Download Economic impact assessment

Economic impact assessment
Methodologies and approaches to valuation
Presenter: Alan Smart
Location: Washington
March 2017
Concepts of value
TOTAL ECONOMIC VALUE
USE VALUES
NON-USE VALUES
DIRECT USE
VALUE
ECOLOGICAL
FUNCTION
VALUE
OPTION
VALUE
EXISTENCE
VALUE
BEQUEST
VALUE
Outputs
Benefits
Benefits
Benefits
Benefits
• petroleum and
minerals
• transport
• communications
• property and
construction
• agriculture
• Fishing
• forestry
• tourism
• public
administration
• flood control
• climate
• sustainable water
resources
• sustainable
natural resource
management
• Biosecurity
• biodiversity
• protection from
fires, floods and
natural disasters
• improved
management of
climate change
• Insurance
• defence
• satisfaction that
resource is there
• preservation of
environment
and conservation
values
• national security
• Long baseline for
historical analysis
• altruistic
• preserving
national assets for
the next
generation
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Economic welfare analysis
Consumer and
producer surplus
Need to know what
consumers are
prepared to pay
Willingness to pay
surveys
And at what price
producers are
prepared to produce
Usually commercially
sensitive
P
Consumer Surplus
S
PE
Producer
Surplus
QE
D
Q
3
Welfare analysis for a public good
Price
Price
P0
Consumer Surplus
PA
Marginal cost
X
PE
Y
Average cost
X
Z
PE
Demand
D
O
Marginal cost
QE
Quantity
O
QA
QE
Quantity
4
Cambridge study – Pollock et al
Studied large scale
topographic
mapping and
transport network
products – sales
worth £70 million
Concluded that a
move from average
to marginal cost
pricing would
increase economic
welfare by £156
million
Price
P0
Average cost curve
PA
PE
Y
Average cost
X
Z
Marginal cost
Demand
O
QA
QE
Quantity
5
Value added
Value added is the value of
output less the cost of inputs
Indicates economic contribution
of a sector to the economy
Gross value added is the main
component of GDP
6
The value added approach
Economic contribution of Ordnance Survey in Great Britain – Oxera 1999
7
8
Economic impact assessment
Assess the net
benefits of a
change in policy
or an investment
Compares a
reference case to
a counterfactual
Benefit cost
analysis
CGE modelling
Input output
multiplier
analysis
Real options
Estimates of value
quantitative and
qualitative
Impact on indicators of
value
Reference scenario improved fundamental data
Counterfactual - no
change to current
approach
Time
9
 productivity x adoption
= direct impact
10
Benefit cost analysis
Focuses on a specific investment or policy change
Uses discounting techniques to bring a time series of benefits and costs to
a common year
𝑁𝑒𝑡 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 =
𝑛 𝐵(𝑛)
1 (1+𝑟)𝑛−1
−
𝑛 𝐶(𝑛)
1 (1+𝑟)𝑛−1
r = discount rate
B(n) = benefit in year n
C(n) = cost in year n
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Estimating benefits
Tangible benefits
Direct benefits
• Market prices and quantities (adjusted as necessary for monopoly pricing or subsidies)
Indirect benefits


Defensive expenditure or substitute cost method – e.g. reduced average annual damage costs
from flooding or fires
Time saved by citizens
Intangible benefits
Stated preference


Willingness to pay surveys
Contingent valuation
Revealed preference


Travel cost method
Hedonic pricing
12
When all else fails – benefits transfer
Draw on comparable studies
elsewhere to gain an indication of
the benefits e.g.EVRI
EVRI contains over 2000 studies
Mostly contingent valuations
Summarises:
- topic subject
- method of measurement
- results
- Reference to further information
Sustaining member citizens have
free access
13
Computable General Equilibrium (CGE)modelling
Economy wide approach
Estimate direct impacts and use general equilibrium model to translate into
economy wide impacts
Takes into account resource transfers within the economy as a result of change
Direct impacts
changes in productivity of labour or capital or multifactor
changes in resource availability
changes in income or trade
CGE model estimates total impacts (direct plus indirect) for the economy
as a whole
14
Economy wide impacts
DIRECT IMPACT
Precise
positioning
used in road
transport
PRODUCTIVITY
IMPROVEMENT
Decreased
per unit road
transport
price
OUTPUT AND
VALUE ADDED
NATIONAL
ECONOMIC
IMPACTS
INDIRECT
IMPACTS
FLOW ON BENEFITS
Lower input costs
Additional supply of
scarce factors
 Lower production cost
for users of road
transport
 Increased access to
factors
CROWDING OUT
Crowding out effects
 Lower production by
competing sectors (eg
rail, coastal shipping)
OUTPUT AND
GDP
VALUE ADDED
Employment
Consumption
Investment
OUTPUT AND
VALUE ADDED
TERMS OF TRADE
Exchange rate effects
 Lowered average export
price to stimulate exports
 Higher import demand
due to higher
consumption
PURCHASING
POWER
WELFARE
IMPACTS
(real income)
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Some published studies
Year
Organisation
Issue
Results (GDP)
2008
ACIL Tasman
Value of spatial information in
Australia
$6 billion-$12 billion in 2006-07
7% higher if barriers removed
$NZ1.2 billion
$NZ 1.6 million with barriers removed
2009
ACIL Tasman/SKM/Ecological
Consultants
Value of Spatial information in New
Zealand
2010
ACIL Tasman
Value of earth observation from
Space
$3.3 billion in 208-09
2010
ConsultingWhere /ACIL Tasman
Value of geospatial information for
local government in England and
Wales
£320 million higher in 2007-08 as a
result of geospatial information
2008
Allen Consulting
Value of enhanced positioning
2011
Value of improved SDI in Tasmania
2013
2013
ACIL Tasman/ Lester
Fanks/Consultingwhere
ACIL Tasman
Consultingwhere/ACIL Allen
Total value in mining, agriculture and
construction $ 0.8billion-$1.9 billion
$105 million to the state in 2010
2014
ConsultingWhere-ACILAllen
2015
HAL/ACILAllen/ConsultingWhere
Value of augmented positioning
$2,2 billion to 3.7 billion in 2012
Value of free open data for Ordnance £13 million to £28 million
Survey
Value of better property services in
Not published
New Zealand
Value of geoconnections Canada
Can$20 million, 19,000 jobs
16
0
Maritime activities
Aviation
Rail
Transport, storage and…
Road transport
Utilities
Construction
Mining
Other crops
Dairy beef
Grains
Reveals sector impacts
1200
1000
800
$m 600
400
200
High case
Low case
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CGE Modelling
The strength of CGE analysis is its ability to the impact of productivity
improvements across more than one sector of the economy and to
account for the resulting resource shifts between sectors.
However the result is only as robust as the quality of the case studies. It
requires extensive and robust case studies and estimates of levels of
adoption to build credible results.
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Questions?
19
Welfare analysis
Problems in extrapolating the shape of the demand curve from single
point observations
A partial analysis that does not take into account resource transfers in the
economy
Eg - Planning and construction gains but lawyers lose when development
approvals are streamlined
Multiplier analysis can be fraught with difficulties
“If I added up all the multiplier studies that come across my desk we would have
an economy four times the size of the one we actually have”
25
Gross revenue analysis
An indication of the turnover of an industry sector such as geospatial
information
Difficult to identify geospatial sector in national accounts
Hence requires surveys or estimation
Oxera – Google (2015) global revenues for Geo
$150 billion - $270 billion in revenues globally
$10 billion cost savings
Gross revenue indicates significance of an industry sector but not its economic
contribution to GDP
26
Oxera findings
Largest contribution to GVA came from users of OS services
and products
£79 billion to 135 billion
Around 10% to 21% of GDP of Great Britain at the time
27
Value added approach in Australia and New Zealand
Allen Consulting Group 2010 Value added in Australia - $12.5 billion
Mainly in government administration, property services, business services,
construction and mining
Around 1.4 % of value added in these industries
Value added in New Zealand - $ 1.6 billion
Around 1.4 % of value added
Similar industries apart from mining
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Economic linkages
Spatial information servics sector
Direct impacts
Differences in spatial
information sector
productivity
Wider economy
Better information
Lower administration costs
Lower search costs
Autonomous vehicls
Robotics
Data analytics
Consumers
Linkages between
sectors and markets
Reduced navigation time
Better and more current information
Lower search costs
Lower product costs
More choice
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Ireland 2014
Indecon Consultants
Gross value added € 126 million (0.07% GDP)
Public sector cost savings 0.2% - € 82 million
Economic value of time saved - €279 million
Competition benefits € 104 million
No calculation
of economy
wide impacts
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Revenue/value added approach
Provides information about the size of the footprint
Difficulties in assessing the wider impacts
Does not take account of resource shifts nor productivity impacts
Not as useful for assessment of economic impact of geospatial
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Waves of adoption
Example from Local Government
in UK
Four adoption waves
Basic use of GIS
Central storage of GIS mapping in
local councils
Extend to web based applications
providing wider access within and
without council
Matures to enterprise applications
Each wave adds further
productivity
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Presentation of the results
Net present value = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 − 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑠𝑡𝑠
Benefit cost ratio =
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑠𝑡𝑠
Internal rate of return (IRR)
Represents the discount rate where 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 =
𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑠𝑡𝑠
Often referred to as return on investment (ROI)
Care needed when cash flows oscillate between positive and negative

More than one solution
Care needed when ROI departs significantly from financing and reinvestment rate

Consider using modified rate of return (MIRR in excel)
34
Simple discounted cash flow
Year 0 Year 1 Year 2
Project Cost (€000)
Year 3 Year 4
Total
-900
-700
0
0
0
-1,600
-90
-70
0
0
0
-160
Support Costs (€000)
0
-110
-110
-110
-110
-440
Total Benefits (€000)
0
400
800
800
800
2,800
-990
-480
690
690
690
600
1.000
0.952
0.907
0.864
0.823
NPV (€000)
-990
-457
626
596
568
Cumulative NPV (€000)
-990
-1,447
-821
-225
343
Contingency of10% (€000)
Net Cost (€000)
Discount Rate (5%)
343
Payback
Point
Cumulative Net Present Value (NPV) = €343,000
Internal Rate of Return = 14% (increase discount rate until NPV = £0)
35
35
Value of the national map USGS(2004)
Benefits in improved
effectiveness of decision making
●
●
●
●
●
Creating an emergency evacuation
plan
Designating critical habitat for an
endangered species
Conducting property tax assessments
Researching land cover change and
deforestation
Verifying insurance claims
Net benefits estimated at $2.05
billion
36
Willingness to Pay :
Cockermouth example
37
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Cockermouth flood defences
Funding for flood protection works was limited:
Environment Agency required a local contribution of £300k towards the
£5.2m scheme
Council could raise £180k from existing funds but would need
an additional levy of £120k from householders
Householders asked if willing to pay between £8.97 - £26.90
dependent on local tax banding a year for three years on their
council tax.
•
Referendum of 4,153 homes saw householders vote
overwhelmingly in favour of paying an extra levy
38
38
The economic impact of spatial data infrastructure Catalonia
Surveyed
●
●
●
20 Local Government Authorities in
the Catalan
15 end users
3 large institution al users
Valued time saved in these
organisations
Net benefits €1.14 million over
2005-06
39
Non-market impacts
“Examples
Social impacts - equality: ethnicity, disablement
Personal impacts – injury, loss of life
Environmental impacts – pollution, loss of amenity
Impacts can be positive or negative
In monetary terms, a cost or a benefit
40
40
Indicative values
Valuing time – UK Department for Transport (DfT)
research
Difference between “own time” and “employer’s time”
●
Work time saved
● Leisure time saved
£29.65 (€35.30) per hour
£6.39 (€7.60)per hour
Valuing prevention of fatality or injury – DfT research1
Reduction in risk of death on roads:
●
£1.585m (€1.900m) per fatal casualty prevented
Reduction in risk of injury on roads:
●
£178,160 (€212,000) per serious injury prevented
● £13,740 (€16,400) per slight injury prevented
Based on WTP plus gross lost output, medical and ambulance
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Indicative Values
Greenhouse gases and carbon emissions
Shortage of good metrics – general approach is:
●
Quantify emissions impact of project
● Use illustrative values for the social damage cost of carbon
● Estimate the monetary value of the impacts
Study from HM Treasury gives figure in range £5 £130/tonne carbon emitted (in 2000 prices)1
Loss of amenity – quarrying and aggregate extraction
Based on WTP per tonne extracted (1999 prices)
●
Hard rock
● Sand and Gravel
● Quarries in National Parks
● National average - all types
£0.34 (€0.40)
£1.96 (€2.30)
£10.52(€12.50)
£1.80 (2.10)2
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Example of output – Australia 2008
Scenario 1
Scenario 2
Productivity only
Productivity plus
resources
Productivity only
Productivity plus
resources
Per cent
Per cent
Per cent
Per cent
A$ billion
A$ billion
A$ billion
A$ billion
GDP
0.51
5.31
0.61
6.43
0.99
10.31
1.20
12.57
Household consumption
0.50
2.89
0.61
3.57
0.93
5.39
1.16
6.78
Investment
0.51
1.43
0.61
1.73
0.98
2.78
1.20
3.39
Capital stock
0.56
-
0.72
-
1.05
-
1.38
-
Exports
0.45
0.98
0.58
1.26
0.80
1.73
1.07
2.30
Imports
0.39
0.89
0.52
1.18
0.72
1.64
1.98
2.23
Wages
0.50
-
0.60
-
0.92
-
1.12
43
Value of open data for UK (2013)
OS OpenData will directly deliver a net £13 million - £28.5 million increase in GDP by
2016. The main components of this increase are net productivity gains (£8.1 million £18.2 million) and additional tax revenues (£4.4 million - £8.3 million).
The GDP increase is net of £3.7 million per year, applied as a negative to U.K. exports
to account for OS OpenData being integrated into products of companies paying taxes
abroad. Despite this loss of export income, overall the value of exports to the economy
increases by £6.1 million - £10.3 million as other sectors of the economy expand.
The increased exports will enable U.K. residents to purchase more foreign goods,
increasing real imports by £3.6 million - £7.1 million.
Real national disposable income (real GNP) will increase £10.2 million - £24.1 million by
2016, indicating an increase in the economic welfare for British society as a whole.
Real consumption will increase £8.1 million - £20.3 million and real investment will
increase by £2.3 million - £5.1 million as result of OS OpenData.
44
Other methodologies – input output multiplier analysis
Input-output multiplier analysis
Takes into account indirect economic impacts in other sectors
But assumes no resource constraints or resource reallocation
Input-output tables provide a comprehensive picture of the supply and
consumption of all commodities within the economy, including detailed
information on factor incomes, taxes and the source (domestic or foreign)
of every commodity.
Most recent I-O tables for Malaysia are 2010
I-O multipliers are summary measures generated from input-output tables
that can be used for predicting the total impact on all industries in the
economy of changes in demand for the output of any one industry.
For geospatial applications prefer CGE modelling
45
Other methodologies – real options analysis
A financial option is the right but not the obligation to acquire an asset
An option has value which is higher the higher the uncertainty
Offshore oil exploration is an options play
Real options similar to financial options
The right but not the obligation to pursue an investment
Very useful when considering investments with high uncertainty
Benefit cost analysis assumes that all costs are incurred throught the live of a project
Real options recognise that certain investments may not be pursued.
Geospatial information creates options for others to develop new products and
services
Can be a useful way of thinking about the value of geospatial information
But not generally recognised in the geospatial community at the present time
46
Benefit cost analysis
Price
Value of geospatial open
information being evaluated
A subset of welfare analysis
Examining a subset of the total
economic impact of geospatial
information
Demand curve
Total value of
geospatial data
Quantity
47