Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

3.2.3.4 Financial analysisAny financial inflows hardly ever exist and financial outflows differ according to the type of project:Financial outflows• For policy and planning measures:- costs relating to institutional and capacity building of appropriate national, regional and local institutions- costs relating to technical assistance, institutional and capacity building• For physical measures:- investment costs- maintenance/operational costs- administrative and technical personnel- expropriationsThe time horizon for project analysis is usually around 50 years.3.2.3.5 Economic analysisEstimating project costs for the prevention or mitigation of the effects of a natural disaster is generallystraightforward. Estimating the projected benefits of prevention investments, however, is more difficult.First, and quite obviously, it is not possible to predict when an actual disaster will occur and with whatintensity. Second, the effectiveness of the investments is estimated through vulnerability assessments thatinclude a degree of uncertainty. Therefore, in disaster mitigation projects, while costs are well defined,benefits derived from likely or avoided losses are not definitive, but are rather probabilistic, at best. Third,in many cases the benefits are public goods (preserving biodiversity, avoiding the loss of culturalinheritances, saving lives) and indirect benefits may also represent a very substantial part of the overallreturns from a project. The time horizons for natural risk projects often exceed 50 years.As regards the discount rate, this is a case where discounting for the very long term implies that a discountrate that declines over time is appropriate; see, for example, Green Book (UK), HM Treasury (2003).In the case of a disaster, the following effects may occur:Direct Effects- physical impacts on capital stock, such as infrastructure, machinery, and buildings- losses of lives and people injuredIndirect Effects - production losses3.2.3.6 Risk assessmentCritical factors- Investment costs- Identification of possible risks- Lack of data- Possible responses to natural riskMainvariablesto consider- Imminent protection measures for vulnerable areas- Natural risk frequency or probability of disaster occurrences- information regarding historical disaster occurrences- Technical and physical information- Identification of one of the four ways of responding to identifiedrisks: acceptance, avoidance, transfer or mitigation104