Flood protection appraisals: guidance for SEPA and responsible authorities

6. Assessing economic impacts

6.1. Introduction

6.1.1. Flooding can have a wide range of economic impacts, including damages to property and contents, costs to emergency services, damages to infrastructure and agricultural land and impacts on land use. This section provides guidance to appraisers on assessing damages to specific receptors and enables appraisers to calculate the benefits of damages avoided ( Section 9). Further and more detailed guidance can be found in the MCM.

6.1.2. It is not necessary to assess damages to all receptors in every appraisal. Appraisers should select the level of detail proportionate to the type and scale of appraisal, be it at a strategic, catchment or local level ( Section 5.5). The process should be iterative: the calculated values and assumptions should be reviewed to make sure the results are representative.

6.1.3. Prior to assessing economic impacts, appraisers should decide on whether the appraisal will be desk-based or whether it will require a survey of topographic threshold levels and a site walkover survey. This will be determined by the acceptable level of confidence in the outputs (see Section 5.5).

6.2. Residential and non-residential property

6.2.1. Flood damages to properties can be estimated given the flood extent, the number of properties and the frequency of flooding. Better estimates will be obtained with additional information on the types of properties and the depth and duration of floods.

6.2.2. The MCM contains some standard data on the economic losses to be expected for residential and non-residential properties. These losses include damages to the building fabric and contents and the costs of drying out and cleaning up. For residential properties, the MCM also contains standard data on losses from vehicle damages and evacuation costs (e.g. temporary accommodation, additional travel and time costs, loss of earnings). Adjustment factors, which take account of the additional losses from saline flooding, are available.

6.2.3. An alternative to standard data is to commission a site survey. This is expensive, however, and is rarely justified unless the property concerned is atypical (such as a large industrial or commercial property, hospital or listed building) and the use of standard data would likely give misleading results. Further guidance on site surveys can be found in the MCM.

6.2.4. Iterative checking of damages is an important quality assurance tool, particularly given the inherent uncertainty in estimates of damages for non-residential properties and capping values (Section 6.2.7).

6.2.5. Where a flood has occurred recently, a record of the damages incurred (if available) can provide a useful context for the evaluation of losses and also used at a later stage to check calculations. (However, information can be incomplete and actual damages will rarely be available for the required range of events. Where losses are recorded, these will often be in financial rather than economic terms ( Section 5.3) and values will have to be converted.)

6.2.6. Permanent buildings at risk of total loss from flooding should usually be valued at their current market value, excluding any adjustment in value for the flood risk (Section 6.2.8). Generally, property will be assumed to be written off if it is flooded on average more than once every three years unless it is flood resistant or flood resilient. This is because there is unlikely to be sufficient time for the property to be repaired and return to full use following the previous flood before the next flood occurs. As a result, repairing the property would be a waste of money.

6.2.7. Where a property is flooded more frequently than once every three years, it is assumed that the cumulative present value damages do not exceed the risk-free market value of the property. Damages to a property should therefore be capped at the risk-free market value (Section 6.2.8).

6.2.8. It is important to use risk-free market values for write-offs (Section 6.2.6) and capping (Section 6.2.7) because the actual market value of an at-risk property could be lower as where the risk is known, there may be lower demand for the property (see the MCM). Historical values should be uplifted to present values ( Appendix 1 Section A1.2).

• For residential properties, the Registers of Scotland ( https://www.ros.gov.uk) publish data on house prices. Regional market values by property type can be used as an estimate of the risk-free market value. This approach may be particularly suited to strategic and feasibility stages of appraisals. An alternative, where feasible, is to develop a local proxy for risk-free market value (based on property prices in nearby and similar properties or adjacent neighbourhoods). Where at-risk property prices are depressed, the prices of adjacent properties or streets may also be affected. Developing local risk-free market values therefore requires local knowledge and may be more suitable for design stage of appraisal. Sensitivity analysis can be used to examine the choice of capping values.
• For non-residential properties, the MCM recommends using rateable values together with a conversion factor (see MCM for details) as a proxy for market values. Rateable values are available from the Scottish Assessors Association ( http://www.saa.gov.uk). If this approach is used, appraises should check that the resulting estimates of market values are appropriate for the type and scale of appraisal, as rateable values are not always proportionate to market values.

6.2.9. When appraising relocation of properties, particular consideration should be given to the appropriateness of capping values. This is because the costs of relocation are rarely less than the market value of the property, so relocation may not compare favourably in economic appraisal. In these cases, it is worth comparing the damages both with and without capping. Also, social impacts ( Section 7) of relocation may be significant and should be fully explored.

6.2.10. Market values sometimes need adjustment. For example, for properties such as pubs and restaurants, the market value includes a significant factor for customer goodwill. This 'goodwill' element is a transfer, not an economic loss ( Appendix 1 Section A1.4). In other circumstances, if there is an excess supply of, say, some types of commercial property, such property would not be replaced if lost and no economic loss would be incurred. It is also important to avoid double counting any waterside amenity element of market value. Furthermore, in the case of loss through abandonment, it should be assumed that the contents of the buildings are removed before the building is lost. Consequently, the value of all removable fixtures and fittings should be excluded from the damages.

6.3. Distributional Impacts analysis for residential properties

6.3.1. A Distributional Impacts analysis can be used to adjust the benefits of reducing flood risk to individuals, depending on aspects such as their socio-economic group. (The rationale being that an extra pound will give more benefit to a person who has lower income than to someone who has higher income.)

6.3.2. Distributional Impacts should be applied where it is necessary and practical to do so ( HM Treasury 2011). Determining if it is 'necessary and practical', depends on a number of circumstances, including (i) whether a community at flood risk can be identified with reliable data and categorised according to their prosperity or social class; (ii) whether the assessment will contribute to an appraisal that demonstrates equity and fairness to people; and (iii) whether the time and effort in undertaking the assessment is proportional to the scale of the overall appraisal.

6.3.3. In addition, appraisers should consider whether they feel that in not undertaking the assessment, an option will still have an adverse differential impact on a particular group. In this case, a decision not to adjust explicitly for distributional impacts will need to be justified.

6.3.4. A Distributional Impacts analysis is achieved by applying Distributional Impacts factors to adjust the damages to residential properties. The subsequent values arising from the appraisal may then be treated in the conventional manner. Further advice and application of Distribution Impacts analysis to flood risk management is set out in Defra (2004) and the MCM.

6.4. Indirect impacts on non-residential properties

6.4.1. If a shop or factory is flooded, the company will lose sales and its customers may be inconvenienced. Therefore there are two forms of indirect losses: losses to the consumer and losses to the supplier. In general, the loss to the consumer is the economic loss; the loss to the supplier is usually financial rather than economic.

6.4.2. If consumers can buy the same goods at the same cost from an alternative supplier immediately, there is no loss to them. If they have to make do with inferior goods or incur higher costs, there may then be an economic loss. However, it will only be appropriate to describe or quantify this in special circumstances; for example, where long-term loss of a rural retail outlet is likely to involve significant extra travel.

6.4.3. Losses to the supplier may occur due to businesses being unable to obtain supplies or to distribute finished products. If other shops or factories can supply products or provide distribution of products, this is simply a transfer unless those other shops or factories incur higher costs ( Appendix 1, section A1.4). The sales lost by one company are gained by another. The only exception is when those purchases are made up by additional UK imports or lost exports. Indirect losses do not normally arise from disruption to commercial and retail activity because there are typically many alternative outlets offering the same services immediately. This need only be considered in exceptional circumstances, for example when highly specialised products are involved. A description of any significant impacts may be sufficient, although if desired indirect effects can be quantified using business multipliers (see Environment Agency 2010b).

6.4.4. There may also be indirect impacts due to closure of businesses. Where a business is expected to close rather than relocate, there may be some knock on effects on trade as well as social impacts. These damages do not need to be quantified, but any potential significant effects should be described.

6.5. Temporary and semi-permanent structures

6.5.1. For temporary and semi-permanent structures, the real economic value of losses may be very different from current market values. For example, the economic value of a caravan on a particular site is equivalent to the cost of moving it there and establishing the site, not the value of the unit itself, which could be retained if it were relocated elsewhere.

6.5.2. For the 'do nothing' case, it should normally be assumed that a caravan could be relocated. The economic loss would then be limited to the cost of removal together with the loss of installed infrastructure, depreciated as appropriate. Where a site is to be protected, the 'do something' damages should be calculated in the normal way, taking into account the seasonal nature of occupation. Similar considerations will apply to other temporary or relatively short-life structures, such as most amusement park rides.

6.5.3. 'Park homes' (residential mobile homes), however, may be treated differently to other types of caravan as they cannot be easily moved and may be written off at flood depths of over 60cm. Further guidance is published in the MCM.

6.5.4. In specific cases, a caravan park may provide important support to another feature (such as tourism) or the revenue of another operation (such as an associated harbour). Moving the caravan park may not be possible within the local area and may therefore have significant impact on the sustainability of other values in the area. It is important that the overall interaction of features are identified and recorded. Information of this type may be particularly significant in drawing comparison between options.

6.5.5. In assessing economic damages, caravans, mobile homes, chalets or other temporary buildings or structures should be considered as depreciating assets worth, on average, only half their replacement cost.

6.6. Emergency costs

6.6.1. A range of organisations may incur emergency costs in tackling flooding and in the recovery process, including: police authorities, ambulance services, fire services, local authorities, voluntary services and the armed forces. The costs are above and beyond the normal operating costs for these organisations. Estimates for these costs are generally calculated as a proportional factor of property damages. See the MCM for further guidance.

6.7. Infrastructure

6.7.1. Infrastructure includes structures and assets associated with:

• Provision of energy;
• Provision, treatment and removal of water and removal of waste water;
• Waste management and recycling;
• Transport;
• Healthcare;
• Education and community facilities.

6.7.2. The impacts on both national infrastructure and on infrastructure of local or regional importance should be considered. In accounting for infrastructure losses, the following should be considered:

• Number and type of infrastructure affected;
• The area served by the infrastructure;
• Spare capacity of existing and alternative infrastructure;
• Opportunities to divert or redirect services;
• Permanent loss of infrastructure.

Disruption from and damage to transport infrastructure (notably main road and rail routes) is considered in Section 6.8.

6.7.3. The damages to infrastructure can be direct (physical damages to the content and or fabric of the infrastructure) and indirect (the implications of the loss of services).

6.7.4. For certain infrastructure (e.g. schools, village halls, sewage treatment works), direct damages to the building itself can be calculated using the non-residential property depth-damage data published in the MCM (Section 6.2). However, generalised depth-damage data can be misleading for some infrastructure as it can be highly individualised and site surveys may be required, particularly for hospitals. Types of infrastructure that may require site surveys are identified in the MCM.

6.7.5. The loss of services provided by the infrastructure should be considered, bearing in mind that potential impacts may well extend beyond the area directly affected by flooding. There may also be knock-on social effects, such as health impacts or community disruption. Methods exist for estimating the monetary economic value of loss of services such as power supply. For the purposes of flood risk management appraisal, however, a qualitative or quantitative assessment of any significant impacts will usually be sufficient. Further guidance is published in the MCM.

6.7.6. Embankments constructed primarily as flood defences have a functional value only in terms of the protection that they provide. Including a value for such assets is likely to lead to double counting. However, they may also have a marginal use value for recreation, which may be taken into account ( Section 7.5).

6.8. Transport

6.8.1. Flood damage to transport infrastructure and disruption of transport networks can result in significant losses.

6.8.2. When assessing direct damage to transport infrastructure, the appraisal should consider the type of infrastructure, its relative importance (e.g. local or national), and the duration and permanency of any impacts. European average road damage costs may be found in Annex 3 Table 18 of Doll and Sieber (2011); other damages are published by in the MCM. Locally derived repair costs may be used if deemed more appropriate.

6.8.3. Road disruption, although may be significant, is difficult to estimate as it is location specific. It will not generally be worth evaluating these unless:

• A major through-road is closed during a flood of at least 10% AEP (1 in 10 year flood event); or
• Diversions are very long or non-existent; or
• Road disruption is a key driver for managing flooding.

6.8.4. If flooding is expected with 20% AEP (1 in 5 year event) or greater, and a significant part of the network carrying through-traffic is affected, the benefits of reducing disruption can be large, both in total and as a proportion of all benefits. Traffic that usually uses the roads will have to divert (if possible), and may have to travel further, and/or for longer, incurring both resource and time costs. Since the speed of traffic depends on volume, the normal traffic on the diversion routes will also travel more slowly, again increasing such costs.

6.8.5. One problem is that of identifying the diversion routes. Another is that the progressive development of flooding may induce a cascade of traffic diversions as one road after another is closed. Further, standard volume-speed relationships are not intended for highly congested traffic, and their application out of context can give misleading results.

6.8.6. Methods and guidance are available to help calculate the difference in the resource and time costs of using the road network under different flooding conditions, and to address the special problems of calculating the costs of flood-induced traffic disruption. The MCM provides guidance on how to take account of the costs of road traffic disruption.

6.8.7. Disruption to rail networks can also give rise to substantial economic costs. The MCM provides guidance on how the economic costs of rail delays can be calculated.

6.8.8. Transport by air and water may be also affected by flooding. If impacts are likely to be significant, then these should be captured at least in qualitative form. Whether it is appropriate to quantify or monetise these impacts will depend the type of decision to be made and the available data. The following information may be useful:

• The number, length and type of transport affected;
• The number of passengers and/or freight carried;
• Whether there are alternative routes (either by the same transport type or other means).

6.8.9. Impacts on transport from flooding may also give rise to knock-on effects, such as 'social' impacts (e.g. health impacts or community disruption). These effects should be considered within appropriate categories. Any effects due to flooding of evacuation routes or infrastructure used in emergencies (e.g. airports or heliports) will also need to be captured.

6.9. Agriculture

6.9.1. Flooding and actions to manage flood risk can impact significantly on agriculture and agricultural production. The MCM and Defra (2008a) contain guidance on how to take account of impacts on agriculture. The guidance advises on the approach for valuing the following scenarios:

• Where land is abandoned or no longer fit for agricultural use for the foreseeable future;
• Where there are occasional losses of output as a result of flooding;
• Where agricultural output per hectare either falls or rises (a more permanent change in output than the occasional losses in the previous scenario).

Note that different flood management options might have different impacts on agricultural land depending on the type of output - for example, a flood warning scheme would be expected to provide greater benefits to pastoral land rather than to arable land.

6.9.2. Where land is lost from agriculture, Defra recommends that the loss should be considered as the market value of the land less the present value of Single (Farm) Payments.

6.9.3. Where occasional losses of agricultural output are expected, appraisers may find the following datasets useful for calculating damages:

• Centre for Ecology and Hydrology (2011) Land Cover Map 2007;
• James Hutton Institute (1982) Land capability for agriculture.

Appraisers should consider whether changes in land use over time may affect the flood damage estimates.

6.9.4. Additional guidance on the appraisal of flood risk management for agriculture is also provided in the MCM. Appraisers should seek further guidance from the Scottish Government when valuing impacts on agricultural land for:

• High level strategic assessments;
• Large scale schemes of more than 10,000 ha;
• Less favoured areas where there could be impacts on farming communities and local economies.

6.10. Future land use: development and regeneration

6.10.1. The impact of flooding on land uses other should also be considered - for example, impacts on development or regeneration.

6.10.2. Any benefits arising from providing flood protection to potential new land use development (including the intensification of existing land uses), should normally be excluded from the appraisal. The primary reason for this exclusion is to preclude Government funding of works which would enable land to be developed for private gain. Where land has been identified for development and agreements are in place, or where construction has commenced, then damage to the proposed development can be taken into account in the appraisal. Brownfield sites should be valued on damages to their current use, except where agreed local development plans or full planning permission are in place. Whether the future development would increase risks should also be considered.