Transcript SUBJECT 2

SUBJECT 2. Valuation of the
impact of disasters
DAMAGE AND
RECONSTRUCTION NEEDS
ASSESSMENT MODULE
DAMAGE AND LOSSES
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EFECTOS DEL TERREMOTO DEL 13 DE ENERO DE 2001 EN EL SALVADOR
Loss of life or injury
Reduced welfare and well being
Material losses and damage
Disruption of “normalcy”
Degrees of affectation
PORCENTAJE DE VIVIENDAS AFECTADAS POR DEPARTAMENTO
(GRAFICO CON DISTRIBUCION DE HOGARES SEGUN MATERIAL DE CONSTRUCCION)
CHALATENANGO
N
SANTA ANA
CABANAS
MORAZAN
SAN MIGUEL
AHUACHAPAN
W
E
S
LA UNION
SONSONATE
LA LIBERTAD
Tipo de material
Concreto
Bahareque y adobe
Otros materiales
SAN SALVADOR
LA PAZ
SAN VICENTE
% Viviendas afectadas
USULUTAN
0.1 - 6.7 %
6.7 - 15.8 %
15.8 - 30.1 %
30.1 - 74.2 %
30
0
30
LA UNION
SAN MIGUEL
60 Kilometers
Fuente: información del COEN al 2 de febrero de 2001
Encuesta de Hogares de Propósitos Multiples 1999. DIGESTYC
Some things are easier to measure
than others
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IT IS DIFFICULT TO DETERMINE
– The value of lives lost or affected
– The opportunity cost, cost-benefit or
investment / profitability. This is
associated with the lack of adequate
base lines that assess the level,
quality and efficiency / efficacy of
health services provided
– The value and quality of services
provided (both curative and
preventive)
– The duration of the transition /
emergency phase (when field
hospitals and evacuation processes
are operational)
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IT IS EASIER TO DETERMINE
– The amount of investment required for
reinforcement vs. The potential losses
in equipment and inventories
– The cost of reinforcement as
compared to the reposition cost of
affected infrastructure
– The alternative cost of providing
services when infrastructures
collapse
Some figures on the impact of disasters
in Latin America and the Caribbean
Deaths (1972-2003)
Directly affected population (primary) (thousands)
Total affected population (‘000)
Total Damage (millions of dollars)
110,000
0.02%
15,000
2.68%
160,000
28.57%
65,000
Yearly average amount (millions of dollars)
2,300
As percentage of exports of goods and services
0.55%
As percentage of foreign direct investment
7.92%
Source: ECLAC
Ricardo Zapata
ECLAC / DMF Workshop
26
WHAT IS IT THE VALUATION
METHODOLOGY:
Impact
assessment
INDIRECT EFFECTS
Loss of services:
Supply / demand mismatch
Imbalance, inadequacy / resilience
Rehabilitation and reconstruction stages
Emergency cost estimates (evacuation, field hospitals,
alternative facilities / services)
Impact analysis
(duration of evacuation and / or use of
Alternative facilities vs. opportunity /cost,
Cost/benefit, costs / profits)
INTERVENTION:
Prevention and mitigation plan
Operational phase, an evaluation:
Updating, revision, prevention reinforcement
and mitigation
(update and maintenance of technological edge)
Technical criteria
Management criteria
Assessment of health network
(sanitary system)
DIRECT DAMAGE
Goods, equipment,
Budget changes
(cost / investment)
Preparation of
technical dossier
Operational maintenance
Training in use of methodology
conservation
Prediction
Prevention
Restoration of service
Determine the situation caused
by the disaster
The value we determine
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Stemming from sector valuations
assess the value-added changes
expected for every sector in the
short term and for a medium-term
period to be agreed (3-5 years or
more)
Supported by input-output tables
or sector weighing factors
determine the projection of
damages of one sector to the
others
A damage scenario is built (taking
into account the measured losses
at replacement value) : variations
in the main economic gaps is
highlighted: external sector, fiscal
deficit, internal equilibrium
(prices, exchange rate, etc.)
The images we see
VALUATION CRITERIA
• Valuation criteria are related to the purpose of the
study, and will be
• For direct damage
– Present value of assets. In some instances, insured value
could be considered
– Replacement prices, at current market prices or projected
for the duration of the reconstruction process
– Additional mitigation and vulnerability reduction investment
should be contemplated
• For indirect losses
– Current market prices of goods and services
– Business losses as estimated on current market prices and
regular turnover of activity
– Insured values, if they are available or insurance contracts
existed
VALUATION PROCEDURE
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To determine the situation caused by the disaster the ECLAC methodology starts by undertaking sector valuations and on the basis of all these, determine the variation in terms of the national accounts, i.e. value-added changes expected for every sector in the short term and for a medium-term period to be agreed
(3-5 years or more). If possible supported by input-output tables or sector weighing factors determine the projection of damages of one sector to the others. A damage scenario is built (taking into account the measured losses at replacement value): variations in the main economic gaps are highlighted: external
sector, fiscal deficit, internal equilibrium (prices, exchange rate, etc.)
The sequence of disaster valuation begins by understanding precisely the concepts of direct damages (Impact on assets, Infrastructure, Capital and Stocks which occur immediately during or after the phenomenon that caused the disaster) and the indirect effects flows and production (Reduced income and
increased expenses, business losses, etc.) which are perceived after the phenomenon, for a time-period that can last from weeks to months, till recuperation occurs.
The methodology is based on measuring the damage “delta” or damage gap (D = Va – Vb), where Va is the initial condition expected for a variable (sectoral, weighed) and Vb is the discounted effect of the disaster. Capital losses may be expressed as K = Ka – Kb, which is obtained by compiling direct damages
computed sector by sector. Similarly DY = Ya – Yb measures the production/income losses. In short, sudden disasters the capital/income-production ratio is generally assumed not to vary substantively as a result of the disaster. On the basis of evaluations conducted over the years, it is consider that, particularly
in developing or small economies disasters have a “perverse effect” on gross capital formation, which may be aggravated by the cumulative effect of successive disasters.
To determine that gap or “delta” it is necessary first to identify the core development factors of the economy, determine the main characteristics at the time of the disaster: face of the economic cycle, seasonal elements, indebtedness level, domestic savings, FDI flows, etc. This requires
access to the macroeconomic data bases from national authorities, academic analysts and/or consultants and advisors in the country. It is useful to identify existing econometric models for the local economy and other instruments such as input-output tables when they are available or determine weighing factors
that indicate inter-sectoral linkages. These instruments and data will acknowledge the expected or projected outcome in the absence of disaster as perceived by government, academics and/or advisors and private consultants. It is common that at one point in time there alternative scenarios or short and medium
term projections before the disaster. Also required is to build a price table at current value for the disaster period with at least five year projections. There may have been more than one pre-disaster scenario for the main economic variables.
With the previous analysis the valuation proceeds to build a constant-value (real magnitude) series for the main variables (using the country’s base year, either in local currency or US dollars), establish the rate of exchange that will be used for the valuation.
Determination of damage is done sector by sector, which are usually organized in three groups: as part of the social sectors are included housing, health, education, culture, and sports facilities. Under the heading of infrastructure are included transport and communications, energy, and water and sewerage. As
productive sectors normally are included sectors of goods (agriculture, industry, mining, forestry, fishing, etc.) and services (commerce, tourism, finance and banking, insurance, etc.). As part of the assessment of the global impact it is proposed to assess the impact on the environment and conduct an
assessment with the gender perspective, even though national account systems do not usually allow for these. Additionally to determine the impact on welfare variations on employment should be looked into as well as trying to quantify effects on other social conditions, including the psychological impact on the
affected population. In terms of welfare impact issues of special relevance would be food and nutritional conditions and migration.
There are sector-specific valuation problems that arise given the nature of the sector analyzed or the quality of information available and how the sector is reflected in the statistical and information system of the country or unit analyzed. As in the case of sectors like tourism or losses to the environment, or the
gender perspective, the normal accounting system is insufficient to provide a good value of preexisting conditions and thus, damage becomes harder to estimate. The methodology provides, in these cases, specific tools to approach losses in these cases.
Quick rules of thumb that allow to check the consistency in the macroeconomic data are to use fiscal statistics to estimate government consumption in the national accounts; to review data on exports and imports from the national accounts to make it compatible with the balance of payments; to check the quality
of the investment data; to compare the growth of nominal GDP with the rate of growth of financial assets; to compare consumption and receipts from domestic taxes; and finally to compare GDP growth and imports.
The assessment report normally includes an introduction with a brief description of the phenomenon's characteristics and the magnitude of its impact. The macroeconomist also plays an important role in the preparation of the introduction.
The overall assessment should show the net results, i.e. the difference between the negative and positive effects. A recovery in the construction sector, for example, is a phenomenon that is noticed relatively soon and that can, to some extent, counteract the fall in the levels of activity forecast for most production
sectors.
The macroeconomic analysis may be called by several names: e.g. 'Effects on economic development' or 'the phenomenon's repercussions on the economy'. To these may be added, where appropriate, the expression 'in the short term' or 'or in the medium and short term' depending on how far into the future the
effects of the disaster are projected. As indicated, such projections are generally limited to a maximum period of five years, although destroyed urban service infrastructure, farmland, woodland, and environment can take longer to replace. Similarly, the investments needed to replace production capacity and
certain plantations can take more than five years to mature. This should be reflected in the report.
It is necessary to analyze trends in the external sector's main aggregates, i.e. exports, imports, external financing, levels of international reserves, and external debts. Trends in the prices and supply of the chief export products must also be taken into account when projecting the level of exports prior to the
disaster. The estimated cost of servicing the debt is another important element, since the viability of making payments must be considered in the light of new post-disaster financial conditions and requirements.
It is strongly suggested to use several future scenarios. The first scenario (quantification and impact of the event without taking later reconstruction activities into account) serves as a basis for alternative reconstruction scenarios. In these scenarios, what will be taken into account are not replacement values, but
reconstruction costs, the emergency reconstruction priorities sector by sector, and the reconstruction strategies that begin to emerge in the weeks following the disaster.
The different scenarios should specify the assumptions made about two core elements: the economy's capacity to absorb external resources and its project delivery capacity. These scenarios should also include assessments of the way that key economic variables will behave in the event of a significant increase
or diversion of resources for reconstruction: interest rates, debt capacity, availability of production inputs and means (raw materials, capital goods, internal savings, labor, etc.)
The effect on income refers to connections that might be established with the impact on employment. This is extremely important for calculating the impact of a disaster that slows or closes down income generating activities. The estimate of the impact on income also includes an assessment of the disaster's
effect on inflation and the available sources of supply. The calculation of the effects on the population's income is another way of analyzing the problem of the disaster's consequences on the level of activity (and for that reason it should not, of course, be added to them). It is sometimes useful to singularize
effects when they impact a defined stratum of the population (especially the lowest deciles), in order to facilitate the design of reconstruction-related occupational absorption programmes, whether in rural or urban areas. Clearly, these assessments will be closely related to those made about the disaster's effects
on employment. These phenomena sometimes affect the population's real income if inflexible supply, caused by temporary interruption to the supply channels, makes inflation worse.
It has already been mentioned that the models to be used will preferably be those used by analysts in the country. Examples will now be given of two generic models that appear in the literature on the subject, and the necessary measurement tools will be supplied: those which adaptations of the models
implemented in each case should have.
The behavior of investment deserves a separate discussion. The effects on investment are not clear from the damage assessment itself; they will vary according the availability and quality (amount, terms and conditions, internal/external mix and public/private participation) of resources for the reconstruction
process. The use of models allows for the introduction of different scenarios and constraints. In Appendix B two models are summarily described as an illustration of how they can be useful for measuring the short and medium term impact and assist in designing the reconstruction strategies.
Models are alternative methods that macroeconomists can use to process and analyze the information received from the sectoral specialists and the country's economic authorities. In any case, past experience of disaster assessments suggests that estimates of impact on GDP and on the GDP growth rate are
made by positing different scenarios, not just one unvarying course of action. It should be remembered that estimates of impact on the GDP growth rate made using the input-output matrix and the GOV and VA ratios are only approximations of reality and that in practice many countries in the region lack an up-todate or relatively recent input-output matrix. Therefore, estimates made using this instrument can be unreliable or fail to reflect the magnitude of sectoral impacts.
From the point of view of macroeconomic policy, the key question is: How much money does the government need to finance the reconstruction costs and how quickly can it obtain it while remaining within the framework of sustainable fiscal policy? At this point in the assessment it is important to identify the
'underlying public sector deficit', i.e. the deficit excluding reconstruction costs. The next step is to determine how the underlying deficit was expected to be financed: e.g. by loans from multilateral institutions, by issuing bonds, or both. If loans are obtained, information on the maturity and grace periods, and
interest rate (generally expressed in terms of LIBOR rates plus x basis points) should be obtained from the country's authorities, and a medium and long-term debt plan be drawn up. Once this information has been obtained, two scenario modes can be proposed:
a.
According to 'probable' financing structure and
b.
According to an occurrence probability associated with each financing structure.
With the first mode, there can be as many scenarios as there are financing structures defined. To simplify matters, no more than three scenarios should be used, each one set out in roughly the following way:
Scenario A ('pessimistic'): this assumes that the government contracts loans for the amount needed to repair the damage and pay the estimated replacement costs over a period of several years (e.g. five) without overheating the economy or throwing the system out of balance. The related expenditure is also
distributed over the same period because of the limits on the economy's absorptive capacity. It is assumed that the loans will have a long-term maturity period (e.g. 20 years), several (e.g. 5) years of grace, and a rate of interest equivalent to LIBOR plus a moderate number of basis points (e.g. 150).
Scenario B ('probable') this assumes that the government contracts loans for the amount needed to repair the damage and pay the estimated replacement costs over the same period (the five years suggested as an example). The disbursements of the loans contracted at the end of the disaster year are paid on the
same terms as in Scenario A, but it is assumed that the financing is raised by issuing special disaster bonds with a longer maturity period (e.g. 7 years) and an interest rate of LIBOR plus a sufficient number of basis points (e.g. 280) to make it a sufficiently attractive investment.
Scenario C ('optimistic'): This assumes that the government borrows more money in order to improve and strengthen the infrastructure of the affected area by incorporating vulnerability reduction programmes in the reconstruction process. The loans are contracted on same terms as in Scenario A.
With the second mode, each scenario is associated with a probability distribution that, as in the preceding mode, can be distinguished by the occurrence probability allocated to the three scenarios. An occurrence probability of 50 percent is assumed for the 'probable' scenario and 25 percent each for the
'pessimistic' and 'optimistic' scenarios.
In every case, it is important to check whether the reconstruction expenditure is expected to create faster economic growth, especially if it is assumed that a good part of the additional expenditure will be reflected in the volume of imports. In short, projections be made for the planned reconstruction period based
on the total underlying deficit:
Total underlying deficit = net financing need plus debt amortization = gross financing need minus disbursements of existing debt = fiscal financing gap
The above information can be used to make a 'sensitivity analysis' by distinguishing between the overall fiscal deficit in each of the proposed scenarios and the underlying position. The analysis can be extended to include public debt and debt servicing, the financial gap, and the balance of payments.
ORGANIZATION OR PROCEDURAL ASPECTS OF ASSESSMENT EXERCISES
A disaster evaluation exercise must be seen as distinct from an emergency needs assessment. Although both are rapid assessments (the window of opportunity for the initiation of the reconstruction process is limited by it visibility within the wider community and the satisfaction of the needs of the primary and
secondary affected population), the disaster assessment is focused on providing tools for the reconstruction process. It requires a different, complementary, set of data. It certainly builds on the emergency needs but probes deeper. Thus, it cannot be undertaken simultaneously with the emergency response
phase. An evaluation of damage to the roads, for example, cannot be made while they are still flooded and covered by water.
The assessment is done sectorally, thus requires a team that comprises experts on all the relevant sectors who will act in coordination, sharing the same basic valuation criteria as adapted to each sector’s specificity and information availability. The interaction among the sector experts, the generalists,
macroeconomist and study coordinator should allow for a full coverage (no lapses, valuation gaps or omissions) while ensuring that no duplication occurs when the summation of direct and indirect damages. Sectoral evaluations permit the appropriate consideration and visibility of damages in all areas, sectors
and groups affected while the summation of damages allocates damage to the relevant sectors without duplication. Judgement calls by the specialist and the coordinator are made in consultation and specific allocation of damages are to be made in away that will allow for proper information to be available for
resource allocation in the reconstruction / mitigation process as well as policy formulation in terms of risk management also in a disaggregated form (by sector, location or social group.
The valuation team comprises both sectoral experts, generalists and macroeconomists, interacting with relevant local stakeholders that range from government officials (from the local to the central government or federal level), economic sector’s representatives, social group’s
organizations, non-governmental organizations, and researchers and analysts from the academic institutions.
Summary of basic concepts
Direct and Indirect effects
Valuation methods
The damage “delta” or the gap caused in performance by the disaster
Sector by sector evaluation of losses, damage and indirect effects
Summation of damage in a non duplicative way
Valuation of impacts not present in the national accounting system (environment, gender, psychological impacts)
Short and medium term effect on the performance of the economy
Modeling alternative scenarios