Cost Benefit Analysis – Pacific Example 1

1. Cost Benefit Analysis – Pacific Example 1 Cost-Benefit Analysis Workshop 23-25 April 2012 Jonathan Bower, Resource Economist, Land Resources Division, Secretariat of the Pacific Community

2. 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?

3. Example 1: drain in Vanua Levu Objective • Stop the valley flooding Whose perspective do we pick? • the Fiji economy

4. This really happened, in Wainikoro, Vanua Levu. This drain was constructed in 2011.

5. What might the benefits of a drain be?

6. 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

7. What might the costs of a drain be?

8. Costs with drain (compared to without) • Construction cost • Maintenance cost • Possibly more flooding elsewhere?

9. What data do we need to measure those costs and benefits?

12. Calculating Costs and Benefits • What discount rate will you use? • What time period is the relevant one? • What assumptions do we need to make?

13. 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

14. 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

15. 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.

16. Using the data, calculate the undiscounted net present value of a drain

17. Now discount all costs and benefits

18. Sensitivity analysis

19. Uncertainty and Sensitivity Analysis • Over what? • Flooding intensity • How long the drain will be maintained • How might we reflect these in the sensitivity analysis?

20. 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

21. Uncertainty and Sensitivity Analysis • Do a sensitivity analysis on the drain not being maintained from Year 2 onwards.

22. Sensitivity Analysis – No maintenance from Y2 onwards

23. 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

24. Thank you Jonathan Bower Resource Economist, Land Resources Division Secretariat of the Pacific Community jonathanb@spc.int +679 337 0733 – ext 35425 lrdeconomics.wordpress.com Also available from ‘information and networks’ tab at www.spc.int/lrd 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