APPENDIX E
PRINCIPLES OF BENEFIT-COST ANALYSIS APPLIED TO SURVEYS

The basic problem lies in determining which requested surveys are most needed, and in what order to perform them. Some surveys may be of minimal value to the nation, and therefore do not warrant the use of government resources. Similarly, other surveys are extremely valuable to the nation, because they enable more commercial activity or because they result in greater reduction of risks of accident and pollution. The known quantities in this problem (known at least with some degree of certainty for the immediate future) are the nation's survey needs and the nation's resources available to meet them. The challenge is to determine the best sequence in which to conduct the surveys. Benefit-cost analysis provides a systematic mechanism for determining an efficient answer to these questions.

Benefit-cost analysis is a tool for assessing the costs and benefits of specific projects. In general, the approach is to define a potential project, identify the costs associated with its execution, identify all benefits that will accrue if the project is carried out, and estimate these benefits in economic terms. The latter step requires calculation of net benefits if the project is undertaken minus the same measures if the project is not executed.

The alternative to conducting the project is referred to as the "baseline" case. In mathematical terms, if B is the net present value of all benefits to society from the products and processes in place in the baseline scenario, and B' is the net present value of all benefits to society if the project is executed, the benefit of undertaking the project is then equal to B'- B.

Evaluating a Single Survey

If the project in question is a hydrographic survey of a particular area, the relevant costs to consider include the costs of data collection (the actual survey), processing the survey data, and compiling the chart (paper or digital) from the processed data. The last component should be included, since many of the benefits of the survey do not accrue until the information is made available to users in the form of a chart product.

Because we are interested in benefits of a survey net of benefits that would accrue without the survey, it is not necessary to consider benefits that do not change as a result of the survey. This recognition is incorporated, for example, in the U.S. Army Corps of Engineers' approach to valuing benefits of waterways construction projects (COE, 1983). Some of the benefits considered by the Corps of Engineers are relevant to the National Oceanic and Atmospheric Administration's (NOAA's) survey projects, especially those accruing to deep-draft transportation, recreation, and fishing. Under deep-draft transportation, the Corps of Engineers includes cost reduction benefits (reductions in



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Charting a Course into the Digital Era: Guidance for NOAA's Nautical Charting Mission APPENDIX E PRINCIPLES OF BENEFIT-COST ANALYSIS APPLIED TO SURVEYS The basic problem lies in determining which requested surveys are most needed, and in what order to perform them. Some surveys may be of minimal value to the nation, and therefore do not warrant the use of government resources. Similarly, other surveys are extremely valuable to the nation, because they enable more commercial activity or because they result in greater reduction of risks of accident and pollution. The known quantities in this problem (known at least with some degree of certainty for the immediate future) are the nation's survey needs and the nation's resources available to meet them. The challenge is to determine the best sequence in which to conduct the surveys. Benefit-cost analysis provides a systematic mechanism for determining an efficient answer to these questions. Benefit-cost analysis is a tool for assessing the costs and benefits of specific projects. In general, the approach is to define a potential project, identify the costs associated with its execution, identify all benefits that will accrue if the project is carried out, and estimate these benefits in economic terms. The latter step requires calculation of net benefits if the project is undertaken minus the same measures if the project is not executed. The alternative to conducting the project is referred to as the "baseline" case. In mathematical terms, if B is the net present value of all benefits to society from the products and processes in place in the baseline scenario, and B' is the net present value of all benefits to society if the project is executed, the benefit of undertaking the project is then equal to B'- B. Evaluating a Single Survey If the project in question is a hydrographic survey of a particular area, the relevant costs to consider include the costs of data collection (the actual survey), processing the survey data, and compiling the chart (paper or digital) from the processed data. The last component should be included, since many of the benefits of the survey do not accrue until the information is made available to users in the form of a chart product. Because we are interested in benefits of a survey net of benefits that would accrue without the survey, it is not necessary to consider benefits that do not change as a result of the survey. This recognition is incorporated, for example, in the U.S. Army Corps of Engineers' approach to valuing benefits of waterways construction projects (COE, 1983). Some of the benefits considered by the Corps of Engineers are relevant to the National Oceanic and Atmospheric Administration's (NOAA's) survey projects, especially those accruing to deep-draft transportation, recreation, and fishing. Under deep-draft transportation, the Corps of Engineers includes cost reduction benefits (reductions in

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Charting a Course into the Digital Era: Guidance for NOAA's Nautical Charting Mission transport costs due to a change in route or mode), shift of origin benefits (reductions in the total cost of producing and transporting goods), shift of destination benefits (changes in net revenue to the producer), and induced movement benefits (value of delivered commodities minus production and transportation costs). Recreational benefits are assessed by the Corps of Engineers as willingness to pay for increments in supply of recreational opportunities, measured by travel cost (TCM), contingent valuation (CVM), or unit day value (UDV) methods. Benefits to fishing include expected changes in harvest volume and cost savings. In determining benefits of surveys, NOAA should consider a similar set of factors. In particular, the factors that presently go into calculation of survey request scores (level of use of the area by various user groups, exposure to damages from accidents) and final area rankings (topography, quality of existing surveys) should be included. (Note that benefits in the case of surveys are often actually savings, or avoided costs, associated with such things as avoided groundings.) The critical difference is that the benefit assessment works with expected economic benefits due to the survey, as opposed to nondimensional rankings. The benefits analysis thus requires use of vessel traffic statistics, statistics about likelihood of accidents with and without a new survey, statistics about expected damages in the event of an accident (which in turn depend on the nature of cargo and local environmental resources), estimates of "new" economic activity dependent on a new survey, etc. For example, software being developed by the Data Quality Working Group within the International Hydrographic Organization Committee on the Electronic Chart makes it possible to evaluate statistically the quality of existing surveys (Kielland et al., 1992). This information can be used to develop an objective measure of the improvement achievable with a new survey. It is neither realistic nor necessary for NOAA to encompass all possible benefits in its calculation, so long as the major benefits are considered and applied consistently to all potential survey areas. This procedure should be sufficient to achieve a reasonable prioritization. Prioritizing Among Multiple Surveys To choose among alternative projects, the decisionmaker calculates the benefit and cost of each, and ranks projects by the ratio of benefits to costs. As long as there are projects with benefit-cost ratios above the decisionmaker's threshold level, the decisionmaker chooses to execute projects in order of decreasing benefit-cost ratio until the budget constraint is reached. This approach ensures that maximum benefits will be derived from the available resources. For survey prioritization, this means calculating benefits and costs for all possible survey projects, and executing them in order of decreasing benefit-cost ratio. Under some simplistic assumptions, the optimal schedule of surveys then consists of performing in each time period (year) as many of the highest benefit-cost surveys as resources allow. This is only true, in general, if the expected benefits under the "survey" and baseline scenarios are the same for each future year. This is not a particularly realistic assumption. For example, we may know that marine traffic in a particular survey area is expected to increase significantly over the next 5

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Charting a Course into the Digital Era: Guidance for NOAA's Nautical Charting Mission years, and that the chance of a grounding without a new survey will therefore increase as well. Under these circumstances, the optimal schedule of surveys is a dynamic programming problem. To set up the dynamic programming problem, one would estimate B(a,t ) and B'(a,t) as benefits associated with area a in year t given a baseline or "new survey" scenario, respectively, just prior to time t. Using these values, one then formulates a dynamic programming problem to maximizes the net present value (NPV) of benefits, solving for the optimal year in which to conduct each possible survey, subject to the resource constraint. This general problem is further complicated by the fact that information about expected benefits, survey requests, and national priorities changes with time, which implies that the optimization has to be repeated (and priorities possibly revised) each time the available information changes. Given that, for practical purposes, NOAA only needs to plan its surveys a few years ahead, and information about the longer future is quite uncertain, it is probably not necessary for NOAA to set up a dynamic programming algorithm for survey prioritization. The following section sketches an implementation that retains the valuable characteristics of a benefit-cost approach without these complications. Suggestions for Implementation A practical implementation of the principles described above could limit the analysis to benefits over a few years, perhaps 2 or 3. NOAA would estimate expected benefit under the baseline and "new survey" scenarios for 1 or 2 years of surveys only; choose the most beneficial surveys to perform next year; and then repeat the analysis, using any new information that may have been obtained, a year later for the following year's surveys. This limitation to near-term costs and benefits is likely to be accurate enough, and it also eliminates the difficult issue of choosing an appropriate social discount rate for the NPV calculations. The relevant unit of analysis is the potential survey area, not the individual survey request. Survey requests should still be tracked, and can help to inform the valuation of potential surveys, but they play a lesser role in prioritizing surveys under the benefit-cost scheme than they do at present. A problem remains in the economic valuation of survey requests issued by the military. It is possible to address this issue by effectively restricting the cost calculation to "costs incurred by NOAA's survey budget." Navy requests for surveys that are accompanied by Navy funds, for example, would then move to the top of the priorities list because their cost to NOAA is low, and their benefit-cost ratio correspondingly high. The same process can accommodate requests from private parties or other government agencies for surveys that they are willing to help fund, and thereby move to a higher priority. To be effective without interfering with scheduled survey projects, this approach requires both a reserve surveying capacity that can be activated when funded survey requests arise, and a mechanism by which other agencies and private parties can share the costs of such surveys with NOAA. The link between the survey request prioritization process and the new chart requests system should be formalized, whether the benefit-cost approach for survey prioritization is

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Charting a Course into the Digital Era: Guidance for NOAA's Nautical Charting Mission adopted or not. If survey priorities are set by economic analysis, then the surveys should drive new chart production priorities. Finally, it may make sense to treat requests for obstacle investigation separately from requests for full area surveys. In principle, both types of surveys could be encompassed in one analytical regime, but it may be easier in practice to treat them separately because of differences in scale of required operations. Obstacle investigation surveys should be subjected to the same kind of benefit-cost analysis as full area surveys. Treating them separately is especially reasonable if a different survey asset base is used for each type of survey. It is possible that the priorities produced by a process such as the one described here will not be very different from those now in place, but the committee recommends that it be tested. Even if tests prove this to be the case, the benefit-cost process will be regarded as less arbitrary and therefore more readily defensible and persuasive to budgeters than the current mechanism. REFERENCES Kielland, P., K. Burrows, B. Ward, M. Dagbert, and R. Velberg. 1992. Toward "IHOstat": IHO approved software which evaluates the quality of bathymetric data. Hydro '92 Conference. Copenhagen, December. U.S. Army Corps of Engineers (COE), Water Resources Council. 1983. Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies. 10 March. (Supersedes principles at 18 CFR 711, 713, 714, and 716.)