Thursday, December 17, 2015

Valuing HydroMet Services

By Roxana Manea

Hydro-Meteorological services have the potential to provide a significant value to our society, our economy and our overall well-being. A recent CRED-UNISDR publication provides clear evidence of the crippling consequences of floods, storms, droughts and the like. Against the background of increasingly frequent weather- and climate-related hazards, as well as changing climate patterns and increasing populations, the value of HydroMet services is on the rise and in order to attach a monetary value to these services, proper benchmarking mechanisms are needed.

One of the main objectives outlined by the CIRDA Programme is to increase domestic finance for HydroMet services. This can be achieved through an enhanced product offering, improved quality and fidelity of climate information services, and, of course, increased allocation of public resources. In order to substantiate a claim for increased funds, an assessment of the value of climate and weather information products and services produced by the NMHS is crucial. Not just their value to the private industry, such as banking, insurance and mining, but also their value to the society as a whole.

A recent WMO publication (No. 1153) discusses the evaluation of socioeconomic benefits (SEB) and describes cost-benefit analyses for HydroMet services. The publication is meant to help National Meteorological and Hydrological Services (NMHS) develop a basic understanding of economic valuation methods and enable them to design and commission similar SEB studies.

As we move to implement the new global commitments on sustainable development, climate change adaptation and disaster risk reduction, interest in SEB studies for HydroMet services will continue to grow, as shown by the WMO publication. SEB studies can therefore be used strategically, as a method to prove the value of HydroMet services, argue in favour of their expansion and modernization and ultimately inform better decisions. For instance, NMHS improvements to reduce disaster losses in developing countries have benefit-cost ratios that range from 4 to 1 to 36 to 1.

The costs and benefits of HydroMet services
as a function of the volume and level
(including quality) of the services provided.
The greatest excess of benefits over costs
is achieved at Q*. See Chapter 5 and Appendix B. Source: WMO.

In what follows, a summary of the main takeaways offered by this publication is presented:

·     Chapter 1 offers a brief introduction and except for some dozen examples of cost-benefit ratios, chances are that you already possess the information. Therefore, just have a quick look at table 1.1 on pages 8-9.

·     Chapter 3 describes the ways in which SEB studies can validate NMHS missions, justify their resource allocations (and re-allocations), demonstrate their value in key sectors and boost claims for increased funding. The publication underlines that the evaluation of HydroMet services should not be seen as a one-off project, but as an ongoing development and delivery of services. See box 3.1 on page 26 for quick advice on targeting SEB analyses to the audience. Complement it with sections 3.3.1 and 3.3.2, pages 27-28. Moreover, see boxes 3.2 and 3.3 on pages 30-31 for examples of analyses that have validated HydroMet services and box 3.4 on page 32 for an introduction to how SEB analyses can justify investments in HydroMet services.

·     Chapter 4 details the process of framing and commissioning an analysis and it assumes that few NMHSs will have the capacity to prepare in-house SEB studies. See figure 4.1 on page 36 for a graphical representation of the five stages needed to design and commission SEB studies. See box 4.1 on page 37 to consult the contents of an SEB concept note – stage one. See the first paragraph of section 4.3, page 39, which enumerates the components of the scope of work – stage two. One of its subcomponents is the SEB plan and figure 4.2, page 40, presents the plan’s ten steps - further developed in table 4.2, page 41. For stage three, commissioning the study, it is noted that even if the agency or department has in-house economic expertise, it may still be better to contract an independent organization to emphasize impartiality and/or enhance the credibility of the study. Skip the description of stage four, conducting the study, which is pretty straight-forward. For the fifth and final stage, communication of results, you may want to have a look at box 4.3 on page 45.

·  Chapter 5 is focused on economic concepts. Read section 5.3, pages 48-49, to understand costs and benefits from an economics point of view. Since HydroMet services are public goods, benefits increase with the number of users, while the cost of production remains constant. In other words, HydroMet services become less costly on a per-user basis when the service is offered to a greater number of users. Check section 5.6, pages 51-53, for a discussion on the value of money over time and also spend some time on section 5.7, pages 53-54, to see how SEB studies deal with uncertainty and risk.

·    Chapter 6 provides guidance on the assessment of benefits. See box 6.2, page 57, for some considerations in framing the benefits’ analysis and table 6.1, page 60, for several examples of HydroMet-associated types of benefits. Make sure to consult table 6.2 on pages 64-65 because it provides an overview of the methods that can be used to value HydroMet services. Each of these methods is thereafter explored in sections 6.5.1 – 6.5.4, which make for very interesting reading.

·     Chapter 7 explains concepts and methodologies used to define and measure costs. If you have experience in preparing budgets, this chapter contains familiar information. Nevertheless, read section 7.3, pages 82-84, for a discussion on the identification of costs and section 7.4, pages 86-87, for advice on screening costs according to the purpose of the study. Lastly, section 7.6, page 94, offers advice on the treatment of costs that cannot be quantified.

·   Chapter 8 describes the methods that are used to compare benefits and costs and explains how discounting and aggregation work. If you are interested in knowing the range of discount rates, read section 8.2.2, pages 97-99. Section 8.3.1, pages 99-103, describes the computation of the net present value and table 8.1 gives an example on page 101. Section 8.3.2, page 103, briefly deals with the reporting of benefits and costs that have not been quantified. The publication emphasizes the need to describe possible biases, their potential impact and the assumptions underlying the evaluation of benefits. In connection to this, section 8.5, pages 105-108, discusses the importance of sensitivity analyses.

·    Chapter 9 covers the communication of results, the range of audiences and the types of messages to be delivered. You may be interested in reading section 9.6, pages 118-119, which is about distribution channels, and section 9.7, pages 119-121, on targeted audiences.

·    In connection to chapter 10, read sections 10.1.2, pages 125-126, and 10.1.3, pages 126-127. The latter highlights the value of open-data and open-access approaches.

The information provided in appendices A-D is not essential for a quick skimming of the publication. However, I would recommend you checking appendix E for examples of SEB studies. Table E.1, page 198, offers a good summary.

Bonne lecture!

Roxana Manea collaborates with CIRDA as a Project Analyst. She has previously worked on issues linked to climate change adaptation and common-pool resources. Roxana graduated in 2014 with a master’s degree in international economics that focused on environmental and development issues. In addition, she holds an MSc in audit and a BSc in finance.

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