Lecture Notes

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Lecture Notes ECON 437/837 ECONOMIC
COST-BENEFIT ANALYSIS Lecture Twelve
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RISK ANALYSIS AND MANAGEMENT
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Decision-Making Under Uncertainty

• What is risk?
• Risk generally describes the possible deviation
  from a project outcome.
• To project any uncertain outcome into the future,
  you need to have a predictive model, which
  could be a simple formula or a very complex
  worksheet.
• Risk analysis
• How to identify, analyze, and interpret the
  expected variability in project outcomes
• Risk diversification and management
• How to diversify unsystematic risk
• How to redesign and reorganize projects in order
  to reallocate risk

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Risk Analysis

• 1. WHY?
• Project returns are spread over time
• Each variable affecting NPV is subject to a high
  level of uncertainty
• Information and data needed for more accurate
  forecasts are costly to acquire
• Need to reduce the likelihood of undertaking a
  "bad" project while not failing to accept a
  "good" project

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Deterministic or Base Case

• Inputs are projected as certainties.
• By that we assign 100 probability that the
  single value of the input we use in the
  projection will actually arise.
• However, any deviation in any of the critical
  input variables from the base case values will
  generate a new scenario with a different outcome.
• There are potentially an infinite number of
  combinations of input values possible, each
  causing a different set of results.

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Alternative Methods of Dealing with Risk

• Sensitivity Analysis
• Scenario Analysis
• Monte Carlo Risk Analysis
• (or Simulation Analysis)

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Sensitivity Analysis

• Test the sensitivity of a project's outcome (NPV
  or the key variable) to changes in value of one
  parameter at a time
• - "What if" analysis
• - Allows you to test which variables are
  important as a source of risk
• A variable is important depending on
• - Its share of total benefits or costs
• - Likely range of values
• Sensitivity analysis allows you to determine the
  direction of change in the NPV.
• Break-even analysis allows you to determine how
  much a variable must change before the NPV or
  these key variable moves into its critical range
  turns negative.

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Another Important Use of Sensitivity Analysis

• Sensitivity analysis on the PV of each row of the
  spreadsheet (Bankers, Owners and Economys
  point of view) is the best way to de-bug a
  spreadsheet.
• If results do not make sense, it is likely that
  there is an computation or logistical error in
  the spreadsheet.

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Sensitivity Analysis for the Mindanao Poverty
Reduction Case-- Tomato Paste in the Philippines
--

• Inflation
• Rate
• 5
• 8
• 11
• 14
• 17
• 20
• 23
• 26
• 29
• 32
• 35
• Capacity
• Utilization
• Factor
• 60
• 65
• 70

Real NPV (Million Pesos) 161 147 136 126 118 111
105 99 94 89 84 Real NPV (Million
Pesos) -189 -147 -105 -63 -21 21 63 105 147 189 2
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World T.P. Price (S.F. FOB) US/Ton 587 637 687 73
7 787 837 887 937 987 1037 1087 Divergence
from Original Cost Estimate -10 -5 0 5 10 15
20 25 30 35 40
Real NPV (Million Pesos) -228 -103 22 147 272 397
522 647 772 897 1022 Real NPV (Million
Pesos) 190 169 147 125 103 82 60 38 17 -5 -27
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Tomato Paste (contd)

• For Tomato Paste Plant Capacity Utilization is
  critical.
• What can cause Capacity Utilization to be low?
• Technical problems with the plant.
• The demand for product does not exist at the
  price that covers the costs.
• The plant can not get adequate supplies of raw
  materials.
• Fact sheet
• this plant eventually run into financial troubles
• could not attain adequate supplies of raw
  materials

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Cautionary Notes for Sensitivity Analysis

• 1. Range and probability distribution of
  variables
• Sensitivity analysis doesn't represent the
  possible range of values
• Sensitivity analysis doesn't represent the
  probabilities for each range. Generally there is
  a small probability of being at the extremes.
• 2. Direction of effects
• For most variables, the direction is obvious
• a) Revenue increases NPV increases
• b) Cost increases NPV decreases
• c) Inflation Not so obvious

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Cautionary Notes for Sensitivity Analysis (contd)

• 3. One-at-a-Time Testing is Not Realistic
• One-at-a-time testing is not realistic because of
  correlation among variables
• a) If Q sold increases, costs will increase.
• Profits Q (P - UC)
• b) If inflation rate changes, all prices change.
• c) If exchange rate changes, all tradable goods'
  prices and foreign liabilities change.
• One method of dealing with these combined or
  correlated effects is scenario analysis.

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Scenario Analysis

• Scenario analysis recognizes that certain
  variables are interrelated. Thus, a small number
  of variables can be altered in a consistent
  manner at the same time.
• What is the set of circumstances that are likely
  to combine to produce different "cases" or
  "scenarios"?
• a) Worst case / Pessimistic case
• b) Expected case / Best estimate case
• c) Best case / Optimistic case
• Note Scenario analysis does not take into
  account the probability of cases arising
• Interpretation is easy when results are robust
• a) Accept project if NPV gt 0 even in the worst
  case
• b) Reject project if NPV lt 0 even in the best
  case
• c) If NPV is positive in some cases and
  negative in other cases, then results are not
  conclusive.

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Monte Carlo Method of Risk Analysis

• A natural extension of sensitivity and scenario
  analysis is a Monte Carlo analysis
• Simultaneously takes into account different
  probability distributions and different ranges of
  possible values for key project variables
• Allows for correlation between variables
• Generates a probability distribution of project
  outcomes (NPV) instead of just a single value
  estimate
• The probability distribution of project outcomes
  may assist decision-makers in making choices, but
  there can be problems of interpretation and use.

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Steps in Building a Monte Carlo Simulation

• 1. Project evaluation spreadsheet for
  deterministic case
• 2. Identify variables which are sensitive and
  uncertain
• 3. Define uncertainty
• Establish a range of options (minimum and
  maximum)
• Allocate probability distribution
• Normal distribution
• Triangular distribution
• Uniform distribution
• Step distribution
• 4. Identify and define correlated variables
• Positive or negative correlation
• Strength of correlation
• 5. Simulate model
• 6. Analysis of results
• Statistics
• Distributions

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Sensitivity Analysis
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Deterministic vs Simulation Analysis
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Foundations of Risk Analysis Probability
Distributions (under 3 Symmetrical Distributions)
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Correlated Variables
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Simulation Runs
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Results of Simulation Analysis

• Statistics
• Expected Value of Outcome
• Standard Deviation and Variance
• Range Minimum and Maximum Values
• Coefficient of Variability
• Distribution of Outcome
• Generate the potential outcomes with their
  likelihood of occurrence

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Distribution of results (net cash flow)
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Case 1 Probability of negative NPV0
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Case 2 Probability of positive NPV0
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Case 3 Probability of zero NPV greater than 0
and less than 1
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Case 4 Mutually exclusive projects(given the
same probability, one project always shows a
higher return)
Case 4 Non-intersecting cumulative probability
distributions of project return for mutually
exclusive projects
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Case 5 Mutually exclusive projects (high return
vs. low loss)
Case 5 Intersecting cumulative probability
distributions of project return for mutually
exclusive projects
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Cost of Uncertainty
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Expected Loss RatiosExample of project
outcomes expected value of project
Expected value of losses
Expected value of gains
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Expected Loss Ratios (contd)
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Risk under Conditions of Limited Liability
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Advantages of Risk Analysis

• Highlights project areas that need further
  investigation and guides the collection of
  information
• Aids the reformation of projects to suit the
  requirements of the investors
• Bridges the communication gap between the analyst
  and the decision maker
• Provides the information to facilitate a more
  efficient allocation and management of risk among
  various parties involved in a project

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Steps to Undertake Risk Analysis

• 1. Complete the financial and economic analysis
  of project -- Deterministic Case
• 2. Identify Risk Parameters, which are
  sensitive and uncertain
• 3. Choose a Probability Distribution and
  Correlations for risk variables.
• 4. Identify Risk Forecasts such as NPVs, Debt
  Services Ratios
• 5. Run a Risk Simulation, using Crystal Ball
  Software.
• 6. Prepare a Risk Report a summary of the risk
  assumptions and the final results of the
  simulation.
• 7. Interpret and Analyze Results.

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Crystal Ball implements Monte Carlo Simulation in
three steps

• For every assumption cell, Crystal Ball generates
  number according to the probability distribution
  you defined in places into spreadsheets.
• Crystal Ball commands the spreadsheets to
  recalculate itself.
• Crystal Ball then retrieves a value from every
  forecast cell and adds it to the graph in the
  forecast windows.

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Risk Management

• Problem
• Many projects have
• large investment outlays
• long periods of project payout
• incomplete sharing of information and technology,
  especially with foreign investors
• differences in the ability of the parties to bear
  risks
• unstable contracts
• Projects may be attractive in aggregate but are
  unattractive to one or more parties due to
  uncertainties about sharing risks and returns
• The result is that attractive projects are not
  being undertaken

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Principles of Contracting, Risk Sharing and Risk
Reduction

• Case A
• A Cement Additives Plant
• in Indonesia

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Cash Flows Total Investment Perspectives
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Cash Flows Equity Holders Perspective
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Sensitivity Analysis for Cement Additives Plant
(Quick Fix)
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Risk Analysis
Evaluation of a Cement Additives Plant Risk
Variables, and Probability Distribution
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Risk ReallocationSources of Contracting Benefits

• Risk Shifting
• Differing risk preferences. e.g., less risk
  averse investor willing to accept a lower return
  on a risky asset
• Differing capacity to diversify. e.g., foreign
  investors may be able to diversify risk in more
  efficient capital markets
• Differing outlooks or predictions of future.
  e.g., some investors are more tolerant and some
  are more optimistic
• Risk Management
• Differing ability to influence project outcomes

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Risk Shifting

• The following options are available
• Contracts that limit the range of values of a
  particular cash flow item, or of net cash flow.
• For example, a purchaser may agree to purchase a
  minimum quantity or to pay a minimum price in
  order to be sure of delivery these measures
  would put a lower bound on the sales revenue.
• Similar measures would include
• limited liability
• a limited product price range
• a fixed price growth path
• an undertaking to pay a long-run average price
• specific price escalator clauses that would
  maintain the competitiveness of the product,
  e.g. indexing price to the price of a
  close substitute

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Censored DistributionCase of a floor price, Pf
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Restructuring Intra-project Correlations

• Risk-sharing contracts that reduce the risk borne
  by investors by increasing the correlation
  between sales revenue and some cost items, e.g.,
• profit sharing contract with labor
• bonds with interest rates indexed to the
  products sales price
• Risk-sharing contracts that decrease the
  correlation between benefit items or
  alternatively between cost items.

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• Restructuring Intra-Project Correlations (contd)
• The benefits from restructuring correlations are
  based on the formula for the variance of the sum
  of two random variables (x and y)
• v (ax by) a2v (x) b2v (y) 2ab cov (x,y)
• where a and b are parameters or constants.
• For example, let
• x revenues (R) y costs (C) and a
  1, b -1
• v(net profit) v(R-C) v(R) v(C) - 2
  cov(R,C)
• Any measure that will increase the positive
  correlation between R and C will increase
  cov(R,C) and reduce the variance of the net
  profit (provided, of course, that the measure
  does not increase the variance of a cost item by
  more than twice the cov)

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• Example A Profit-Sharing Agreement
• Assume that wages are the only cost
• Without the agreement total cost C
• With the agreement
• Let g proportion of the costs that is still
  paid to workers
• as a wage,
• h labors share of profit after wages
  have been paid.
• Thus, total cost gC h(R - gC)
• Net profit R - gC - h(R - gC)
• (1-h)R - g(1 - h)C
• v(net profit) (1-h)2v(R) g2(1-h)2v(C) -
  2g(1-h)2cov(R,C)
• If 0lt g lt 1 and 0lt h lt 1, then the variance of
  net profit will be
• lower than it was without the agreement.

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Expected Value of NPV 23.72 Standard Deviation
34.53 Expected loss from accepting
2.82 Expected loss from rejecting 26.53
Re Quickfix Project - contract with supplier
that establishes a cost ceiling of 12 -
correlated initial selling price (po) and unit
cost (Co) such that 18ltPolt20 and correlation
between Co Po 0.6
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Re Quickfix Project - cost ceiling of
12 -contract for selling price linked to initial
costs (Co) If Co lt 9, Po 16 otherwise Po 20
Expected Value of NPV 48.73 Standard Deviation
28.24 Expected loss from accepting
0.09 Expected loss from rejecting 48.82
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Principles of Contracting, Risk Sharing and Risk
Reduction

• Case B
• Mexican Cheese Operation

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Mexican Cheese Operation Queso OAXACA Inc.

1. Project to build cheese processing plant in
   Mexico.
2. Product sold 70 percent in the U.S. and 30
   percent in Mexico
3. Investment of 2.0 million pesos, financed by 23
   equity and 77 debt
4. Initially loans and equity all from Mexican
   sources
5. Investment during first year, operations for a
   ten-year period.
6. No imported inputs

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QUESO OXACA Inc.
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Sensitivity Analysis
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QUESO OAXACA Inc. Risk Variables Report
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Risk Analysis Results
DETERMINISTIC NPV (in 000 Pesos) 1,461
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Management and Alleviation of other Project Risks

• A. Pre-Completion Risks
• Examples of Ways to Reduce or Shift
• Types of Risks Risk Away from Financial
  Institution
• Participant Risks
• - Sponsor commitment to project - Reduce
  magnitude of investment
• - Require Lower Debt/Equity ratio - Finance
  investment through equity and
• then by debt
• - Financially weak sponsor - Attain third party
  credit support for weak sponsor (e.g., letter of
  credit)
• - Cross default to other sponsors
• Construction/Design defects - Experienced
  Contractor
• - Turn key construction contract

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Management and Alleviation of Risks

• A. Pre-Completion Risks (contd)
• Examples of Ways to Reduce or Shift
• Types of Risks Risk Away from Financial
  Institution
• Process failure - Process / Equipment warranties
• Completion Risks
• Cost overruns - Pre-agreed overrun funding
• - Fixed (real) price contract
• Project not completed - Completion guarantee
• - Tests mechanical/financial for
  completion
• Project does not attain - Assumption
  of debt by sponsors if mechanical efficiency
  not completed satisfactorily

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B. Post-Completion Risks

• Examples of Ways to Reduce or shift
• Types of Risks Risk Away from Financial
  Institution
• Natural Resource/Raw Material
• Availability of raw materials - Independent
  reserve certification
• - Example Mining Projects reserves twice
  planned mining volume
• - Firm supply contracts
• - Ready spot market
• Production/Operating Risks
• Operating difficulty leads to - Proven
  technology
• insufficient cash flow - Experienced
  operator/management team
• - Performance warranties on equipments
• - Insurance to guarantee minimum cash

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B. Post-Completion Risks (contd)

• Examples of Ways to Reduce or Shift
• Types of Risks Risk Away from Financial
  Institution
• Market Risk
• Volume cannot sell entire output - Long term
  contract with creditworthy buyers take-or-pay
  take-and-pay
• Price cannot sell output at profit - Minimum
  volume/floor price provisions - Price
  escalation provisions
• Force Majeure Risks
• Strikes, floods, earthquakes, etc. - Insurance
• - Debt service reserve fund

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• Examples of Ways to Reduce or shift
• Types of Risks Risk Away from Financial
  Institution
• Political Risk
• Covers range of issues from - Host govt.
  political risk assurances nationalization/expropri
  ation, - Assumption of debtchanges in tax and
  other laws, - Official insurance e.g., EXIM
• currency inconvertibility, etc. - Private
  insurance e.g., LLOYDS
• - Offshore Escrow Accounts
• Abandonment Risk
• Sponsors walk away from project - Abandonment
  test in agreement for
• banks to run project
• Other Risks Not really project risks
• but may include
• Syndication risk - Secure strong lead financial
  institution
• Currency risk - Currency swaps / hedges
• Interest rate exposure - Interest rate swaps
• Rigid debt service - Built-in flexibility in
  debt service
• obligations

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Evaluation of Regulations

• Example
• Cost-Benefit Analysis of Reductions of the
  Sulphur Level in Gasoline in Canada

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Regulatory Policy

• In November 1999, the Government of Canada
  instituted the policy that a cost-benefit
  analysis must be carried out for all significant
  regulatory proposals to assess their potential
  impacts on the environment, workers, business,
  consumers, and other sectors of society.
• In 2006, all regulatory departments and agencies
  are expected to show that the recommended option
  maximizes the benefits in relation to costs and
  yields greater net benefits over time than any
  other type of regulatory or non-regulatory
  action.
• Other countries and international communities
  such as the United States, Australia, European
  Commission, etc. have also come to recommend that
  a cost-benefit analysis is the centre of
  regulatory analysis.

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Identification of Policy Issues

• In 1997, the sulphur content of Canadian gasoline
  and diesel fuels varied widely across the
  country.
• Fuels with high sulphur levels affect tailpipe
  emissions of motor vehicles and contribute to air
  pollution.
• Emissions of pollutants from vehicles cause harm
  to the health of Canadians and to the
  environment.
• High sulphur fuels hinder the development of more
  fuel efficient motor vehicles needed for the
  future control of greenhouse gas emissions.

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Setting Objectives

• Development of alternative regulatory and
  non-regulatory policy options to reduce
  concentration of sulphur in motor fuels
• - Non-regulatory options include use of economic
  instruments, i.e., taxes. (Economic instruments
  not suitable because of difficulty of having a
  national tax policy on motor fuels)
• - Regulatory options in terms of the level of
  sulphur concentration.
• Cost-benefit analysis is a tool to assess the
  benefits and costs of alternative options.

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Development of Alternative Scenarios

• The alternative scenarios and the base case are
  developed on the basis of the sulphur reductions
  in gasoline and diesel fuels that would come into
  effect on January 1, 2001.
• The base case is established with the maximum
  level of sulphur maintained at 410 ppm over the
  period from 2001 to 2020.
• Six alternative scenarios are related to the
  reduction of sulphur in gasoline and three
  options are associated with the reduction of
  sulphur in diesel fuels.
• General rules All scenarios are required to have
  a maximum annual level of sulphur in gasoline or
  diesel fuels and the level of sulphur at any
  point in time must never exceed a specified level
  of sulphur.

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Approaches to Measure the Benefits and Costs of
Alternative Scenarios

• Two alternative approaches
• - first, estimate both the gross annual benefits
  and costs of alternative scenarios and the base
  case
• - second, estimate the incremental annual
  benefits and costs of alternative options in
  excess of the baseline scenario.
• Principle for measuring the economic benefits is
  WTP while for measuring the economic costs it is
  the opportunity cost of the resources used.

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Measurement of Economic Costs

• Compliance costs by the private sector
• - 17 refineries produce fuels in Canada
• - Each refinery employs different strategies to
  meet the specification of each scenario
• - Capital costs reflect changes in facilities
  required by refineries to meet the regulation set
  by each scenario
• - Annual operating costs are increased to
  operate the facilities with lower levels of
  sulphur.
• Administrative costs by governments to enforce
  the regulations.
• Additional social costs are accounted for as a
  result of refinery closure.

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Measurement of Economic Benefits

• Using an atmospheric model, the change in
  sulphate concentration is estimated brought about
  by changes in the level of sulphur in gasoline
  and diesel fuels for each of seven cities.
• Using the benefit transfer approach,
• - take the estimates from related research of
  the impact on human health and then adjust to
  reflect the circumstances of the situation in
  Canada
• - assign probability weights for low, central
  and high estimates to account for uncertainty.
• Measure the impact on health and environment in
  monetary value.

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Sulphate Concentration Reductions for Selected
Scenarios in Years 2001 and 2020 (µg/m3)

• Scenario 4 (150 ppm)
• 2001 2020
• - Halifax 0.08 0.09
• - Toronto 0.25 0.30
• - Vancouver 0.04 0.05
• Scenario 6 (30 ppm)
• 2001 2020
• - Halifax 0.11 0.13
• - Toronto 0.31 0.38
• - Vancouver 0.08 0.11

• Scenario 7 (400 ppm)
• 2001 2020
• - Halifax 0.15 0.20
• - Toronto 0.15 0.18
• - Vancouver 0.12 0.16

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Estimated Health Responses for a 1 µg/m3 Change
in Sulphate Concentration

• Mortality
• Range Weights
• - Low 1.14x10-5 22
• - Central 2.54x10-5 67
• - High 5.70x10-5 11

• Morbidity
• Chronic Respiratory Risk
• Range Weights
• - Low 7.06x10-5 25
• - Central 1.35x10-4 50
• - High 2.00x10-4 25
• Respiratory Hospital admissions
• Range Weights
• - Low 1.30x10-5 25
• - Central 1.60x10-5 50
• - High 1.80x10-5 25

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Total Reductions of Yearly Health Effects for
Scenario 6

• 2001 2010 2020
• Premature Mortality 84 103
  129
• Morbidity Effects
• - Chronic Respiratory Disease 302 372
  469
• - Respiratory Hospital Admissions 52
  65 82
• - Cardiac Hospital Admissions 43 53
  66
• - Emergency Room Visits 270 333
  420
• - Asthma Symptom Days 131,402 161,680
  203,570
• - Restricted Activity Days 63,721
  78,392 98,686
• - Acute Respiratory Symptoms
  438,197 538,961 678,317
• - Child Lower Respiratory Illness 3,683
  4,553 5,764

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Health Effects in Monetary Values

• Principles for measuring the benefits is WTP. If
  WTP estimates are not available, cost-of-illness
  estimates are used and adjusted upward to reflect
  the economic benefits.
• Central Value per Case
• (1994 prices)
• Mortality (Age-weighted average) 4m
• Morbidity Effects
• - Chronic Respiratory Disease 291k
• - Respiratory Hospital Admissions 65,000
• - Cardiac Hospital Admissions 8,300
• - Emergency Room Visits 600
• - Asthma Symptom Days 49
• - Restricted Activity Days
  74
• - Acute Respiratory Symptoms 14
• - Child Lower Respiratory Illness 360

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Measurement of Gross Health Benefits

• The size of benefits is directly related to the
  reductions of the sulphur content of fuels
• - for the most stringent scenarios, the health
  benefits accrue to individuals across the
  country
• - for the less stringent cases, only the areas
  with high sulphur at the present time are
  affected.
• The benefits generated from avoiding premature
  mortality risks account for more than
  three-quarters of the total benefits.

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Measurement of Net Economic Benefits (a)

• The net benefits are derived from the gross
  economic benefits minus the incremental economic
  costs.
• E.g., for scenario 6, the amounts of benefits and
  costs are expressed in millions of 2000
  prices NPV _at_7
• Gross Economic Benefits 6,127.37
• Economic Costs
• - Compliance Costs 3,307.66
• - Administrative Costs Federal 0.64
• Provincial (14.12)
• - Closure of Refineries 19.29
• Net Economic Benefits 2,813.90

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Net Health Benefits for Canada (b)

• Using the 7 discount rate, the NPV of net
  economic benefits are positive for scenarios 1 to
  7 while scenarios 8 and 9 would result in a
  negative net benefit.
• Some omissions and uncertainties should be noted,
  e.g.,
• - pollutants other than sulphate may have
  independent health effects
• - the impact of the long-range transport of air
  pollution is not accounted for
• - the impacts on agriculture, forest, and
  fishing are not quantified.

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NPV of Net Economic Benefits for Alternative
Scenarios (millions of dollars in 2000 prices)

• Max. Never NPV Annual
  to _at_7 Average Exceed (ppm)
  (ppm)
• Gasoline - Scenario 1 360 420 1,985.8
• - Scenario 2 250 300 2,330.3
• - Scenario 3 200 250 2,694.3
• - Scenario 4 150 200 2,879.4 -
  Scenario 5 100 150 2,994.6
• - Scenario 6 30 80 2,813.9
• Diesel - Scenario 7 400 300 2,498.0
  - Scenario 8 300
  350 (136.4)
• - Scenario 9 50 100 (709.1)

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Dealing with Uncertainty and Risk

• Risk variables and probability distribution
• - capital costs, /- 40, normal distribution
• - operating costs, /- 25, normal distribution
• - responses of premature mortality to sulphate
  with 22, 67 and 11 for low, central and high
  estimates (1.14x10-5, 2.54x-5, and 5.70x-5), step
  distribution
• - values of statistical life with 33, 50 and
  17 for low, central and high estimates (2.4m,
  4.0m, and 7.9m), step distribution.
• Perform Monte Carlo simulations for scenarios 4,
  6 and 7
• - the expected value of the NPV of net benefits
  for each scenario is very close to the value of
  the respective deterministic cases
• - there is zero probability of getting the
  negative net benefit.

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Distribution of Net Benefits by Stakeholders

• The oil refiners are required to comply with the
  regulation by incurring capital expenditures and
  additional operating costs. However, a
  significant portion of the costs would be passed
  forward to consumers in the higher prices of
  gasoline fuels.
• Individuals are the main beneficiaries of the
  regulations because having cleaner air lowers the
  risks of premature mortality and morbidity.
• Some refinery workers will suffer temporary
  income losses as a result of refinery closures.
• Provincial government will save costs of medical
  care. Savings arise because of lower hospital
  admissions due to avoided health effects.
• Finally, the federal government will incur
  marginal administrative costs to monitor and
  enforce the regulations.

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PV of Net Benefits by Stakeholders

• Refinery Consumers Government
• Refiners Workers /Individual Prov.
  Fed. Total
• Scenario 1 (117.0) 0 2,097.6
  5.8 (0.6) 1,985.8
• Scenario 2 (272.9) 0 2,595.9
  7.9 (0.6) 2,330.0
• Scenario 3 (339.7) (4.8) 3,029.9
  9.6 (0.6) 2,694.3
• Scenario 4 (444.8) (14.5) 3,328.4
  10.8 (0.6) 2,879.4
• Scenario 5 (578.4) (19.3) 3,580.5
  12.4 (0.6) 2,994.6
• Scenario 6 (826.9) (19.3) 3,646.6
  14.1 (0.6) 2,813.9
• Scenario 7 (238.0) (4.8) 2,733.6
  7.9 (0.6) 2,498.0
• Scenario 8 (189.2) 0
  51.9 1.5 (0.6) (136.4)
• Scenario 9 (542.6) (4.8)
  (164.5) 3.4 (0.6) (709.1)

88
Conclusions

• Lowering the sulphur levels in gasoline will
  generate a substantial amount of health benefits
  to Canadians for all alternative scenarios.
• The most stringent scenario 6 may not be the
  scenario with the largest amount of benefits.
  However, it is the scenario that will create a
  suitable regulatory environment because it would
  generate not only a considerable amount of
  benefits but also a number of benefits that are
  not easily taken into account in the quantitative
  analysis. They are
• - help vehicle control systems function more
  efficiently
• - help Canada control greenhouse gas emissions
  in the future.
• In the case of sulphur level in diesel, the NPV
  of the net benefits are negative for both
  scenarios 8 and 9. However, scenario 7 with a
  modest change in the sulphur level to 400 ppm
  would produce a significant health benefit for
  Canadians.

89
Ex Post Assessment

• Regulations The sulphur in gasoline regulations
  was set at a maximum level of 30 ppm with a
  never-to-be-exceeded maximum of 80 ppm beginning
  in January 2005. An interim step was to have the
  sulphur level in gasoline limited to 150 ppm with
  a level never exceed 200 ppm starting July 2002
  to the end of 2004.
• The levels of sulphur in gasoline have followed
  closely those set by the Regulations. These
  results show a significant improvement in the air
  quality in Canada.
• There has been no closure of any refineries since
  the introduction of the regulations. Some
  refineries have even skipped the phase-in
  approach and moved directly to the sulphur level
  of 30 ppm.

90
Recommendations for Improved Evaluations

• All refineries should be obliged to submit a
  record of their actual capital expenditures to
  Environment Canada.
• A careful assessment of the administrative costs
  by the public sector should be carried out.
• To facilitate the cost-benefit analysis of a
  regulation, both the capital and operating costs
  incurred by the private sector should be broken
  down into detailed categories.