The return of the water - IUCN

The Return of the Water
analysis, it is standard practice to test the robustness of results to changes in key variables, in order
to present a more confident assessment of the desirability of a project. For this reason, the predicted
benefits and costs of flood release measures had been subjected to sensitivity analysis, to assess how
they would be affected by changes in discount rate, levels of benefits, flooding coverage and climatic
conditions:
118
• Changes in discount rate. The application of a discount rate to bring future streams of costs
and benefits to comparable present values has conventionally been a key element of economic
cost-benefit analyses. It is however important to note that discounting gives relatively more
weight to values that accrue in the early years of a project, and relatively less weight to
values, which accrue further in the future. For the case of the re-inundation of the Waza
Logone floodplain, all of the heavy investment costs of the project were incurred in the first
five years, and flood-related environmental economic benefits accrued slowly over time.
This is typical of environmental conservation projects.
This phasing of benefits and costs meant that there was a danger that the results of
conventional cost-benefit analysis would under-emphasise the (long-term) environmental
benefits of flooding, and over-emphasise the (immediate) physical costs of re-inundation
measures. Although it is generally agreed that environmental projects should be subject to
the same types of economic analysis as any other project or sector of the economy, it is
worth noting that applying a zero discount rate to the case of re-inundation of the Waza
Logone floodplain generated both a much higher net present value, and showed a much
greater differentiation in the net present values of different re-inundation options (Table
11.10).
NPV for incremental costs and benefits of re-inundation ( €
million)
Discount rates
0% 5% 6% 10% 12% 15%
Option X 34.67 16.75 14.54 8.28 6.22 3.99
Option Y 29.04 14.60 12.80 7.67 5.96 4.09
Option Z 20.47 10.75 9.51 5.99 4.80 4.08
Table 11.10 Sensitiviy of results to change in discount rate (IUCN, 2002).
The base discount rate applied in this study was 10%, because this figure was thought to
best represent the opportunity cost of capital in Cameroon. Analysis of the sensitivity of
results to higher discount rates showed that all values were robust, and continued to display
a net present value (Table 11.10). It is however notable that at much higher rates (15% and
above), Option Y (rather than Option X) became a slightly more economically desirable reinundation
option, while Option Z consistently remained the least desirable.
• Changes in the value of key benefits. Although based on real data, recorded after pilot flood
releases, valuation relies on a large number of assumptions and extrapolations. The bulk of
the economic value of re-inundation - between 88% (Option X) and 84% (Option Z) of total
benefits - is also accounted for by three benefit streams: pasture, fisheries and agriculture.
Sensitivity analysis shows that results are however robust to changes in the value of these
key benefits, showing little change in (and consistently positive) net present values, even
when benefits are assumed to decline by a quarter (Table 11.11).