How does public participation in decision-making help cost-benefit analysis (CBA)/ multi-criteria analysis (MCA)?

Public participation help CBA/MCA at various stages of analysis to minimize the role of subjective factors and arrive at figures which best reflect social valuation. It is impossible to include the social dimension, especially the equity issue in CBA. Stakeholder participation becomes even more useful in view of the widespread gaps in reliable data and information, which prevail in developing economies.

The voice of the public can determine the weights of the qualitative and subjective elements forming a part of CBA. The opinion of the public may be sought at different stages in the CBA/MCA exercise. The first inclusion of local values in the CBA/MCA process comes at the “scoping” stage, resulting in selection of the more important impacts for further study. But it is in the valuation of intangibles that stakeholder participation is expected to be most useful.

The public may also be invited to give comments on a CBA/MCA worked out by experts whether with or without stakeholder participation and be taken into account while finalizing CBA/MCA.

What are the major shortcomings of multi-criteria analysis (MCA)?

The major shortcomings of MCA arise when some option would be better against one criterion but worse against another in the matrix. This is a question of trade-off which occupies a central place in decision-making having multi-dimensional aspects. Weighting or ranking becomes necessary to handle such cases, but with their own associated methodological difficulties. This becomes a really critical issue to which no fully satisfactory answer is available. Multi-criteria analysis is also weak with regard to making inter-temporal comparisons. Impacts during the project construction phase are not distinguished from impacts during the operational phase. Multi-criteria analysis has no analytical technique like discounting to compare impacts (benefits and costs) occurring in different years.

How can sensitivity analysis deal with uncertainties surrounding projects in the flood management sector?

The technique of sensitivity analysis can deal with uncertainties when alternative assumptions about key variables are made and their effects on the project’s net effect (Benefit-cost ratio (BC ratio), B/C or Economic internal rate of return (EIRR)) are worked out under such uncertainties.

Suppose the project has a BC ratio of 3:1 on the assumption that it will be completed in three years. What happens to the BC ratio if the completion is delayed to five years or ten years? This requires calculation of the BC ratio on the assumption of a completion time of five years and also ten years. It may turn out that these BC ratios are 1.5 and 0.8 respectively.

This shows that the project is sensitive to the period of construction but remains viable even in the case of delay of up to two years. But it becomes unviable if its completion is delayed by seven years.

 

What is the internal rate of return (IRR) of a project in term of the Net Present value (NPV)?

The IRR of a project is the rate at which the NPV is zero or the present value of costs and benefits are equal or the Benefit-cost ratio is one.

In the figure below displaying the relationship between the NPV and the interest rate, the point P is the maximum interest rate at which it would be economical to undertake the project.

What is Net Present value (NPV)? How is it calculated?

The Net Present value (NPV) is a sum of the present or discounted value of costs and benefits for each year. The NPV is a condensed summary of the viability of a project.

A positive NPV implies that the project would have positive gains after paying all costs, including the repayment of loans and operation and maintenance costs, whereas a negative NPV implies that the benefits from the project will not cover all the costs. In this case, it is not justified to implement such projects.

If one out of several options is to be selected then the option with the maximum NPV should be selected. Mathematical formulae and computer programs are available to simplify the calculations.

Why is the use of discount rate in cost-benefit analysis (CBA)?

The use of discount rate has become an integral part of CBA because a high discount rate tends to give a lower value to benefits which accrue after longer periods and result in giving more attention to the interests of future generations.

As such, since the discounting process calculates its results from the present generation’s perspective, one need to be concerned about inter-temporal equity issues, that is, the fairness of the decision to future generations.

 

What is hedonic pricing? How can the adverse effect of flood on house or land values be estimated by hedonic pricing?

Hedonic pricing is a method to establish the monetary value of such items as noise, flood risk, air quality etc based on the assumption that property and other land value which is exposed to the risk of frequent flooding commands less value than an exactly similar house located in different and better surroundings.

In order to estimate how the value of a house is affected by the risk of flooding, it would be necessary to collect information on sale prices of houses with different degrees of risk for for flooding, including zero flooding, along with other characteristics of similar houses (such as number of rooms, type of structure, availability of other facilities and quality etc.).

Thereafter, a statistical or econometric analysis can be conducted to establish a relationship between extent of flooding and decrease in sale price assuming everything else stays the same. In this manner, the adverse effect of flood on house or land values can be estimated.

What is the contingent valuation method (CVM)?

CVM is essentially a method which provides values (in terms of willing to pay (WTP) or willing to accept compensation (WTA)) of the concerned people for an environmental good as stated by them during a survey. Rather than prices actually paid or received, WTP and WTA are used because many of the project impacts that are to be included in the economic analysis will be unmarketable, for example, biodiversity preservation, or incompletely marketed, such as water supply and sanitation benefits.

Note:

Willingness to accept compensation (WTA): Sometimes, construction of a flood management project results in the loss of income or other amenities to people. This happens in the case of those whose land or property is acquired by authorities for the construction of the project, say a reservoir. The affected people in such cases would like to receive compensation so as to induce them to part with their property. The minimum amount that they would be willing to accept as compensation is regarded as a measure of the value of loss suffered by them. WTA like WTP is also dependent on the income of an individual.

Willingness to pay (WTP): People derive benefit from something which they prefer to have. Preferences, of course, differ from person to person. But there is a good degree of commonality also so that an idea of average preferences for the whole community or a country can be derived. If people prefer something because they derive satisfaction from its use, then they are prepared to pay a price for it. How much a person or a nation is willing to pay for a good or a service that is preferred by them is the true measure of its value or of the benefit derived from the concerned item. WTP is partly dependent on the income of an individual. This WTP for something also determines the prevailing market price if there are no distortions in the market.

What are non-market values of floods benefits?

Floods produce several direct and indirect effects most of which remain unpriced by the market. Many of the benefits provided by natural resources such as wetlands remain unpriced. The inability to exclude others from enjoying benefits or suffering costs prevents the market price from sending the correct signals about the true economic value of the wetland. Non-market value can be categorized as follows:

  • Value of a prevented fatality or prevented injury;
  • Value of time lost prevented;
  • Value of health benefits;
  • Value of design quality;
  • Value of environmental services lost (air quality, landscape, water, biodiversity, noise, recreational and amenity values for forests etc.); and
  • Value of dis-amenity.

How can the direct benefits from flood management determined?

The direct benefits from flood management projects is determined by the annual average of flood damage minus the residual damage that may continue to take place even after the implementation of the flood management project-a flood moderation reservoir, an embankment or a flood warning program.