1. Cost-benefit analysis in Disaster Risk Management
Cees van Westen

2. 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

3. 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

4. Disaster Risk Management

5. 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

6. Framework

7. 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

8. 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

9. 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.

10. Risk evaluation based on F-N curves

11. 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.

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

13. 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.

14. 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)

15. Stakeholders

16. 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

17. 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.

18. 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.

19. 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

20. 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

21. 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

22. 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

23. 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

24. Risk is changing

25. TYPES OF LOSSES (direct and indirect)

26. 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

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

28. 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

29. 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

30. RiskCity
RiskCity is (not) Tegucigalpa, Honduras
Educational changes

31. 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.

33. Generation of the Risk Curve

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

35. Damage functions

37. 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

38. 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

39. 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

40. 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

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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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:= E-06*vuln*nr_b_moderate
Loss_50_low:= E-07*vuln*nr_b_low
etc
ISL 2004
Introduction to GIS

49. 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

50. Calculate risk
Period
ISL 2004
Introduction to GIS

51. 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

52. 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

53. Combine hazard types
ISL 2004
Introduction to GIS

54. Combine annual risk
ISL 2004
Introduction to GIS

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

56. 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.

57. Economic risk

58. 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.

59. 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

60. 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

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

62. 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.

63. 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

64. 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.

65. 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.

66. 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.

67. 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.

68. 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 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 per year. We consider that these costs will increase with 5 % each year. See table below.

69. 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.

70. 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.

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

72. 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.

73. 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)

74. 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)

75. 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

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

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

78. “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 ?”

79. 21 April 2017
Discounting
What is the present value of $ received at the end of 3 years from now, assuming an interest rate of 10% ?

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

81. 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 = / ( )3
X0 = / (1.331) = 100

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

83. 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

84. 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

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

86. 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

87. NPV Scenario I and II at 10%
Scenario I: $ * (negative !)
Scenario II: $ * 106

88. IRR Scenario I and II at 10%
Scenario II: %

89. NPV and IRR

90. NPV and IRR

91. NPV and IRR

92. 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%

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

94. 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

95. 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

96. 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

98. 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

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