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Making the business case:classic challenges and new horizons

Ian Gambles(Director, Forestry Commission England)

(Author, “Making the Business Case”)

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What I’ll be talking about

• A few key forest facts

• Old problems

• New horizons

• Staying relevant

• Questions and discussion

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Forest facts

• Forestry Commission manages the public forest estate in England on behalf of the Secretary of State

• 250,000 hectares - 2% of the land area

• More than 25% SSSI

• 40 million visitors each year

• Cost to taxpayer c.£20m

• Timber and visitor income c.£50m

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Classic challenges

• Selection of familiar problems– Important issues in their own right– Raise wider questions of relevance

• Negative NPV

• Future costs

• Decision momentum

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Negative NPV

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Negative NPV?

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Negative NPVs – key points

• Some things just have to be done

• Never appraise against a static background

• Non-monetary benefits can outweigh a negative NPV – eg social capital

• To ignore or to manipulate – is that the question?

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Future costs - predictable

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Future costs - unpredictable

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Future costs – hard to quantify

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Future costs – key points

• Business case must consider:– Operating costs– Decommissioning costs– Risk-adjusted future costs

• Neglecting future costs will:– Pass costs on to future years or generations– Restrict the choices of future decision makers

• But should they change the decision?

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Decision momentum

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Decision momentum

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Decision momentum – key points

• Sometimes the business case is irrelevant to the main decision

• Shun the post hoc business case

• Find the decision not yet made and the factors which can and should shape it

• But does that push the business case into the margins?

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Casting about for relevance?

• Are we wasting our time?

• Is decision making in reality so irrational that all our rigorous calculations are beside the point?

We must continually strive for relevance, innovate, and reflect changing ideas

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New horizons – Natural Capital

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What is natural capital?

• Natural capital refers to the elements of nature that produce value to people, such as the stock of forests, water, land, minerals and oceans.

• These benefit us in many ways, by providing us with food, clean air, wildlife, energy, wood, recreation and protection from hazards.

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Stocks, flows and benefits

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This is no longer a sideshow

• Natural Capital Committee – independent advisor to Government

• Office of National Statistics - Roadmap for development of Natural Capital Accounts published December 2012

• Defra - formal environmental accounts to be complete before 2020.

• United Nations - the UN System of Environmental-Economic Accounting (SEEA) sets the relevant International Standard

• Increasing relevance in corporate reporting

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Role of Environmental Accounts

• To quantify the value of benefits flowing from the natural capital that we have in order to inform and prioritise investment in its protection and enhancement

• To extend economic accounts to include environmental considerations, specifically to include depletion of non market natural capital assets (and to quantify any expenditure needed for maintenance and/or restoration).

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Impact on the business case

• Challenges the definition of capital

• Gives structure to a vast category of non-monetary benefits

• Helps to identify future costs

• Provides a language for factors which will – and should – increasingly influence decisions

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NCC example: where to plant woods

• Hypothesis: 250,000ha of new woodland in GB

• Scenario A: chosen to optimise market values only

• Annual cost to taxpayer: £134m

• Non-market benefits: £68m

• So annual net social value = (£66m)

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NCC example: where to plant woods

• Hypothesis: 250,000ha of new woodland in GB

• Scenario B: chosen to optimise social value

• Annual cost to taxpayer: £287m

• Non-market benefits: £833m

• So annual net social value = £546m

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A rather different decision!

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Piloting PES in the public forest• How much should the Public Forest Estate cost?

• By investing in our natural capital, we generate many ecosystem services. Just a few examples:

– Restoring Ancient Woodland– Creating and maintaining Open Habitat– Promoting biodiversity and species conservation– Providing community woodland– Improving water quality and mitigating floods

• These services produce benefits, but not income. Indeed they can displace income generating activity.

• Do they belong in a business case? Who should pay for them?

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Staying relevant

• The business case is a tool for decision makers

• Analysing the impacts of decisions matters – even if actual decisions differ

• If a factor is important to decision makers, and to the economy and society within which they operate, it belongs in the business case

• Keep your tools sharp!

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Sources

• The following sources are acknowledged. Anyone wishing to reproduce text or images from these sources is responsible for checking and respecting copyright:

– Slides 5, 8, 9, 13 – Forestry Commission– Slide 6 – Library of Birmingham– Slide 10 – Guardian News and Media Ltd– Slide 12 – Scottish Parliamentary Corporate Body– Slides 16-18, 22-24 – Natural Capital Committee

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