5. Stage three: compare and select
5.1 Transparent decision-making
Decisions that lead to sustainable actions will come from considering the economic, environmental, social and technical issues that affect the choice of the solution, together with proper consideration of risk and uncertainty. By balancing these issues, the most viable solution should be identified. Whatever the decision (do something new, sustain existing, change existing or do-nothing) it must be made in a clear, justifiable and transparent manner based on sufficient information, such that it can be understood by, if not accepted by, those affected.
Flood risk management has to compete with other areas of public expenditure, and individual projects may need to compete for funding with other possible flood management interventions. It is therefore important that the selection of the preferred option is informed by an appraisal that captures all relevant impacts and uncertainties that could affect the choice of option.
Uncertainties will exist at all stages of appraisal and these should be clearly presented in all appraisals. Section 1 of Delivering Sustainable Flood Risk Management provides more information on managing uncertainty.
Projects and strategies are only economically worthwhile if the benefits exceed the costs (the ratio of benefits to costs is greater than one). This should not to be confused with the affordability of an option. Affordability is a separate matter relating to availability of funds; although in developing plans, strategies and projects, SEPA and the responsible authorities will clearly need to consider affordability and potential sources of funding.
The goal of investment in flood risk management is to maximise the total value of interventions in a sustainable manner whilst achieving any targets that may be set for the plan or programme as a whole. Cost-benefit analysis will provide important information to support this goal. However, decision making should be balanced and should make use of an appropriate combination of approaches, including multi-criteria approaches or other similar or relevant methods, to arrive at a preferred option, and not necessarily depend on a single metric.
5.2 Tools to support selection of preferred options
The following types of analysis should be used as appropriate to compare and support theselection of the preferred option.
If all significant impacts of options are satisfactorily expressed in monetary terms, the option with the highest benefit-cost ratio will usually be the most appropriate choice. Appraisal summary tables should still be used in such cases to add to the transparency of the decision making process (for example, to illustrate which impacts have been taken into account and how they have been described and valued in the cost-benefit analysis).
There will however be cases where it is not practical or possible to assign monetary values to all significant impacts for a cost-benefit analysis. In such cases, multi-criteria approaches, which can include weighting and scoring, should be used to complement, or as an alternative to, the cost-benefit analysis.
When using cost-benefit analysis and multi-criteria approaches together in appraisal, it is important to ensure that they are robustly and consistently applied in order to: avoid double counting; make appropriate and consistent use of discounting; and ensure a common baseline.
Cost-effectiveness analysis may be used to identify the lowest cost way of achieving a pre-set objective. It is likely to be used in a limited number of situations, for example, where:
- there is a legal requirement to achieve a certain outcome and that outcome cannot be met through a project with a positive benefit-cost ratio; or
- an option has been justified through the normal appraisal process and an intervention (such as investment in a like-for-like replacement of a sluice gate) is necessary to continue to deliver that option.
Monetised and non-monetised impacts still need to be taken into account in determining the options with least negative impacts (or lowest cost).
Incremental benefit-cost ratio
The incremental benefit-cost ratio may be used in the decision process. A key principle should be to retain a full understanding of the opportunity cost (where there is, at least, an extra pound of benefit for each additional pound of cost); and then ask whether greater benefits could be gained by investing the additional resources in an alternative project in another geographical area, for instance a project that delivers multiple objectives.
Thus, there may be a justifiable case for selecting a project which would provide a higher level of protection than that offered by the option with the highest benefit-cost ratio, providing that the overall ratio is adequate to represent good value for money, when compared with other investments. The Scottish Government will monitor and respond to any future need for guidance on such decision rules.
Where the decision process leads to a preferred option that is not the optimum in monetised benefit/cost terms, this should be clearly indicated in the appraisal report and a rationale given. In all cases, the distribution of the costs and benefits amongst different groups should be transparent.