Flood protection schemes - assessment of economic, environmental and social impacts: guidance

2. The Appraisal Context

2.1 The principles of appraisal for sustainable flood risk management are set out in the Scottish Government's policy statement (reference 2). Additional guidance is provided here on specific issues.

Principles for evaluating costs and benefits

Price basis

2.2 Cost-benefit analysis should be undertaken using real prices; that is, inflation is ignored where 'inflation' has the everyday meaning of the price of a resource increasing without its relative value also increasing. Commonly, the relative prices of the different streams of costs and benefits are assumed to be constant over time; this is generally a conservative practice. In reality, they may change over time.

2.3 Growth factors may be adopted to reflect predicted changes in relative prices or demand. However, if such factors are used for one stream of benefits or costs, they should logically be used for all streams. Since prices are relative, it follows that, over time, some will fall relative to others, in the same way that the real price of many electrical goods has fallen over the last 30 years. Therefore, any use of selective growth factors should be considered carefully.

• Inflation should be ignored in undertaking the analysis
• Real prices should be used for all streams of benefits and costs

What is a benefit and what is a cost?

Treatment of negative costs and negative benefits

2.4 In deriving a benefit-cost ratio, there is no universally agreed basis for classifying a particular item as either a positive cost, or a negative benefit (disbenefit), or vice versa. While the particular approach adopted will have no effect on the net present value of an option, it can have a significant effect on the benefit-cost ratio. To ensure a consistent approach between options and schemes, it is important to have a common rule. The following conventions should therefore be adopted:

• Any 'negative costs' should be regarded as benefits
• Any 'negative benefits' should be regarded as costs

2.5 The benefit arising from a flood protection scheme is the net difference between total present value damages with and without the scheme - that is, the damage avoided in comparison with the 'do nothing' option. Any negative benefit, or disbenefit, arising from the project represents a loss to society, and should therefore be treated as a scheme cost. Conversely, resources which become available to society as a result of project implementation should be regarded as a benefit.

2.6 Sales that offset the costs of construction are to be treated as benefits of the scheme. For example, the sale of sand or gravel excavated as part of a channel widening scheme, or charges raised for the incorporation into the scheme of arisings from others, should be treated as a benefit.

2.7 Disbenefits such as noise and disruption caused by project works, and obstructions to views, should be treated as costs. In general, however, they are likely to be better handled as part of the consultation process and environmental appraisal, through which ameliorating actions are likely to be identified and included in scheme costs. If not, the costing of the disbenefits is likely to be disproportionate to their magnitude. The residual impact (the impact that remains following mitigation) will need to be described, quantified and, where appropriate, valued as damages. If mitigation is not possible and actions are required to compensate, then these costs should also be included in the option costs. The value of disbenefits will only require consideration when there are significant differences of impact between different groups or between different options.

2.8 However, there may be additional benefits from the flood protection scheme, particularly environmental and social benefits, that may not have been captured by considering benefits based only on net present value. These benefits might be difficult to value but should still be considered in the appraisal process.

2.9 Note that cost-benefit analysis is only concerned with changes in the total value of benefits and the total cost of the resources used. People will often adjust to a flood loss, and do so in a way that minimises their losses. If flooding closes a factory, production may be increased elsewhere. In such a case, the total national value remains the same. If the alteration simply varies the distribution of benefits and costs across the country, then no economic change occurs. Changes only in the distribution of consumption and resources are termed 'transfer payments' and should be excluded from the cost-benefit analysis ( Annex A).

Stocks and flows

2.10 When identifying and valuing the different streams of benefits and costs, it is helpful to think in terms of 'stocks' and 'flows'. It is easy to make the mistake of including the same benefit or cost twice because of a failure to distinguish sufficiently between the stock of some asset and the flow of resources, or consumption, which that stock generates. Typically, stocks give rise to some flow of consumption or resource so that the current capital value of the stock is determined by the discounted value of the future benefits, which flow from it. In some cases the flow diminishes the value of the stock value (e.g. mining coal necessarily diminishes the stock of coal) whereas in other cases it does not (e.g. catching fish at below the rate of replacement).

2.11 An appraisal can include either the stock value of a resource or the sum of all the flows that it yields but not both. However, the market value of a stock might not always fully reflect the value of the flow of services which it provides since these can include unpriced public goods, such as the provision of opportunities for enjoyment of the countryside. In such cases allowance can be made for these additional flow values, suitably discounted.

2.12 In some cases it may be easier to estimate the change in the annual flow of benefits from the stock than the change in the capital value of the stock. For instance, there is no obvious market price for a riverside park that might be destroyed through the construction of a flood protection scheme. An estimate of the value placed by users on visits made to that park might represent a better approach to valuing its loss ( paragraphs 5.67-5.72).

A proportionate approach

2.13 The level of detail in a cost-benefit analysis should be proportional to the scale of the project, and to the level of detail needed to chose a preferred option. For projects involving a small amount of expenditure, a detailed cost-benefit analysis may not be economically justified. Similarly, the amount of information required to make a decision will depend on a project, its size and its complexity:

• At the early stages of appraisal, summary data are usually sufficient; as the appraisal proceeds, data are usually refined to become more specific and accurate as needed to support decision making - it is important that the effort applied at each step is proportionate to the time and resources available and that additional data are only collected where they help in identifying a preferred option.
• Less information is needed where the choices between options are clear, whereas more detailed information is likely to be required where there are complex trade-offs between options.
• Once the choices between options are clear, then there is no further justification for the addition of any further detail (for example, where two options have very similar average cost-benefit ratios and it is clear that for all other social and environmental objectives, one option significantly outweighs the other).

2.14 Decisions will therefore be required on the appropriate level of detail, the streams of benefits and costs to be included, and the amount to be spent on the analysis. One of the skills needed for good project appraisal is deciding when enough information has been collected to make a robust and defensible decision. This is usually where collecting more information will not make a significant difference to the decision. In addition, it is essential to demonstrate this clearly and openly to those that may be affected by the decision.

2.15 For example, where appropriate, strategic and prefeasibility studies should be undertaken using readily available data, since the most expensive part of a cost-benefit analysis is data collection and collation. A simplified analysis should not, however, be interpreted as one that lacks economic rigour. This may include the simple technique of value transfer, which involves taking values derived in one context and applying them elsewhere; for example, taking the values of enjoyment for a visit to one river, and using them to estimate the value of visits to another.

2.16 For the more detailed design studies, the cost-benefit analysis should be sufficiently extensive to show with reasonable confidence whether or not it is worth adopting any of the 'do something' options. Ideally, the first streams of benefits and costs to be included should be those contributing the greatest proportion of the total. While it is not always possible to determine in advance which will be the largest, there are 2 areas which should generally be considered first. These are:

• benefits and costs which accrue earliest in the lifetime of the scheme; and
• those which have the highest probability of occurrence.

2.17 The cost of carrying out the appraisal will vary depending on the types of impacts that are appraised and the precision required. For recreational benefits or non-use values, it will cost as much to evaluate these for a small scheme (or area) as a large one, since the costs are largely fixed. The assessment cost also depends on the extent to which standard data can be used, such as the depth-damage data for residential properties. Further, if the flood surface and topography are complex, evaluation costs will increase.

How to determine a proportionate approach

2.18 There are several additional approaches that can be used to identify whether it is proportionate to value certain impacts:

• Are the impacts significant? The size of impacts can be considered in relation to property impacts (which can be estimated reasonably quickly) - if monetised impacts are likely to be ~10% or more of property damages they could impact on overall estimated benefits and are likely to be worth spending time on to estimate them in more detail. It is also often worth considering non-residential property damages in detail as they can vary significantly and can account for a large proportion of damages, even if they make up a relatively small proportion of affected properties.
• Do the impacts differ across the options being appraised? Detailed assessments should focus on differences between options as it is these differences that will help you decide which are preferred. Where impacts are very similar across all or most options, there is unlikely to be much value to the decision-making in considering these impacts in a lot of detail.
• How much uncertainty is there in predictions of risk? There is very little advantage in spending a lot of time looking at impacts in detail if the approaches that have predicted those impacts are coarse. For example, if a model predicts flood levels of 0.5m ±0.1m, it would not be worthwhile spending time describing differences in impacts that could occur based on 0.4m to 0.6m flood depths. This is because the uncertainty from the model means that the impacts on options with 0.4m and 0.6m flood depth need to be treated as similar.
• How much time is required to describe, quantify or value the impacts? It can take a considerable amount of time to estimate the monetary damages of some impacts (for example, disruption to road traffic) where those impacts are relatively small. It is essential to consider how significant the impacts are likely to be before starting to collect data or estimate damages. If the choice of preferred option turns out to be reliant on differences between options in any one category, it is possible to estimate and monetise these impacts later in the appraisal process.
• Are approaches available to value the impacts? Not all of the impacts will be easy to value in monetary terms. However, this is not an appropriate reason for excluding impacts. It is important to remember that you are valuing impacts at £0 if you exclude them from the appraisal. If significant impacts cannot be valued in monetary terms, it is important that they are described and quantified so they can be taken into account during decision-making

Consultation

2.19 Consultation is a necessary part of scheme development. It is good practice to consult early in the scheme design, and to continue the process throughout the design work and implementation. This should enable a comprehensive consideration of the appropriate costs and benefits.

The project domain

2.20 In some cases, the form of appraisal will depend on whether the solution is in fact a single scheme, or a series of independent projects. If the latter, a separate cost-benefit analysis should be carried out for each independent element. For example, if separate flood embankments are proposed for several different villages, the protection of each should be justified on its own. Where, however, it is possible to protect all the villages with a single scheme, such as a barrage, or flood storage reservoir, it is still necessary to consider the option of protecting each one individually. In this case, the aggregate costs and benefits of the best worthwhile individual protection schemes should be compared with those of the single scheme.

Multifunctional schemes

2.21 The development of strategic approaches to flood protection may result in the promotion of a multi-functional project. At its simplest, such a project may involve two or more different structures, each with a different purpose, but built together to make savings in total construction costs. In this case, it would be reasonable to apportion these costs, and to appraise the flood defence function of the works separately.

2.22 However, the aim of promoting a multi-functional project will generally be to provide a range of facilities at a lower total cost than if each were provided separately. In this situation, when undertaking the cost-benefit analysis, all benefits and costs should be included and the question of who benefits and who pays can be ignored.

2.23 The question then arises of how to share the costs equitably between funders. Because the overall aim is to make more efficient use of resources, it is reasonable to assume that no party should pay more than the whole-life cost of meeting their specific requirements on a stand alone basis. The contributions should usually be based on the costs of the relevant major sections of the work. However, there may be situations where it will be more equitable to divide costs in the ratio of the major benefits, provided these can be determined on a consistent basis (see also paragraphs 7.9-7.11).

Phasing of a project

2.24 When a single scheme is phased, and there are no independent elements, the cost-benefit analysis should be carried out for the project as a single entity. However, a review of the justification of each stage of the phased works should also be undertaken.

2.25 As a scheme is progressed, the probability of a failure of one part of the scheme will change. It is this change in probability that should be used in the review of each stage of the works. Further, there are likely to be differences in the consequences of a failure, depending upon the particular works already completed.