ECONOMIC COST-BENEFIT ANALYSIS IN ACTION: A PRACTITIONER S PERSPECTIVE

Transcription

1 ECONOMIC COST-BENEFIT ANALYSIS IN ACTION: A PRACTITIONER S PERSPECTIVE Presentation for Clearwater Hot Topics, 25 October CHRIS OLSZAK Director

2 INVESTMENT IN STORMWATER - A WINDOW OF OPPORTUNITY BUT WILL WE GET IT RIGHT? 2

3 ECONOMICS HAS A ROLE TO PLAY To argue the case, this presentation provides Overview and rationale for using economic CBA Common practical challenges Insights on how they can be overcome Future directions and needs 3

4 THE BASIC FEATURES OF ECONOMIC COST BENEFIT ANALYSIS Structured tool for comparing options Difference at the margin Recognise change over time ALL costs and benefits Present day $ 4

5 WHAT CAN CBA BE USED FOR? AND WHY SHOULD IT BE USED? Justify Ration CBA Choose Prioritise 5

6 ADVANTAGES OF CBA Theoretical basis Consistency & repeatability Comparability across projects sectors types of benefits Avoids subjective weightings by experts Provides a basis for cost-sharing Required anyway 6

7 CBA FOR WATER PROJECTS IS A MULTIDISCIPLINARY PROCESS Proponent Stakeholders Identify needs and objectives Identify and describe options and base case Identify and quantify costs and benefits Calculate net present value and benefit-cost ratios Engineers / modellers / scientists Test sensitivity Reporting 7

8 MANY VALUATION TECHNIQUES This is where the economists come in! 8

9 THAT S ALL FINE BUT THE REALITY IS A BIT MORE CHALLENGING 9

10 CHALLENGE 1 LINKING BIOPHYSICAL CHANGE TO ECONOMIC VALUES Increasing uncertainty Physical change (e.g. flow regime) Ecological outcome (e.g. species / ecosystem) Community willingness to pay for environmental / non-market outcome 10

11 CHALLENGE 2 ASSESSING CHANGE INTO THE FUTURE Value The reality is far more complex, noisy and uncertain for most environmental / natural resource projects (thresholds, non-linearity) With Without Now 20+ years Time 11

12 CHALLENGE 3 UNDERSTANDING OF NON-MARKET VALUES 12

13 CHALLENGE 4 UNDERSTANDING VALUES AND OPTIONS AT A MEANINGFUL SCALE. Lot Small urban streams Major waterways Bay 13

14 WHAT CAN BE DONE Focus on the CBA thinking, not just quantification Get comfortable with uncertainty and indications of value Use threshold analysis Avoid perennial mistakes made by non-economists Use multiple valuation methods and look for convergence Clearly present results to highlight the decisions that need to be made 14

15 WHAT CAN BE DONE Benefit / cost Can we value it? Key issue / comment Capex / opex Bread and butter for engineers Avoided / deferred cost What costs can actually be avoided? Potable water savings? What is Melbourne s LRMC? Green space / water use Cost of alternative sources, inc. potable Flood damages Change in AAD but are there changes? Recreation and other use? Estimating change in visitor numbers / use values Amenity? Estimating change in amenity Waterway ecological health? Multiple scientific and economic knowledge gaps Urban heat island effect public health Supply system security / resilience to drought events? Multiple scientific and economic knowledge gaps? Hard to value needs big picture assessment Energy / greenhouse gases Market prices 15

16 HOW TO REALLY MAKE PROGRESS Do the planning and applied research to build practical, repeatable methodologies Need details, not just more frameworks! 16

17 TAKE HOME MESSAGES Economics can help ensure that investment in stormwater contributes to real and long-term liveability outcomes Economists can provide useful input to feasibility studies 17

18 THERE IS A ROLE FOR ECONOMISTS IN UNDERTAKING FEASIBILITY STUDIES Proponent Stakeholders Identify needs and objectives Identify and describe options and base case Identify and quantify costs and benefits Calculate net present value and benefit-cost ratios Engineers / modellers / scientists Test sensitivity Reporting 18

19 TAKE HOME MESSAGES Economics can help ensure that investment in stormwater contributes to real and long-term liveability outcomes Economists can provide useful input to feasibility studies Melbourne-specific applied economic research is needed Practical methodologies need to be developed and used 19

20 CHRIS OLSZAK