Cost Benefit Analysis – Pacific Example 1 Cost-Benefit Analysis Workshop April 2012 Jonathan Bower, Resource Economist, Land Resources Division, Secretariat of the Pacific Community

Example 1: drain in Vanua Levu Problem 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?

BENEFITData requiredSource of data COSTData requiredSource of data

BENEFITData requiredSource 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 COSTData requiredSource of data Construction costA quote for cost of constructionDigger hire, local community or construction company Maintenance costA 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 onwards BenefitsY0Y1Y2Y3Y4 Crop production not lost to flooding 50, Extra profit for 2 shops 8, Year totals58, Discounted totals 58,00053, CostsY0Y1Y2Y3Y4 Construction5, Maintenance 2, Year totals5,0002, Discounted totals 5,0001, Discount factor (1/((1+0.07)^t)) Discount rate7% Total benefits - discounted 111,940 Benefit-Cost Ratio16.3 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 Bower Resource Economist, Land Resources Division Secretariat of the Pacific Community – ext lrdeconomics.wordpress.com Also available from ‘information and networks’ tab at