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Financial, Economic and Distributional Analysis 614.5 Findings and RecommendationsThe section on valuation of external impacts of projects yields the following findings:• evidence of the application of the tools of valuation to social and environmental externalities tolarge dams is limited to the last two decades, with most experience coming from the US;• there is a small, but growing number of applications in developing countries, primarily toenvironmental impacts;• as a result of the limited application there can be no comprehensive statement about the overallcosts and benefits of large dam projects where these have identifiable externalities;• the methods for valuation of social and environmental impacts, including non-marketed goodsand services are well-developed but are not widely understood or trusted by the general public;and• stakeholders in the dams debate often have strong feelings either for or against the valuation ofsocial and environmental externalities.Based on the analysis of these findings the following principles can be offered on the valuation ofexternalities of dam projects:• Wherever possible, external impacts should be valued in financial and economic terms providedthat a participatory scoping suggests they represent either a significant economic impact or asignificant impact on a vulnerable group.Finally, a number of recommendations for operationalisation of these principles through suggestedmethodological improvements, process enhancements and/or changes in institutional incentives canbe made with regard to environmental and social valuation:• In the case of dams the valuation of external impacts should be driven by a recursive consultativeprocess involving project stakeholders (to include developers and affected people);• The valuation process should involve at a minimum three steps: a scoping exercise to identify andselect impacts to be valued, valuation studies that are consultative in nature and participatory inmethodology wherever possible, public meetings to report back to stakeholders on the results ofthe studies; and• For the valuation of a given impact the methods to be applied should be given rough priority inthe following order: market methods, revealed preferences, hypothetical methods, benefitstransfer and replacement costs.• The information generated through valuation studies should be explicitly tabled so as to informthe negotiations between stakeholders and decision-makers.This is a working paper prepared for the World Commission on Dams as part of its information gathering activities. The views, conclusions,and recommendations contained in the working paper are not to be taken to represent the views of the Commission
Financial, Economic and Distributional Analysis 625. Valuation of Impacts over Time: DiscountingThe long-lived nature of large dams raises the issue of how to assess the costs and benefits that willoccur over time, whether in the short- to medium-term or over the course of future generations.Philosophers, economists, environmentalists, policy-makers and others view this question in differentways. In order to sum the impacts that occur over long time periods in a consistent manner financialand economic analysts employ a discounting procedure. In simple terms, the discount rate is simply arelative price that enables a comparison of current and future bundles of goods and services. 19The choice of a discount rate can have a significant influence on whether or not a dam is found to beeconomically efficient and/or financially viable. In practice, the lower the discount rate, the moreprominent future costs and benefits become in computing the net present value of a project and,hence, in the decision-making criteria. 20 Assumptions made in discounting can, therefore, have asignificant influence on whether a dam is viewed as economically viable. Where CBA or relatedmethods, such as least-cost analysis, are used in decision support for long-lived projects, the choice ofdiscount rate can become the overriding methodological decision in determining viability.The concept of discounting has been widely accepted by the economics community since the originsof cost-benefit analysis. Yet disagreement and confusion is not limited to the non-economist. At a1966 conference aimed at establishing the appropriate rate of discount for evaluating water projects inthe US there was little agreement on the conceptual basis for choosing a rate. 21 However, with thepublication of the primer on discounting in Lind (1982) there has been more or less general agreementon the theoretically correct approach to the practical problem of selection and application of discountrates in cost-benefit analysis (Portney and Weyant 1999).Given the emergence of climate change on the policy agenda, recent years have seen a reneweddebate – amongst civil society and policy circles, as well as within the academic community – as tohow to best cope with the long-term effects of current investment decisions. 22 Critics of CBA oftenstate that discounting of future impacts is generally inconsistent with equity goals; in particular, it isfelt that discounting thwarts the goals of environmental sustainability and intergenerational equity. Anextension of this argument is relevant to the case of large dams and, as a result, discounting hasbecome a controversial factor in the planning and evaluation of dam projects. At a more mundanelevel, the drivers of this larger debate are reflected in continued differences of opinion, and confusionover, the exact method or rate to apply in actual practice. Such practice stills varies considerably fromthat recommended in 1982 by Lind, as documented below for the appraisal of dam projects.Certainly, the plethora of different and overlapping terminologies present in the literature do not serveto facilitate understanding by the interested reader. 23 The objective of the current chapter is to restatethe debate, provide an indication of the alternative choices that can be made in selecting (or not) adiscount rate and to review how current practice in the evaluation of dams compares with establishedtheory and good practice. Still, in the space available it would be difficult to do justice to such anobjective and, thus, references are provided so that the reader may examine the different arguments atleisure. No review of the mechanics of discounting is presented in the text below, however, relevanttechnical explanations and formulae are provided in the notes.The chapter begins by explaining the significance of discounting to the evaluation of dam projects.An introduction to the theory and methods of discounting is then presented to facilitate a consistentterminology and approach in the ensuing discussion of the debate regarding the use and choice ofdiscount rates. Actual practice and guidelines are then contrasted with available theory and goodpractice methods in order to provide a set of recommendations for future direction and practice withregard to discounting in options assessment and project evaluation for dams.This is a working paper prepared for the World Commission on Dams as part of its information gathering activities. The views, conclusions,and recommendations contained in the working paper are not to be taken to represent the views of the Commission
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