Evaluating project costs and benefits

Environmental and Social Impact Assessments (ESIAs) look at the impacts of proposed projects, and there is often a tendency to focus narrowly on adverse biophysical impacts. But projects have benefits too, particularly economic benefits, and few competent professionals have the expertise to identify and assess benefits. Since 2005, SRK consultants in Cape Town have managed Economic Impact Assessments (EcIAs) to inform ESIAs. EcIAs examine the microeconomic and macroeconomic impacts of a project, considering payment of taxes, royalties and wages, procurement and employment. These direct impacts create larger ripple effects in the economy through added employment, through service providers (indirect effects) and downstream expenditure on goods and services (induced effects). Quantifying indirect and induced effects can demonstrate the hidden value of projects, but it is a challenge. SRK employs input-output models or Social Accounting Matrices (SAM) to derive multipliers and quantify economic benefits. For example, we estimated that direct investment in a coal mine in Limpopo Province, South Africa, would indirectly contribute a further 20% of the investment to national GDP, while indirect employment generated by the project would equal the number of people directly employed at the mine.

Aside from benefits, projects can also have negative impacts on the economy if they jeopardise existing businesses. Cost Benefit Analysis (CBA) provides a tool to determine the net economic effect of a project and helps to identify whether it has a net positive effect, and then identify the most cost-effective option. SRK recently used CBA to help a cash-strapped municipality in the Western Cape, South Africa, prioritise spending on coastal management by comparing the value of environmental benefits to the financial cost of the measures.

Similarly, SRK’s economists quantify the “free” natural resources affected by a project. Also referred to as ecosystem goods and services, natural resources have a tangible but often neglected economic value. Quantitative valuation methods, such as replacement cost and contingent valuation, can translate the value of environmental resources in financial terms. This is becoming increasingly important for projects that emit carbon and/or limit carbon sequestration, with regulators and lenders expecting such accounting. For a large mining project in a tropical environment where it was projected that thousands of hectares of pristine rainforest would be stripped, it was estimated the social cost of additional carbon released to the atmosphere was ~15% of standard project benefits (e.g. balance of trade contribution, taxes, royalties, payroll, etc.). The EcIA also determined the value or opportunity cost of lost forest products, estimated at over half of projected mine income. “Monetising” environmental goods and services that might be lost as a result of a project has its critics but allows a fairer comparison of project costs and benefits and helps to facilitate sustainable development. 

Matthew Law: mlaw@srk.co.za
Sue Reuther: sreuther@srk.co.za

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