Benefit Cost Analysis for Flood Hazard Mitigation: The
Federal Emergency Management Agency (FEMA)
Method
(selected excerpts from FEMA EMI Training Course)
FEMA does benefit-cost FEMA does benefit-cost analysis to . . .analysis to . . .
Meet the statutory eligibility requirement.Meet the statutory eligibility requirement.
Determine whether or not a project is worth doing.Determine whether or not a project is worth doing.
Have a common basis on which to compare projects.Have a common basis on which to compare projects.
Show that mitigation works.Show that mitigation works.
Section 404 (a) of the Stafford Section 404 (a) of the Stafford Act:Act:
““The President may contribute up to 75% The President may contribute up to 75% of the cost of hazard mitigation of the cost of hazard mitigation measures which the President has measures which the President has determined are determined are cost-effectivecost-effective and which and which substantially reduce the risk of future substantially reduce the risk of future damage, hardship, loss or suffering in damage, hardship, loss or suffering in any area affected by a major disaster.”any area affected by a major disaster.”
44 CFR Part 206 Section 44 CFR Part 206 Section 206.434 (b) (5) (ii) 206.434 (b) (5) (ii)
““The Grantee must demonstrate (that the The Grantee must demonstrate (that the project is cost effective) by documenting that project is cost effective) by documenting that the project…will not cost more than the the project…will not cost more than the anticipated value of the reduction in both anticipated value of the reduction in both direct damages and subsequent negative direct damages and subsequent negative impacts to the area if future disasters were to impacts to the area if future disasters were to occur. Both costs and benefits will be occur. Both costs and benefits will be computed on a net present value basis.”computed on a net present value basis.”
TRUE or FALSE?TRUE or FALSE?
““All well-designed mitigation All well-designed mitigation projects reduce future projects reduce future damages and losses.”damages and losses.”
TRUETRUE or FALSE? or FALSE?
““All well-designed mitigation All well-designed mitigation projects reduce future projects reduce future damages and losses.”damages and losses.”
TRUE or FALSE?TRUE or FALSE?
““All well-designed mitigation All well-designed mitigation projects reduce future damages projects reduce future damages and losses and thus all are and losses and thus all are cost-effective projects.”cost-effective projects.”
TRUE or TRUE or FALSEFALSE??
““All well-designed mitigation All well-designed mitigation projects reduce future damages projects reduce future damages and losses and thus all are and losses and thus all are cost-effective projects.”cost-effective projects.”
Is It Worth $1 Million To . . .?Is It Worth $1 Million To . . .?
1.1. Protect one doghouse Protect one doghouse or one outhouse?or one outhouse?
2.2. Protect one house that Protect one house that floods infrequently?floods infrequently?
3.3. Protect a flood-prone Protect a flood-prone hospital, city hall, hospital, city hall, school, and other school, and other important buildings?important buildings?
4.4. Protect 150 flood-Protect 150 flood-prone houses?prone houses?
Probably Probably
Not
Is It Worth $1 Million To . . .?Is It Worth $1 Million To . . .?
Probably Probably
Not1.1. Protect one doghouse Protect one doghouse or one outhouse?or one outhouse?
2.2. Protect one house that Protect one house that floods infrequently?floods infrequently?
3.3. Protect a flood-prone Protect a flood-prone hospital, city hall, hospital, city hall, school, and other school, and other important buildings?important buildings?
4.4. Protect 150 flood-Protect 150 flood-prone houses?prone houses?
Flood Hazard and Flood RiskFlood Hazard and Flood Risk
x =FLOOD HAZARD
(FREQUENCY & SEVERITY)
FLOOD HAZARD
(FREQUENCY & SEVERITY)
Probability Probability of Damaging of Damaging FloodsFloods
PROPERTYEXPOSED
TO FLOODS
PROPERTYEXPOSED
TO FLOODS
Value and Value and Vulnerability Vulnerability of Property of Property Exposed Exposed to Flood to Flood HazardHazard
FLOODRISK
(DOLLARS)
FLOODRISK
(DOLLARS)
Severity Severity of Threatof Threatto the Builtto the BuiltEnvironmenEnvironmentt
MitigationMitigation
Mitigation is an action taken Mitigation is an action taken
specifically to eliminate or reduce specifically to eliminate or reduce
the potential for the potential for FUTUREFUTURE
damages and losses from the damages and losses from the
hazard being addressed.hazard being addressed.
Cost-EffectiveCost-Effective
Cost-effective means: Cost-effective means:
The benefits of a hazard mitigation project The benefits of a hazard mitigation project exceed the costs, or exceed the costs, or
The benefit-cost ratio is greater than one.The benefit-cost ratio is greater than one.
The Benefit-Cost Model The Benefit-Cost Model “Model” vs. “Modules”“Model” vs. “Modules”
TheThe MODELMODEL is theis the MATHMATH..The economic theory, hazard and risk assessment The economic theory, hazard and risk assessment methods, and mathematical formulas on which FEMA methods, and mathematical formulas on which FEMA bases the benefit-cost analysis of hazard mitigation bases the benefit-cost analysis of hazard mitigation projects.projects.
TheThe MODULESMODULES are theare the SOFTWARESOFTWARE..FEMA’s software programs for conducting benefit-cost FEMA’s software programs for conducting benefit-cost analysis. The benefit-cost modules are based on the analysis. The benefit-cost modules are based on the benefit-cost model.benefit-cost model.
The Benefit-Cost ModelThe Benefit-Cost Model
BB EE NN EE FF II TT SS
CC OO SS TT SS== BC R BC R AA TT II OO
Mitigation Project Benefits:Mitigation Project Benefits:DefinitionDefinition
BB EE NN EE FF II TT SS
The expected avoided damages and The expected avoided damages and losses over the lifetime of the mitigation losses over the lifetime of the mitigation project.project.
Project BenefitsProject BenefitsDirect Damages and Losses AvoidedDirect Damages and Losses Avoided
Damages to buildings and other facilities Damages to buildings and other facilities such as infrastructuresuch as infrastructure
Damages to contentsDamages to contents
Loss of function costsLoss of function costs
CasualtiesCasualties
Emergency management costsEmergency management costs
Project BenefitsProject BenefitsIndirect Damages Indirect Damages NOTNOT Considered Considered
Changes in gross regional economic Changes in gross regional economic product, incomes, or employmentproduct, incomes, or employment
Changes in future economic development or Changes in future economic development or tourismtourism
Criminal justice system costs for disaster- Criminal justice system costs for disaster- related crime (e.g., looters)related crime (e.g., looters)
Mitigation Project BenefitsMitigation Project Benefits The project benefits calculation is based on The project benefits calculation is based on
four key elements:four key elements:
Flood frequency and severity Flood frequency and severity
Damages and losses beforeDamages and losses before mitigationmitigation
Damages and losses after mitigationDamages and losses after mitigation
Economic factors including the discount rate Economic factors including the discount rate and the mitigation project useful lifetimeand the mitigation project useful lifetime
The Benefit-Cost ModelThe Benefit-Cost ModelFlood Frequency and SeverityFlood Frequency and Severity
FFE = 2,300’FFE = 2,300’10-year flood = 10-year flood = 2,302’2,302’
100-year flood = 2,310’
Mitigation Project Benefits: Mitigation Project Benefits: Damages Damages BeforeBefore Mitigation Mitigation
Flood Depth (feet)
Annual Probability
ofFlooding
Scenario Damages
and Losses
Expected Annual
Damages and Losses
0 0.2050 $ 6,400 $1,312
1 0.1234 $14,300 $1,765
2 0.0867 $24,500 $2,124
3 0.0233 $28,900 $ 673
4 0.0098 $32,100 $ 315
5 0.0034 $36,300 $ 123
Total Expected Annual Damages and Losses
$6,312
Flood Depth (feet)
Annual Probability
ofFlooding
Scenario Damages
and Losses
Expected Annual
Damages and Losses
0 0.2050 $ 0 $ 0
1 0.1234 $ 0 $ 0
2 0.0867 $ 0 $ 0
3 0.0233 $ 0 $ 0
4 0.0098 $ 6,400 $ 63
5 0.0034 $14,300 $ 49
Total Expected Annual Damages and Losses
$112
Mitigation Project Benefits: Mitigation Project Benefits: Damages Damages AfterAfter Mitigation Mitigation
Mitigation Project Benefits:Mitigation Project Benefits: Annual Avoided Damages and LossesAnnual Avoided Damages and Losses
Flood Depth (feet)
Expected Annual Damages Before
Mitigation
Expected Annual Damages
AfterMitigation
Expected Annual Avoided Damages and
Losses
0 $1,312 $ 0 $1,312
1 $1,765 $ 0 $1,765
2 $2,124 $ 0 $2,124
3 $ 673 $ 0 $ 673
4 $ 315 $63 $ 252
5 $ 123 $49 $ 74
Totals $6,312 $112 $6,200
The Benefit-Cost ModelThe Benefit-Cost ModelEconomics Terminology and ConceptsEconomics Terminology and Concepts
NN EE T PT P RR EE SS EE NN T VT V AA LL UU EE
The value “today” of money that you will receive The value “today” of money that you will receive in the future.in the future.
DD II SS CC OO UU NN T RT R AA TT EE
An interest rate used to determine the time value An interest rate used to determine the time value of money. For Federally funded mitigation of money. For Federally funded mitigation projects, the discount rate is determined by the projects, the discount rate is determined by the U.S. Office of Management and Budget (OMB).U.S. Office of Management and Budget (OMB).
NEVER NEVER factor inflation into estimates of future damages or benefits.
The Benefit-Cost ModelThe Benefit-Cost ModelEconomics Terminology and ConceptsEconomics Terminology and Concepts
The Benefit-Cost ModelThe Benefit-Cost ModelEconomics Terminology and ConceptsEconomics Terminology and Concepts
PP RR OO JJ EE CC T UT U SS EE FF UU L LL L II FF EE TT II MM EE
The estimated time period over which the The estimated time period over which the mitigation project will maintain its effectiveness mitigation project will maintain its effectiveness in preventing or reducing damages and losses in preventing or reducing damages and losses from future disasters.from future disasters.
The Benefit-Cost ModelThe Benefit-Cost ModelEconomics Terminology and ConceptsEconomics Terminology and Concepts
PP RR EE SS EE NN T VT V AA LL UU E CE C OO EE FF FF II CC II EE NN T T (PVC)(PVC)
The PVC expresses the combined effect of the The PVC expresses the combined effect of the discount rate and the project useful lifetime on discount rate and the project useful lifetime on the net present value of future benefits. the net present value of future benefits.
Mitigation Project Benefits: Mitigation Project Benefits: Benefit-Cost Analysis ResultsBenefit-Cost Analysis Results
Expected Annual
Benefits
Present Value
Coefficient
Net Present Value of Future
Benefits CostsBenefit-
Cost Ratio
$6,200 12.41 $76,942 $20,000 3.85
$6,200 x 12 .41 =
(PVC based on a 30-year project life and 7% discount rate)
Benefit-Cost ModelBenefit-Cost ModelFlood Depth (feet)
Expected Annual Damages Before
Mitigation
Expected Annual Damages
AfterMitigation
Expected Annual Avoided Damages and
Losses
0
1
2
34
5
$1,312
$1,765
$2,124
$ 673$ 315
$ 123
$ 0
$ 0
$ 0
$ 0$63
$49
$1,312
$1,765
$2,124
$ 673$ 252
$ 74
Totals $6,312 $112 $6,200
PVC (7% Discount Rate, 30 years) 12.41
Net Present Value of Future Benefits $76,942
Costs $20,000
Benefit-Cost Ratio 3.85
The BC ModulesThe BC Modules
BC Analysis Modules:BC Analysis Modules:
Full-Data (FD)Full-Data (FD)
Limited-Data (LD)Limited-Data (LD)
Very-Limited-Data (VLD)Very-Limited-Data (VLD)
The BC ModulesThe BC Modules
Basis
Data Required
Accuracy
LD Module
VLDModule
FD Module
Engineering information and flood hazard data
Historic damage data
Historic damage data
Damage data from 2 or more flood eventsMost
Accurate (When flood hazard data available)
Damage data from 1 flood event
Accurate(Most accurate when flood hazard data unavailable)
Site-specific project data and flood hazard data
Least Accurate
DemoDemo
Dr. Shane Parson, PE, CFM
Senior Project Associate
Virginia Tech
Center for Geospatial Information Technology
200 Patton Hall
Blacksburg, VA 24061
Office: (540) 231-7147
Fax: (540) 231-7532
E-mail: [email protected]
Website: www.cgit.vt.edu
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