Causes: heavy rainfall combined with poor drainage in the valley

• Objective of a project?

Example 1: drain in Vanua Levu

Objective• Stop the valley flooding

Whose perspective do we pick?• the Fiji economy

This really happened, in Wainikoro, Vanua Levu. This drain was constructed in 2011.

WHAT MIGHT THE BENEFITS OF A DRAIN BE?

Benefits with drain (compared to without)

• Less sugar cane lost• Less business lost• Less school days lost• Improved road access – good for business,

good for healthcare

WHAT MIGHT THE COSTS OF A DRAIN BE?

Costs with drain (compared to without)

• Construction cost• Maintenance cost• Possibly more flooding elsewhere?

WHAT DATA DO WE NEED TO MEASURE THOSE COSTS AND BENEFITS?

BENEFIT Data required Source of data

COST Data required Source of data

BENEFIT Data required Source of data

Sugar cane saved from flooding

Average number of tonnes of sugar cane saved, and a prediction of how many years the drain will last

Farmers and farming community in the valley

Costs saved on repairing buildings or other belongings after floods

The cost of repairing buildings and other belongings in previous years

Farmers and residents in the valley

Any other way of valuing the road being passable e.g. less business days lost

It may not be possible to value things like less days off school, but business days lost could be measured by an average day’s profit

Discussion with community living in the valley

COST Data required Source of data

Construction cost A quote for cost of construction Digger hire, local community or construction company

Maintenance cost A quote for cost of maintenance per year

Digger hire, local community or construction company

More flooding downstream? Is there a risk of more flooding downstream & if so, how much would this cost

Local community, a land use expert’s look at where the water would run to

• What discount rate will you use?• What time period is the relevant one?• What assumptions do we need to make?

Calculating Costs and Benefits

• What discount rate will you use?– 7%

• What time period is the relevant one?– As long as the drain incurs costs and benefits

• What assumptions do we need to make?– The drain will be maintained for 5 years

Calculating Costs and Benefits

Data - Costs

• Construction required digger hire and driving, to dig a 600m ditch which cost just 3500FJD

• Maintenance costs are assumed to be 1500FJD/year on average – for 5 years

Data - Benefits

• 16 days less flooding on average per year• At least 1000 tonnes/year of sugar cane saved.

At about 50FJD per tonne that’s 50,000FJD/year of extra revenue, over 5 years

• 2 shops open 16 more days per year, gaining a total profit per day of 250 dollars each

– Also :16 school days for 100 kids (that’s 1,600 school-child days) regained due to the drain. However we cannot easily put a value on that.

USING THE DATA, CALCULATE THE UNDISCOUNTED NET PRESENT VALUE OF A DRAIN

NOW DISCOUNT ALL COSTS AND BENEFITS

SENSITIVITY ANALYSIS

Uncertainty and Sensitivity Analysis

• Over what?– Flooding intensity– How long the drain will be maintained

• How might we reflect these in the sensitivity analysis?

Uncertainty and Sensitivity Analysis

• Do a sensitivity analysis of an unusually large flood that happens in year 2 that– the drain cannot prevent– means the drain has to be reconstructed

Uncertainty and Sensitivity Analysis

• Do a sensitivity analysis on the drain not being maintained from Year 2 onwards.

Sensitivity Analysis – No maintenance from Y2 onwardsBenefits Y0 Y1 Y2 Y3 Y4

Crop production not lost to flooding

50,000 50,000 0 0 0

Extra profit for 2 shops

8,000 8,000 0 0 0

Year totals 58,000 58,000 0 0 0 Discounted totals

58,000 53,940 0 0 0 Costs Y0 Y1 Y2 Y3 Y4

Construction 5,000 0 0 0 0

Maintenance 2,000 0 0 0

Year totals 5,000 2,000 0 0 0

Discounted totals 5,000 1,860 0 0 0

Discount factor (1/((1+0.07)^t)) 1 0.93 0.87 0.82 0.76Discount rate 7%

Total benefits - discounted

111,940 Benefit-Cost Ratio 16.3

Total costs - discounted

6,860 Net Present Value (no discount rate)

105,080

Conclusion

• The ditch is worth digging• Maintenance is worth it• In the event of an unusually large flood that

destroys the drain, reconstruction is also worth it

TANGIO TUMAS/TENKYU TRU/THANK YOU/VINAKA VAKALEVU/SULANG/KO RABWA/TUBWA KOR/MALO 'AUPITO/FA'AFETAI TELE LAVA/MERCI BEAUCOUP/KIA MANUIA/KIAORA KOE/KOMOL

TATA/FAKAUE LAHI/SI YU'US MA'ÅSE‘/TEKE RAOI/KALANGAN/FAKAFETAI

Thank you

Jonathan BowerResource Economist, Land Resources DivisionSecretariat of the Pacific [email protected]+679 337 0733 – ext 35425

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