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DFID/International Development Research Centre/Thomas Omondi

Chapter 18 Monitoring and evaluation

Cost–benefit analysis

Photo: DFID/International Development Research Centre/Thomas Omondi

Disasters cause huge economic losses through the damage and destruction of infrastructure, housing, crops, natural resources and other livelihood assets, and through lost production and employment. Relief and reconstruction are also costly. The case for DRR is often made in economic terms, by using cost–benefit analysis (CBA) to justify investment in protection generally, or in particular types of risk-reducing interventions. In addition, agencies and donors want evidence that their projects and programmes are delivering good value for money. Evidence produced for the costs and benefits of DRR frequently shows that investment brings greater benefits than costs. However, every case is different, specific to location, hazard and type of intervention, and hence cost–benefit ratios may vary considerably (and may even be unfavourable).+C. Shreve and I. Kelman, ‘Does Mitigation Save? Reviewing Cost–Benefit Analyses of Disaster Risk Reduction’, International Journal of Disaster Risk Reduction, vol. 10, part A, 2014, http://www.sciencedirect.com/science/article/pii/S2212420914000661.

CBA has long been used as an economic assessment tool in large-scale mitigation projects, especially involving the protection of infrastructure and other physical structures. It is now being used increasingly in planning and, in particular, evaluating local-level DRR initiatives.+For examples, see C. Cabot Venton and P. Venton, Disaster Preparedness Programmes in India: A Cost–Benefit Analysis, Network Paper 49 (London: ODI, 2004), http://www.odihpn.org/hpn-resources/network-papers/disaster-preparedness-programmes-in-india-a-cost-benefit-analysis; T. H. Tuan and B. D. Tinh, Cost–Benefit Analysis of Mangrove Restoration in Thi Nai Lagoon, Quy Nhon City, Vietnam (London: International Institute for Environment and Development, 2013), http://pubs.iied.org/10644IIED.html; D. Willenbockel, A Cost–Benefit Analysis of Practical Action’s Livelihood-Centred Disaster Risk Reduction Project in Nepal (Brighton: Institute of Development Studies, 2011), http://www.ids.ac.uk/idsproject/cost-benefit-analysis-livelihoods-centred-disaster-risk-reduction. As yet there is no common or standard methodology for this, and a variety of approaches have been used.

At the start of a project, CBA can be used alongside VCA to identify which interventions will obtain the best benefits with the resources available. However, it is not a routine part of project appraisal or evaluation in small-scale projects. This is partly because the principal local actors, NGOs and CBOs, are unwilling to give too much weight to purely quantitative features of complex socio-economic processes, partly because of their lack of familiarity with the methods, and partly because of the perceived difficulty of carrying out this kind of analysis. CBAs are generally quantitative, using data from primary and secondary sources, but they can also incorporate qualitative aspects, especially when carried out at community level as part of a participatory process, or to explore quantitative findings more extensively. For instance, ISET-Nepal has facilitated ‘shared learning dialogues’ with local stakeholders to identify and discuss their perceptions of the costs and benefits of different flood mitigation interventions and develop appropriate risk reduction strategies.+A. Dixit, A. Pokhrel and M. Moench, Costs and Benefits of Flood Mitigation in the Lower Bagmati Basin: Case of Nepal Terai and North Bihar (Kathmandu: ISET-Nepal and ProVention Consortium, 2008), http://www.preventionweb.net/files/8116_WP206highres1.pdf. Data gathering does not necessarily require considerable extra resources or technical capacity, depending on the data available or the level of analysis. Where data are limited quantitative assessment may not be possible, or would provide misleading results.

Case Study 18.4 Cost–benefit assessment of a DRR project

The NGO Tearfund commissioned a cost–benefit analysis of a DRR and food security programme in Malawi, which had been running for four years and covered 53 villages. The programme’s key components were crop diversification, soil and water conservation and provision of livestock (goats) that could withstand drought. The analysis was based on quantitative estimates of the programme’s benefits, in terms of increased crop and livestock production, continued education (by preventing drop-out due to hunger and inability to pay school fees) and a reduction in hunger-related malnutrition and mortality. It was calculated that the programme had delivered $24- worth of benefits for every $1 invested.

C. Cabot Venton and J. Siedenburg, Investing in Communities: The Benefits and Costs of Building Resilience for Food Security in Malawi (Teddington: Tearfund, 2010), http://tilz.tearfund.org/~/media/files/tilz/research/investing%20in%20communities%20web.pdf.

There are several challenges and issues regarding the use of CBA in risk reduction. It is difficult to assess the human and economic impact or cost of disasters. Data and methods have improved over the years but remain unreliable, especially in low-income countries. Estimates of economic impact generally focus on direct costs, and it is more difficult to assess indirect and secondary costs (see Box 18.3: Economic costs of disasters). Assessment of direct losses is harder where a large proportion of losses are uninsured, and it is difficult to calculate less direct costs such as loss of income when a significant proportion of economic activity takes place in the informal sector.

Box 18.3 Economic costs of disasters

The economic costs of disasters are usually divided into three kinds: direct, indirect and secondary.

  • Direct costs relate to the capital cost of assets (e.g. buildings and other physical infrastructure, raw materials, crops) destroyed or damaged.
  • Indirect costs are the damage to the flow of goods and services (e.g. lower output from factories destroyed or damaged, loss of sales income due to damaged infrastructure, costs of having to buy materials or services from elsewhere, medical expenses, lost productivity).
  • Secondary effects are the short- and long-term impacts on overall economic performance (e.g. deterioration in external trade and government budget balances, reallocation of planned government spending, increased indebtedness, changes in income distribution patterns, changes in the scale and incidence of poverty).

A focus on economic costs and benefits addresses only one aspect of people’s vulnerability to disasters. One of the main criticisms of CBA in DRR is that it values costs and benefits in purely monetary terms. In the case of physical structures (e.g. homes, infrastructure, public buildings) and economic aspects (e.g. employment, crops and livestock, savings) these calculations are relatively straightforward. It is much more difficult to quantify less tangible aspects (e.g. the natural environment, social and psychological issues) and many CBAs do not pay enough attention to them. Projects with clear monetary benefits may be selected over those which may be equally beneficial, but whose results are not so easily quantified: this is problematic for community DRR, which typically includes a mixture of ‘hard’ and ‘soft’ measures. Other challenges include incorporating uncertainty and trends into assessments. Calculating the probability and extent of a hazard’s occurrence and impacts can be difficult, especially at local level and where there are data gaps and deficiencies. CBA is better at assessing shorter-term outcomes than longer-term trends, where there is a much higher level of uncertainty. Climate change adds another level of complexity.

There are also ethical concerns, the main one being that many people object in principle to assigning a monetary value to human life. Another is that conventional CBA does not consider the distribution of costs and benefits within communities (in other words who gains from DRR measures, and who loses out). Additional qualitative assessment may be needed to identify the impacts on different households, social groups, businesses and institutions.