Disaster Cost-Benefit Framework

The Framework should be applied when preparing cost-benefit analysis (CBA) for disaster resilience initiatives. A business case, including a CBA must be completed to support a government funding with an estimated total cost of over $10 million, as required by Submission of Business Cases (TPG22-04). The Framework contains recommendations and guidance that complement the NSW Government Guide to Cost-Benefit Analysis (TPG23-08).

The Framework includes a Flood Cost-Benefit Analysis Tool to support CBA of flood resilience initiatives. It can be used to calculate average annual damage based on a series of standard parameters, and to undertake sensitivity analysis and Monte Carlo simulation. Further details are provided in the Technical Note: Flood Cost-Benefit Analysis Tool.

The Framework recognises that there may not always be time to complete a business case, including a CBA, for initiatives that are seeking to respond immediately to a disaster. It includes a rapid assessment method, which provides a structured process to assist decision making in urgent circumstances. It also requires evaluation, including an ex-post CBA, where an ex-ante CBA was required but unable to be completed.

Application of the Framework and the standard parameters it contains should be tailored to the availability of data, the size and significance of the initiative, and the time available to complete analysis.
 

Core requirements about when a business case and CBA need to be completed, and what a CBA needs to contain are the same for disaster resilience CBAs as any other type of initiative. Additional recommendations and guidance provided by the Framework, such as the use of Monte Carlo analysis, should be applied depending on the nature of the initiative to improve the quality and consistency of the analysis.

The Framework requires that, where a proposal is not supported by a business case and CBA, it must include planning, resourcing, and identify a responsible party to complete an evaluation, including an ex-post CBA. The requirement aligns with existing requirements in the NSW Evaluation Policy and Guidelines (TPG22-22). It is highlighted by the Framework given the importance of evaluation in these circumstances to inform future initiatives.

The Framework applies to disasters resulting from natural hazards, such as floods, bushfires, storms, and coastal hazards. It is not intended to apply to technological, biological, or human-caused disasters; however, elements of the Framework may nevertheless be applied in these situations where relevant.
 
The Framework provides detailed guidance on CBA for flood related initiatives, in line with a recommendation of the 2022 NSW Flood Inquiry Final Report.

The connection between climate change and natural hazards is well established. Climate change is also reducing reliability of historical observations in anticipating the severity and frequency of future disasters. The Framework recommends considering climate change throughout a disaster resilience CBA and applying consistent data sources.

Disasters are low-frequency, high-consequence events, sometimes known as ‘tail events’. The nature of tail events makes CBA of disaster resilience initiatives highly sensitive to assumptions or estimates of risk and uncertainty. Even small changes in the estimates of (or assumptions about) the frequency, severity and timing of a disaster can change the benefit-cost ratio by orders of magnitude.

The Framework encourages consideration of risk and uncertainty throughout development of a CBA. It recommends the use of Monte Carlo analysis to help understand the distribution of possible outcomes and presentation of results to decision makers that highlights what the benefits would be should extreme events occur.

Areas where further research may contribute towards future updates to the Framework include: 

• More detailed analysis of the impact of climate change on different types of natural hazards.
• Development of methods for undertaking multi-hazard risk assessment.
• How best to provide distributional analysis to support decision making regarding disasters.
• Quantification of additional benefit categories for flood initiatives (e.g. government emergency response).
• Quantification of volunteer effort, before and after a disaster (e.g. general clean-up of debris, sandbagging, removal of fallen trees, securing property roof tiles, administrative duties).