Cost-benefit analysis in Disaster Risk Management Cees van Westen westen@itc.nl

Disaster management cycle Components: relief, recovery, reconstruction, prevention and preparedness. Initially most emphasis was given to disaster relief, recovery and reconstruction Later more attention was given to disaster preparedness. Eventually the efforts are focusing on disaster prevention and preparedness

Disaster Risk Management Disaster Risk Management (DRM) can be described as an array of measures involving public administration, decentralization, organizational and institutional development (or strengthening), community-based strategies, engineering, settlement development and land use planning. It also takes into consideration environmental issues as part of the risk mitigation and reduction strategies

Disaster Risk Management

Scales of risk assessment and aims Scale description Indicative range of scale Objectives Inter national < 1:1,000,000 Prioritization of countries/regions Early warning ???? National < 1:100,000 Prioritization of regions Analysis of triggering events Implementation of national programmes Strategic environmental assessment Insurance ?? Regional 1:100,000 to 1:25,000 Analysing the effect of changes Regional development plans Local 1:25,000 to 1:5,000 Land use zoning Environmental Impact Assessments Design of risk reduction measures Site-specific > 1:5,000 Early warning systems

Framework

Risk evaluation versus perception Risk evaluation is the stage at which values and judgment enter the decision process, explicitly or implicitly, by including consideration of the importance of the estimated risks and the associated social, environmental, and economic consequences, in order to identify a range of alternatives for managing the risks. We have analyzed the risk either qualitatively or quantitatively. Now questions arise: Is the risk too high? Where is the risk too high? What is too high? What do the people think? Risks can classified into involuntary risk and voluntary risks. Risks associated with natural hazards are often classified as involuntary risk. The “factual” dimension, which indicates the actual measured level of risk, and which can be expressed in probability of losses (e.g. number of people, building, monetary values) The “socio-cultural” dimension, which includes how a particular risk is viewed when values and emotions come into play

Risk perception Risk perception is the way how people/communities/authorities judge the severity of the risk. Do they know? Are they worried? Are they prepared to act? Who they think should act? What is it worth to them? Their personal situation. Cultural and religious background. Social background Economic level Political background Level of awareness Media exposure Other risks Risk reduction situation

Risk evaluation. The ALARP principle is that the residual risk shall be as low as reasonably practicable. Acceptable risk: a risk which the society or impacted individuals are prepared to accept. Actions to further reduce such risk are usually not required unless reasonably practicable measures are available at low cost in terms of money, time and effort. Tolerable risk: a risk within a range that society can live with so as to secure certain net benefits. It is a range of risk regarded as non-negligible and needing to be kept under review and reduced further if possible. ALARP (As Low As Reasonably Practicable) principle: Principle which states that risks, lower than the limit of tolerability, are tolerable only if risk reduction is impracticable or if its cost is grossly in disproportion (depending on the level of risk) to the improvement gained.

Risk evaluation based on F-N curves

Which risk is acceptable? During the life of an average person, the chance of death is never less than 1:10,000 (1.000E-4): this is due to all causes. So it would not be realistic to require the risk due to natural disasters to be lower than this. These curves differ from country to country. No international standards Voluntary – involuntary risk is also relevant.

F-N curves Risk acceptability is mostly defined on the basis of F-N curves

Risk acceptance criteria in Netherlands “dyke rings” that protect a part of the country against flooding. The more important the area, the lower the chance that the dyke ring breaks and the area will be flooded.

Risk Governance Framework The aim of Risk governance is to involve the various stakeholders within all aspects of risk management. Risk communication is central. The International Risk Governance Council Risk Governance Framework ( Source: IRGC, 2006)

Stakeholders

Risk reduction R = f (H, V, C) Risk can be reduced by: R = Risk H = Hazard V = Vulnerability C = Coping capacity Risk can be reduced by: Reducing the hazard Reducing the vulnerability of the elements at risk Reducing the amount of the elements at risk Increasing the coping capacity

Risk reduction strategies Structural measures: refer to any physical construction to reduce or avoid possible impacts of hazards, which include engineering measures and construction of hazard-resistant and protective structures and infrastructure Non-Structural measures: refer to policies, awareness, knowledge development, public commitment, and methods and operating practices, including participatory mechanisms and the provision of information, which can reduce risk and related impacts.

Tools to evaluate best risk reduction measures Cost Benefit Analysis (CBA) is used to compare costs and benefits of a one specific measures or a set of alternative measures over a period of time for a. CBA assesses the measure(s) mainly on the basis of the efficiency criterion. It requires the monetization of all the effects. The effects that cannot be expressed in monetary terms will be usually described in their original unit of measurement. Cost Effectiveness Analysis: (CEA) has most of the features of CBA, but does not require the monetization of either the benefits or the costs (usually the benefits). CEA does not show whether the benefits outweigh the costs, but shows which alternative has the lowest costs (with the same level of benefits). CEA is often applied when the norm for a certain level of safety has been set. CEA analyzes which types of solution is the ‘cheapest’ given a certain level of safety standard. Multi Criteria Analysis (MCE) is a tool that allows comparing alternative measures on multiple criteria. In contrast to CBA, MCE allows the treatment of more than one criterion and does not require the monetization of all the impacts. MCE results in a ranking of alternatives.

c. Which alternative is economically the most attractive? If all alternatives are all as effective in terms of risk reduction  the cheapest alternative (Cost Effectiveness Analysis, CEA) If effectiveness in risk reduction differs  the cheapest alternative in terms of risk reduced (Cost Benefit Analysis, CBA) Flood proofing relocation. Levees

What is an optimal level of a risk reducing measure? A number (most?) risk reduction measures could be applied in a variable way Height level of dikes Earthquake resistance of buildings Legal restrictions land use ….. A higher level of risk reducing measures  reduced risk, BUT diminishing returns Often at higher variable costs MORE is not necessarily more beneficial EXAMPLE: small example CBA_risk_reducing

Cost-Benefit Analysis and Damage Assessment – for whom?? Government and funding agencies National and provincial governments Governments/general public Emergency planners Insurance companies Private firms/house owners Ex-ante project appraisal Accountability - Tax money Economic loss - compensation Identification of critical risk areas Financial loss Insurance or other protection measures

Perspective – damage/cost/benefits for whom? Public: national ministries, provincial governments, emergency planners Private: private firms, private property owners, insurance companies Economic values – real values – broad economic perspective Financial values – monetary values

Cost Benefit Analysis of Risk Reducing Measures Costs for (structural) risk reducing measures are relatively less difficult to estimate Estimating the benefits is a major challenge ! We need to know: Avoided damage Probability of damage We need to estimate: how often natural hazard events occur (frequency) how much damage and losses occur as a result of the event

Risk is changing

TYPES OF LOSSES (direct and indirect)

Costs of Natural Hazards - e.g. flooding Indirect damage income forgone interruption of economic and social activities extra costs of transportation due to infrastructure damage Direct damage buildings infrastructure crops and livestock Machines human victims landscape/nature

Damage functions Damage-probability curve Damage-probability curve in case of flood protection against events upto 1:100 years

Basic CBA steps Define scope of the project Identify the type of costs and benefits Put monetary values on costs and benefits Compare costs and benefits Calculate profitability indicators/decision criteria Sensitivity analysis Make recommendations

What do we need to know of both scenarios? The costs of both scenarios (investment and annual) The investment period The benefits (i.e. annual risk reduction) of both scenarios The life time of the investment Discount rate

RiskCity RiskCity is (not) Tegucigalpa, Honduras Educational changes

Risk concept Definition of risk the probability of harmful consequences, or expected losses (deaths, injuries, property, livelihoods, economic activity disrupted or environment damaged) resulting from interactions between natural or human-induced hazards and vulnerable conditions Definition of risk assessment: A methodology to determine the nature and extent of risk by analyzing potential hazards and evaluating existing conditions of vulnerability that could pose a potential threat or harm to people, livelihoods and the environment on which they depend.

Generation of the Risk Curve

RiskCity concept Go through all steps of a risk assessment Urban area Multi-hazard Developing country Different approaches

Damage functions

Seismic risk Step 1: Defining earthquake scenario. Step 2: Calculate the attenuation Step 3: Calculate soil amplification Step 4: Convert PGA to MMI Step 5: Apply Vulnerability Functions for Building types Step 6: Apply Vulnerability Functions for Infrastructure types Step 7: Apply Vulnerability Functions for casualties If additional information is available: Step 8: Apply cost information to the buildings and combine with vulnerability to calculate losses for different return periods. Step 9: Combine loss information for different return periods and calculate the risk by adding up the losses from these periods. Step 10: Combine information and make summary ISL 2004 Introduction to GIS

Risk = Hazard * Vulnerability * Amount Seismic risk Risk = Hazard * Vulnerability * Amount Return period 15 35 50 60 Probability 0.067 0.029 0.020 0.017 Loss 1323 4850 8945 10991 Risk 88 139 179 183 ISL 2004 Introduction to GIS

Flood hazard modeling Sobek: a two dimensional hydraulic model. Input: Digital Surface Model (Lidar) Discharge data Roughness data (landuse) Output: Flood depth Flow velocity (Per time step) Discharge Time 5 10 25 100 ISL 2004 Introduction to GIS

Flood risk Hazard polygons Buildings Affected 5 years 50 years 5 years Mapping units 25 years Hazard polygons Buildings Affected ISL 2004 Introduction to GIS

Flood risk Risk = Hazard * Vulnerability * Amount ISL 2004 Introduction to GIS

Risk = Hazard * Vulnerability * Amount Flood risk Risk = Hazard * Vulnerability * Amount Return period 5 10 25 50 100 Probability 0.2 0.1 0.04 0.02 0.01 Loss 33 74 192 405 1096 Risk 7 8 11 ISL 2004 Introduction to GIS

Calculating buildings in hazard zones Building map Susceptibility Calculates the number of houses in High, Moderate and Low susceptibility zones using a Building footprint map Cross 4426 buildings 9645 buildings 22019 buildings ISL 2004 Introduction to GIS

Quantitative risk assessment Only susceptibility Still to do Known now Risk = Hazard * Vulnerability * Amount How much percentage of the high, moderate and low hazard classes may be affected by landsides? In which period will these landslides occur? What is the vulnerability to landslides? Results using mapping units High Moderate Low 4426 buildings 9645 buildings 22019 Hazard = Spatial probability * Temporal probability The temporal probability that landslides may occur due to a triggering event. Here we will link the return period of the triggering event with the landslides that are caused by it. We have differentiated return periods of: 50, 100, 200, 300 and 400 years. The spatial probability that a particular area would be affected by landslides of the given temporal probability. This is calculated as the landslide density within the landslide susceptibility class. ISL 2004 Introduction to GIS

From susceptibility to hazard Landslide_ID map If the indication of the high, moderate and low areas susceptibility is correct, different landslide events with different return periods will give different distributions of landslides in these classes. Million dollar information!!! The probability can be estimated by multiplying the temporal probability (1/return/period for annual probability) with the spatial probability (= what is the chance that 1 pixel is affected) Landslide related to different return periods Susceptibility Cross Density in high Density in moderate Density in low ISL 2004 Introduction to GIS

Calculating hazard Return periods Susceptibility classes Assumption is that events with a larger return period will also trigger those landslides that would be triggered by events from smaller return periods Return periods Susceptibility classes ISL 2004 Introduction to GIS

Calculating Vulnerability Estimating landslide vulnerability is very complex. It requites knowledge on the building types and on the expected landslide volumes and velocities. These are difficult to estimate. In many study landslide vulnerability of buildings is simply taken as 1, assuming complete destruction of the elements at risk. This would, however, in our case give too exaggerated values of risk. Simple assumption: The more buildings there are with 3 floors or higher, the lower will be the landslide vulnerability, as it becomes less likely that large buildings will be destroyed by landslides. Vuln:=iff(PerVacant=1,0,1-(Perc3floor+Percover3floor)) ISL 2004 Introduction to GIS

Losses = Spatial Probability * Consequences Calculate losses Losses = Spatial Probability * Consequences Losses = Spatial P * V * A Loss_50_high:=0.0181*vuln*nr_b_high Loss_50_moderate:= 1.31199E-06*vuln*nr_b_moderate Loss_50_low:= 5.96345E-07*vuln*nr_b_low etc ISL 2004 Introduction to GIS

Calculate losses Losses for a return period = sum of losses in high, moderate and low susceptibility areas What can you conclude when you compare the spatial probabilities and consequences for the high, moderate and low susceptibility classes ? ISL 2004 Introduction to GIS

Calculate risk Period ISL 2004 Introduction to GIS

1: Add trendline and integrate trendline Calculate total risk Total Risk = Area under curve Two methods: 1: Add trendline and integrate trendline 2: Use graphical method with triangles and rectangles ISL 2004 Introduction to GIS

Risk = Hazard * Vulnerability * Amount Technological risk Risk = Hazard * Vulnerability * Amount Hazard class sc1 sc2 Buildings 828 10843 Return period 50 500 Probability 0.0200 0.0020 Vulnerability 0.1 Loss 82.8 1084 Risk 2 ISL 2004 Introduction to GIS

Combine hazard types ISL 2004 Introduction to GIS

Combine annual risk ISL 2004 Introduction to GIS

Cost benefit analysis Calculate economic risk Define risk reduction measures Define cost of risk reduction measures Define characteristics Analyze cost benefits

Calculating economic losses First we will calculate the total floorspace within each mapping unit. We do this by multiplying the building footprint area with the number of floors. Then we use unit costs (per square meter) per urban landuse type for buildings and for contents of buildings. We multiply these with the floorspace to get the total costs per mapping units. Then we will generate attribute maps that contain the costs of buildings affected for each hazard type and hazard class. We will then use the results from the annual loss estimation to combine these with the vulnerability and probability if these are not yet included. We will then combine the data and generate risk curves.

Economic risk

Risk reduction measures The municipality of RiskCity has made a study and the report came up with the following possibilities for risk reduction. The following table shows a number of possible risk reduction measures, including also a very general indication of the costs that these measures would take. In the following section we will evaluate some of these in more detail.

Example CBA Flood Reducing Measures Scenario I (removal) removal of housing in the 10-year Return Period flood zone 10 year RP flood zone is converted into green areas buildings are demolished, new terrain to be bought, and new buildings have to be constructed in other hazard free zones the set-up of a vigilance group is required The risk in the area that was formerly threatened by a 10 year Return Period flood will be reduced to 0 Scenario II (retention) construction of an upstream storage lake engineering works flood retention basin and drainage need maintenance the retention basin will reduce the flood losses. It will retain the discharge for 2 and 5 years RP and reduce the risk to 0. For the other return periods the damage will reduce the losses

Damage without risk reduction, Scenario I and II at different Return Periods Flooding   Return Period Annual Probability without mitigation Scenario 1 Scenario 2 2 0.5 0.0 5 0.2 19.3 10 0.1 34.4 25 0.04 100.0 65.6 50 0.02 199.0 164.6 100 0.01 510.0 475.6 200 0.005 1134.0 1099.6

3. Annual risk reduction of both scenarios Costs Scenario I (removal) Costs Scenario II (retention)

Triangles and rectangles method This is the annual risk, taking the sum of the triangles and squares in the graph Triangles and rectangles method The area under the curve is divided into trangles, which connect the straight lines between two points in the curve and have X-axis difference as difference between the losses of the two scenarios. Y-axis of the triangles is the difference in probability between two scenarios. The remaining part under the curve is then filled up with rectangles, as illustrated in the graph and table below.

Simplified rectangles method In this method we simplify the graph into a number of rectangles, which have as Y-axis the difference between two successive scenarios, and as X-axis the average losses between two successive loss events. See graph and Excel table below

Risk reduction Now that we have calculated the annual loss for the existing situation, we can also now evaluate the reduction in total annual losses for the two scenarios. Calculate in Excel in the same way the average annual risk for Scenario I and Scenario II ( see earlier table with the losses for the two scenarios for the various return periods that you filled in yourself) Calculate the amount of risk reduction, comparing Scenario 1 and Scenario 2 with the original average annual risk. Fill in the table below.

Calculating the investment costs After calculating how much the risk reduction is on an annual basis for the two different scenarios, we can now evaluate the benefits. The benefit is equal to the amount of risk reduction. However, the two risk reduction scenarios also involve certain costs. The next table indicates the investment costs for implementing the two scenarios.

Calculate costs To calculate the A to D component costs from the table above, you need to know first the number of buildings in the flood zone of 10 years return period. For the component E you need to know the area pf the 10 year flood zone.

Costs After calculating the risk reduction (benefit) and the investment costs of the two flood scenarios we can now continue to evaluate the cost/benfits. The following table indicates the costs of the two scenarios.

Maintenance and operation costs Each of the two scenarios will also require long term investments. Scenario 1 requires the set-up of a municipal organization that controls the illegal spread of housing in highly hazardous areas. It will require staff, office and equipment costs, which will rise over time depending on the increases of salary and inflation. The annual costs are estimated to be 250.000. We consider that these costs will increase with 5 % each year. Scenario 2 also requires maintenance and operation costs. The flood retention basin contains a basin in which sediments are deposited. Annually the sediments from this basin have to be removed using heavy equipment. Also the drainage works needs regular repair. The costs for maintenance are considered to be 500.000 per year. We consider that these costs will increase with 5 % each year. See table below.

Investment period The investments for both scenarios are not done within one single year. They are spread out over a larger number of years, because normally not all activities can be carried out in the same year. It is quite difficult to remove existing buildings. The municipality would like to buy the land of private owners, but they will resist, and there will be many lawsuits that might take a lot of time. Therefore we consider that the entire relocation of all building might take as much as 10 years. The investment costs are therefore spread out over this period. The construction of the engineering works for scenario 2 will take less time. Still it is considered that the costs are spread over a period of 3 years. The benefits will start in the year that the investments are finished. For scenario 1 this is in year 11 and for scenario 2 it is in year 4.

Project lifetime The lifetime of the scenario 2 is considered to be 40 year. After that the structure will have deteriorated and it needs to be rebuilt. For the relocation scenario it is more difficult to speak about a life time, but we will also keep the same period of 40 years.

Cost of flood reduction scenarios Costs of the Flood Risk Reduction Scenario’s (costs in € .10 6)

Incremental benefit Create in Excel a new table: called Flood Mitigation Scenario I ( see figure left). Column 1: Years ( starting with 1 up to 40 year) Column 2 Risk Reduction (i.e. Risk avoided, or Benefit) Column 3: Invest cost for the risk reduction scenario. Column 5: Maintenance Column 4: Incremental Benefits Enter the values and calculate the incremental benefit over the 40 years period.

Net present value We need to take into account that the same amount of money in the future will be less valuable today. We will need therefore to calculate the so-called net present value (NPV)

21 April 2017 Time value of money Money today is worth more than money in the future Why ? Inflation Risk Consumption Earning power (investment opportunities)

Compounding and Discounting 21 April 2017 Compounding and Discounting Techniques for comparing values at different points in time In CBA mainly concerned with Discounting for better understanding first: Compounding

Compounding suppose amount of $ 100 on bank account interest 10% after 1 year ? After 2 and 3 years ?

Compounding start: 100 after 1 year: 100 + 10 = 110 after 2 years: 110 + 11 = 121 after 3 years: 121 + 12.1 = 133.1 etc.

“what is the present value of a known future amount ?” 21 April 2017 Discounting the reverse of compounding it looks from the future back to the present and asks: “what is the present value of a known future amount ?”

21 April 2017 Discounting What is the present value of $ 133.1 received at the end of 3 years from now, assuming an interest rate of 10% ?

Discounting in formula 21 April 2017 Discounting in formula X0 = Xt / (1 + i)t X0 = present value Xt = value in year t

X0 ? Discounting - example X3 = 133.1; i = 0.10; t = 3 21 April 2017 Discounting - example X3 = 133.1; i = 0.10; t = 3 X0 ? X0 = Xt / (1 + i)t X0 = 133.1 / (1 + 0.10)3 X0 = 133.1 / (1.331) = 100

Time Value of Money To care of time value of money We apply discount rates We discount each future annual amount

Flood mitigation Scenario I year incremental benefits NPV_10% 1 -8.333 -7.576 2 -6.887 3 -6.261 4 15.690 10.716 5 9.742 Until year 40

Flood mitigation Scenario II year incremental benefits NPV_10% 1 -8.333 -7.576 2 -6.887 3 -6.261 4 15.690 10.716 5 9.742 Until year 40

Internal Rate of Return (IRR) NPV decreases if i (interest rate) increases At one i (interest rate): =0 IRR

Internal rate of return Now we are going to calculate the Internal rate of return. The Internal Rate of Return is the discount rate/interest rate at which the NPV=0

NPV Scenario I and II at 10% Scenario I: $ -0.38 * 106 (negative !) Scenario II: $ 39.69 * 106

IRR Scenario I and II at 10% Scenario II: 42.32%

NPV and IRR

NPV and IRR

NPV and IRR

Summary CBA scenario I and II Flood Risk Reduction Scenario NPV at 5 % interest rate NPV at 10 % interest rate NPV at 20 % interest rate IRR Scenario I 42.23 -0.38 -14.96 9.91%   Scenario II 203.80 93.69 27.79 42.32%

Result Question: Which Mitigation Scenario would you advice the Municipality?

CBA -strengths Systematic way of thinking and analysis Focus on use of scarce resources Strong methodological basis Monetary measurement provides comparison Appeal to policy makers

Elements often overlooked in CBA in Natural Hazard and Disaster Management Indirect economic damage Social effects Irreplaceable items Stress induced by disaster Temporary evacuation Social disruption Environmental effects Evaluation of non-structural measures

Limitations Cost-Benefit Analysis One approach to assess the efficiency of (structural) risk reducing measures Take care of uncertainty of all parameters used Estimated values of objects at risk Probabilities of the hazard Take care of all aspects NOT considered: Social effects Irreplaceable items Stress induced by disaster Temporary evacuation Social disruption Environmental effects Indirect effects Discounting favours present generations One single outcome hides assumptions and value judgements

Costs: Tuition fee 2000 Addition 125 Accommodation, meals 1790 Insurance 130 Hazard assessment Elements at risk Vulnerability Risk assessment Risk Curves Spatial Multi Criteria Evaluation Users and provider SDI and risk man. Cadastral data Probabilistic HAZUS,CAPRA Emergency preparedness Cost benefit Planning Concepts of SEA EIA and risk Scoping Stakeholders SDSS Alternatives Monitoring

For more information: www.itc.nl Cees van Westen westen@itc.nl