Flood and Coastal Defence Project Appraisal Guidance Economic Appraisal

Flood and Coastal Defence Project Appraisal Guidance Economic Appraisal FCDPAG3 A PROCEDURAL GUIDE FOR OPERATING AUTHORITIES

Foreword This is one of a series of guidance documents designed to provide advice on best practice for the appraisal of flood and coastal defence projects. It supercedes the Ministry s Flood and Coastal Defence Project Appraisal Guidance Notes (PAGN) published in 1993, although some aspects of that guidance are to be contained in other volumes of the new series. The content was developed by a consortium of Babtie Group and Middlesex University under contract to the Ministry. The Ministry is grateful for the advice and assistance of the steering group members and others who have provided useful comments and suggestions during the development of this guidance note. Members of the steering group were: Mr R G Purnell, Chief Engineer, MAFF (Chair) Mr D Cawley, Economist, MAFF Mr D Richardson, Principal Engineer, MAFF (technical editor) Mr H Payne, Welsh Office (now National Assembly for Wales) Mr R Horrocks, Flood Defence Manager, Environment Agency, South West Mr M Hagger, Principal Project Manager, Environment Agency, North West Mr M Alexander, Assistant Borough Engineer, Metropolitan Borough of Wirral. Principal authors of the text were: Mr K Riddell, Babtie Group Mr C Green, Middlesex University Flood Hazard Research Centre. However, the final text is guidance issued by the Ministry, in accordance with wider Government appraisal procedures, for use when considering all publicly funded works for flood and coastal defence. It does not necessarily reflect the individual views of contributing third parties. Ministry of Agriculture, Fisheries and Food Flood and Coastal Defence with Emergencies Division December 1999 iii

Stages in a benefit-cost analysis Contents 1. Introduction 1 1.1 Background to benefit cost analysis 1 1.2 Organisation of the text 2 1.3 The need for benefit cost analysis 2 1.3.1 Goals 3 1.4 Benefit cost analysis and the design process 3 2. The appraisal context 5 2.1 Why are you doing this project? 5 2.2 A strategic approach 5 2.3 Issues which cannot be incorporated into a benefit cost analysis 5 2.4 Hazard management options 6 2.5 Conservation 7 2.6 Consultation 7 2.7 Multi-functional schemes 7 3. Stages in a benefit cost analysis 9 3.1 Identifying the do nothing option 9 3.2 Identifying the do something options 11 3.3 Identifying the probabilities of failure 11 3.4 The nature of benefits and costs 12 3.5 Defining the boundaries of the benefit cost analysis 12 3.5.1 The project domain 12 3.5.2 Geographical boundaries 13 3.5.3 The time span of the analysis 14 3.6 What is a benefit and what is a cost? 14 3.7 Iterative stages in benefit cost analysis 15 3.7.1 Strategic assessments 16 3.7.2 Prefeasibility and reconnaissance studies 16 3.7.3 Detailed assessments 16 3.7.4 Scheme monitoring 18 4. Assessing the benefits 19 4.1 Evaluation of losses and benefits 19 4.1.1 Domestic and other urban property 19 4.1.2 Temporary and semi-permanent structures 21 4.1.3 Infrastructure 21 4.1.4 Development benefits 21 4.1.5 Agricultural benefits 22 4.1.6 Indirect losses 23 4.1.7 Non-monetary impacts on households 24 4.2 Recreational and environmental values 26 4.2.1 Recreation 26 4.2.2 Environmental and heritage issues 28 v

Contents Stages in a benefit-cost analysis 4.3 Flood alleviation 32 4.3.1 Damage calculation 33 4.3.2 Calculating the benefits 33 4.3.3 Sampling the return periods 34 4.3.4 Above design standard benefits 35 4.3.5 Freeboard 37 4.3.6 Simplified assessment 37 4.3.7 Use of software packages 37 4.4 Coastal erosion 38 4.4.1 Erosion probabilities 38 4.4.2 Calculating the probability of the loss 38 4.4.3 Comparing the do nothing and do something options 41 4.5 Combining flood and erosion losses 43 4.6 Climate change and sea level rise 43 4.7 Pumped drainage 44 4.7.1 Calculating the benefits 45 4.7.2 Example 1 a single pump 45 4.7.3 Example 2 multiple pumps 48 4.8 Flood warning 49 4.9 Monitoring and studies 51 5. Comparing costs and benefits 53 5.1 Estimating the costs 53 5.2 Other cost elements 54 5.3 Confidence limits 55 5.4 Discounting and economic efficiency 56 5.5 Economic sustainability 58 6. Choosing the option 61 6.1 Indicative standards 61 6.2 The decision process 62 6.2.1 Example 1 typical cost and benefit profiles 66 6.2.2 Example 2 benefits rise in advance of costs 68 6.2.3 Example 3 costs rise in advance of benefits 70 6.3 Timing of investment 72 6.4 Sensitivity analysis and robustness testing 74 Contact points 75 Addresses and contacts 75 References 76 Glossary of terms 78 Annex A: Spreadsheets for economic appraisal of flood and coastal defence 81 A.1 Introduction 81 A.1.1 Spreadsheet format 81 A.2 Standard Worksheets 81 A.3 Worked examples 83 A.3.1 Example 1 (FCDPAG31.xls): delaying coastal erosion 83 A.3.2 Example 2 (FCDPAG32.xls): changing probabilities of failure 84 A.3.3 Example 3 (FCDPAG33.xls): river flood defence 87 A.3.4 Example 4 (FCDPAG34.xls): pumped drainage system 88 vi

Contents Annex B: The valuation of agricultural output and land 91 B.1 Introduction 91 B.2 Types of project 91 B.3 Scenario 1 abandonment of agricultural land 92 B.4 Scenario 2 loss of one year s agricultural output 92 B.5 Scenario 3 partial loss of agricultural output 94 B.6 Increase in agricultural output 96 B.7 Direct subsidy payments 97 Annex C: Components of economic value and environmental assets 98 C.1 Introduction 98 C.2 The need to derive existence values 98 C.3 Determining existence value 100 C.4 Guidance for contingent valuation and other studies 101 C.5 Further reading 102 vii

1. Introduction This guide, one of a series on the appraisal of flood and coastal defence in England and Wales, covers only the economic aspects of project appraisal. It assumes that the reader has prior knowledge of general benefit cost analysis techniques. In the process of revision of the 1993 Project Appraisal Guidance Note (PAGN), the opportunity has been taken to clarify a number of areas which have been found to cause problems in the past, and to include reference to subsequent developments. The complete list of titles to be published in the flood and coastal defence project appraisal guidance series (FCDPAG) is as follows: FCDPAG1 FCDPAG2 FCDPAG3 FCDPAG4 FCDPAG5 FCDPAG6 Overview Strategic planning and appraisal Economic appraisal (this volume) Approaches to risk Environmental appraisal Post project evaluation The six volumes of this series are designed to provide an integrated suite of guidance on all aspects of project appraisal. The documents are intended to assist knowledgeable practitioners; they are not comprehensive manuals or textbooks and they do not define government policy. However, compliance with the guidance is likely to produce projects that are acceptable for central government support. FCDPAG1 will provide more guidance on the general integration of approaches and the recommended use of the document series. In summary, FCDPAG2 sets out a framework for strategic consideration of appropriate flood or erosion risk areas related to river catchments or lengths of coast. This should lead to appropriate problem definition and identification of broad options for solution. This guide, FCDPAG3 then identifies methods for valuing costs and impacts in monetary terms and also sets out a recommended decision process, based on economic values. FCDPAG4 is intended to assist in the derivation of appropriate economic values and decision making, through proper consideration of risk issues. FCDPAG5 provides a similar function in relation to environmental aspects of flood and coastal defence works. 1.1 Background to benefit cost analysis In England and Wales almost all capital works undertaken by the Environment Agency or local authorities are effectively funded out of general taxation. This guide (FCDPAG3) sets out the principles that should be used in undertaking economic appraisals for such nationally-funded projects for river and coastal flood alleviation, coast protection and other related purposes. Specifically, it provides an interpretation of how the requirements set out in the Treasury s Green Book (reference 1) can be achieved. It sets out good practice but is not intended to be 1

Stages Introduction in a benefit-cost analysis followed mechanically or to cover every possible eventuality. All matters of eligibility for grant and operation of the grant aid system are covered in separate memoranda. Most of the general approaches will also be applicable to those who are evaluating projects for other clients although, for example, they may need to consider different economic boundaries. Appraisal-led design The recommended approach is appraisal-led design. This means that the whole process of option development, refinement and choice should be carried out within a logical appraisal framework, ideally working from strategic assessments through to the appraisal of the options for a particular project. The key to application of benefit cost analysis to flood defence and coast protection projects is the management of risks. Compared to the existing situation, flood defence schemes reduce the probability or severity of future flood damage. This change in probability may vary over time; for example, as an embankment erodes or a pump becomes less reliable. Coast protection schemes typically delay erosion, but there is a risk of a storm that overwhelms or destroys the scheme. No scheme can eliminate the possibility of flood or erosion and there can be no certainty about when the next damaging event will occur. Further discussion of issues related to the definition and evaluation of risk will be found in FCDPAG4. It should be emphasised that the aim of benefit cost analysis is to provide a transparent and inclusive approach to decision making which, as far as possible, takes all relevant factors into account. Some impacts cannot easily be valued in money terms, but this should not exclude them from the decision making process. 1.2 Organisation of the text The text includes good practice recommendations (shown in the text by emboldening), together with the following: suggestions of good practice to complete a realistic benefit cost analysis; summaries of economic concepts that can be difficult to apply in practice, together with examples, in text boxes (e.g. transfer payments, sunk costs); worked examples of some common problems; suggestions for dealing with some practical problems (e.g. when is it likely to be worth assessing the benefits of reducing traffic disruption). In addition, Annex A includes a series of spreadsheets for the presentation of costs and benefits, while Annexes B and C provide detailed methodologies on economic theory, not generally required for a typical analysis. Value for money 1.3 The need for benefit cost analysis Benefit cost analysis is a useful tool for determining the most appropriate strategic approach, deciding whether it is worthwhile to undertake a scheme and identifying and comparing scheme options. It should not be viewed as a hurdle. The analysis should stimulate the development of alternative solutions by clarifying the consequences of all options. A well-designed benefit cost analysis should ensure that schemes undertaken represent the best value for money, and that uneconomic schemes are identified at an early stage. 2

Introduction 1.3.1 Goals Economic appraisals have several goals, as outlined below. Best use of public money Demands for public funding always exceed the money available. It is therefore necessary to aim for economic efficiency in the investments that are made. Economic efficiency Economic efficiency is achieved when the total of all forms of benefit is maximised relative to the resources used. The analysis should not be limited to the consideration of priced benefits and resources, but should, where appropriate, include unpriced benefits such as the enjoyment gained from walks by a river as well as the unpriced costs incurred, such as nuisance during construction. Sustainability Sustainable schemes are those which take account of the interrelationships with other defences, developments and processes within a catchment or coastal cell, and which avoid as far as possible tying future generations into inflexible and expensive options for defence (reference 6). This can often be demonstrated in economic terms (see section 5.5). Accountability A formal process of project appraisal can demonstrate that a wide range of different alternatives has been considered transparently, and that the advantages and disadvantages of each have been properly considered. Appraisals also create an effective audit trail of decision making. Quality assurance Good quality appraisals save both time and money by early rejection of unrealistic options and increase certainty and confidence in the final outcome. 1.4 Benefit cost analysis and the design process The design process is a cyclic, iterative process of exploring the problem, generating options and refining the selection as the project team progressively focuses on the best solution. Benefit cost analysis, to aid and guide this process, should also be undertaken iteratively, starting with initial assessments and progressively becoming more detailed. Iterative process In some cases it may be necessary to apply the benefit cost approach to determine the appropriate degree of refinement that can be justified. Benefit cost analysis should also be applied to periodic reviews of the maintenance strategy and should be included in post project evaluations. Each review of the maintenance strategy will, for example, suggest whether continued maintenance, abandonment, replacement or rehabilitation is appropriate at any given time. Unless otherwise stated, all references to economic values in this document, whether costs, losses or benefits, assume that all components of economic value are taken into account. A discussion of these components, which can include social, political and environmental values, is included in annex C. 3

2. The appraisal context 2.1 Why are you doing this project? Any appraisal should start with a clear statement of the problems that are to be tackled or the objectives to be achieved, taking account of all social, environmental and economic issues. These objectives and problems should not be defined in terms that prejudge the solution. Major constraints upon the options to be considered should also be stated. Defining the problem Examples of possible statements of the problem are: 200 properties are at risk from erosion within 10 years at predicted erosion rates, including a local hospital. The foreshore is an SSSI and valued views should be preserved if at all possible. The town is prone to flash flooding with an annual probability of greater than 5% (i.e. at return periods of less than 1 in 20 years); the area at risk covers 120 properties including some sheltered housing with a higher expectancy of risk to life. The problem is believed to have increased in recent years because of urbanisation of the catchment. It is not acceptable to state that the objective is: to replace existing flood defence with a 1 in 100 year design standard flood embankment. 2.2 A strategic approach Flood and coastal defence schemes should be technically sound, economically viable and environmentally acceptable. In order to achieve these objectives it is desirable that a strategic approach be taken. Once broad solutions have been determined at the strategic level, the range of options to be considered on a projectspecific basis will be made clear. Guidance on strategic appraisal is provided in FCDPAG2, which also covers the relationships between schemes, strategy plans and wider initiatives, including shoreline management plans, catchment plans and water level management plans. 2.3 Issues which cannot be incorporated into a benefit cost analysis A limitation of economic analysis is that it involves the comparison of the alternatives in terms of a single objective, economic efficiency. There may be other national objectives that are relevant to the choice, for example the achievement of sustainable development. There are some impacts that cannot be readily valued in economic terms and others which, for various reasons, may not be given their full weight in economic analysis. It is, therefore, crucial to set out project objectives and then compare the alternatives in terms of their contribution to the achievement of these objectives. If the contribution of one alternative cannot be wholly quantified in economic terms or does not affect economic efficiency, it is important to identify and to state this contribution. Basic criteria for schemes Some impacts cannot be valued in economic terms 5

Stages The appraisal in a benefit-cost context analysis Legal obligations The importance of a good choice of options Legal obligations under UK and international law also set requirements that must be met. For example, it is not correct to use economic analysis to determine whether to satisfy existing legal obligations. In this case the principles of cost-effectiveness are usually more appropriate, and a benefit cost analysis may serve only to identify the least costly method of satisfying those requirements. 2.4 Hazard management options Benefit cost analysis can only identify the best of those options considered. A good appraisal will, therefore, encompass a wide range of management options, if only to rule out many of these at an early stage. A narrowly defined search for options may result in only the best of a poor set of options being identified by the benefit cost analysis. Options may reduce the risk of an event or reduce the damages incurred when an event occurs. Institutional or behavioural adaptations, such as relocation of some activities or the temporary closure of promenades when storm warnings are in force, may be considered in addition to the construction of works. The form of the detailed analysis also depends upon the situation and physical form of the land (Figure 2.1) and whether or not there is an existing scheme. The residual life and standard of protection offered by any existing scheme should be taken into account. These different conditions determine the appropriate do nothing option to be considered, together with the range of other possible options. Figure 2.1 The consideration of options Physical form Condition Range of options where Considerations where no of the land a man-made defence exists man-made defence exists Do nothing walk away; give up no action; no intervention maintenance and do not in the natural development undertake emergency of features such as dunes repairs; minimum actions or shingle banks for public safety only (e.g. warning notices) Do something do minimum; emergency do minimum; emergency repair, routine repair, reinforcement of maintenance natural defences different scheme options; varying levels of protection, varying risk of breach, alternative defence alignments, reduce flood levels (e.g. by flood storage, offshore structures or estuary realignment) Special issues risk to life, overflow or wave overtopping followed by breach or erosion followed by flooding, residual risks, structural life of defences Do nothing do nothing; walk away, give no action up maintenance and do not undertake emergency repairs; minimum actions for public safety only (e.g. warning notices) Do something do minimum; emergency repair, do minimum; emergency routine maintenance response and maintain different scheme options, varying standards of protection and/or risk of failure, managed realignment (controlled erosion rate) to new defence line, reduce risk of erosion, or structural failure Special issues residual failure risk, slope failure, timing of works, structural life 6

The appraisal context Deaths from flooding in the UK have fortunately been rare. However, this risk is always present and it is, therefore, sensible to assess whether floods in a particular situation pose an unusually high risk to life. Such a threat might occur with a rapid rise in floodwaters, accompanied by high flow velocities and deep water, particularly where this may result in the structural failure of buildings. For example where structures such as flood embankments fail, or where flooding can occur in very small, steep catchments, special attention might be directed at considering how this risk may be managed, perhaps through flood warning and evacuation, where these are feasible. There is always the possibility that a more extreme event than the design event will occur during the lifetime of the scheme. Appraisals should include considerations of all events and not just those up to the design standard of protection. The costs of emergency actions and repairs should always be included, except in the do nothing option where only the most basic intervention (e.g. warning notices) should be assumed to safeguard the public. 2.5 Conservation Coastal and river environments provide a range of habitats, supporting a wide variety of species. Changes to these natural environments, both locally to the scheme and in a wider national context, need to be taken into account in the appraisal process. Further information is provided in the Ministry s Code of Practice (reference 2) and FCDPAG5. Assessing the risk to life When an event exceeds the capacity of a scheme All environmental changes to be considered 2.6 Consultation Consultation is a necessary part of most schemes and it is good practice to undertake consultations early in the scheme design and continue them throughout design work and implementation. Lists of both statutory and other consultees are provided in other MAFF guidance and reference should be made to these to ensure that all interests are covered. Consultations should provide the opportunity to ensure comprehensive consideration of all appropriate costs and benefits by the promoting authority. 2.7 Multi-functional schemes The development of strategic approaches to flood and coastal defence will often result in the promotion of a multi-functional project. At its simplest such a project may involve two or more different structures, each with a different purpose, but constructed together to make savings in total construction costs. In this case it is reasonable to apportion the costs of construction and to appraise the flood or coastal defence function of the works separately. Multi-functional projects provide an opportunity to satisfy several separate objectives However, the aim of promoting a multi-functional project will generally be to provide a range of facilities at a lower total cost than if each were provided separately. In this case, when undertaking the benefit cost analysis, all benefits and costs should be included and the question of who benefits and who pays can be ignored. The question then arises of how the costs should be equitably shared between funders. Because the overall aim is to make more efficient use of resources, it is 7

The appraisal context reasonable to assume that no funding party should be expected to pay a contribution which is greater than the whole life cost of meeting their specific requirements on a stand alone basis. The contributions should usually be based on the costs of the relevant major sections of the work. However, there will be situations in which it will be more equitable to consider dividing the costs in the ratio of the major benefits, provided that these can be determined on a consistent basis (see also section 5.2). 8

3. Stages in a benefit cost analysis Figure 3.1 shows the main stages in a benefit cost analysis with the iterative loops by which the identification of the do something options and the estimation of the benefits and costs of those options can be progressively refined. Figure 3.1 Main stages in a benefit cost analysis Define the problem and identify all the options define Eliminate unreasonable options develop Determine the benefits and costs for each feasible option Compare option benefits and costs compare Choose the best option Test the robustness of the choice select Select preferred option 3.1 Identifying the do nothing option Benefits and costs for all do something options need to be compared with those of the do nothing case. This provides a convenient common baseline against which alternative options can be assessed and different investments, in different parts of the country, can be compared. It is particularly important that such a common 9

Stages in a benefit cost analysis baseline is adopted when, in a situation of national shortage of funds, the benefit cost ratio is an important element in the ranking of schemes. Scheme benefits are calculated from the losses avoided by carrying out the proposed works rather than doing nothing. Do nothing option Walk-away option Identifying the do nothing option correctly is therefore critical to the analysis and needs careful consideration. Where there is no scheme in existence, then the do nothing option is obvious; no action is taken to intervene with natural processes. Where there is a scheme at present, the option will be to walk away and abandon all maintenance and repair to the existing structure, allowing nature to take its course. Simply continuing with maintenance and repair of the existing structure is then one of the do something options to be considered. Doing nothing is always an option. While it might appear to be impossible for political or other reasons to simply abandon the area, this should mean that the advantages of preserving what is there are overwhelming. It should then be very easy to demonstrate that continuing present practice is better than the do nothing option. If, exceptionally, this is not the case then the non-economic reasons for continuing must be carefully considered. For health and safety reasons, it may be necessary to take minimal steps to make any abandoned works safe and these costs should be taken into account. In some (rare) cases, it may be necessary to use the do minimum option as the baseline. This case should always be justified. It will only be appropriate when there is interdependence between action on the site of the project and other areas, such that the costs of analysing the consequences of the do nothing option are greater than is justified by the size of the project. Other than in exceptional circumstances, the do nothing options adopted should be: where there is an existing scheme, walk-away: cease all maintenance, repairs and similar activities immediately; where there is no existing scheme, do nothing; do not intervene in natural processes. Do nothing losses Typically the economic value of do nothing losses will be represented by: the economic cost of reinstating an asset to its condition prior to flooding or loss due to erosion (with appropriate deductions for depreciation); plus temporary losses due to disruption; or the cost of permanent replacement or relocation to an alternative location. 10

Stages in a benefit cost analysis 3.2 Identifying the do something options In the early stages of analysis, the range of options should be as wide as possible and the process of analysis may suggest new options. For flood defence schemes, different design standards should always be considered and the range of standards should not be drawn too narrowly. For coastal protection schemes, different probabilities of failure should usually be considered as should the optimum time to undertake the scheme. Generally, the best solution in environmental terms should be amongst those compared, together with any reasonable options that have been suggested by consultees. Range of design standards Although it is good practice to start with a wide range of options for several different standards of defence, these can usually be quickly reduced to a smaller range of standards and options for detailed analysis. For example, in economic terms, the solution with the lowest present-value cost will be the most cost-effective solution for any particular standard. Alternative lines of defence should be considered, wherever feasible. The managed realignment option usually involves the relocation of the defences further inland, and can be appropriate for river defences as well as for coastal and estuarial situations. Local protection works, or works which only protect particular areas of high value, should also be considered. These may include floor-raising and flood-proofing individual properties or local hard points for coast protection. Managed realignment Local protection works Where an existing scheme is being considered for renovation or renewal, a range of options to maintain, repair or replace that scheme should be investigated. It is also necessary to demonstrate that it is preferable to carry out the works at the time proposed rather than delaying the investment, possibly for a number of years. It may be economically inefficient to carry out such works without taking full advantage of the residual life of the existing structure. An appropriate range of options should be considered. These should normally include: different standards of protection; alternative alignments; alternative timing of works; different approaches to solution of the problem. 3.3 Identifying the probabilities of failure Changes in probability are central to the benefit cost analyses of flood alleviation and coast protection. For flood alleviation schemes, the do something options reduce the probability of flooding; for coast protection schemes, the do something schemes reduce the probability of erosion occurring in a given year. Commonly, these probabilities change over time; for example, the probability that an existing sea wall will fail may well increase with time. Climate change, development of catchments and changes in ground level may also change the probabilities of events of particular magnitudes. Differences in probabilities 11

Stages in a benefit cost analysis FCDPAG4 provides further guidance on the use of risk assessment in project appraisal, and the derivation of appropriate probability functions. Losses are minimised through adjustments Transfer payments 3.4 The nature of benefits and costs Benefit cost analysis is only concerned with changes in the total value of benefits and the total cost of the resources used. People will often adjust to a flood or erosion loss, and do so in a way that minimises the losses they incur. If a beach is lost, then visitors to that beach may visit another beach; or if flooding closes a factory then production may be increased in a factory elsewhere. In either case the total national value remains the same. If such a change simply results in a change in the distribution of benefits and costs across the country, then no economic change occurs. Changes only in the distribution of consumption and resources are termed transfer payments and should be excluded from the benefit cost analysis. (See text box in section 4.1). 3.5 Defining the boundaries of the benefit cost analysis Boundaries in space and time have to be drawn for any benefit cost analysis. They should be set taking account of the consequences of all the different options. Not all consequences can necessarily be assessed, and a reasoned decision must therefore be made as to how far this should be pursued. A scheme option may have an influence outside that of the immediate area of the scheme, but, in addition, the consequences of the different options may depend upon what happens outside the project boundaries. For example, urbanisation of the catchment upstream of a project would have an effect upon the flood risk in the project area. All appraisals of the consequences of the different options will therefore be conditional upon the assumptions made about these external conditions. The assumptions made should be realistic and not simply convenient. One scheme or a series of individual elements? 3.5.1 The project domain In some cases the form of the appraisal will depend on whether the solution is necessarily a single project or a series of independent projects. If a project is a series of independent elements, it is reasonable that each of those elements should be subject to a separate benefit cost analysis. For example, if separate flood embankments are proposed for several different villages, then the protection of each village should be justified separately. Where, however, it is possible to protect all of the villages with a single scheme, such as a tidal barrage, or flood storage reservoir, it is still necessary to consider the option of protecting each one individually. In this case the aggregate costs and benefits of the best worthwhile individual protection schemes should be compared with those of the single scheme. 12

Stages in a benefit cost analysis Figure 3.2 Three-phase renovation of a coastal embankment embankment 3 2 1 When a project, which necessarily forms a whole, is phased then the benefit cost analysis should be carried out for the project as a whole. However, a review of the justification of each stage of the phased works should also be undertaken. For example, Figure 3.2 illustrates a coastal embankment that is to be renovated in three phases. If any one of the three phases fails, through overtopping or collapse, then the area behind will be flooded. If the probabilities of failure for each of three phases were to be independent then it would be straightforward to calculate the changing probability that the area would be flooded if any part of the embankment failed. Although the likelihood of failure of each phase is influenced by the likelihood of a combination of tidal surge, high tide and onshore winds, which affect all three phases simultaneously, it is also influenced by the state of any existing defences. Therefore, as a scheme is progressed, the probability of a failure of one part of a scheme will change. It is this change in probability that should be used in the review of each stage of the works. Furthermore, there are likely to be differences in the consequences of a failure, depending upon what works have already been completed. Such situations will be considered further in FCDPAG4. Phasing of a project 3.5.2 Geographical boundaries An economic appraisal for national funding should consider only those benefits and costs accruing within the national boundaries, and treat localised effects, which are offset by equal gains or losses elsewhere in the country, as transfer payments. It is only economic to undertake detailed hydraulic or geomorphological analysis over a limited area, and the boundary conditions for that detailed analysis must be defined. In particular, assumptions must be made about what is happening upstream or updrift. The assumptions that are adopted will increasingly be based on the conclusions of strategic management plans. Where the local area boundary conditions cannot be determined from a wider strategic plan then plausible assumptions must be made, for example, whether the coastline updrift will be protected in the future. Any impacts beyond the boundaries of the project area should be included if they are significant. Effects from outside the boundaries Strategic effects 13

Stages in a benefit cost analysis Scheme impacts extending beyond the boundaries Analysis should be based on period of up to 50 years For example, the value of the sediment generated from continued erosion in the project area to beach building downdrift is a valid benefit of the do nothing option. The value of that sediment may be calculated from the cost of importing beach material to provide defences to the same standard as presently exist provided that such defences are economically worthwhile. However, if the sediment were likely to increase the quantities of dredging required for navigation, this would represent a legitimate economic cost. 3.5.3 The time span of the analysis Benefit cost analysis should generally be undertaken to cover the engineering life of the longest lasting component in the longest lasting scheme, since shorter time horizons can bias the analysis towards options with short lives or high operating costs. The period chosen should allow appropriate comparison of options. There is usually little point in undertaking the analysis over a time horizon of more than 50 years because discounting means that consequences far in the future have little effect on present values. If, exceptionally, a shorter time horizon is used, then terminal values may be employed to ensure that different options are evaluated on a comparable basis. These values should equate to the residual values of any assets, normally calculated using straightline depreciation. Clearly all options should be evaluated over the same time period. Inflation Constant prices Growth factors Benefit cost analysis should be undertaken using real prices; that is, inflation is ignored where inflation has its everyday meaning of the price of a resource increasing without its relative value also increasing. Commonly, the relative prices of the different streams of costs and benefits are assumed to be constant over time; this is generally a conservative practice. In reality, relative prices may change over time; if, for example, wetlands become scarcer, then the value of those remaining should rise, or shingle availability in a particular area may reduce over time and lead to a corresponding real price rise. Growth factors may be adopted to reflect predicted changes in relative prices or demand. However, if growth factors are used for one stream of benefits or costs then they should logically be used for all other streams. Since prices are relative, it follows that, over time, some prices will fall relative to others, in the same way that the real price of many electrical goods has fallen over the last 30 years. Therefore, any use of selective growth factors should be considered carefully. Inflation should be ignored in undertaking the analysis. Real prices should be used for all streams of benefits and costs. Treatment of negative costs and negative benefits 3.6 What is a benefit and what is a cost? In deriving a benefit cost ratio, there is no universally agreed basis for classifying a particular item as either a positive cost or a negative benefit (disbenefit) or vice versa. While the particular approach that is adopted will have no effect on the net present value of an option, it can have a significant effect on the benefit cost ratio. To ensure a consistent approach between options and between schemes, it is important to have a common rule. In the analysis of flood and coastal defence schemes, therefore, the following conventions should be adopted. 14

Stages in a benefit cost analysis Any negative costs should be regarded as benefits. Any negative benefits should be regarded as costs. The flood or coastal defence benefit arising from a project is the net difference between total present value damages with and without the proposed works (i.e. the damage avoided in comparison with the do nothing option). Any negative benefit, or disbenefit, arising from a project represents a loss to society and hence should be considered as a cost of the project. Conversely resources which become available to society as a result of project implementation should be regarded as a benefit. For example, if an option restricts the views of residents, this loss of amenity should be counted as a scheme cost; if widening or dredging a river for flood alleviation yields gravel which can be sold then this is a benefit of the scheme. Stocks and flows potential pitfalls When identifying and valuing the different streams of benefits and costs, it is helpful to think in terms of stocks and flows. It is very easy to make the mistake of including the same benefit or cost twice because of a failure to distinguish sufficiently between the stock of some asset and the flow of resources, or consumption, which that stock generates. Typically, stocks give rise to some flow of consumption or resource so that the current capital value of the stock is determined by the discounted value of the future benefits, which flow from it. In some cases the flow diminishes the value of the stock value (e.g. mining coal necessarily diminishes the stock of coal) whereas in other cases it does not (e.g. catching fish at below the rate of replacement). An appraisal can include either the stock value of a resource or the sum of all the flows that it yields but not both. However, the market value of a stock might not always fully reflect the value of the flow of services which it provides since these can include unpriced public goods, such as the provision of opportunities for enjoyment of the countryside. In such cases allowance can be made for these additional flow values, suitably discounted. In some cases it may be easier to estimate the change in the annual flow of benefits from the stock than the change in the capital value of the stock. For instance, there is no obvious market price for a riverside park that might be destroyed through the construction of a flood defence scheme. An estimate of the value placed by users on visits made to that park might represent a better approach to valuing its loss (but see also section 4.2). 3.7 Iterative stages in benefit cost analysis Benefit cost analyses need to be undertaken for different types of decision making as well as in progressively greater detail as a particular project develops. Strategic plans need to involve an economic appraisal to identify, for instance, those areas where protection is likely to be justified and those areas that could be sacrificed. For projects involving a small amount of expenditure, a detailed benefit cost analysis may not be economically justified. Level of detail proportional to the scale of the project 15

Stages in a benefit cost analysis Decisions are, therefore, required as to what level of detail is appropriate, which streams of benefits and costs to include and how much is to be spent on the analysis. For example, strategic, prioritisation and prefeasibility studies will be undertaken using readily available data, since the most expensive part of a benefit cost analysis is data collection and collation. A simplified analysis should not, however, be interpreted as meaning that it should lack economic rigour. Appropriate specialist advice should be sought, as necessary, for the benefit cost analysis of all schemes. Identifying priorities for protection Benefit transfer in economic appraisals 3.7.1 Strategic assessments Strategic assessments should consider the major interactions and broad options for action, including appropriate standards of protection where these are affected by relationships between sectors (see FCDPAG2). They should not consider the detailed implementation of different solutions. Similar techniques of economic analysis can be used, as in prefeasibility studies (see below), and, in view of the costs involved, the collection of detailed field information over wide geographical areas will rarely be justified. 3.7.2 Prefeasibility and reconnaissance studies The purpose of a prefeasibility study is to determine whether a scheme is likely to be justified, and whether it is worth investing in more detailed studies. Therefore, the initial analysis will utilise readily available information, possibly including simple techniques of benefit transfer. Benefit transfer involves taking values derived in one context and applying them in another; for example, to take the values of enjoyment for a visit to one river, and use them to estimate the value of visits to another river. Use of initial benefit cost ratios to determine likely success of a scheme If the prefeasibility study shows a reasonably high benefit cost ratio (greater than about 4) then it is highly likely that a scheme will be justified and a detailed study is worth undertaking. Conversely, if the benefit cost ratio is small (less than about 0.3), then unless some radically cheaper solution is found, a scheme is unlikely to prove worthwhile. The greatest uncertainty exists for schemes with an estimated benefit cost ratio of around 1 (or where the result is close to a higher target value determined by priority funding considerations). Unfortunately, both more detailed design studies and benefit cost analyses will then have to be undertaken before there can be any great confidence that a scheme is justified. 3.7.3 Detailed assessments The analysis should be sufficiently detailed to show with reasonable confidence whether or not it is worth adopting any of the do something options. Decisions must be made on the level of detail for the analysis and the streams of benefits and costs that should be included. 16

Stages in a benefit cost analysis Ideally, the first streams of benefits and costs to be included will be those which contribute the greatest proportion of the benefits and costs. Whilst it is not always possible to determine in advance what benefits and costs will be the largest, two areas which should generally be considered first are: benefits and costs which accrue earliest in the lifetime of the scheme; those which have the highest probability of occurrence. For example, it is more important to value erosion losses that will occur in the near future than those which occur in perhaps 30 years time, even if the latter involves high-value property. Similarly, for flood alleviation schemes, it is more important to identify the losses from the most frequent events. The costs of evaluating particular streams of benefits and costs depend upon the precision required but also vary markedly according to the category of benefits and costs involved. Table 3.1 illustrates the approximate relative magnitude of the cost of assessing some streams of benefits and costs. The costs of undertaking assessments of recreational benefits or non-use values are largely fixed; it will cost almost as much to evaluate these for a small area or small scheme as for a large one. The assessment cost also depends on the extent to which it is possible to use standard data, such as the depth-damage data for residential properties. These relative costs can be overlaid by other factors; for example, if the flood surface and topography is complex, then the costs will increase. Table 3.1 Relative costs of evaluation Benefit or cost stream Relative cost of assessment Flood alleviation scheme: protecting residential plus some small commercial or industrial properties Flood alleviation scheme: protecting agricultural land Flood alleviation scheme: protecting some large commercial or industrial properties Coastal defence scheme protecting residential plus some small commercial or industrial properties Coastal defence: infrastructure Traffic disruption Recreation benefits Environmental assets: replacement cost method Environmental assets: evaluation of non-use value Key: the greater the number of, the greater the relative cost. 17

Stages in a benefit cost analysis 3.7.4 Scheme monitoring The design cycle does not end with the construction of a scheme. Maintenance and repairs will have to be undertaken, and the best strategy for such works should be kept under review. To do this, those variables that affect the successful performance of the scheme should be monitored at appropriate intervals. Where a benefit cost appraisal has previously been carried out for capital works, the updating necessary to evaluate options for future maintenance should be straightforward. Usually it will be necessary only to update the benefits to account for any subsequent changes to the benefit area or changes in risk exposure identified from monitoring. Similarly, future costs of maintenance or renewal may be updated in line with experience gained from scheme operation. Post project evaluations (see FCDPAG6) demonstrate whether past investment has been worthwhile and has achieved its objectives. The process of evaluation will be considerably eased if the fully documented original appraisal is readily available to evaluators. For example, it will be possible to compare the actual performance against the sensitivity analysis in the benefit cost analysis to consider whether the actual variation of those variables about which there was the greatest uncertainty at the time of the original analysis has been within the predicted limits. In undertaking benefit cost analysis as part of post project evaluation of flood and coastal defence schemes it can be difficult to identify realised benefits, which are based on the avoidance of losses which would have occurred had the scheme not been implemented. Hence, it is very difficult to determine whether the actual benefits are equal to those predicted. It will usually, therefore, be necessary to judge success on the accuracy of related predictions such as the costs of construction and maintenance, rates of environmental enhancement or measures of residual damage. 18

4. Assessing the benefits This section is organised into nine parts, which deal respectively with: 4.1 Evaluation of losses and benefits 4.2 Recreational and environmental benefits 4.3 Flood alleviation 4.4 Coastal erosion 4.5 Combining flood and erosion losses 4.6 Climate change and sea level rise 4.7 Pumped drainage systems 4.8 Flood warning 4.9 Monitoring and studies. Part 4.1 provides brief guidance on some common questions on the calculation of losses and benefits in both flood alleviation and coastal defence schemes, while part 4.2 gives guidance on how environmental and recreational issues can be included in the analysis. Flood alleviation schemes on rivers or coasts are concerned with reducing the probability or impact of flooding and the associated reduction in damages provides the benefits which justify investment. The evaluation of these benefits is covered in part 4.3. The benefits of schemes to delay coastal erosion are obtained from the delay in loss of assets and the principles of appraisal are set out in part 4.4. Where the situation involves both erosion and flooding, then the two streams of benefits have to be integrated as indicated in part 4.5. Part 4.6 covers particular issues relating to climate change and sea level rise. The final parts give guidance on approaches to particular types of evaluation: pumped drainage systems (4.7), flood warning (4.8) and monitoring and studies (4.9). 4.1 Evaluation of losses and benefits 4.1.1 Domestic and other urban property Usually permanent buildings which are at risk of total loss from flooding or erosion should be valued at their current market value, excluding any adjustment in value for the erosion or flooding risk. For many strategic and preliminary studies the mid-range of council tax bands, suitably adjusted from their 1993 price datum, can be used to estimate appropriate property values. Generally, property will be assumed to be written off if the mean annual maximum water level exceeds the floor level. Similarly, write off will normally be assumed if a property is within a reasonable safety margin of an eroding cliff edge (perhaps equivalent to 1 2 years 19