SUBJECT 2. Valuation of the impact of disasters

1. SUBJECT 2. Valuation of the impact of disasters DAMAGE AND RECONSTRUCTION NEEDS ASSESSMENT MODULE

2. DAMAGE AND LOSSES • Loss of life or injury • Reduced welfare and well being • Material losses and damage • Disruption of “normalcy” • Degrees of affectation

3. Some things are easier to measure than others • IT IS DIFFICULT TO DETERMINE • The value of lives lost or affected • The opportunity cost, cost-benefit or investment / profitability. This is associated with the lack of adequate base lines that assess the level, quality and efficiency / efficacy of health services provided • The value and quality of services provided (both curative and preventive) • The duration of the transition / emergency phase (when field hospitals and evacuation processes are operational) • IT IS EASIER TO DETERMINE • The amount of investment required for reinforcement vs. The potential losses in equipment and inventories • The cost of reinforcement as compared to the reposition cost of affected infrastructure • The alternative cost of providing services when infrastructures collapse

4. Direct damages Impact on assets Infrastructure Capital Stocks Occur immediately during or after the phenomenon that caused the disaster Indirect Damages Effects on flows Production Reduced income and increased expenses Are perceived after the phenomenon, for a time-period that can last from weeks to months, till recuperation occurs Main Concepts

5. WHAT IS IT THE VALUATION METHODOLOGY:

6. Determine the situation caused by the disaster The value we determine • Stemming from sector valuations assess the value-added changes expected for every sector in the short term and for a medium-term period to be agreed (3-5 years or more) • Supported by input-output tables or sector weighing factors determine the projection of damages of one sector to the others • A damage scenario is built (taking into account the measured losses at replacement value) : variations in the main economic gaps is highlighted: external sector, fiscal deficit, internal equilibrium (prices, exchange rate, etc.)

7. Social Sectors Housing Health Education, culture, sports Infrastructure Transport and communications Energy Water and sewerage Productive sectors Goods: agriculture, industry Services: commerce, tourism, etc. Global impact On the environment Gender perspective Employment and social conditions Macroeconomic assessment SECTOR BY SECTOR VALUATION METHODOLOGY

8. An example: COMPOSITION OF DAMAGES CAUSED BY MITCH IN CENTRAL AMERICA

9. VALUATION CRITERIA • Valuation of direct damage will depend on the purpose of the valuation • For historical record and comparison over time and with other disasters, present value accounting cost should be used • For reconstruction planning and mitigation strategies • Replacement prices should be used. • Mitigation investment, in terms of reinforcement, redesign, relocation or vulnerability reduction additional values should be incorporated. • Valuation of indirect losses will always be done at current market prices of: • Lost production and supply of goods and services • Additional cost of provision of goods and services under disaster emerging conditions • Business losses due to reduced sales and or activity • When insurance exists, covering assets (infrastructure, buildings, machinery, stocks, etc.) or business loss, value will be established on the basis of covered amount, comparing it to total estimated loss.

10. MEASURING THE DAMAGE “DELTA” OR DAMAGE GAP Pre-existing conditions (ex ante) The measure Of direct and indirect damages Upon the pre-existing situation (sector by sector baselines) is aggregated into the national accounts and determines the resulting disaster-caused scenario, as the gap over the expected performance prior to the event. Several scenarios may be outlined, based on the assumptions made for the reconstruction process Expected performance (without disaster) 3-5 years Disaster impact (ex post) 3-5 years

11. VALUATION PROCEDURE • D = Va – Vb Where Va is the initial condition expected for a variable (sectoral, weighed) and Vb is the discounted effect of the disaster. • K = Ka – Kb Measures the capital (assets) lost, estimated by compiling direct damages computed sector by sector. DY = Ya – Yb Measures the production/income losses The capital/income-production ratio is generally assumed not to vary substantively as a result of the disaster

12. Know the pre-existing situation • Identify the core development factors of the economy • Identify the main characteristics at the time of the disaster: face of the economic cycle, seasonal elements, indebtedness level, domestic savings, FDI flows, etc. • Access the macroeconomic data bases from national authorities, academic analysts and/or consultants and advisors in the country • Identify existing econometric models for the local economy • Identify if input-output tables are available or determine weighing factors that indicate inter-sectoral linkages.

13. THE EFFECT OF SUCCESSIVE DISASTERS ON CAPITAL FORMATIONAdapted from Mora, “El impacto de los desastres, aspectos sociales, polítifcos económicos, ambientales y su relación con el desarrollo de nuestros países (BID, 1999) * DISASTER * * * DEVELOPING COUNTRIIES INDUSTRIALIZED COUNTRIES GROSS CAPITAL FORMATION * TIME

14. Summary table

15. Summary of global impact

16. The question of expected future performance

17. ORGANIZATION OR PROCEDURAL ASPECTS OF ASSESSMENT EXERCISES • Composition of team: multisectoral, interdisciplinary, interinstitutional • Timeliness: within the “window of opportunity”, not interfering with emergency actions • Ensure full coverage and avoid duplication • The need for “judgment calls” or the educated guessing of experts • Difference between emergency needs and rapid assessment of need for reconstruction

18. Summary of basic concepts • Direct and Indirect effects • Valuation methods • The damage “delta” or the gap caused in performance by the disaster • Sector by sector evaluation of losses, damage and indirect effects • Summation of damage in a non duplicative way • Valuation of impacts not present in the national accounting system (environment, gender, psychological impacts) • Short and medium term effect on the performance of the economy • Modeling alternative scenarios