1.1 This document provides guidance for Scottish local authorities on the economic, social and environmental aspects of project appraisal for flood protection schemes promoted under the Flood Risk Management (Scotland) Act 2009. It identifies methods for valuing positive and negative impacts in monetary terms and recommends a decision process, based on the principles of sustainable flood risk management ( Delivering Sustainable Flood Risk Management - Statutory guidance (reference 1) and Principles of Appraisal: a policy statement (reference 2) and consistent with the HM Treasury Green Book (reference 3). Good practice recommendations are shown in bold text.
1.2 The guidance assumes that the reader has prior knowledge of general cost-benefit analysis techniques, and should be read in conjunction with Chapter 6 (Approaches to Risk). It is not intended to be followed mechanically, or to cover every possible eventuality. Appropriate specialist advice should be sought as necessary for the cost-benefit analyses of all schemes.
1.3 Unless otherwise stated, references in this chapter to economic values, whether in terms of costs, losses or benefits, assume that all components of economic value are taken into account. Such components can include social and environmental values ( Annex B).
1.4 The document provides guidance that is consistent with the Scottish Government's aims of delivering sustainable flood risk management. It is a revised version of Flood Protection Schemes: Guidance for Local Authorities - Chapter 5: Economic Analysis (published by the Scottish Government in 2005), which has been updated to provide interim guidance for local authorities. The intention is to replace this document in future with guidance on appraisal for the whole of the flood risk management planning process.
1.5 The recommended approach is appraisal-led design. That is, the whole process of option development, refinement and choice should be carried out within a logical appraisal framework (fig. 1.1). Ideally, this should entail working from strategic assessments through to appraisal of the options for a particular project.
1.6 The key to application of cost-benefit analysis to flood protection schemes is the management of risks. Such schemes reduce the probability or severity of future flood damage, compared to the pre-scheme situation. This change in probability may vary over time; for example, as an embankment erodes. No scheme can eliminate the possibility of flooding, and there can be no certainty about the timing of the next damaging event. Further discussion of issues related to the definition and evaluation of risk can be found in Chapter 6 of the Scottish Government's Flood Protection Schemes: Guidance for Local Authorities.
Figure 1.1 Main stages in investment appraisal
1.7 Cost-benefit analysis is a useful tool for determining the most appropriate strategic approach, deciding whether it is worthwhile to undertake a scheme, and identifying and comparing scheme options. It should not be viewed as a hurdle. The analysis should stimulate the development of alternative solutions by clarifying the consequences of all options. Well-designed, it should ensure that schemes undertaken represent the best value for money, and that uneconomic schemes are identified at an early stage.
1.8 The design process is cyclic and iterative. It involves exploring the problem, generating the 'do something' options, and refining the selection progressively. This approach should also be applied to the cost-benefit analysis, to aid and guide the design towards the best solution.
1.9 It should be emphasised that the aim of cost-benefit analysis is to provide a transparent and inclusive approach to decision-making which, as far as possible, takes all relevant factors into account. It involves comparison of options in terms of a single criterion: economic efficiency. However, the selection of sustainable flood risk management actions will require that the full range of impacts (economic, environmental, social (including human health and cultural heritage) are considered in an equitable manner. Some of these impacts may not be readily valued in monetary terms and others, which for various reasons, may not be given their full weight in the analysis: these impacts should always be described, quantified and brought into the appraisal through appraisal summary tables. Understanding these impacts is critical to selecting sustainable actions and they should not be ignored simply because they are difficult to quantify or value on monetary terms.
1.10 The goal of investment appraisal is to maximise the total value of interventions in a sustainable manner whilst achieving the objectives set out for the scheme. The appraisal process should aim to achieve the following goals:
- Best use of public money - Demands for public funding always exceed the money available. It is therefore necessary to aim for economic efficiency in the investments that are made. This is achieved when the total of all forms of benefit is maximised relative to the resources used. The analysis should not be limited to the consideration of priced benefits and resources. It should, where appropriate, include unpriced benefits, such as the enjoyment gained from walks by a river, as well as the unpriced costs incurred, such as nuisance during construction.
- Sustainability - A sustainable scheme will take full account of economic, environmental and social priorities, and protect and enhance our natural and built environment for ourselves and for future generations. The scheme must be developed with consideration of catchment processes and characteristics, making all reasonable and practical efforts to enhance the (urban and rural) landscapes natural ability to slow and store flood water. A sustainable scheme should take account of interactions with other interventions in the catchment, and should avoid as far as possible tying future generations into inflexible and expensive options.
- Accountability - A formal process of project appraisal can demonstrate that a wide range of different options has been considered transparently, and that the advantages and disadvantages of each have been properly considered. Appraisals also create an effective audit trail of decision-making.
- Quality assurance - Good quality appraisals save time and money by early rejection of unrealistic options; they increase certainty and confidence in the final outcome.